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NewTrader,RichTrader:
HowtoMakeMoneyintheStockMarket
By:SteveBurns
WithJannaBurns
Reviewsfor
"HowIMadeMoneyUsingtheNicolasDarvasSystem"
SteveBurnswantsyoutofollowthetrendandmakemoney.Thatisagoodthing.Listenup!–MichaelW.Covel,bestsellingauthorof"TrendFollowing"&"TheCompleteTurtleTrader"
Awesomework!Thisquickreadisfull
ofgoldennuggetsofmarketwisdomandIencourageeveryonetolearnfromthosewhohavebeenthissuccessful...DarvasandBurnsalike...thisisamustreadtoaddtoanytraderorinvestor'sarsenal!–TimothySykes,authorof"AnAmericanHedgeFund"
GoreadSteve’sbook,“HowIMadeMoneyUsingtheDarvasSystem.”It’safastread,purposelykeptassimpleaspossible,sothateventotalnewbiescanunderstandit.And,itshowsareal-lifeexampleofhowyoucanusetheDarvas
Systemtomakebigmoneyandtrulychangeyourlifeforthebetter.–DarrinDonnelly,“DarvasTrader.com”
Thisbookispowerfulbecauseitsimplifiesasubjectthatmanypeoplefindhardtounderstand.Thisbookofferspeopleaclearstrategyforbecomingfinanciallyfree.–KeithCameronSmith,Authorof"TheTop10DistinctionsbetweenMillionairesandtheMiddleClass"
ThisbookisessentialreadingforDarvasfollowers.IhavereadalloftheDarvasbooksinprintandSteveBurns’booknotonlyusesallDarvas'techniquesbutcomplimentsandconfirmswhatDarvashasdoneusingrealexamplesandmakingrealmoney.–FredChen,Amazon.comReviewer
Thisbookremindsusallthatit'snotenoughtomakemoneyinthemarket,ifyoudon'tkeepthemoneyyoumake.SteveBurnsgivestimetestedandlifetestedinstructioninhowtomakesure
youkeepthemoneyyoumakeinthemarket.–C.Oliver,Amazon.comReviewer,VineVoice
NewTrader,RichTrader
AlsobySteveBurns:HowIMadeMoneyUsingthe
NicolasDarvasSystem
NewTrader,RichTrader:
HowtoMakeMoneyintheStockMarket
By:SteveBurns
WithJannaBurns
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrieval
system,ortransmittedinanyformorbyanymeans,
electronic,mechanical,photocopyingorotherwise,without
thepriorpermissionof
IntroductionThepurposeofthisbookistosharewithreaderstheprinciplesofsuccessfultrading:methodology,riskmanagement,andpsychology.Newtradersusuallylearnthesethehardway,bylosingmoney.Whenanewtraderentersthestockmarketwith
moneybutnoexperience,theoddsarehewillquicklygainexperiencebylosingmoney.
Thisbookwaswrittentogivenewtradersaheadstartinthemarkets.Withonlyaboutonein10tradersactuallymakingmoneyinthemarket,Ibelievethisbookcanincreasetheseoddssubstantially.Itiscriticalto
begintradingwithasoundmethodologywhichgivesyouanadvantageoverthemarkets.Butevenmoreimportantisthetrader’sabilitytotakelossesandperseverethroughtherougheducationthatwillensue.Youwillbecompetingwithothertraderswhoseonlygoalistomakemoney.Profitsaremadebybeingontherightsideofthetrade.
Unfortunately,newtradersfindthemselvesonthewrongsideoftradesthemajorityofthetimewhentheyarefirststartingout.Makenomistake:itisajourneyworthtaking.Theprofitsarethereforthosewhofollowtherightprinciples,managetheirlosses,andruntheirtradinglikeabusiness.Successfultradersmadeitbecausetheyperseveredthroughtheinitial
lossesandlearnedhowtowininthelongterm.InthisbookIsharewithyouthelessonsIlearnedinthemarketsoverthepast12years.Theselessonscomefrommanysources.Ilearnedmanyoftheselessonsandprinciplesfrommyownpersonalexperiencesofwinningandlosing.Ialsohavereadandstudiedover150booksoninvestingandtrading.Ihave
friendsandmentorswhohavebeenaninspirationwiththeirsuccessesandwhoIlearnedagreatdealfrom.Ialsohavepickedupmanypowerfulprinciplesfromreadingbookswrittenbygreattradersabouttheirmethodsofsuccess.Thisbookismeanttobeashortcuttotheprinciplesnecessarytobeasuccessfultrader–withouthavingtotradeforadecade,spendthousandsof
hoursreading,orlearnthehardwaybylosingthousandsofdollars.Itismyhopethatyoufindthisbookhelpfulandusefulonyourtradingjourney.IwishIhaditwhenIbegantrading.
Foreword
IwasthrilledwhenIfirstheardSteveBurns’story.
Firstoff,herewassomeonewhonotonlysurvivedoneoftheworstperiodsinthehistoryofthestockmarket,butheactuallytradedhiswaytoasix-figure
fortuneduringthisperiod.
ButbeyondthefactthatBurnsthrivedduringsuchatoughinvestors'period,Ilovedlearningthathewasjusta“regularguy”tradingwithhisretirementaccount.Hewasn’tsomeWallStreetbigshotwhomanagedotherpeople’smoneytomakehisfortune,andhewasn’tsometypeoffinancialacademic
wholookedbackontherockymarketandofferedahypotheticalmodelofwhataninvestorshouldhavedone.
No,SteveBurnswaslikemostpeople.Hehadajob,afamily,andamortgagetoworryabout.Hewassimplyinterestedinsecuringhisownfinancialfuturewithwiseinvestmentdecisions.
ButBurnswasunlike
mostpeopleinthathedidn’tblindlyfollowthetraditionalbuy-and-hold“WallStreetwisdom,”andhedidn’ttrusthismoneyinthehandsofothers.Hetookchargeofhisfinancialfuturebystudyingwhatactuallyworkedandimplementinghisstrategyinthesimplestwaypossible.
Burnsfoundhisinvestmentmethodofchoice
inthetrendytradingstrategyknownas“TheDarvasSystem.”Thissystemwasinventedinthelate1950sbyasuccessfulballroomdancer(read:non-WallStreetprofessional)namedNicolasDarvaswhousedhisstrategytoturn$30,000intomorethan$2millioninlessthantwoyears.TheDarvasSystemimplementsasimplechartingmethodforridingthe
upwardtrendsofbig-earninggrowthstocksandthenexitingpositionswhenthetrendisbroken.
WhiletheDarvasSystemhasevolvedagreatdealoverthepast60-plusyears,ithasremained,atitscore,averysimplewaytotradestocktrends:youbuyagreatstockwhenitbreaksoutofitstopbase,youholditfor
aslongasitremainsinasteadyuptrend(ignoringthe“normal”pullbacksalongtheway),andyousellitwhenitfinallybreaksitsuptrend.Thisverysimpleandproventheoryisactuallyquitedifficultformostpeopletofollowduetothehumanemotionsandpsychologicalbarrierswhichcomewithholdingastockduringalonguptrenddespitepullbacks.
Thekeystosuccessful
trendtradingareremovingyouremotionsfromthetrade,avoidingtheWallStreet“noise”andstockguru“predictions,”andkeepingyourbuy-and-sellrulesassimple,clear,andeasytoimplementaspossible.
SteveBurnshasmasteredthekeystosuccessfultrading,andinthis
bookherevealstherules,techniques,andlessonsthatareessentialtotradingsuccess.
Ifyou’renewtothestockmarket,understandingtheseruleswillsaveyouyearsoffrustrationandpainfullosses.Ifyou’reaseasonedpro,considerthisthe“commandmentsoftrading”thatneedtobe
repeatedlypoundedintoyourhead.
Ibelievethatanyonewhowantstoearnbigmoneytradingstocks(orsteadilygrowtheirnesteggwithoutlosingbigmoney)shouldkeepthisbookontheirdeskatalltimes.Iseeitasanessentialhandbookoftrendtrading,andIbelieveagenerationoftraderswillbe
verythankfulthatSteveBurnstookthetimetowritethiswonderfulbook.
DarrinDonnellyEditorofDarvasTrader.com
March2011
ContentsIntroductionForward
PartIPsychology1.NewTradersaregreedyandhaveunrealisticexpectations;RichTradersarerealisticabouttheirreturns.2.NewTradersmakethe
wrongdecisionsbecauseofstress;RichTradersareabletomanagestress.3.NewTradersareimpatientandlookforconstantaction;RichTradersarepatient.4.NewTraderstradebecausetheyareinfluencedbytheirowngreedandfear;GoodTradersuseatradingplan.5.NewTradersare
unsuccessfulwhentheystoplearning;RichTradersneverstoplearningaboutthemarket.
PartIIRISK6.NewTradersactlikegamblers;RichTradersoperatelikebusinesspeople.7.NewTradersbetthefarm;
RichTraderscarefullycontroltradingsize.8.ForNewTradershugeprofitsarethe#1priority;forRichTradersmanagingriskisthe#1priority.9.NewTraderstrytoprovetheyareright;RichTradersadmitwhentheyarewrong.10.NewTradersgivebackprofitsbynothavinganexit
strategy;RichTraderslockinprofitswhiletheyarethere.
PartIIIMethodology11.NewTradersquit;RichTraderspersevereinthemarketuntiltheyaresuccessful.12.NewTradershopfromsystemtosystemthemoment
theysufferaloss;RichTradersstickwithawinningsystemevenwhenit'slosing.13.NewTradersplacetradesbasedonopinions;RichTradersplacetradesbasedonprobabilities.14.NewTraderstrytopredict;RichTradersfollowwhatthemarketistellingthem.
15.NewTraderstradeagainstthetrend;RichTradersfollowthemarkettrend.16.NewTradersfollowtheiremotions,puttingthematadisadvantage;RichTradersfollowsystemswhichgivethemanadvantage.17.NewTradersdonotknowwhentocutlossesorlockingains;RichTradershaveanexitplan.
18.NewTraderscutprofitsshortandletlossesrun;RichTradersletprofitsrunandcutlossesshort.AppendixA:ResourcesAppendixB:Authortrading/investingresults2003-2010AppendixC:MyRecommendations:TheTopTwentyTradingBooks
AppendixE:MyTopTenBookRecommendationsforSuccessinLifeandTradingAbouttheAuthorAcknowledgements
Part1
Psychology
1NewTradersaregreedyandhaveunrealistic
expectations;RichTradersarerealisticabouttheir
returns.
WhenNewTraderawoke,brightandearly,hecouldfeelhisexcitementbuildingwith
everymoment.Bootinguphiscomputer,hecouldn’thelpbutremembereveryexcruciatingdetailthatwentintobuildinghisaccount,themanyhoursofovertimeathisregularjobanddeliveringpizzasonweekendstoearnsomeextracash.Butnowthatpartofhislifewasover.Hisheartbeat
quickenedashetypedinhisusernameandpasswordforhis$10,000account.Hewasready.Howcouldhenotbe?NewTraderhadbeentradingthroughsimulatedaccountsforoverayear,watchedCNBC,andfollowedmanytradinggurus.Thewayhesawit,itwas
easy.Whenanaccountlosttoomuchmoney,hesimplyopenedupanewone.Andwhenhemadeagreatreturn,hisselectivememorydecidedtoforgettheaccountthathadlostsomuch…Thisfedhisego,convincinghimthathecouldeasilyoutperformthemarket.
NewTraderprojectedthathecoulddoublehisaccountinafewmonths,thendosoagainbytheendoftheyear,bringinghisaccountto$40,000.Itwouldn’tbesohard,hethought;hehadreadafewbooksaboutlegendarytraders,sonowallhehadto
dowasrepeatwhattheyhaddone.UnfortunatelyforNewTrader,heeitherdidn’treadordidn’tcomprehendthefactthattheseverysametraderssufferedlossesandfaceddifficultiesbeforetheiramazingsuccesses.Manyhadblownup,losing50%ormoreoftheirstartingcapital.Someevenwent
bankruptwhentheydidn’tcontroltheirriskorbrokefromtheirtradingplan.Butunfortunately,NewTrader,whowasstillhighontheexcitementofhisshinynew$10,000inbuyingpower,couldnotconceiveanyloss.Hisexcitementoverruledanyfearordoubtthatmayhaveenteredhismind.
NewTraderwaseagerandhungrytotrade,quicklyfamiliarizinghimselfwiththetools.Allofthesewerenewtohim:thechartingsoftware,therealtimestreamers,howtoentertrades.Sonowtherewasonlyonequestionleft:Whattotrade?Firsthewouldneedastockthatwoulddoubletohelphimreachhisfirstgoal,ortradea
stockfora26%returnthreetimes.
Heknewthemath;hewasalwaysgreatatmathinschoolandwasusedtoalwaysfindingsolutionstoproblems.
Tradingwassimplymath.Andmathwassimplylogic.NewTraderwaslogical.
Orsohethought,ashisheadswamintheresultsofcompoundedreturns;hewouldbeamillionaireinafewyears,justlikehistradingheroes!Actually,oneofhisheroes,RichTrader,livedinthecity.NewTraderfoundhimselffrequentlygoingtothemanwithquestionsabouthowtobecomeatrader…perhapshe
shouldaskhimforsomelast-minuteadvicebeforehestartedtrading…notthatheneededit,ofcourse!AndthatwashowNewTraderfoundhimselfknockingonhismentor’sdoor.TheyexchangedtheirusualgreetingandRichTraderlethimin.“Isupposethisisaboutthataccountofyours?”Rich
Tradersaidwithawrysmile.Thiswasn’tthefirsttimeNewTradercametoRichTrader’shomeabouttheaccount.“Ireallyappreciateyoubeingabletoanswermyquestions,”theyoungermansaidasRichTraderpouredhimselfsomefreshlybrewedcoffee,gettingNewTraderamugashelistened.
“Myplanis…”NewTraderbeganspeakingassoonasthecoffeewasinhishand,“…todoublemyaccountinafewmonths,thendoubleitagainsoIcanbuilditupto40,000totradewithnextyear…what?”RichTraderwaslookingathimwithanamusedgrin.“Wow…”hetookasipofcoffee.“Soyou’replanning
tobeoneofthetoptradersintheworldthefirstyearyoutrade?That’saveryaggressivegoal…forabeginner.”“Ijustneedtofindastockthatdoublestwice,orhave26%returnscompoundedsixtimes!”NewTradersaid,intheovereagerexuberanceRichTraderhadcometoexpectfromhim.
RichTradershookhishead,thewrysmilebackonhislipsasheremovedhisglassesandrubbedhiseyes,asifinthought.“Well,NewTrader,”hesaidafteramoment,“whilethosereturnsarepossible,theyusuallyonlyhappenduringspecialtimeperiods–liketheboominglate'20sbullmarket,ortheInternetstock
boomofthelate'90s.Historically,certainultra-highgrowthstockslikeCisco,Google,orAppledidperformverywellforlongperiodsoftime,butthoseareveryspecialstocks,andnotonlydoyouhavetopickthesestocks,butyouhavetohavetherightplantobuyandsellattherighttime;yourhotstockcouldjustaseasilyfall50%insteadofdoubling…”
Hepaused,takingabreath.“Notonlythat,butthemarketwouldhavetotrendinfavorofyourstyleforyoutomakesuchoutstandingreturns.Itdoesn’tdoyouanygoodtoplantobuyastockthat’sgoingtodoubleifthemarketturnsbearishandthestockfalls.Inadownturnintheeconomy,orwhenfeartakesholdofinvestors,theytendto
selljustabouteverythingandmovetheirmoneywheretheythinkitwillbesafe.Sometimesthismeansconsumerstaplestocks,butsometimesitwillbebondsorevencommoditieslikegoldoroil.”WhenRichTraderputhisglassesbackon,hesawthatNewTrader'shopefulexpressionhadfallenintoone
ofconfusion.
“Soyou’resayingImaynotgetmy200%returnthisyear?”NewTraderasked.
“Thereisahighprobabilityyouwilllosemoneythisyear,”RichTraderrepliedinamatter-of-facttone.
“But…Ididn’tgothroughallthetroubleof
savingmoneyandopeninganaccounttolose;myonlypurposeistowin,”NewTraderresponded,voicefullofpride.
RichTradersighed.
“Themarketwillteachyoumanylessonsbeforeyouconsistentlymakemoney–themostdangerousthingyoucandoismakeagreatdealofmoneyfromthestart.That
usuallyleadstorecklessnessandlosingbiglongterm.”“Isn’tthatwhatIwanttodo,winbig?”NewTraderasked,incredulous.
“No,youwanttogetrichslowly.Youwanttomakeconsistentreturnsoveralongperiodoftime;youraccountcangrowrapidlybycompoundingyourgains.Whileyou’redoingthis,you
havetomanageyourriskforminimumdrawdownsinyourequity.Successfultradingisbasedonever-increasingaccountequitywithminimumdrawdowns.Properlymanagingyouraccountalsosetsyouupforthosetradesthatwillreturn25%duringatrendorfortheyearyoudohavea200%return.Yourfirstjobasatraderistofocuson
trading,notprofits,”RichTradersaid,takingasipofhiscoffee.
“Okay…soifIdofocusontrading,whatreturnscanIexpect?”NewTraderasked,curious.
“Realistically,agoodtradercangeta20%to50%returnormoreayear.Howevertheoddsareatraderlosesmoneythefirstyear,but
gainsaneducation.Youhavetolookatitlikepayingtuition.Tradingisaprofessionlikeanyother,andyouaretradingagainstprofessionalsmostofthetime.Adoctordoesn'tjustreadabookandstartpracticingmedicine;hemustgotomedicalschooltolearntheproperproceduresfromotherdoctors.Healsowillhavetomakemistakesbefore
hegetspaidtobeadoctor.Withdoctors,hopefullytheirmistakesaremadeinmedicalschoolandnotonapatient!”
RichTraderlookedatNewTrader,whowaslisteningstudiously.
“Tradingisnodifferent.”Hecontinued,“Iwouldalsoassumethere’sahugedifferencebetweenoperatingonacorpseandon
alivepersonduringsurgery.Iamsurethereisarealfactorofstressthatcomesintoplayintheoperatingroom,andthedoctormustmanagestressandhaveconfidenceinhisperformanceandhisabilitytofollowthecorrectprocedures.Adoctordoesn’tthinkabouthowmuchhe’sgettingpaidwhileheisperformingsurgery.Youneedtofocusonasoundstrategy,style,and
tradingplan–notprofits.Goodtradingwillcreateyourprofits,whilefocusingprimarilyonyourprofitswilllikelyleadtobadtrading.”NewTradercouldfeelhisagitationanddisappointmentgrowing.Thisadvicemighthavebeengoodforsomeotherbeginner,buthewasdifferent.Hewassharpandhadabetterfeelforthe
marketthanothersdid.Hewastheexception.Whenhefinallyresponded,itwasdifficulttohidethesnidetonefromhismentor.“SoyouthinkIcouldmakea50%return,or$5,000inprofitthisyear,andthatwouldberealisticandpossible.”RichTradercouldobviously
sensehisattitude,butitdidn’tseemtobotherhim.“Ithinkthatwouldputyouinthetop1%ofalltraders.Thequestionis:areyouwillingtodotheworktobeattheother99%?”RichTraderasked.“OfcourseIam!”NewTraderreplied,evenashefelthisholdonthedreamofeasymoneyloosening.
"Peoplewholookforeasymoneyinvariablypayfortheprivilegeofprovingconclusivelythatitcannotbefoundonthisearth."–JesseLivermore
Recommendedreadingfor
thischapter’slesson:
TheUniversalPrinciplesofSuccessfulTrading:EssentialKnowledgeforAllTradersin
AllMarkets,byBrentPenfold
2
NewTradersmakethewrongdecisionsbecauseofstress;RichTradersareabletomanagestress.
NewTraderhadbeenwatchinghisstockallmorning.
Ithadgonefrom$9.25to$9.55andthenbackto$9.45–helovedwatchingthevolumechangetohigherandhighernumbers.Helovedwatchinghisstockglowabrilliantgreenwhiletheothersfellred.TheDowJoneswasred,andtheNASDAQwasclutchingtogreenbyjustbarelyatenthofapercent.
Nowhisstockwas$9.40,andnowhewasready.Hewantedathousandshares.Hehad$10,000inhisaccount,andheknewthisstockcouldeasilyriseto$12.00overthenexttwomonths,givinghim$2,600profit.Hedecidedtogetinat$9.25;itwasshowingstrongsupport
at$9.00andhadn’tbeenbelowthatinweeks.Ithadoverthepastmonthbeenaround$9.03,butreversedandralliedonhighvolumebeforeithit$9.00.Inthepastmonth,ithadalsoreachedashighas$9.89butstalledthereatanewall-timehigh.Asthepricefellto$9.30,then$9.25,NewTraderfelta
rushofexcitementashequicklykeyedinthestocksymbol,and‘1000’besidequantity.Hisheartwasracingasheclickedonhismouseagaintoseethecurrentpositions.Glancingathisaccountscreen,itshowed:1000sharesSRRSBUYExecuted$9.35
“$9.35?!”NewTraderexclaimed,shocked.
Lookingbackathisrealtimestreamer,hisbloodfrozeashesawthecurrentquote:$9.10.
Hefeltsick.
“I…justlost$250?!Ittakesmeanentireweekendofdeliveringpizzastomake$250,”hemuttered,fear
tightlygrippinghisstomach.
Hisheartwaspounding,thoughthistimeitwasfromfear,notexcitement.
Lookingbackatthequote,hesawthataccordingtothedailyhighandlowprices,thestockhadfallenallthewayto$9.08.Butitwasnowat$9.15.Hetriedtocalmhimself.
“Itwillholdat$9.00,
thenturnaroundandgetto$12.00beforeearnings.Igotagreatpricetobuyinat,”hesaidtohimself.
Papertradingandsimulationswasonething,butthiswasdifferent.Thiswashismoney–everycentcamefromhisblood,sweat,andtears,andtohave$250snatchedawayjustlikethat…
Itfeltlikehe’djust
beenrobbed.
Whywasn’titgoingthewayheplanned?Thispressure,stress,andfearwerenothinglikewhathehadexpected…especiallyforsuchasmalldropinprice.
Whilehewaspullinghimselftogether,thestockroseto$9.40,yetitdidn’t
calmhimdown,despitethe$50inprofit.
Hestillfeltgrippedbyfear,andhewaveredonwhethertotakehisprofitsortodoashehadoriginallyplannedandholduntilearningsinthenextfourweeks.
Itwasasthoughhecouldphysicallyfeeleverypennyofhis$10,000
perilouslycrossingatightropewithoutasafetynet.Itwaslikehis$10,000couldfallintooblivionatanymoment.Hehadneverbeeninthiskindofrealdangerbefore,andhedidn’tunderstandit.
Withshakingfingers,NewTradercalledhismentor,whoansweredonthethirdtorturousring.
“Hello?”NewTraderbegantofeelashamed,certainthathisreactionswouldseemsillytoRichTrader.Evenso,hemanagedtoforceoutthewords.“Iplacedmyfirsttrade.”Therewasapause,andNewTradercouldsweartheoldermanwassportingoneof
thoseamusedsmiles.
“That’sgood…”
“Howdoyoucontrolyourstresswhentrading?”NewTraderaskedsoquicklyhismentorcouldbarelyunderstand.
NewTraderheardadeepchucklethatgratedonhisnerves–howcanhebesocalm?!
“Moststressesarisefromunknownvariables–fearofloss,uncertaintyofmarkettrend,ortheneedtomakemoney.Sometimestradersallowtheiregotogetsowrappedupinatradethattheirself-worthgetswrappedupintheneedtoberight,”RichTraderrepliedeasily.
“Buthowdoyoucontrolstress?”NewTrader
urged.
“Youcanlimityourstresslevelbyremovingasmanyunknownsaspossiblefromyourtrading.Youshouldknowyourtradingplanbeforeyoustarttrading.Youshouldalreadyhaveawatchlistofwhatyou’llbuy.Youhavetodecidehowmanysharesofwhatspecificstocktotradeevenbeforeyou
executethetrade.”
RichTraderclearedhisthroatandcontinued.
“Beforeyouplacethetrade,youneedtohaveinplaceanexitstrategyofhow,when,andwhyyouwilltakeprofitsandwhatyourstoplosswillbe.Youhavetoplantosellyourstockataspecificpercentageloss,pricesupportbreach,ortrendchange.”
“Well,Isupposethat
makessense.”
“Alltradersexperiencestressandmustmanageitlikeinanyotherjob.Ifyourstresslevelisstillexcessiveafteryouhaveaworkingtradingplan,thenyouareeithertradingtoobigordon’thavefaithinyourtradingsystem.Ifyouknowyoursystemisawinnerinthelongterm,then
trycuttingyourpositionsizeinhalf.If1,000sharesstressyouout,trytrading500.”
“But…”NewTraderstarted,beforesilencinghimselfsoRichTradercouldcontinue.
“Ifyou’restilloverwhelmed,godownto400or300sharespertrade.Ifyoubelieveyourstressiscausedbynothavingfaithin
yoursystem,thenyouneedtoback-testyourstrategy.Dependingonyoursystemanditscomplexity,thismayrequireback-testingyourbuy-and-sellsignalswithcomputerprogramsorwithpastcharts.Youcanalsotestyourtradingmethodbysimplytradingyourexactentryandexitsignalsonpaperorinsimulators;youwillneedatleast30trades
overdifferenttypesofmarketstogetarealfeelforyourwin/lossstatistics.”
“SoIneedtomakesureIhaveasystemthatIfollow.ThenIneedtodesignatradingplanwithwhichI’mcomfortabletrading.ThenIhavetotestmysystemtoensureit’sawinner,soIcandevelopfaithinmystrategyandlimitmystress.IfIstill
feeltoomuchpressure,IcanjustdecreasemytradingsizeuntilI‘mcomfortable.”
“Yes,exactly;youneedtohaveaplantocontroltheoutcomesofwhat’sinyourpowertocontrol–likestoplosses,trailingstops,positionsize,timing,andtechnicalindicators.Youwillneedtobecomfortablewiththevolatilityofthestockyouare
trading.Tradersneedatradingstylethat’scompatiblewiththeirpersonality.Aggressivetypeslikeastockthatmovesandgivesthemhugeprofitpotential.Otherslikeanicesteadystocktheycantradeatpredictablepricesupportandresistancelevels.Somelovetheactivityofdaytrading,whileothersprefersystemswhichonlyrequire
adjustmentsafewtimesamonth.Theimportantthingisthatyouaretradingasystemyouthatiscomfortabletoyouandthatisprofitable.Ifyouarestressedtoanunhealthylevel,thenyourlackoffaithinyoursystemoryourlackofconfidenceinyourknowledgeorabilitiesarethecause;alternatively,youmaysimplybetradingtoobigofapositionforyourcomfort
zone.”
“Isee…yousoundlikeyou’respeakingfromexperience.”
RichTraderlaughedagain.
“Well,Iunderstandnow.Thanksagainfortakingthetimetotalktome.”
“Oh,it’snotrouble,”RichTraderreplied.
NowNewTraderfeltasthoughhehadabetterunderstanding.Athousandshareswereobviouslytoomuchforhim,butnowheknewwhathehadtodo.
“Ifyouexperiencehighlevelsofstressduringtrading,eitheryouare
tradingtoobigofapositionoryoudonothaveenoughconfidenceinyoursystem.Reduceyourpositionordofurthertestingonyoursystemtocureyourstress.”–SteveBurns
Recommendedreadingforthischapter’slesson:
EnhancingTraderPerformance:ProvenStrategiesfromtheCuttingEdgeofTradingPsychology,byBrettSteenbarger
3NewTradersareimpatient
andlookforconstantaction;RichTradersarepatientandwaitforbuy
signals.
NewTraderwoketwohoursbeforethestockmarketopened,excitedaboutfinallyhavingadayofftotrade.
Hemadeastrongcupofcoffeetopreparefortheday,signedintohiscomputer,andbegantolookatthemarketactioninAsiaandEurope.
Allmarketswereupanicehalfapercentonthemajorindexes.HisstockSRRSwasat$9.70inpre-
markettrading.
Hegrinned.
I’mup$350injustoneday;Ireallyhaveatalentfortrading…
Butfirstthingsfirst:ImustreducemypositionsizetowhatIamcomfortablewithandcreateatrading
planthatfollowsaprofitablesystem.
Asthemarketopenedhesold500sharesofSRRSfor$9.75ashare.Hemade$200incapitalgainsminus$10forthecommissiontotradeinandoutofthestock.
Hewasverypleased
withthe$180inprofitsonhisfirsttrade.Hewasstillholdingthe500sharesofSRRStogointoearningswith,andwasaimingathis$12pricerange.
Hefeltasenseofreliefwithastockpositionoflessthan$5,000insteadofonecloserto$10,000.
Hewasn'texperiencingtheacceleratedheartrateor
stresshehadfeltat1,000shares,andconcludedthat500sharesor$5,000shouldbehissizeperposition.
Hewashoping,however,thatashisexperienceandaccountgrewhewouldbemorecomfortablewithbiggertrades.Timewouldtell.
Nowhefeltlikehehadtogetthemoneyinhis
accountbacktowork.
Sincehisaccountwasamarginaccount,hecouldtradewiththismoneytodayandnothavetowaitthreedaysforthetradetoclear,asotherswithcashaccountsfortradingmustdo.Hefeltmuchmorecomfortablewitha500-sharepositionof$5,000,whichwastobehistradingplan.Ifa
stockwas$50hewouldtrade100shares.Ifastockwas$5,hewouldtrade1,000shares.Healsofiguredhemighthavetofactorinthevolatilityofastock.
Hewantedtotradestablestocksinuptrends.Hewouldtradestockswithnomorethana2%to5%dailypricerange.Hethenwentonlineandcheckedhisstock
SRRSforitspricehistory.
Itwasavolatilestock,justbarelyaveraginglessthan5%adayinpricemovement.
Thisdidn’tstressNewTrader;hewantedastockwithmovement.Heneededsomevolatilitytoshowhimthemovementofthetrend,tomakeaprofit,andtocoverhistradingcosts.
Hebeganasking
himselfquestionstobuildhistradingplan.WithCNBCplayinginthebackgroundandhislivestreamersflashingonthecomputerscreen,hesettledintothink.
Heglancedbackathisposition;hisstockwasnowat$9.92;ithadbrokenthroughthe52-weekhigh.
Thismadehimhappy.Hefeltasenseofsatisfactionhavingpickedawinnerandhavingpurchaseditatagoodentrypoint.
Butthenhethought:whyexactlydidIbuyatthatprice?Wasitbecauseitwasashort-termpricesupport?Wasitahunch?Didhereallyhaveasystemthathetraded,orwashemerelya
discretionarytrader,tradingonhisopinion?
Hehadtroublefindinganswerstothesequestions.Atthesametimehehadastrongdesiretoputtheother$5,000inhisaccounttoworkinatrade.
Helookedathiswatchlistforaction.Theoverallmarketwasnowupalmost1%acrossmostindexes,and
DMY,asuppliertoSRRS,wasatanew52-weekhighof$4.90.
Hedidn’tthink;hejustbought1,000sharesat$4.91ofDMY.Thestockthenwentto$4.95,thenstalledandreversedto$4.92.Hewashopingforastrongtrendupforprofits.
WhilehewaswatchingtheBid/Askspreadhang
aroundthe$4.92/$4.93areaforafewminutes,hequestionedhimself:
WhatamIdoing?Ihavenoexitstrategy.Idon'tevenknowwhyIboughttheshares.
Hedidn'trealizeitatthetime,butgreedwashismotivator–andinthefutureitwouldaskhimtomakesomebaddecisions.Butfor
nowhewasjustconfused.
Maybecreatingatradingplanduringtradinghourswasnotthebestdecision.
Withthestockgoingnowhereafter30minutesofstaringandstrainingatthescreen,hedecidedtosell.Hesold1,000sharesfor$4.92.
GoodthingIdidn’tlose
anymoneyonthattrade…
Oncloserexamination,however,henoticedhisaccounthad$10lessvaluethanbeforethetrade.
Hisprofitwas$10buthehadtopay$20incommissionsonthetrade.
Nowhejustfeltfoolishforhavingmadethattrade,andtodoitwhiletryingto
createatradingplanseemedridiculoustohim.
HedecidedtocallRichTrader.
WhenRichTraderansweredthephoneinhisnormal,pleasantvoice,NewTraderwastednotime.Hegotrighttothepoint.
“Haveyouevermadeatradewithoutknowingwhy
youdidit?”
“Yes,whenIwasmuchyounger,intheheatofbattle,whenthestakeswerehighandtheadrenalinegotgoing,IdidthingsIregretted.”
“Whatcausesovertradingorspontaneoustrading?”
“Iwouldsaythisparticularproblemiscausedbyafew
differentthings:
1.Nothavingaspecifictradingplan.
2.Beingboredandlookingforexcitement.
3.Beingarrogantandthinkingyoucantradejustbasedonbeingsmarterthanothertraders.”
“AndwhatcanIdotostopthis?”
“Iwouldsuggestthatyou
tradeonlytomakemoney,notforentertainmentortoproveanythingaboutyourself.Muchofthetimeprofitabletradingisboring.Ifyoualreadyknowwhatyouaregoingtodobeforeyou
trade,thattakesalotoftheexcitementoutofit.Ifyoutradewithasystemthatgivesyouanadvantageinthemarketandhaveatradingplanonexactlyhowyouwilltradeyoursystem,thentherearenospontaneoustrades.Youarewaitingforentrysignalsandexitsignals.Intime,asyousufferlossesontradesyoumakebasedonlyonyouropinion,youwill
cometolearnthatyoursystemmakesyoumoneyinthelongtermbutyouregolosesyoumoneyintheshortterm.Tradeyoursystem,notyouropinions.”
“Thatmakesalotofsense…”
“Doyourplanningandresearchwhilethemarketisclosed;tradeyoursystemwhilethemarketisopen.”
“Istillhavealottolearn.
Thanksforlistening.”
“Experiencehasalwaysbeenthegreatestteacher,”RichTraderreplied.NewTraderdecideditwouldbebesttonotmakeanymoretradesuntilhehadaplan.
“Itisbettertodonothingthantodowhatiswrong.Forwhateveryoudo,youdotoyourself."–Buddha
Recommendedreadingforthischapter’slesson:TradingforaLiving,byAlexanderElder
4NewTraderstradebecausetheyareinfluencedbytheirowngreedandfear;GoodTradersuseatradingplan.
NewTraderfeltmorepreparedthaneverbefore.Itwastimetogetserious;itwastimetostartcreatingatrading
plan.Butfirsthehadtoanswersomequestions.Takingoneofhisfavoritetradingbooksofftheshelf,heopenedittothechapteronhowtowriteatradingplan.Whatwillbeyoursignalforenteringatrade?Whenwillyousell?Howmuchwillyouriskoneachtrade?
Whatwillbeyourtradesize?Whatequitieswillyoutrade?Howlongwillyouholdyourtrades?Howwillyoutestyoursystemforprofitability?Whatisyourratioofrisktoexpectedreward?Andsohestartedmakingdecisions.
I’lltradetrends,hethought,somysignalneedstobuyintopriceandvolumestrength.
Soinsteadofbuyingsupport,hewouldbuyeitheratthebreaktoanewhigh,orwhenitbreaksresistanceofeitheramovingaverageorprice.
Hedecidedtoriskonly5%ofhistradingaccountper
trade.Thiswouldgreatlyreducetheriskofruinhehadreadaboutsomanytimesbefore.Soifhetradeda$5,000position,hewouldonlyrisk$250total;witha500-sharepositionthatwouldbe50centsashare.HisstoponhisSRRStradeshouldbeat$8.85,sinceheboughtitat$9.35andstillhad500shares.
WhendoIplantosellSRRS?
IfIhaveastoplossIneedaplantotakeprofits.
Twelvedollarswashistarget,butwhatifitonlygoesonlyto$11.99andthenreverses?Wouldheberidiculousenoughtogivebackhisprofitsandmaybeevenlosemoneyifitkeptfalling,evenbelowhis
purchaseprice?
Hethoughtthebestplanwouldbetotrailastoplossandtakeprofitsifitpulledback5%.Ifitwentupsteadilyto$9.85,thenpulledbackto$9.35,hewouldgetouteven.
Ifitwentallthewayto$11.99,thenpulledbackto$11.19,hewouldgetoutwithaniceprofit.Hewouldavoid
givingbackallhisprofitsandhaveaplantosell.
Thestock,however,wouldhavetohaveaniceuptrendforthissystemtowork.Inabullmarket,heknew,itshoulddoverywell.
Itwouldallowprofitstorunnicelyandpreventtoomanystoplosseswhenthestockjustmovesinitsnormalpricerange.
Sohedecidedthathis
tradesizewouldbe$5,000andhowevermanysharesthatbuysforaparticularstock.
Hewouldtradeinthehotteststocksinthemarket,withatleastonemillionsharestradedadayforliquidity.Theywouldhavetohaveadailyrangeoflessthan4%.
Thiswouldalleviate
beingstoppedoutbecauseofvolatility.
Notonlythat,butthebeststockscanrunupto15%ormorebeforeearnings–somecanevengoup50%orevendoublebeforetheirtrendchanges.
Thiswouldgivehimachancetocashinonthebig
winners,buthisbuyswouldneedtobeprompt.Hecouldn’taffordtogiveup4%inanuptrend,thenchasethestockandbuyitlate.Inavolatilestockwhichmovesalotduringtheday,itwouldbecrucialthathisstockwasinanuptrendanddidn’tpullback5%andgethimstoppedout.
Sohedecidedhe
shouldputinabuystopsothatthestockwouldbeautomaticallyboughtatthebeginningofanuptrend.
Hisplanwastoholdstocksaslongastheygoupwithoutpullingbackby5%inprice.Apricebreakoutcouldfail,forcinghimtosellonthefirstdayandmakehimadaytrader.Orhecouldalsoendupholdingastockfor
overayearasitneverpullsback5%andjustrocketsupanddoubles.Hewouldput5%,or$250,atriskineachtradewithunlimitedupside.
Theonlywaystotesthissystemwastopapertradeoruseasimulator;buthisstockpickingwastoosubjectiveanddiscretionarytoprogramintosoftware.
NewTraderfelt
confidentinhistradingplan.HehadsimplyfollowedsuggestionsfromthemanytradingbookshehadreadandtheadviceofRichTrader.Hedidn’tfeeltheneedtobotherRichTraderagain.Haven’tIbotheredhimenough?
Hewasbeginningtofeellikeabusinessmanwritingabusinessplan.This
wasfeelingwasquitedifferentfromtheadrenalinerushhegotfromtradingonhisopinions.
Foramomenthewonderedifhisplanwasnotaggressiveenough.Heshouldbetakingmorerisk.Was$250atradereallyworthallthistrouble?
Hisgreedwantedamuchmoreaggressivetrading
plan;itwantedtobeamillionaireinayear,nottradeforafewhundreddollars.
Asgreedtemptedhimintoamoreaggressivetradingplan,fearbegantognawathim.Hecouldfeeldoubtsrisinginhisheartandmind.
WhatifIlosemyfirsttentradesinarow?Thatwill
be$2,500gone;Iworkedhardforthatmoney.Itcouldtakemefourorfivemonthstosavethatmuchagain!
Hefeltnauseous.
“Wasitworthit?”hesaidaloud,thinkingabouthisjob,thenhissecondjob.
Hethoughtaboutthelegendshehadreadaboutwhohadmademillions,and
thefreedomthatRichTraderenjoyed.RichTraderhadanicehomeandhadnojobtoreportinto.Noboss,noschedule–hehadbecomeamillionaireeventhoughhewasacollegedropout!
SoNewTraderhadadecisiontomake.
Wouldhejustgiveupandgobacktoworkingatajobfortherestofhislife,or
wouldhecontinueonhisjourneytowealth?
Atoncethechoiceseemedsoeasytomake.Hewouldbeatrader.Whatotherjobofferedthiskindofopportunityandtheseoddsforsuccess?Itwaslikealotteryhecouldeventuallywinbasedonhardworkandlearningthebusiness.
Hewouldcontinueon
hisjourney,experiencingbothfearandexcitementashecontinuedtogrowandlearn.
“Prideisagreatbananapeel–asarehope,fear,andgreed.MybiggestslipupsoccurredshortlyafterIgotemotionallyinvolvedwithpositions.”–EdSeykota
Recommendedreadingforthischapter’slesson:
ThePsychologyofTrading:ToolsandTechniquesforMindingtheMarkets,by
BrettSteenbarger
5
NewTradersareunsuccessfulwhentheystoplearning;RichTradersneverstoplearningabout
themarket.
NewTraderwokeupfeelinglikehehadfinallydoneit.
Hewasagoodtrader.Hehadhisstyleandhistradingplan.
HecalledNewTradertoseeifhewasavailableforbrunch–itwasSaturday,sothemarketswereclosed.
Sowhatdoesatraderdo?Relaxandenjoyhisprofits.
Theyagreedtomeet,
andbeforenoontheyweresittinginahomeyrestaurantorderingtheirfavoritebreakfastfoods.Theyrelaxedandsettledinforadeliciousmeal.
“Ihavethistradingthingfiguredout,”NewTradersaidoutofthebluewhileenjoyinghiseggs.
RichTraderchokedonhisorangejuice,almost
makingascenewithhisboisterouslaughter
“What’ssofunny?”NewTraderasked,bewilderedbyRichTrader’sreaction.Thiswasseriousbusiness!“I-I’msorry,”RichTradersaidashefinallycaughthisbreath,“butthatwas…”Helaughedagain,thoughitwasmoreofachuckle,“Idon’t
thinkI’veeverheardanyonesaythatbefore.”
“I’vedonealotofresearch,anddecidedonmystyle:trendtrading.I’vealsowrittenmytradingplan,”hesaid,handingRichTraderafoldedpieceofpaper,theneatingasliceofbacon.
RichTraderlookeditovercarefully.“Thisisagreatstart.”
“Start?”NewTrader
saidincredulously,frowningashefinishedoffhissecondpieceofbacon.
“Thisislikeyourfirstfreshmanpaperyou’returninginforyourfirstclass.Ifyou’relikeothersuccessfultradersyouwillhavetotestthissystemfirstandthenmakeadjustments.”
RichTradertookanothersipoforangejuice.
“Itmayworkwellforawhile,thensuddenlystopworkingandgiveyourcapitalalargedrawdownduetoachangeinmarketconditions.Thesystemmaynotevenwork;youdon’tknowyet.Oritmightmakeyouaniceprofitinabullmarketthentaketheprofitsbackinabear
market.Ifyouwanttobeprofitableinabearmarket,youmayhavetoreverseyoursystemandsellthesamestocksshortwhentheybreakdownthroughsupport.Testingyoursystembothinsimulationsandrealmoneywillteachyoualot.Youfirstneedtogetanideaofyourwinningpercentageandtheaveragesizesofyourwinsandlosses.”
NewTradercouldfeel
theconfidencehehadwhenhewalkedintotherestaurantwilting.Whydidtradinghavetobesocomplicated?
HefelthisappetitedwindleintonothingnessafterRichTrader'slesson,anddisappointmentsettledonhisshoulders.Hehadn’tevenconsideredthepossibilitythathissystemwouldbeonlythe
beginningandnottheendofhishomeworkandstudy.
ItseemedthismeetingwithRichTraderwouldn’tbeasdifferentashethought–healwayscameconfidentbutlefthumbled.“Somynextstepissystemtestingandmakingadjustments?”NewTraderasked,attemptingtohidehisdeflatedego.
“Yes,yoursystemis
builtonsolidprinciples,butyouneedtoquantifyandmeasurethemasmuchaspossible.Youneedtobuildarecordofhowthesystemperformsinrealtrades.Butmostimportantly,youneedtotestyourdisciplineandconfidenceintradingthesystemexactlyasyouplanned,”RichTrader
informedhim,takingabiteofpancakes.
“OfcourseIwill!”NewTradersaiddefensively.
RichTraderraisedabrow,amused.
“Iwouldalsostronglysuggestkeepingatradingjournalwhereyoulistyourtrades;listyourplanbeforeandafterthetrade.Record
anyproblemsyouhaveinyourownabilitytobuyorsellattherighttimesaccordingtoyourtradingplanandsystem.Recordbreachesofdisciplineandwhyyoutradedofftheplan.Youhavetoalwaysbewatchfulforaninflatedegotakingoveryourtrading,andtheemotionsofgreedandfear.Boredomcanturngoodtradersintobadtradersas
theylookforactioninsteadofprofits.Atradingjournalislikehavingateacherwhoteachestradersaboutthemselves.”
NewTraderbitbackhisfirstreply–thatitwassillyandawasteoftime–butheknewRichTraderhadhisbestinterestsatheartandhadyettosteerhimwrong.
Andhedidn’twantto
feelthefoolagainafternotdoingit.
“Whatwouldmyjournalshowme?”
“Patterns.”
“Whatkindofpatterns?”
“Patternsinwhatcausesyourgoodtradesandyourbadtrades.Whatyouwerethinkingandwhatcausedyou
togoagainstyourplan?Also,whatmadeyourbesttradespossible?Youmightevenseepatternsthatshowyoursystemworksbestinthemorningorinthefinaltwohoursoftrading.Youshouldpackasmuchinformationaspossibleintoyourjournal,alongwithyouractualtradeinformation,yourmood,feelings,goals,andevenyourchartswithbuyandsellareas
marked,ifpossible.”
“I’lldothatthen,”saidNewTraderashepickedathislastpancake.Thefactthathedidn’thaveanappetiteforhisfavoritepancakeswasunsettlingenough.
“Arethereanyotherlessonsyouthinkareimportant?”NewTraderaskeddejectedly,yethopefully.
“Alwaysstayhumble.
Alwaysknowthemarketistoobigforanyonetomaster.Youmustneverstoplearningaboutyourself,aboutthemarket,andaboutrisk,”RichTradersaidbeforeposingaquestion,“Howmanytradingbookshaveyouread?”
“Ten,”NewTradersaid,hopingitwasn’tadisappointingnumber.
“Mostofthebest
tradershavereadhundreds,”RichTradersaid,andNewTradersighed.Hewasexpectingthatsomehow.
“Howlongdoyouspendlookingatchartseachday?”
“AfewminutesbeforeIplaceatrade...”NewTradersaidsheepishly.Heknewthat
wasn’tagoodanswer…
“Greattradersspendhoursadaydoinghomeworkoncharts,identifyingsupport,resistance,andtrend,”RichTraderinformedhisstudentgently.“Greattradersarelife-longlearners.Myadviceistoalwaysbeastudentofthemarket,alwaysgotobedeachnightunderstandingmoreaboutthemarketthan
youdidwhenyouwokeup.Withhardwork,experience,andfocus,youwillonedayconvertallthattimeintomoney.”
“Inmywholelife,Ihaveknownnowisepeopleoverabroadsubjectmatterareawhodidn'treadallthetime–none,zero.”–Charlie
Munger(WarrenBuffet’spartneratBerkshireHathaway)
Recommendedreadingforthischapter’slesson:HowLegendaryTradersmadeMillions,byJohnBoik
PartII
RISK
6
NewTradersactlikegamblers;RichTraders
operatelikebusinesspeople.
NewTraderturnedhisalarmoffassoonasitstarteditsannoyingbleeps–hehadbeenlyingawakeforsometime,butnowitwasanhour
beforethemarketopenedandheneededtoprepare.Hecouldfeelanunusualamountofadrenalineashealwaysseemedtobeforehetraded,andherushedtoturnonCNBC.
TheEuropeanandAsianmarketswereupover1%,andthoughhetriedtounderstandthenumberstheywerespoutingoff,hecouldn’t
decipherexactlywhythemarketswereup.Butheknewthatthetraderswerebullishandpriceswereheadedup.
Andso,confidenthewouldbemakingmoneythatday,helaidhistradingplanbesidehiscomputer.HespenttwoweeksafterthatbreakfastwithRichTradertestinghissystemonasimulatorand
hadrecordedthe10testtrades.Trade1:-$250Trade2:-$250Trade3:$250Trade4:EvenTrade5:$500Trade6:-$250Trade7:$200
Trade8:$750Trade9:$300Trade10:$400Withsevenwinsandthreelosses(whenyoudon’tlosemoneyit’sawin;youonlyhavetopaytheexpenseofthecommission),hehadmade$2,400,andlost$750,foraprofitof$1,650.
Hissystemseemedtoworkwell,butheknewRichTraderwouldtellhimittookmorethantentradestodefineasystem’slong-termviability,andthatthemarketbeinginanuptrendcouldbeafactorotherthanthesystemitself.Helookedathisjournal–gladthathehadtakenRichTrader’sadvice–torefresh
whathehadlearned.1)Cuttinglosseswascrucial;manyofthestocksIsoldwitha$250losscontinuedtofallandIcouldhavelostover$1,000onone.ImustknowtheamountofmoneyIamwillingtoriskbeforeItrade.2)Buystopsaregoodbecauseithelpedmemakeextramoneyonthemovebygettingintoatrade
automatically.IfIwouldhaveattemptedtobuysomeofthesestocksinanuptrend,Iwouldhavelosthundredsofdollarsinprofitswhiletryingtomanuallybuyitasitshotupward.3)Itakeaprofitwhenitbeginstofall.IfIdidn'thaveatrailingstopIwouldhavegivenbackallmyprofitsontwoofthetrades.It’sgoodto
haveaprofit-takingstrategy.IthinkmysystemcouldbebetterifIfindawaytobuyearlierinahotstock,maybeatsupport,andtakeprofitsonabigrunupinsteadofonadrawdown.I’msureRichTraderwillhavesomeadvice.NewTraderfeltastrongpulltotradeinthemarketsthatmorning,sohedecidedtoscanhiswatchlistforbuy
points.Hisgreedwaslikealittledevilonhisshoulder,whisperinginhisear,tellinghimtobuythestockinhisrealaccountinsteadofthesimulatedaccount.Hedeservedit,didn’the?–saidthelittledevil.Hehadworkedhard,learningabouttradingandbuildinghisaccount.Hedeservedthe
profits.Themarketowedhim.
Thereal-timestreamersflashedredandgreen,temptinghiminthewaythatLasVegaslightstemptgamblers.Foramomentthelittledevilwon,andthedelusionofwinningbig,easymoneysatinhismind.
Hewasclever,afterall–thelittledevilknownas
Greedtoldhim–andhecouldbeatthemarket.
Stocksweregoingup;heonlyhadhisoneSRRSpositionon;itwasnowat$10.35,andhehadpaperprofitsof$500.Thatwasencouraging,andhewouldsellifitretracedto$9.85.
Hisrationalmindreturnedashelookeddownathistradingplanandrealized
hehadtostayontrack.Itwouldbefoolishtowildlybuyastockwithnoplan.Itwastimetogetawayfromthecomputer–andthetemptationtotrade.
HeeventuallycalledRichTraderandreceivedanopeninvitationtocomeforatalk.
WhenNewTradershoweduparoundnoon,he
suddenlyrealizedthatheneversawRichTraderwatchingCNBC,nordidRichTraderhaveafancytradingstation.Doesheevenstilltrade?Isheretired?
“IamreallysurprisedatthetemptationsIfeelwhenItrade,”NewTraderbegan.“Ikeepwantingtotradeaggressivelyinsteadof
followingmyplan.”
“Likeallbusinessesanddisciplines,thepsychologicalaspectisusuallythepartthatcausespeopletobecomeunsuccessful,”RichTradersaid.“Beingaprofessionalmeansdoingyourjobnomannerhowyoufeel.Atraderreallyhastwojobs–youarebotharesearcherandatrader.Firstyoumustdo
yourresearch;findsystemsthathaveagoodprobabilityofsuccessinthelongterm,testthosesystems,andcreateatradingplanthatfitsyourpersonality.Measurethebestamountofrisktotakeoneachtradebasedonyourwinningpercentageandhistoricaldrawdown.Thenyournextjobistofollowthisplanandnotchangeitduringmarkethours.Adjustments
shouldbemadeinoffhours.”
“Drawdown?”NewTraderasked,feelingabitfoolish.
“Intrading,anaccountdoesnotgostraightup.Youmaystartwith$10,000,godownto$9,500,thengoupto$10,500.Evenifyoudoubleyouraccountitmaybeachoppyuptrend.Youmayhaveabigwinfollowedby
threesmalllossesthenanotherbigwin,thentwosmalllosses.That’snormal.Thekeytosuccessistolosesmallandwinbig,"RichTradersaid.“Whenyou’reinaloser,getout;thebesttradesmakemoneyatthebuypoint.Whenyou’rewinning,letitrununtilitstops.Thebestwaytolosequicklyistonotcutlosses,hopingtheywillcomebackastheyfall
fartherandfarther,ortotakequickprofitsandmissthebigprofitsthatpayforyourlosses.”
“Thereisalsoonemore,veryimportant,thing,”RichTraderaddedafteramoment.“Whenyougotoyourcomputertotrade,youshouldapproachitasifyouareenteringanauction,notacasino.Youshouldfeellike
youaregoingtoworkforyourownbusiness,notlikeyou’regoingtopullaslotmachineorputdownchipsonanumberontheroulettewheel.Ifyouexperiencethesefeelingsoryoujustwanttogamble,youwilleventuallyfailattrading.”
“Trendtradersmakemoney,chartreadersmakemoney,swingtradersmake
money,daytradersmakemoney,andpositiontradersmakemoney,butallgamblersinthemarketeventuallyloseeverything.”
WhenRichTraderfinished,NewTraderfeltalittleunsettledbuttookthewarningtoheart.
“Riskcomesfromnotknowingwhatyou’redoing."–WarrenBuffett
Recommendedreadingforthischapter’slesson:TradingwithoutGambling,byMarcelLink
7NewTradersbetthefarm;RichTraderscarefullycontroltradingsize.
NewTraderwasdeepinthought.Hewantedmoreprofitsandhewantedthemtocomemorequickly.Perhapswithhisexperienceholding500sharesofSRRSforalmostamonthhewasreadytotrade1,000shares.
Hewouldjusthaveonepositionof$10,000insteadoftwopositionsof$5,000.Nowthathehad$20,000withtheuseofmargin,surelyhewouldbecomfortabletrading$10,000…Hethoughtitthroughoverandover,tryingtoconvincehimselftochangehistradingplan.Hewantedabigtradingaccount,andhewanteditas
quicklyaspossible.HewasjustsosurethatSRRSwasgoingtotwelvebythetimeitsearningswereannounced,andhewassoverytemptedtogoallin.Ofcourse,atthispointGreedwasgettingthebetterofhim.Hewasconsciousenoughofthefact,andknewheneededtoconcentrateonRichTrader’slessons.
“Yourfirstjobasatraderistofocusontrading,notprofits.”Profitswouldcometohimonetradeatatime.Thenathoughtflashed:SRRS$11calloptionsfornextmonthweretradingat$1acontract,andsothecrazythoughtenteredhishead.
Icouldcontrol10,000
sharesformy$10,000.
Heknewthatoptioncontractswerefor100shares,andthatthequotepriceisforeachsharethathewouldcontrol;sopaying$100tocontrol100shareswasrathersimplyunderstood.
Whathedidn’tunderstandwasthatthestockhadtonotonlygoupto$11,butto$11plusthecostofthe
optionpremium.SRRShadtogoupto$12in30daysjusttobreakeven.
Hewasn’tbuyingintrinsicvalue,just$3intimevaluewiththestocktradingaround$10.Hewasbuyingtherighttothesharesatthatpriceforonemonth.
Hedidn’tunderstandhowveryslimthepossibilityofthestockmovingup20%
in30dayswouldbe.
Historically,SRRSmovedbetween10and15percentleadinguptooraftereachearningsannouncement–whichhadalreadyoccurred.
NewTraderwastemptedintoatradethathadfivemajorproblems:1.Itwasagainsthistradingplan.
2.Hedidnotfullyunderstandthenatureofwhathewouldbetrading.3.Hehadnotresearchedthehistoryofthestockspriceactiontounderstandtheprobabilityofthetradebeingsuccessful.4.Itwasanall-or-nothingbet.Iftheoptionsexpiredworthlesshewouldlosehisentireaccountof$10,000.
5.Evenifhewasrightandmadehugeprofitsonthistrade,itwouldencouragehimtotaketheriskagain.Thiswouldleadtoeventuallylosinghisentireaccount.Fortunatelyforhim,histrepidationcausedhimtolistentoanotherofhisemotions–Fear.Manytimesthisemotioncan
crippleatrader,butitisstillwisetohaveenoughtowardoffGreed.Fearwasveryquicktopointoutthathecouldloseeverythingifthistradewasacompletelost.ItalsopreventedhimfromcallingRichTradertotellhimabouthiscompulsiontorollthediceandbetthefarm.Thensomethingdawnedon
NewTrader:
IfIamtooembarrassedtotalkatradeoverwithmytradingmentor,it’snotatradeIshouldbedoing.
NewTraderdecidedtogotohismentor’shomeforadviceonmakinghistradingplanbetter–andmoresuitedforhisgoals.ButhealsodecidednottotellRich
TraderabouthisboutwithGreed.
HearrivedatRichTrader’shouseunannouncedinthemiddleoftheweekdayandwassurprisedtoseehiminpajamaswithabookhehadobviouslyjustbeenreading.
How…odd.
WhywastheTVoff?
Whywasn’tCNBCon?Whywasn’tthecomputerwhirringwithRichTradergluedtothescreen?
NewTraderwascurious.
“Areyoudoinganytradingtoday?”heasked,ashestoodawkwardlyinthedoorway.
RichTraderraiseda
browashemotionedNewTraderinside.
“Ihavesometrailingstopsin,soifmypositionsreverseI’llbesoldout.I’mgoingtocheckinatthelasthouroftradetoseeifIshouldenteranyadditionalbuystops.”
NewTraderwasdumbfounded.
Hejustcouldn’tunderstandhowRichTrader,withanaccounthissize,anddoingthisforaliving,couldpossiblybesoblaséabouthistrading.
Whywasn’thestaringateverytickandwantingtoknoweverylittlethingaboutthemarkets?!
“Aren’tyouconcernedaboutyourpositionsorabout
missinganytradingopportunities?”NewTraderasked,asheenteredthelivingroom.
“Well,weallhatetolosemoney,butmysellsarebasedonhittingpredeterminedstoplossesandnotmyopinions.Ialsotradeasystem,notmyopinionsaboutwhatthemarketwilldo.Sothere’snoneedtobe
gluedtomycomputerandCNBCsinceitcouldcausemetobeimpulsiveandtaketradesagainstmytradingplan.”
“Iwastemptedtotakeatradeagainstmytradingplantodaybutchosenotto,”admittedNewTradersheepishly.WhateverhappenedtonottellingRichTrader?
“Well,themostdangerouspartofyourplantoviolateisyourrisk.Tradingalargerpositionputsyouraccountatgreatrisk,”saidRichTrader.
“That’s…actuallywhatIwastemptedtodo.”
RichTradershookhishead.
“Ifyoumakeamistake
andloseafewpercentagepointsofyouraccount,that’snotasbigadeal;youcantradeandgetthatback.Youcanlose5%ofyouraccountfourtimesinarowandbedown20%,soyouneedfivewinsinarowtogetback25%tobeevenagain.”Hepausedinthought.“Ofcourse,normallythesearespreadoutliketwowinsaloss,thenthreewinsandtwo
losses,etcetera.Theproblembeginswhenyoutakeonebigrecklesstradewithabadstoplossplanandlose50%ofyouraccount;youmustgain100%togetbacktoeven.Ifa50%losstakesyour$10,000accountto$5,000,youneedtogain100%onyournew$5,000incapitaltogetbackto$10,000.Thatisadisaster.Ifyougofrom$10,000to$8,000witha20%loss,a
25%returnwilltakeyoubackto$10,000.Thegreatestdeterminerofyourriskisthesizeofyourtrade.Iwouldneverriskmorethana4%lossonanytrade.Goodtradesaregenerallyoneswhichshowaprofitfromthebeginning.”
“Iwasgoingwith5%asmystoplossandpercentageofrisk.”
“Andwhatisyourexpectedgainforyourwins?”
“Idon’tknow.”
RichTradersighed.“That’sveryimportantinformationtohave.Outoftentrades,ifyoutakea5%lossfivetimesandyour5winsareonly2.5%,youarestilldown12.5%ontentradesthatareevenlysized.Ifyoulose5%fivetimes,
however,andthengain10%fivetimes,youareup25%aftertentradesthatarethesamepositionsizewitha50%winrate.Howeverifyoudonotkeepconsistentpositionsizesyouwilldistortyourpayoffratio.”
“Payoffratio?”NewTradersaidwithaconfusedexpression.
“Basically,theratioof
theaveragewinningtradetotheaveragelosingtrade.Thelargerthisratioisthebetterchanceforhavingawinningstrategy.It’sdifficulttobeasuccessfultraderwithapayoffratiounder1.5.Theratioiscalculatedbydividingthegrossprofitsbythegrosslosses.Mosttraderswantatleast$2ofrewardforevery$1risked.Whichiswhatthe5%lossversus10%win
scenariowitha50%winratiogaveyouinoursecondexample.Asyoutestandtradeyoursystemitiscrucialtokeeptrackofyourwinningpercentageandpayoffratiosoyoucansetupprofitexpectations.It’salsocrucialtodevelopfaithinyoursystemtobeabletocontinuetradingitwhenitislosing.Allsystemsgothroughdrawdownswhenmarket
conditionsarenotconducivetoprofitsbasedonthestyleofyoursystem.”
“Hmm…Isee.Thanksagain,RichTrader.You’vedefinitelyopenedupanewareaIneedtoexaminecarefullywhileIdevelopmysystemandtradingplan…Ihavealotofworktodo…”
“Anytime,NewTrader,"saidRichTrader,pickinguphisbookagainas
heshowedtheyoungermanout.“Butnexttime,wouldyoumindcallingfirst?”
NewTradergaveawrygrin.
“Throughoutmyfinancialcareer,IhavecontinuallywitnessedexamplesofotherpeoplethatIhaveknownbeingruinedbyafailureto
respectrisk.Ifyoudon'ttakeahardlookatrisk,itwilltakeyou.”–LarryHite
Recommendedreadingforthischapter’slesson:ATrader'sMoneyManagementSystem:HowtoEnsureProfitandAvoidtheRiskofRuin,by
BennettMcDowell
8
ForNewTradershugeprofitsarethe#1priority;forRichTradersmanaging
riskisthe#1priority.
Firstthingthenextmorning,NewTraderwasknockingonRichTrader’sdoor.RichTraderopenedthedoorafter
afewminutes.“Hello,again,”RichTradersaidinhisusual,pleasanttone.“Youcalledthistimeatleast.”
NewTradergrinned.“Ofcourse…I’vecomeforclass,Professor.”
“Well,then.I’mafraidIdon’thavealecturepreparedtoday,butwhydon’tyou
comein,haveaseat,andtellmeaboutwhatyou’recuriousabout.PerhapsIcanhelp.”
“Well…riskseemstobeamuchdeeper–amoreimportanttopicthanIthoughtitwouldbe.”“RiskislikeaCerberus,anditcanbiteatradermanydifferentways.Differenttradingmethodsexposeyoutodifferentkindsofrisk.”
“Ithoughtriskwasjustthechancethatyoucouldlosemoney...”“Itis,buttherearemanywaysyoucanlosemoney:
1.Youhavethebasicriskthatyourtradewillbealoser,thatitwillmoveintheoppositedirectionofyourlongorshortposition.Thisistrade
risk;howevermosttimesyoucancontrolthemaximumamountyoulosethroughpositionsizeandastoploss.
2.Youalsohavethegeneralmarketriskfactor.Youcanpickastockofawonderfulcompanybutifthetrendofthestockmarketitselfisdownforsomereason,
thelikelihoodisthatyourstockwillalsofallregardlessofthefundamentalmeritsofthecompanyorthepaststrengthofyourstock’spricemovement.Themarketislikeatidethatcomesin,liftsupallships,andthengoesoutandlowersthembackdown.
3.Youhavetheriskofyourstockeitherbeingorbecominghighlyvolatile.Volatilityriskcanscareyouintosellingyourstocktoosoonorsimplycauseyoursystemtostopworkingbecausethestockyouboughthityourpredeterminedstoplossandforcedyoutosell–eventhoughitmightreverseandberightback
whereitstartedlaterthatsameday.Itisthebroadeningofastock’spricerangefromitspasthistory.
4.Overnightriskiswhensomethingunexpectedhappenswhilethemarketisclosedandthenextmorningyourstockgapsdowninthepre-marketandyounever
evenhadachancetosellandstopyourloss.Thisriskappliestoeveryoneexceptdaytradersortraderswhotrademarketsthatareopen24hours.
5.Liquidityriskiswhentherearejustnotmanybuyersorsellersforyourstock,soyoulosemoneyinthebid/askspread.The"bid"iswhatamarket
makeriswillingtobuyyourstockfor,andthe"ask"iswhattheyareofferingtosellitfor.Therearestocksandoptionswhichhavesuchlowvolumethatyoucanlose5%-10%justsimplybuyingandselling,evenifthestockpricedoesnotmove.IfyourstockhasaBID$9.50andASK$10.00andyoubuyitat
theaskpricethensellitatthebidprice,youlose5%whenyouenterandexitthetrade.Itisimportanttotradeinstocksthathaveasmallspreadinthebid/askquotes.Lessthan10centsisgoodbutapennyortwoisexcellent.
6.Marginriskiswhenyouuseyourstocksascollateralandborrow
moneyfromyourbrokertobuyadditionalstocks.Mostbrokers,afteryouhavesetupamarginaccount,willallowyoutobuyadditionalstocksanddoublethesizeofyouraccount.Withmarginyoucanusea$10,000accounttobuy$20,000worthofstockaslongasthestocksaremarginablesecurities.Somemoreriskypenny
stocksandsmallcapstocksarenotmarginable.Thegoodthingaboutmarginisyoumaketwiceasmuchprofitwhenyouareright,buttheriskisthatyoucanlosetwiceasmuchifyouarewrong.Doublingyourriskwithmargingreatlyincreasesyourriskofruinbymakingyourlossescompoundtwiceasfast!
7.EarningsRisk:Ifyouareholdingastockthroughearnings,youareexposedtotheriskofasharpmoveinonedirectionaftertheannouncement.Itcanhurtyouraccountifthemoveistoofastafterhoursandblowsthroughyourstoploss.
8.PoliticalRiskisa
possibilityifyouareinvestedinacompanylocatedinadifferentcountryoryourstock’scompanydoesamajorityofitsbusinessinacountrythatsuddenlyhasachangeinpower.InvestorsandpropertyownersofallkindswerewipedoutwhentheCommuniststookoverallprivatepropertyforthe
stateinCubain1960.
9.Timedecayrisk:Ifyoutradeoptions,theclockisalwaystickingagainstyou.Amajorcomponentofastockoptionsvalueisitstimevalue:eachdayitlosesasmallamountofthisvalueuntilitisonlyworthitsintrinsicworth–howmuchitis‘inthemoney’
basedonitsstrikeprice.Soifyoudecidetotradeoptions,youmustberightaboutthepricemovementandthetimeframe.Youarealsopayingfortherighttocontroltheshares,soyouhavetoberightbymorethanthecostoftheoptionforittobeawinningtrade.
10.Thereisalsotherisk
oferrorwhereyoucanactuallyputonetoomanyzeroesontheamountofsharesyouwanttobuyforatrade,orbuythewrongsymbol,orsellastockshortinsteadofbuyingitlong.Doublecheckingyourtradesbeforeyouplacethemisveryimportant.
11.Oneofthemost
frustratingkindsofriskofallistechnologyrisk.Iftradingisnothardenoughalready,youcanalsohaveyourInternetconnectioncrashoryourbroker'stradingplatformgodownwhileyouareinatrade.Thesearegoodreasonstohaveabackupplanlikethephonenumberforyourbrokerreadyatthepushofabuttontogetout
ofatradeentered.Anythingcanhappenwhileyouaretrading,sobeprepared.”
WhenRichTrader
finished,NewTradertookamomenttoletitallsinkinandfinishhisnotesbeforereplying.
“That’s…alittleoverwhelming.It’samazingtomethatyoucanspeak
aboutallthatoffthetopofyourhead.”
“Asatraderyouquicklylearntorespectrisk.Beforeyoustartanyblockoftradesyouhavetolookatalltherisksinvolved.Askyourselfquestionslike:‘HowmuchamIwillingtoriskpertrade?’and‘IfIlosefivetimesinarowwhat
willbemypercentageofdrawdown?’”
“Canyougivemeany
suggestionsonmanagingthesedifferenttypesofrisk?”
“Herearesomesimple
suggestionstohelploweryourriskswhenyoutrade.Someofthisyouhaveprobablyheardbefore:
1.Determineyourstoplossbeforeanytradeisplaced.
2.Honoryourstop;CUTYOURLOSS.
3.Tradethesamesizeofdollarvalueineverytradetoevenoutyourlosseswithyourwins.
4.Onlytaketradesthatmeetthecriteriaofyour
predeterminedtradingplan.
5.Trademostlylonginuptrendingbullishmarketsandmostlyshortindowntrendingbearishmarkets.(A10-daymovingaverageoverthe20-daymovingaverageisagoodsignofanuptrend,andthereverseisasignofbearishness).
6.Onlyusemargintotrademoretradesofequalsize.Onmarginyoudonottypicallyhavetowaitthreedaysforyourtradetoclearandyoucankeeptradingaftertradesareclosed.Donotusemargintomakeonehugetrade.
7.Onlytradeinstockswithoveramillionormoresharestradedaday
andoptionswithopeninterestofoverathousandcontracts.
8.Ifyoudecidetobeadaytraderyoucanavoidovernightrisk,howeverthemostprofitabletraderscarrytradesforweeksandmonths.Theonlywaystomanagethisriskistoeitherbecomeadaytraderwhereinthereisa
hugeamountofuncertaintyinthemarkets,oryoucansimplygotocashwhenahugeannouncementissetafterhours,whetheritbepoliticalinnatureorsimplyearningsforyourcompany.
9.Tomanagetheriskofvolatilityyoucansimplytradeslow,dependable
stockswhichhaveconsistentdailyranges.Astockwithabetaof1.0simplymovesthesameastheS&P500;astockwitha2.0movestwiceafastastheindex.Youwanttotradelowerbetastockstomanagevolatility.Youdonotneedavolatilestocktomakemoney;youjustneedastockthatiseitherinatrendorinaprice
rangewithsupportandresistancelevels.
10.Youcancontrolpoliticalriskbysimplytradingstocksthatdothemajorityoftheirbusinessincountrieswithhistoricallystablegovernments,suchastheUnitedStates,GreatBritain,Canada,Japan,etc.Whenyoutradein
emergingmarketsyoutakeontheelementofpoliticalrisk.
11.Ifyoudotradeoptionsyoucanlimittheriskoftimedecaybytradingdeepinthemoneycallsandputs.Mostofthesearepureintrinsicvalueanddonotevenhavemuchtimevalue,ifany.Someofthese
optionsmovecloseto100%withthestockprice.Soeventhoughtheycostmore,youeliminatetheriskoftimerunningoutbeforetheygointhemoney.
12.Remembertoalwaysdoublechecktradeinformationbeforeyouhitthatlasttradebutton.Ihaveaccidentallytraded
10,000sharesinsteadof1,000.IhavealsoaccidentallytradedastocklongwhenImeanttoshortit.Thisisarealrisklikeanyother.
13.HaveaPlanBforyourbrokerandInternetconnection.Ialwayskeepmybrokerinmy'contacts'onmycellphone,andIalsohavetheInterneton
myphonetocheckstockprices.”
“Ineverreallythought
aboutalltherisksinvolved.Thosearealotofgoodpointstothinkaboutwhenwritingatradingplanandpickingstocksformywatchlist.Thanksformylessonoftheday.I’msureitwillbeofgreatvaluetomytrading,”NewTradersaid,preparedto
leaveandcontinuehisjourneyofbecomingatrader.
“Ofcourse,Iamalwayshappytohelp,”RichTradersaidpleasantly,histhroatabitsore.
“Rule#1:Neverlosemoney.Rule#2:Neverforgetrule#1.″–WarrenBuffett
Recommendedreadingforthischapter’slesson:SuperTrader,byVanTharp
9NewTraderstrytoprove
theyareright;RichTradersadmitwhenthey
arewrong.
NewTraderstumbledsleepilytohiscomputer.HehadbeenholdingSRRS
foroveramonthnowandithadbeenbehavingwell;thestockhadclimbeduptoanewall-timehighof$10.58beforegoingallthewaybackto$10.03.Hewasquiteproudofhimselfandconfidenthisstockwouldriseto$12ashepredicted.Heturnedonhiscomputerlazily,stillnotcompletely
awake.Afewclickslaterandhewasinhisbrokerageaccount,clickingonhisreal-timestreamer,gettinguptofixsomecoffee.Andthenhisstomachdropped.$9.25.
Thepre-marketquotewas$9.25!Forgettingeventhethoughtofcoffee,hewas
nowwideawake.
“$9.25?Whatthe…”
Hequicklyworkedthroughthemath.Atonetimehewasup$615,andnowhewasdown$50?!Hisprofitshadevaporated–overnight.
HesearchedtheInternetforanswersandfoundthatoneofSRRS’srivalshadannouncedthatit
wasbringinganelectronicdevicetothemarketthatwassuperiortoSRRS’s.Analystsbelieveditwouldbeavailableinlessthanfourmonthsandthatitwouldtake20%marketshareoverthefirstyearfromtheSRRSproduct.
NewTradercouldfeelhismindshutdown,butnotbeforehisegotookoverhistradingplan.
WhatdoIdonow?
Don’tworry,hisEgosoothed,you’reright…holdtheposition.Thestockwillcomeback…Theothercompany’sproductcan’tbeasgoodastheoriginal–thisisjustanaturalreactionfromothertraders…
Hewasright,NewTraderagreed,hisegonotacceptingthissmalllossin
thesteadofthehugegainhewasexpecting.
Hecouldn’tbeartothinkofallthehardworkhe’ddonethesepastmonths–forwhatseemedlikenothing.Allthewastedtimeandeffortandfrustration…whatwasthepoint?Wasitworthit?Ifhedidn’tsell,hewasn’twrong–notyet.Hewouldjusthavetobepatientfortherally.
Thenhewouldsell.
That’swhathisEgosaid,inanycase.Histradingplansimplysaid:“Sell.”
NewTrader’stradingplan–unlikehisEgo–wasneutral.ItwasbasedonNewTrader’srationale.
ThetradingplanwascreatedtodictatewhattodothroughthelensofNew
Trader'smethodologyandsystem.ItwasmeanttoprotectNewTraderfromhugelossesorfromgivingbacktoomuchofhisprofits.Unfortunately,NewTraderbelievedhewassmarterthanthetradingplan.Hebarelyrememberedhehadplannedtosellwhenthestockretraced5%.
Thisstockhadretraced
over10%andhestillwasn’tconvincedtosell.
Thetradingplanwasnothisbosswhenhewaslookingatthelossof$615inpaperprofits.Hewasattachedtothem;hehadbeenfawningoverthemdailyforweeks.Theywerehis,andhewouldgetthemback.
HisEgowas100%behindhim.Itshouted“Don’t
sell,waitforittocomeback,atleastgetouteven!”
AsNewTraderwasponderingallofthisthemarketopened.Heeagerlystaredatthequote.Theopeningpricewas$9.30,then$9.20;nextquote$9.18,$9.14,and$9.09.
NauseasetinandNewTrader’sheartpoundedagainsthisribcageashe
obsessedovereverybidandeveryaskprice,everyquote,thevolume–itallmeantsomethingtohim.
Buthewasviewingeachmovementasvalidationthathewasright.Itwouldrebound.
Ofcourseitwillgodownto$9.00,thatwassupport;itcannotgolowerthan$9.00,andbuyerswill
moveintosupportit.Thevolumewasnotasheavyasitshouldbeifthiswasarealselloff.Heshouldn’tsell;thisisagreattimetobuy,whywouldIsell?
EgocomfortedNewTraderasmoreofhismoneyevaporatedbytheminute.
$8.98wasthelastquote.Hewasnowdown$185;hewasheadingintothe
territoryofthemosthewantedtoloseonanyonetrade.Hisinabilitytohonorhisstophadnowcosthim$135morethanifhewouldhavesimplyhonoreditandstuckwiththeplanandsoldattheopen.
Hewassurenowtherewouldhavetobeabounce;itwasrightatsupport,itwasoversold.Thebuyerswould
bescoopingupthebargain.
SRRSmadeamoveto$9.10,thenrolledoverandplummetedto$8.80inamannerofseconds;thevolumespikedhalfaday’svolumeforSRRSandthestockfelllikearockintoadeepwell.
Thepainwastoomuch.NewTradersoldout.
Itmadehimsick.Hewasdemoralized.
HefeltlikeafailurebothforpickingSRRSandfornotsellingitwhenthestockopenedbelowhisplannedstop.
Helost$275afterhehadspentsomanyweeksadmiringhis$615profits.
Hehadwastedsomuch
timegluedtoquotesforSRRS,watchingthepricemoveeachhour,pretendinghewasabig-timestockoperatorinterpretingthechart,volume,andprice.
Hisemotionsweighedheavilyonhim.Hedidn’twanttotalktoRichTrader.Hedidn’twanttotrade.Hefeltlikealoser.
Hefeltlikeasuckerfor
believingthistradingthingwouldevenwork.
Thesewerenothisthoughts;thesewerehisfeelingsmakinghimfeellikeafailure.
Afterafewhoursofbroodinghestartedtolookathisstreameragain.SRRShadgoneallthewayto$8.49andralliedbackashighas$8.97,butitwasinanewrangethat
morningwiththemarketpricingendingthedominanceofitsspecialtydevice.
Woulditrecoverbyearnings?Nooneknew.NewTraderdidnotcare;hejustwantedtomakemoney.Butnowhetrulyunderstoodthattherealitywasthathecouldlosemoneyonanytrade,buthecouldcontrolwhatthatamountwas.Helearnedthat
ifastockmethisexitprice,trailingstop,orstoploss,theoddswerethathewaswrongaboutthetrade.Heshouldtakethatsignalandgetout.
Hethoughtitwassortoflikeinsurance.Herealizedthatheshouldn’tbemadwhenhepaysforcarinsuranceanddoesn’tneeditthatmonth.Insuranceis
simplypaidtoavoidtheriskofruinintheeventthathewastototalhisnewcar.
Stoplossesandtrailingstopsprotectyoufromthebigdropwherethetrendneverreversesandyoujustlosemoreandmoremoneywaitingforitto“comeback.”Ifhewouldhavebeenabletostopoutduringregularmarkethourshealsocould
havelockedinsomegains.
Herealizedthatevenifhewasstoppedoutandthenthestockreversed,hecouldjustbuyitback–sowhat?
Heunderstoodwhyit'simportanttodecidewheretoplacethestoplossestoavoidbeingstoppedoutunnecessarily.Thetrailingstopwouldalsoneedtobeplannedoutcarefullytokeep
maximumgainswhileallowingthetrendtorun.
ThegreatthingaboutthisincidentwasthatittaughtNewTraderapersonallifelesson,ratherthanbeingtoldaboutitbysomeoneelse.Hewasluckytolearnthislessonatsuchaminimalcost.Hisplantobuyoutallofthecalloptionscouldhaveleadtoalossofhisentireaccount,or
hisfull1,000sharepositioncouldhavecosthimtwicetheloss;insteadofalossof$275hewouldbelookingatalossof$550.
Hewasgrowingasatrader.Hewasthinkingthroughwhathadhappenedandwhathehadlearned.Hewasturningintoatrader.Hewasthinkinglikeatrader.Hewaslearningthelessonsthat
alltradersmustatsomepointlearnbeforetheyaresuccessful.
Thebookshehadread,RichTrader'sadvice,andhisownexperienceswerecomingtogether.
Hedidnotfeellikeitatthetime,buthewasveryfortunate.
“Goodinvestingisapeculiarbalancebetweentheconvictiontofollowyourideasandtheflexibilitytorecognizewhenyouhavemadeamistake.”–MichaelSteinhardt
Recommendedreadingforthischapter’slesson:
TheDisciplinedTrader:DevelopingWinningAttitudes,byMarkDouglas
10NewTradersgiveback
profitsbynothavinganexitstrategy;RichTraderslockinprofitswhiletheyare
there.
ThetriptoRichTrader’shousewasmuchshorterthanNewTraderhadremembered
andbeforeherealizedithewassteppinguptotheporch.Apartofhimwashappytoreceiveanotherlessonfromhismentor,whiletheotherpartwasmortifiedbyfailuretofollowhissystem.HeknewhistimewouldbewellspentwithRichTraderandthathewouldemergewiser–whichwouldhopefullytranslateintocash.
HehadbarelyrappedonthedoortwicebeforeRichTraderopenedit,amugofsteamingcoffeeineachhand,oneheldouttoNewTrader.NewTradertookitwithasmileofgratitudeandcouldn’thelpbutnoticesomethingaboutRichTraderhe’dneverseenbefore–hispoise.
Helookedlikethepictureofsuccess,eveninapoloshirtandslacks.Hecarriedhimselfwithasenseofpurposeandintelligence,asthoughheplannedeverywordoraction.Healwaysseemedrefreshed,readyforthenewday,andthenNewTraderknewhewantedtobeexactlylikeRichTrader.Hewantedthefreedom,theconfidence,and
thesecurity.That’swhyhetraded.“Thanksforthecoffee.”“It’snotrouble,”RichTradersaid.“Comein.”
NewTraderfollowedhimintothediningroom.
Afterabriefboutofsmalltalk,RichTradergottothepoint.
“How’syourtradingbeengoing?”
“Well,everytimeIthinkIhaveitfiguredout,acurveballhitsmeintheface,”saidNewTradersheepishlywithahalfsmile.
RichTraderchuckled.
“Yes…I’vetakensimilarhitsrightbetweentheeyes.It’sallpartofthe
education,yousee.Butyouwon’tever‘figureout’themarket.Youcan’tpredictthemarkets;youcanonlyreacttothesignsitgivesyou.Atleast,that’swhatI’vebeensuccessfulat.”
“Sowhatwouldyousuggestisthebestwaytotakeprofitsinatradingplan?”
“Thatdependsonyour
tradingplan,methodology,andsystem.Trendtraderslikemetendtotakeprofitswhentrailingstopsarehit,butsometimeswealsohavesellsignalsasastockfallsthroughamovingaveragesupportorhitsanewlowforacertainnumberofdays.Wealwaysletprofitsrunasfaraspossible.Wewanttogivethestockanopportunitytocatchthebigtrends.Atrendtrader
mustcapturelargewinstopayforallthesmalllosses.”
RichTradertookasipofcoffeebeforecontinuing.
“Howevertherearetradersthattradesupportandresistanceandwouldselltheirstockonceitreachesthepricetheyconsiderresistance.Ifyoursystemislookingforshort-termswingsinpriceliketradingaroundan
earningsannouncement,youmightsimplyhaveatargetbasedonthehistoricalpriceactionofthestock.”
“Whatdoyoumeanby‘historicalpriceaction’?”
“Imeanthatifyou’reswingtradingastockandbuyingitamonthbeforetheunderlyingcompanyannouncesitsearnings,youwouldwanttoknowhow
muchthestockmovedleadingupintoearningsannouncementsoverthepastyear.”
RichTraderclearedhisthroat.“Ifthelastfourtimesthestockincreased8%,7%,10%,and12%thefourweeksbeforethecompanyannouncedearnings,itwouldbeprudenttotakeprofits
whenthestockwasup7%,orsetastopifitretracesto7%whenitisup8%ormore.Ifyouareup10%inthisparticulartrade,theoddsarethatyouhavealltheprofitsyouaregoingtohaveandyouneedtolookattakingthem.”
NewTraderpausedamomentbeforereplying.“Ididn’tthinkaboutallthose
movingparts.Iwasjustlettingmyprofitsrunonmylasttrade...Thenanannouncementdemolishedmeinthepre-market.Thentomaketheproblemworse,Ididn’tsellandtakemyoriginallosswhenithitmyselltarget.”
“Soyouhadsimplebadluck,combinedwithanoverextendedprofitand
failuretofollowyourtrailingstops?”
“Yes,”NewTradersighed,“alloftheabove.”
“Well,thatwasalearningexperience.That’salsohowplanecrasheshappen;it’sneverjustoneproblembutacombinationthatresultsincatastrophe.It'susuallybadweather,anewpilot’serror,andatechnicalmalfunction
thatresultsinaplanecrash.It’sneverjustonething;therearetoomanysafeguardsinplaceforonethingtocauseacatastrophicplanecrash,whichismuchliketrading.Whenyoutradeyoushould:
1.Reallyunderstandthestockyouaretrading,itsvolatility,dailypricerange,andhistoricalmovementsleadinginto
earnings.Youshouldalsounderstandhowtheearningsreportsofsimilarcompaniesaffectyourstock.Economicreportsmayalsocausemovementinyourstock.Knowitinside-outbeforeyoutradeit.
2.Controlyourrisk.Whenastockmovesagainstyouandhitsyour
stoporgapsdownbelowyourstop,getout.Thisisyourinsuranceagainstruin.Donothope,donottrytopredict,justsell.Themajorityoftimesthiswillsaveyoufurtherlosses.Whenyousellyoucanplantogetbackinatapredeterminedrallyifitfitsyourtradingplan.
3.KeepyourEgooutof
thetrade.Yourgoalisnottoberighteverytime;yourgoalistomakemoneyoverthelongterm.Thisisaccomplishedbyyourwinnersbeingbiggerthanyourlosers.Focusonbeingrightbigandwrongsmall,notonbeingrighteverytime.”
NewTraderwas
writingquicklytohelp
absorbhismentor’sadvice.
“Whenyoudecidednotto
sellyourstockonthegapdown,doyouknowwhichrulesyouwereviolating–psychology,risk,ormethodology?”
NewTraderfrowned.
“IsupposeIneverthoughtofthepsychologyhavinga
lotofrulesbefore,butprobablyalloftheabove.Mytradingplanisbasedmainlyonmethodology.Doyouhaverulesforthepsychologyoftrading?”
“Ihavecollectedtenprinciplesthathavehelpedmytradingoverthepasttwentyyears.Everylastoneoftheselessonswaslearnedthehardway.”
RichTraderwenttoanoldnotebooknexttohiscomputer,flippedthecoveropentothefirstpage,andhandedittoNewTrader.Handwrittenontheslightlyoff-whitepaperwerethesetenrules:
1.Readyourtradingrulesandtradingplanbeforetradingeveryday.
2.Neverhopefora
bounceback;cutlossesatpredeterminedprice.
3.Exercisedisciplineatalltimes.Followyourpredeterminedtradingplan.
4.Donotovertrade.
5.Asuccessfultradeisatradethatfollowsyourtradingplanandyoursystem.
6.Donotdivideyourtime;whenyouaretrading,focusonlyontrading.
7.Youropiniondoesnotmatter–onlypriceaction.
8.Nevertrytopredict;followtrendsandtrendreversals.
9.Neverfallintothetrapofhindsight–onlyreal-
timetradingcounts.
10.Respectthemarketatalltimesanddonotbecomearrogant.
“Ilearnedmostof
theselessonsbylosingafewthousanddollarsviolatingthem.Thesealsocameoutofmytradingjournal.”
“Youknow,afew
monthsagoIwouldhavethoughtthiswasjustcommonsenseandthattheserulesdidn’tapplytome,butnowIknowbetterandIamsurprisedatthedifferencethereisbetweensimulatedtradingandtradinglivewithrealmoney.Ihaven’tstartedmytradingjournal.Ineedtodothattoo…Ineedtostartactinguponthe
lessonsIwrotedownandontheprinciplesandrulesyouaregivingme,whichyoulearnedovermanyyearsoftrading.”
“Tobesuccessfulin
anythingyouhavetolearnfromyourmistakesandcorrectthem.Ifyouwanttobeagreatgolfer,goingandhittingabucketofballswiththewrong
formeverydaywillnotmakeyouanybetter.Youneedtolearnwhichclubtousefordifferentsituations,howtoholdtheclubproperly,howtoswingproperly,andalsohowhardtohittheballdependingonthedistanceyouwanttheballtotravel.Tradingisnodifferent;itiscrucialthatyoulearnfromyour
mistakesasquicklyaspossibleandnotkeeprepeatingthem.Themarketgivesinstantfeedbacktowhetheryouarerightorwrong;youneedtolearntheprinciplesofsuccessfultraders.Tradingisveryrewardingbutisnoteasy.Youmusthaveaplantobuyandaplantosell.Yourplanmust
historicallyhavebiggerwinnersthanlosers.Youmusthavefaithinyourplanandcontinuetofollowiteventhroughafewlossesinarow.Youhavetokeepyouregoincheckandnotletittakeoveryourtrading.Youhavetokeepyourriskpertradeatasafepointandnotgetgreedywhenyouhaveseveralwinsina
rowandwanttogoallin.Tradingisabusinesslikeanyother,andifyoutreatitlikeabusinessyouwilldowell.”
“Takeyourmoneyoffthetablewhileitisstillthere.Trailingstops=keepingprofits.”–SteveBurns
Recommendedreadingforthischapter’slesson:
SellandSellShort,byAlexanderElder
PartIII
Methodology
11
ThemajorityofNewTradersquit;RichTraderspersevereinthemarketuntiltheyaresuccessful.
Lately,NewTraderhadbeendoingmorethinkingthantrading.
Heaskedhimselfiftrading
wasforhim.Theanswerseemedsimpleenough.Helovedtradingandwanteddesperatelytomakemoneyandbesuccessful.Ofcourseheshouldcontinuetrading!AndsohedecidedtosearchtheInternetforthemostpopulartradingbooksandthenvisitdifferentwebsiteswhichprovidedfreestockcharts.Hestudiedthecharts
totrytounderstandthepriceaction.Workingwithsystemsthatwonhistorically,hetradedthemwithsmallpositionsizestodeveloptrackrecordsinrealtrading.Hewasreadytogetdowntobusiness.Hewouldbesuccessfulanditwouldtakestudy,experience,andperseverance.Hewasready
topaytheprice.
NewTraderhadaweekendofffromworkandhewasreadytocramhisbrainfullofinformation.Hehadastackoftentradingbooksnexttohisfavoritereadingchair,severalfinancialmagazines,hisfavoritefinancialnewspapers,andplanstovisitmanywebsites.
Withastockpileofsugar,caffeine,andassortedjunkfoodhebeganhisjourneyat8a.m.thatSaturdaymorning.
HeflippedhisjournalopenpasthisdocumentationoftradesandRichTrader’slessonstoablankpage.Hewouldtakenotesofanythingthatseemedhelpfulashewentalong.
Whilelookingthroughchartafterchart,hebegantoseetrends.Mostofthetimethestockwasmovingupordown.Itmightbemovingslowlyorquickly,anditmayhaveatightpricerangeoralooserpricerange,butitwasveryobviousthatthemajorityofstockstrended.
Movingaveragesalsoseemedtoplayapartinprice
ranges.Hecouldseewhatlookedlikepricesliterallybouncingofftheselines.Theyhadanalmostethereal,yetpredictablequalitytothem.
The10-,20-,and50-daymovingaveragesseemedtobetheonesthataffectedstockpricesthemost,andwhenheexpandedhischartsforverylongtimeframesand
lookedatthepriceactionofstockindexesliketheS&P500,DowJonesIndustrialAverage,andNASDAQ,itlookedlikethe100-and200-daymovingaveragesalsocameintoplay.
Italsoseemedthatonceastockorindexbroketheselinesitwashardtogetbackoverthemandthatthismaysignalchangeinthecurrent
trend.
Itwasfascinating.
Stocksofsmallercompaniesseemedtomovefasterthanlargercompanies.Healsonoticedlargecompaniesweremorelikelytoberangeboundthansmallerones.
Bystudyingthesecharts,patternsstartedto
emergeforNewTraderthathehadn’tseenbefore.Hespentfourhoursthatmorningexaminingchartafterchart.
BollingerBandscaughthiseye,asmostofthetimeitappearedwhenastockpricewouldscrapeagainstthetopofthebandsinanuptrendandthebottomofthebandsinadowntrend.Helookedatthedifferenttechnical
indicators:MovingAverages,BollingerBands,MACD,RSI,andStochastic.
Hebegantounderstandchartsbetter,butbynoonhisstomachtoldhimheneedednourishment.Threeslicesofpizzaandacolalater,hewasreadyformoreresearch.
Hestumbleduponchartpatternsonawebsitebyarespectedtraderandreviewed
eachpattern.
Helookedatacupwithhandles,ascendingtriangles,headandshoulders,flagsandpennants,descendingtriangles,andwedgeformations.Hereadupontraderpsychologytheorieswhichweresupposedtocausethesepatternstoform,andhewonderedhowoftentheyreallyworked.Healso
wonderediftheycouldbeincorporatedintoawinningsystem.Hecouldusethesepatternstobeatechnicaltrader;hejustneededtofindwhathewascomfortabletrading.
Hewassearchingforatechniquehecouldtradeanddevelopfaithin;hewantedahighpercentagewinnerbecausehehatedlosing
trades.
Asystemwitha60%winratewaswhathewantedtotrade.Hewantedhisaveragewintobetwicethesizeofhisaveragelossfora2:1ratioofprofitversuslosses.Heknewwhathewanted;nowhehadtofindit.HotstockscurrentlyinuptrendsiswhatreallyappealedtoNewTradersofarinhis
searchingandtrading.
Helikedtradingstockthateveryonewanted.Helikedtradingstockswhereheunderstoodthecompany’sbusiness,andhelikedthemarketbeingbullishonhispick.
Sofarthatmorninghehadlearnedthatwhilefundamentalsandearningsexpectationscouldtellhim
whattobuy,heneededchartsandtechnicalindicatorstotellhimwhentobuy.
Therightbuypointsseemedtobeonapullbacktosupportorahighvolumebreakouttonewhighs.Thepullbackwasusuallyatthe10-daymovingaverageinmostofthehotstockshewaslookingat.
Someofthesuper-hotstocks,however,hadjustbeenonanupwardtearandneverexperiencedapullback.Theyhadabreakoutonheavytradingvolumeandneverlookedback.
Didhereallyhavethegutstotradethesebreakouts?
Heneededrules,andheneededtofollowwhathedecidedwerethehighest
probabilitytrades.Lateintheafternoon,hebegandiggingintothetradingbooks.
Hereadthecovers,thetableofcontents,andabouttheauthor.Hethenbeganreadingeachbook,readingachapterortwoandthenpickingupanotherandreadingitforawhile.Byeveninghehadstartedeach
bookanddecidedonthefivehelikedthemost,andhecontinuedreadingthemuntilmidnight.
Theprinciplesoftrendtrading,moneymanagement,andchartreadingreallystruckachordwithNewTrader.Hedecidedtobeatrendtrader,lookingtoprofitontrends.
Hewouldusechartsto
pickhisbuyandsellpoint;atthispointhewasconvincedthathisopinionreallydidn’tmatter.Whatdidmatterwerethepricesbuyerswerewillingtopayforastockandthepricesellerswereaskingbeforetheywouldgiveuptheirstock.
Pricewasreality;personalopinionshadlittlevalue.
Hestartedtoviewthestockmarketasademocracywiththevolumerepresentingthenumberofvotescastinaparticulardirection.
Stockpriceswerenotbasedonacompany’sunderlyingvaluation.Priceswereacompositeofalltraders’opinionsaboutthefutureexpectationsofmakingmoneyonthestock.
Couldfearandgreeddrivepricesmorethanacompany’sactualvalue?Thisthoughtwasinterestingtohim;hehadneverthoughtaboutactualpricedriversbefore,butafterallthechartsandbookshehadbeenreading,thingsstartedtobecomeclearer.
Hisheadwasspinningwiththoughtsaboutthe
markets.Hefellasleepinhisreadingchairwithabookinhand.Thenextmorning,NewTraderawokestillsittinginthechair,wearinghisglasses.
Hewasexcitedabouttheknowledgehewasbuilding.Hestartedrightbackwherehehadleftoffinhisbooks.Hereadalldaywithonlyrestroomandmealbreaks.
Hewasamanona
mission.
Ashewent,hejotteddownkeylessonsongrowthinvestingfromthetradingbookswhichhethoughtmaybeimportant.
•Tradestockswithdouble-digit-earningincreasesyearoveryear.
•Thegeneralmarketdirectiondeterminesthe
directionofyourstockmorethananythingelse.
•Onlytradetheleadersinthehottestindustries.
•Tradestockswhichtradeatleastamillionsharesadaysotheyareliquid.
•Stocksthatareclosetoall-timehighsandhavegreatsupportonthe
chartsaretheonestotrade.
•Stocksthathavenewproductswithheavyconsumerdemandshouldhavethehighestearningsexpectations.
•Stayawayfromilliquidpennystocks;tradestocksonthemajorexchanges.
•Cutlossesat
predeterminedamounts,2%-8%maximum.
•Nevertrytobottomfishorbuyafallingstock.
•Neverbetagainstagovernmenttakingcorrectiveactionintheeconomy.
Someofthishehadheard
fromRichTrader,buthepickedupmanydetailshe
hadn’tthoughtaboutbefore.
Healsohadgottenmorethanhalfwaythroughsomegreatbooksontraderpsychology.Bynowheknewthathavingtherightmindsetwouldbeveryimportantinhistrading.Hejotteddowntheselessons:
•Youmustmakeupyourmindtotradeuntilyouaresuccessful,or
youmaynevermakeitlongenoughtobesuccessful.
•Towinattradingyoumustthinkandactlikeawinner.Whinersarenotsuccessfultraders.
•Thebiggestdeterminantofatradingsystem'ssuccessistheabilityofthetradertofollowit100%.
•Listenandlearnbutalsoverifythesourceandwhetherwhatisbeingtaughtreallyworks.
•Donotstarttradingrealmoneyuntilyouhavedoneduediligenceonyoursystem.
•Nevertradewithoutawrittentradingplan.
•Controlyourtradingrisk
byreducingyourriskofruintoasclosetozeroaspossiblewhilestillmakinganacceptableprofit.
•Yoursystemshouldshowyourequitycurvegrowingoverseveralmonthsinhistoricalbacktestsorpapertrading.
•Haveanaccountabilitypartnerwhomyoucan
talktoaboutyourtrading.
•Keepatradingjournalwithasmuchdetailaspossible–howyoufeltduringeachtradeandwhatyouwerethinking.Includechartswithbuyandsellpointsifpossible.
NewTraderwassurprised
atthemanysimilaritiesbetweenwhathehadexperiencedinhisown
tradingandwhatthebookshadtosayaboutthepsychologyoftrading.
ManylessonsalsoreinforcedwhatRichTraderhadbeensaying.Hewouldcontinuetoreadintothenight,committedtoperseveringuntilhewassuccessfulintrading.
"Theharderyouwork,the
harderitistosurrender."–VinceLombardi
Recommendedreadingforthischapter’slesson:TradingforaLiving,byAlexanderElder
12
NewTradershopfromsystemtosystemthe
momenttheysufferaloss;RichTradersstickwithawinningsystemevenwhen
it'slosing.
New Trader decided onMonday morning that his
time would be better spentwithhismentor.
This would be part of hiseducation in trading, and hefigured he could learn whathe needed from varioussources:
1.Amentorwhohasbeensuccessful in trading formanyyears.
2. Books, to learn the
principles of successfultraders.
3. Studying charts tounderstand repeatingpatterns.
4.Hewouldalsohaveanaccountability partnerwithwhomhecouldsharehis ideas and trades tokeephimselfontrackandgrounded.
5. He would usejournaling to learn abouthimselfandhissystemashetraded.
This was his plan for
success. He was determinedto learn andno longer repeathismistakes.
He knocked on RichTrader's door and the elderman appeared as quickly asusual.NewTraderstilldidn’t
understand how he was notgluedtoCNBCandhisstockstreamer.
As soon as they weresettled inhismentor’shouse,NewTraderblurtedout: “Doyou still trade? Or did youretire?”
“I still trade, but I use aless aggressive approach,”RichTraderanswered.
“Whatdoesthatmean?”
“I currently trade a trendtrading system using stockindexes. The system I amtradingisonlyadjustedinthelast hour of trading each dayifIgetasignal.
“I’ve always picturedsuccessful traders glued totheir computer screens allday, buying and selling,sweating and stressing,
watching every newsdevelopment.”
“This is just my personalsystem right now; it fits mypersonality and mytemperament. There are alsodaytradersandswingtraderswhoactivelytradealldayandmakemoneydoingso.Inmyopinion, trend trading hasbeen proven to be the mosteffective way to trade, and
trends can last for months.But you canmakemoney inmany different ways as longasyou follow the right rules.Disciplined traders canmake money trading anysystem with an edge, buttraders without disciplinecannotmakemoneytradingany system because theywill not follow it. They willtrytojudgesignalsinsteadoffollowingthem.Theywilltry
to predict the market insteadof following what the priceand volume are telling them.The really sad thing is thatafter they take a few smalllossestheypromptlygiveup,when one of the next fewtrades is actually the bigwinner which would pay forall the small losses. Thebeauty of my current systemis that it’s very simple andwhen it catches a trend, it
makes large gains with littleadjustmentsneeded.”
“So you recommend trendtrading?”
“I recommend followingthe principles we havediscussed, and trading thestyle that fits yourpersonality. What are youcomfortable trading? Do youwant to sit in front of yourcomputer all day and try to
scalp small moves in bigpositions? Do you want tojust trade the index andfollowthecurrenttrendusingtechnical signals likemovingaverages?DoBollingerbandsappeal to you, using them tobuywhen thebottomband isreached and sell and maybeevengoshortat thetopbandonachart?Youcanalsobeagrowth investor, buying thehottest stocks in the market
with the greatest earningsexpectationsandusingchartsto know when to buy andwhen to sell. It is like anyother career; you will besuccessful in what youbelieve in and are passionateaboutdoing.”
“I just want to do whatmakesthemostmoney...”
“Thesystemyoufollowinadisciplinedmanneroverthe
long term and that you havefaiththat it’sprofitableis theone that will make you themostmoney.”
“What do you mean? Thesystem that I can actuallyfollowwillbe theone that ismostprofitable forme?Whydo you think I can’t followeverytypeofsystemthathasthebestreturns?”
“Somepeoplearenaturally
bargain shoppers; it goesagainst their very nature tobuyastockorindexatanall-time high. They wouldprobablydobettertowaitfora pullback to a movingaveragesupportorthebottomof a Bollinger band. Theyshould still be able to makemoney with something ontheir watch list getting apullback in an uptrend.Another trader may be very
aggressive and feel goodabout buying the breakoutbecause it means his stockhas technical power withbuyersverybullishonit.Thistrader will eventually buy amonster stock on his watchlist that does not pullbackbefore a huge run whichmakes him a killing. Bothtraders will be profitable inthe long run because both ofthem are using systems that
work–butitwoulddrivetheaggressivetradernutstowaitfor a pullback that may notevenhappen,and thebargainbuyer would be sick forpaying all-time highs for astock no matter what it didoverthenextfewdays.Theywill both be uncomfortablewith their trades, which willin turn probably render themunsuccessful in the long run.The aggressive trader will
lose his patience and buy astockthathasalreadyruntoofar just in time for thepullback. The bargain hunterwill panic and sell stock hedeemstooexpensiveateitherthe first sign of weakness orwhen it has just begun itsrun.”
“Could you sum upsuccessintrading?”
“Hmm…” Rich Trader
mumbled, starting to slowlycalloutwhathethoughtmadehimsuccessfulinthemarkets.“Well,let’ssee…
1. Find a style of tradingyouarevery interested inand which feels right toyou.
2. Learn everything youcanaboutthisstyle.
3. Develop a system that
ishistoricallyprofitable.
4.Developawatchlistofstocks and/or exchangetradedfundsthathavethecharacteristics which willmake them goodcandidates for yoursystem.
5. Test it out on paperover a few monthsthrough different marketcycles to see how it
currentlyperforms.
6. Ifyouareconvinced itis a winning system,begin trading it in verysmall positions, justenough to be profitableand cover commissioncosts.
7. Slowly increase yourposition size as youunderstandallthemovingparts involved in your
specificsystem.
8. Journal your thoughtsand feelings as you tradeto learn what causes youto over-trade/under-tradeornotfollowyoursystem.
9. Continue to learn andgrow by reading bookswritten by successfultraders.
10. Continue to network
with seasoned traders togrowasatrader.
11. Discuss your tradingwith another trader tokeepyourselfontrack.”
These were not Rich
Trader's opinions, butratherwhathadmadehimamillionaire a few timesover. Many of his traitswere shared with thelegends of trading whom
he had studied andlearnedfrom.
RichTradercontinued.
“As a new trader, you
are like amedical intern,sampling all the fields ofmedicine toseewhat fits.You should spend sometime day trading, swingtrading, position trading,trading growth stocks,and trend trading. You
should develop a watchlist of fast and slowmovers; it should includebig and small caps indexETFs and leveragedETFs.You should followyour interests andexperiment on paper andin small positions. Listento your emotions as youtrade.Yourstressmaybetelling you that a volatilestock moves too fast for
you to deal with. Yourboredom may be tellingyou that the system youare trading is not givingyouenoughofareturntomake it worth your time.Your uncertainty in atrade may be telling youthat you have not lookedat its historicalperformance sufficientlytohavefaithinit.”
“SoI’mlookingformysystem, not just a systemthatmakesmoney?”
“Ifyourtradingsystem
doesnotfityourtolerancefor risk and reward, andyou cannot develop faithin its performance, thenthe odds are against yoursuccess.”
“You can measure the
success of your system
withthese.”Hepulledouta blank work sheet andexplained each line toNewTrader.
1. The winningpercentage: wins dividedbytotaltrades
2. Pay off ratio: Profitsversuslosses
3. Your largest winningtrade
4. Your largest losingtrade
5.Averagewinningtrade
6.Averagelosingtrade
7. Largest percentagedrawdown: The mostmoneyyouhave lost inarow divided by yourstarting capital before thedrawdown
8. Average percentage
drawdown: What is theaverage money lostduringyourlosingstreaksdivided by your accountbefore each loss, thendivided by number oftotallosses?
9. Largest numbers ofstraightlosses
10. Largest numbers ofstraightwins
11. Total percentageprofit for different timeperiods
“These records will
build your faith in yoursystem, after 100 tradesyou should begin to seepatterns of how yoursystem performs indifferent marketenvironments. You mayalso see flawswhich you
can adjust to make itperform better, such as awidertrailingstoporhowit works best on specificstocks, et cetera. Thepoint is to continuallywork toward building atrading system whichmatches your beliefsabout the market, whichhasanadvantageyoucanverify, risks you cancontrol, and a system in
which you can developfaithandhavethetenacityto follow long term tobuild your tradingcapital.”
“Everyonehasagameplan'tilltheygetpunchedinthemouth.”–MikeTyson
Recommendedreadingforthischapter’slesson:HowtoMakeMoneyinStocks,byWilliamO’Neal
13NewTradersplacetradesbasedonopinions;Rich
Tradersplacetradesbasedonprobabilities.
NewTraderwasbuzzingwithexcitement:RichTraderhadinvitedhimtogotodinner.
Thiswasafirst,andhefelthewasbecomingcloserfriendswithhismentor.Hehadsomuchrespectfortheoldermanandtheirgrowingfriendshipmeantalottohim.Hedecidednottotakenotesthatday–itwouldberude–thoughhedidhopehecouldrememberitalllater.
Hedidnotice,however,beforeheleft,thathisnotesseemedtobegroupedintooneofthreecategories:methodology,riskmanagement,orpsychology.Andafailureinanyoneofthesethreeareaswouldcausehimtofailattrading.Evenifhistradingmethodhadahugewinningpercent,ifhedidn’tcontrolhisriskhe
wouldeventuallylosethecapitalinhisaccounteitherthroughonehugelossortoomanylossesinarow.
Ontheotherhand,hecouldcuthislosseslikeaprofessionaleverysingletime,butifhedidn’thaveamethodthatwasprofitablehistoricallyorinthecurrentmarketenvironment,hewouldnotbesuccessfulinthe
longterm.
Ifhissystemdidn’thaveastrongwinningedgeoverthemarket,hisrepetitivelosses–combinedwithcommissioncosts–wouldwhittledownhisaccountuntilitwasruinedandtoosmalltotradeeffectively.
Hewasalsobeginningtounderstandthatevenwithawinningmethodandrisk
controlhehadtokeephisheadonstraight.
Afterwinningtoomanytimesinarow,hisegocouldgetawayfromhim,andhecouldeasilytradetoobigapositionsizerightwhenhewasdueforalossandgivebackalargeamountofprofitsinonetrade,evenwhileusinghiswinningmethodandhisriskcontrol.
Anotherpitfallheknewtoavoidwaslosingafewtimesinarowandthenbeingtooafraidtotakeasignal,ultimatelymissingoutwhenthebigwinnerfinallyarrived.
Orworse,hecouldexperienceseverallossesinarowwhichweresimplyduetooccuronaccountofmarketchanges,andthiscouldcausehimtolosefaithinhis
methodandsystemandabandonitaltogether.
Hehadtomakehistradingplanwithaclearmindandwithclearthoughtsbeforethetradingdaybegan;thistradingplanhadtogivehimanadvantageoverthemarketinlong-termtrading.
Theprobabilitiesofwinninghadtobeonhisside.
Tradingwasturningouttobeharderthanheexpected.Herealizedtherewasmuchmoretoitthanbuyingstockswhichweregoingup.Stocktradingisnotfreemoney;profitmustbeearnedthroughhomework,discipline,courage,patience,andperseveranceinthemarket.
Thesewerelessonshe
waslearningloudandclearwhiledabblingintradingandreadingstock-traderstories.Hewasalsopapertradingsystemshewasworkingonandstudyingcharts.
HearrivedatoneofRichTrader’sfavoriterestaurantsthatevening.RichTraderwasseatedatalargeboothinthecorner.Healreadyhadhisfirstwine
bottleonthetable,alongwithsomeunfamiliartypeofbread.Twosmallbowlsofoliveoilwithherbsweresetinthecenterofthetable.
“Sitdownanddigin.Orderwhateveryoulike;mytreat.”
NewTraderthoughtthiswasverygenerousandlookedoverthemenucarefully.Hedidn’twantto
begreedywithRichTrader'smoney,buthereallywantedasteak.
Whenthewaiterarrived,NewTraderwasthefirsttoorder.
“I’dliketheNewYorkstrip.”
“Andhowwouldyoulikethatcooked?”
Accustomedtofast
foodmorethanfancyrestaurants,hehadtothinkamoment.
“Welldone,”hefinallyresponded.
“AndI’dliketheporterhouse–medium-rare,”RichTraderadded.
Asthewaiterleft,RichTradersensedNewTrader’sdiscomfort.
“Youseemuncomfortable.”
“Sorry,Ican’thelpbutthinkabouthowmuchthisisgoingtocost.”
“You’reworriedhowmuchthisisgoingtocostme?Youhavetostopthinkingofmoneyinthoseterms.You’reprobablycalculatinghowmanyhoursyouwouldhavetoworkto
earnenoughmoneytopayforthismeal.”
“Yes.Ialsohatetospendmoney.I’malwayslookingtosavemoney,notspendit.”
“WhileIagreethatyoushouldonlyspendmoneywisely,andfrugalityisagreatwaytogetyourfirstaccountfortrading,Ialsobelieveitisimportantto
enjoythemoneyyouhaveearnedandspenditonthethingsyoufindmostimportant.WhileIcouldn'tcarelessaboutanewcarornewcomputer,Iliketospendmymoneyonmyhomeanddiningwithfriends.Whenyouspendmoney,youneedtoaskyourselfifyouaregettingthevalueforthemoneythatyouarespending.Ifyouare,thenyoushould
relaxandenjoyit.Ifnot,thendon’tspendyourmoneythatwayagain.Butbyallmeans,relax;thesearetradingprofitswellspent,”saidRichTraderwithagrin.
“IntradingIreallyfeelpainwhenIloserealmoney.”
“Likewe’vetalkedaboutinthepast,youhavetounderstand–andthenbelieve–thatinyourearlytrading
yourlossesareyourtuitiontolearning.It’snodifferentthanifyoupaidmoneytoacollegeortoatechnicalschooltogetaneducationortraininginyourchosencareerfield.Whenyouhaveadvancedasatraderandhaveworkedoutyoursystem,thelosingtradesaresimplyyourcostofbusiness;theywillbepaidforbyyourwinningtrades.”
“WhenIlose,Ifeellike
afailure–likeIdon’tknowwhatI’mdoing.”
“Ifyoufollowedyourtradingplan100%fromstarttofinish,thenitwasasuccessfultrade.Ifyoumadeamistakebutlearnedalessonfromthetrade,itwasmoneywellspentontuitiontoimproveyourtrading.Mistakesthatloserealmoney
tendtoberememberedandcorrectedmuchmorethanmoneylostinpapertradingorsimulators.”
“SowhatisthebestwaytodealwithmystresswhenI’mlosingmoneyinatrade?Ilovewinningbutitstillmakesmesicktolosemoney.”
“Youhavetolookatdollarsaspointswhileyou
aretrading.Professionalsdonotcounttheirprofitsorlosseswhiletheyareworking.Adoctordoesnotcounthowmuchheismakingduringsurgery.‘Great,Imadeanincision,Ijustmade$400;I’mremovingthegallstone,that’sanother$800.’Thatisnothowaprofessionaloperatesinanyfield.Theyfirstfocusonpropertechniqueandtheprofits
comelater.Donotcountyourwinsastheycomebecauseifyoulosethemitwillhurt.Focusinsteadonfollowingyoursystem,takingyoursignalsasyougetthem,andtheprofitswillfollow.”
“HowdoIincreasemychancesforsuccessinmysystem?”
“Letmethink…I’llgiveyouatopfivelist:Howto
improvetheprobabilitiesofyoursystembecomingawinningsystem.
1.First,youwanttotradewiththemarkettrend.Youhavemuchbetteroddsifyouaretradinglonginanuptrendandshortinginadowntrend.ThebestwaytodeterminethisistolookatachartoftheS&P500
orNASDAQ;ifthe10-daymovingaverageisabovethe20-daymovingaverageline,thenyoushouldbetradinglongintheuptrend.Ifthe10-daymovingaverageisbelowthe20-daymovingaverage,youareinadowntrend.Ifthemarketisinanuptrendthenyoucanfollowasystemwhereyougolongbased
onyourpredeterminedparameters.Butyouhavedrasticallyloweredyourprobabilitiesofsuccesstryingtotradelongasthemarketasawholeisgoingdown.Whenatorpedohitsaship,thewholeshipsinks–notjustpartofit.”
“SoItradeinsyncwith
theoverallmarketin
whateverdirectionitiscurrentlyin?”
“That’sstepone…
2.Youwanttobuyatthesweetspotonthechartforthestockorindex.Thesearehighconsolidationareaswherethereisvolumeandacrossroadfordecision.Theyincludeabreakouttoanewall-timehighwhereeveryone
hasmademoneyandhavelittleinterestinselling.Abreakoutcouldalsobeinalong-termresistancepointlikea10-,20-,or50-daymovingaveragewhichapricefinallyrisesabove.Ontheflipside,ifyouareshortingastockwhenthepricegoesunderthe20-or50-daymovingaverage,thatislikelytheplacetogoshortsinceit
indicatesthatitdoesnothavebuyerstosupportitspriceinthedowntrend.Sweetspotsarealsoatapointofsupportonachartinanuptrend;thiscouldbethebottomofaBollingerbandwhichhasheldforacoupleofmonths.Thesupportcouldbeataspecificmovingaveragelikethe10-or20-day,oran
actualprice.Itdependsonthespecificchartandyourabilitytoseetherepeatingpatterntodeterminetheseareas.Itisimportanttobuyatthatpointafteryouhaveidentifieditthroughstudyingthechart.Donothesitate;buyitwhenyoursignalsaysto;donotwaitandchaseitafterthefact.Ifyouwait
andbuytoolateortooearly,youlowertheprobabilityofyoursuccess."
“Yes.Ineedtotakemy
signals,overcomefear,notbetrigger-shy,andnotbegreedyandbuytoosoon.Gotit,”saidNewTrader,gettingthefeelingthatRichTraderrepeatedthesamelessonsoverand
over.RichTradercontinued:
"3.Donottradebasedonyouropinionsorfeelings.ONLYtradeyoursystem.Donottradeyoursystemuntilyouhavebothbacktesteditusingsoftwareoreyeballingpastchartsandhaveagoodideaofthewinratioandrisk-versus-rewardpayoutratio.You
willneedatleast50to100hypotheticaltradesforareasonablyaccuratebacktest.Youalsoneedtotesttradeitonpaperorasimulatortoseehowitperformsinthecurrentmarketandhowyouperformtradingit.Thenyouarereadytotrade.Inthestockmarket,opinionsandfeelingsarewrongthemajorityof
thetime;howeverthecurrenttrendisrightthemajorityofthetime.Youhaveaverygoodchanceofbeingrightoverthelongtermwhenyoufollowaprovensystemwithdiscipline.
4.Becominganexpertinbothspecificstocksandinyourchosenmethodputsyouatanadvantage.
Ifyouwanttobeadaytraderyoushouldunderstandhowstockstradeduringeachhourincrementofthedayandknowwhenthemostvolumeistradedandwhenthemarketismostlikelytotrend.Yourtradingwouldbebasedontheseobservations.Youmightsitoutthefirsthourbecauseitwastoo
choppy.Yoursystemmightsimplybetobuybreakoutsafter2p.m.onyourwatchlistorbuyoffabounceinsupportafter10:30a.m.Yoursystemmighthaveyoutradelongwhilethemajorindexesaregreen,orshortwhentheyarered.Oryourtradedirectionmightbebasedontheweeklytimeframeofwhether
theywereabovethe10-daymovingaverage.
Asanexpertdaytrader,youwouldbuildawatchlistofstockswhichhadpriceactionthatfityourtradingsystem.Ifyouweregoingtoplaydaytrendsorbreakouts,youwouldneedvolatilestockswithlargedailyaverageranges.You
wouldbuildwatchlistsofstocksbasedonthesecharacteristicsandbecomeanexpertonhowtheytraded–theirtrends,averagevolume,thepercentanddollaramountstheymovedeachday.Youwouldknowexactlywhentheyhadupcomingearningsannouncementsandeverythingthatmayaffect
theirtrading.Youwouldchangethislistwhenyoufoundbettercandidatesthantheonesyouweretrading.Someonewhohasstudiedsomethingforhundredsifnotthousandsofhourswillalmostalwaysbeatsomeonewithjustapassinginterest.Thereisahugeadvantagetothosewhoknowwhattheyaredoing.Inthe
stockmarket,moneyflowsfromthosewhodonotknowhowtotradetothosewhodo.
5.Followthevolumeinyourtrading.Thesmartmoneyknowswheretheactionandprofitsare;findthem.Monsterstocksarenothiddenunderarock;theyaregenerallyhouseholdnameseven
beforetheygoupanadditional200to500%.Whenacompanyhaswildearningsexpectations,tradersandinvestorsknowaboutit.Thepricerisesalongwiththevolume.Itisonthehighestvolumetradedlistonmajorwebsitesandindailybusinessnewspapers.Thefunnythingisthatinthepast,
manywould-betraderslookedforthathotpennystockornextobscurehotstockwhiledrinkinganenergydrinkproducedbythenexthotpubliclytradedcompany,orwhilelisteningtomusiconanewdevicecalledaniPod,madebythecompanywhosestockbecamethebiggestmonsterstockofthat
decade.Daytradersincreasethevolumesofstockswhichareperfectfordaytrading;optionwriterswriteoptionsonequitieswhichhavemovementthattheycantradeoptionson.MaximumvolumeflowsintostocksandETFswhichhavethegreatestpotentialforsuccessfultrading.Tradethese
equities.Donotfallintothetrapofhearingaboutsomehotpickfromamessageboardorapenny-stock-pumpingnewsletter.Alotofthesesourcesarepumperstryingtogetpeopletobuysotheycansellwhattheyalreadyhold.Stayinthehightrafficintersectionswherethevolumeisat.Thiswillclosethebid-
and-askspreadsoyoudonotlosemoneywhenyoubuyandsell,andyouwillalwayshaveabuyerreadytobuyfromyou.”
“Sotosummarize,tohave
ahighprobabilityofsuccessinmytradingIshould:
1.Tradeinthedirection
oftheoverallmarkettrendonly.
2.Letmysystemmakeallthetradingdecisions,notmyopinionsandfeelings.
3.Buyonlyatthesweetspotonachart.
4.BecomeanexpertinthemethodItradeandonthestocksItradeonmywatchlist.
5.Tradewherethevolumeisnotinilliquidstocksormarkets.”
NewTraderlookedup
atRichTraderfromwherehewasstaringathisnapkin.“Right?”
“That’showwewin,”
respondedRichTraderastheirfoodarrived.
“Sothisputstheoddson
myside,”NewTradermumbled.“Oh–couldIhaveanothernapkin,please?”
“Ofcourse,”thewaitersaidpleasantly,leavingtoretrieveit.
“Thesefivedynamics
workingtogetherarewhatcanputyouinthe10%oftraderswhomakemoneyconsistentlyandinthelong
term.”
ThewaiterreturnedwithanewnapkinandNewTraderstuffedhisfirstone,packedwithnotes,intohispocket.Hewishedhe’dbroughtthatnotebooknow…
“Well,that’swhereIwanttobe,sothat’sjustwhatIwillhavetodo.”
“InthestockmarketandinLasVegas,youmakemoneyonthedifferencebetweenplayingthetrueoddsandtheopponent'sdisregardoftheodds."–HarveyFriedentag
Recommendedreadingforthischapter’slesson:HighProbabilityTrading,by
MarcelLink
14NewTraderstrytopredict;RichTradersfollowwhatthemarketistellingthem.
“So what do you think
themarketwilldotoday?”
“Ihavenoidea.”
“Which stocks do youlike?”
“Theonesthatgoup.”
“Are you long or short
inthemarket?”
“My system has melong.”
“Doyouthinkthistrendupwillcontinue…?”
“Ihavenoidea.”
Rich Trader almostgrittedhisteeth.
“Do you think the job
report coming out thismorning will be good orbad?”NewTraderasked,yetanother attempt to get anopinionfromhismentor.
“NotonlydoInotknowbut I also don’t know if agood report will cause theuptrend to continue or if itwill have traders selling thenews. I do not predict, I do
not have an opinion, and Ireallydon’tknow.WhatIdoknowisthatfollowingtrendsmakes me money, and mysystemcapturestheprofits intrends and getsmeoutwhenitreverses.”
“I’mstilltryingtowrapmybrainaroundhowatraderwho does not predict pricesmakes money. Isn’tpredicting where prices are
going the only way to makemoney?”
“First of all, that’simpossible–thefuturehasn’thappened yet, so how can itbepredicted?Moneyismadeby being right on thedirection of your trade. Thedirection of the market or astock generally stays in oneoverall trend with fewchanges the majority of the
time.A stock, or themarket,is usually in the process ofmaking either a higher highprice along with higher lowpricesover the short term,orlower high prices and lowerlow prices. This can usuallybe measured over anytimeframe by checking thechart.Thisdoesnotpredict;itsimply shows you the trend.You have better odds bysimply going with the trend
than trying to predictanything.”
“So you read themarket… you don’t try topredictit?”
“Exactly–Ireadcharts,Itradepatterns,andIreacttochanges in trends. Mostimportantly, I follow themarket.Ittellsmewhattodo.There is no way one personcan predict what all market
participants are going to doandfigurethatinwithallthemovingpartsoftheeconomy,world politics, and monetarypolicy. That’s absurd. Youthrowinsomerandomeventsand it's just luck if someonepredicts correctly. The sadthing is that when someonecalls some big event inadvance, the majority of thetime it was just a lucky callbecause someone was bound
toberightwithallthepeoplemaking predictions. Ofcourse, no one checks therecords of how many timesthey were right in the past.They become a guru untiltheir next few predictionsdon't come true and peoplemoveontothenextguruwhoisrightonabigcall.”
“Okay, you don’tbelieve in psychics in the
stock market. I get it,” saidNewTraderwithabigsmile.
“I do, however, knowthat traders canmakemoneyby following the market’sdirection.Thewholepointofcreating your trading systemis to develop signals whichtell youwhen a trend beginsand when it ends. The onlysignals you can use todetermine a trend are price
and volume. All othertechnical indicators aresimply derivatives of thesetwo. So you can make asystem as complex as youwant,butinmyexperience,Ihave seen people makemillions and never even usethe more complex technicalindicators.Manyofthesenewcomplexindicatorswereonlyinvented in modern timeswith the help of computers.
Few legendary traders of thelast 100 years ever heard ofthese in their lifetime andthey did fine. The tools Ipersonally work with areprice, volume, candlestickcharts, andmoving averages.That is just my personalchoice; you should use anytool that helps you makemoney. Just limit yourindicators to a manageablelevel so you don’t confuse
yourself. Three or four areusuallyplentyforanyone.”
“So the purpose of thesystem I am building is tocatch trends and to findcommonvariablesinthepastthat are identified at thebeginningorendofatrend?”
“The price and volumeofastockrevealinvestorandtrader behavior; humanbehavior never changes. It
creates patterns you canobserve.Greedandfearcomeinto play in the markets andcarrytrendsfarbeyondwhererational fundamentalvaluations could ever takethem. The market is goingtogowhere thevotescarryit; your job is to vote withthemajority.”
“Thestockmarketisalwaysright and always tells itsown story best.” – BentonDavisRecommendedreadingforthischapter’slesson:YouCanStillMakeItintheMarket,byNicolasDarvas
15NewTraderstradeagainstthetrend;RichTradersfollowthemarketstrend.
"Trend":–Noun1.Thegeneralcourseorprevailingtendency;drift:trendsintheteachingofforeignlanguages;thetrendofevents.
2.Style;vogue:thenewtrendinwomen'sapparel.3.Thegeneraldirectionfollowedbyaroad,river,coastline,orthelike.–Verb(usedwithoutobject)4.Tohaveageneraltendency,asevents,conditions,etc.5.Totendtotakeaparticulardirection;extendinsomedirectionindicated.6.Toveerorturnoffinaspecifieddirection,asariver,mountainrange,etc.:Therivertrendstowardthesoutheast.
–Relatedformscoun·ter·trend,nounsub·trend,noun–Synonyms1.Seetendency,stretch,run,incline.
NewTraderreadthroughthedefinitionof"trend"severaltimes.Hethoughtaboutwhatitreallymeant.
“Thegeneralcourseor
prevailingtendency”reallymadesensetohim–eitherthemajorityofinvestorswereacquiringstockandholdingforincreasingprofitsortheyweresellingstocksbecausetheywerelosingmoneyandhadfearsoflosingmore.
Markets,stocks,andsectorsallhadgeneralcoursesandaprevailing
tendencyinonedirectionortheother.Inhisstudyofcharts,heactuallysawmoretrendsthanrange-boundcharts.
Itseemedlikethemajorityofstockchartsweremakingarunforashort-termhighorlow.Eachstockwasgenerallyclosertothe52-weekhighorlow,veryrarelyrightinthemiddle.
Hecouldusuallyidentifyuptrendsasstockswithacurrentpriceabovea10-daymovingaverageanddowntrendsinstocksbecausethecurrentpricewasrightatthe50-daymovingaverageorunderit.
Itwasalsoobvioustohimthatwhenthemarketasawholewasinanuptrend,moststockswerealsoinan
uptrend.
Heknew,ofcourse,thattherewerestockswhichwereleadersandhadthestrongestuptrendsandotherstockswhichwerelaggardsandintheirowndowntrends,regardlessofhowstrongtheuptrendwasinthegeneralmarket.
Whathewasbeginningtounderstandwasthatthe
leadingstocksinthemarkethadthebestearningsexpectationsandthelaggardshadfallingearningsbecausetheywerelosingmarketshare–orworse,theywerelosingmoneybecausetheirbusinessmodelnolongerworked.Investmentmoneyflowswheretheearningsexpectationsgrow.
Itwastimeforwhat
wasbecominghisdailydoseofRichTrader.HewantedtohearRichTrader'sthoughtsandexperienceswiththe“trends”hecontinuedtotalkabout.
NewTraderandRichTradermetatalakealmostexactlyhalfwaybetweentheirhouses.
NewTradershowedupjustasthesunpeakedout.He
feltthewarmthseepingintohisskinashewaitedcomfortablyonabench,afewsmallchildrenskippingrocksnearby.
RichTraderapproachedmomentslater,andtheysmiledateachother–itseemedtheybothhadthesameidea,bringingaloafofbreadwiththem.
Butthenagain,itwas
moreofadefensivemeasure,astheseduckswereaggressive.Theducksandgeeseweren’tatallshy,peckingandquackingattheirvisitorsforbread.Theywerespoiledthings,really.
“Whatarethebestwaystoidentifyandtradetrends?”NewTraderbegan,afterafewminutesofthrowingbitsofbreadtowardsthe
approachingducks.
“Yousearchforincreasingvolume;youlookforthehighestvolumestocksandETFsandlookfornewrecenthighandnewlowprices.Ideally,youwouldliketoseeanequityyou'reinterestedintradingwhichhasbeeninatightpricerangeforafewmonths;like,sayalowof$95andahighof$100
suddenlybreaktoanewall-timehighof$101ontwicetheaveragedailyvolume.Thatisatrendrightfrombirth.Sellersarenolongerwillingtogiveuptheirstockat$100,andbuyersarewillingtopay$101becausetheybelieveitwillgoupforwhateverreasonandtheywillmakemoney.Trendtradersdonotcarewhyitisgoingup;trendtradersonlycare
thatitis.Asamatteroffact,trendtradersarenotbullishorbearish;theydonotcarewhichdirectionthemarketismoving,onlythatitismoving.Thetrendtrader’ssystemwouldhavebeenjustaslikelytosellthesamestockshortat$94ashewouldhavebeentogolongat$101.Manytrendtradersbecamemillionairesfollowingsimplesystemsthat
usedpricealoneasthetriggertobuyandsell.Theytradedbothstocksandcommoditiesthatweretrendinginnatureandcapitalizedonthis.”
RichTraderhadbeentossingbreadthroughouthisspeech–theducksseemedhungrierthanusual,andthatwassayingsomething.
“Andwhatcausestrends?”
“Forone,supplyand
demand–forthestock,withincreasingbuyersdrivinguptheprice,orforthecompany'sproduct,whichdrivesupearningsandbringsinmorebuyershopingtoprofitfromthefundamentals.
“Thehumanemotionsofgreedandfearcanalsodriveequitiestoovershootfundamentalvaluationsby
absurdamounts.Inadowntrend,fearincreaseswitheachtickdownwardinprice.Investorslosemoneyandthrowinthetowelwhentheyloselostlargeamountsofmoneyintheiraccounts.Atthesametimeothertradersshortthestockafterseeingthepricefall,inanticipationofmakingmoneyonthefall.Downtrendsfeedonlossesasbuyershaveahardtime
buyingwhenalltheyseeisthatothersarelosingmoney.”
RichTradertookabreathandgaveanotherpieceofbreadtoaduckthatseemedtobealmostterritorial.
“Uptrendsalsoturnintogrowingfires,andthegasolineofgreedsparksmorebuyerstojumponboardasastockrocketsupward.Fearful
oflosingoutonabigrunup,traderswaitforapullbackgiveupandbuy.Otherswhosoldthestockshorthavetocoverbybuyingitback,addingevenmorebuyingpressuretotheuptrend.”
Theseducksarenotnormal,NewTradercouldn’thelpbutthinkashelistenedtoRichTrader.Theyseemedsomuchmoredocileinhis
youth…“Atrendtraderonlyhastocatchthemeatofatrendtomakemoneyandberight;acountertrendtraderhastheoddsstackedagainsthimbecausehehastopickabigreversalonthetoporbottomtoberight.”
“DoIhavetobuynewhighsasatrendtrader?”
“No,notatall,aslongasyoucanestablishthattheequitiesonyourwatchlistareinanuptrend,youcouldalsobuyonpullbacks.Youcanmeasurepullbacksbylookingatchartsforsupport.Yourstockmayhavesupportatthe10-daymovingaverageor20-daymovingaverageoverthepasttwomonths.Ifyoucanverifythatinthepastthepricefindssupportatthe20-
daymovingaverageandthengoesbackup,yoursystemcouldconsistofbuyingatthe20-daymovingaverage.Youthenhavetodecidewhenyouwanttosell.Dependingonthestrengthofthetrend,youcanletitrideaslongasitdoesnotlosethe20-dayagain,oryoumaysellwhenitreachesthetopofaBollingerBand.Itdependsonthatparticularstock'schart.Ina
stronguptrendsometimesthe10-and20-daymovingaveragesarenottouchedbythepriceforweeks.Themovingaveragegrowsbiggersowhenyourstopistriggeredyouhaveaprofitbecausethemovingaveragepriceyousellatismuchlargerthanwhenyouboughtit.Youmayalsohaveastock,aswediscussedearlier,bouncingaroundinaslowuptrendwithalowof
$95andahighof$100forweeksonend.Yoursystemcouldbetobuyatthesupportaround$95andsellatresistanceof$100.Youcanusepriceaswellasmovingaveragesforsupportandresistance.Youjustwanttobesuretobuyasthestockbouncesupoffresistanceratherthanfallsthroughit.Theperfectbuyoffabounce-offsupportinanuptrend
wouldbeforittohit$95.05,andthengoupto$95.50;thatwouldbeabuyoffsupport.Ifithit$94.75,thenfellto$94.25,youdonotwantanypartofit;thatisafallthroughsupport.”
“Soasystemcanbuyoffdifferentsignalsinanuptrend,notonlyanewhigh.ButIsupposeIwanttotakesignalsthatmakemelongin
abullmarketandshortinabearmarket.”
“Exactly–agoodwaytolosemoneyistogoshortinabullmarketorlonginabearmarket;theprobabilitiesarestackedagainstyou.Itisveryarroganttothinkyoucancalltops,bottoms,andmarketreversals.Theonlythingtradersshouldbetryingtodoiscallthemarketdirection
anddecidewheretostoptheirlosseswhenitreverses.”
“Whatpercentageofthetimedotrendtraderswin?”askedNewTrader,expectinganimpossiblyhigh90%.
“Thebesttrendtraders’winsarebetween40to50percent.Whatmakesthemsuccessfulisthatwhentheywintheywinbigandwhentheylosetheylosesmall.The
drawbackisthattheyhavelosingperiodsduringchoppymarketswheretheylosemanytimesinarow.Howeveroverthelongtermtheirwinscompoundandtheirequitygrowstoamazingamounts.”
“Soundslikeyouspeakfrompersonalexperience,”saidNewTrader,smilingasheflungbreadtooneofthe
ducksthatseemedtoneverbesatisfied–althoughthatwasprettymuchallofthem.
“Yes,Ihavebenefitedlikemanyothersfromtrendtradingoveralongperiodoftime.Thehardestpartmaybetokeepfaithinyoursystemwhenitsuffersseverallossesinarow.Italsogetsmoredifficultasyourcapitalgrowslargerandlarger.A$100,000
tradefeelsdifferentthana$10,000trade.”“IwishIhadthatproblem,”NewTradersaidwithalaugh.
“Itradeasystemthatispurelytechnical;itwascreatedbasedonpastperformance.Mysystemonlydependsontheactualtrend,notmyopinionsornewsstories.Idonottradeoff
fundamentalvalues;Itradeoffothertraders'andinvestors'reactionsinbuyingandselling.Idonotpredictthetrend,Ifollowthetrend.Imeasurethetrendthroughvolume,price,andmovingaverages.”
“Tradingisrocketscience– you find a rocket andrideit.”
"Thereisonlyonesidetothestockmarket,notthebullsideorthebearside,buttherightside.Ittookmelongertogetthatgeneralprinciplefixedfirmlyinmymindthanitdidmostofthemoretechnicalphasesofthegameofstockmarketspeculation."–Jesse
LivermoreRecommendedreadingforthischapter’slesson:TrendFollowing,byMichaelCovel
16NewTradersfollowtheir
emotions,whichputthematadisadvantage;Rich
Tradersfollowsystemsthatgivethemanadvantage.
OverthenextmonthNewTraderstudiedcharts.Hestudiedstocksandtheirbehavior.Hehadawatchlist
offivestocksthathebelievedwerethehottestinthemarketatthetime.Theyallhadfivecharacteristics:
1.Theywerewithin5%ofall-timehighsinprice.
2.Theyeachtradedoverfivemillionsharesaday,somemuchmore.
3.Theyallhadnewtypes
ofproductsorbusinessmodelsthatweresuccessful.
4.Eachofthemhadearningsincreasesofover20%yearoveryearforthesamequarter–somemuchmore.
5.Allthecompanieswereexpectedtocontinuetogrowinsalesandprofitsandtakeoverorchange
themarketplace.
Thiswasthefundamentalpartofhistradingplanthatwoulddeterminehiswatchlistandwhathewouldtrade.
AllofNewTrader'sstockswereinestablisheduptrends,witheachmonthin
thepastsixmonthshavinghigherpricesthanthepreviousmonth’shighprices.
Noneofthestocksonhiswatchlisthadlosttheir50-daymovingaveragesinthepastsixmonths.Theygenerallystayedabovethe20-daymovingaverage,touchingitonlyinmarketretracements.Thesestocksspentover80%oftheirtime
abovethe10-daymovingaverage,goingtonewhighpricesaroundeachofthelasttwoearningsannouncements.
HealsosetupBollingerBandsonhischartswiththesettingofa20-daymovingaverageandtwostandarddeviations.ThesestocksalsospentmuchoftheirtimescrapingtheirpricealongthetopoftheirBollingerBands.
HenoticedthatmanyofthestocksindowntrendsscrapedacrossthebottomofBollingerBands,andthesedowntrendingstockswerealmostthereverseofhiswatchlist;ontheirchartsthe10-daymovingaveragewasbelowthe20-daymovingaverage,whichwasalsobelowthe50-daymovingaverage.
Hewantedhissystemtocapturetheuptrendsinthestrongeststocks.Itlookedtohimlikethe10-daymovingaveragewasagreatsupportinuptrendsandresistanceindowntrends.
HisstudyalsoledhimtobelievethatthetopBollingerBandwasresistanceinuptrendsandthebottombandwassupportin
downtrends.Notalways,ofcourse,butmostofthetime.
Helookedatchartswithuptrends:
Helookedatuptrendsthatturnedintodowntrends:
Volatilestocks:
Niceuptrends:
Stronguptrends:
NewTraderonlywantedtotradestocksthathadchartswithsolidstableuptrendsinprice.Hedecideditwouldbetonerverackingforhimtotradestocksthathadpriceswithlargedailypriceswings.
Volatilitywasnotgoingtobehisfriendintrendtradingsystems;itwouldcausefalsestoplossestobe
triggeredwhenthestockbrokebelowsupportforamomentandalsoearlyprofittakingwhenthepricereversedmomentarilybelowthetrailingstoplikelytoonlyretracebackuptowhereitwasbeforethemomentaryretracement.Avolatilestockcouldloseits10-daymovingaverageonedayandthenextdaybebackupaboveitagain.
NewTraderwanted
stockswhere10-daymovingaveragesheldupforatleast20tradingdays.Hesawalotofopportunityinbuyingstocksonhiswatchlistatthe10-daymovingaverageandsellingwhenthe10-daymovingaveragewasbreachedandnotrecoveredbeforetheclose.
Inuptrendingstocks,
bythetimethe10-daywasbreacheditcouldhaverunup20%inpriceormore.
WhilethetopBollingerBandswereresistance,itwouldnotbewisetosellastheypenetratedthetopbandsincethestocksonhiswatchlisttendedtostayatthetopbandandkeepgoingup.
Hecouldreallyletprofitsrunwitha10-day
movingaveragesorarelybreachedonthestocksonhiswatchlist.
Hefeltconfidentthathewasontherightpathineffectivesystembuilding.Histechnicalruleswouldbe:
1.Newtraderwouldbuystocksonhiswatchlistastheytrendedupthroughthe10-daymovingaverageorbouncedoffit
assupport.
2.Afterhemadethebuyhewouldsetastoploss2%belowhispurchaseprice.Thiswouldputonly2%ofhiscapitalatriskatanytimeduringhistrade.
3.Oncehisbuywascorrectandhisstockstartedtrendingupwardsandreached2%abovethe10-daymovingaverage
hewouldthensetthestopatthecurrent10-daymovingaverage,movingitupordownbasedonthenewlyfigured10movingaverageeachday.Thepopularmovingaveragewouldbehistrailingstoplosstolockinprofitsandbehissignaltosellbecausethetrendhadreversed.
4.Thissystemwentforthehomeruns,nottakingprofitsuntiltheuptrendended.Thissystemalsoseemedtoplayitsafe,gettingoutbeforeanylargelossescouldensueafterthelossofsupport.
5.Ofhis$10,000accounthewouldtrade$2,500pertrade.Heknewthiswouldtakealotoftheemotions
outofhistradesandlethimfocusonthesystem,nottheprofits.Hewouldmoveupinsizeashisequitygrew.Thiswouldalsohelpwithrisk;thesestockscouldexperiencethe‘torpedo’effectandfallquicklyiftheymissedearningsorloweredguidance.Ittookalargesupplyofheliumtokeeptheseballoonsfloatingso
highintheair.Whiletheycouldgouptheycouldalsopopandcomedown.Itwouldbeveryimportanttocontrolpositionsizeandstoplossesatthe10-daymovingaverage.
NewTraderbelievedthis
wasasoundsystem,andhisbuypointwouldbeimportant;hedidn’twantto
bewhip-sawedifitfell2%rightwhenheboughtit.
Hebelievedthissystemwouldperformverywellinrealtradingaslongasthemarketasawholestayedinanuptrend.Hehadalsocometoknowtherealityoftradingandhowdifferentitwaswhenrealmoneywasonthelineandastockdidnotmoveupwardsinpricelikehe
believeditwould.
Thesethoughtscausedhimtogobackandaddonemorerule:
6.HewouldonlytradethissystemwhentheS&P500charthadthe10-daymovingaverageabovethe20-daymovingaverageandthepriceoftheS&P500wasabovethe20-daymovingaverage.
Themarketneededtobe
inanoveralluptrendandbullishforhissystemtobeconsistentlyprofitable.Hebelievedthisrulewouldhelphisoddssubstantially.
Nowhefeltasifhehadbuiltasystemthatwouldworkandenablehimtotradewithcontroloverhisemotionsandlimitedrisk.
Hebelievedhehadanadvantagenow.HethoughtallthebookshehadreadandallthetalkswithRichTraderwerebeginningtocometogetherforhim.
Oddlyenough,hegotthemostvaluefromlookingatchartsforhoursonend.Thatwasreality;noopinions;onlystockpriceandtradingvolumeaction.
Henowknewtherewasaflowandebb–almostarhythm–tothestockmarket.
Hecouldalmostvisualizetradersmakingdecisionsinsidethechartshelookedat.Hecouldimaginethemlettingtheirprofitsrunasstocksshotupwardsinprice,goinghigherandhigherwithlittlesellingpressure.
Henoticedfearinsome
chartsastheuptrendwasbrokenandastockquicklyfilltoits20-daymovingaverageandafteralastgasptumbleddowntothebottomBollingerBand,whereothertraderswerewaitingpatientlytograbthebargaintheysought.
HenowbelievedthatmovingaveragesandBollingerBandswere
sometimesself-fulfillingprophecies.
Hedidnotbelievethattheindicators,inthemselves,hadanyrealpower,butthetraders'beliefinthemledtothebuyandselldecisionsthathewatchedplayoutinthecharts.
Itlookedliketraderslovedtoaddtopositionsatthe10-daymovingaverageoverand
overagain.Alsothe20-day,50-day,andeven100-daymovingaveragesseemedtobeplacesonchartswheretradersmadethedecisiontobuytosupportpricesorsellwhenthesesupportswerebroken.
Hewonderedifmutualfundmanagershavehugepilesofcashsittingonthesidelinejustwaitingtoenter
thesestocksonpullbacks.
NewTraderwasbeginningtofeellikehewasnottradingstocksbuttradingonothers'opinionsofastock’spriceandmovement,andherealizedtheworstmistakehecouldmakewastryingtotradeagainstthemajority’sopinion.
NewTraderbelievedhisnewsystemwouldcaptureup
trendsinthehotteststocksinthemarket,andhiswatchlistwouldbebasedonstocksofgreatgrowingcompanies–nothisopinions,butbusinesseswhichalreadyexcelledinearningsincreasesandfutureexpectationsofmoreofthesame.
Hewouldtradeonlyifthestocksstillhadgreatpricechartsandinvestorinterest.
Themostimportantthingwasthathewouldtimehisbuysathighprobabilitypointswhichfromahistoricalperspectiveseemedprofitable.
Hebelievedhehadbuiltasolidplanandsystemforuptrends.Butthebigquestionwas:WouldRichTraderapprove?
"Thesooneryourealizeyouaretradingagainstothertradersandnotjustthestocksorthemarket,thebetteroffyouwillbe."–QuintTatro
Recommendedreadingforthischapter’slesson:TheCompleteTurtle
Trader,byMichaelCovel
17NewTradersdonotknowwhentocutlossesorlockingains;RichTradershavean
exitplan.
NewTraderhadgivenRichTraderacoupleofweeksofffrommentoring;hewastryingnottobecomean
annoyance.
OneofthegreatestthingsabouttalkingtoRichTraderwasthathewasgiventoolshecouldusetodevelophimselfasatrader.
RichTraderwasnotgoingtotellhimwhattodo;hewasgoingtoshowhimhowtodoit.
Tradingstyleand
tradingsystemareverypersonalchoiceswhichhavetofitatrader’stoleranceofriskandpain.
JustbecauseasystemworkedwellforRichTraderdidnotmeanNewTradercouldjustuseandsucceedatittoo.Justlikejobsmustbeagoodfitinorderforaworkertosucceed,tradinghastofitthetrader.
Whilestylesoftradingcoulddifferandsystemscouldhavedifferentbuyandsellsignals,itwastheprinciplesoftradingwhichNewTraderwaslearningthathadtobethesame.Manyofthesewereprinciplesnotjustfortradingbutforbusinessandsuccessinlifeaswell.
AsNewTraderapproachedRichTrader's
househefeltdifferent.Hecouldn’tputhisfingeronexactlywhatwasdifferent.Washejustinagoodmood?
Hefelthehadmuchmorecontroloverhistrading.Hedidnotfeelobsessedwithhavingtotrade.Hisonlygoalwastomakemoney,notproveanything.
Ifhewasgoingtohavetocutalossitwassimply
becausethemarketwasnotcurrentlyconducivetohissystemofprofitmaking.Hewasnotwrong;hejusthadtotakealoss.
Aftersomanyhoursofpouringoverchartshewasconfidentthatoverthelongtermhewouldmakemoneywithhissystem.
Healsoknewthathislosseswouldprobablycome
frombeingstoppedout50%ofthetime,buthiswinswouldcomefromhugemovesinastockhewouldnotbeabletopredict.Hecouldonlyfollowtheaction.
Hefeltconfident,hefeltcalm,andhefeltlikehewasbecomingarealtraderratherthanjusttalkingtoone–hewasapeer.
Hebelievedhewas
readytostarthiscareerinthemarketsinadisciplinedandfocusedmanner.
“Longtimenosee,”RichTradersaidasheansweredthedoor.“Iwasstartingtothinkyougaveup.”
“Giveup?”NewTradergrinned.“Iwasjustgivingyouavacation!”
“Ihavebeenaskedtomentormanyothersovertheyearsandnineoutoftengiveupveryquickly.Mostdon’tevenmeetforasecondtime.Theirheadsspinfromalltheinformation.Alltheyreallywantiseasymoney.TheonethingIhavelearnedinmydecadesinthemarketisthatthereisnoeasymoneylayingaroundfortradersonWallStreet.Believeme,
I’vesearchedeverywhere.Theremaynotbeanyeasymoneyonthisearth.Unlessyouworkforthegovernment,”addedRichTraderveryseriouslybeforelaughing.
“Businessisbusiness,whetherI’mtradingstocksordeliveringpizza.Ibelievethatnow.Successatanythinginliferequirescontrolling
risk,therightmindset,asuccessfulmethod,supplyanddemand,discipline,courage,stoppinglosses,andlettingwinnersrun.”
“Thefunnythingisthattheprinciplesyouhavebeenteachingmefortradingsuccesshavealsobeenhelpingmeinotherareasofmylife.Ithinkmuchmoreclearlyaboutmanypartsof
mylifenow.Myjournalhasexpandedintoaself-helpjournalaswellasatradingjournal.IdidnoteventhinkaboutmanyofthesethingsuntilafterIlearnedmanyoftheprincipleswe’vebeendiscussing.Iwouldliketoreadyousomethoughtsfrommyjournalandseewhatyouthink.”
NewTraderbelieved
thathisself-improvementwouldhelpwithhistradingandthathehadreallyingestedtheprinciplesRichTraderwastryingtoinstillinhimbecausenotonlydidheunderstandtheirapplicationfortrading,butheappliedthemtootherareasofhislife.NewTraderbeganreading,excitedtofinallysharetheseobservationswithhismentor.
•Inlife,asintrading,therightmindsetiscrucialforsuccess.Youmustbeconfidentinyourdecisionsbecausetheyarebasedoncauseandeffect,notonemotionsoropinion.Negativepeoplewhoareunsureofthemselvesarenotsuccessfulinanyfield.Youneedfaithinyourselfandyourmethodstobe
abletopersevereandnotgiveupbeforereachingsuccess.
•Youcanrisktoomuchandloseitallinyourbusiness,life,marriage,friendshipsorfamily.Youhavetomeasurethepotentialcostofeveryaction.Oneaffaircancostyouyourmarriage,justlikeonebigtradewithtoo
muchriskcancostyouallyourcapital.
•Inbusinesstherearecertainmethodswhichbringincustomersandturnaprofit,andotherswhichcauseabusinesstoturnawaycustomersandlosemoney.Tradingissimilar:methodswhichturnaconsistentandlong-termprofitare
essentialforsuccess.
•Havingunrealisticexpectationsinamarriage,job,orbusinesswillleadtounhappinessandfailurejustlikeitwillintrading.Youhavetosetrealisticexpectationssoyoudonotgetdiscouragedeasilyandquitinanyoftheseareas.Youhavetobesatisfied
thattheresultsareworthyoureffortoverthelongterm.Youneedtounderstandwhattoexpectbeforeyoubeginamarriage,ajob,abusiness,ortrading.
•Thosewhosucceedinallareasoflifearetheoneswhocanmanagestressthebest.Thebestwaytomanagestressisto
increasewhatyoucanhandlestepbystepsothatyougrowintonewcircumstances.Anotherwaytomanagestressistoavoidactionswhichgetyouintosituationsyouareuncomfortablewith.
•Patiencecanpaybigdividendsinlife.Patienceisnotinaction;itissimplyknowingwhatyou
arelookingforandtakingactionattherighttime.Whetheryouarewaitingfortherighttradesetuportherightpersontomarry,patiencecanprotectyoufromirrationalemotionsandfeelings.Waitforwhatyouwant,andwhenitistheregogetit.
•Inlife,asintrading,peoplewithwrittenplans
accomplishmuchmorethanpeoplewithnoplans.Sitdownwhenyouarecalmandrationalandjotdowngoalstopursue.Thiswillprovideyouwithamapwhenlifecircumstancesbringoutyourfears,greed,andotherdestructiveemotions.
•Educationdoesnotend
inschool.Tobesuccessfulinlifeortradingwemustneverstoplearning.Themarketandtheworldareconstantlyadvancingandchangingandtheonlywaytokeepupistokeeplearning.
•Inlife,themajorityofgamblersarebrokeandthemajorityofgood
businessownersbecomerich.Thesameprincipleistrueintrading.
•Inlife,ifyouriskeverythingenoughtimesyouwilleventuallyloseeverything.Instead,justmoveinthedirectionofyourgoalseveryday,soevenwithsetbacks,inthelongrunyouwillgettowhereyouaregoing.
•Beforemakinganydecisioninlife,thequestion:“WhatdoIhavetolose?”isaseriousquestion.Thisshouldprecede,“WhatdoIhavetogain?”Iftheansweris:Icouldlose$100,butifIamrightIcouldgain$500andmyoddsofbeingrightare50%–thenyouhaveagoodriskrewardprofile.Ifitis
reversed,thenyouhaveabadriskrewardscenarioandshouldpass.Thesearealsoquestionsyoumustaskinyourmarriage,job,business,orfriendshipsbeforemakingdecisionsyouregret.
•Failuretoadmitwhenyouarewrongcanbedisastrous.Whenyouaregoingdownthewrong
roaditisbettertoturnbacksoonerratherthanlater.Neverfightawarforahillofbones,becauseevenifyouwin,allyouhaveisahillofbonesandregretoverwhatitcostyou.
•Whenyouhavewonbigpreparetotakeprofits.Haveanexitplaninplace.Ifyourhousegoes
from$100,000to$300,000,haveaplantosellandmove.Donotjustsitthereandletitdropbackdownto$100,000.Itissurprisinghowmanypeopleareintherightplaceattherighttimeandwinwhatisequivalenttothelotteryinstocks,ahouse,orabusinessbuthavenoexitplan,sotheyrideitallthewayupthen
allthewaydownagainwithalmostnothingtoshowforit.Tragic.
•Whatmostseparatessuccessfulpeoplefromunsuccessfulpeopleinallareasoflifeisthattheypersevereuntiltheyaresuccessful.Everyonehastoovercomefailures,butthosewhokeepgoingaretheoneswithsuccessful
marriages,businesses,careers,andtradingsystems.
•Peoplewhoaresuccessfulbecomeexpertsinonearea.Theyputin10yearsoflearningandmasteringonebusiness,onecareer,onemarriage,oronetradingstyle.Theydonotjumparoundandbecomea
jack-of-all-tradesandmasterofnone.
•Successfulpeopledowhatreallyleadstosuccess,notwhattheybelievewillmakethemsuccessful.Theyreadbooks,studypatterns,havementors,andlearncauseandeffect.
•Winnersbasetheiractionsonprovenresults,
notontheirownopinionsorpredictions.Feedbackiscrucialtothem;peoplewithstrongopinionswhobelievetheycanpredictwhatwillhappenrejectfeedback.Winnersgowiththeflowofthetrendcausingtheirsuccess.
•Inlife,thosewhoaredrivenbytheirvision,passion,andplanusually
endupwheretheywanttobeorclosetoit.Thosewholettheiremotionsandfeelingstakeoveranddrivetheirdecision-makingusuallyendupwheretheydonotwanttobeinlife.
•Ibelievethatpeoplewhorealizetheyhavemadeamistakeinagivensituationandwhocut
thoselossesandtryagainwillbemuchmoresuccessfulthanpeoplewhowasteyearsonamarriage,business,orcareerthatcontinuouslygetsworse.Itisimportanttocontinueinabusinessorcareerthatissuccessfuluntilthattrendchanges.
“Iseeyou’vebeen
listening.Ithinkyoumaybe
startingtoteachmeafewthings.I’mveryimpressed.”“Thanks.It’sallstartingtocometogetherforme.You’vereallymademethinkabouttheimportanceofthetraderinanytradingsystemandawareofmanyprinciplesofsuccessthatIreallynevereventhoughtaboutbefore.What’sbeenthemostdifficultthingforyouasa
trader?”
“Ihavealwayshatedlosingmoney.Ihatetakingaloss.Itusedtomakemefeelbad.NowIrealizeitisthecostofdoingbusiness,butIdon’tlikeit.ButwhatreallyhurtbackwhenIwasayoungtraderwasnottakingthatfirststoplossandallowingasmalllosstoturnintoalargeone.Thatreallymademesick.My
firstyearoftrading,Iplannedtogetoutwitha$100loss.IthoughtIwasluckybecausetwiceIdidnottakealoss.Iwatcheda$115lossgobacktoevenandthena$150lossturnintoa$100profit,sothisemboldenedme.ItactuallyturnedoutthatIwasnotlucky;Iwasunluckybecauseittookmelongertodisciplinemyselftotakethefirstloss.Ihadahardtimenotthinking
thatIwouldgetluckyagain,soletitride,itwouldcomeback.ThenexttimeIwasdown$100IabandonedmyplanandthoughtIwassmartenoughtoreadthepriceandvolumeactionandmakeadecision.Theproblemwasthatayoungtraderinthissituationisonlygoingtoseewhathewantstosee.Ididn’twanttotakethelossatfirst;thenIdidn’twanttobe
wrongaboutnottakingit.
ThenIcommittedthefinaldeadlysinofatrader:Ireallyhopeditwouldgetbacktoeven.ThiswastheworsttradeIevermade.Iturnedwhatshouldhavebeenatradeofafewdaysfora$300profitintoaweeklongordealthatturneda$100lossintoa$500loss.NottomentiontheridiculoustimeI
wastedgluedtoitseverytick.Irodeanemotionalrollercoasterofhopeasitrebounded50cents,thenawaveofdespairasitfellbackandmadealowerlow.Ididnotknowtherewererumorsinthecompanyaboutaproductthatwasgoingtohavetoberecalled.ButIdidn'tneedtoknow;Ijustneededtofollowmyrulesandgetout.Thatwasagood
lessonwhichtaughtmefromthenontohonormystopswhentheywerehitthefirsttime.Thefirstplannedstoplossisthebestonetofollow.IpromisedIwouldneverdothattomyselfagain.
Ibelievethisisgoodpracticeinlifeaswellastrading.Itsavesyourmostpreciousresource–time.Italsoavoidsemotionalwear
andtearonyourpsycheandstomachlining.Theseareimportantresourcesyouwillneedforalongtradingcareer…”
“AlossneverbothersmeafterItakeit.Iforgetit
overnight.Butbeingwrong–nottakingtheloss–thatiswhatdoesdamagetothepocketbookandtothesoul."–JesseLivermoreRecommendedreadingforthischapter’slesson:WallStreet:theOtherLasVegas,byNicolasDarvas
18NewTraderscutprofitsshortandletlossesrun;
RichTradersletprofitsrunandcutlossesshort.
RichTraderwaslookingoverNewTrader'ssystem.
NewTrader’svisitswerenowoccurringonlyeveryotherweekinsteadofseveraltimesaweek.MonthshadpassedsinceNewTraderhadreachedoutforguidance
fromRichTrader.
Thoughregularvisitsweregettingfewerandfewer,thiswasnotasignofalackofdrive.NewTraderspentabouttwohoursaday,everyday,lookingatcharts,studyinghiswatchlist,andreadingthebesttradingbookshecouldfind.
HefeltRichTraderhadgivenhimthebasictoolsand
hewasnowbuildinghistradingskills.
Atfirsthewaslikemanytraders–verydisappointedthatRichTraderdidnotshowhimtheholygrailoftradingwhichguaranteedprofits.
Healsoexpectedamulti-screensetupwithCNBCinthebackgroundandRichTraderfrantically
tradingoneverypieceofnews.
Thiswasnothowhetraded,norwasithowthelegendsheresearchedtraded.WhileRichTraderneversaiditwaswrong,NewTraderstartedtobelievethattheonlywaytogowastrendfollowing.
Thiswashisstyleofchoice.Thisiswherehesaw
themoneyandthepotential.
NewTraderwaitedpatientlyasRichTradercontinuedtolookoverhistradingplanandsystemalongwiththerecordsofhispapertradeshehadbrought.
“Yourwinningratiolooksverygood–60%.That’sexcellent.However,yoursystemwasbenefitingfromtherecentuptrendin
themarket.Yourlossesweresmallduetoyourtightstops,butthatmaybetootight;youcouldexperimentwith3%underthe10-daymovingaverageasyourstoporevenusea12-or14-daymovingaverageasabetterindicator.Whenthemarketturnschoppyoratthebeginningofadowntrenditwillaffectyourwinningratioagreatdeal.Butitwillalsogiveyou
fewertrades,asthe10-daymovingaveragewilllikelybecomeresistanceandgiveveryfewbuysignals.Ialsobelieveyoursystemwilltakeyousafelytocashinamajormarketretracement.Thisisaverygoodplan.”
NewTraderwassosetonthe10-dayand20-daymovingaveragesthathehadneverevenconsideredany
others.
Whatasimplesuggestion;howhadhenotthoughtofthat?Itwouldbecomeawholedifferentchartifhechangedthemovingaverages.Whatifanothermovingaverageshowedmorereactionthanthe10or20day?Thiswasaveryinterestingideatolookinto.
“Yourpayoffratiowasalittleover2:1.Youmadeabout$200inprofitsforevery$100inlosses.Thisisexcellent;itwillbelesswhenyoureallybegintotradeandhavetofigureinthedifferenceofthebid/askspreadwhenenteringandexitingtradesalongwithcommissionsandslippage,whereyoudonotgetthepriceyouwantaseasilyas
youdoinpapertrading,especiallywithmarketordersonstockswithlowervolumeatdifferentpartsofthetradingday.Butapayoffratioof1.5:1isstillaveryrobustandprofitablesysteminwhichyoushoulddowellinthelongterm,especiallyduringbullmarkets.”
“Yes,papertradingislikeshootingafishina
barrel.I’mreadytostartbuildingarealtradingrecord.Ithinkit’sreadytogolive.”
“Yourlargestwinningtradewas$500andyourlargestlosingtradewas$125.Thatlooksverygood.Thisisanamazingreturnfora$2,500trade.Youhada$25stockmoveupto$30withouttouchingthe10-daymovingaverage?Youaredefinitely
tradingstockswithgoodmomentumandinvestorinterest.”
“Isoldthebigwinnerat$30whenitpulledbacktothe10-daymovingaverageonthechart;itpulledbackto$30afterarunawaytrend.Itranupbeforethecompany’searningsannouncementtoashighas$33.50.Mysystemactuallyhadmesellthisstock
andtakeprofitsbeforetheannouncement;itcrashedbackto$25aftertheearningswereannounced.ThismakesmewanttoaddarulethatIdonotholdthroughearnings.Thetrendcangoeitherwaydramaticallyafterthesehighfliersannouncetheirearningsforthequarter.ThestocksthatItradecanevencrashinpriceaftertheircompany’sreportblowsoutearnings
aboveexpectations;itisjustamatterofwhenthestockrunsoutofnewbuyers,andifthegreatearningsareallreadybakedintothestock’sprice.”“Thatwouldbeagreatruletobettermanageriskandvolatility.Whileyouwillgiveupsomehugeprofits,sometimesyouwillalsoavoidtheextremeriskandequitydrawdownsby
holdingthroughaneventwithanunknownoutcome.Ialwaysputcapitalpreservationbeforecapitalappreciation.WhenItradedindividualstocksIonlyheldthroughearningsonceandthatwasadisaster.Inmypersonaltrading,Ihadmuchbetterriskadjustedreturnsplayingtheexpectationofearningsleadinguptotheannouncementthanholding
throughearnings.ItwasliketheWildWestinthemarketafteranearningsannouncement.Itwasveryunpredictable.”
“Youraveragewinningtradewas$212,”RichTradercontinued,“andyouraveragelosingtradewas$105.Theseareverygoodnumbers.Soyoureturned42.6%onyour$10,000incapitalin50
trades?That’sastounding;unfortunatelyrealtradingwillshavethatdowndramatically.Whenyougotoreallytradethemarketmayenterabearmarketattheverymomentyoustarttradingthissystem,causingmanystopstobehitinarowandseverallosses.Thencommissionswilltakeabiteoutofeverytrade,especiallywithyourtradingsize.Twentydollarsin
commissionona$2,500tradeis0.8%onthatcapitalbeforeyouevenknowifyouwinorlose.Youneedtotradewithapersharebrokerwhocharges$1per100shares,notonewhocharges$10pertradeoryouraccountwillbeeatenupwithcommissions.Youwillalsoexperiencetechnicalproblemsattheworstpossibletimeswithyourcomputer,theInternet,power
supply,oryourbroker’swebsiteortradingplatform.Restassuredthatwhenthishappensyoumaymissagreattradewhichwouldhavemadeyoualotofmoney.Youwillalsoplacemarketordersthatarefilledatworsepricesthanyouexpected;itwillbeunexpected,hurtyourreturns,andmakeyouangry.”
“Soa42.6%returnin
50tradesmaybealittletoogoodtobetrue.IfyougetabiggeraccountsizeoracheaperbrokerIbelieveyoursystemisanexcellentstartingpoint.Iwouldexpectareturnofabout19%duringuptrendingbullmarketsafterconsideringalltheseotherfactors.Yoursystemwilllikelyloseatthebeginningofabearmarketuntilitnolongerhasbuysignalsand
untilthenextuptrendbegins.”
NewTraderhadalottothinkabout.HeknewwhatRichTradersaidwastrue.Itwasdisheartening,butitwasreality.
“WouldyousuggestIdevelopasecondsystemtotradeinabearmarket?”
“Ifyoulike;some
tradersdonotlikeshorting,ever.Theysimplyplaywhateverisgoingup.Somewouldratherbuyonlystocksinuptrendsinbearmarketslikegoldminers,oilstocks,consumerstaples,energystocks,dollarstores,discountstores,orjuststayincashandwait.Thatisapersonalchoice.IgoshortwhenIgetmysignalstoshort.”
“Thatwoulddoublemychancestomakemoney…”
“Italsodoublesyourchancestolosemoney,”RichTraderrepliedwithahalfsmile.
“SoIamatmystartingpoint?Iamreadytobeginrealtrading?”
“You’remorethanready.What'sleftistoletthe
marketsteachyou;theygivegreatinstantfeedbackandareneverwrong.Pricesarealwayswhattheyshouldbeatanygivenmoment.Pricesarethecompositeofwhateverybuyerandselleragreestopayatthatmoment.”
“Idon'tknowifI’mgraduatingfromstocktradingcollegeorstocktradingbootcamp.”
“Well,onethingisforsure.Youaregoingtobattleothersforprofits.Ifyoudoallthethingsyouhavelearned,youwillprofitfromothers'mistakes.”
NewTradermadeadecisionthatday.Hewouldkeeptradinguntilhewassuccessful.
Hewasnolongeranewtrader;hewasatrendtrader.
“It'snotwhetheryou'rerightorwrongthat'simportant,buthowmuchmoneyyoumakewhenyou'rerightandhowmuchyoulosewhenyou'rewrong.”–GeorgeSoros
Recommendedreadingforthischapter’slesson:HowImade$2,000,000intheStockMarket,byNicolasDarvas
AppendixA
RecommendedResourcesfor
Traders
Newspaper
Investor’sBusinessDailyWebSites:www.DarvasTrader.com(subscribetothenewsletter)www.chartpattern.comwww.investors.comwww.Investimonials.com(Reviewsofallthingsfinancial)www.Amazon.com(Trading
Bookreviews)www.freestockcharts.comSuggestedFollowsonTwitter:@DanZanger@DarvasTrader@IBDInvestors
AppendixB
Author’sTradingResults2003-2010
SteveBurnshasnothadalosingyearactivelytradinginhistwomainaccountssince2002.From2003-2007hereturnedanaverageannual
gainof22.95%andwenttoacashpositiononJanuary4th,2008,keepingallofhisstockmarketprofitsthroughtheGreatPanic.HistradingbeattheS&P500forsixstraightyearsandhadacumulative209.5%returnoveraneight-yearperiod.Hisreturnsaveraged15.7%versustheS&P,returning7.8%from2003-2010.
Theauthortradesaccountsworthoveraquarterofamilliondollars.Theseaccountswerebuiltusingtheprinciplescontainedinthisbook.
AppendixC
MyTopTenTradingBookRecommendationsforNew
Traders
#1TradingforaLivingbyAlexanderElder
#2TheUniversalPrinciplesofSuccessfulTradingbyBrentPenfold#3SuperTraderbyVanK.Tharp#4ATrader’sMoneyManagementSystembyBennettA.McDowell#5TradingwithoutGamblingbyMarcelLink#6WallStreet:TheOtherLas
VegasbyNicolasDarvas#7YouCanStillmakeItinTheMarketbyNicolasDarvas#8HowIMadeMoneyusingtheNicolasDarvasSystembySteveBurns#9Overcoming7DeadlySinsofTradingbyRuthBarronsRoosevelt#10TwelveHabitudesof
HighlySuccessfulTradersbyRuthBarronsRoosevelt
AppendixD
MyTopTenTradingBookRecommendationstoMake
YouaRichTrader
#1TrendFollowingbyMichaelCovel
#2HowtoMakeMoneyinStocksbyWilliamO’Neil#3ComeintomyTradingRoombyAlexanderElder#4HowIMade$2,000,000intheStockMarketbyNicolasDarvas#5MarketWizardsbyJackSchwager#6ReminiscencesofaStockOperatorbyEdwinLefevre
#7LessonsfromtheGreatestStockTradersofAllTimebyJohnBoik#8HowtoTradeinStocksbyJesseLivermore#9TheCompleteTurtleTraderbyMichaelCovel#10MonsterStocksbyJohnBoik
AppendixE
MyTopTenBookRecommendationsfor
SuccessinLifeandTrading
#1TheTopTenDistinctions
betweenWinnersandWhinersbyKeithCameronSmith#2TheTotalMoneyMakeoverbyDaveRamsey#3FinancialPeacebyDaveRamsey#4RichDad,PoorDadbyRobertKiyosaki#5ThePowerofNowbyEckhartTolle
#6UnlimitedPowerbyTonyRobbins#7TheTopTenDistinctionsbetweenMillionairesandtheMiddleClassbyKeithCameronSmith#8HarmonicWealthbyJamesArthurRay#9TheAnatomyofSuccessbyNicolasDarvas
#10CreatingyourBestLifebyCarolineAdams&Dr.MichaelFrisch
AbouttheAuthor
SteveBurnshasbeenanactiveandsuccessfultraderforover12years.Heistheauthorof"HowIMadeMoneyUsingtheNicolasDarvasSystem"publishedbyBNPublishing(availableatallmajorInternetretailers).
Mr.Burnsranksinthetop300ofallreviewersonAmazon.com;heisalsooneofthesite'stopreviewersforbooksontrading.HehasbeenfeaturedasatopDarvasSystemtraderonDarvasTrader.com.HeisalsoacontributortoZenTrader.ca.HistradingbookreviewshavebeenfeaturedonBusinessInsider.com.Hisaccountoutperformedthe
S&P500forsixstraightyearsduring2003-2008withovera20%returneachofthoseyearsandhasnothadalosingyearsince2002.HelivesinNashville,TNwithhiswife,Marianne,andtheyhavefivechildren:Nicole,Michael,Janna,Kelli,andJoseph,andonegranddaughter,Alyssa.
ContactSteve:
E-Mail:[email protected]:SteveBurnsNashville,TNTwitter:@SJosephBurnsContributorto:ZenTrader.caContributorto:BusinessInsider.com
Contributorto:OxstonesInvestmentClubTopReviewer:Amazon.comMemberofAmazon.com/VineProgram
Acknowledgements
IwouldliketothankUriatBNPublishingforgivingmetheopportunitytowritetwobooks.Thiswasa
goalthatIdidnotthinkIwouldaccomplishuntilafterIretired.ThefirstbookwasanopportunitytoshowthattheDarvasSystemdoeswork.Thisbookisanopportunitytogivenewtradersaheadstartinasimpleandeasy-to-understandformatwithoutboggingthemdownwith300pagesoffillerwords.Ihopetradersfinditusefulandusethebookasastartingpointin
theirtradingcareers.
IalsowanttothankmywifeMarianneforalwaysbelievinginmytradingeventhoughsheonlywantedtohearaboutthebottom-lineprofits,nottheamountsofmoneyItraded.Shehasgivenmethefreedomtocreateanuptrendinourcapitaloverthepastsevenyearsanddidnotworryabout
thebriefdrawdowns.
Icouldnothavewrittenthisbookwithoutmyco-authoranddaughterJanna.SheloveswritinglikeIlovetrading.Sheturnedmyconcreteblocksoftextintoastory.Shecanalsotalktradingwiththebestofthem.
References
TheNorthAmericanSecuritiesAdministratorsAssociationdidastudyandfoundthat11.5%oftraderswereprofitable,18.5%werebreakingeven,and70%lost
moneyWebSites:www.contrarianvalueinvesting.comwww.brainyquote.comhttp://stock-market.superiorinvestor.netwww.traders-talk.comhttp://trenders.blogspot.comhttp://2.bp.blogspot.com/_C0Jf4qaV4-
8/S2JwqYOQIJI/AAAAAAAAAKk/kTXcIwIL0Bg/s1600-h/S%26P+500+1989-2009.JPG(S&P500annualreturns)http://en.wikipedia.org/wiki/Cuban_Revolutionhttp://www.investopedia.com/termswww.Chartpatterns.comhttp://dictionary.reference.com/browse/trend_http://www.seertrading.comFreeStockCharts.com
Books:“TradetheTrader”–QuintTatro
RecommendedReading
HowImade$2,000,000intheStockMarketbyNicolasDarvasWallStreet:TheOtherLasVegasbyNicolasDarvasYouCanStillMakeitintheMarketbyNicolasDarvas
HowIMadeMoneyUsingtheNicolasDarvasSystem,WhichMadeHim$2,000,000intheStockMarketbySteveBurnsTheBattleforInvestmentSurvivalbyGeraldM.LoebThePsychologyOfTheStockMarketbyG.C.SeldenTheScienceofGettingRichbyWallaceD.WattlesThinkandGrowRichbyNapoleonHillTRADINGSMART:92Tools,Methods,HelpfulHintsandHighProbabilityTradingStrategiestoHelp
YouSucceedatForex,Futures,CommoditiesandStockMarketTradingbyJimWyckoffRulesUsedbyProfitableTradersforInvestinginGoldandSilverbyArikZahb
Availableat
www.bnpublishing.net
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