How to Trade the OWL System from Gil Morales and Chris Kacher (A step-by-step guide)

Learn to trade this simple and effective trading system

The OWL trading system, developed by renowned traders Gil Morales and Chris Kacher, offers a comprehensive approach to identifying and capitalizing on high-probability trading opportunities.

Combining insights from three legendary market figures — William O’Neil, Richard Wyckoff, and Jesse Livermore — the OWL system emphasizes the importance of fundamental strength, price-volume analysis, and disciplined trend-following.

This guide will take you through the steps to trade the OWL system, offer detailed risk management strategies, and show you how to implement this methodology using TradingView, one of the most versatile trading platforms available today.

The Stellar Track Record of Gil Morales and Chris Kacher

Gil Morales and Chris Kacher have established themselves as two of the most successful traders in modern history. During their tenure at William O’Neil + Co., both traders achieved extraordinary performance results:

Chris Kacher turned $11,000 into $18 million over a span of just a few years, achieving returns exceeding 18,000%.
Gil Morales consistently delivered triple-digit annual returns managing institutional portfolios, leveraging his expertise in high-growth stocks and advanced technical setups.

Their real-world trading success has solidified their reputations as pioneers in combining fundamental analysis with precise technical strategies. They’ve shared their methodologies in acclaimed books such as Trade Like an O’Neil Disciple and In the Trading Cockpit with the O’Neil Disciples. Their innovative tools, including Pocket Pivots and Buyable Gap-Ups, have become staples for growth stock traders.

Step 1: Understanding the Foundations of the OWL System

The OWL system integrates three distinct methodologies:

William O’Neil’s CAN SLIM Strategy: Focus on growth stocks with accelerating earnings and strong institutional sponsorship. Pay attention to technical patterns like cup-with-handle, flat bases, and double bottoms.
Richard Wyckoff’s Market Structure: Understand market phases (accumulation, markup, distribution, markdown) and analyze price-volume action to identify institutional buying and selling.
Jesse Livermore’s Trend-Following Approach: Focus on pivotal points, ride trends with conviction, and sell when the stock shows signs of weakness or distribution.

These principles form the backbone of the OWL system and guide both entry and exit strategies.

Step 2: Tools You Need to Trade the OWL System

To trade the OWL system effectively, you’ll need a reliable platform to analyze charts, track price-volume patterns, and set alerts. TradingView is the one I use for all my trading, there is simply no equivalent:

Customizable Indicators: Use moving averages (e.g., 10-day, 21-day, 50-day) and volume overlays to spot key signals.
Chart Pattern Recognition: Identify base patterns and breakout levels with TradingView’s intuitive drawing tools.
Alerts: Set alerts for breakout levels, pocket pivots, or buyable gap-ups to ensure you never miss an opportunity.
Community Scripts: Access community-created scripts for advanced Wyckoff analysis or CAN SLIM setups.

Step 3: The Buy Rules of the OWL System

1. Identify High-Quality Stocks

The OWL system starts with selecting stocks that show strong fundamentals and technical characteristics:

Earnings Growth: Look for stocks with at least 25% year-over-year earnings growth.
Revenue Growth: Consistent sales growth supports the sustainability of earnings.
Relative Strength: Use TradingView’s Relative Strength Index (RSI) to identify stocks outperforming the market (RS above 80 is ideal).
Industry Leadership: Focus on stocks in leading sectors.

A great source to look for all of these stocks is the IBD website.

2. Buy on Breakouts

Breakouts are a cornerstone of the OWL system. Follow these steps:

Identify a base pattern (e.g., cup-with-handle) using TradingView’s pattern tools.
Wait for the stock to break out above the base’s resistance level on above-average volume (40%-50% higher than average).
Confirm the market trend using TradingView’s moving average crossover strategy or the platform’s Wyckoff scripts.

3. Pocket Pivots for Early Entries

A Pocket Pivot is an early buy signal within a base or during a pullback. Use these rules:

Identify a day where the stock’s closing price exceeds the highest close of the prior 10 days.
Ensure the volume on the pocket pivot day is higher than the volume of any down day in the prior 10 days.
Use TradingView’s volume indicators and moving averages (e.g., 10-day and 21-day EMAs) to confirm the setup.

Pocket Pivots allow you to enter strong stocks before the traditional breakout, giving you an edge in volatile markets.

4. Buyable Gap-Ups (BGUs)

BGUs occur when a stock gaps up significantly on high volume due to news or earnings. Here’s how to trade them:

Look for stocks gapping up above their previous high with heavy volume.
Enter near the low of the gap-up day and set your stop-loss at that low.
Use TradingView’s gap indicators or alerts to spot these opportunities in real-time.

Step 4: Risk Management Rules

1. Position Sizing

Never risk more than 1%-2% of your total capital on a single trade. Use TradingView’s Position Size Calculator to determine the number of shares to buy based on your risk tolerance.

2. Stop-Loss Placement

Set stop-loss levels based on the trade setup:

For breakouts: Place the stop-loss below the breakout point or below the nearest moving average (e.g., the 10-day EMA).
For Pocket Pivots: Use the 10-day EMA as your stop.
For BGUs: Set the stop-loss at the low of the gap-up day.

3. Trailing Stops

As the stock moves in your favor, use trailing stops to lock in profits. TradingView’s automated trailing stop feature makes it easy to adjust your stops as the stock’s price increases.

4. Diversification

Avoid overexposure to a single stock or sector. Aim to diversify across 8-10 high-quality stocks in different industries.

Step 5: The Sell Rules of the OWL System

1. Sell on Breakout Failures

If a stock falls back below its breakout level on high volume, sell immediately. Failed breakouts often signal a lack of institutional support.

2. Sell on Moving Average Violations

If the stock closes below a critical moving average (e.g., the 10-day or 50-day), exit the position. Use TradingView’s moving average alerts to monitor these levels.

3. Trim Profits on Extensions

When a stock becomes 20%-25% extended from its breakout point, consider selling part of your position to lock in gains.

4. Monitor Distribution Days

Distribution days occur when the stock or market declines on high volume. Multiple distribution days signal weakness and may warrant reducing exposure. Use TradingView’s volume analysis tools to track this.

Step 6: Optimizing the OWL System with TradingView

TradingView provides all the tools you need to implement the OWL system effectively:

Custom Alerts: Set alerts for breakout levels, Pocket Pivots, or moving average violations.
Backtesting: Test the OWL system’s rules using TradingView’s strategy tester.
Community Insights: Access scripts and indicators shared by other traders to refine your setups.
Multi-Timeframe Analysis: Use multiple timeframes to confirm breakout signals or Pocket Pivots.

Conclusion

The OWL trading system from Gil Morales and Chris Kacher is a great framework for trading growth stocks.

By combining fundamental strength, technical analysis, and disciplined risk management, this system can help traders achieve consistent results.

Platforms like TradingView make it easier than ever to apply the OWL system with precision, thanks to their advanced charting tools, alerts, and backtesting capabilities.

Whether you are a seasoned trader or just starting, the OWL system’s structured approach can provide the edge you need to succeed in the market.

Start using the OWL system today on TradingView to take your trading to the next level!