Sepa Strategy

SEPA Strategy Analysis

Analyze stocks using Mark Minervini's SEPA (Specific Entry Point Analysis) framework — a complete system for identifying high-probability growth stock entries with strict risk management.

Core philosophy: Buy the right stock, in the right stage, at a precise entry point, with strict risk controls. Win rate is ~50-55% — profitability comes from asymmetric risk/reward (small losses, large gains), not from predicting direction.

This skill is for educational/analytical purposes only. It does not constitute investment advice. Never execute trades based solely on this analysis.

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Step 1: Gather Stock Data

Collect the following data for the stock. Use yfinance, funda-data, or any available market data tool.

If certain data is unavailable, note it and proceed with what you have. Missing RS rating is a significant gap — flag it.

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Step 2: Stage Analysis — Identify the Current Stage

Every stock cycles through four stages. Read references/stage-analysis.md for full details.

Determine which stage the stock is in:

If the stock is NOT in Stage 2, stop here and tell the user. No further analysis needed.

Within Stage 2, count the base number (how many consolidation-then-breakout cycles have occurred):

• Base 1-2: Safest, most upside potential — full position
• Base 3-4: Still valid but reduce position size
• Base 5-6: Late stage — half position at most
• Base 7+: Avoid — likely transitioning to Stage 3

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Step 3: Trend Template — 8 Mandatory Conditions

All 8 conditions must be met simultaneously. If any fails, the stock does not qualify. Read references/trend-template.md for detailed explanations.

Present results as a checklist:

Memory aid: Conditions 1-5 = "MA staircase" (Price > 50MA > 150MA > 200MA, 200MA rising). Conditions 6-7 = "Price position" (far from low, near high). Condition 8 = "Relative strength" (market leader).

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Step 4: Fundamental Check

Strong fundamentals separate real leaders from momentum-only stocks. Read references/fundamentals.md for thresholds and rating criteria.

Check these in order of importance:

1. Quarterly EPS growth ≥ 20% (prefer 25-50%+). Below 20% = disqualify. 2. EPS acceleration: Current quarter growth > prior quarter growth. Deceleration (even with positive growth) is a warning. 3. Annual EPS growth ≥ 25% for each of the past 3 years. 4. Revenue growth ≥ 15% annually, ≥ 20-25% quarterly preferred. If EPS grows but revenue doesn't, the growth is likely from cost-cutting (unsustainable). 5. Margin trend: Gross and net margins stable or expanding = healthy. Contracting margins even with EPS growth = red flag. 6. Institutional ownership increasing: Smart money accumulating = fuel for Stage 2 move. 7. Catalyst: New product, FDA approval, major contract, market expansion, etc. Stocks with catalysts can run 50-100%+; without, typically 15-25%.

Rate fundamentals: A (EPS >30%, positive, revenue growing) / B (15-30%) / C (0-15%) / D (negative — skip).

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Step 5: Pattern Recognition

Identify which consolidation pattern is forming (if any). Read references/patterns.md for detailed identification rules for each pattern.

VCP (Volatility Contraction Pattern) — The Core Pattern

The signature SEPA pattern. Look for these 7 characteristics:

1. Stock must be in Stage 2 uptrend (prerequisite) 2. Pullback depths decrease in sequence (e.g., 20% → 12% → 6% → 3%). Minimum 3 contractions, 4-5 ideal. 3. Volume shrinks with each contraction. Final contraction shows "Volume Dry-Up" (VDU) — multi-week low volume. 4. Higher lows — each pullback bottom is higher than the previous one. 5. Clear pivot point — the consolidation range high = resistance level to break. 6. RS > 70 (preferably 85-90+) 7. Market in bull or neutral environment

Other Valid Patterns

All patterns share the same entry rule: breakout above the pivot point with volume ≥ 1.5x the 20-day average.

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Step 6: Entry Point Analysis

Read references/entry-rules.md for detailed entry mechanics, true vs false breakout identification, and the pocket pivot alternative.

Primary Entry: Pivot Point Breakout

• Pivot point = the highest price in the consolidation range. This is the supply/demand inflection point.
• Buy zone = pivot price to +5% above pivot. This is the only valid entry window.
• Beyond +5%: Do NOT chase. Wait for the next setup.
• Breakout volume: Must be ≥ 1.5x the 20-day average volume (≥ 2x is strong confirmation).
• Earnings proximity: Avoid entering within 2 weeks of an earnings report.

Breakout Quality Check

Risk/Reward Validation

Before entering, verify:

• Stop loss distance: Entry price to stop ≤ 7-8%
• Reward/risk ratio: Target profit / stop distance ≥ 2:1 (prefer 3:1)
• If ratio < 2:1, the entry is too risky — skip it.

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Step 7: Position Sizing & Stop Loss Plan

Read references/position-sizing.md for the full formula, examples, stop loss evolution, and pyramiding rules.

Position Size Formula

Shares = (Account Value × Risk Per Trade %) ÷ (Entry Price − Stop Price)

Example: $100,000 account, 1% risk, buy at $50, stop at $46.50:

• Max loss = $100,000 × 1% = $1,000
• Stop distance = $50 − $46.50 = $3.50
• Shares = $1,000 ÷ $3.50 = 285 shares ($14,250 = 14.25% of account)

Stop Loss Evolution (3 phases)

Iron rules: Stop losses only move UP, never down. Never average down on a losing position. After 3-4 consecutive losses, reduce risk per trade to 0.5%.

Pyramiding (Adding to Winners)

Only add to winning positions, with decreasing size: 50% initial → 30% at +8% → 20% at next base breakout. Never add to losers.

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Step 8: Market Environment Check

Read references/market-environment.md for detailed criteria.

The market environment is the master switch for position sizing:

Even the best setups fail in bear markets. Holding cash during bear markets IS a winning strategy — preserving capital for the next bull run.

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Step 9: Respond to the User

Present a structured analysis report with these sections:

Report Structure

1. Stock & Stage: Ticker, current price, identified stage, base count if Stage 2 2. Trend Template Scorecard: 8-condition checklist with pass/fail and actual values 3. Fundamental Grade: A/B/C/D with EPS growth, acceleration status, revenue, margins 4. Pattern Identified: Which pattern (VCP, cup-handle, flat base, flag, HTF, or none), with key measurements (contraction depths, volume behavior) 5. Entry Assessment:

• If a valid pattern exists: pivot price, buy zone, breakout volume requirement
• If not yet formed: what to watch for
• If already extended: "This has moved beyond the buy zone — wait for the next consolidation"

6. Position Sizing: Using the formula, show exact shares, stop price, first target, second target, and reward/risk ratio. Ask the user for their account size and risk tolerance if not provided. 7. Market Environment: Current assessment and how it affects sizing 8. Overall Verdict: One of:

• Strong Buy Setup — all criteria met, actionable now
• Watch List — promising but pattern not yet complete or one condition marginal
• Pass — fails trend template, wrong stage, or poor fundamentals

Always end with the disclaimer that this is educational analysis, not investment advice.

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Reference Files

• references/stage-analysis.md — Four-stage theory, transition signals, base counting
• references/trend-template.md — Detailed 8-condition explanations and memory aids
• references/fundamentals.md — EPS, revenue, margins, institutional holdings, catalysts
• references/patterns.md — VCP 7 rules, cup-with-handle, flat base, flag, high tight flag, quality vs fake signals
• references/entry-rules.md — Pivot point mechanics, buy zone, pocket pivot, true vs false breakout identification
• references/position-sizing.md — Formula, stop loss 3-phase evolution, pyramiding, loss handling
• references/market-environment.md — Bull/choppy/bear criteria and position adjustment rules

SEPA Strategy Analysis

Analyze stocks using Mark Minervini's SEPA (Specific Entry Point Analysis) methodology — a complete framework for identifying high-probability growth stock entries with strict risk management.

Triggers

• Mentions of SEPA, Minervini, superperformance, trend template
• VCP (Volatility Contraction Pattern), stage analysis, Stage 2 uptrend
• Pivot point breakout, growth stock screening
• Moving average alignment checks (bullish stacking)
• Consolidation pattern analysis (cup-with-handle, flat base, flag, high tight flag)
• Position sizing with risk-based calculations
• "Should I buy this stock?" or "Is this a good setup?" in growth/momentum context

What It Does

1. Stage Analysis — determines if a stock is in Stage 2 (the only buyable stage) and counts bases 2. Trend Template — evaluates 8 mandatory conditions (MA hierarchy, price position, relative strength) 3. Fundamental Check — grades EPS growth/acceleration, revenue, margins, institutional ownership 4. Pattern Recognition — identifies VCP, cup-with-handle, flat base, flag, and high tight flag patterns 5. Entry Assessment — calculates pivot point, buy zone (0-5% above pivot), breakout volume requirement 6. Position Sizing — risk-based share calculation, 3-phase stop loss plan, pyramiding rules 7. Market Environment — adjusts strategy based on bull/choppy/bear conditions

Platform

All (works on Claude Code, Claude.ai, and other agents)

Setup

No special setup required. Works best with access to market data tools (yfinance, funda-data) for real-time prices and fundamentals.

Reference Files

Disclaimer

This skill is for educational and informational purposes only. It does not constitute financial advice. Stock investing involves risk. Always do your own research and consult a qualified financial advisor before making investment decisions.

Entry Point Rules

"Specific Entry Point" is the core of the SEPA name. This isn't about "looks roughly good, let's buy" — it's about entering at a very specific price level with defined risk.

The Pivot Point

Minervini's definition: Below the pivot, supply equals or exceeds demand. Above the pivot, demand overwhelms remaining supply. The pivot is not just a technical resistance level — it is the true supply/demand inflection point.

The pivot point = the highest price within the consolidation pattern (VCP, cup-handle, flat base, etc.).

Buy Zone: Pivot to +5%

• Valid entry window: From the pivot price to 5% above the pivot
• Beyond +5%: Do NOT enter. Minervini calls this "buying someone else's profit." The stop distance stays the same but profit potential shrinks — the risk/reward ratio deteriorates.
• Missed it? Wait for the next consolidation and breakout. There will be another opportunity.

Volume Confirmation

True Breakout vs False Breakout

True Breakout Characteristics

• Breakout-day volume is a significant spike (≥ 1.5x average)
• Stock closes near the day's high (strong buying into the close)
• Volume Dry-Up preceded the breakout (supply was exhausted)
• Follow-through: stock continues higher the next day/week
• The breakout candle is decisive — large body, small upper wick

False Breakout Characteristics

• Volume is weak (below or barely at average)
• Stock touches the pivot but closes back below it
• No VDU preceded the attempt (sellers still present)
• Stock falls back into the consolidation range within days
• Long upper wick on the breakout candle (rejection at resistance)

Alternative Entry: Pocket Pivot (Advanced)

For experienced traders, the pocket pivot allows earlier entry during the consolidation phase:

• Trigger: On an up day during consolidation, the day's volume exceeds the volume of any down day in the previous 10 sessions
• Entry point: Near the 10MA or 20MA within the consolidation
• Stop: 1-2% below the pocket pivot day's low (tighter than standard)
• Risk: Higher skill requirement, more subjective judgment
• Benefit: Earlier entry = lower cost basis = better risk/reward if the breakout subsequently succeeds

Pocket pivots are appropriate for traders with experience reading volume patterns. Beginners should stick with the standard pivot point breakout.

Five Entry Rules (Iron Laws)

1. Buy within 0-5% of the pivot point — the only reasonable entry window 2. Never chase beyond 5% above the pivot — missed opportunity, wait for next one 3. Never enter during consolidation without a pocket pivot signal — you'll likely get stopped out during the next contraction 4. Be cautious if breakout volume is below 1.5x average — the biggest warning sign for false breakouts 5. Avoid entering within 2 weeks of an earnings report — earnings are binary events; even perfect setups can gap down on a miss

Risk/Reward Validation

Before placing any trade, calculate:

Reward/Risk Ratio = (Target Price − Entry Price) / (Entry Price − Stop Price)

• Minimum: 2:1 (e.g., risk $3.50 to make $7.00)
• Preferred: 3:1 or better
• If < 2:1: Do not take the trade. The math doesn't work even with 50% win rate.

Example: Buy at $50, stop at $46.50, target at $57.50

• Risk = $50 − $46.50 = $3.50
• Reward = $57.50 − $50 = $7.50
• Ratio = $7.50 / $3.50 = 2.14:1 (meets minimum)

Fundamental Requirements

SEPA is not purely technical. Historical data shows 75% of superperformer stocks had quarterly EPS growth exceeding 20% before their largest advance. Fundamentals separate real leaders from momentum-only plays.

EPS (Earnings Per Share) Growth

Quarterly EPS

EPS Acceleration — The Most Critical Factor

Raw growth isn't enough. The growth rate must be accelerating: this quarter's EPS growth rate > last quarter's EPS growth rate.

• Last quarter +20% → this quarter +28% = accelerating (bullish)
• Last quarter +30% → this quarter +22% = decelerating (warning signal, even though +22% looks decent)

Deceleration often precedes price peaks. The market prices in future expectations, so slowing growth can trigger selling even if absolute numbers look fine.

Annual EPS

• Past 3 years: each year ≥ 25% growth
• Most recent year's growth rate > prior year's rate (annual acceleration)
• Avoid one-off spikes (1-2 quarters of high growth that isn't sustained)

Revenue Growth

Why revenue and EPS must both grow: If EPS grows 30% but revenue only grows 2%, the growth comes from cost optimization rather than genuine business expansion. This is unsustainable and Minervini calls it "fake growth."

Profit Margins

Margins are often overlooked but critically important:

Healthy signs:

• Gross margin stable or expanding quarter-over-quarter
• Net margin stable or expanding
• Indicates pricing power and strengthening competitive advantage

Danger signs:

• Gross margin contracting quarter-over-quarter
• Even if EPS is still growing, be cautious
• Indicates intensifying competition or loss of pricing power
• Growth sustained by scale rather than efficiency — may collapse suddenly

Institutional Ownership

Institutional buying is the fuel that drives sustained Stage 2 advances. Retail money alone cannot push a stock through a multi-month uptrend.

What to look for:

• Number of institutional holders increasing quarter-over-quarter
• Top-tier funds and hedge funds initiating positions
• Check 13F filings (quarterly institutional disclosure in the US)
• Tools: Finviz, Whalewisdom, WhalePortfolio

Institutional ownership increasing = real demand. Decreasing = distribution warning.

Catalysts (Bonus Factor)

Catalysts can dramatically amplify a move:

• New product achieving major success
• New CEO bringing transformational strategy
• FDA drug approval
• Winning large government or enterprise contracts
• Entering entirely new markets
• Disruptive technology breakthrough

With catalyst: potential 50-100%+ advance Without catalyst: typically 15-25% before stalling

Fundamental Rating Summary

Market Environment Assessment

The market environment is the master switch for all SEPA activity. Even the best individual stock setups fail at high rates in bear markets. Assessing the environment determines whether to trade at all, and how aggressively.

Three Market Environments

Bull Market (Indices Strong)

Identification criteria:

• S&P 500 and Nasdaq above their 200-day moving averages
• Market breadth expanding (more stocks advancing than declining)
• New 52-week highs consistently outnumber new 52-week lows
• Breakouts generally follow through (success rate high)

SEPA parameters:

• Risk per trade: 1-2% of account
• Position size: S-tier setups get 10-15%, A-tier get 5-10%
• Maximum concurrent positions: 6-8
• Strategy: Aggressive offense — actively seek and enter quality setups

Choppy / Sideways Market (Direction Unclear)

Identification criteria:

• Indices oscillating without clear direction
• Frequent failed breakouts — stocks break out then reverse
• Roughly equal numbers of advancing and declining stocks
• Mixed signals: some sectors strong, others weak

SEPA parameters:

• Risk per trade: 0.5-1% of account
• Position size: Only take A+ grade setups, enter at half normal size
• Maximum concurrent positions: 2-3
• Strategy: Cautious observation — trade only the best of the best, smaller

Bear Market (Sustained Decline)

Identification criteria:

• Major indices below their 200-day moving averages
• More than 50% of stocks trading below their 200-day MAs
• New 52-week lows consistently > new 52-week highs
• Even quality breakouts fail or reverse quickly
• Defensive sectors (utilities, staples) outperforming growth

SEPA parameters:

• Risk per trade: 0% (no new positions)
• Position size: Gradually exit to 100% cash
• Maximum concurrent positions: 0
• Strategy: Full cash. Preserve capital. Wait for the next bull market.

Key Principle

Holding cash during a bear market IS a profitable strategy. While others lose 30-50% trying to "find the bottom," cash preservation means you have full ammunition when the bull market returns.

Minervini's rule: "Wait for the market to offer opportunity, then strike with full force."

Quick Environment Check

When assessing the market, check these indicators:

1. S&P 500 position relative to 200MA — above = bullish, below = bearish 2. Nasdaq Composite position relative to 200MA — tech sector health 3. Advance/Decline line — broadening participation = healthy; narrowing = deteriorating 4. New Highs vs New Lows — consistent new highs > new lows = bull; vice versa = bear 5. VIX level — sustained above 25-30 suggests elevated fear/uncertainty 6. Recent breakout success rate — if your last 5 breakouts all failed, the market is likely the problem, not your stock selection

Adjusting From Bull to Bear (Gradual Process)

The transition from bull to bear rarely happens overnight. Watch for these progression signals:

1. Leading stocks start failing on breakouts 2. More stocks hitting 52-week lows 3. Indices start spending more time below 50MA 4. Former leaders break below 50MA, then 200MA 5. Market rallies on decreasing volume 6. Indices breach 200MA

Response: At each step, gradually reduce exposure. Don't wait for a full bear confirmation to start protecting capital. By the time everyone agrees it's a bear market, the damage is already done.

Consolidation Patterns

All SEPA patterns share the same entry logic: breakout above the pivot point + volume confirmation ≥ 1.5x 20-day average.

Pattern 1: VCP (Volatility Contraction Pattern) — The Core Pattern

VCP is Minervini's signature and most important pattern. Think of price as a spring being compressed: each pullback compresses it tighter (smaller amplitude). When the spring reaches maximum compression (supply exhaustion), it releases forcefully — that's the VCP breakout.

7 Identification Rules

Rule 1: Stage 2 uptrend (prerequisite) Price above 50MA/150MA/200MA with bullish alignment. Without this, any contraction is just a bounce in a downtrend, not a VCP.

Rule 2: Pullback depths decrease in sequence (core feature) Typical example: 20% → 12% → 6% → 3%. Each contraction is roughly 20-30% smaller than the previous one. Minimum 3 contractions; 4-5 is ideal. If the second pullback is deeper than the first, it's NOT a VCP.

Rule 3: Volume shrinks in sync, ending with "Volume Dry-Up" (VDU) Volume decreases with each successive pullback. During the final contraction, volume drops to a multi-week low — this is the VDU signal, indicating supply exhaustion (sellers are nearly depleted).

Rule 4: Higher lows Each pullback bottom is higher than the previous one. This proves buyers are stepping in at progressively higher prices — institutions accumulating at each dip.

Rule 5: Clear pivot point The high of the consolidation range = the pivot point = resistance. The VCP breakout occurs when price crosses this level.

Rule 6: RS > 70 (preferably 85-90+) Ensures the stock is a genuine market leader. Leader VCPs have far higher breakout success rates than laggard VCPs.

Rule 7: Market in bull or neutral environment Major indices above their MAs, market breadth expanding. VCP breakout failure rates spike in bear markets.

Volume + Price Interpretation

Volume shrinkage alone doesn't prove selling pressure is diminishing. The correct interpretation requires both price and volume:

Quality VCP vs Fake VCP

Quality VCP:

• Pullback depths strictly decreasing (20% → 12% → 6% → 3%)
• Each low higher than the previous
• Volume decreasing with each pullback
• Clear VDU in the final contraction
• Overall in a clear uptrend
• RS ranking near the top
• Breakout with strong volume (≥ 1.5x average)

Fake VCP (common traps):

• Irregular pullback depths (sometimes bigger, sometimes smaller)
• Lows not progressively higher (or moving lower)
• Volume not shrinking, or actually expanding on declines
• Stock in a downtrend overall
• Only 2 contractions (insufficient structure)
• Breakout with weak volume (below average)
• Price quickly falls back below the pivot after "breaking out"

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Pattern 2: Cup with Handle

• Cup: U-shaped price recovery, depth 12-35% from peak to trough
• Handle: Small pullback after the cup completes, ≤ 1/3 of cup depth (typically ≤ 12%)
• Volume: Low at cup bottom, even lower during handle, large on breakout
• Duration: 7-65 weeks total
• Pivot: Top of the handle's range
• Strength: 4/5 — works well for stocks in mature uptrends

The cup should be U-shaped (rounded bottom), not V-shaped (too sharp, no proper basing).

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Pattern 3: Flat Base (Platform Consolidation)

• Depth: ≤ 15% from high to low (very tight range)
• Duration: 5-10 weeks
• Volume: Contracts during the consolidation, expands on breakout
• Pivot: Top of the flat range
• Strength: 3/5 — represents a strong stock taking a brief rest near highs

Flat bases often appear in stocks that are too strong to pull back much. The tighter the range, the better.

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Pattern 4: Bull Flag

• Flagpole: Sharp advance of 25%+ (steep, fast move up)
• Flag: Slight downward drift or tight consolidation, pullback ≤ 50% of flagpole
• Volume: Flag portion shows shrinking volume; breakout shows volume expansion
• Duration: 1-5 weeks for the flag portion
• Pivot: Top of the flag range
• Strength: 4/5 — good continuation pattern after strong initial moves

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Pattern 5: High Tight Flag (The Rarest and Most Powerful)

• Prerequisite: Stock must have already advanced 100%+ in 4-8 weeks
• Flag: Pullback ≤ 25% from the peak, extremely tight
• Volume: Extremely dry during the flag; massive on breakout
• Duration: 1-4 weeks for the flag
• Strength: 5/5 — rare but highest success rate
• Note: These are uncommon. When they appear, they often lead to further massive advances.

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Universal Entry Rules for All Patterns

1. Price breaks above the pivot point (consolidation range high) 2. Breakout-day volume ≥ 1.5x the 20-day average volume (the bigger the better) 3. Stop loss at 5-10% below entry price (specific level depends on pattern structure)

Position Sizing, Stop Loss & Pyramiding

This is the most critical part of the entire SEPA system. Minervini: "Not losing big is the only prerequisite for winning big." You cannot control how much a stock goes up, but you can fully control how much you lose.

Key insight: Minervini discovered that if he had tightened his stop from 15% to 10% early in his career, a losing account would have been profitable (+72%). This discovery made the 7-8% stop loss a sacred, inviolable rule.

Position Size Formula

The logic: first determine the maximum dollar amount you're willing to lose, then work backward to determine how many shares to buy. Don't decide position size by looking at the stock — decide it by fixing your risk first.

Shares = (Account Value × Risk Per Trade %) ÷ (Entry Price − Stop Price)

Complete Calculation Example ($100,000 account, 1% risk per trade)

1. Maximum loss amount = $100,000 × 1% = $1,000 (the most this trade can lose) 2. Entry price: $50.00. Stop at −7% = $46.50. Stop distance = $50 − $46.50 = $3.50/share 3. Shares = $1,000 ÷ $3.50 = 285 shares 4. Total position = 285 × $50 = $14,250 (14.25% of account — reasonable) 5. Stop price: $46.50 (exit immediately if touched) 6. Target 1: $50 × 1.08 = $54.00 (+8%, sell half) 7. Target 2: $50 × 1.15 = $57.50 (+15%, sell another 25%) 8. Reward/Risk (to target 2): ($57.50 − $50) / ($50 − $46.50) = 7.5 / 3.5 ≈ 2.14:1 (meets minimum)

Stop Loss Three-Phase Evolution

Phase 1: Initial Hard Stop (At Entry)

• Set stop loss order immediately upon entry: entry price minus 7-8%
• Non-negotiable. No "let's see how it goes." Entry = stop is set.
• If triggered, exit immediately. Don't ask why, don't hesitate.
• The stop being hit doesn't mean you failed — it means this trade's premise didn't hold. That's normal probability.

Phase 2: Move to Breakeven (At +8% Profit)

• Sell half the position to lock in profit
• Move stop loss from −7% up to the entry price (breakeven)
• After this point, this trade cannot lose money — capital is safe
• The remaining half is now a "free trade" — playing with house money

Phase 3: Trailing Stop (At +15% Profit)

• Sell another 25% of the original position
• Trail the remaining 25% using the 20-day moving average
• Update stop weekly to 1-2% below the current 20MA
• When price closes below 20MA, exit all remaining shares — let profits run as long as the trend holds

Special Case: Rapid Advance

If the stock surges 20-25% in a short period (obvious acceleration), tighten the stop to below the 10MA instead of the 20MA. This prevents large profit give-back in overextended moves.

Stop Level Summary

Iron Rules

1. Stop losses only move UP, never down. Moving a stop down "to give it more room" is how small losses become catastrophic ones. 2. Never average down on a losing position. Adding to a loser is the fastest path to account destruction. 3. After 3-4 consecutive losses, reduce risk per trade from 1% to 0.5% and cut the number of positions. Determine whether the issue is your execution or the market environment before resuming normal size. 4. Average loss should be 4-5%, hard cap at 10%. VCP's precise entry often allows exits at 3-5% loss. The smaller the average loss, the fewer winning trades needed to recover.

Pyramiding (Adding to Winners)

Pyramiding = adding to a winning position with decreasing size. This is the opposite of averaging down.

How to Pyramid

Why Pyramiding Works

• The largest position (100 shares) is at the lowest cost ($50) — minimum risk, maximum cushion
• Even if tranches 2 and 3 both hit stops (combined loss ~$263), tranche 1's locked profit from the +8% partial sell ($400) covers the loss
• You only add more money when the market proves you right — each addition has a new breakout signal confirming the trend

Why Averaging Down Fails

• Each addition is at a lower price = the market is proving you wrong
• "$60 → $40, that's down a lot, must be near the bottom" — then it goes to $20, then $5
• "My average cost went from $60 to $52" is an illusion — your real total loss is expanding exponentially
• You're doubling down on a failed thesis
• This is the single fastest way to destroy a trading account

Handling Losing Trades

SEPA wins only ~50-55% of the time. Nearly half of all trades lose money. This is expected and by design.

Loss Review Framework (Three Questions)

Q1: Was it an execution problem or a strategy problem?

• Execution problem (chased above +5%, didn't set stop, entered with weak volume, entered before earnings) → fix the habit, the strategy isn't wrong
• Strategy problem (misidentified the pattern, entered without trend template confirmation) → study more historical examples to improve recognition

Q2: Was it a "good loss" or a "bad loss"?

• Good loss: Followed all rules, market just didn't cooperate, exited at stop — this is a normal cost of doing business, change nothing
• Bad loss: Broke rules (no stop, averaged down, chased) — this is what must be eliminated

Q3: Was it the individual stock or the overall market?

• If recent breakouts are frequently failing, check the market first: indices below MAs? Breadth deteriorating?
• If the market environment has changed, pause trading and wait for improvement rather than forcing more trades

The Casino Analogy

A casino doesn't win every hand — it wins through mathematical edge (favorable odds) over thousands of hands. SEPA works the same way:

• Win trades average +15-30%
• Lose trades average −5-7%
• Over 10 trades at 50% win rate: 5 × 15% − 5 × 6% = +45% net
• A retail trader with 55% win rate but no discipline: 5.5 × 5% − 4.5 × 12% = −26.5% net

The win rate matters less than the win/loss size ratio.

Stage Analysis — The Four Stages of Stock Price Cycles

Stan Weinstein's 4-stage theory (1988), integrated into SEPA by Minervini. Every stock continuously cycles through these four stages. Identifying the current stage is the starting point for all decisions.

Stage 1: Basing / Accumulation

• Price oscillates sideways around the 200MA
• 200MA is flat or declining
• Moving averages are tangled (no clear order)
• Volume dries up — the market has forgotten this stock
• Institutions quietly accumulate shares
• Duration: Can last 1-3 years
• Action: Do nothing. Wait for transition signals.

Stage 2: Advancing / Markup (The Only Buy Stage)

• Stock makes consistently higher highs and higher lows
• Perfect bullish MA alignment: Price > 50MA > 150MA > 200MA
• Volume expands on up moves, contracts on pullbacks
• VCP and other consolidation patterns appear repeatedly
• Typically goes through 3-6 consolidation bases
• This is where 100% of SEPA trades occur
• Action: Actively look for entry points on each base breakout

Counting Bases Within Stage 2

Each completed "consolidation → breakout" cycle = one base. This tracks how far along Stage 2 has progressed:

How to count: The first consolidation breakout after transitioning from Stage 1 to Stage 2 = Base 1 (the safest).

Stage 3: Topping / Distribution

• High-level wide swings, increased volatility
• Frequent false breakouts
• Heavy volume at highs without upward progress (institutions distributing)
• Media attention peaks, retail sentiment most euphoric
• Action: Gradually reduce positions. Do not open new ones.

Stage 4: Declining / Markdown

• Sustained decline, bearish MA alignment
• Bounces are selling opportunities, not buying opportunities
• "It's down 60%, must be near the bottom" — the most dangerous thought. A stock at $40 (from $100) can still go to $10.
• Action: Fully exit. Hold cash. Wait for the next Stage 1→2 transition.

Stage 1 → Stage 2 Transition Signals (Precursors to the Best Buy Points)

1. 200MA shifts from declining → flat → starting to slope upward 2. Price breaks above the consolidation range on increased volume 3. 50MA crosses above 150MA or 200MA (golden cross)

These signals don't guarantee a Stage 2 move, but they're necessary preconditions. The first VCP breakout after these signals appear is typically the highest-probability entry.

Trend Template — 8 Mandatory Conditions

The trend template is a pre-entry qualification filter. All 8 conditions must be satisfied simultaneously. If any condition fails, skip the stock entirely — don't waste time on deeper analysis.

The 8 Conditions

MA Staircase (Conditions 1-5)

These five conditions establish that the stock has a healthy, stacked bullish moving average alignment.

Condition 1: Price > 150MA AND Price > 200MA The stock must be trading above both its 150-day and 200-day moving averages. This confirms it is in a long-term uptrend, not struggling below key support levels.

Condition 2: 150MA > 200MA The 150-day MA must be above the 200-day MA. This is a critical component of the bullish MA hierarchy.

Condition 3: 200MA trending up for at least 1 month (ideally 4-5 months) The 200MA slope must be positive and sustained. This confirms the long-term trend is healthy and not just a temporary bounce. To check: compare today's 200MA value with the value from 1 month ago (and ideally 4-5 months ago). It should be higher now.

Condition 4: 50MA > 150MA AND 50MA > 200MA The short-term moving average leads the pack. This shows strong recent momentum.

Condition 5: Price > 50MA The stock is above its short-term trend line. This confirms even near-term momentum is positive.

Summary: The complete MA hierarchy is: Price > 50MA > 150MA > 200MA, with 200MA sloping upward.

Price Position (Conditions 6-7)

Condition 6: Price ≥ 30% above 52-week low (the more the better) This proves the stock has truly left its bottom and is in a genuine uptrend — not just a minor bounce off lows. Calculate as: (Current Price / 52-Week Low − 1) × 100%.

Condition 7: Price within 25% of 52-week high (the closer the better) The stock should be trading near its highs, not 50% off a peak. Ideally it's near or making new 52-week highs. Calculate as: (1 − Current Price / 52-Week High) × 100%. Must be ≤ 25%.

Relative Strength (Condition 8)

Condition 8: Relative Strength ranking > 70th percentile (prefer 85-90+) Only trade true market leaders. RS measures how a stock's 12-month price performance ranks against the entire market. Stocks in the top 15% (RS > 85) are real leaders; those below the 70th percentile are laggards.

Sources for RS: IBD RS Rating, MarketSmith, TradingView "Relative Strength" indicator, or calculate manually by comparing 12-month return to S&P 500.

This is one of the conditions most commonly missing from screenings, yet it is one of Minervini's most emphasized filters.

Memory Aid

Three sentences to remember all 8 conditions:

1. MA Staircase (Conditions 1-5): Price > 50MA > 150MA > 200MA, with 200MA rising 2. Price Position (Conditions 6-7): Far from the low (≥30%), near the high (≤25% away) 3. Relative Strength (Condition 8): Market leader, RS > 70th percentile

Common Gaps in Screening Tools

Many stock screeners implement conditions 1-5 well but miss:

• 200MA uptrend duration (Condition 3) — most screeners only check if MA200 is rising today, not for sustained periods
• Relative Strength (Condition 8) — the single most commonly missing condition; without it, you may trade mediocre stocks with good chart patterns but weak relative performance