I do not waste even my spare time in trying to understand why people do these things in the market. I do, however, spend a lot of time trying to understand how people behave in the market. Shift to this focus and an entirely new range of relationships emerges. The study of the market becomes a study of human nature and crowd behaviour. The activity is tracked effectively in the patterns of buying and selling, in the structure of the price charts. They tell me little about the company, but speak volumes about the crowd of buyers and sellers.
Tighten the focus a little more, and we discern a set of statistical or probability relationships. Working with the crowd, but not being part of the crowd, is a strange experience. There is a danger of being sucked into the whirlpool of emotion only to emerge, like so many others, financially poorer for the experience.
This is about trend trading. These are trades which may last weeks, or months, or years. The objective is to find a trend and hitch a ride for a defined period, for a defined return, or until we are aware the trend is no longer moving up. We do not create the trend, and the level of our trade participation alone is not enough to maintain the trend. For trend continuation we must rely on the activity of many other traders and investors. Understanding what they are rhinking and how they are behaving is the most significant aspect of successful trend trading.
Understanding how we are going to manage the trade once we buy the stock underpins our trading profitability. Mastering these aspects of trading is the focus of this book. Of the many different approaches, we have selected the approach we find most useful. Use this as a guide, but not as a universal solution. Understand how we bring together various indicators and analysis approaches to establish our trading solution.
When it comes time to build or refine your own approach we hope these ideas will help you create a better solution for your own particular circumstances. However they are a little more skilled at identifying the balance of probability. This is not guesswork. It makes the best possible use of technical and charting indicators to identify where the balance of probability lies. They recognise many of the popular indicators, and other indicators derived from them are very unreliable. People who use them must expect failure because the tools are flawed.
In addition to understanding the role probability plays in the market, successful traders and investors also match trade management with better money management created by good stop loss control. This turns a successful trade into a major contributor to portfolio returns.
This ensures an unsuccessful trade has just a minor impact on portfolio returns. Confused and common thinking is a major barrier to trading successes. They must be because they are so widely used and referred to. These widely held ideas may help to explain why so many people fail in the market. They are not ideas we use and they do not underpin the way we approach the market. The diagram in Figure 1 shows why this assumption is incorrect.
It shows a ,tock that has been moving sideways for an extended period, The price action is confined to the thick box. Nothing has changed at the point shown by the end f the box. The stock price has three choices - not two. It may continue to ,nove sideways, move up, or move down. Here we make an assumption drawn from Newtonian physics. Newton's law says the object - price - will continue to travel in the same direction until it meets an opposing force. Once it meets this force the direction of travel is deflected. In market terms this may be an important news event which has enough force to deflect or change the direction of the trend.
The event is unknowable so we must work with what we have, and it suggests a spread of the balance of probability as shown. Instead there is an overwhelming weighting towards a continuation of the existing price movement. We are happy to admit this is informed guesswork based on our close observation of market activity.
A lower reading does not reflect the tendency of prices to continue to move as a continuation of their previous price direction. Here is the most important point, usually missed by those who accept common understandings of the market, market behaviour, and the relationship the trader has with this and probability. The diagram in Figure 1 shows this price activity as a sideways movement.
A sideways pattern is not dynamic. A sloping uptrend is very dynamic.
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This shows activity with a crowd of people very interested in buying the stock and this keeps pushing the price upwards. Our interest is, as always, in the right-hand edge of this chart. The end of the price box shows us all the information we have. Newton's laws of physics still apply. Prices are most likely to continue in the same direction until they are met by an opposing or stronger force.
This changes or deflects the direction of the previous price movement and changes the balance of probability. A rising trend in prices is a measure of price acceleration and increases the probability of uptrend continuation. This trend acceleration also increases the probability of a price 'pop' or 'bubble' above the trend line.
This is very important. This is the raw power of trend trading. Pick a stock like this and the balance of probability is overwhelmingly on your side. The answer is simple. It is called human error, or more accurately, the tendency of traders to tty to pick the bottom of down trends by applying breakout trading techniques. These are exciting because they can lead to very large returns. They are also extremely high risk because we trade against the balance of probabilities. We use a range of specialist techniques and indicators to try to increase the probability of success, but we acknowledge this style of trading is inherently riskier than trend trading.
The diagram in Figure 3 shows why. With apologies again to Newton, we borrow his idea of gravity. Prices feel the impact of gravity, falling much faster than they rise. Compare any downtrend with an uptrend. The overwhelming majority of downtrends are much faster and swifter, and this changes the balance of probabilities. This is an acceleration of the existing trend, and our observations over many years of trading suggest the probability of these dips remains relatively constant. However, on balance, we acknowledge the failure rate here is rriuch higher than with other styles of trading.
We also examine a range of other trading strategies in the newsletter and some are included in the case studies just to show how they do not work. The results are included in our portfolio tally and this further reduces the success rate. This is wrong because the balance of uptrend continuation is much higher. When we trade with the strength of probability we achieve a higher success rate.
Despite its frequent repetition by many investment writers, this remains inaccurate and untrue. N ; mediocre performance or failure. It rarely leads to consistent success or market outperformance. Most people do not seriously examine the bring to their understanding of the market.
They dismiss the idea of prediction because it is fashionable - and then they spend hours looking for a system, a broker or an investment manager with a high success rate because they subconsciously believe this means they can predict the future. Others are a little more advanced in their understating of probability. A common belief implies all sllccessful trades must be very large winners to overcome the balance of winners and losers. This brings together several assumptions, shown in Figure 4. High reward means high risk, or so we are told, and like children warned of the dangers of playing with fire, we accept the warning without question.
High reward does equal high risk, but only if we choose to sit back passively and do nothing to manage risk. Investment and trade management is about the management of risk. The idea that once a trade is selected the reward in the trade is about the same as the risk in the trade is shown in the first part of Figure 4. It comes from the assumption that the probability of rising prices is the same as the probability of falling prices. It further assumes the range of this rise or fall is evenly balanced.
We could spend a lot of time showing why this is not correct, but we do not need to. The error in thinking is resolved by understanding the role of a Stop loss and the relationship it has with money management. OUf own action in the market using stop loss orders limits the risk by capping the level of loss. The stop loss limits our risk and allows the rewards to run. We have simplified this diagram to show how even moderate returns are successful in counterbalancing the very smaHlosses in unsuccessful trades.
Successful trades do not need to be large winners to grow portfolio returns. A more detailed discussion of the implementation of these concepts is included in Part VI. Many assume common indicators are reliable because they are so widely used and referred to. Others develop more indicators derived from these common indicators, tweaking them with proprietary and secret modifications. Some of these indicators are less reliable than a coin toss, but because they are mentioned in most trading books and endorsed by high-profile writers, we assume they must work.
Consider the bar chart with the stochasric display. Of a total of eight trading signals, there are only two completed trades, shown by the thick black arrows. This is the first buy followed by the first sell. With eight signals we could reasonably expect to see four complete trades defined by an entry and exit signal. The real problem is deciding which of the buy signals is a valid buy signal, and then deciding which of the sell signals is a valid sell signal. Easy to do retrospectively on the chart but devilishly difficult to do in real time.
It gets worse. Of the two trades identified, only one is successful and it is a small winner. The other is a large loser. Common thinking leads to common results. Uncritical thinking leads to poor performance. Thinking it is impossible for anyone to do better than yourself limits your ability to improve your trading. In this book we aim to show readers how a better understanding of the role of probability in the market results in a higher success rate in selecting and managing trend trades. It can be achieved consistently, and with better money management techniques, this is turned into better portfolio returns.
Inevitably there is some repeated material and concepts but I trust it is presented in a new way that adds to your understanding. Each part examines the tests required to identify, select and manage a trade. Where do we start and what do we need? The first part, 'Gone fishing', provides a starting point. Common solutions rarely lead to uncommon profits so we spend a little bit of time examining some common ideas to see if they are really useful. This includes several simple methods of finding suitable trading opportunities.
The market is complex, but solutions for breaking into it need not be. Simple tools give us access to good profirs in the market. The final chapter in the first part introduces the first of eight ongoing tests for readers. One of the most pernicious and incorrect of common misconceptions about market success suggests we need exclusive information or systems or techniques for success. This series of tests at the end of each part provides all readers with exactly the same information, yet every reader makes a different decision and ends up with a different profit result.
The tests are based on similar work we did with newsletter readers so you can compare your results and reactions to theirs. We show how this visual test is applied in the second part, 'Hey good looking'. This is not a complicated task and perhaps this is why so many new investors ignore it. Their preference seems to lie with what can only be described as ugly charts when prices fall dramarically from the top left of the chart to the bottom right.
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These are investment bargains and they come with an invitation to financial disaster. We discuss ways to avoid these attempts to separate you from your investment capital. The third part, 'Line of lode', introduces a different approach to the application and use of trend lines. These are probability tools directly related to the management of the trade. Many traders use trend lines to define price action, often with a sneaking suspicion that they might be able to predict the future. This part considers these classic applications and then moves beyond them to examine the rebtionship between the trend line and better trade management.
Since then the indicator has evolved into more advanced and sophisticated applications. For many traders it has become the core way of understanding trend behaviour and indicating the type of trading opportunity. This part provides a detailed discussion of the trading and investment applications oftheGMMA. Before a stock is added to OUf" portfolio we need a price check to more precisely define the trend and our entry point, and to commence the calculations necessary to manage risk.
This is examined in Part V. Our preferred tool is the count back line. This was introduced in Share Trading in and this technique has also evolved with more sophisticated applications. It is used as a stop loss to protect rrading capital when a trade is first opened.
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We show how this is applied to mid-trend entries. We also show how the count back line is combined with the GMMA as a protect profit tool as the trend develops. This is a powerful trend trading combination. Risk is the cornerstone of the market, and yet so many people accept the assertion that high reward equals high risk. They believe they are powerless when confronted with the force of the market.
This is simply not true and we examine some of the methods designed to effectively manage risk while leaving reward 12 A FLEA l. The necessary figures are easy to produce, but implementing an effective stop loss or protect profit strategy is much more difficult. OUf reaction to risk changes with experience, and unless we recognise these changes we may stumble on the path to success. The approach developed by Nicholas Darvas represents an entirely different way of understanding trend behaviour. Originally developed and successfully applied to markets in the mids this approach was overwhelmed by the appeal of complex computerdriven analysis of the market and by increasing market volatility.
We examine the classic Darvas application. We retain the logic of his understanding of trend behaviour and update the technique for application in modern, volatile markets. We use six tests to select the best trend trading candidate, and no test is complete without a test result. In 'Performance plus' we discuss some of the ways ollr performance is diminished. We start a trade with the best of intentions, and then tllrn it into a trading wreck. There are no easy solutions to resolve this behaviour, but our discussion is designed to help you recognise the problem.
They string together, first in notes, then in articles and chapters, and finally in parts to form a book. Before the words corne ideas formed from trading experience, tweaked and stimulated by questions from people who attend our trading workshops, by questions from newsletter readers and others who have read my books. The ideas are challenged and forged in the heat of the market. They withstand scrutiny from industry professionals in Australia, Asia and the United States as the ideas are presented in professional development workshops.
NG The subject trend in this book gained impetus from the questions posed by Chen Jing, who wanted to know if the strategies could be applied to her home markets of Shanghai and Shenzhen. Like many new tradets she felt success depended on using infotmation not held by othets and the 'No Secrets' chapters are designed to answer this concern. All have contributed to the ideas included in this book and I thank them for their assistance.
Leehoon Chong gave her time again to rigorously hunt down poor expression and rhe numerous spelling and typographical errors in the early drafts. My mother Patricia added her unique editing skills, proving old teachers of English never willingiy surrender their red marking pens. Neither writing nor trading are possible without the support of my wife and son, who have long resigned themselves to the side effects of extended periods of intense concentration while the first draft is created and subsequent drafts rewritten.
The time to write this book, free from the everyday demands of running Guppytraders. The end-of-day charts in this book are created by the Guppy Traders Essentials charting package, or MetaStock. A few charts are created by Ezy Charts. End-of-day data comes from JustData and is downloaded with their Bodhi Freeway service. Common thinking does not lead to uncommon results in the market. Many market myths, or commonly accepted practices, often stand between us and market success.
We look at some of these from new perspectives to show how you can find an edge that delivers better market returns. Your skill makes the difference between successful and unsuccessful trading, but we must remember thar, like a flea on an elephant, we are just along for the ride. This ignores the other 1, stocks, many of which offer excellent trading opportunities. YOll need a short-cut that allows you to use your knowledge, and the actions of others, to guide you to better opportunities. We put together several short-cuts and a combination of solutions in this book.
Many people use trading as a part-time occupation to deliver a full-time income and this is a useful approach. The shift from earning money to making money earn money for YOll is important. Unless YOll accept that the objective is to make your money work for you, your approach to the market is most likely to be a gambier's approach, looking for quick money.
A successful trader develops a different view of the world of money, and the relationship between capiral and I income. A typical example of these different views is between those who want to immediately develop a replacement income for their wages, and those who want to use trading to supplement their income. The latter group focus on the most I effective use of capital.
They are not after a big hit - the gambler's approach. They look for the best return on their capital rather than focus on the size of the dollar return. I i Protecting your capital, growing your capital and finding the best return are the core tasks for the tr;:lder and investor. Some people examine their current job with its heavy time demands and decide the life of a share trader sounds easy in comparison. The common questions about becoming a full-time share trader include: 1 Do I need to become a full-time share trader to benefit from the market?
In this chapter we examine the first six questions. The bst twO questions call for dedicated chapters. This is our starting point for the market. Unless we believe it is possible to learn how to succeed in the market we cannot take the first step. Look ahead for a moment. After we embark on this journey we sOon i face a daunting obstacle - how to find suitable trading or investment opportunities. This is easier than it first appears. The more difficult task is ,II reducing this list from 10 or 15 to just a single stock.
Finding the best candidates means we subject each stock to a further six tests. Each part in this book is built around one of these tests, except the detour in Part VII, in which we look at Darvas-style trading. They are combined in the final performance test. The tests are: D A selection test - covered in this part. D A visual test. A character test using a Guppy Multiple Moving Average.
D A position size test. Do I need to become a full-time share trader to benefit from the market? The short answer is 'No'. Full-time share traders are relatively fare and they tend to work for institutions. Full-time private traders are rarer. It is a skilled profession but unlike many professions, it also offers a part-time component. When I first started, trading provided a'very useful supplement to my wages income. Trading was clearly the best use I could make of my savings capital.
X:-""F"--' Thebestllsec,f' ;;apitcll " ' We applied a simple trend trading strategy discussed in the next chapter. What is the difference between traders and investors? This is a popular question that is often answered incorrectly. The correct division is shown on the left in Figure 1. He buys an asset such as a house, a government or corporate bond or a share because the asset delivers an income stream.
He is particularly concerned about his return on capital as defined by the interest paid, rhe coupon rate or the dividend rate. When he makes these calcularions he starts from the price he paid for the asset and looks at the income generated based on the original price. If the current price of the asset falls, but the income generated remains much rhe same, he sees no cause to sell.
If the price of the asset rises dramatically he may be tempted to sell to collect a capital gain. This extra capital is then employed to buy another asset such as a rental property, more bonds or other dividendpaying shares available for a low cost. The trader has a different objective. He wants to buy a product from a supplier at one price and sell the product to the consumer at another price. Trading is the activity which drives business. It does not matter if you are selling tinned food, televisions, computers, office furniture or shares. The underlying principle is unchanged.
We buy an item for one price and intend to sell it to a customer at a higher price. The successful businessman trader buys items he knows other people want. He buys items in demand because he can resell those items at a higher price. If golf is the current fad there is not much appeal in filling the store with tennis racquets.
We buy shares in a rising trend because we can resell them at a higher price in a few days or weeks or months. Every now and then we get an unexpected bonus on the sale. Others cal! Here is where common usage conflicts with the correct understanding of these activities and it is shown on the right hand side of Figure 1.
When we commonly talk about investing we include both asset income management and trading activities. We bundle the tWO together and this makes it very easy to fool ourselves when things go wrong. It works like this: o The 'investor' buys a dividend-paying stock at a good price and holds it for the 'long term'. He is an asset income manager. D The 'investor' buys a stock in a strong industry sector with a bright future. I I He pays a high price for it because he intends to sell it at some time in the future to collect the capital gain. He thinks he is investing, but in fact he is trading.
He buys an item - the share - because he believes others will want to buy it from him at a later date, perhaps in the 'long term', for a higher price. He buys it because he believes the downtrend is about to end as demand for the company's products improves, or management gets better, or for anyone of a hundred reasons. He has no income from the asset while he waits. His profit depends entirely on capital gain. He is trading, not investing. The downtrend continues for several years and the linvestor' still holds onto the stock. In fact, he might even buy some more because it is now cheaper than when he Erst bought it.
His intention is to sell rhe stock ar some time in the future for a higher price than he paid for it. His profit depends on the difference between his buy price and his sell price. He might believe he is an 'investor' because he is dealing with a well-known, high-profile, well-respected listed company, but his purpose is not different from the 'investor' who buys a small bio-tech company hoping to sell it for J higher price M some time in the future. Both urc trading, not investing, because their reward comes from capit;.
However, common usage of the term 'investor' combines and confuses asset income management with the business of buying and selling a productlisted market equities or shares. When we talk of investors in this book we are not referring to asset income managers. We are talking about 'investors' who aim to make a capital gain from their activity and who believe the 'long term' will assist them. If you purchased them with the intention of seiling them at a higher price in the future then this book is for you.
Traders are short term, holding a stock for days or weeks. Investors are long term, holding a srock for months or years. Like many commonly accepted ideas in the market, these definitions are quite wrong and misleading. The difference between traders and investors is about their understanding of risk - not time. A trader may ride an uptrend for many months, but this does not make him an investor.
I-tow DO! The real difference between traders and investors is in the way they approach the risk of market exposure, and is summarised in Figure 1. Investors usually believe the risk is mainly found prior to buying the stock. Their focus is on analysis and stock selection risk. Investors often spend a lot of time selecting the best stock. They favour fundamental research methods, looking at market share, company activities, management quality and financial reports.
This research is important. They are prepared to ride out any ups and downs because they believe these are minor fluctuations in the price. Larry Williams, a US trader and author, suggests investors are the biggest gamblers in the market because they make a bet and stay with it.
The truder rakes a differenr approach. He does nor abandon analysis of the stock and the company. He takes the time to research the trading opportunity. He tn.. The difference is not in how he selects stocks, but how he manages them once purchased. The trader recognises the time of maximum risk is when he buys the stock. He 24 lJ. The investor does better in the market if he learns how the trader treats market risk when a trade or investment is open. They both have the same objective - to make money from rising prices. The trader achieves this by actively managing his trade.
The investor achieves this by actively managing his investment in the face of market price moves. How long they intend to be in the market has nothing to do with making money from rising prices. The srudents in Darwin applied a discretionary trading approach which is as relevant to investors as it is to traders. This trading style puts the trader or investor in the driving seat. The trader assembles a collection of his preferred indicators, assigns a level of importance to each, and then makes a decision based on his understanding of the indicator readings and trading signals.
This inevitably involves some subjective judgment, and this opens the door for error. The trade is managed in the same way, and this requires a high level of confidence. Mechanical trading seeks to remove human intervention - and hence subjective behaviour - as much as possible from the trading equation. Typically such systems rely purely on mathematical relationships. However in establishing any system there is subjective human input to determine the most desirable outcomes. Intuitive trading develops from experience, and should not be confused with the gut feelings used by novice traders.
Experienced traders are subconsciously aware of certain patterns and market set-ups. When they see them they act intuitively, drawing on many years of trading experience. This requires a high level of confidence and skill, and trades are managed with certainty. These trading processes are difficult to explain. In this book our emphasis is on developing discretionary trading approaches. Pursuing a part-time occupation is not the same as turning it into a full-time occupation.
If you do not get around to opening a new trade it does not have a significant impact on your standard of living. If a trade takes longer to develop than you expect then the lack of cashflow does not disrupt your weekly grocery shopping. As a parHime trader, you do not have to rely on the income generated from trading. Full-time trading is an entirely different beast.
There is no regular income from wages. The pressure suddenly increases because many people feel the need to see a regular weekly income from their activity. They do not like dipping into their savings to meet the weekly food bills. They believe they have to make a certain amount each week to at least match their old wage income. In my case, when my three-year work contract finished I was making enough 1t'llm part-time trading to not have to worry about looking for traditional I" II-time work.
I took on full-time trading only after I was already making a living from it. You become a full-time trader by graduating from a part-time trader and 'vhen your trading income is greater than your current wage income. Hut you do not need to become a full-time trader to enjoy the benefits available! Most people are able to successfully use part-time II. Iding to rrm'ide ,1n excellent supplement to their existing income.
This may I ,'duce the pres::;ure to take on overtime, and l11 ,I-rategies. The choice is yours, and the trend trading techniques we discuss will assist you on the path to success. This belief is based on our success in other activities where we generally experience a direct relationship between knowledge, skill and success. This is a straight line relationship, shown in Figure 1. We accept not all of us will become wizards, but we expect our native ability to improve with more knowledge and understanding. Learning about trading does not work in this way.
When we start trading we believe our lack of analysis skills stands between us and success. To some extent, this is true. There are advantages in learning how to use the tools of charting and technical analysis correctly. Many of our early trading mistakes come from simply not understanding how to apply a stochastic, or failure to understand the entry and exit signals. We improve our chances of success in the market with basic education, and for a while there is a steep and successful learning curve. The learning curve of the typical trader is shown by the curving lines in the bottom section of Figure 1.
The first curve moves quickly upwards. The more we know about the tools of analysis, the better our trading becomes. We generally move quickly from poor, or uninformed, ability to average. Then something strange happens. Our trading performance plateaus. Trades that worked in the past stop working. The number, and perhaps size, of our losses grows. This is where many traders are washed out of the market because the number and size of their wins is not large enough to overcome their losses.
We want to get off this poor performance plateau and we believe the easiest way is to learn more about the market and technical indicators. This is often when the trader decides to purchase an expensive tool box charting program to access more indicators. Some people consider specialist programs that give them the ability to extensively construct and test trading systems and indicators.
A significant group goes hunting for short-cuts and they are fodder for the tip sheet newsletters. Another group believe success comes from a black box system advertised in a glossy brochure. This looks like a shortcut but more than a few are mugged along the way. The thirst for knowledge is driven by the belief that the more we know about the subject, the better our performance will be. We are still stuck with this vision of a straight line relationship between knowledge and skill. For many people the quest for additional knowledge results in confusion.
Market clarity is replaced with many competing approaches and subtle distinctions. Depending on your trading style. We all feel a compulsion to explore the indicators in the MetaStock charting package to see if there is one combination that will improve ur trading results. This week we are fascinated by the Relative Sttength Indicator and we take several trades based on this idea. Next month we believe the ADX indicator is more important, based on a magazine article. We try a few trades based on these ideas. The result is our trade planning disappears under the assault of so many choices.
Unless we are careful our trading performance declines to a new lower plateau. We are still performing better than the beginner, but our performance is now less than average. This is analysis confusion, and it may take many months, or years, to work our way out of this. The way out of the labyrinth still rests with education but the shift is from the mastery of the theoretical subject matter to the practical implementation of trading.
Owning an expensive tool set and knowing the correct names of each chrome-plated spanner, screwdriver and set of pliers does not make you a motor mechanic. This book is designed to help you take the next step. Sadly the typical trader is eliminated either on the first plateau or on the second. There are also a few spectacular falls from other points on the curve.
Traders fall off the plateau because they simply run out of money or stop making money, and that dampens their enthusiasm. The difference between average traders and successful or wizard traders is shown by lines A and B, and our objective is to show you how to change your learning curve to match these. No matter which plateau you start from, the outcome is the same. It marks an important shift in attitude and understanding.
While our trading is on the plateau we develop a belief that because the market is a complex system the best way to understand it is by using complex indicators. The first step on the new learning curve is taken when we discard this notion. The Darwin students' trading results at the start of this chapter are evidence that simplicity works. We have shown the successful trader's learning curve as arching back towards a reasonable level of knowledge. This is a little misleading.
In reality the curve shows the way we select a 'reasonable' amount from our total ttading knowledge and apply it to the market and our trading apptoaches. This selection is always a move away from complexity and towards simplicity. Although we know a great deal about systems, indicators, trading methods and money management we make a conscious decision to apply just a handful of this knowledge to our trading. We need the additional knowledge before we can make the decision to exclude some of it.
We cannot trade successfully from a position of ignorance, but like an artist, the best pictures are built from what we choose to leave out. Successful traders know a lot about the market but they approach it using simple techniques. Each plateau provides us with a constellation of choices.
Our choices expand as our knowledge grows, and the second plateau provides more choices than the first. Most traders slip slowly into the second plateau in a process which is measured in years rather than months. By making a conscious selection of just a few proven or preferred methods we improve our trading success quite substantially. This is the real secret of success for market wizards. We emulate this by understanding the process. If we know our position on the curve, we can prioritise the resources and tools we need for each stage. The diagram shows the curve in relation to knowledge of charting and technical analysis.
It does not show an axis related to money management. If we could do this, we would show these upper learning curves also curving away from each plateau to show an increase in knowledge about money management techniques. More knowledge continuously improves trading performance. It is the hidden partner in trading Sllccess. The difference between coaching and tipping is important.
The beginner knows he does not know much, so it is tempting to buy a weekly publication that purports to provide a list of stocks to buy. Some may be published by obscure groups or organisations, while orhers are published by well-known identities. In all cases, the tip sheet provides buying, and occasionally selling, advice. Generally the reasons for buying are rarely explained.
Subscribers are asked to accept the buy recommendation based on the experience and reputation of the tip sheet publisher. Alternatively they are encouraged to accept that buy recommendations are the result of some specialist technical technique. Parts of the technique may be revealed, but readers are never entirely certain how the final buy recommendation is made. Any technically based search is likely to turn up 10 to 20 potential trading candidates, so unless we know why one candidate was selected in preference to the others we can never learn how to emulate these decisions.
Tip sheets do not teach. Traders learn nothing useful from them. In many cases, all they learn is bad habits, particularly when it comes to handling the inevitable trading errors.
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Tip sheets are in the business of publishing and marketing. The financial market is their chosen field, but it could just as easily be horse racing, property development or Tupperware. These are harsh comments, but an extended and serious examination of tip sheets provides the evidence. From a marketing perspective, errors in stock selections are a negative. Readers want successful tips, which is why they buy the newsletter. Advertising highlights how many tips the newsletter got right, and shows dramatic returns on a few selected trades.
It makes for good advertising and increases circulation. Unfortunately it bears little relation to the real world of trading. Tip mistakes - stocks that go down instead of up - are quietly ignored and very rarely discussed in detail again in the tip sheet. Publishers are able to do this because the churn rate of subscribers is high, and the attention span of readers is short. Readers want the next hot tip and are not interested in the losers.
After 12 months many subscribers have stopped reading the tip sheet because trade losses have robbed them of trading capital. It is easy to hide the losers behind the hype of a few winners. Ignoring losers mirrors the way many new traders approach their own portfolio performance. We start with Figure 1. Take the time to do the same by listing the buy recommendations from a tip service and then matching them with sell tips for the same stocks. The results are enough to frighten any serious investor or trader.
One market report recommended the purchase of a mining stock. No sell advice was issued - not even when it was clear the stock was going to be delisted! Two weeks later the trend collapsed. No sell advice was issued to subscribers. The common thread with these types of rip sheets is the absence of any concept of stop loss selling to protect capital or protect profits.
In other words, there is no risk control because the success of the tip sheet rests on its ability to get the tips right. They are not interested in teaching their readership how to trade, perhaps because much of their income comes from magazine and newsletter sales.
Tips are for waiters. Tip sheets are not for traders, although later we show how they are used in a trading strategy. A good coach or coaching newsletter should spend as much time analysing their losers as they do their winners. A coach explains how he reached his conclusions. He demonstrates how decisions were made. He examines ways the decision could be improved. The coach concentrates on risk conrrol- on what to do when things go wrong.
He recognises failure is part of the game. Failed trades are recognised and accurately accounted for in any portfolio report. The coach demonstrates in advance how he intends to manage the trade, how his stop loss is strucrured and why he has chosen one particular method rather than another. The coach analyses every trade for ways to make it better.
He develops a clear trading plan setting the conditions for selection, entry and exit. The final aspect of the plan is how much return the trade could make. V" V""'. To stay at the top of his game, champion golfer Tiger Woods employs several coaches. He has a coach for his golf swing. He has a putting coach. He does not have a tip sheet. How do you get a coach? There are three ways: 1 Hire a personal trading coach and be prepared to pay for his time and expertise.
It has taken the trainer many years to learn this skill so it is not available for a pittance. Coaches include Nick Radge at Reef Capital, www. They all work with a small number of selected students. These may be general trading workshops, or workshops on specific techniques. Seminars at these price levels are a marketing hook to attract customers who are potential clients for very expensive trading programs, systems or products.
The presenter's trading experience did not come for free, and he does not give it away for free. They do not discuss current individual buy and sell opportunities. Their focus is on exploring techniques and tools. Shares magazine leans more towards stock selection advice than education. Our weekly newsletter, Tutorials in Applied Technical Analysis, is one of the very few coaching newsletters available worldwide.
It provides an opportunity to look over my shoulder, and the shoulders of other traders, as we find, assess, select and manage different types of trading opportunities in current market environments. We know many people do not have the time or discipline to explore and apply different trading techniques so the newsletter provides a way to properly explore these ideas with disciplined application. The newsletter is an ongoing I t smorgasbord of techniques and opportunities.
We use notional case study trades, managed and monitored in real time with weekly reporting, to demonstrate and evaluate a variety of trading techniques. Most of our income is derived from trading the market - not from newsletters. Trading and investment analysis should be objective.
One of the strengths of charting and technical analysis is its use of objective figures - price activity - which are readily available to anyone interested in the market. How individual traders choose to apply and interpret those analysis techniques is a matter of subjectivity. The fundamental analyst relies On figures created by the com pany in annual reports and press releases. He works with figures generated by outsiders, such as auditors ,lOd accountants. He also works with figures produced by others for particular purposes. The application of fund,]mcl1tai analysis is a subjective process from the very start because very few of the figures used are independently verifiable.
Even the balance sheet is a carefully massaged document. A significant problem for traders and investors who rely on the research and analysis of others is the objectivity of the research and recommendations. When a research company is being paid by a company to do the work then it is not uncommon for the report to put the best possible gloss on the situation. When a brokerage is preparing a report on a company, and it is also handling trading work for the same company, then the same constraints apply. The result is few sell recommendations are produced by the analysis industry.
This applied even in after the tech market crashed. New traders starting out on the path to part-time or full-time trading should read, read, and read. This is the cheapest part of any market education.
Follow up areas of interest with specific reading, then explore the ideas with paper trading to see how they work, and if they work for you. The market has many opportunities. Some are more complex than others. We do not have to follow every opportunity. There are many excellent books available, and we mention many of them throughout this book. In no particular order we suggest any books written by i4 How DO!
Under the Traders Reading button link on www. The objective in these book reviews is to give you some idea of the content and usefulness of new trading books as they are released. If we review a book, it means we have read it. The reviews are written from the perspective of a trader. Books are ranked from 'must have' books for serious traders to 'bedside reading' for those who have a consuming interest in all things related to the market.
Use the rankings and the reviews as a guide to books you have heard about, or areas of interest you wish to pursue in more detail. In terms of my own books, this summary guide may be useful. Trading Tactics improve your trading resulrs? Better Trading understand short-term trading? Snapshot Trading survive difficult markets? Bear Trading understand low-risk trading? Beginner to experienced Want to know more about charts? Experienced to profession.
Beginner to experienced Beginner to experienced New traders start small and part-time. Apply just one technique on paper. When it works successfully several times think about taking a single trade using the technique. Build on successes, and make sure the inevitable failures do only limited damage. You did not get to your current career position in a single bound. Every success, no matter how small, is important. Concentrate on the return on capital and real money will follow. Long-term, part-time trading to supplement your income offers a good compromise solution.
We do not dismiss it out of hand. I have blown a couple of accounts myself and each time l lose a trade l go out to feed my rabbits I have rabbits in my backyard! Thanks man…. Your article has been very enlightening. Hi Rayner. You had just brought great fact to the notice of traders. Thanks and God bless you. Guru Rayner all you had said is true… May it serves a lesson to anyone who reads it…. During those year, aside from tough competition, my bussiness faces strugles due to lack of marketing fund and family problems also that bothers me..
Then I came to a tough decision thinking to sell my business and go for forex trading because it seems Forex smells yummy. I tried demo account and looks promising profit. And so, what I did was I sell my strugling food business to a friend and used the entire fund to start live account.
I never understood that the world is round. As financial market has rise and fall…. In two weeks I faced market reversals. My fund goes down.. I wish you all the best. Thanks for awesome support Sir. From all your free videos and articles, I noticed that……. Is was one of your videos last year …. They require evidences.
Only then, they will start to believe the notion that strictly following their systems is what really matters,. If you already posted such articles before, be great if you could post it again via your social media channels. I understand showing that might have some unwanted consequences, considering you still need to maintain your reputation.
So, showing more actual winning trades are also a good thing of course. Just a number of them every now and then that you think we might take lessons from. I share my wins and losses in my weekly analysis. I am just starting with trading, I focus on Forex. My experience has been short but I want to share that the first month I got almorst USD with a demo account of 5. That excited me a lot, but when I openned my real account with USD the first two months I lost half of the account.
What this short time trading experience left me was I only can think about success. What an apt time to repost this and it caught my eye! Yet continue to watch it whenever the 30 min bar forms… Big mistake! Trading definitely requires time, lots of work, control of your emotions and most importantly, the commitment to stick with your trading plan regardless of the outcome. I got spooked when I saw the 30 min bar turning against me just 90 mins into the trade. Silly me, turned out my plan worked, only if I had stuck with it!
This is a common mistake made by many traders. As much as I wish to believe I have good control over my emotion, the best is just to execute according to the plan and leave it. Lesson learned! And yes…why i want to be a trader? Still trying to learn to trade! Hi Rayner I hope you are doing well! I also cut down on buying unnecessary material want things but only the personal necessities like for self grooming.
The reason, I was so eager to earn money without any knowledge in trading. I was brought in by the hype of stocks going up and in the end paying with my arrogance. So in the first weeks of February I decided to take my due to study, and there I found your channel and this site of yours, I also bought a couple of books to read.
Can you share your thoughts with regards to my situation? It would be very much appreciated. Totally agree with you mate. Left my job a year ago and never looked back! You certainly understand the feeling of not doing anything while parents work and others are busy with their studies. The scenario of my life changed and I was still thinking about overcoming it. I really frustrated thinking of work that can be done in this case, wanting to work on something that has been provided. I have the skills to design, but there are a lot of situations that have to be taken into account.
Here I am. I was complacent, like a mouse lured with cheese and did not think the risk of being trapped in it. But in the past few days, after seeing many articles here and there, trading increasingly attracted my interest. I myself really like to think, observe and research something. It looks complicated especially in its application in the field.
But still determined to try. I speak big now, have a high spirit, emit positive light that has not experienced a broken heart. That is very true. You are the one that motivates me, your article is good and I will try to follow all your directions as a consideration. I see trading as the best field to know who you really are. This field also requires growth in numerous areas of life. My goal as of now is to grow my buying power and so when I reach my retirement age, I will not rely on anyone to provide for my daily expenses.
I like challenges…. I want to pursue the skill that can give me confidence to deal with a business which is very hard to digest and far far different than any other things…It gives immense pleasure when you understands it better and gain confidence at that time, the thought process and analysis is the superior things which give happiness, and then the money becomes secondary and obvious thing in reward to respecting the business and market in its true manner. However, I still want to persue this path as a professional trader and generate income through trading as a sideline job.
I think trading is going to teach me money management, patience and to control my emotions in other fields. I want to be a trader to produce extra income, an active trading income, in addition to working part time, or investing, or passive dividend and interest income. Trading is also a fun game. The game is what first got me interested in trading, not the income or the profits, but the charts and the challenge and the puzzle of figuring it all out.
The goal is always profits and consistency and finding what works best for me. The deciding factor is always profits and consistency. The skill is in combining trading styles and time frames and trade management to constantly adapt to market changes. Day trading can easily be a part time income producing strategy, just a few hours in the morning with coffee watching the London-NY overlap for a reversal or breakout trade eastern time , or simply targeting periods of great volatility looking for intraday trends to trade. To me, this is one of the best trades in the Forex market.
An additional income to help grow my accounts and fund retirement. Mostly, this is about creating a small part-time business that I can take with me anywhere in the world, and work at my discretion and at any age. I love being good at something that is interesting. Especially something that others are afraid of. It is helping me learn about myself. It is helping me to become a better version of myself by continuously forcing me to do introspection, meditate to calm my mind and it is humbling.
I have a passion to become better and it reflects in my trading. Rayner, I thank you for such a piece. I am a victim to all the seven Brutal truth about trading and I have learnt a lot from it. Rayner, you are very very good mentor and I will fellow your steps until I became a professional trader. Thank you very much….!!! Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. I have no obligations and at this age want be trader with a brain and hard thinking.
I have been observing rather the trading system since and I have started trading with low amount you can say paper trading from last two months.
I love Financial topics… thanks for the info Sir!!! Diversify — had other investments, and active income, and the feeling of winning and learning and lossing and everything in between — is challenging, and worth conquering. Improve my psych — Noticed, after I get passionate about trading, I learned a lot about myself. Money shows the real soul of a human. Goals and Actualization — Money is not power, but idea is. Know what you get into, and money flows into you. Smart and sassy — Everybody loves a person who understands money well, and makes a money well, and keeps a money well.
Retire rich and become a philanthropist — After I trade, I hate complications, I hate hoarding, I hate buying, I hate drama, I hate nonsense. I just want money in my old age, and I want to build my own foundation. Say, 50 for me is my ultimate goal of becoming. Remaining yrs, is a self fulfilling prophecy. I downgrade my phone, I shutdown my social media, and I buy more books. I sleep late, I wake up early. Buying Luxuries — I am in a journey of learn and earn, learn first, then earn. And learning is an expensive thing, especially at trading. When I was preparing for the entrance test, that time I was taking newspaper for a couple of month to get notice about the entrance test, that time I saw about market bull and above the news headline of front page from that time I was curious to know much more about market.
Hi Rayner , very interesting , I really enjoy looking at your content and YouTube videos. If those are all the wrong reasons , Please may ask what are all the right reason? Hi Rayner, This article is an eye opener. I am new at trading and over the past year or so I have lost money and many of the reason stated in the article fits me. Learning the art and skill in trading is not difficult and not easy either especially if you come in with the wrong mind set which is what happened to me. I have now developed a passion for trading.
It is something I think in the long run I will make money with guidance from you Rayner. Thank you for sharing your knowledge. Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page. Hey Bruce, Thank you for sharing your experience. I believe someone will benefit from it. Keep up the great work!
Yo Peter, Great to hear from you, my friend. Very well said and I totally agree with you. Anyway those are all truths. Great job man, All the best. Hi Henry, Thanks for sharing your thoughts. Glad you enjoyed this post. Rayner Brother very good article GOD bless you, you are angle for me thanks. Hope that explains! Hi Stephen, Thanks for sharing and I wish you all the best!
Hi Asriel, Thank you for your kind words. If you ask me, this applies to all areas in life… not just trading. Hi Elton, Thanks for reaching out. Hi Aman, Sure thing, looking forward to your post…. Yo Carlos! Thank you for sharing your in-depth thoughts. I read every word of it. Hi William, Sorry to hear about your losses.