How 3-time veteran investing champion David Ryan finds and trades upward trending stocks

David Ryan is a three-year consecutive winner of the US Investing Championship, finishing first from 1985 through 1987.

After trading for nearly four decades, he can confidently say that the patterns and characteristics of successful stocks remain the same.

“I can show you a chart of the earnings of Bethlehem Steel in 1990 and compare that to Nvidia now, and you’ll find that they have the same characteristics in terms of earnings growth and being in an area that’s expanding and growing very, very quickly,” Ryan said. “So there’s nothing new under the sun. I’m just trying to find those patterns, those characteristics that have repeated themselves.”

One timeless observation Ryan points to is that a stock’s price will go wherever its earnings go. Companies with good or accelerating growth will see their stock price increase, while those with flat earnings will see them drop. A slight difference today is that those moves can happen faster and be more volatile due to a widening of market participants, including algorithmic and retail traders.

It means now more than ever, it’s important to have a disciplined approach around entering and exiting a trade so that emotions don’t take over. Emotional reactions lead to poor decisions, and that’s where most traders lose, Ryan said. When a stock is down, one of the easiest ways to slip is to start rationalizing why you think it will return, he added.

It’s why ahead of any talk about stock-picking strategies or pattern identification, he believes traders must learn to mitigate risk so they never take a big loss. That’s done by deciding on an exit point ahead of taking a position and using a stop loss to execute it.

“All my losses are almost always— unless a stock gaps down — under 10%, and most of those are under 5%,” Ryan said. “I’m usually timing these investments at the point where I think they’re going to go up automatically, and if they don’t, then there’s something wrong. And I usually come out of that in a very short period of time.”

Once a trader has their safety measures in place based on their risk tolerance, they can move to finding their trading style and duration preferences. For Ryan, he predominantly trades two patterns: breakouts and pullbacks. He holds stocks for weeks to months, making him a swing trader.

Finding upward trends

When filtering for tradable stocks, Ryan generally sticks to guidelines from the CANSLIM method, an acronym for a set of fundamental and technical metrics that can identify stocks in a strong upward trend. They include current and annual quarterly earnings; new products, services, or management; supply and demand; leaders or laggards; institutional ownership; and market direction. It was developed by Investor’s Business Daily founder William O’Neil.

On a fundamental basis, he mainly screens for stocks with strong quarterly earnings, those up by 20% or more, but the bigger the better, he noted. Their annual earnings should also be solid, growing by at least 20% yearly over a three to five-year period. These companies should also be a leader in their sector and have high institutional sponsorship.

On a technical basis, he’s looking for stocks that have established a steady uptrend and are moving above their 200- and 50-day moving averages and sometimes even their 21-day moving average.

His predominantly traded pattern depends on the stock market’s overall mood: he will look for breakouts in a strong upward trend. In a sideways and choppy one, he will trade pullbacks.

More recently, the volatility caused by tech-heavy selloffs has made him lean into pullbacks.

In a pullback scenario, he expects a stock’s price to eventually correct after a strong run that overextended it above its upward moving averages. Typically, a tradable pullback would be accompanied by lighter volume as it moves back down to its 21-day or 50-day moving average. It should then find support along those lines for a day or two before it begins to move back up.

“I like to see what kind of supply is coming in,” Ryan said. “Is there a lot of selling going on in the stock, or is the stock pulling back nicely without a huge increase in volume?”

Softer volume on the downtrend means the selling pressure doesn’t outweigh the buyers, indicating that buyers could push the price back up once the selling dries out.

If the thesis proves correct, Ryan scales in throughout the following two to three days. He may add more to his position if the stock reaches its previous high and finds support at that level for a few weeks. But once the stock becomes overextended, passing its moving averages by a wide range, he begins to scale his position back, taking profits. This makes riding through additional pullbacks easier since he has already secured some profits and limited exposure to his principal investment.