new trader, how to make -...

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

http://www.amazon.com/gp/product/1607962950?ie=UTF8&tag=darvastrader-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1607962950

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

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discountsforbulkpurchases,pleasecontactBN

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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

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


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


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

http://www.DarvasTrader.com/

http://www.Investimonials.com/

http://www.Amazon.com/

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

mailto:[email protected]

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-

http://www.contrarianvalueinvesting.com/

http://stock-market.superiorinvestor.net/

http://www.traders-talk.com/

http://trenders.blogspot.com/

http://2.bp.blogspot.com/_C0Jf4qaV4-8/S2JwqYOQIJI/AAAAAAAAAKk/kTXcIwIL0Bg/s1600-h/S%26P+500+1989-2009.JPG

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

http://en.wikipedia.org/wiki/Cuban_Revolution

http://www.investopedia.com/terms

http://www.Chartpatterns.com/

http://dictionary.reference.com/browse/trend_

http://www.seertrading.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

new trader, how to make -...

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