- A = Advanced Entry Points
- M = Market Conditions
- P = Psychological Analysis
- D = Defense First
Adam Sarhan created the A.M.P.D. trading strategy to help self-guided independent investors improve their results in the market. Adam is the founder of Park 50 Investments and the author of Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle. As a Forbes contributor, he is frequently quoted on CNBC, Fox Business, and in The Wall Street Journal. Since he began his trading career in the 1990s, Adam has developed a strategy for trading in the market that he calls “A.M.P.D.” “A” is for advanced entry and exit points. “M” is for market conditions. “P” is for psychological analysis, and “D” is for defense first. We’ll get deeper into what all of that means shortly, but first, we have to cover a few basic principles.
In his book, Adam writes about finding the Smart Money Superhero inside of you and avoiding the Dumb Money Beast.
Always Respect Risk
Trading in the stock market involves risk. A lot of people lose money in the stock market. For the most part, the people who lose more money than they gain are traders who do not have a plan for minimizing their risk. Adam’s A.M.P.D. strategy has a built-in method for managing risk, but before you read any further, you must understand that ANY strategy you use for trading in the market involves risk, and you could lose money.
More Than One Way To Make Money In The Market
The A.M.P.D. strategy is not the only way to profit from trading in the market. Adam hosts the Smart Money Circle podcast where he interviews traders and investors with diverse backgrounds, each with their own philosophies on how the market works, each with their own trading strategies. In the end, every good trader develops a unique trading strategy that leverages their strengths, compensates for their weaknesses, and conforms to their level of risk tolerance.
A.M.P.D. is strongly influenced by well-known technical traders such as William O’Neil, but it is also informed by the wisdom of legendary fundamental investors such as Warren Buffett. As a consultant, Adam has brought his A.M.P.D. strategy to fund managers and investment advisors who have taken what they like from his method and incorporated it into their own trading styles. Even if the A.M.P.D. strategy is not perfect for you, you will likely find aspects that you like, and you’ll be able to incorporate some of Adam’s ideas into your personal trading strategy.
The Great American Tailwind
In the 2018 Berkshire Hathaway annual letter to shareholders, Warren Buffett coined the term “The American Tailwind.” While reflecting on his 77-year trading career, he noted that if the first $114.75 trade he made in 1942, “had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested,” then the pretax value of his position would have been worth $606,811 on January 31, 2019. That’s a 5,288% increase. Buffett’s point is that the American equities market has, for more than two centuries, trended upwards and the American spirit for innovation has led to “almost unbelievable prosperity.” Investors in the American equities market have enjoyed a “tailwind” that has propelled the market, as a whole, upwards over time. Adam frequently refers to it as “The Great American Tailwind.”
There are no guarantees in investing, and past performance cannot predict future performance, but if the tailwind persists, it means an investor can put money into an index fund or an exchange-traded fund (ETF) designed to mirror the American equities market, and while there will be ups and downs, over time, they could reasonably expect to make healthy gains. Since 1958, the benchmark S&P 500 Index has had ups and downs. Some years it was up 38% (1959), and it has fallen by as much as 38% in one year (2008), but an investor who stuck it out and rode the waves would have seen an average annual return of 8%.
Beating The Market
On Wall Street, the term for beating the market is “generating Alpha.” If the S&P 500 Index saw a 10% return in a given year, for a trader to generate Alpha, they would have to realize a gain of 10.1% or more. Adam interviewed investor Robert Fehrmann who has had as much as $11 billion in assets under management. Fehrmann said his goal is to double his money every five years, which requires an average annual return of 20%. That’s tough to do. You can’t just park money in an index fund and hope to double your money every five years; you have to start actively trading. Many try. Most fail. Maintaining the discipline required to execute a trading strategy designed to generate Alpha is tough, and it is not for the faint of heart. There is no shame in riding The American Tailwind, and for most people, that’s probably the right move, but for those who are up to the challenge, the A.M.P.D. strategy is designed to help traders who want to beat the market.
Most people who think about investing in the stock market take a traditional fundamental approach. They are looking to buy shares of good companies that are turning a profit, show potential for growth, and have sound balance sheets. Warren Buffett is, at his core, a fundamental investor. Being a good fundamental investor takes a lot of research, it demands the patience required to pore through corporate filings, and it necessitates an advanced understanding of how corporate finance works. Having an MBA doesn’t hurt.
While fundamental analysis is sound and makes intuitive sense, it doesn’t always work. Sometimes stocks rise in value despite the underlying company having crummy fundamentals. During the pandemic recovery, AMC and GameStop saw their stock prices surge, despite gloomy outlooks for the companies’ respective futures. Meanwhile, the old bulwark Coca-Cola lagged behind the market during the V-shaped recovery. The lesson is that the price of a stock is only spuriously connected to a company’s performance. That means there is money to be made by trading stocks based on indicators that are independent of the underlying company’s fundamentals. Now we’re entering the world of the technical trader.
A technical trader watches the market for patterns. Over time, a technical trader can learn to recognize shapes in stock charts that could indicate whether a stock is poised to make a move upwards or downwards. This is not an exact science, and some traditional fundamental traders consider it a kind of “voodoo,” but Adam has seen the same patterns form and repeat enough times that he has been able to build a successful trading strategy with a solid technical foundation. He’s in good company. Ever since Jesse Livermore demonstrated how to accumulate a vast fortune with technical trading in the early 20th Century, technical analysis has been the heart of many legendary investors’ trading strategies.
Support and Resistance
To get a sense of how technical analysis works, you need to understand the concept of support and resistance. Perhaps you’ve noticed that while prices move up and down every day, they often move within a specific range. A certain stock may trade for several days with highs around $22 and lows around $20 dollars. It seems like there is a mysterious force keeping it within that range.
The mysterious force is support and resistance, and it’s really not that mysterious. As a stock rises in value, a certain segment of investors will be compelled to sell shares to realize a profit. As a selloff begins, the price will fall until another segment of investors starts to see the stock as undervalued, and recognizing an opportunity, they buy, which drives the price back up. This pattern may repeat for a while, establishing a trading range and defining a line of resistance at the top of the range and a line of support at the bottom of the range. Eventually, a stock will break out above resistance or break down below support and establish a new trading range.
There are also other trendlines that can provide support or resistance for a stock price. In the early 1900s, Charles Dow pioneered the use of moving averages by calculating the average price of a stock over a given number of days and plotting that value as a line on a chart. The most common daily averages used by investors are the 50-day moving average (50 DMA) and the 200-day moving average (200 DMA). Most advanced stock market charting software show 50 and 200 DMA lines by default, and if you look up practically any stock symbol, you will likely notice that the price of that stock often seems to bounce off one of these trend lines. Moving averages frequently act as lines of support and resistance.
For decades, many technical traders have known there can be an opportunity to make money by buying breakouts. They would find a stock moving within a trading range, they’d watch it rise and fall, identify support and resistance, and if the price broke out over resistance, especially if trading volume was heavy, they would buy it and hope to ride it up and make a tidy profit. This technique was most effective back in the day when most people got their stock prices from the newspaper. Now that traders have nearly instant access to stock prices and can place orders with the computer in their pockets, traditional breakouts often fail. In the information age, traders need to identify a breakout opportunity before the crowd recognizes it. That’s where A.M.P.D. cones in.
Advanced Entry And Exit Points
The “A” in A.M.P.D. stands for “Advanced Entry and Exit Points.” Adam looks for a stock that is respecting support and resistance, and he waits for the price to bounce off the support line. At the same time, Adam places a protective sell stop order just below support. If the stock moves in the wrong direction, the sell stop order will trigger and limit his losses. However, if the stock moves up, he might be in a position to profit on a breakout. If the stock fails to break out and continues to respect support and resistance, Adam can decide to wait for another cycle or two to see if the stock breaks out, or he can sell at the top of the range and put that money to work on a different idea.
Some people say “buy the dip,” suggesting a trader buy a stock when it hits the bottom of a trading range, but it’s difficult to know exactly when that is. Adam says, “Buy the bounce after the dip.” He will wait for the price to react to support and start to move upward before he enters the position. When we look back at a stock chart, we can clearly see the highs and the lows, but moment by moment, it’s impossible to know if a price is at the bottom or the top of a trend. It’s practically impossible to buy exactly at the bottom and sell exactly at the top. Adam aims to capture what he calls “the bulk of the move.” He buys after it bounces off support, and if things go well, he’ll sell sometime after a stock has broken out, reached a new peak, and appears to be trending downward again.
The “M” in A.M.P.D. stands for “market conditions.” Adam often says, “Make the trend your friend.” What he means is that, at any given time, the market exhibits certain behaviors. In a bull market, there is an upward push on equities across the board. In a bear market, there is downward pressure on stock prices. Within a broader bull or bear market, there can be periods of upward and downward pressures. Sometimes the market is choppy, making only lateral movement for a significant period.
If you’re using the A.M.P.D. strategy, and you’re looking for advanced entry points for potential breakouts, you’re more likely to find success if the market is in an upward trend. One of the great things about the A.M.P.D. strategy is that it can work in a downtrend as well, and instead of looking for breakouts, a trader looks for breakdowns and enters short orders for those stocks. A trader hoping to make money this way has to wait for a downward trend. When the market is making only lateral movement, a trader who uses the A.M.P.D. strategy may choose to wait for a new trend to form and decide whether the bulls or the bears take charge before making new trades.
The important lesson is that a trader needs to align themselves with the market conditions. In the old days, stock prices were communicated via telegraph cables and printed out on ticker tape. Adam says, “Don’t fight the tape.” Listen to the market and move with the market. It seems like simple advice, but far too many traders ignore market conditions and make decisions based on intuition or bad advice and end up losing money because they went against the market and fought the tape.
The “P” in A.M.P.D. stands for “Psychological Analysis.” Adam coined the term “Psychological Analysis” to describe the role human nature plays in the stock market. Early in his trading career, Adam realized that his greatest losses occurred when he made emotional decisions about his trades. He started studying the history of markets, and he read about every boom and bust since the 3rd Century. The commodities being traded changed, empires rose and fell, and the technology of trading changed, but the one constant throughout the centuries proved to be human nature. Human nature has always had an outsized influence on markets, and it probably always will.
Psychological analysis becomes important in the A.M.P.D. strategy because any trader who fails to acknowledge the impact that human nature has on the market is not seeing the whole picture. Fear is an emotion that affects the market. Fear can lead to panic, causing people to convert to cash despite countervailing fundamental and technical indicators. Greed also affects the market, and some investors, caught in the fervor of a bull market, ignore risk, ignore fundamental and technical indicators, and they can lose big. Strangely enough, psychology can cause people to sell off winners early and hold on to losers for way too long.
Adam has written an entire book about psychological analysis, aptly titled Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle. For the purpose of applying the A.M.P.D. strategy to your trading, it’s important that you understand that human nature affects the market, and even more importantly, it’s critical that you understand how psychology affects your own trading decisions.
The “D” stands for “Defense First.” In an interview with Adam, well-known asset manager Jim Roppel said, “Risk management is job one. If you have no other tool, cutting your losses is going to keep you in the game forever. People who blow out don’t cut their losses.” Managing your losses is the most important part of the A.M.P.D. strategy, and there are two key components to keeping your losses small. The first is position size, and we’ll talk about that in a minute. The second is something you’ve already heard about: advance exit points.
We mentioned earlier that when Adam enters a position (remember, the bounce after the dip), he puts in a sell stop order just below support so if the stock moves in the wrong direction, he automatically exits the position for a small loss. If the stock breaks out, Adam will move his sell stop order up to his entry point so that if the price reverses, he’ll automatically exit the position at breakeven, substantially eliminating the risk that he will lose money on the trade. If the stock goes up significantly, Adam will move his stop order above his entry point to lock in profit.
Now we can circle back to position size. With the A.M.P.D. strategy, a trader risks no more than 1% of their portfolio on any one idea. Imagine a trader managing a $100,000 portfolio. They can buy a $10,000 position in a stock and set their stop at 10% below their entry price, and if the stock goes south, they’ll likely lose no more than 10% of their $10,000. That’s $1,000, or 1% of their entire portfolio. Adam notes that 1% is the maximum a trader should risk. Half a percent is better, and investors may be well-advised to set their protective exit stops at less than 10%. A stop at 5-8% of the entry price is not uncommon.
Keep Your Losses Small And Let Your Winners Run
If you follow the A.M.P.D. strategy, you will most likely lose more often than you win. That’s okay because when you place your protective stop orders, you’ve limited the downside of any trade, but there is no limit to how high a stock can go. Adam says, “Keep your losses small and let your winners run.” What he means is that to make the A.M.P.D. strategy work, you have to stick to your guns and always place your protective stops, and you have to find the courage to let your winners go as high as they can before exiting a position.
Here’s why this strategy can work so well. Let’s say our trader with the $100,000 portfolio makes 10 trades, buying $10,000 in each position and setting a protective stop at 10% below the entry price. If six of the 10 trades go south and the trader gets stopped out, they will lose $6000. But if the remaining four trades realize 20% gains, that equals $8,000, for a net profit of $2,000 on the ten trades.
In reality, it’s unlikely that six of the stocks that you have been watching will fail completely — some will simply fail to break out, and you can cash out of that position for breakeven and put that money to work in a new idea. Also, we mentioned that there is no limit to how much a stock can gain. That means if just one of your winners shoots up, you can really magnify your profits. If just one of 10 ideas doubles in value, you could have full stop-out losses on the other nine and still realize a profit.
Simple But Not Easy
If the A.M.P.D. strategy sounds simple, that is because, in relative terms, it is — but that doesn’t mean that it is easy. Most people have trouble sticking to the strategy because they allow their own human nature to interfere. They fail to respect risk by putting too much money into one idea, or by failing to place a protective stop order when they enter a position. Many people sell their winners too soon, afraid of losing their hard-fought gains.
Legendary investor Benjamin Graham once said, “The investor’s chief problem — and even his worst enemy — is likely to be himself.” Adam has found Graham’s words are true. Adam’s book goes into great detail on how to identify the psychological obstacles that prevent traders from being successful, and it provides strategies and tactics for how to rise above your own human nature and make money in the market.
Gaining A Sense of The Market
The hardest part of the A.M.P.D. strategy — apart from overcoming your own human nature — is learning to read stock charts and recognizing the technical patterns that can emerge. The only way to learn how to recognize stock patterns is to build a watchlist of stocks and monitor their movements regularly and try to identify lines of support and resistance. Watch how stock prices react when they approach the moving averages.
Adam says that learning the qualities of how the market moves is like learning to recognize the color red or the taste of chocolate. If you’ve never seen the color red, nobody could describe it to you in a way that would allow you to identify it at first sight. If you’ve never tasted chocolate, nobody could describe it in a way where you’d know it at your first bite. But once you’ve seen red, and once you’ve tasted chocolate, you’ll never forget it, and you’ll always be able to identify it in the future.
Poring over stock charts, building a watchlist, and recognizing opportunities are also some of the most time-consuming parts of the A.M.P.D. strategy. Luckily, Adam already does this work, and he publishes a newsletter for his FindLeadingStocks.com subscribers. Most include a watchlist of stocks Adam is tracking, an assessment of market conditions, and an indication of when key leading stocks are “buyable” according to the A.M.P.D. trading strategy.
If you’re a new self-guided, independent trader, Adam encourages you to start small. In fact, after suffering a couple of giant setbacks early in his career, Adam started forming his A.M.P.D. strategy as a “paper trader,” meaning he managed imaginary money and kept track of buy and sell orders to see if his strategy was working without risking any real money. Once he saw that his trading decisions produced positive results, he started putting real money behind his trades and built his portfolio from there. You may consider doing the same thing. Once you’ve got the hang of it, you can start trading with real money.
Choose Your Trading Schedule
There is a tendency for many self-guided investors to become day traders, watching stock tickers minute by minute and making multiple trades per day. Adam has said there is more than one way to make money in the stock market, but in his experience, day traders have a difficult time consistently beating the market. Every time you look at your portfolio, you’re inviting your human nature to infect your trading decisions. Adam suggests establishing a trading schedule and sticking with it. For Adam, a weekly schedule works best, and he likes to make all of his trading decisions on the weekend when the markets are closed. Because he has sell stop orders placed, he can leave his trades alone all week, monitor their performance at the end of the week, and make any trading decisions before the markets open on Monday.
For many new investors, it may be better to make decisions on a monthly timeframe. Some only make decisions quarterly. The important thing is that you choose a time frame that works for you. No matter what timeframe you choose, it’s important to remember that you don’t have to make trades every week to be a good trader. Legendary technical trader Jesse Livermore said, “It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!” Very often the best trading decision is not to trade at all.
Buy, Sell, or Hold
Ultimately, there are only three decisions to make as a trader: buy, sell, or hold. Of course, there are also the questions of “what?” and “when?” to buy, sell, or hold. The A.M.P.D. strategy indicates when to buy and sell: buy the bounce after the dip, and place strategic sell stop orders to limit your losses or lock in profit. What you should buy is a little more complicated. It takes time to develop a sense of the quality of the market and to recognize technical patterns that could indicate a breakout opportunity. Adam believes that with time and practice, just about anyone can develop this skill, but in the meantime, he produces the FindLeadingStocks.com newsletter to give subscribers access to his watchlist and to actionable opportunities.
What To Do Next
Sign up for a free trial to Adam Sarhan’s Find Leading Stocks newsletter for access to actionable ideas that may benefit from the A.M.P.D. trading strategy.
Listen to the Last Week In The Market podcast where Adam uses last week’s market action to illustrate key aspects of the A.M.P.D trading strategy.