2

TABLE OF CONTENTS

INTRODUCTION 3

Thinking Differently Than Others

CHAPTER ONE 17

Knowing What Will Happen Next

CHAPTER TWO 20

Trading The Probabilities

CHAPTER THREE 26

Patiently Waiting

CHAPTER FOUR 30

Same Plan Another Day

CHAPTER FIVE 34

The Master

CHAPTER SIX 40

Singles and Doubles

CHAPTER SEVEN 44

Focus

CONCLUSION 47

3

WHEN 10 IS GREATER THAN 90.

WHY 10% OF TRADERS MAKE 90% OF THE MONEY AND HOW YOU CAN TOO.

Are you not making consistent and sustainable profits in the stock market?

Have you hit a plateau in your trading with little to no noticeable recent

improvement?

Have you tried trading system after trading system without any lasting success?

Have you made money trading only to lose it just as quickly as you made it?

Have you hit a streak of losers causing you to question the validity of your trading

system?

Is it one step forward and two steps back no matter what you do?

Are you constantly seeing your losers lose more money than your winners gain?

4

If you answered yes to any or all of these questions you are definitely not alone. For you

see, early in my trading career I could answer yes to all of these questions and many more

too numerous to mention here.

Let’s just put it this way:

THERE IS NOT A TRADING MISTAKE YOU WILL MAKE THAT I HAVE

NOT MADE ALREADY.

My affirmative answers to the questions above negatively affected my trading capital

because I either blamed the market or my trading system (or lack thereof) for my trading

losses. Fortunately, through much trial and error, I discovered that the answers to my

trading problems were not to be found in the market. The answers were within me. The

answer to most trading problems lies within, not without.

The 10% (successful traders) have figured out what the 90% (unsuccessful traders)

have yet to discover.

Here is a major revelation. It may sound simple but is true…

THE 10% THINK DIFFERENTLY THAN THE 90%.

Let’s really consider that for a moment. The 10% possess a mindset, a perception of the

5

market, which allows them to take money from the other 90%. And, by the way, the

makeup of the 90% is constantly changing since the losers are being replaced by new

potential losers every day! Why do you think the 10% are consistently able to make

money? It is because every trading day the 90% are entering the market like pigs being

led to slaughter. If you are not consistently making money in the stock market blame it

on the professional traders who are taking it from you without you having a clue as to

how or why. What’s even more frustrating is knowing how the 10% do it, but not

being able to stop yourself from making the same emotional mistakes over and over

again.

Scientists tell us that the great majority of our “logic” is filtered, or colored, by our sub-

conscious. Our sub-conscious thought is a formidable foe in human efforts to “kick

habits” such as smoking, drugs, eating, spending and, while we are at it, the emotionally

devastating aspects of trading. Just think of the one irrational but firmly imbedded

emotional problem that is hard to kick–looking for the magic bullet.

The professional traders want nothing more than for you to continue looking for the

magic bullet, the holy grail of trading, because the longer you look the more

frustrated you become. And while you are looking, you miss the obvious, easy

trades, further eroding confidence and increasing anxiety. It is a vicious cycle that

only disciplined thinking can correct. The sooner you learn to think like the 10% the

sooner you will become one of them.

My focus then, as well as the focus of CROSSHAIRS TRADING, is on the market as a

place of war, hence my motto and the tagline for thecrosshairstrader.com:

6

Every market day there is a constant emotional battle raging between the bulls and the

bears and between the 10% and the 90%. If you haven’t figured this out yet, you soon

will when your losses start piling up and you have no explanation for it. Successful

traders make money in these battles based on their knowledge of market movements that,

from all appearances seem random, when they are not. It is the successful traders’

intimate market knowledge of these movements and their disciplined emotions versus the

amateurs’ lack of both that allows for the professionals’ consistent success.

Successful traders possess superior technical skills as a result of mental discipline,

not the other way around. If you do not possess the mental skills there is no

technical skill that will save you from your ultimate defeat.

Successful traders were once where you may be right now: with wallets wide open. Now

the same traders are getting their money back from the new kids on the (chopping) block.

Those traders who were once taken are now taking. Their newfound ability to take back

what was once theirs is a direct result of a newly focused perspective on the unique

nature of the market.

7

The change for me came when I learned to focus on trading just as a soldier focuses on

battle, constantly defending positions and attacking when given the opportunity. As a

result, I began to win more battles than lose. The sooner you possess the proper

mindset the sooner you too can win more battles.

Why do I view the market as a battlefield and the trader’s duty as one of preparing for

war? I will give you three reasons.

1. PERSONAL EXPERIENCE

My experience gives me the strongest proof I need. There is no better education than that

of personal experience. In my early years I was killed in the market. My trading account

was sacrificed to the trading gods who took money from me at will. I know from first

hand experience that preparation for war is essential to long-term trading success.

If you ever meet a trader who says he has never experienced loss then he is revealing

only half the truth and you do know what the other half is don’t you? The best traders

have lost plenty and are now richer for it. The best traders will admit to the difficulties

inherent in trading, knowing full well that those following in their footsteps will

experience the same difficulties. There is no need to hide what will soon be

discovered!

There is a price to pay for inexperience, but fortunately the price can be lessened the

sooner you learn the proper way to think about trading. If I could go back to the

beginning of my trading career and change just one thing it would be the way in which I

thought about trading. Learning technical analysis takes time but it is relatively easy.

8

Learning about yourself as you adjust to market psychology is the longest and the most

difficult part. It is so intensely personal, most traders try to avoid dealing with it. But,

since the sub-conscious is in control, the trader must become master of self if he is to

succeed.

In fact,

the 90%, who have at least done the homework to find or develop a good trading

system, are using the same indicators and techniques of the 10%. The difference,

however, is that the 10% are in control of the thought process surrounding their

system!

Sun Tzu, the author of The Art of War, wrote the following 2500 years ago and it is just

as true today:

“If you know the enemy and know yourself, you need not fear the result of a

hundred battles. If you know yourself but not the enemy, for every victory gained you

will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb

in every battle.”

You must know the market (the enemy) but, most importantly, you must know yourself!

2. THE CHARTS PROVIDE VISUAL PROOF OF THE BATTLES

All we have to do is look at a few examples from the charts to get a really good visual

representation of the battles that take place in the market. Here you can see the energy

raging in the candlesticks and indicators. The following WEEKLY chart from EXXON

(XOM) is but one example.

9

You would not think that a WEEKLY chart would be very volatile but look closely at the

price swings. XOM went from a closing low of 62.36 the first week of October 2008 to a

closing high of 81.64 the last week of December 2008 and then returned to a closing low

of 64.03 the first week of March, 2009. That is a $20.00 price swing from one direction

to another and then back again. Simply trading a bigger chart does not protect you from

the battle! Now let’s look at a DAILY chart during the same time period:

10

On October 8, 2008 XOM closed at a high of 79.39. Two days later, XOM hit an intraday

low of 56.51. Only two days after that XOM hit a high of 75.66! But it gets even better.

Two days later, on October 16, XOM hits an intraday low of 59.17 only to rebound to a

closing high of 74.99 in another two trading days!

11

Within a period of just eight trading days EXXON, the largest corporation in the world,

experienced price swings of $20.00 or more! This is a raging battle between the bulls

and the bears.

This is the sort of battlefield where the 10% slaughter the 90%. The professional traders

live for this. It is within these price moves that the battles are waged and won by only the

most skilled minds–the minds which have discipline and have subdued their sub-

conscious emotions from blocking how their market thinking minds know how to trade.

Let’s look at another example from a DAILY chart of Newmont Mining (NEM):

Again, we are able to see the daily battle raging as the bulls and the bears move NEM

from a high on January 26, 2009 of 45.45 to a low of 37.02 on January 29 only to move

back up to a high of 45.00 on February 20, 2009 and then take out the previous low of

this period to a closing low of 34.40 on March 10, 2009. It does not end there, however,

12

as NEM then roars higher over the next 16 days to close at a high of 47.40 on April 1,

2009.

Over the course of 46 trading days NEM moves $13.00 from low to high no less than

four different times! The bulls and the bears are fighting it out once again.

One begins to be able to see the energy of each fighting force. Run your eyes along the

“lines of battle”. Can you see where the battle lines are drawn for each of the sides?

Why should NEM be any different than XOM? They are both the same. They are both

traded by human emotions, nothing more and nothing less. The 10% are able to feast on

the emotions of the 90% because the professionals think differently!

Now let’s look at a smaller INTRADAY chart of NEM during the same time period:

This intraday chart (I call it my “deployment” chart) encompasses a time period of 16

13

trading days with intraday swings represented here from a low of 38.92 on February 10

to a high of 42.81(approximately 10:30 the next morning) with another steady rise to a

midday high of 45.00 on February 20 only to sink all the way back down to a low of

37.16 on March 3 (just 7 days later).

Let’s look at one more. The following is a DAILY chart of Amazon (AMZN) from

March to June 2009.

14

Is there really such a big difference in the business model of Amazon (AMZN) to justify

the large swings in price as indicated here? Is it not obvious that stocks move more on

the emotions of traders than they do on any fundamentals of the company itself.

Can you see the flow of the battles in all of these? This is where the 10% make their

money. Every single stock, index, and ETF chart will have the same battles raging on a

WEEKLY, DAILY, and INTRADAY basis. These same battles are raging whether you

trade gold, oil, bonds, etc. You cannot hide from the battles. The battles are everywhere

you look and must be faced, understood and, most importantly accepted. This is why

there is no “magic bullet” that you can rely on, only a good, solid grasp of the emotions

that move stocks from one point to another.

3. THE BATTLES IN THE HEADLINES

Last but not least, the battles can be found in the headlines of the day. Back in the fall of

2008 when the stock market was reaching volatility levels not seen in decades, I penned

the following daily entries in my trading journal:

STOCKS DOWN FOR EIGHTH DAY IN A ROW

MARKET RALLIES 900 POINTS TODAY

MARKET CRASHES 800 POINTS TODAY

MARKET RALLIES 800 POINTS FROM LOW TO HIGH

DOW DOWN 1100 POINTS IN FIVE DAYS

MARKET RALLIES OVER 800 POINTS

15

These entries would not be too out of the ordinary until you realize they were taken over

an eighteen day period!

And how about some of the briefing.com (one of the many news services I use) headlines

from December 2008:

The stock market kicked off the week on a strong note after investors were pleased with news that President-elect Obama plans to launch the largest infrastructure investment program in 50 years and word that progress is being made on a financial relief package for U.S. automakers. (12/08) Stocks ended a choppy session with significant losses after a profit warning from an economic bellwether and signs of continued risk aversion prompted traders to take some profits following the strong gains seen since Nov. 21. (12/09) Stocks settled with solid gains on Wednesday following a volatile session as traders digested news that an agreement had been reached over a potential aid package for the struggling U.S. automakers.(12/10) Investor skittishness kept stocks in check before selling pressure gained momentum and sent the major indices tumbling. Ongoing economic weakness and uncertainty surrounding a bailout for automakers weakened equities, while commodities advanced on rising oil prices and a weaker dollar. (12/11) News that automakers won't immediately be receiving a congressionally-backed bailout drove selling in early action, extending the prior session's losses. However, comments from the Treasury and White House staff calmed concern on the matter, helping limit selling pressure enough to give way to gains. (12/12) Did you notice the dates? These were over the course of one week! The reason for the market going up one day would then become the reason for its sell-off the next. The market is indeed a war waged by emotional traders who can and do change their minds from day to day, indeed from hour to hour. In fact, Wall Street suffers from short term memory loss to downright amnesia! So, how do you prepare for the battles ahead? You focus on mental discipline by

thinking differently. Your mind must be able to see the field of battle from a higher

perspective. A hawk doesn’t catch a field mouse by scurrying from place to place in the

weeds. He spots them with calm, keen precision; makes a decisive capture; then returns

to the sky to survey the field of battle once again.

16

Learn to think like the 10% and start making your fortune or keep thinking like the

90% and give your fortune (and future as a trader) away!

The battles waged are reported every day on many different fronts–from headlines,

television, internet services, and charts. But, more importantly, there is the battle raging

within your mind. It is for these reasons that traders must develop winning principles in

order to achieve sustainable success.

What follows are seven winning principles that are attributable to the success of the 10%

and the corresponding seven principles that account for the failure of the 90%.

17

CHAPTER ONE

The 90% believe they know or need to know what the market is going to do next, the

10% accept the market reality that…

ANYTHING CAN HAPPEN

18

No matter how good your analysis, no matter how perfect your set-up or pattern may be,

no matter how many others may agree with your analysis, and no matter how many wins

in a row you have had, once you enter a trade anything can happen.

In fact,

you should be surprised every time you make money!

Now that does not mean you cannot form an analysis based opinion about where you

believe a stock may go over a specific time period. The opinion, however, must be

allowed to change and change quickly if the evidence warrants. The 10% accept the fact

that with each trade anything can happen and they act accordingly. The 10% know that

when it comes to working within the market, there is no such thing as a sure thing.

Because of this, there is no temptation to double up on a loser or to go all in, putting all

your hard earned money at risk. That’s emotional. That’s irrational. That’s a scared field

mouse, not a hawk looking from a higher perspective.

Keep in mind that it only takes one trader with enough capital to turn your trade

around no matter the set up you use and no matter how many times you’ve

successfully traded the set up in the past.

With every tick in the market traders are making decisions about the next direction of a

stock. I recall a few years ago I was in an Exxon trade on the long side (calls) and there

were two large block sell trades (in the millions) that busted my trade. Someone wanted

out and there was no way I could have known or could do anything about it but sell at a

loss. No need to go back to the drawing board and reconfigure my system. I just had to

19

accept the fact that anything can happen. Just recently, I entered a put trade on IBM.

Less than an hour later IBM raised guidance. All I could do was sell on the news. No

reason to stick around and no reason to get upset. Not only can anything happen but it

can happen at any time! There are just too many variables in the market from economic

news, sector specific news, stock specific news, to big trader decisions, etc. for me to

safely say I know what will happen next.

The 10% cannot accurately predict every move in the market and they don’t feel a

need to.

The best traders simply make the uncertainty a non-issue by not fretting about those

things out of their control. Instead, they focus on the sub-conscious emotions that they

can control by accepting the market limitations placed on them.

Uncertainty is factored into the trade decision process as an absolute. It just is.

Successful traders take advantage of the uncertainty and unpredictability of the market to

take money from the less skilled and emotionally driven amateurs. Always know and

believe that anything can happen and the temptation to load up or buy more of a loser

will never be part of your trading strategy. You will never be tempted to throw away

your trading system due to a loss because a loss is expected from time to time.

If you factor in small losses as part of your trading plan, then you have resolved the

“anything can happen” problem.

If anything can happen then how do the 10% consistently succeed? How do the 10%

find consistency amid all the uncertainty? The answer brings us to the second principle.

20

CHAPTER TWO

The 90% trade as if the market is predictable whereas the 10%...

TRADE THE PROBABILITIES

21

Just as the 90% believe they know what the market will do next, they also believe that the

market is based on predictable common sense. If a company’s stock is upgraded the

stock should go up, if downgraded then down. If a company beats its quarterly earnings

the stock should go up, if it misses the stock should go down. If a company issues a

warning its stock should go down, if a company issues upside guidance its stock should

go up. If the weekly oil inventory report is bearish, then oil and oil related stocks should

trade down, if a bullish report then up. Oh, if trading were that easy! Buy the stock (or

purchase call options) with a bullish report, sell the stock (purchase put options or go

short) if bearish. Unfortunately, the stock market just does not work that way. If it did,

then those with no common sense would be the losers and everyone else winners.

Instead, the market has a mind and logic all its own.

So, what does the market run on if not common sense? It is greed and fear that causes

the irrational movements in the market. It is this same greed and fear that provide the

opportunities for the 10% and the greatest conflict for the 90%.

John Maynard Keynes said “the market can remain irrational longer than you can remain

solvent”. If you choose not to accept this, then you do so at your own peril.

Fortunately, market logic is found in a very simple, yet oftentimes hard to understand

concept: probability. Successful traders focus on the probability of a trade working

based on its historical actions. In other words, the market in all its randomness (“noise”)

does give evidence of repeatable and, therefore, tradable patterns.

The 90% are so focused on making sense of all the noise in the market that they

miss the quiet calm of the highly probable.

22

The noise acts as camouflage for the 10%. The 10% are in there, somewhere (much like

a sniper hiding from his target), making sense out of what the 90% cannot even bring into

focus, nonetheless see! How can you hit a target that does not exist?

What the 10% see and what the 90% are searching for are the highly probable patterns

that reveal themselves only to those who know how to find exactly what it is they are

looking for.

Let’s look at a particular example from the Oil Services Index (OIH). First, we will look

at a DAILY chart and then an intraday “DEPLOYMENT” chart (the chart I use to enter a

trade). I look for one particular pattern that sets up on the DEPLOYMENT chart, yet

finds its confirmation on a bigger chart (in this case, the DAILY). So, in the following

example you will see my entries on the DEPLOYMENT chart confirmed by strong areas

of support from the DAILY chart. I have several rules that must be satisfied before I

enter a trade and when these rules are combined they form the consistently profitable

CROSSHAIRS. Do not let this confuse you. It is really very simple when you have seen

it as often as I have! (For an explanation of the lines used here visit my blog and read

http://www.thecrosshairstrader.com/2009/06/understanding-stock-market-moving-

averages-with-the-crosshairs-trader-and-forrest-gump/).

23

OIH DAILY Chart:

This is a typical chart in that you have up and down days with no apparent rhyme or

reason for the sentiment shifts. Here I find certain areas of support and/or resistance

which help me make my trading decisions. Once I have a good grasp of the DAILY

chart, I next look at my DEPLOYMENT chart (the chart I use to enter a trade). Then I

look for my CROSSHAIRS.

24

OIH INTRADAY “DEPLOYMENT” Chart

Once I look at my DEPLOYMENT chart, opportunities begin to reveal themselves to me.

The opportunities are found IN THE CROSSHAIRS. Since I am looking for only one

pattern, and since I trade this one pattern over and over again, I know the probability for

continued success is high.

Also, and this may be the most important point, on those rare occasions when the trade is

not working I will know (remember: anything can happen). How will I know? Because

my thorough knowledge of my CROSSHAIRS pattern will let me know. I can see the

pattern set up for a trade and I can see the pattern break down as well. In fact, the

CROSSHAIRS not only gives me an entry point but also gives me an exit point (the

horizontal crosshair) AT THE SAME TIME. The CROSSHAIR itself will let me

know when the trade is not working.

25

No longer do I have a needle in a haystack approach but a black swan among white

swans approach.

I will discuss trading a single pattern further in just a moment but suffice it to say here:

High probability patterns reveal themselves amid all the market randomness. And

all you need to do is focus on one of them!

The 10% focus on high probability patterns and trade them over and over again. The

90% put on a trade to see if it will work because it looks or feels like a good trade,

because their gambling instinct kicks in, because they are bored or feel they have to do

something, because the latest analyst on CNBC recommends it, or because the latest

market guru has made the call that is 99% foolproof—all classic symptoms whose root

cause is found in the trader’s inability to focus on what matters most. The 10% simply

trade the highly probable, repeatable patterns knowing that the odds of success are in

their favor. And they ignore the chatter of the 90%.

This leads us to the third principle.

26

CHAPTER THREE

The 90% chase trades whereas the 10%...

PATIENTLY ALLOW THE TRADES TO COME TO THEM

27

The 90% see a stock moving in one direction or another and jump on board only to find

that the bus left the station a long time ago and is now slowing down or reversing course.

The true art of trading comes from boarding the bus as it leaves the station or while it is

moving toward its destination. The 10% know this and trade accordingly.

Let’s take a look at chasing a trade versus waiting on one.

The following is a DAILY chart of Joy Global (JOYG) from May to June 2009. For

several days JOYG consolidated around its 200 Simple Moving Average (I refer to

moving averages as TANKS and you can read a detailed discussion at

http://www.thecrosshairstrader.com/2009/06/understanding-stock-market-moving-

averages-with-the-crosshairs-trader-and-forrest-gump/), then exploded higher. The

WAIT occurred during the consolidation period as JOYG sought to clear its 200 SMA.

The trade entry was at the break out point for a good quick profit. Chasing the trade

would have occurred after you had already seen the move take place! The smart money

had already banked a profit, while the dumb money chased overextended momentum.

28

The 10% patiently wait for the stock to set up based on certain predetermined rules.

When those rules have been met a trade is made. If those rules are yet to be fulfilled

or never materialize then no trade is made. If the rules were met two days earlier and

it was missed then no trade is made.

Think in terms of a deer hunter. When hunting from a tree stand the hunter most often

will have to wait… and wait… and wait until a deer comes within his line of fire. This

could take hours or days or may not happen at all. Herein lay the difference between the

skilled and the unskilled, the one who brings home the deer and the one who arrives

home empty handed. The patient deer hunter waits while the impatient deer hunter

chases the deer that is just too smart and too fast to be fooled.

Just like a patient deer hunter, the trader must allow the trade to come to him based

on his rules and then–and only then–is a trade made.

The very strong emotion of not wanting to be left out, of regret for not taking earlier

action, of feeling like you must do something in order not to fail, leads to the 90% falling

for the “I don’t want to miss the trade” mentality; therefore, “I must get in.” The 10% get

out when the other 90% believe they must run after the bus–just as it stops and heads the

other way! Sound familiar?

Here’s another habit that contributes to impulsive trading: to be successful in one’s

career, one feels the need to be constantly working, hence the term “workaholic”. In

trading, this is translated to mean “I must be in a trade.” Broaden your definition of

“working” to include working on sharpening your skills as a trader. By this, I mean your

skills can be sharpened by studying, reading, researching, analyzing past trades, etc. Do

29

anything but feel you have to be in a trade to be “working”. Patiently waiting on a trade

is most often the best form of work for the trader because patience moves you forward.

Jumping into trades and failing propel you backward. [For more on trading patience

check out http://www.thecrosshairstrader.com/2009/06/can-missing-a-trade-build-

confidence/ and http://www.thecrosshairstrader.com/2009/05/sun-tzu-and-the-art-of-

stock-traders-patience/. For a discussion of the JOYG trade see

http://www.thecrosshairstrader.com/2009/06/high-probability-trading-in-the-crosshairs/.

Warren Buffet puts it this way: “The stock market is designed to transfer money from the

active to the patient.” Or, to quote Sun Tzu again, “the good fighters of old first put

themselves beyond the possibility of defeat, and then waited for an opportunity of

defeating the enemy.”

The question then becomes: how do you feed patience and let it grow? The answer leads

us to the fourth principle of successful trading.

30

CHAPTER FOUR

The 90% trade a different plan every day whereas the 10%...

TRADE THE SAME PLAN EVERY DAY

31

Notice the subtle distinction here because it can be transforming.

The 90% change their trading plan—if they have one—as often as they change their

clothes.

The 10% have a plan and stick to it no matter what day it is. The 10% trade according to

a set of rules developed through focused repetition. No different than, say, a mechanic

who changes the oil in a car: it may be a different car on a different day but the oil change

is the same.

There is an age old wisdom that is just as true today: If you fail to plan, you plan to

fail. In other words, success is based on a well planned strategy; failure is based on no

plan at all. No wonder it is so easy to fail. You do not have to plan for it.

If you want to find successful people look all around you, for there are successful

failures everywhere.

Everyone has succeeded at something and that something is failure! If you have been a

successful failure at trading, it is now time to be a successful trader and in order to do so

you must plan to be a success.

By having a clearly defined plan of action, the 10% protect themselves from over trading,

one of the many pitfalls of the 90%.

Over trading is the by product of the following emotionally driven errors of judgment:

32

1) revenge trading or desperation trading. Here the trader is trying to quickly make up

for a recent loss. This usually leads to another loss greater than the first as he chases a

low probability trade.

2) greed or excitement. After experiencing excitement or euphoria from making money

on the last trade, the trader quickly looks for anything to trade, usually leading to a return

of the money gained from the previous winner as he loads up on a sure thing.

3) fear of missing out. The trader sees the market going in a particular direction and

does not want to miss the move, jumping on board the caboose only to realize the move is

over.

The list goes on and on but I am sure you get the point. Without a plan the 90% are

likely to trade off pure emotion which is a loser’s game and one of the many reasons for

consistent failure.

In order to plan properly, it is imperative to screen stocks at night or when the market you

trade is closed, locating those stocks that fit your criteria for a possible trade. Any

screening done during market hours can become contaminated with too much “noise”.

Your goal is to produce a list of stocks for possible entry. Some traders call this a

“watchlist” or “stocks to watch”. I refer to it as “stocks on my radar”. Whatever you

wish to call it, create a list for the following market day focusing only on those stocks

with potential. These potential trades may never set up for entry or your screening may

not even provide a list of potential trades for that day which is fine! In fact, if your list is

too large or produces too many potential trades every day, you may need to add more

filters or specialize (which we will discuss in our next topic).

33

Accept the fact that markets can and will function without you!

If your reason for entry is not there then go do something else! Do anything but enter the

market.

Sometimes the best action is inaction. Since there are so many different markets to trade

and various instruments within each of those markets, how do you decide what to trade?

That leads us to the next principle of the successful 10%.

34

CHAPTER FIVE

The 90% try to be all things to all markets and end up mastering nothing, whereas the

10%...

SPECIALIZE IN A MARKET AND BECOME MASTER TRADERS

35

One of the biggest mistakes I made when I began trading is a mistake most beginning

traders make: I attempted to trade every market available. There is just no way you are

ever going to successfully trade every market. Each of us has different abilities when

managing information into a cohesive plan. Recognize how many variables your mind

can comfortably analyze into a plan and then proceed with this knowledge.

The 10% focus on a particular market knowing that trading is a game of steady

gains.

The 90% believe survival is found in knowing all markets. Attempting to trade all

markets is rooted in the desire to feed the ego, in the need to know all things market

related. Why feed it this way? Your ego will never get enough to satisfy the hunger for

the “need to know”. Trading is a very expensive education for those who refuse to obey

this principle for the learning curve can be long and difficult for just one market,

nonetheless, all of them! So what are you to do? Here are just a few suggestions:

A. Trade a few stocks in one particular sector. In other words, trade a few oil stocks,

or focus on technology stocks, or on financial stocks. Pick a sector then pick 5-10

stocks within that sector to trade.

B. Trade an ETF or INDEX which represents a particular sector. For financial

stocks trade the XLF. For oil services stocks trade the OIH. For technology

stocks trade the QQQQ. The list could go on and on.

C. Trade the highest volume stocks within a particular index. For example, trade the

stocks with the highest average volume the last three months among the S&P 500

or NASDAQ. Or even trade the DOW 30.

36

D. Trade a limited number of stocks from a wide array of sectors thereby taking

advantage of sector rotation (which is simply the transfer of money from one

sector to another due to changes in investor sentiment).

E. Trade one particular instrument such as oil futures, E-Mini futures, FOREX,

equities, options, bonds, an ETF (such as SPY, DIA) etc.

And here is a strategy that is the most important:

Trade only one pattern or edge!

I know what you are saying: but how can I trade just one pattern when there are so many

potentially profitable ones? The answer lies within your question: because there are so

many! Just as you cannot trade all markets (and ever hope to master any of them) you

can never profitably trade all possible patterns. Profitable trading cannot be complicated.

Making it so is self defeating. You must determine a system that works for you and stick

with it.

For example, take a look at the following two charts over the next two pages. Each chart

is for the same stock (AAPL) and the same time period (May/June 2009). The first chart

is a complex chart with multiple indicators, trend lines, moving averages, etc. and the

other a simple CROSSHAIRS chart.

37

CHART #1 COMPLEX CHART: ENHANCES CONFUSION, DOUBT, AND INDECISION.

38

CHART #2 SIMPLE CROSSHAIRS TRADING CHART: PROMOTES CLARITY, SIMPLICITY,

AND CONFIDENCE!

The first chart includes various indicators from a host of different trade systems and is a

good visual representation of the ego’s attempt to know everything. The second chart is a

CROSSHAIRS TRADING chart. Now ask yourself: which one of these charts would I

prefer to use when making trading decisions? Would I prefer the confusingly complex

chart or the simple chart that allows me to easily locate a highly profitable pattern? If

you wish to specialize and become a master trader the answer should be quite obvious.

Specializing makes sense in just about any endeavor. Take, for example, physicians. A

general practitioner, or your family doctor, has a general knowledge of a wide range of

illnesses, but if you consult him for a possible heart condition he will refer you to a

39

specialist, such as a cardiologist. Your family physician is paid well for his advice but he

is well aware of his limitations. The specialist, however, is paid a premium for knowing

more about your specific illness rather than having a general knowledge of all illnesses.

The specialist makes more money focusing on a specific illness than the general

physician who knows a little about all illnesses.

Should a trader be a generalist or a specialist? The 10% know the limitations imposed

upon them by the many and varied opportunities in the market; therefore, they focus their

time and energy on where they are comfortable making successful trades. The 90% try to

be all things to all markets and end up uncomfortably broke. The choice is yours.

Once you understand the first five principles the sixth one makes logical sense.

40

CHAPTER SIX

The 90% take home run swings with every trade, whereas the 10%...

FOCUS ON HITTING SINGLES AND DOUBLES OVER AND OVER AGAIN

41

The 10% are well aware of the Wall Street maxim “live to trade another day”; the 90%

flirt with death on any given day.

Let’s look at a baseball analogy. In baseball, hitting a home run is a rare event. Take, for

instance, Hank Aaron and Barry Bonds, the top two home run hitters of all time.

According to a study by James Ray in May, 2007

http://baseball.suite101.com/article.cfm/barry_bonds_vs_hank_aaron) Barry Bonds hit a

home run every 12.98 at bats and Hank Aaron hit a home run for every 16.38 at bats. In

other words, Bonds did not have a home run 12 out of 13 at bats, Aaron 15 out of 16.

Each player was much more likely to hit singles and doubles or even strike out than

hit a home run! In fact, Bonds had over 1531 strikeouts in his career and Aaron 1383.

The 90% swing for the home run only to find that between those home runs (which rarely

occur anyway) the market takes most, if not all, of their money. Most traders do not have

deep enough pockets to swing for home runs and take the chance of coming up short time

and again. Moreover, the markets are not that generous. The 10% take what the

market is willing to give and nothing more. Just as there is an art to entering a trade,

there is an art to exiting. The best traders know that since anything can happen, and most

likely will, it is better to enjoy the singles and the doubles than to try for the home runs

risking the opportunity to play again. The solution? It is found in a formula I developed:

BIG CHARTS + CROSSHAIRS = QUICK PROFITS

Develop a profit target for each trade before the trade is entered and always take the

quick, easy profit. Then sit back and watch the rest of the traders figure out how far to let

it run.

42

If you have a good trading system like I have, then there should be three predetermined

numbers or points on the chart: 1) an entry point, 2) a profitable exit point, and 3) a loss

exit point. Without these three steps, it is three strikes and you are out! By focusing on

singles and doubles, the 10% build confidence and a consistently rising equity curve,

taking their profits over and over again. Why stick around? There will be another trade

on another day. Let me prove it to you.

Let’s go back to Newmont Mining (NEM) again and look at my DEPLOYMENT

CHART, which is smaller than a DAILY chart but would not be classified as a “day

trader” chart. Here you will find that over the course of several days I was able to trade

NEM no less than three times, taking the easy profits with each trade.

43

The reason I take the easy profits over and over again is twofold: 1) I can bank money

over and over again building my account and my confidence at the same time, and 2) I

eliminate the emotional roller coaster of staying in a trade too long where I would then

have to decide whether the stock is in pullback mode or ready to reverse. Why not

eliminate the worry all together? Look at trade #3 above. If profits were not taken

quickly, as in trades #1 and #2, I would then have to make a decision: is this going down

to my loss target for a pullback test or will it break the horizontal CROSSHAIRS line?

Either way, I am taking a chance on losing all the money I made on the previous two

trades. Why try to hit a homerun when a single would be perfect? In the example above,

I hit three perfect singles, not a home run. This has everything to do with how you

think about trading.

Building confidence requires taking responsibility for all that we have discussed and

leads us to our final principle of successful trading.

44

CHAPTER SEVEN

The 90% focus on the last trade, whereas the 10% …

FOCUS ON THE NEXT TRADE

45

The 90% make costly errors when they focus on the last trade whether a winner or a

loser.

If the last trade was a winner then the errors include: 1) trading a larger position than

usual due to overconfidence; 2) impatiently entering another trade before the rules for

entry are met (known as “jumping the gun”); and 3) searching for another trade when

there is not one (a symptom of overtrading).

If the last trade was a loser then the errors include: 1) loading up on the next trade in

order to make up for a previous loss; 2) not entering the next trade due to the

fear of another loss, even though the rules for entry have been met; 3) second guessing

the trade set-up because something did not work the last time.

The best golfer in the world, Tiger Woods, can teach us a thing or two about our next

trade. Why do you think Tiger is so good at recovering from a bad shot? While setting

up for the current shot is he thinking about why he just hit the ball in the water or in the

woods? No. That shot has already been made and there is no need to think about the past.

The focus now is on the recovery shot. In Tiger’s own words he says, “I’ve hit a variety

of snipes, quacks and shrimps in my lifetime, and if I continue to play I’ll hit plenty

more. I realize that a poor shot is just a swing away. I also realize that once I’ve hit a

poor shot my only recourse is to hit a better shot on the next swing. In other words, I’ve

learned how to hit it and forget it. There’s no sense dwelling on a mistake. You can’t hit

the shot again, so forget about it.” (TIGER WOODS: HOW I PLAY GOLF, p. 268).

Have you learned how to trade it and forget it?

46

The 10% focus on the next trade because of the following beliefs: 1) anything can

happen; 2) probability is better than predictability; 3) patience is rewarded; 4) successful

trading is repetitious; 5) specializing beats generalizing; and 6) home runs are better left

for the baseball field.

All of these factors contradict the way the average person thinks because the average

person has not taught himself to believe in these things.

The 90% do not want to believe in the way the market behaves.

If the 90% did, then their whole perception of the market would be turned upside down.

“Why change the way you think?” the 90% reason. That would just take too much time

and effort. Surely the market will come around. Don’t fool yourself and lose all your

money.

47

CONCLUSION

When taken together, all of these principles clearly define the difference between the

successful 10% and the unsuccessful 90%. Think of it this way: the difference between

the top 100 golfers in the world and all the other professionals is only a few strokes a

tournament. Is this difference attributable to differences in talent? Most likely not. All

professional golfers are very talented or they would not be professionals. The difference

is found in the way the top 100 think about the game. So it is with the difference between

the 10% and the 90%. The 10% adhere to a few simple yet profoundly effective

principles that the 90% have not developed the discipline to believe. The choice is up to

you.

If your goal is to be a consistently successful trader, TO BE PART OF THE 10%,

then you must change your thinking and change your trading methods.

Changing the way you think and changing your trading method takes effort and requires

that you practice every principle mentioned here. Once attained, the effort becomes a

habit and the habit becomes a lifestyle.

Crosshairs Trading is based on a very specific methodology grounded in sound thinking

with the ultimate goal of promoting the confidence you desire so that you may join the

successful 10%. Is it not time for you to switch sides?

David Blair “The Crosshairs Trader” has developed a system of trading based on simple technical analysis that can be used by

long term and short term traders alike. This system was developed over years of study and provides the trader opportunities

to locate high probability set-ups for profitable trading, while helping the trader maintain control over various emotionally

based errors of judgment. You can read more about Crosshairs Trading and The Crosshairs Trader at

www.thecrosshairstrader.com.

48

Copyright, Legal Notice and Disclaimer: This publication is protected under the US Copyright Act of 1976 and all other applicable international, federal, state and local laws, and all rights are reserved, including resale rights: you are not allowed to give or sell this publication to anyone else. If you received this publication from anyone other than thecrosshairstrader.com or its licensed affiliates, you've received a pirated copy. Please contact us via e-mail at thecrosshairstrader.com and notify us of the situation. Please note that much of this publication is based on personal experience and a market that is constantly changing. Although the author and publisher have made every reasonable attempt to achieve complete accuracy of the content of this ebook, they assume no responsibility for errors or omissions. Also, you should use this information as you see fit, and at your own risk. Your particular situation may not be exactly suited to the examples illustrated here; in fact, it's likely that they won't be the same, and you should adjust your use of the information and recommendations accordingly. Any trademarks, service marks, product names or named features are assumed to be the property of their respective owners, and are used only for reference. There is no implied endorsement if we use one of these terms. Finally, use your head. Nothing in this ebook is intended to replace common sense, legal, medical or other professional advice, and is meant to inform the reader. The author and publisher of this ebook cannot accurately assess your risk tolerance, your current financial situation, or your familiarity with the terms used herein. It is my hope that you enjoy the read and that you find it beneficial to your future success. Copyright © 2009 David Blair. All rights reserved worldwide.