What I Wish Someone Had
Told Me 20 Years Ago
A Book About Getting Started in Trading
By Tom Hougaard
WHY DO MOST TRADERS FAIL?
WHY DO FEW TRADERS SUCCEED?
WHAT IS THE DIFFERENCE BETWEEN THE TWO?
ALTERNATIVE TITLES
The High-Stake Trader
Confessions
Confessio
ns of a High-Stake Trader
CONTENTS
PROLOGUE
LIFE AS A HIGH-STAKE TRADER
PART 1
The Psychology of You
CHAPTER 1
Blind Man Finds Gold
CHAPTER 2
Economic Theory Doesn’t Help a Day Trader
CHAPTER 3
The Tragic Trading Floor
CHAPTER 4
Being Normal Will Lose You Money
CHAPTER 5
Don’t Blame the Broker
CHAPTER 6
Where is my Pain?
CHAPTER 7
Show Me “Not-So“Not-So-Normal”
Normal”
CHAPTER 8
What is your trading philosophy?
CHAPTER 9
Everyone is a chart expert (!)
CHAPTER 10
Trading is not Linear
CHAPTER 11
Control Your Mind – Control Your Future
CHAPTER 12
The Beauty Contest
PART 2
The Psychology of Charts
CHAPTER 13
The Curse of Patterns
CHAPTER 14
Thinking in Scenarios
CHAPTER 15
The Good and the Bad Trades
CHAPTER 16
So, You Want the Money?
CHAPTER 17
Get Disgusted
APPENDIX
My Warm-Up Slides
Life as a High-Stake Trader
I have worked and traded in the retail trading industry for 20 years. I doubt you know who I
am. I am not famous. I don’t have a glittering CV, and I haven’t worked for Goldman Sachs
or a prestigious hedge fund. However, I am a high-stake trader, often trading £500 a point,
and for a retail trader, I have generated exceptional volumes.
On volatile days I have traded in excess of 200M US Dollars in stock indices. To those of you
who are familiar with CFD trading terminology, where you trade in “dollars per point”, this
would equate to risking $8,000 per point in the Dow Jones Index, or trading 1,600 mini Dow
contracts, all within one trading session.
It was not my intention to write a book. It just happened. I had something to say. Over the
last 20 years I have read many books on technical analysis and trading techniques. I
personally find them boring and pointless. All I see in these books are one perfect example
after another. If it was THAT easy to trade, why do 99% of trading accounts fail to make
meaningful money? Why do 90% lose money?
Of course, there are exceptions. There are some good books written on techniques and
strategies, but most of them are garbage because the author suffers under the illusion that
he or she should only show perfect trading examples. It perpetuates the illusion that trading
is an easy endeavour. I think it is fair to say that with a failure rate around the 90%, there is
absolutely nothing easy about trading.
As this book emerged out of the notes created for a speech I did, I was very conscious of
what I was trying to achieve. This is not a book about trading techniques. I have included
some examples from trades I have executed. I have made sure there are as many losing
examples as there are winning examples.
I found that the best books I read on trading described the person trading rather than the
strategies they used. One of the best books ever written on trading is the “Reminiscence of
a Stock Operator”. There is no mention of trading techniques in that book.
This is a book about what it is like to trade for yourself. It is about how to trade big size. It is
about the mindset that lies behind it. Let’s face it, we can all learn to walk a tightrope,
suspended 1 foot off the ground. However, can you walk across that same tightrope, if it,
when it is suspended 100 feet off
o ff the ground?
In the same vein we can all trade bravely and aggressively when we are trading 1 lot, but
can you trade as well when you are trading a 10-lot or a 100-lot? Well, I can’t guarantee
guarantee you
will trade 100-lots, but I will describe the process that got me to trade that kind of size.
The Birth of This Book
I was asked by a CFD broker in Denmark if I wanted to give a talk on trading. Although I
don’t use the broker myself, I said I would
wou ld do it, if I could give a talk about trading on the
topics that I considered vitally important to profitable trading.
They agreed, and everyone was happy. The broker’s clients were particularly happy. They
had invited some 700 guests over two evenings to attend the event. I gave a passionate
speech about what I felt constituted good trading. The
T he feedback was great.
I gave out my email to the delegates during the talk, telling them they could email me if they
wanted a copy of the PowerPoint Presentation. Over the next 2 weeks I received some
3,000 emails, requesting the presentation. A little odd, as only 700 attended, but I suppose
word got out.
Have you ever been to a talk or a presentation, and when you came home that night, you
wished you had taken better notes? You remember the broad themes of the presentation,
probably some of the stories, but many important details are gone from your memory.
Well, I have too, and I wanted to remedy that. Initially I wrote the speech using a
PowerPoint Presentation as my visual aide. The theme of the speech
spee ch was to describe what it
is like to trade for a living. I wanted to give a talk about the “secret” ingredient that no one
really talks about. I didn’t want to give a talk about technical analysis. I didn’t want to gi
give
ve a
two-hour talk about indicators and oscillators.
Then it occurred to me that those 700 people wouldn’t benefit from my brilliant insight into
trading (modestly speaking, of course) If all I gave them was the PowerPoint Presentation. I
decided to type up all my notes to each slide, and that is more or less what you are about to
read now.
What to Expect
The pages ahead are telling my story. First and foremost, this is a book about trading like the
1%. As a broker I have spent 10 years watching retail traders execute trades. I know where
everyone goes wrong. I want you to be like the 1% rather than the 99%. Your progress starts
with an awareness of how your behaviour is like everyone else’s behaviour.
It is also a book about trading big positions. It is about the mindset that is required to trade
a size outside your comfort zone. It should read as an instruction manual on how to achieve
this objective.
It is also a personal story about my journey, from reading a book about trading as a young
man, to studying in the UK, to working for an American Investment Bank, to being a self-
employed trader, to working for a major CFD broker for 10 years, to being made redundant
and having to make money from trading as a “home trader”.
The first few pages are focused on my journey to the trading industry, and how I got there. I
wrote those pages for the benefit of the young people attending the talk, who were perhaps
inspired by what I have accomplished. Since I don’t consider myself a light in the academic
world, I thought it would provide some inspiration to those who have a lot of “go get”
attitude, but who perhaps lack a little in the “academic suitcase”
suitcase”. If you have both, the
academic light and the go get attitude, there is no telling how far you will go.
There is another reason why I wanted to transform the notes from talk into a book. This is
the book I wish I had at hand 20 years ago. It would have saved me a lot of wasted hours.
Maybe I am being unnecessary hard on myself. I don’t think I wasted my time, but I did
pursue paths that turned out to be a waste of my time. I suppose that in itself is a lesson. I
think I would have been profitable sooner though, had I had what you have in your hands
right now.
Sadly, there was just no one around to tell the story at the time. Trading amongst private
individuals was not a common thing. Of course, home traders existed, but they were like
warm summers in Denmark. You had heard about them, but you had never actually seen
one. I had to figure it out myself. It took time. My hope is that this book can cut your
learning curve down significantly.
My Name
I realise I haven’t even introduced myself to you. My name is Tom Hougaard. I am a private
trader, probably very much like you. If you had asked me 20 years ago, what I would give to
be able to utter those words, to call myself a trader, I would have replied:
replied: “Anything
“Anything”.
”.
Today, the answer hasn’t changed, but my knowledge of trading, my understanding and
perspective of the art of this game, has changed. The last 2 decades of my life has been
dedicated to either working for a CFD broker or trading CFDs for myself.
I have during many periods of my life burnt the candle both ends. I have enthusiastically
worked all hours, doing research and trading. 20 years ago, I thought I had an idea of what it
would take to be a great trader. 20 years ago, I thought that the answer to my prayers of
financial independence was found in technical analysis. Today I am much wiser.
The speech, that turned into this book, was my attempt to make young and old,
experienced and inexperienced traders and speculators understand that the true recipe to
success in trading is found far away from the conventional
co nventional trading books.
20 years ago, I would have said that the more technical analysis you knew, and the more
market knowledge you knew, the better a trader you would be.
Today I am saying that technical analysis alone has never made anyone serious money
trading. Today I am saying that self-knowledge is much more important than market
knowledge. One of the great lights of the trading world once said that he could have
published his trading rules on the front page of the Wall Street Journal, and yet people
would still not be able to make money consistently and to the extent he had. He too knew
that taking money out of the markets is much more than what most people believe it to be.
Don’t worry, this is not a New Age hippie book, asking you to get in touch with your inner
self. I am not advocating yoga and green smoothies as a path to your inner trading wizard.
Nor am I suggesting a particular lifestyle to achieve your goals. So, what is the book about?
The essence of this book is to answer many of the questions that I wish I had an answer to
20 years ago. Back then I didn’t even think to ask those questions. The essence of this book
is to guide you to a state of mind that will make you more money. It is a book for the
newcomer. It is also a book for those who have a significant amount of trading experience.
I gave an early draft of this book away to my Telegram channel, where I run a live trading
group. I had very seasoned traders tell me that the words within these pages hit them like a
hammer to their head. It made them seriously question their approach to trading. It made
them rethink their philosophy to trading.
My Goal
I would never write a book for the sake of writing one. I am not doing it for the money. I am
doing it because I think I am unique. I believe that what makes me money is my “thinking”
rather than my techniques. I also think that my thinking is unusual. I want to pass on that
understanding and knowledge to you.
Why?
I think it is my duty. I think knowledge should be shared. I hope I am successful in this
spirited and ambitious endeavour to enlighten the road ahead of you. If I fall short of my
lofty goal, then I would love to hear from you. Tell me what you think. My email is found
below.
hello@tradertom.com.
I hope you enjoy the book. I would like to extend a special thank you to the 700 people who
showed up at the events that laid the foundation to this book. You made it a memorable
moment for me, and I thank you for that.
Blind Man Finds Gold
It is 20 years ago I started trading. How I wish I could have heard these or read these words
within these pages two decades ago. It would have taught me a lot about trading the
financial markets, things that I had to learn the hard way by myself.
If you are new to trading, this book will guide you to a successful path. If you have traded for
a while, and you know you haven’t reached your full potential, I want to assure you that I
have no intention of teaching you a “secret
“se cret technique”.
Rather I would like you to read these pages with an o
open
pen mind and consider the suggestions
that I make within. If it is at all possible, do not let your ego get in your way by telling you
that you don’t need to read these pages, because you already know all there is to know. If
you already know enough about technical analysis, then the answer to trading success is not
more technical analysis.
This is not a book about technical analysis, but then again, even if it was, technical analysis
has never made anyone wealthy. It is not trendlines and Fib Ratios and Bollinger Bands that
makes people rich in trading. It is something entirely different. That is what this book is
about. Yes, it contains many technical elements, but at the heart of the book is a desire to
show you what makes good traders good, and how you can acquire the right approach to
trading.
Who Am I?
Who am I? My name is Tom Hougaard. I was born in Denmark in 1969.I have a BSc in
Economics and a Masters in Money Banking and Finance. None of those qualifications are
relevant for trading! Indeed, they can be a great barrier to profitable trading.
I haven’t had many jobs in my adult life. My career CV is largely contained to working for JP
Morgan for three years, trading for myself for 18 months,
mon ths, and then working for a CFD broker
for 9 years, after which I have
h ave traded for myself ever since.
In 1997 I started working for JP Morgan. Then in 2000 I became a home trader for a year
and a half. It only lasted 18 months because I lost my money trading and I ran out of funds
to live for. At that point I had applied to and been offered a job at Financial Spreads, a CFD
broker in London. I started there in May 2001 and I worked there a year.
In 2009 I was made redundant from City Index, and I have been a private trader ever since. I
have no plans to do anything else in my life. It is a great life, albeit a very challenging one. It
all started completely by chance.
Liar’s Poker
My journey, the story I want to tell you, started when I came across a book called Liar’s
Poker. Liar’s Poker is a period piece. It is an attempt by Michael Lewis to describe the
excesses of the 1980s. In his own words it was meant to serve as a warning to future
generations about the excesses of the finance industry, as well as serve as a warning to
young people wanting to work in the financial industry.
I have to say that I find that amusing. I love Liar’s Poker. It served as an introduction to Wall
Street and London for thousands of young men and women, who all wanted part of the
action. It describes a young man travelling from America to Britain to study at a London
university and subsequently being hired to work for an American Investment Bank. Salomon
Brothers was at the time one of the biggest finance houses in the world.
The book describes what it was like to work as a sales trader and observe some of the big
traders there. I was hooked, and I knew trading would be my vocation. I have since read
many other trading books that are perhaps more specific about trading than Liar’s Poker
Poker,,
but as a starter book, I could not have asked for anything better.
My life changed. It was a wake-up call. There is no doubt in my mind that my life changed
after reading Liar’s Poker.
Poker. I went from being a skateboard loving, football adoring, girl
chasing young man, to being something entirely different. It was as if I had found my calling.
I started applying to university degree courses around Europe. I got a job at a pension
pe nsion fund. I
figured it would have something to do with “the markets”. I worked all hours I could, day
and night. During the day I would work at the pension fund and in the evening, I would skate
5 miles to an amusement park in order
orde r to work there until 1am.
During the day I would absorb as much information as I could from Danish finance pages. I
would read English books to improve my language skills. Incidentally, the first book I read to
train my language skills was a book about global warming.
When I explain to my children how I went about selecting a university in the UK they cringe.
I found a map of the England and Wales, and I decided I wanted to study at a university near
the sea. That is how I ended up in Aberystwyth.
Everything was done by snail mail. Everything took forever. I remember having to sit a
language test at the British Institute in Copenhagen, while someone in the office next door,
had a blazing argument with someone else. So much for peace and quiet.
I also vividly remember opening my mailbox and seeing the envelope that would contain my
acceptance letter to a UK university. It was a big moment for me. My family was less than
supportive. On the big day of departure, I had to make my own way to the airport. When
you know something is right in your heart, nothing can stop you.
I made the journey from the safety of little Denmark to a big and pulsating Britain and I
attended two different universities. I left home when I was about 21 years old and I have
been away ever since.
I have lived in many places around the world. The world has become a lot smaller in the last
30 years. Back when I started out, the world didn’t have the information technology and
information infra-structure that we have available to us today. I am only telling you this to
enlighten you to the fact that there has never been a better time to be a trader.
My First Big Trade
There is a saying in the financial markets, which states that you should not confuse talent
with luck. I was blind to the ways of the financial markets, but I got incredibly lucky.
I was accepted to a good university. I had worked hard to earn enough money to finance the
tuition fees and living expenses for three years, but, as I said, I was also incredibly lucky. In
1992 the UK crashed out of the European Monetary System, although you might know it as
the ERM, the Exchange Rate Mechanism.
Its purpose was to keep currencies within a tight band vis-à-vis each other. However, The
United Kingdom was in a recession and had been for about 18 months. The Bank of England
found it more and more difficult to honour their commitment to maintain the British Pound
within a tight band against other currencies in Europe.
So, as I was walking down to the bank with my 120,000 Danish kroner, looking to exchange
them to British pounds, a major drama was unfolding in the financial markets.
This was of course all unbeknownst to me, yet it had a material impact on my studies. Had I
walked down to the bank just a few weeks earlier I would have had to pay 11.5 Danish
kroner for one Pound. By sheer luck I walked straight into, and benefited from, one of the
biggest currency-crashes the world had ever witnessed, and I was able to convert my Danish
kroner at an exchange rate of about 9.25 as opposed to 11.5.
It meant I did not have to take a student loan to make ends meet. My annual budget was
£3,000 over 3 years. The weaker exchange rate meant I made an extra year’s worth of
money, than if I had exchanged my funds a few weeks earlier.
The Price of a Hotdog in Paris
You may already know the story of how George Soros broke the Bank of England on his
Sterling trade and made himself and his fund a billion dollars. He wasn’t the only one though
who has noticed some stark value differences between the European currencies.
When I started working in the City of London, I heard the story of a client of City Index, who
had been holidaying in France. During a visit to the capital, he found himself buying a
hotdog down by the Eifel Tower.
Towe r.
When it came to pay for the goods, the price for the hotdog was so shocking for our
Englishman that he was thinking the hotdog stand owner was trying to cheat him. He was
assured that this was the prevailing price for a hotdog in Paris. He decided to buy another
hotdog somewhere else, just to make sure he had not been cheated the first time around.
The outcome was the same.
Our Englishman was unbeknownst to him laying the foundation for one of the greatest
single-man bets in the history of the CFD industry in the UK. He walked into a supermarket
in Paris and started making a note of the prices for food and drinks and household items.
Back in London he compared the prices for the same goods to the prices in his local
supermarket, and he concluded that the French Franc was hugely overvalued. He called his
local broker, and spoke to a young man, who was later to become my boss.
My boss loved to tell the story of how his client managed to turn a £5,000 account deposit
into a £4m (that is 4 million pounds) profit. He relentlessly pursued the idea that the French
Franc was hopelessly overvalued, and he profited hugely from it.
The reason for sharing this anecdote is not merely to tell you a good story, but also to
prepare you for what this book is all about. You see, this might have been a great story, had
it not been for the fact that the client lost all of it and then some. Isn’t successful trading all
about making the money AND holding on to it as well?
Economic Theory Doesn’t Help a Day Trader
Studying at university taught me what there was to learn about economic theory, and it
taught me about how the financial markets were put together and how current economic
theory tried to make sense of the world around us.
However, it didn’t teach me how to trade. It didn’t teach me how psychology and sentiment
have a major influence on the financial markets. The major objection I had with my
Economics degree course is an expression we called “ceteris paribus”, or “other things being
constant”.
The idea is that you can test variables within an economic system, by holding other
components constant. I am not sure I was consciously mindful of it then, but I saw the world
differently. I didn’t think that the markets were efficient. I had a strong belief that t he
markets were anything but rational.
I enjoyed studying economic history more than I enjoyed studying economic models of the
world. One of the pivotal moments came when studying the Rich Man’s panic in 1903 and
1907. Bernard Baruch, a famed Wall Street speculator, made a substantial amount of money
by correctly anticipating the consequences of a failed “corner” of a railroad stock.
A “corner” is when a group of people or a syndicate is inflating the price of a stock, in order
to create a buzz, thus trying to entice more gullible investors to join the bandwagon, and
then off-load the stock to the late comers.
What made an impression on me was how Bernard Baruch anticipated the sequence of
events. He started to sell short a broad range of popular stocks, because he reasoned that
the syndicate would have to raise money to keep their ill-fated
ill- fated “corner” alive, by selling out
of their general stock portfolio. He was right. The general market declined rapidly. The Dow
Jones index fell 49% in a few months. As th
the
e saying goes, he “made a killing.”
From then onwards it became difficult to study economic models. I found it was too
theoretical in concept. I felt it made assumptions that made it a fallible structure. I am
certain that my economic professors would be upset about my comments or turn in their
graves. I just didn’t think the world worked how it was portrayed in the lessons I took.
I have no doubt that economic factors will drive a market up and down. However, as a day
trader I need to have a mental flexibility that is never described or accounted for in
economic theory. I have seen markets fall on good news and I have seen markets rally on
bad news.
To my mind the markets are made up of participants who have very different agendas
timewise. There will be people hedging their exposure. There will be people who are
speculating on one direction or the other. Within that group there will be speculators who
anticipate a certain price movement over the next 30 minutes and there will be investors
who at the same time will want to take a position for the next six months.
Economics Don’t Belong in Day Trading
I don’t think that economic theory has any value for a day trader. I will want to repeat that
sentence. I simply do not think that economic theory has any value for a day trader. I am
very careful about how I interpret news items. Only yesterday evening I traded the Dow
before the close. It was a wildly bullish day. The Dow was up 500 p
points
oints with 5 minutes to go
of the trading day. Then for no reason, it falls 200 points in 5 minutes. Explain that using
economic theory. You simply can’t
As I type this, in 2019, the world is witnessing something that no one thought would be
possible. We are seeing negative interest rates in many places globally. If I had raised my
hand in 1992 and asked my professor if we would ever see a day where people h
had
ad to pay a
penalty to have their money in the bank, he would most likely have sent me to have my
head examined.
JP Morgan
After my graduation I tried for many graduate jobs within the banking and finance industry. I
didn’t get my dream job, working as a trader trainee, but I did get a good job w orking for
Chase Manhattan Bank, later JPMorgan Chase. It was an invaluable experience. I arrived
with a lot of energy and a lot of go-go courage. Working for an American investment bank is
probably the best thing that could ever have happened to me.
I was able to channel my enthusiasm for the financial markets into my work. I worked with
portfolio analysis and performance benchmarking, which meant I was able to observe the
financial markets unfold before my eyes every single day. I happened to sit right next to a
Bloomberg terminal. I loved that machine. I would often sneak into the office building on
Saturdays and Sundays to devour economic
e conomic news and trading stories and download data.
The great thing about working for an American Investment Bank is that there is a very
different work ethic than you will find in a typical European company. This may have
changed in the last 20 years, but when I was working at JPMorgan we were literally allowed
to work as many hours of overtime as we wanted to. The work was there if we wanted it.
I worked for the bank for close to 3 years and in those three years I never had a work month
where I didn’t do at least 40 hours overtime. It taught me how to stay focused during long
hours of concentrated work, so when I left JPMorgan in late 1999, I was a hardened and
seasoned workaholic. I don’t say that with pride, but I don’t think there is any point in hiding
the fact that the reason for my success was not due to immense intelligence, but rather my
work ethic. I just worked more than the others, longer hours. I made the sacrifice for what I
wanted.
Arriving at a Trading Floor
The paradox became evident when I walked onto a trading floor about two years later. I
arrived with a bag full of enthusiasm and an almost unlimited amount of energy, coupled
with an unrivalled work discipline. However, if the markets are quiet, a trading floor can be
a very unusual place to work.
What I found was that people would sit around and read the newspaper or comic books, if
there was nothing to do. If the phone didn’t ring,
ring , you could hardly force a broker to do
anything. I think this was the biggest culture shock I experienced, the contrast between a
normal office job and a trading floor.
Yet I don’t regret for one second making the transition from a good career job to a job as a
trader/broker/analyst. I feel very strongly about working from your heart rather than from
your mind. You must follow your heart in everything that you do. I sacrificed all forms of job
security, so I could follow my heart.
I left Denmark so I could follow my heart of studying abroad and hopefully end up in a
trading job. I sacrificed a promotion at JPMorgan so I could follow my passion, and I
reasoned, and I still to this day reason that I would rather fail spectacularly at something I
love doing than to succeed in something I couldn’t
couldn’t give a flock about.
The Tragic Trading Floor
Walking onto a trading floor is a special experience. I remember vividly being interviewed
for a trading job after my university graduation. It took place on the trading floor, while the
guy was watching the markets as well as interviewing me. You could tell that he was
intensely focused on something, and I was an inconvenient distraction.
I have been in that situation MANY times in my life. I have made a commitment to someone
or something, and the markets kicked off. Instead of being p
present
resent and attentive, your mind
is somewhere else. 2nd Christmas Day 2018 is a great example. I am trading the biggest oneday rally in the history of the Dow Jones index, while eating Xmas pudding. I had to hide my
mobile phones under the dinner table so not to offend my host, and I had to fake numerous
trips to the toilet so I could watch the chart on one phone and the broker platform on the
other mobile phone.
Working on a trading floor is a special experience. There is a unique atmosphere present. It
is nothing short of a gigantic melting pot of human emotions. It is hard to believe that the
financial markets are a complex mechanism, if you just look at what is going on at a trading
floor. It reminds you more of a local market stall on a busy Saturday morning, where one
stall owner is trying to out-voice the next stall owner.
When you witness the raw barbaric emotions that unfold before your eyes on the trading
floor, it is difficult to see how that fits into a finely tuned global economic environment that
makes up the very fabric of our
o ur modern society and civilisation.
Working on a trading floor gives you front row access to observe the financial markets
through the prism of human emotions and their associated behaviour. Here you see things
that you would normally associate with anything but an orderly and logical financial market.
Raw emotions are freely being shown for the whole world to see. Impulse buying, panic
selling, holding on to losses, refusing to admit defeat, greed, stupidity, stubbornness,
despair, tears and abject depression or exhilaration and excitement, and all in quick
succession of each other.
I got a job at a firm called City Index. It was owned my Michael Spencer, the founder of ICAP,
the biggest US Government Bond broker in the world. City Index had about 25,000 clients,
of which 3,000 were active most days. These clients would trade currencies, commodities,
stock indices, individual stocks, options, bonds and anything in between. I estimate that I
must have witnessed somewhere between 50 million and a 100 million trades in my career.
No Memory of the Great Traders
I recently spoke to a friend of mine, who is the CEO of a CFD company in London. I asked
him if there were traders who had stuck out in his mind over his last 30 years on trading
floors. He said that over the last 30 years he had witnessed many bizarre things, but in
terms of good traders, he had seen very
v ery few.
Here is a man who has spent his entire adult life on trading floors. Yet he is incapable of
remembering people who did well. We are talking about a percentage of successful traders
so infinitely small, that it makes you wonder why anyone would want to trade in the first
place, or if anyone could ever get good at this profession. I will return to my CEO friend in a
moment, but first I want to take a trip down memory lane, so you can appreciate that the
game of trading never changes.
Conditions 20 Years Ago
Of course, this book is not about brokers.
brokers. Nor is it a nostalgic trip down memory la
lane.
ne. I will
save that for when I am really old, rather than just old. This book is about you. It is about
how we get you to trade well, and trade big.
Nevertheless, a little trip down memory serves a purpose in this context. You need to
understand that nothing ever changes, except for those who work towards change.
I keep an eye on all brokers, in order to make sure I trade with the best and cheapest
broker. Why would I pay 1.5 in spread, if I can pay 1 in spread? That is simple economics. I
run a business, and I want to spend as little on transaction costs as possible.
One of my favourite instruments to trade in the German DAX index. Today when I trade, I
pay a 1 point spread in the Dax. The spread is the difference between the buy price and the
sell price.
However, when I started trading some 20 years ago, the spread intraday in the Dax was 6 to
8 points. I remember vividly trading the Dow intraday. You had to pay an 8 point spread in
the Dow for the intraday product.
If you wanted to trade the quarterly contract the spread was 16 points. This was at a time
when the Dow was trading around 10,000. Today I am trading the Dow with a 1 point
spread and Dow is now trading around 27,000.
You are much better off trading in 2019 than you were trading in 1999. It was much harder
to make money trading in 1999. The market has to move significantly less in your direction
before you are at breakeven than it had to back in 1999.
Another major advantage that people who start trading today have is the tools available
from the brokers. Look at virtually any trading platform today, and you will see the length
brokers go to, in order to help you make money. You have access to hundreds of technical
studies. You have access to instant news flow. You have the option to be trained through
online material and webinars. You have access to level II data from stocks all over the world.
You have decent bid-ask spreads. If an institutional trader from 30 years ago saw the tools
that you are trading with today, they would be green with envy.
You have at your disposal every single conceivable analytical tool available from the vast
resource pool of technical indicators. You have Bollinger Bands, you have Keltner channels,
you have moving averages, you have tools that I have never even heard of or used myself.
Suffice to say every other broker in the world have spared no expense in their effort to
provide you with every opportunity to make as much money as you possibly can out of the
markets. BUT it matters nothing. It
It really
really doesn’t matter
matter at all. Most people will
will fail. The
failure rate is astronomical in the trading industry. No one is immune against statistics.
Immunity Against Normal
Yet even though you have all those tools available to you and much more, no one is immune
to the statistics of the financial markets. Unless you have gone through some sort of
structured training or you have been schooled by someone who is walking the path you
yourself want to walk on, or you give this endeavour some serious thought, you will most
likely fail to make a success of your time in the financial markets.
Look at any broker website in the European Union, and you will see the failure rate. The
brokers are obliged by law to post them on their front pages of their websites. Here are
some of the biggest and well-known CFD brokers in the world, and their failure rates:
BROKER
FAILURE RATE
IG Markets
75%
Markets.com
89%
CMC Markets
75%
Saxo Bank
72%
FX PRO
77%
th
Rates correct as of the 7 November 2019
I know you like to think you are different, and you probably are, in your mum’s and dad’s
eyes, and hopefully in the eyes of your partner and children, if you have any. However, in
the eyes of the financial markets, you are statistically like everyone else.
Despite all the tools and bells and whistles that all these brokers make available to their
clients, more than 90% of their clients lose money trading with them or make to little
money that it is not worth their time and effort.
Now please don’t get me wrong, this is by no means a slight at these brokers, nor is it an
indication that they are anything but a well-meaning broker. You can look at the top 10
brokers of the world and the statistics do not change. You can look at CMC Markets, you can
look at IG Markets, you can look at Gain Capital or you can look at any one of the top tiered
or second tier CFD brokers. No one
on e will have a statistic less than 70%.
There is one exception to that. I found a broker that has a 59.6%. I suspect it is because of
their tight fixed spreads. The difference between the bid and the ask price is called the
spread, and it does matter immensely to your trading how much you pay in spread,
especially as a day trader. The spread is the silent commission.
Normal is Bad
What is the point that I am trying to get across to you?
Well that is a good question. What I’m trying to do is to make you see trading for the holistic
enterprise that it really is. I am doing my best to make you understand that fundamental
analysis or technical analysis or whatever tool you are using for your trading will simply not
make you money over time, unless you add another ingredient to your trading. This
ingredient is not easy to acquire, mostly because people are looking in the wrong place.
I do not want to sound like I am talking in riddles, but I accept that I am right now. I have no
doubt that the people who attended the talk I gave at the CFD broker were wondering
where I was headed with this talk. I could almost hear them say “ I thought this seminar was
about how to make money trading. I thought I was going to learn tools and tricks that would
help me in my trading.”
Well it is about making money.
money . I’m just not presenting it in a way that they or you had
anticipated. And if you will allow me a moment of mischievous teasing:
If I gave you exactly what you thought you wanted and needed, it would not make a blind
bit of difference to your trading tomorrow and in the years to come. If you want to be a
good a trader, if you want to achieve the level of success that you know is possible, you
immediately need to stop thinking that the path to riches in trading has anything to do with
the tools or techniques you are using.
Yes of course you need a strategy. Yes, you need a plan. Yes, you need to understand the
markets. So, what is this book all about, if it is not about tools and strategies? Well, let me
address that question from a different perspective. Let me address it from the perspective
of the people who work in the industry as brokers and sales traders and as marketing
people.
Being Normal Will Lose You Money
When you go to trade shows, or your read trade magazines, or you look at the educational
sections at brokers, 100% of the focus by the exhibitors displaying their products is what I
call “How To”.
How do I scalp?
How do I swing trade?
How do I day trade?
How do I trend follow?
How do I trade the FX market?
This is perfectly normal. The trade shows are geared towards providing you with solutions to
what most people believe is what is needed to make money in the financial markets. The
brokers are following the same path. They provide you with the information that they think
you need.
As a newcomer to the industry of trading, you are most likely guided by the very people
who are likely to set you off on the wrong path. You are led to believe that it is all about
technique and strategy, and no one is preparing you for the fact that it isn’t strategy that
will set you apart from other traders. It is how you think about your strategy and your ability
to follow the strategy that will set you apart. If “strategy” was all there was to trading, it
would be easy.
Do you not wonder if this is the right path for you? Do you not wonder about the futility of
dedicating all your resources to one pursuit, where you witness that virtually everyone who
walked that path before you have failed?
Normal Won’t Cut It
I was invited by the organisers of one of these trade shows to give a talk. This one was in
London, and I was told I could talk about whatever I wanted to. I decided to give a talk about
the disastrous failure rate in the trading industry.
My argument is that if 90% of all CFD accounts lose money, the problem is a human
problem. My argument is that everyone opening a CFD account are normal people with a
normal way of thinking. There must be something inherent in the way normal people think
and act that makes trading so unsuccessful for them. Why is there such a high failure rate in
trading? This is a human problem. It is not a broker problem. It is not a market problem.
OTHER PROFESSIONS DON’T HAVE AN 90% FAILURE RATE!
It Should Be Easier Than Ever
When I started in this business 20 years ago the spread in the DAX was 6 points intra-day
and the spread in the Dow index was 8 points intra-day. Today, these indices have doubled
or tripled from their price levels of 20 years ago (Dow was around 10k, and DAX was around
6-7k), yet the spread has come down to just 1 point with some of the brokers I trade with.
Therefore, it should be easier than ever for traders to make money. However, it isn’t. People
are still struggling to make money trading. My main premise for this book is to get to the
bottom of this conundrum. The approach I have taken is centered around the following
facts:
1. It has never been easier to trade. The IT infrastructure is superb for traders.
2. The spreads have never been lower.
3. The margins have never been more favourable.
4. The tools have never been so readily available.
5. The brokers have never done so much for their clients as they do now.
6. The stock indices have never been higher, meaning there is volatility.
Additionally, I assume that people who open trading accounts are normal well-adjusted
human beings, who are perfectly capable of functioning within society. I assume they are
normal, without using the word “normal” as a slight or an insult.
The question I want to ask, and answer is this: What does “normal behaviour”
behaviour” look like?
How can I avoid being normal when I trade? The assumption is that the 80-90% of people
trading are normal people, and I want to avoid acting like they do.
Are You Normal?
My argument, provocative as it is, in its simplicity, asks an essential question: Are you
thinking like everyone else is thinking? Are you approaching trading like everyone else is
approaching trading?
If so, you may have a problem.
If you think like everyone else, is it so strange that you get the results that everyone else is
getting, even though you are smart, good-looking, have several school diplomas, and you
have been a success at everything else in life?
What Normal People Do
Let us take a look at what normal behaviour is. The normal behaviour is to engage in a
never-ending cycle of education – looking for the next new edge. I knew from the moment I
read Liars Poker that I wanted to be a trader, but I never had any formal training on how a
good trader behaves. Why should I? I was always told that a good trader buys low and sells
high.
Except every time I bought low, it always went lower and lower. What kind of advice is that?
And yet this is what we listen to when we start. This is the benchmark, and if this is the
benchmark, then it is a miracle that it is only 80% that are losing. It should be 100%, because
buying low and selling high is a sure way recipe for ruin.
It took me some time to accept this. I was good at catching tops in the market and I was
good at picking lows. However, I also believe that there is an element of “selective memory”
at play here. I think I want to remember the good calls and my mind conveniently filters out
the bad calls.
People will learn to use tools such as candlestick analysis. People will attend weekend
courses hoping to learn secrets. People will study the use of tools such as stochastics, RSI,
MACD, moving averages, and the list goes on and on and on. This is normal behaviour in a
nutshell.
Even the Bible
Even the bible
bible of technical analysis doesn’t do much to help a person on their way – once
the initial learning curve is over. Over the years, many a Wall Street acolyte has made
pilgrimages to the Trinity Church Bookstore to buy the bible. Not the King James version,
mind you, but the "bible" for technical analysis authored by Edwards & Magee, which has
sold more than 800,000 copies since its first printing in 1948.
What most readers don't realise, however, is that Edwards and Magee were not the real
creators of modern technical analysis. It was a little-known technical analyst named Richard
W. Schabacker.
A brilliant market technician, Schabacker codified almost everything there was to know
about technical analysis up to his time -- which included such pioneering work as Charles
Dow's Dow Theory. Between 1930 and 1937, he taught several courses to serious Wall
Street traders and investors. Unfortunately, Schabacker died in 1938 when he was less than
40 years old.
Shortly before, Schabacker gave a mimeographed copy of his lessons to his brother-in-law,
Robert D. Edwards, who rewrote Schabacker’ s lessons with the help of his collaborator,
John F. Magee, an MIT-trained engineer. As a result, it was not Schabacker who received
credit for the original compilation of technical analysis, but Edwards and Magee, whose
work became a perennial bestseller.
You can’t fault the book. It has everything you need
ne ed to
understand trend. However, as a day trader, it is simply
not detailed enough.
This is not a criticism of the authors. I don’t think that
day-trading, momentum trading, scalping and swing
trading were even truly invented when this book was
first created.
I may be vague, so let me be clear. Reading a book like the bible of technical analysis is a
must, but please don’t think that it will make you a professional profitable trader, anymore
than reading a manual on tennis will enable you to compete
co mpete with Rafa Nadal.
Let me give you an example. It may help you understand better what I am trying to get
across to you. Yesterday, the 1 st October 2019, was a particularly bearish day in the Dow
index and the DAX index. I was short all day and I had one of my better days, all verified and
documented on my Telegram channel.
Towards the end of the day, when the Dow index was falling even lower, a student of mine
contacted me and asked me a very alarming question. I have shown you the conversation,
which is in Danish, so I will translate it.
“Tom, do you think it is a good idea to buy now, ahead o
off the close?”
I reply: “hmm, I am short….maybe you should ask someone else”
He goes on to express his absolute shock I am short, and a little later he goes on to state
that he has bought the Dow at 590.
No professional trader would in their right mind engage with the market 10 minutes before
the close. Why are you buying the Dow 10 minutes before the close on a day where Dow
has fallen 400 points? You have had all day to find a short entry. What are you hoping to
achieve, by being a buyer now? Are you thinking that because it has fallen 400 points that
now it is cheap, and maybe just before the close, you may see some buying of these cheap
stocks? I used to think like that too. That was when I was not p
profitable.
rofitable.
I know the Dow didn’t rally into the close. There was no bounce. I am sure my student
s tudent didn’t
lose a lot. It wasn’t so much his wallet I was concerned about. It was his way of thinking.
That is what this book is about. It is about making you think the right way about the market.
That is where the 80-90% of losing traders tend to go wrong.
The 90% vs. The 10%
We are all pretty much normal people. We need to be to fit in and function well within the
fabric of modern society. If every person engaged in trading is a normal human being,
meaning they are well-functioning, intelligent, considerate, hard-working, then why is there
a 90%
90 % failure rate in our industry? That doesn’t make any sense at all. Usually when people
work hard at something they will succeed, or they will see some degree of success. That
doesn’t appear to be the case with trading.
If you are selecting a school for your child and the school has an 90% failure rate, I am
certain you will not enrol your child in that school. This is the sad fact about the trading
industry. We are fed a steady stream of information that is meant to help us in our quest to
make money trading, yet we are missing the most important part. And the sad fact is that
very few people know it. The brokers we trade with are not traders. They are no better to
give you advice about trading than say a kitchen equipment maker can give you directions
to become a Michelin-star chef.
We tend to engage in a never-ending cycle of predictability. We do well for a while. We are
happy and our discipline weakens. We lose money. We strengthen our resolve and we get
more education. We do well for a while. We lose money, we engage in more education.
Sounds familiar?
Am I against education? No, I am against people thinking that all it takes is more education.
Sure, it takes education, but it must be the right kind of education.
It is true that I myself run 1- and 2-day courses, so I could easily stand trial for being a
hypocrite. In my courses I tell people that for every hour you spend on technical analysis,
you must set aside at least 25% of that time to what I call “internal analysis.”
You need to know what your weaknesses are. You need to know what your strengths are.
You need to know what you are good at and you need to know what you are not good at. If
you don’t spend time trying to improve that, how will you get better?
better ? Very few people, if
any, will engage in that level of introspection in order to gain the results they want.
Don’t Blame the Broker
I had a conversation with a friend of mine. He is the CEO of a major CFD broker in London. I
asked him about the nature of their clients and their win-loss
win -loss profit ratio.
Tom:
You have worked in the CFD industry for 30 years. You must have seen some good traders
along the way. Can you tell us about them?
CEO:
I wish I could. I have seen many people make a lot of money, but very few managed to keep
the money. I started in the industry at a time when CFD trading was not a mainstream tool
for trading. It was mostly very wealthy people or people who worked in the industry that
had CFD accounts. These clients back then often traded as part of an “old boys club” kind of
network. It meant they mostly traded specific shares and some commodities. Back then
trading was nowhere near as prolific as it is today.
Tom:
Were they good traders?
CEO:
No, I would not say they were. We had clients who were well-known personalities in the
City (City is slang for the financial district in London – like Wall Street is for America), and
their personal trading was often atrocious, even though they were hedge fund traders or
fund managers. It was almost as if they lost their discipline when trading their own money. I
am certain they would not be allowed to trade for their clients in the manner they traded
for themselves.
Today we have far more “smaller traders”, but the pattern is remarkably similar between a
“small trader” and a “large trader”. Almost all clients have more winning trades than losing
trades. As such you could argue that they are good traders. However, they tend to lose
more, much more, on their losing trades than they win on their winning trades. The ratio is
that for every pound they win, they
t hey lose about £1.66.
Tom:
How does a CFD broker make money out of that?
CEO:
Well, believe it or not, but we want our clients to win. I have a network of contacts to other
CEO’s, and although we are competitors, and we would do anything to outmanoeuvre a
competitor, we do have one shared wish. We wish our clients would trade better.
We try our best to help them. We give them every tool under the sun. We give them
favourable spreads, and we give them news services. We give them sophisticated charting
packages. We give them data. We give them analytical tools to measure their performance.
In short, we do absolutely everything we can to ensure they have all the tools they need to
make money. And then we let them trade. The problem is that most smaller accounts tend
to lose within a short space of time.
Trust me when I say I wish it was different. I don’t know what more we as a broker can do
for our clients. We prefer clients make money because there is clear evidence, that those
who trade and win, carry on trading. That is better for business.
The truth of the matter is that you can clearly see the difference between a consistently
profitable trader and a normal trader. Their approach is very different.
Tom:
How can you tell whether someone knows what they are doing?
CEO:
There are a multitude of parameters that we may look at. If I have to narrow it down to the
5 most important factors, it would be these:
1. Account size
2. Trade frequency
3. Ratio of time spent holding winning vs. losing trades
4. Adding to winning or losing trades
5. Do client trade with a stop loss?
Someone who opens an account with anything less than $500 will with a very high degree of
certainty lose that money, sadly. Someone who trades everything and anything, i.e. overtrading, will eventually lose their money. Anyone who is unable to hold on to their winners,
but who are able to hold on to their losing trades, will eventually lose their money. Anyone,
who adds to their winning trades will catch our attention (positively), but anyone adding to
their losing trades will with near certainty lose their account deposit at some point – sooner
or later. Anyone trading without a stop loss will follow that path too. We sadly see it all the
time.
As you can see, as a broker, we do everything we can to help people making money, but
people are people, which means they will
wi ll find a way to self
self-sabotage.
-sabotage.
43 Million Trades Analysed
His opinion resonates with another industry professional. His name is Rodrigues and he
works for the FX company called FXCM. Rodrigues and one of his colleagues attempted to
find out why there was such a high failure rate amongst the FXCM clients. FXCM has on a
daily basis 25,000 people who trade currencies.
Rodrigues investigated all the trades executed over a 15-month period. The amount of
trades was truly staggering. The 25,000 people executed close to 43 million trades. From a
statistical point of view that creates a reliable and immensely interesting sample space to
investigate. Specifically, Rodrigues and his colleagues looked at the amount of winning
trades.
I would like to give you an opportunity now to think about how many trades were winning
trades and how many trades were losing trades. You can represent it as a percentage of the
overall 43 million trades. I will give you 10 seconds to think about.
If you feel it has any influence on the answer you want to give, I can tell you that most of the
trades were executed in Euro Dollar, Sterling Dollar, Dollar Swiss and Dollar Yen. However,
the vast majority of the trades were executed in Euro Dollar, where the spread industrywide
is very tight. Unfortunately, that doesn’t seem to make much of a difference to the
outcome.
62% of all the trades by the FXCM clients ended with a profit. That is a little more than 6 out
of 10 trades. That’s a good hit rate. A trader
trader with the hit rate of 6 out of
o f 10 should be able to
make money from trading. Of course, it does depend greatly on how much he wins when he
wins and how much he loses when he loses. In there lies the problem for the 25,000 people.
See, they were very successful
su ccessful in terms of “hit rate”. Yet when you look at how much they
made on average per trade and how much they lost on average per trade, you soon realise
that they have a major problem. When they won, they made about 50 pips. When they lost,
they lost about 80 pips.
There’s nothing wrong with having a system where you lose more on your losing trades than
you win on your winning trades. However, it does require that you have a sufficiently high
hit rate in order to absorb the losing trades.
A colleague of mine, a professional trader from South Africa who trades a hedge fund, has a
hit rate of about 25%. I will tell his story in greater detail later in the book. When he and his
colleague lose, they lose 1X. When they win, they win as high as 25X. It stands to reason
that my friend is immensely profitable even though he doesn’t have a convincing hit rate, at
least not from a traditional perspective.
What I find particularly interesting is how much bad advice there is in the trading industry. You will
often hear traders talk about risk to reward ratio, which in itself is fairly innocent, unless the trade
takes it literally, and apply it on a trade by trade basis.
Trading with Targets
When I call out trades in my live TraderTom Telegram group, I will always announce a stop
loss. Always! However, I often get asked if I have a target in mind. The answer is quite often
a little sarcastic: “No, my crystal ball is out for repairs”, or if I am particularly grumpy and
tired, I will be rude and say “Sorry amigo, but do I look like a fortune teller to you?”.
Yes, I know. It is not very polite. I am sorry. Ignoring my blatant inability to be polite when I
am sleep deprived, there is a deeper meaning to me not calling “targets” on my trades. It
has a lot to do with “risk vs. reward”.
I personally find the whole “risk to reward” an enormous flaw, but since I am the only one
who ever talks about it, I accept
accep t that I am probably wrong. Still, hear me out.
How on earth do I know what my reward will be? I literally do not know. Even if I pretended
to know, say by using a measured move calculation or a Fibonacci extension etc, I know
myself well enough to know that I will have added to my trade along the way, and when it
got to my “target”, I would not close it, because that is my philosophy.
I would kick myself if I closed a trade at my target, and then it went even further. I would
rather give away some of my open profits than miss out on potentially even more profits.
Now I am probably making a big fuss out of nothing, but targets are not for me. I want to
see what the market will give me. I am prepared to accept that this may mean I will give
away some of my open profits.
Interview with CNN
In an interview with CNN some years ago, I was asked about the traits of winning traders. In
this very candid interview, I highlighted a few points that I felt differentiated the winning
traders with the losing traders.
1#
When the market is trending lower, whether it is intraday, or over a longer timeframe, there
seems to be a tendency from retail traders to attempt to find the low of the move. Whether
that is out of a desire to buy cheap and sell expensive, or because they use ineffective tools,
I simply don’t know. What I do know is that this trait is immensely damaging to anyone’s
trading account.
2#
The opposite also holds true. When the market is trending higher, traders tend to want to
find a place to sell short. Although, it must be said that people are generally better at
jumping on board a market that has already risen, than they are jumping on board with a
short position in a market that has already fallen significantly.
If the market has moved higher by a significant amount, especially in the very short-term,
retail traders tend to want to fade the rising prices, i.e. they look to establish short
positions. Again, this is probably the result of a distorted view of things being cheap and
things being expensive.
3#
The above chart is from yesterday in the Dow. It is used to illustrate my point 3. If you have
sat on a trading floor during a busy day in stock indices you will know exactly what I am
talking about now. If you have ever traded a very weak day in a stock index, or indeed in any
asset/product, you will most likely understand what I am talking about.
Imagine the Dow is falling relentlessly during the afternoon of trading and you are sat on the
trading desk observing people’s trading behaviour.
You wonder why people attempt to find the low of the day when all the Dow is doing is
going lower and lower. Then it occurs to you that every single time people are buying, it is
because the market is making the slightest little bit of movement
move ment to the upside.
The chart above illustrates this perfectly. It is a weak day, but there are small pockets of
strength where the Dow rallies a little bit. They are usually short lived, and the experienced
trader uses it to get into short positions, while the inexperienced trader thinks that every
single little counter reaction against the trend is the beginning of a new trend higher.
This is a common trait amongst traders. They think that every single little counter reaction
against the trend is the beginning of a new trend. More fortunes have been lost trying to
catch the lows in a falling market than in all the wars put together (unsubstantiated
statement – made for emphasis – please don’t attempt to catch lows).
Where is my Pain?
What is normal behaviour amongst retail traders? We know that 80 to 90% of all retail
traders engage in the same self-destructive behavioural pattern. We know that 80 to 90% of
traders do not make money consistently trading CFD’s or spread betting. It is probably also
fair to assume that those 80 to 90% of traders are intelligent, ambitious, self-motivated
human beings, who like to create their own luck and forge their own way in life.
I have never met anyone who started trading because they thought it was the same as
playing the lottery. Virtually every person I have ever met who was interested in trading and
who wanted to learn more about trading have been self-starters,
self -starters, entrepreneurs, or students
at an institution of further education.
Therefore, I think it’s a fallacy to say that trading attracts the wrong kind of people. I think it
attracts the right kind of people. I think it attracts the kind of people who have a chance of
making a success at it. I think it attracts the kind of people who are not fooled by the Get
Rich Quick schemes. I doubt many traders buy lottery tickets, purely on account of the odds
being rubbish, and traders understand that all too well.
Nevertheless, something is wrong. Something is wrong when 80 to 90% of people fail. On
this slide I have identified a handful or more of behavioural patterns that I think are
detrimental to traders. The most frequently observed behaviour is that of letting a loss run
out of control.
In order to do that the trader will have had to have no stop loss in place. If you are ever
lucky enough to meet someone who is admitting that they have a big loss on their account,
you could ask them why the position is still open?
The answer that you would most likely hear is that they are hoping that the position will
turn around. As the saying goes, hope dies last. Our minds seem ill equipped to engage in
risk management. Our minds have one primary objective: to protect us against pain,
perceived or real pain. During the process of running an open position, which is producing a
loss, our subconscious mind is telling our conscious mind to keep the position open. It will
mask this message as well as it can, in order to protect the ego, which is more fragile to the
subconscious than the state of your trading account.
When I read the above passage, during the review, I decided that this sounded a little bit
“airy fairy.” Here is the same message but written with other words.
As long as the losing position is open, there is hope that our luck will change, and the
position will come good. The moment you close the position, and you crystallise the loss,
the pain of the loss becomes real. I accept there are many permutations to this argument.
Some would argue that the very act of closing the position is when you can stop agonising
over the open loss and move on. I accept that. However, my primary argument is that the
reason we are hoping has little to do with hope itself and everything to do with avoiding
pain.
How many times did I see clients sit on losing positions for ages? I saw them fund their
accounts to keep the position open – margin calls – just so they didn’t have to take the loss.
To compound my confusion, how many times did I see the position come good again, and
when it did, the client would close the position? I saw it a lot. They didn’t hold on to t he
position because they believed in the position. They held on to the position because they
could not stand being wrong. The moment they were relieved of their pain of the losing
position, they got out – for nothing. They were so relieved to have avoided the pain of being
wrong that they completely ignored the fact that the market was now actually agreeing with
them.
Whether you are taking your profits early under the excuse that “ you can’t go broke taking
a profit”, or you are on a winning streak so you are now reducing your stake size, you are
essentially anticipating pain of losing some of your gains and you are now rationalising your
way to avoid the pain, even though it hasn’t actually happened. Perceived pain or real pain
matters not to the subconscious. It will be treated with the same response and the same
emotions.
When the pain is real, i.e. real pain has manifested itself in body and mind, because of a
trading loss, there is no end to the lengths our ego will go to make the money back. It is the
primary driver behind the argument of “when wrong, double up”. We tell ourselves during a
losing streak that we are ever so close to beginning to win again, so the natural conclusion
must be to double up in order to regain what has been lost. The real subconscious reason
for doing this is to attempt to get rid of the pain. Now we are not trying to avoid pain. Now
we are dealing with pain and we are trying to get back to that state of equilibrium where we
were pain free.
Act Without Fear
As I said earlier, and I am at the risk of repeating myself, you learn a lot from observing
millions of trades. If you want to stand a real genuine chance of making money as a trader
from the financial markets, I believe with every string of DNA within me, with every fibre in
my body, that you need to change the way you think about fear and pain and hope.
William Blake said that he who desires, but acts not, breeds pestilence. I have worked
tirelessly towards being able to act, without fear and hesitation. What do I mean by that?
Have you ever seen a chart pattern, or a setup of some nature on a chart, and your first
impulse was to buy or sell, but then immediately that thought was followed by a reflex
response of fear that you had no control over?
To be more specific, your free creative mind instructed you to do something, but your fear
instinct immediately cautioned you not to follow through, because you might lose. Have you
ever seen a market that was in freefall and you were afraid to sell short because you were
afraid you might lose?
My basic premise with this book is to rid you of these fears. I argue that the 90% will too
often take trades, because they fall into two categories:
1/ they look “cheap” to buy.
2/ they look “expensive” to sell short.
It can be a huge challenge for many traders to sell short something that has already fallen
significantly. I will give you a good example. Yesterday the German DAX index fell from
12,497 to 12, 250. That is quite the fall for this index.
This morning you could sell short this index at 12,250, but many of my students did not like
to do that because they were fearful that the market would bounce before falling. What
they failed to understand at that precise moment in time was that
1/ the market had already shown it was weak. How often do you see one lonely red
negative bar on a daily chart? Rarely! Weakness tends to come in clusters. So does strength.
2/ Whatever happened yesterday will most likely be replicated the day after. The markets
are not THAT irrational. People are selling because they want to get out of the market. It is
rare that you then reverse the very next day. Even if it did, your risk parameter would stop
you out of your position.
Most of my students accepted the market was weak, and that it probably should be sold
short, but no one dared doing it in a meaningful way.
This is the reason why the 90% lose. The reason why people do not make money from the
markets has nothing to do with their ability to read the charts. It has nothing to do with
their ability to understand what is going on in the market.
My basic premises that people
1/ think the wrong way before they get into a trade
2/ think the wrong way when they are in a trade
It reminds me of the late Mark Douglas, a real light in the trading industry - and an
inspiration to thousands of people, when he said that good traders simply just think
differently. That was the first thing he said at the start of his book “Trading in the Zone”. It
started by stating good traders just think differently.
I have coined my own phrase. I argue that people are fearful when they should be hopeful
and they are hopeful when they should be fearful.
I would like to explain that by the use of an example.
Imagine you have bought Dax at 10 and the market is now trading up at 25. Instead of
thinking that the market may be on a tear higher, and it may go on to offer you many more
points, you begin to fear that the points you have already earned will be taken away from
you.
Hence my saying, you should be hopeful in a situation like this, but instead you are fearful.
You are afraid that the points will be taken away from you, rather than letting the primary
focus of your mind to rest on the hope that even more points will come your way.
The opposite holds true when you are in a losing position. You are now hoping that the
market will turn around and take you out of your pain and bring you back into a state of
equilibrium. Your soul objective is to get rid of your pain, and instead of being afraid that
you’re going to lose even more, your focus is now on hoping that you would lose less. Every
tick in your favour is celebrated.
cele brated. Every tick against you is ignored.
I would like to bring in a conversation I had with a student. We are discussing a position I
have running in Sterling Dollar.
Him:
It feels like gambling.
Tom:
Please explain.
Him:
Well, you have 40 pips in profit, but you will not let me take the profit.
Tom:
I won’t stop you from taking the profit, but if you ask for my opinion, you
should let the position run.
You might want to consider the following scenarios, and then ask yourself
how you feel under each scenario:
1: Run position and you get stopped out for nothing.
2: Run position and it explodes higher.
3: Close position and it explodes higher.
4: Close position and it reverses.
Him:
I think it is best to close the position and secure the profits, rather than risk
that the market will take the profits away from you.
Tom:
How would you then feel if the market exploded in your favour?
Him:
I would be disappointed, but I could always jump back in again.
I believe this is what the 90% will think like. It is the reason why in the study of FXCM clients
that the traders would lose more than they made. Hope dies last, and as long as there is
hope, there is a reason to hold onto the position.
When the trader is confronted with a loss, they hope it will turn around. The operative word
now is HOPE. When he or she is confronted with a profitable position, they are afraid the
profit will disappear. The operative word now is FEAR.
My student naively thinks he can jump back in again, but he would undoubtedly have to do
that at a worse price than the exit price of his profitable position, not to mention the
transaction cost should be factored in as well.
So, the trader holds onto the position until such point where the pain finally becomes too
much, and they close the position. Unfortunately, this point, this threshold tends to be
further down the road than the threshold of hope.
This is what you need to focus on. This is what you need to work on consistently to change
your pattern. I will not state whether it will be easy to do or difficult to do. It just is. There is
no point in going any further in speculation if you can't get yourself to do what you must do,
even though it feels uncomfortable to do.
You must be aware of the fact that in trading we are prepared to chase hope a lot further
down the road of misery, than we are prepared to endure on the road of opportunity. It is
just the way we are put together, unless you are aware of it, and you have a plan for
combatting your natural behaviour.
However, I must come with a warning. Your mind is like a muscle. This is not a one-off quick
fix any more than doing 100 push-ups once will make you look like Captain America for now
and eternity.
Atrophy is not just a bodily concept. It is also a mind concept. You need to strengthen that
mind of yours by repetition.
repetition. I’m going to provide you with a brilliant way of getting control
of your mind. I will present
p resent that idea towards the end of the book.
We are prepared to chase hope a lot further down the road of misery, than we
are prepared to endure on the road of opportunity.
The Not-So-Normal Behaviour
What is the notnot-so
so--normal behaviour? Well, firstly, I am all too aware of the short comings
most people display when they are trading: running a loss, cutting short the profitable
positions, overover-trading, trading for excitement and entertainment.
But this is already known to most, if not all people, so the “not -so
so--normal” behaviour goes
somewhat beyond that. It is very rare that we ask ourselves why we do what we do. Why do
I trade when I do? Why do I take profits when I do?
I think it’s time to bring in the words of a relatively unknown trader, but one who was hugely
respected by his peers. He was a pit trader at the Chicago Board of Trade, and his name is
Charlie De Francesca, also known as Charlie D.
My Hero Charlie D – Legendary Bond Trader
Charlie De Francesca arrived at the floor of the CBOT, with a dream and a small account. He
had a background from competitive college football – American style – but otherwise there
was nothing about this guy that would indicate that he would go on to become the biggest
trader in the US T-Bond pit in Chicago.
He had a rough start too. He barely traded in the first 6 months on the floor. He just stood
there and observed. Then one afternoon something clicked, and he traded up a storm for 2
hours, and made himself $5,000. From then onwards there was nothing stopping Charlie D.
He became a legend in the trading pit until his untimely death.
I will digress a moment here. In 2007 I met a person who was going to radically change my
way of trading. It all came about by chance. I had come back from a lunch break and a
colleague of mine returned from a meeting with an educational company. This educational
company taught technical analysis and they were pitching their products to my colleague,
who happened to be the head of marketing.
What you need to know about my colleague is that he was the most obnoxious East End
London guy you could possibly imagine. He was brash, he was obnoxious (I know, I said that
twice), he was arrogant, and no one could tell him anything h e didn’t already know. Yet
somehow this educational company had gotten his attention. He spoke very glowingly about
a gentleman called Dr David Paul, who had taken my colleague through some basic technical
analysis.
He showed me the technical analysis, and it was basic. Yet there was something about the
course material, which I had been given a copy of, that told me that I needed to engage in a
conversation with this gentleman. It turned out that Dr David Paul had a two day trading
course coming up in Johannesburg. So I booked myself on a flight to Johannesburg a few
days later. It was one of the only times I have ever participated in formal training on the
topic of technical analysis.
There is something incredibly humble about Dr David Paul. He has got a Masters in
Mathematics, and he has a PhD in Metals. He used his immense brainpower to invent a drill
for miners in South Africa. This was no ordinary drill. It was the kind of drill that would suck
the gas out of the holes in the ground, while drilling, and thus saving lives, because it more
or less eradicated the occurrences of explosions.
e xplosions.
David Paul made himself a wealthy man, and he spent his time investing and trading. On the
second day of the course David said something that would change my perspective on
trading.
He said something along the lines of this: When you are in a winning position, instead of
thinking where to get out, why don’t you think about where to get in more?
He basically told me to turn everything upside down. Most traders with a profit will begin to
contemplate where to take half the profit. Next they will begin to contemplate where to
take the next half of the profit. David argued that this was what the 90% would do. He didn’t
use those exact words, but he did argue that if you want to make money trading, you need
to do that which the majority finds difficult to do. The first time you try it, you may fall flat
on your face. That is to be expected, but the next time it might be a little easier, and the
next time a little easier again.
David was essentially arguing that when you are in a winning position, you should put
pressure on your position. The argument for doing so was something he himself had
observed when the market really began to trend.
I have tried to put a different spin on his words. When you want what you want, more than
you fear what you want, you will have it. You want profits in your trading. You probably
have a good instinct about trading. You probably also realise by now that it is your thinking
that causes your problems, rather than your knowledge about the financial markets.
If the 90% of traders are engaged with taking half profits and letting the other half run,
maybe the right thing to do is to double up on your position, or perhaps conservatively add
a little to the position, when everyone else is taking half the profits. At least this is what I
read between the lines, as I sat in that hotel conference room in Johannesburg.
I walked across the street when the workshop was over and locked myself into my hotel
room. 10 minutes later I was in a short position in the Dax, and five minutes after that I had
doubled up on my short. I don’t recall how the trade went, but I recall moving my stop loss
to breakeven on the first position and I then executed a second position.
Depending on your experience level, you may or may not be able to answer this question.
Have you wondered why it is easier to add to a losing position than a winning position? I
have wondered about that myself many times.
You decide that you want to enter short the market at 12,325. The market then moves up to
12,345 and you are tempted to add to the position.
Why?
Why is it easier to add to a losing position than a winning position?
Well, for starters, you would have loved to have sold short at 12,345 rather than 12,325
because you would get a better entry price. Therefore, getting in again at 12,345 makes
sense from an economics point of view. That is plain simple logic. There is a chance that you
have a stop-loss in mind, and there is a chance that you have a target in mind. Now you
have an opportunity to have the same stop-loss as before, but you have 20 points less risk,
and you now have 20 points more profit potential.
You have also created a higher average price, so the market only has to move 10 points in
your favour, before you are at breakeven.
Simple and logical – something our minds love.
However, you will now have added to your position exposure, and the market has told you
that you are wrong, at least right now. It was easy to do the wro
wrong
ng thing, because we attach
a value to the market. When the market gives an opportunity to increase the value of our
trade, it will seem compelling to us.
Why is it then difficult to add to a winning trade? If I bought at 12,325, and the market is
moving in my favour, I am relieved. Now other emotions will en
enter
ter the consciousness. There
will be greed. You want to make more. There will be fear. You want to protect what you
have made.
When the market reaches 12,345, you will be thinking that if you add now, you have
increased your average price to 12,335. It means that the market will only have to move 10
points against you, before your position will now show a loss.
We decide to dwell on one or the other. That is the heart of the issue. We decide to dwell
on the potential for bigger profits, when we add to our losing positions. We decide not to
dwell on the fact that the market is telling us we are wrong.
We also decide to dwell on the fact that the market may take our profits away, if we add to
our winning position, because we now have decreased our average price. We decide not to
dwell on the fact that the market is corroborating with us. The market agrees, but we are
doubters. On the other side of that coin is a market that disagrees with us, but we have
blind faith that the market is wrong, and we are right. Hmm!!!!!!
Adding to a winning position can be uncomfortable to begin with. That is why I would love
for you to read the book called Charlie D, the Legendary Bond Trader. Charlie D was an
exceptional human being. He found trading hard to begin with, yet somehow, he became
the biggest US government bond trader ever. He was a private trader, yet his trading size
rivalled that of major institutions.
There is a great YouTube video of Charlie. His full name is Charlie De Francesca. You should
put his name into YouTube. He gave a talk to other Chicago Board of trade traders, and this
speech was recorded. It is also transcribed in the book, which is a good thing, because the
video is old, and very grainy, and the audio is terrible. It is also 30 years old, which explains
the poor quality of the video.
Fight Your Humanness
The most memorable quote from having read the book over and over, studying a gentleman
who was not a success immediately, was this line: Everything you do hurts, when you are
trading well.
I am often asked how I control my risk when I am adding to my winning trades. It is a good
question, and it should be addressed somewhere in this book. Now is as good a time as any.
I have just bought the Dow at 26,629. The Dow has already rallied from a base of 26,569, so
I might be a little late to the party, but that doesn’t bother me. Many a good trade has been
missed because you thought you were too late. If I have an exit stop in place, I am fine to
join a momentum move, even one that has been moving for a while.
The Dow prints 26,649, and I buy again. Now my stop loss on the first position has been
moved to reflect the fact that I have taken on more risk. If my stop loss on the first position
is 50 points, and I don’t move my stop loss up, then I am essentially just doubling my risk.
I move my stop loss up to breakeven on the first position, and I place a stop loss on the
second position as well. Where I place the stop loss on the second position is irrelevant for
this discussion. It could be at the same place as the first position, or it
i t could be a little higher
or a little lower. The important point to remember is that although I have doubled my
position by adding to my winning trade, I am not doubling my risk. My risk stays the same,
more or less.
There is now an increased chance I will get stopped out of my position because my stop loss
is so much closer than before. The flip side is that I will make much more money if the
market continues in the direction it has already travelled.
Do you get it? There is no magic to it. It is a philosophy, but it is born out of a desire to NOT
be normal. The normal thing to do is to “close half your position and let the other half run.”
Why would you do that? Why would you have the market agree with you, but you only ride
it with half a stake. That is what the 90% is doing, and I don’t want to do what the 90% is
doing, no matter how logical it may seem. They are wrong over time, and I want to be right
over time!
Example of Not Normal Thinking
What you are seeing here is not an unusual situation for me to be in, but it once was. I am
conscious that I may appear to be showing off and I like to avoid that. I do not want my
message to be confused with a need to show off my skills. Lord knows I have days where I
don’t trade well.
I could also have shown you a losing trade (and I will next - and there are plenty of those
too). I want to move beyond the “wow” factor and get to what I am really trying to illustrate
with this slide. It is not the monetary gain I want to focus on. It is the way I added to the
position.
I get many questions on how to add to a position. There are obviously as many answers as
there are traders doing it. Each will have their own style and flavour, which suits them and
their temper and personality.
On the next page I have shown you the chart for the trade above. The amounts you see are
Danish Kroners. They are not Pounds or Dollars. It shows my “risk per point”.
1/
The chart below shows a positive Thursday, and a Friday where Dow falls below the
low of Thursday and fills the gap from Thursday. Did you know that 78.6% of all Dow
gaps of more than 10 points gets filled within 3 trading days? I turn bearish as the
selling accelerates below the Thursday lows,
lows, and I start selli
selling
ng short. I scale into my
position around 25,450-60, and I add to the position as the market moves down.
Dow Trading Friday 4th December 2018
2/
Dow moves against me. You can’t see that here, but it does. My stop loss is in place. I am simply watching. I am hoping that I don’t get
stopped out. I don’t mind “hoping”, as long as the hoping is done with a stop loss.
loss . I don’t move my stop loss further a
away.
way. That would
be denial. What I am doing is “healthy” hoping. I am hoping for more profits.
profits.
3/
The Dow moves in my direction. I add a smaller amount (200). What I am really
doing here is critical to understand. I have been under water on my position, and
now I am finally making money.
My brain has had to endure pain during the loss period, and I am now being sent
signals from my mind to relieve my brain of the pain it felt during the losing period
(15 minutes earlier).
I counter-act this pain by actively doing the very thing that causes me pain. I am
embracing the discomfort by compounding it. If I am to actively engage in behaviour,
which is the opposite of the 90%, then this is required. You will notice that my “add on” is not a big position. Yet, it serves to reinforce the right kind of behaviour.
b ehaviour.
4/
The Dow falls strongly. I am in the safe zone now. My core position cannot be
threatened. My stops are placed at breakeven. However, I am still prepared to let
this trade turn into an insignificant trade (small profit trade) in the HOPE that it will
turn into a significant trade. Therefore, although I am 100 points in profit, I am by no
means relaxing. I am adding to my position again and again, in smaller increments, in
order to reinforce the right behaviour.
This trade has the potential to turn into a spectacular trade. It didn’t. The Dow bounced
strongly (before falling again), and although I made a profit, it was not the amount you see
on this screen shot. That is very important for me to get across to you. Why? Because I think
it is important that you understand that a good trader rarely gets out of his position at the
maximum profit potential.
How can you? How can you discover what the market will give you if you are not prepared
to let the profit run, and maybe give some of it back? Are there exceptions? Sure, of course
there are. For example, If the market is about to close and you don’t want to run the
position overnight or over the weekend, then that is a perfectly
p erfectly valid reason to exit.
I have a philosophy to trading, which means I am prepared to sacrifice profits in order to
discover how big the profit can get. If you don’t have that philosophy, you will never
discover how big the profit can get. If you always think of potential targets, using technical
analysis, you are most likely just talking your way out of a good trade. You might be using
ATR to time your exit, or perhaps you use a Fibonacci ratio to get out, but I don’t subscribe
to that.
There is a reason for that. When the market is trending, and I am on board the trend with a
position, I hope that the market will close that night at its strongest/weakest for the day. It
happens often enough to bet on occurring again. Yes, I have had plenty of disappointments,
but I have had sufficiently enough
enou gh stellar days to make it part of my philosophy.
Let me show you another example of a good trade, and this time I will show you precisely
where I did add to the position. On the next page you can see the chart that relates to the
trading entries shown below.
I am not on board the first push down. I look at the rebound for an opportunity to short the
DAX index. Under “1” you essentially see me add a handful of smaller positions, rather than
one big position. Most of them are added at a worse price than the first entry. This is
consistent with adding to winning trades.
Dax finally caves in and resumes its downtrend. Now I have a profit and at “2”, I get
aggressively short.
There are several things I would like to inspire you to see here:
1/ I am not afraid to sell short something that has already fallen in price. This is consistent
with what the majority of people do not want to do.
2/ I scale into the position in this example, and I add aggressively to my short position once
my position is in profit.
DAX Trading Friday 17th May 2019
I urge you to contemplate how you can add the element of “adding to winners” into your
trading. I am not interested in re-writing your trading plan. I am not interested in making
you into a copy of me. I am interested in trying to make you understand the value of “pain”
in trading, as a barometer for adding to positions. If it is uncomfortable, then it is probably
the right thing to do.
You may also want to give some serious contemplation to this question: Why do people in
general find it much easier to add to a winning trade than a losing trade?
I hope to make you understand that by asking you a question. Which one of the two
scenarios below gives you the most heartache?
Scenario A or scenario B?
Scenario A
You buy DAX at 12,125. Your stop loss is 12,100. Dax moves up to 12,150. You move your
stop loss to 12,125. You add 100% to your position. Now you are long 200% in total, 100% at
12,125 and another 100% at 12,150.
At 12,175 you decide to take profit. You gain a total of 75 DAX points.
Over the course of the next 3 hours DAX moves up to 12,275. You are not on board. Your
position 3 hours later would have been worth 275 points.
Scenario B
You buy DAX at 12,125. Your stop loss is 12,100. Dax moves up to 12,150. You move your
stop loss to 12,125. You add 100% to your position. Now you are long 200% in total, 100% at
12,125 and another 100% at 12,150.
Dax moves up to 12,175, and you buy another 100%. You have moved the stop loss on the
two prior positions to 12,150. Your average price is 12,150. You put a 25-point stop loss on
the last position.
Over the course of the next 3 hours DAX moves in a range and finally you get stopped out at
12,150. You made nothing. Your maximum potential profit was 75-100 points, but you got
nothing out of it in the end.
Which one of these two scenarios will cause you the most pain?
If it is scenario B, you can congratulate yourself from at least being able to add to winning
trades. However, it is scenario A that causes me the greatest emotional pain.
It is for this reason that I am not keen on taking my profits. I find it very upsetting to see my
position turn into a much bigger profit AFTER I am out of the trade. This way of trading is
not without dangers. You trade bigger and bigger size, and the market on a big position
doesn’t have to change direction by a lot before you give away a big portion of your open
profits.
I promised you
you a losing trade, didn’t I? Here is what happens when I lose my discipline, or I
am on the wrong side of a Donald Trump tweet.
tweet . However, I don’t let my mind dwell on it for
long. I have no way of anticipating market reversals, except if I use tools that I perhaps am
not a believer in, in the first place. I have no way of knowing that Donald Trump was going
to tweet.
I did what I had to do, and I lost. If you study the trade below, you will see an example of
o f me
breaking my rules. I add to a losing trade! I am not proud of it. That is why I am showing it to
you. It is a way of holding yourself accountable. I am not going to punish myself for it. You
make a mistake, you learn from it, you move on. The same mistake may crop up again at
some other point, in a different disguise. Hopefully next time I am better at recognising my
error sooner than I did here.
What is Your Trading Philosophy?
I am making an assumption that you already have a decent skill set in technical analysis. If
you haven’t,
haven’t, then that’s where you must start. You can download my free 200
200-page
-page book on
trading from my website www.TraderTom.com.
It’s free of charge.
https://tradertom.com/ebook/
You want to trade bigger and better. If I asked you the following questions, what would you
answer me?
1. Are you prepared to do what the 90% are not doing?
2. Are you aware of your weaknesses?
3. Do you have a routine to counteract them?
4. Are you pushing yourself? Or are you “Sunday driving”?
5. Are you trading your account, or you trading your past trades?
6. Do you have a metaphor or a philosophy that enables you detach?
The first question asks: are you prepared to do what the 90% is not doing? I know it’s very
easy to say: Yes, I am prepared to do what the 90% is not doing. However, what if you don’t
know what the 90% is doing? Then you are a little bit out of luck. I understand it is
somewhat of an arrogant question to ask. It is arrogant to assume that I am different from
anyone else. So, I think the first issue that needs to be addressed is, what is the 90% doing.
Trading with a Philosophy
What is it that you are meant to do?
If you haven’t got a strategy or a philosophy
philosop hy to trade from, then that is your starting point. I
am going to assume that you have a strategy or some degree of technical expertise.
To me the “philosophy part” is more important. My philosophy could perhaps serve as an
example to you.
•
I prefer to buy strength rather than sell short into strength.
•
I prefer to sell weakness rather than buying into a weak
we ak market.
•
I will add (aggressively) to my winning trades, but I will never ever add to my losing
trades.
Considering that most retail traders prefer to buy weakness and sell strength, because how
else you are going to be able to “buy low and sell high”, you can see for yourself that I am
different to the 90% of traders.
There is an easier way of answering whether you are in the 90% group or in the 10% group.
Are you engaged in research? Do you pour over the charts during your free time? Are you
doing research over the weekends? Are you disciplined with your stop losses? Are you able
to run a winning position for a lot longer than you perhaps are comfortable with? Are you
often letting your stop loss take you out of your winning trades rather than closing them by
yourself? Well, these are some of the qualities that will separate the 10% from the 90%.
This on its own doesn’t ensure profits of course. However, I don’t think anyone was ever
immediately profitable in trading. I know it’s easy to resort to stories about famous traders
and how they blew up initially, before they made a success of themselves. It is somewhat of
a cliché to hear stories like that. On the other hand, it may just serve as an inspiration to
you, if things are not going exactly how you had imagined it would.
Paul Tudor Jones describes how his risk management was awful to begin with. He made it
his life mission to get his risk under control. The rest is history as they say. He stands out as
one of the greatest lights in the trading world. So, don’t think it is rocket science what you
must do to be in the 10% group. Trading is no different from any other endeavour.
It takes practice. It takes effort. It takes consistency. It takes application of the human
qualities that makes us good at anything: patience, desire, tenacity, ability to withstand
setbacks, having a grand plan, maybe do some visualisation of where you want to end up.
There’s nothing wrong with being a dreamer. But if you want your dream to come true, you
need to back it up with a significant amount of planned routines
routines.. That is a “10% quality”.
What is My Weakness?
Are you aware of your weaknesses? My weakness is “boredom”
“bo redom” and “being too aggressive”.
aggressive”. I
am also prone to shorting the market more than going long. I have at times been accused of
fighting the trend. It is difficult to hide when you have a Telegram channel and you trade live
every day, while streaming your trading account. All the criticism is true at times.
Do you have a routine to counteract your weaknesses? Yes, I have a routine to counteract
them, but I am certainly human as well, and I fail often. They are not catastrophic failures.
Ultimately, you have to remember that when you buy, someone has to sell, so there has to
be differing opinions for there to be a market.
I will review past trades to remind myself of what I am hoping to achieve. I should say this
gets much easier with time, and now it is simply part of who I am. My routine consists of
going through a collection of some good trades and some poorly managed trades of mine.
That is my warmup ahead of the trading day.
Are you pushing yourself? Imagine you have a trading strategy that yields a profit of some
percentage. My question to you is: are you operating in your comfort zone or are you
conscious of trying to increase your trading size
size little by little?
The great thing about running seminars to me is that you get to meet people like yourself.
My advantage is that I (in most cases) have more experience than the people I am teaching. I
am not saying I am a better trader than they are, but I have “seen things” over the years,
things that most people might well be aware of, but may not know how detrimental it can
be to your trading.
For example, if a trader has had a few losing trades, there will be a tendency to bring the
emotions of those trades into the decision process on the next trade. So now you are no
longer trading the current trade by its own merit. You are also trading your last trade at the
same time.
This sort of mental accounting can be quite detrimental to your account. Say for example
that you lost 20 points on your last trade, and you now have a winning trade that is making
you 20 points. If you are conscious of what your last loss was, then you may be tempted to
do a mental accounting exercise, and close your position, to even the scale monetary and
emotional scale.
This is perfectly natural, but “natural” is sadly a costly emotion. It is our “natural” human
responses that makes us lousy traders. Just because it is natural does not mean it is in your
interest to act this way. As Charlie D, who you will get to know later, says: you have to fight
your humanness. This part is by far the hardest to train and the path to detachment and
describing it is convoluted, but I will give it a try
Imagine it is Monday morning. You have no open positions. You have done your chart
preparation. The market is about to open. Do you have a mental plan? I am not talking about
a strategy. I am not talking about a plan where you have decided to “buy here” or “sell
there”. I am more interested in if you can tick these boxes – displayed below?
My Mental Framework
I have accepted with every inch of my being, with every cell of my belief system, that I have
no idea if my next
nex t trade will be the best trade of my life or a little loss.
I know with every fibre of my body that this trade can easily turn into my worst trade ever
and bust my account if I let it. All I have to do is to act like the 90%, and “hope” at the wrong
time, or “fear” at the wrong time.
I am not a fortune teller – I REALLY don’t know what will happen next - so my self-worth is
not tied to the outcome of the position, but I am curious how big my profit can get.
I am conscious that if I want to be like the 90%, then I will consider “targets” and invent
ideas when to get out, but I am not like the 90% - so I embrace the “pain” – the
uncomfortableness of the uncertainty – and run the trade – just to see how big my profit
can get. If I tell you I treat it like a video game, and I try to beat my high score, would that
resonate with you?
The Mental Giants
The most famous group of traders ever were the Turtle Traders. It was the brainchild of two
Wall Street legends, Richard Dennis and William Eckhart. It is richly described in the Market
Wizard book by Jack Schwager.
I want to spend some time talking about Richard Dennis. As I said, he is a famed commodity
trader and also a former pit trader on the Chicago trading floors. Not so many people today
know how he got so good at trading, and how he addressed the typical issues that faces
every trader. He called it the battle with the self. The battle with self was where he focused
his energies:
“I think it’s far more important to know what Freud thinks about death wishes than what
Milton Friedman thinks about deficit spending , “he said.
Someone who traded with him in the soybean trading pit in Chicago said this of him:
“Dennis is much more likely to carry a book on Freud’s theories than he is inclined to carry
the latest crop report. He seemed to be far more focused on the mind’s interaction with his
trading than any corn report that may be published by federal agencies. That makes him
very different to the rest of us.”
Mental Accounting
People will do what people will do. Nevertheless, I think point number three is one of the
most important statements about trading that you will ever read. I don’t think you can have
a standard attitude about money and do well in the business of trading. I think there is a
danger in trading when this one draws direct links between trading and life.
Let me give you an example: I am in a trade and it is not going the right way. I look at my
profit and loss on my monitor, and I see how much money I am losing. I’m beginning to let
my mind wander. I will imagine what I could have bought with the money that I am
currently losing.
Maybe my partner has told me they want to go on holiday, or they would like to visit a car
dealership for a new car. I begin to add up the cost of the holiday or whatever it is I am
contemplating buying, and I look at how much I am down for the day or the week, and I
observe how much my current position is making.
You have probably already figured out that this sort of mental accounting is not an ideal
exercise for a trader. You are no longer trading the markets and assessing the situation
dispassionately. You are trading your “new car” or “your holiday” or “your last trade”.
Say for example that you received an unexpected inheritance, or you received a tax refund
that you had not anticipated. Well, you are more likely to spend that money on reckless
things. You often hear brokers and well-meaning educators say that you should only
speculate with money that you can afford to lose. Well, that may be true. However, that is
not the kind of attitude that I want to bring into the trading arena. I would rather bet on a
person with discipline and a small account to make it, than I would be on a large account
traded by a man with no plan and no discipline.
Of course, I am not arguing that one should take a loan in order to fund a trading account.
Now that would be reckless. However, I don’t think one should open a trading account
either with the view that this money can be lost without consequences. This last sentence
seems to go against my first statement which was, “you can’t have a standard attitude
about money and do well in this business .” However, there is, to my mind, a big difference
between being fearful and being reckless.
I am generally very careful with how I dish out advice. As I grow older and hopefully a little
wiser, I realise that one man’s meat is another man’s poison. You simply can’t tell someone
how to live their life or do their job. The best you can do is to inspire them through your
own path and example. So when I say to you that you can’t have a standard attitude about
money and do well in trading, I mean it from the perspective of experience. However, it is
true for me, and it may not necessarily
nec essarily be true for you. I suspect it is, but I can’t be sure.
su re.
I do much better when I don’t look at my P&L during the day. Even if I was to glance over to
my P&L to see how much money I have made or lost on the day, I am generally not
unsettled from it. I prefer to know that I am in profit, but I will worry about the size of the
profit when the trading is over. In the meantime, I will do what is the right thing to do
dispassionately.
Let me finish off this rather important point with a quick generalisation. When I am trading
on volatile days and I’m building up a big position, which is yielding a big profit, then I know
from experience that I have to be very careful about assessing the market from a monetary
point of view, versus assessing the market from a factual point of view. In other words, am I
closing my position because I think the market has run its course, or am I closing the
position because I want to feel good about myself and take away the anxiety of running
positions?
This is where my philosophy to trading comes in handy. I treat it like a video game. My
mission is to beat my high score. That makes it a game, one that I like to play over and over.
It detaches me from the monetary outcome, and it means that I can evaluate and execute
the plan from an objective point of view.
vie w.
I will say this though. It is much easier to say this than to implement it. It takes time and
practice. It is, would you believe it, one of the primary reasons for being so adamant about
adding to winning positions. It is my way of counteracting the unconstructive signals my
protective brain sends me.
By treating it like a video game I seem to be
more detached. It works for me. I see the money
as points. I want to beat my high score. It must
sound juvenile, but it works for me.
Everyone Is a Chart Expert (!)
I wanted to give this chapter a title that is very different to the one I finally settled on. Why
didn’t I use the
the one I preferred? The answer is that it was too long. I wanted to call this
chapter:
Everyone is a chart expert, and no one is making money from it!
Developing low risk ideas is our job as traders. I think the 80 to 90% of people that lose
money trading may very well have excellent abilities. They can read charts very well, and
they understand patterns too. However, I think there is much more to trading than knowing
a “head and shoulder” formation, a bar chart special pattern or a Fibonacci ratio.
I truly believe that what separates the 10% from the 90% is how they think when they are in
a trade. Of course, you can learn things from studying charts. I run a one- and two-day
course where I teach people things that I don’t think they would have noticed witho ut
considerable study time. I believe that’s what they are paying for, but that is not to say I am
not aware of the very real possibility, that my students think that trading is all about
techniques. It is for this reason that I run a live trading group every
ev ery single day. I lead the way
by showing people where I would like to be a buyer or where I would like to sell short.
Learning technical analysis is not difficult. It is what makes the field attractive to
newcomers. What would you prefer: spend 3 years learning how to value companies and
assess economic principles, or buy a good technical analysis book on a Saturday morning,
and by Sunday night be quite proficient in TA? As I said, it is a no
no-brainer.
-brainer.
However, just because you have a STA diploma (Society of Technical Analysis) does not
make you an accomplished trader anymore than reading a book on golf makes you welcome
on the professional golf circuit.
If people were not good technical analysts, I don’t think the FXCM clients from the previous
pages would have a hit rate of 62%. I believe it is the knowledge of technical analysis
amongst retail traders that cause the fact that there are more winning trades than losing
trades in our industry.
A coin-flip strategy should produce a 50/50 outcome, but most retail traders have a hit rate
around 65%. In my opinion this supports the argument that the real test of trading is how
we think when we are in a winning trade or when we are in a losing trade.
I don’t think people need
n eed to learn more technical analysis to make more money. I think they
need to learn how to play to their mental strengths.
Let me get personal. Let me take you behind the curtains and show you what it’s like to do
what I do. Remember, I’m a private trader. I don’t trade for a hedge fund. I don’t draw a
salary unless I win.
I survived the flash crash of 2010, but only just. I was lucky not to be heavily embroiled in
the Swiss Central Bank drama 5 – 6 years ago. Every day there are plenty of
o f opportunities to
bust your account, if you are not mentally ready and fighting fit. And I can’t rule out the
possibility of just being plain unlucky by having a big position on, just as Donald Trump
makes a Twitter announcement that moves the market against your position.
As I said, let me get personal. Today is the 1st October 2019.
I am currently in 2 trades. I am short the DAX. I am short the Dow. This is my third trade
today. The first trade of the day, also a short in the DAX, got stopped out. It was one of
those “unfair” ones, where the market clips your stop by a point or two, and then it moves
in your favour. I lost 25 points on that trade.
I entered a short position in the DAX again shortly after, and the German index has fallen
rapidly this morning. I added to the short position, as it fell, and right now I am plus 100
points in open profit.
Here is my first screenshot of the position. It is sent to my Telegram group at 09:02am (UK
time).
Am I tempted to take my profit?
Yes?
Why is that?
Yesterday was a poor day of trading. I lost 150 points. I read the market poorly, or to be kind
to myself,
myself, I had an idea, and the idea didn’t work out. Either way, I lost 150 points.
If I close my DAX position right now, I can make up for the lost trade this morning, and I can
recover a lot of the points lost yesterday.
I am also short the Dow. The Dow position is showing me a profit of 53 points. Am I tempted
to close that trade? Yes. Why? Because if I close all the trades right now, I can make about
150 points. It would be as if yesterday and this morning’s losses never happened. Now that
is a soothing thought,
thought, isn’t it?
You have this ping-pong dialogue in your head, arguing for and against taking profits. I am
no stranger to that conversation. I may have many years of trading experience, but I still
have those thoughts in my head.
What I am experiencing is known as Cognitive Dissonance. In the field of psychology,
cognitive dissonance is the mental discomfort - psychological stress - experienced by a
trader who holds two contradictory beliefs or ideas. This discomfort is triggered by a
situation in which a person's belief clashes with new evidence perceived by the person.
When confronted with facts that contradict beliefs, ideals, and values, people will try to find
a way to resolve the contradiction
co ntradiction to reduce their discomfort.
The best way for your rational mind to resolve the discomfort of a profitable position is to
close it. The best way for the rational mind to resolve the discomfort of a losing position is
to let it run.
From the book “A Theory of Cognitive Dissonance” from 1957, the author Leon Festing er
proposed that human beings strive for internal psychological consistency to function
mentally in the real world. He says that a person who experiences internal inconsistency
tends to become psychologically uncomfortable and is motivated to reduce the cognitive
dissonance.
One way to achieve the goal of reducing the discomfort is by making changes to justify the
stressful behaviour, either by adding new unsubstantiated or irrelevant information to the
cognition, or by avoiding circumstances and contradictory information likely to increase the
magnitude of the cognitive dissonance.
In my case, I am conflicted. I am associating pain with the performance of yesterday. I am
able to eradicate the pain by closing my positions right now. The way I am able to justify this
reasoning is by ignoring the information the market is giving me about my position. The
market participants agree with me that the market should be sold short, but instead of
acknowledging this, I am considering ignoring it.
From a logical point of view, this all makes sense. From an emotional point of view, this is an
inconsistent approach to trading. My trades from yesterday have no bearing on the markets
today. It is a new day. It is a new set of circumstances. Yet to my mind, the two trading days
are connected. To my mind I am continuing today what I did yesterday. Why wouldn’t I be, I
tell myself? If I am on
o n a roll, I bring that enthusiasm and confidence with me to the next day.
Are you telling me that you can “reset” your emotions every morning?
mor ning? Are you telling me
that you can go to bed
b ed at night after a blazing row wi
with
th your loved ones, and you wake u
up
p all
reset and emotionally in equilibrium? I doubt it. It is for this reason that I warm up ahead of
the trading day, by going through a process. We will cover that later.
However, there is a simple way to resolve this cognitive dissonance. When I say “simple”, I
acknowledge that it is anything but simple, because we are dealing with emotions, and
neither one of us are reasoned purely by logic. Where is Mr Spock from Star Trek when you
need him? He battled to reconcile the two natures within him—
him —the rational, staid
pragmatism of Vulcan and the wild, un-tempered emotionality of Earth. This half-Vulcan
half-human spent his entire life trying to accommodate these halves, for the purpose of
creating a balanced centered being.
The cause of the conflict is down to fear. Let us call a spade a spade: we are afraid of losing
money. We are afraid we are taking on too much risk. We want the upside without the
downside. We want the big stake but without the risk. We want to win big and lose nothing.
no thing.
It is our fear that stops us from conquering our wildest dreams. You know the clichés, as
well as I do. Face your fears, live your dreams etc. I even have a notebook, which has on its
front page my favourite fear quote. “Everything you ever wanted lives on the other side of
fear.”
Yet fear is a necessity in our lives. The human brain is a product of millions of years of
evolution, and we are hard wired with instincts that helped our ancestors to survive. We
need fear to ensure survival in certain situations, but many of the fears that we are hardwired with are not appropriate for our trading.
Our minds have a primary function, which is to protect us against pain. If you introduce big
drastic changes in your life, you are likely going to come face to face with that pain. A clever
way to introduce staying power for your change is to introduce change slowly.
Say you set yourself the ambitious target of running a marathon, you achieve this goal by
building up your body and mind for the task. Trading big size is exactly the same process.
You need to give your mind time to learn to handle the mental anguish that comes from
losing when the stakes are bigger.
There is no point in comparing yourself with others. Sure, take inspiration from others, but
know this is a personal journey, and your job is to achieve an equilibrium mindset, no
matter what size you are trading.
You want an example? You want some inspiration? Then why
w hy don’t you cast your eyes on
the photo below. This is a photo of a gentleman called Phillipe Petit, as he is making his way
from one of the towers at the World Trade Centre to the other tower.
I saw the original documentary a long time ago. This was long before the Hollywood
adaption of the story. What struck me about the incredible feat was the preparation.
It took Phillipe some 7 years of preparation to accomplish the feat. Did you think he just set
off and hoped for the best? Hell no. He prepared and prepared. I took a snapshot from the
Netflix documentary, which has old grainy black and white videos of his preparation.
As you can see from the image, his original training height was quite modest, compared to
what he would eventually end up with.
Phillipe Petit is a fascinating character, and he is someone who has had to deal with fear at a
whole other level than any of us ever had to. I have learned a lot about fear and identifying
my own shortcomings by studying his approach to his craft.
He Wants to Visualise Victory
"Before my high-wire walk across the Seine to the second story of the Eiffel Tower, the
seven-hundred-yard-long inclined cable looked so steep, the shadow of fear so real, I
worried. Had there been an error in rigging calculations?" How did he overcome his doubts?
With a simple visualization exercise: "On the spot I vanquished my anxiety by imagining the
best outcome: my victorious last step above a cheering crowd of 250,000. "
He Exaggerates His Fears
Rather than try to muscle through or outwit fear, Petit suggests taming it by building it up so
that when you are finally faced with your fear, you will be disappointed by how mundane
the threat really is.
"A clever tool in the arsenal to destroy fear: if a nightmare taps you on the shoulder, do not
turn around immediately expecting to be scared. Pause and expect more, exaggerate. Be
ready to be very afraid, to scream in terror. The more delirious your expectation, the safer
you will be when you see that reality is much less horrifying than what you had envisioned.
Now turn around. See? It was not that bad--and you're already smiling."
He goes on to say that he has fears like everyone else. In particular, he talks about his dislike
of spiders.
On the ground I profess to know no fear, but I lie. I will confess, with self-mockery, to
arachnophobia and cynophobia (fear of animals). Because I see fear as an absence of
knowledge, it would be simple for me to conquer such silly terrors.
“I am too busy these days,” I’ll say, “but when I decide it’s time to get rid of my aversion to
animals with too many legs (or not enough legs —snakes are not my friends, either), I know
exactly how to proceed.”
I will read science reports, watch documentaries, visit the zoo. I will interview spiderwranglers (is there such a profession?) to discover how these creatures evolved, how they
hunt, mate, sleep, and, most importantly, what frightens the hairy, scary beast. Then, like
James Bond, I won’t have any problem
problem having a tarantula
tarantula dance a tarantella
tarantella on my forearm.
forearm.
Petit's walk remains one of the most fabled, and stunning, acts of public art ever. He says
there was no WHY to why he did it. To quote his own words, here he is:
To me, it is really simple. Life should be lived on the edge of life. You have to exercise
rebellion, to refuse to tape yourself to rules, to refuse your own success, to refuse to repeat
yourself, to see every day, every year, every idea as a true challenge, and then you are going
to live your life on a tightrope.
Clichés are a cliché
Rather than I am quite cynical towards those who peddle clichés. It doesn’t sit well with me
to hear people say that I should
s hould run my profits, but I should cut my losses. It doesn’t sit well
with me when a female friend tells me she is in an abusive relationship, and another friend
chirps in and dismissively states that the solution is to “just leave the bastard.” It is a
platitude. It is factually true, but it is nonsense, nevertheless. When a solution is obvious,
the problem is rarely the only problem. You might as well tell an alcoholic to just stop
drinking. There is a reason he is drinking, and there is a reason he is st ruggling to stop.
Failure is always a possibility in life. I participate in a radio program about trading and
investments. The focal point of the show is the competition between me and two other
traders. The competition is always fierce, and every week we are being questioned about
the content of our portfolios. My trading style is quite black and white. If I think the market
is headed lower, I will buy some put options or some bear certificates, and vice versa if I am
bullish.
I learned a long time ago that the best way to shut down a journalist is to be 100% honest.
So, when the radio host baits me by saying “uhm Tom, you got that one wrong , huh?”, the
worst thing I can do is to start defending myself. If I start making excuses or put up
defences, I simply pour petrol on that fire.
It is such a great metaphor for life. Own up to your errors and be done with it. So when the
radio host is trying to engage in a line of questioning aimed at getting me to defend myself, I
always double down in the opposite direction
direc tion by saying something like “O
“ Oh my lord, I don’t
think I could have been more wrong, even if I tried”, or “Oh
“Oh boy, even a 5-year old could
have done better than me.”
Elon Musk
We are bound to make mistakes in life, but mistakes are like fuel for the rocket of
improvement. Talking of rockets, how do you think people like Elon Musk handle failure? He
is trying to accomplish humongous life changing things -- things like the electrification of
automobiles and the colonisation of space, and he does it while the whole world is
watching.
For him the possibility of failure is ever present, but when he fails, it is a spectacular
headline creating spectacle, and yet Musk just keeps on going and going, doing incredibly
audacious, risky, and valuable things.
How does he handle his fear of failure? Or is he just some superhuman, genetically gifted
individual with a mercifully malfunctioning anxiety circuitry? Nope. Apparently not. He has
publicly stated he feels fear quite strongly. So how does he keep going despite this terror?
Passion
Musk, it seems, has a two-part recipe for fearlessness. The first essential ingredient is heaps
and heaps of passion. The SpaceX was an insane venture, but he had a compelling reason
for pushing ahead: “I had concluded that if something didn't happen to improve rocket
technology, we'd be stuck on earth forever. People sometimes think technology just
automatically gets better every year but actually it doesn't. It only gets better if smart
people work like crazy to make it better. By itself, technology, if people don't work at it,
actually will decline. Look at, say, ancient Egypt, where they were able to build these
incredible pyramids and then they basically forgot how to build pyramids.... There are many
such examples in history... entropy is not on your side ." Elon Musk was not prepared to sit
idly by and watch that outcome unfold.
Musk also deploys a strategy of fatalism. Just focusing on why you're taking a scary risk isn't
always enough to overcome hesitation. It wasn't for Musk. He employed an additional
strategy as well. You could call it strategic pessimism. He calls it "fatalism."
"Something that can be helpful is fatalism, to some degree ," Musk has said. "If you just
accept the probabilities, then that diminishes fear. When starting SpaceX, I thought the odds
of success were less than 10 percent and I just accepted that actually probably I would just
lose everything. But that maybe we would make some progress ."
He is not the only one to use this strategy. By really visualizing the worst-case scenario can
make you appreciate objectively what you are trying to achieve. It's a form of exposure
therapy: by facing the thing you fear, you break its power over you and realise that you will
survive even if the worst comes to pass.
Have I digressed too far from the trading journey ahead? I don’t think so. I draw inspiration
from many sources outside of the trading world. Kobe Bryant, Rafa Nadal, Charlie Munger,
to name a few. Very different people, yet all obsessed with the journey and the enrichment
of their lives and the perfection of their craft.
Maybe It is not for you
Is it for you? I don’t know. Permit me to ask you a question: what is the alternative? You are
reading this because you want to trade well. Perhaps it is time to acknowledge trading for
what it is? It is a great way to expose all your insecurities. It is a great way to highlight your
strengths. Work on your weaknesses and you will find that trading is much more than a job
and an income stream. Failure is one of our greatest learning tools.
tools.
Well, that was a heavy section. I hope you are still with me. You know, one of the hard parts
of change is how other people perceive our quest. Not everyone is as supportive as one
could wish for. To silent our inner critic is hard enough, but when we also have to silence
our friends and colleagues, it becomes much harder.
I was in a short position last week in the DAX. I have a running dialogue with many of the
people who are in my Telegram group. One trader in particular had some good views on the
market. However, he was often very vocal in his criticism of me. I had just posted some
words about being torn between two outcomes, hence the chapter on cognitive dissonance.
Here is what he sent me.
He is rather vocal about his opinion about my short position in the Dax index.
He posted this at 14:59. At that point the chart looked like this. I saw no reason to be long,
but when someone you do trust and respect gives you an opposite opinion, it is a good
opportunity to double check internally.
It may be a reflection of my own experiences, but I find that trusting myself and my own
opinion – after I have given it considerable thought – is the best path forward.
Then at 3pm – one minute after his post to me – the market fell through a trap door, and it
turned into one of the best trading days
d ays ever in my life. Trust yourself!
On this trade, here shown in a much bigger perspective, I am short from 12,470, with a stop loss at 12,495. I get stopped out, but I sell short
again at 12,480. By the time the market is trading a 12,440, I am adding to my short position.
Trading is not Linear
It is the 9th September 2019.
2019. It is a Monday, and I’m preparing for a series of speeches this
coming
comi
ng week. I’m aware that I probably need to be a little careful when I’m trading. So I am
trading at a 50% pace. It means my stake size is smaller than usual.
Still, there is plenty of room to mess things up.
Right now, I am in a position in the DAX index. Today is Monday. On Friday the
unemployment report was released in America. The market reacted rather positively to it,
so we expect that there will be some follow-through today. But the market is not in a rush
today.
And here’s a very important lesson: when the market changes its tune, you better make
sure that you change your tune with it. When the market has been incredibly volatile, and
then it calms down, it can be very difficult to adjust your trading to the new set of
circumstances.
It is for this reason that I printed a picture of our very own Mads Mikkelsen (he is Danish) as
the villain in Casino Royale, sat opposite James Bond. They may be playing poker, and poker
is a game of statistics, a game of chance and odds. However, as anyone who has ever played
high stake poker will tell you,
you , there is a whole lot more to it than just “odds”. You don’t play
the cards in your hand. You play the man opposite you. You may be sat with a strong hand,
and you are barely able to contain your excitement, but the guy opposite you also seems
quite content, and he keeps raising the stakes. Is he bluffing? Is he for real this time?
It may not be a direct metaphor to what trading is all about, but it goes a long way in
explaining the game of trading. I may have a very strong opinion about what the market
should do today, but unless the market collaborates with my opinion, the market wins.
There’s no point in you wanting to disco dance with the market if the market only off ers you
a slow waltz.
What I believe makes trading the challenge it is, is the “spectrum of outcome”. All of us live
normal linear lives. However, in trading “normal”
“normal” doesn’t really exist. Either you are doing
very well, and you are making much more money than any normal day job could ever offer
you, or you are losing money head over fist. One day you are the king of the jungle. Next day
you are an old man in despair.
despair .
The challenge is the emotional roller coaster that is associated with it. You can do all the
right things in the trading, but no amount of preparation can anticipate the unexpected,
such as Donald Trump posting a Tweet,
Twee t, and you are caught on the wrong side of the market.
However, if you don’t find a way to roll with the punches, this business will grind you down.
That is the bizarre bit about the trading world. You can arrive in the morning, unprepared
and hungover, and yet you happen to catch a break in the market, by chance and by luck,
and you make a substantial amount of money. There are also days where you spend hours
preparing, but the market is just not collaborating with your idea that day.
Virtually every single person in the world lives “linear lives”. What do I mean by that? I mean
that everything we do more or less is on a schedule. We more or less have the same amount
of sleep every night, we more or less eat at the same time every d
day,
ay, we tend to get up at
the same time and go to bed at the same time every day. We go to work at the same time
and leave work at the same time every day. And we are most certainly paid a salary at the
same time every month, and it means that our salary is the same
s ame every day. In other words,
our lives are “linear”.
Trading however is nothing but linear, and if you try to make it linear, you are in for big
trouble. This transition is what baffles virtually everyone, and it is what makes trading
difficult. You will not be able to ride the big winners because you think tthe
he markets are
linear, and the market will reverse to the mean,
mean , so you had better get out with your
y our profit
before it does reverse. When you are losing, you sit and wait for the mean reversion,
because you think everything in the world is linear, so you think that the market will come
back at some point.
A man goes to work. He does his job. He goes home. He is paid for his service. Depending on
his competency, he will get rewarded accordingly. Say for the sake of the argument, he is
paid $500 for a day’s work.
wo rk.
He now starts to trade, and he buys the Dow. The Dow explodes higher a few minutes later.
He moves his stop loss to break-even.
break-even . He is in a risk-free trade. His open profit is rising,
$500, then $750, $1,000 etc. He hasn’t done anything for that money. He is making more
money in a few moments than he does
d oes for a full day’s work. His linear mind is struggling to
cope with that. How can I make so much money for so little effort, he asks himself? The
profits climb, and his linear mind begins to extrapolate. If I get to $2,500, it is a whole
week’s salary I have earned. If I get to $3,000, I can pay o
off
ff my loan.
Every little tick up and down
do wn on his position is equated to a tangible objective. Every move
higher is associated with more joy, more financial goodwill. Every move in the other
direction is associated with burst dreams, with financial goals evaporated. You can h
hardly
ardly
blame him for being emotionally exhausted. He is no longer trading the market. He is
trading the size of his account. He is trading his dreams and his goals. He is no longer
objective.
The linearity issue in trading is a problem I have heard no one discuss. I think it needs to be
addressed thoroughly, perhaps more thorough than I can do it justice right now. In a normal
job we have a sense of security. We know we will get paid a lump sum at the
the end of the
month. That is called our salary.
However, in trading this safety is gone. Anyone who has ever tried to recreate the linearity
from their normal jobs onto trading will testify that it is impossible. If you make $500 a day
in a job, that equates to making 10 points a day in the Dow trading $50 per point.
“Anyone can make 10 points a day in the Dow”, they tell themselves. Sure, most people
probably can make 10 points, but there are some major flaws in the plan:
1. At what stage during the trading day will you make the 10 points? If you make it
early, do you then just stop for the day?
2. If you start with a loser, do you then carry on until you have made the 10 points?
3. What if you have 10 points in profit, do you just take the reward, instead of letting
the profit run?
4. Do you stop taking your losses because you feel you can’t afford to close them,
because then you are even further away from your daily target? “As long as the
trade is open, there is hope”, you tell yourself.
Our linear mindset is imposed on a framework, the markets, which is anything but linear.
You can be majorly rewarded for very little work. You can be re
rewarded
warded with a pittance or a
loss, despite having sat at the screen for 12 hou rs without as much as a coffee break.
Therefore, it is vitally important for success in trading that you are trading the markets, and
you don’t trade a million other things, such as your last trade, or the state of your
you r account,
or any other of the dozen or so emotionally charged agendas that your linear mind has
“kindly” constructed for you.
How do you avoid that? Well, there is no quick fix, but it all starts with an awareness of your
state of mind. If you feel the slightest twinge of hesitation at the thought of exe
executing
cuting a
trade, then don’t. Don’t execute the trade until your rational mind (the one that saw the
trading setup) and your emotional mind (the one that is going to make you ride this winner,
or make you take the loss at the appropriate time) is 100% aligned.
What tools can you use for that? There are a few great tools for this objective. Here are
some of my suggestions, not in any particular order of importance.
Imagine It
1. Imagine it. I think some would call it visualisation. It is a grand word for something as
simple as simply imagining yourself achieving your desired outcome. Some people
call it mental rehearsal. Don’t let the new age smell to it put
p ut you off. If you are a
logical thinking man or woman, you may be put off
o ff by the thought of using an airyfairy New Age tool. I appreciate that, but I am not proposing
p roposing you start wearing violet
coloured clothes and put a daffodil in your hair. I am proposing you sit quietly and
imagine a future trade, or even better a past trade, and you give it a better outcome,
especially if you are unhappy with the original outcome.
Print It
2. Print it. I have plotted my best and worst trades on a chart on big A3 pieces of paper.
As part of my preparation, I am looking at old trades. It reminds me of what I am
trying to achieve. I have plotted my entry and my exit, and my add
add-on
-on trades on the
chart. I have also shown what happened after I exited the trade. How did the market
evolve after I got out? Was there a good reason for the exit? It is time consuming.
consuming. I
will admit that, but you will get a very different perspective to your trading.
Control Your Mind – Control Your Future
I don’t want you to think that I’m a masochist. Nothing could be further from the truth. If I
do tend to dwell on pain, it is more a reflection of pain’s role in the context of trading
profitably. What I’m attempting to do is a difficult endeavour. I’m trying to explain why 90%
of all people fail in achieving their dreams and hopes when it comes to trading.
When so many people commit the same mistakes over and over, there must be a deeper
meaning that has yet to be uncovered. Naturally I’m hoping that by now you will have a
much greater understanding of what it is that is going wrong. I am not into trademarking,
but if I could, I think I would trademark my own saying: Control Your Mind - Control Your
Future.
I don’t want you to think that I am speaking to you from an elevated level either. I don’t
want you to put me on a pedestal, just in case you were tempted to do so. Professionals
make mistakes. Of course, they do. All the time. I could sit here and speak mightily about
trading, as if I never made mistakes myself, as if I never broke my own trading rules, but that
would be a preposterous lie.
Of course, I make mistakes. Of course, I have bad days. Of course, I look back on certain
trading days and I think to myself what the #### was I doing?
I remember very vividly watching CNBC during the financial crisis in 2008. Mr Kramer
received an email from a viewer asking about the health
heal th of Bear Stearns. Now I am sure that
if Mr Kramer had an opportunity to go back in time, he would most certainly amend what he
said in that broadcast. He basically shouted at the screen, saying that Bear Stearns was fine.
He probably had shares in the company. A mere 72 hours later Bear Stearns was gone, done
and dusted, never to be seen again.
It is easy to be swayed by a “supermarket mentality” when we are trading. When we go into
a supermarket, we are drawn towards the special offers. When I look at my shopping basket
from this weekend, I see things that I wouldn’t normally buy. Of course, I would need these
things at some point or another. We all need toilet paper. We all need dishwasher tablets,
and we all need hand soap. The reason why they were in my shopping basket this week was
because they were on offer. Who can resist a 50% discount on toilet paper?
Being in a supermarket is one thing. Being an operator in the financial markets is an entirely
different proposition, or at least it should be. You should not go into the financial markets
with the same kind of mindset that you would when you enter the threshold of a
supermarket. It’s fine to look for bargains on household items but it is not necessarily fine to
look for bargains in the financial markets.
It doesn’t matter where you are from. We are all governed by the same emotional laws of
marketing.. And if we don’t exert a conscious effort to release
marketing
re lease ourselves from the shackles of
conventional thinking, we may very well end up as a bunch of City Index clients did back in
2006 - 2007.
Back then the stock called Northern Rock was one of the quieter companies in the FTSE
complex. It basically went nowhere. However, suddenly in late 2006 it began a stellar
movement higher. There was no real interest from the City Index client base in this meteoric
rise of Northern Rock. No one participated in the upside. However, when it began to slide
back down again afterwards, the interest rose. It was as if Northern Rock had the same
effect on investors that half price toilet paper has on shoppers in a supermarket.
I worked at City Index at the time, and it was clear that Northern Rock had become quite a
lively traded stock. The more Northern Rock fell in price, the more people got interested in
the stock. At one point I received a phone call on a Saturday morning. At this point Northern
Rock had slipped from 1200p down to around 500p. The person on the other end of the
phone was a stranger to me. He had picked up my business card at one of the talks I had
given on technical analysis. He apologised for calling me so early on a Saturday morning, but
him and his friend had decided to invest in Northern Rock. At the same time, they had
decided to get the opinion of a professional, just to double check if it was a good idea.
Apart from being rather annoyed at being woken up at 7 AM on a Saturday by a stranger, I
was also annoyed with the question. At this point Northern Rock was in freefall. I roughly
said the following to the stranger:
Look, I don’t know what is going on with Northern Rock, but there is something horribly
wrong. Although the general market is declining too, Northern Rock is declining much more.
What I am afraid of here is that there is something amiss that we d on’t know about, and it
has yet to be known to the market. It feels as if someone somewhere knows something is
horribly wrong, and they are selling out while they can.
I told him that I had many clients who had been saying exactly what he was saying, but they
said it about a share called Marconi. Fortunes were lost by clients who kept buying Marconi,
even though it was falling and falling, because they engaged in bargain hunting. I was
working for Financial Spreads at the time of the demise of Marconi.
It was horrible to see the fortunes being lost by our most valuable clients, simply because
they did not want to admit they were on the wrong side of a bad share.
I said to him that from a trader’s perspective, you are engaging in a very dangerous activity.
If you buy Northern Rock now, it will be very difficult for you to have a meaningful stop loss.
You are essentially trying to catch the falling knife. You talk as if Northern Rock is the only
bank in the world worth investing in. You talk about Northern Rock as if it couldn’t go bust.
You talk about it as if the fact that it is 200 years old means that things couldn’t get worse
before it gets better. You even said it yourself: Northern Rock is too big to fail. It means you
are already to some extent aware of the danger here.
he re.
There is a second reason why I don’t think it’s a good idea you buy Northern Rock. Let’s say
you are fortunate enough to witness a turnaround in the fortunes of Northern Rock. You will
have trained your mind to think that it is perfectly okay to buy into things that are falling.
This works perfectly in a supermarket. Toilet paper has a practical use. Soap has a practical
use, so when you are provided with an opportunity to purchase these items at a 50%
discount, you should do it.
However, to believe that the financial markets offer discounts akin to what you’re seeing in
a supermarket is ludicrous. The financial markets are not a supermarket with special
offers.
The Beauty Contest
John Maynard Keynes, the father of modern economics, expressed the essence of
speculation with an analogy of a beauty contest. He referred to a beauty contest in a
newspaper, where you were presented with 30 beautiful ladies. Your job was to rank these
30 ladies in terms of beauty. However, as John Maynard Keynes beautifully put it, this has
nothing to do with whether you like blondes over brunettes, or you like tall ladies over small
ladies. In fact, this has nothing to do with your own personal preference.
As a side note, I really wish that the first father of economics had been a woman. I wonder
how we men would have reacted, if we had been one of 30 men in a picture, and ladies now
had to rank us according to our masculinity or our muscles or the amount of hair on our
heads. But times were different back then. So, I apologise to the women reading this. I am
referring to an example from the past, but trust me when I say, I am somewhat
uncomfortable with the example.
Mr Keynes said that his own personal preference was irrelevant. Rather he argued that his
job was to consider what other people are considering. He basically stated that investing or
trading is the art of figuring out what the other person is thinking. It was for this reason that
I showed you the scene from Casino Royale, known as the poker scene. We’re not
necessarily just playing a game of investing. We are playing a game of trying to figure out
what the person opposite us is thinking and what that person wants to do.
A Story About Technical Analysis
When I wrote the notes and the presentation for the two evenings, I knew I had to share the
stage with another speaker. His name is Steen Jacobsen. He is brilliant at what he does,
which is to approach the markets from a pragmatic and fundamental perspective. I admire
him, and I knew that I would need to explain why I use charts, when I am actually equipped
with no less than two university degrees in what could accurately be called fundamental
analysis.
There are two major camps of analysis. There is the fundamental analysis camp, and there is
the technical analysis camp. Fundamental analysts tend to pour scorn on technical analysts,
while technical analysts tend to be rather disrespectful to people who have spent time and
effort to learn the fundamentals of economics and stocks and sectors.
It is true that technical analysis is significantly easier to master than fundamental analysis. I
spent four years of my life learning about the fundamentals of the financial markets, and I
wasn’t even trained in accounting. Conversely, you can pick up a book on technical analysis
on a Saturday morning, and by Sunday night you will have a very good idea of what
technical analysis is all about.
It is probably for this reason that most retail traders believe that the path to the financial
markets and trading profits is through technical analysis. However, it is arguably down to
personal preference which tool you use. Some have made fortunes using fundamental
analysis and some have done the same using technical analysis. It is not often you get an
opportunity to put the two sides off
o ff against each other. However, we are in luck.
CNBC runs a daily segment where a fundamental analyst and a technical analyst goes head
to head, and they offer their opinion on where a stock or index or commodity is headed.
Some researchers from a university, I think it was in India, decided to test which performed
better. The result is shown on the next
nex t page.
The technical analysts in this survey have far superior returns than the fundamental
analysts. I suppose you could argue that I am biased. I don’t deny that. However, there is
another reason why I prefer charts over fundamental analysis. It is not the only reason, but
it is an important reason.
If I show you two charts side by side, and I tell you that one of these charts is a five-minute
chart, and the other chart is daily chart, would you be able to tell which one is which?
What I find advantageous with chart analysis, is that it is applicable to the time frame that
suits my temper. It is far superior in my mind to fundamental analysis, when it comes to
entry points and exit points, and I can use the same tools, irrespectively of what time frame
I am trading on. Am I opposed to fundamental macro analysis? I would be a fool if I
dismissed the fundamentals. Believe it or not, the two should not be in opposing camps.
They should walk hand in hand, as they complement each other and make up for each
other’s flaws.
Now, I would not go so far as to say that chart analysis is the Holy Grail. Yes, I have made a
lot of money from becoming an expert in technical analysis, but I am also aware of the
shortcomings in technical analysis. I don’t believe that there is a Holy Grail when it comes to
trading, and I certainly don’t believe that chart analysis is the Holy Grail.
In Latin there is a word called Apophenia. Translating it into common English, it would be
“patternicity
patternicity””. This behaviour is centred around seeing things
thi ngs that aren’t there. Our minds
tend to seek out the information that confirms the bias that we have already decided upon.
Therefore, to be completely objective in chart analysis is virtually impossible.
My own mentor Bryce Gilmore once commented on this fact. He said to me: “Tom, you only
see in the markets and on charts what you have trained your eyes to see.
see.””
I guess another perspective of such wisdom is expressed by Anais Nin. She said, “We don’t
see things as they are, we see them as we are. ” What is the relevance to trading, I hear you
say? I had a friend a long time ago. Nick was a great trader, right up until 2004. Then he
turned bearish the stock market. He kept shorting. The market kept going up. He just could
not accept that there was no more downside after the bear market of 2000-2003.
2000- 2003. He didn’t
see the market as it was. He was it as he was. By the way, he
h e is no longer trading.
Take a look at the image below. Now I don’t mean to be rude.
rude . I am just trying to make a
point. I am pretty sure I know what you thought you read.
There is even a very good chance that you got the second sentence wrong too. As I said, I
didn’t mean to cause any offence. I hope you can see the humour in this, while illustrating a
very important point.
The editor of the book told me she nearly spat her coffee out from laughing. She admitted
she also got the second line wrong. I hope I made my point. Again, apologies for the
example. It was not to cause offence, but
b ut to make you think carefully.
The Curse of Patterns
I am going to enter the heavier part of this presentation. This chart is to illustrate the issue
of patternicity in the context of chart analysis. In the early stages of our chart journey we
come across trendlines. Trendlines are easy-to-use, and they give the appearance of a great
trading strategy.
So, on this chart our chartist has skilfully drawn a line from point 3 and connected some
lower tops on the chart. As the market breaks through the downward sloping trendline, it
generates a BUY SIGNAL. If you are in a research position, and you draw enough of these
trendlines after the fact, you’re most likely going to conclude that trendlines are nothing
short of a fantastic tool, perhaps the Holy Grail.
This is where I step in and say, be careful. Your eyes will tend to seek out that which you
look to confirm. As we go to the next chart, you will now see a different perspective of the
same chart and, as we progress to yet another chart, the next one in the series, you will see
that actually there was a trendline before the one drawn, and this particular trendline was
nowhere near successful as the trendline your eyes sought out, after the fact.
This is the danger of charts. When we research, we are looking for something to get us in on
the long side, so we never miss a rally, or we look for something to make us sell short, so we
never miss a short sell. We enter with a bias. This is Apophenia in play. Be aware!
Divorce Rates in Spain
I like to inject a little bit of humour when I can. Did you know that there is a 65% divorce
rate in Spain and an 87% divorce
d ivorce rate in Luxembourg? There’s only a 42% divorce rate in the
UK. Does that mean that you have a higher chance of finding your soulmate on the British
Isles than in the warm climate of Spain?
As I said, I only put these images into the book to provoke a feeling of “what is he going on
about now????” Well, I admit that some believe the earth is flat, and some believe in
soulmates and horoscopes. I don’t. I consider such beliefs
be liefs as ignorance.
And I sure as hell don’t believe that the perfect trading system can be bought, yet alone
produced.
My Style of Technical Analysis
I would like to show you what technical analysis can do for you. When you can act and
perform without any form of fear of consequences and repercussions, you are trading from
an ideal state. When you consider how many people lose money overall in trading, you
logically have to conclude that achieving this state is not an easy undertaking. It would be
foolish
foolish to think that this state of mind comes easily or even naturally. It doesn’t.
In this part of the book I would like to show how to achieve this state of mind. It means
building on the foundation of knowledge I outlined in the first part of the book. Bridging a
theoretical concept with a practical application will take time. The great thing about this
framework is that IF you can bring one thing with you, I can almost guarantee you what you
want, which is trading profits.
What do you have to bring
b ring to the table? Well, I said one thing, but it is a little more than one
thing, but there is one thing that towers over all the others: patience.
You have to be patient with yourself. You have to be able to let your knowledge settle and
mature within you. If you trade small size now, but you want to trade bigger size in the
future, then that journey will most likely be anything but linear. It will be a journey of
progress and setbacks. It will be a journey of progress and status quo. I can guarantee you
that. You have to grow into the trader you dream of becoming.
You must be patient with your trade entries. You have to be patient with yourself. If you can
bring those two qualities to the table, then the rest will solve itself in time. You will grow
your trade size at a pace where your mind will not be alarmed or be fearful. Let’s get started
with some technical analysis.
Time to Buy or Sell?
Here is a chart of the FTSE 100 (next page). After a hesitant open at 8am (the first bar after
the gap in the middle of the chart is the 8am bar), the FTSE makes a move higher, makes a
small retracement, and then pushes further higher. It then moves into a consolidation
phase, where we see two lower highs.
The question is very simple:
Are you a buyer? - because we are in a trading range?
Are you a seller? - because it seems as if we are breaking below support?
What is your answer please?
The FTSE 100 index has a slow start to the day, which starts at 8am, at about the middle of the page, where there is a gap in the chart.
Eventually the index rallies. However, by mid-morning the index has made a top and two lower tops. It is not overly bearish, but it is not overly
bullish either. If you were confronted with such a chart, would you buy it, because it is the bottom of the trading range, or would you sell short
because you have a series
s eries of lower highs and what looks like a break of the trading range? What do you think?
Same Pattern – Different Index
This is the German Dax index. It shows a similar pattern to the FTSE. It has
has also made a high, and then retraced into a tradin
trading
g range. It appears
as if DAX is now in a trading range? Would you buy, in anticipation of a test of the highs? Or short, on account of the trading range?
Please ignore the comments in the box for the time being. I will explain them later. They
merely show what I did in Telegram. Now I would like to ask you a straightforward question:
Are you a buyer?
Are you a seller?
What is your answer please?
Side by Side
Below we see both charts side-by-side. The DAX index is on the left side, while the FTSE
index is on the right side. They appear relatively uniform in pattern: Both have a series of
higher highs initially, and then both move into some form of consolidation range.
Have you decided what you want to do?
Back to the FTSE Index
We are back at the FTSE 100 index chart.
ch art. Have you made up your mind whether you want to
be a buyer or seller?
On the next chart we see that the FTSE meets buyers at the double bottom. Although it is
not conclusive that we are headed higher from here, the bulls have certainly won the first
test.
When you are confronted with the FTSE on this chart below, what would you like to do? Are you a seller or are you a buyer? At this point it
seems as if the trading range is holding. As a trader who likes to run positions on “trend days”, it can be a frustrating exp erience to trade a
sideways market. You think every little push below an old low or above an old high is the beginning of a new trend. Then the market turns
around and goes back into the trading range. Considering that trading ranges is part and parcel of trading, there is no point in getting annoyed.
Maintaining your mental composure at all time is essential. I find that it helps me tremendously to “warm up”
up” before I start trading. It is an
essential part of my preparation every day, and I attribute this component as
a s the key to my trading success. I will explain later how I do that.
On the chart below, there are sellers at the double top within the trading range. So, although you have a series of lower highs and lower lows
after an initial surge up, the market is not about to roll over. At least there is no evidence at this moment in time that it is about to roll over.
The reason why I am showing you these charts – perhaps a little tedious to go through bar by bar - is because I want you to appreciate the
nature of trading. You see the FTSE 100 index roll over into a trading range, where there is little money to be made, except if you decide to
trade the range. In this case trading the ranges means trading for 5 – 7 points, which might not be everyone’s cup of tea . Unless you like
scalping, there are not many points to be made here.
Yes, you will have no way of knowing this in advance so you need to approach trading from
the viewpoint that literally anything can happen, and you need to appreciate that two near
identical patterns can yield very different outcomes.
On the FTSE chart you would perhaps have been a seller right here – a bar or two earlier
perhaps, in anticipation of the FTSE trading down to the low end of the range. Your stop loss
would have been above the most recent high, or perhaps your stop loss would have been
above the highest high for the day.
Either way, the FTSE is not showing signs that a big trend day is looming. Just remember
that anything can happen.
When I look at the FTSE chart we have just seen, I am thinking
thinking “sell short”. I have an early
early
morning top, and I have a trading range within the context of a lower high.
Selling Short the Dax Index
We are back at the German Dax index chart, which is shown on the next page. Have you
made up your mind whether you want to be a buyer or seller? One thing that you could
decide to focus on – on these apparently near identical setups – is the fact that the Dax
index seems to trade somewhat lower from the morning, compared to the FTSE index. The
FTSE index is quite close to the morning high, while the DAX is comparatively weaker, as
measured by how close the two indices are to the morning high. Even though the patterns
are quite similar, the DAX seems weaker.
If you look at the comments within the chart of slide 86, you will see
s ee that I am looking to sell
short the Dax index. You will also see that I am trading a smaller size because I have a string
of trading losses behind me. I cut my trading size down to reflect that I might not be as
“hot” as I could have wanted to be.
At 11:27am I issue a sell alert in the DAX.
I see a double top in the morning, and I see a subsequent trading range. I start my shorting the moment I see a red candle after a double top
within the trading range. I think waiting for weakness before shorting is a great way to trade. It was something Bryce Gilmore once taught me.
I think he used that strategy for a little extra confirmation before he entered a trade. He was a very good trader. I often traded live with him.
He would tell me what he was doing live over the internet. It was quite an experience to hear him swear at the market to move ☺.
I have inserted some comments from the time of
o f the trade. You can see that I make a comment on the fact that the moment the D AX is about
to break through a critical area to the upside, it fails. The buyers have run out of energy. To me it looks as if the Dax is at a critical point. Within
the context of the trading range, Dax appears as if it wants to move lower. The situation we are witnessing on this chart is near identical to
what we witnessed on the FTSE chart. We have higher highs, followed by lower highs within a trading range. We can also see that ever since
we hit the double top within the trading range, the German index has traded lower. The last two bars were red, followed by on e blue bar,
which was unable to get above the high of the previous bar. It might seem irrelevant to you, but to me it is important. It tells me there is
weakness in the market.
While you have very identical situations on the two indices, the outcome is very different. One index is trading within the confines of a trading
range, while the other index is breaking down. My reasoning for showing you these two charts, as similar as they are, is to p rovoke a feeling of
doubt in your approach to trading. Why on earth would I want to plant a seed of doubt in your mind?
Please don’t misunderstand me, I’m not trying to plant seeds of doubt in your ability to
make money. That is not my intention. However, my intention is to instil a sense of
objectivity in your approach to trading. Now I won’t go as far as to say you shouldn’t care
about the outcome. You are welcome to feel a flicker of joy when you are trading well, but
don’t overdo it. You are also allowed to be a little annoyed if you know you made a mistake,
but again, don’t overdo it.
Two stories spring to mind here, and one of them will contradict what I just said. I will start
with that one. Brett Steenbarger once wrote about two traders he was coaching. One was
perhaps a little bit like me. Stoic and calm*. The other, however, was a volcano of emotion.
He would scream and shout at the screen, irrespectively of whether the trade went his way
or not. Brett however could not discern any noticeable difference in their performance. So
maybe a little emotion is not a bad thing.
* I am not always calm! I get royally upset when I am in a good position and some presidential jerk somewhere
sends out a Tweet that lands me firmly on the wrong side of the market. Trust me, I am anything but calm in
those situations.
The other story is about a French trader I read about, who traded for a hedge fund in
London. He was described as an outstanding trader. One client described him as “humble
and arrogant in equal measures – the perfect trader”. The interview went on to describe
that the trader had an absolute conviction on his trades, to the point of being arrogant, BUT
he was equally
equally quick to be humble when the trades didn’t work out well.
So actually, maybe I should tell you to just be you. You should strive for that fine balance
between confidence and humbleness. You need to be confident your trade will work out,
but humble enough to admit when it does not.
Remember this saying: it is not what you know that kills you. It is what you think you know,
but which just isn’t so, that kills you. You are perfectly entitled to think you know where the
market is headed, as long as you have the ability to admit you are wrong before the position
kills you. Below is the outcome of the DAX trade. It went we
well.
ll.
The DAX and the FTSE situation is a case of the “same set-up
set -up – but different outcomes”.
out comes”. Use
this example the next time you are annoyed a trade didn’t work out. It is just a case of “it
didn’t work out this time.”
Hedge Fund with 25% Hit Rate
Before we continue with the chart and their associated comments, I would like to tell you a
story about one of my friends. His name is Trevor. He is a professional hedge fund trader. He
ran a small hedge fund with one of his friends. They had about £60 million under
administration. You may remember him from the comments on page 31 in this document.
The reason why I want to tell you this story is because, as of right now, there is a very good
chance that you have little or no idea about how professional traders trade and think. I hope
the story will be illuminating, and I hope the story will give you a good perspective into how
a professional trader thinks. It should also serve as a reminder that there are many ways to
make money in the market. Your job is not to follow someone, but to find a way that you
like, that resonates with you and who you are
ar e and what you like to do.
The story starts with me asking Trevor a question. I knew that he had been associated with
Tom DeMark and his Sequential indicator. Tom DeMark is somewhat of a legend within the
technical analysis world. I happen to have met him myself at a Bloomberg lunch many years
ago. He seemed like a nice guy, although I had very little to ask him, as I was unfamiliar with
his work. You see, his work was only available to those who had a Bloomberg terminal. The
Bloomberg terminal at that time was some $25,000 a year. Today though Tom DeMark ’s
work is available on many trading platforms, in case you are interested.
As I asked Trevor about the sequential indicator, his eyes lit up. He told me a story about
how him and his friend had decided that there was an edge to be gained from trading the
sequential indicator on a very short-term timeframe in South African shares.
They moved to South Africa and started trading South African shares on a one-minute chart.
I have never heard of a professional outfit, with significant funds under management, trade
on such a short timeframe. However, that is not what impressed me most about the story.
What impressed me the most was how they managed to make money on what other
traders would consider an abysmal hit rate.
Most people believe that you have to deploy a trading strategy that has a hit rate which is at
least better than 50%. Trevor told me that their results varied. There were times when they
were hot, and there were times when they were not. When they were hot, the hit rate
would push the 40%. When they were not, the hit rate was down in the mid -20s.
Overall though, Trevor told me, they had in their hands a tool that generated about 25-30
winning trades out of every hundred trades placed. They were wildly successful. They
traded the fund for a handful of years, and then they returned the capital to the investors.
They had made their money, and as neither of them were spring chickens, they decided
enough was enough. It was time to go home and spend quality time with their families. Had
they been younger, they probably
p robably would have continued.
Now I don’t know about you, but I like the story. It reaffirms the idea that I have about
trading. It is much more important how you think when you trade, than whether your
trading strategy has a hit rate in the 50s or in the 70s or in the 90s. While the story is not
conclusive evidence that anyone can make money trading, as long as they have the proper
money management rules and the required patience, it is a brilliant anecdote of two traders
being able to make money, even though their strategy on paper from a conventional point
of view should not have generated a profit.
So, what was the secret? Well the answer is simple. Although they lost 75 trades out of a
100 trades, those 25 trades more than surpassed in profits what the 75 trades generated in
losses. Trevor told me that they expected to make 25 times in profit what the risk was. He
also told me that when they executed a trade, they expected it to work immediately. So, I
grilled him a little bit on that point.
“What do you mean you expected it to
t o work immediately?”, I said. He said that when they
executed a trade, they expected the trade to begin to work immediately. If they had bought
at say 50, they would not want it to go to 48. If it went to 48, they would stop themselves
out.
It meant they had plenty of small losses. Their back-testing had shown that if the strategy
was to be traded correctly, it meant that it would work immediately. If it didn’t work
immediately, the strategy called for the position to be closed.
Over the next few pages you will find slide 91 to 96. It will show you the whole story of the FTSE 100 index trades. It will also show you the
comments I have made, from the feedback I received from teaching this to students and delegates at talks.
I make a comment on the chart that I think is worth repeating here. The market doesn’t reverse nearly as often as I am betting
bettin g it will reverse. I
think we as traders often see reversals that simply are not there. When you think about all the tools that are available to us, such as Fibonacci
and Stochastics, their purpose is to highlight the potential for a reversal. I am very careful how I use these tools.
What I see here is an index at the top of the trading range. I know the day is bullish, but I am still inclined to sell sshort,
hort, on account of being a
trading range. The market has traded sideways for 35 bars. Why should I bet it is about to change its tune now?
But it did change its tune, and I was handed a loss again. If you saw this differently, I say WELL DONE. I was short and caught. There is truth to
the expression that you should “get to know the product you are trading.” FTSE can be a strange fish to trade. And I am short again. ☺
The chart below is the same index, but I have had to use
us e a different chart package, so this is the reason it looks different from the chart on the
previous page. The circle on the chart below corresponds to the circle on the chart on the previous page. I have shorted the index again. I saw
s aw
failure at the double top. My stop loss is just above the most recent top. I am yet again being made to sweat a position. Welcome to trading!
Finally, I am getting some traction on a trade. A good runner can really make a trading day, especially if you add to your po sition.
The Nature of the Game
Let’s sum this up….
This game never changes, and it never will. Algorithms won’t change the game. Laws won’t
change the game. Because this is an inner game, and you need to spend time – maybe not
as much time as you do on charts – but a huge amount of time contemplating what human
qualities you are bringing to the game of trading.
Moving in the right direction comes from knowledge of yourself and an understanding of the
markets. The game never changes. The players change, of course. We all grow old and die,
and we are replaced with new fresh bloody.
bloody. Sadly, people don’t change, unless
unles s they make an
out--of-the
out
the--ordinary effort to change.
We have a reptile mind, which is not fond of change. “Hey, if it ain’t broke, why do you want
to fix it?” Well, because it is broken. I am not making money how I know I can, so I want to
change that. If that means I have to learn to live under a different paradigm, and have a
different perspective
perspective on fear and hope, so let that be it.
i t.
The Role of Charts
Charts are not the solution, and more than flower is the only ingredient in a cake. Chart is a
vital part in trading (for most traders) but it is MOST CERTAINLY NOT the only ingredient.
Don’t for one second think you can never be a big trader. Big traders started somewhere.
AND big accounts do not have an advantage over you. Take nothing for granted – respect the
market – and keep pushing yourself into the uncomfortable zone. That is where you will
learn most about yourself. It may feel like you are failing, but you are not. You are growing.
I always thought that people who traded with the big
b ig names, like Goldman Sachs, were great
traders. Then an insider told me that is just plain rubbish. Just because they trade with a big
name does not mean they are winners. Goldman Sachs have many clients who bust their
accounts every year.
year. I personally
pe rsonally knew of one guy who lost £5,000,000 with them.
Remember that the very thing the public think will help you, is the thing that will stop you
from being successful, because they think it is all about system and method. It isn’t. It is all
about your inner dialogue. Charts are simply not the solution. They are an ingredient.
You can do this – but this is just like a diet. If your goal is to change in days, you will fail.
MOST people completely overestimate how much they can achieve in a year and are
oblivious to the immense change they can create in themselves and others in 5 years. The
irony is that the 5 years will come and go, whether you do anything or not. You will either
work time, or time will work you. Don’t for one second think that this is purely a game of
learning techniques and strategies
strategies..
Let me give you a taster of what you are in for. It might make you appreciate that your mind
needs working on, to shape it into a mean lean trading machine. Here comes a little mind
game to help you appreciate the power of our involuntary response system.
A Mind Game
The next two slides have been adopted to the book. I am not sure it will work in a book
format, but I decided to print it anyway. It is a mindmind-flexibility exercise. People who take it a
few times report that it gets easier. I have shown you the slides, in English, and the purpose
of the exercise is to go through the colours one by one. You will then notice how dominant
your automatic response system is, even when you know that you are saying the wrong
thing.
The object of the exercise is to name the colour of the shape. When you then come to
naming the colour of the text, our minds will struggle to say “black”, because the word “red”
is written in black.
Now I am sure you found that pretty easy. Turn the page and as quickly as you can, say out
loud the colour of the text. I said the colour of the text.
REMEMBER – I SAID I WANT YOU TO CALL OUT THE COLOUR OF TEXT.
My Experience with Students
It has taken me nearly two decades to understand why “how you think” is much more
important than “how you trade” or “the tools you use”. You may wonder why I didn’t
discover this earlier. The answer is that I didn’t realise it until I started providing training for
people. I would not say that my own career had been a “barn -stormer” either. I suspect I
made all the same mistakes that everyone
everyone else is doing – more or less.
I don’t think I am especially gifted, but I don’t give up very easily. Sure, I gave up on learning
to windsurf, but maybe I was never really into it anyway. I am into trading in a rather big way,
and I have persisted, and I am persisting now.
There must surely be a couple of questions on your mind now.
1/ Why is he saying that he only learned the role of psychology when he started training
people?
2/ Why is he saying he is “still persisting now”?
The answer to question 1 is as follows: I taught some 200 people on my 11-day seminar over
a 4-year period. They were all taught the same, and they all had the same material at their
disposal. They were all subjected to the same intensive training and the same follow -up
web--seminars.
web
Out of the 200 people I have regular contact with some 50 of them. The last 150 have
disappeared off the grid. I don’t know if they are trading anymore, but I suspect they might
not be trading. Did they give up? Was it not as easy as they had imagined? I will never know,
unless I contact them.
The 50 people I have contact with is proof that it is possible to make the financial markets
your playground on a full time or partpart -time/hobby basis. They engage with the music of the
markets on a regular basis. They have persisted, and although their results are varying
according to their commitment and their account size, they are still here.
This group of 50 people have proven to me that it is not enough to simply engage in the
markets from a “technique” point of view. You must understand your own role. Are you
trading from an opportunistic point of view, or are you trading from a point of view of fear or
anxiety?
The group of 50 have proven to me that you can have the best understanding
understanding of a technique,
but if you don’t have a fool proof mental stability,
stability, one that will ensure you don’t get knocked
sideways when the market throws you a curvecurve -ball, then you will without a doubt end up
like the 90%.
It is really true when Richard Dennis said in the interview with Jack Schwager, in the book
Market Wizards, that “we could print our trading rules on the front page of the Wall Street
Journal, and people would still not be able to make money from our techniques.”
I have met some very smart people along the way, people who prided themselves with
having a high IQ and being Mensa members. They failed. They were unable to make a
success of it.
Why do you think that is? Could it be that their intelligence got in their way? Could it be that
all their life they have grasped and understood matters quicker and easier than normal
people, and now they were faced with a problem which required them to look inwards?
inwards? The
market is not an equation to be solved. It is not a conundrum that can be mused over during
a casual conversation with a friend. It takes a lot of introspection to understand why your
best intentions is not enough. To succeed you have to accept that how you normally handle
“pain” and “discomfort” will not suffice.
This leads me perfectly into question number 2: Why am I saying that I am “still persisting
now”?
There is a really easy way to answer that. A way that will make you understand it instantly, in
the form of an analogy: When you lose weight, and you have done so successfully, can you
go back to eating the way you did before?
Of course, you can’t. You would fail and you would put on the lost weight again. Trading
discipline is not a oneone -off course or a oneone-off newsletter, or a oneone-off book, or a oneone -off
session with your local therapist. It is a lifelife -long devotion to your profession. If you do that,
you will be rewarded with riches. If you don’t, you will “put on the kilos again”.
again”. Discipline is a
muscle, and it needs to be nurtured constantly, like physical muscles. Otherwise, you will
develop mental atrophy.
Thinking In Scenarios
Have you ever come across the expression of “thinking in scenarios”? Instead of thinking in
terms of patterns or ratios or “overbought “and “oversold”, you are thinking in terms of
“cycle behaviour”.
behaviour”.
It is people who drive a market up or down. They do so for a million different reasons and
time perspectives. Well, people are rather predictable in their behaviour. Don’t be offended
o ffended..
I am too. We all are. However, if you are the observer of your habits, you are like the
captain of a ship. You can direct at your will your behaviour. If you are not, then you are
drifting through life.
People in the financial markets are hard workers and they work hard to keep their place in
the markets. Of course, there is a natural attrition rate in the trading industry, but
remember, your job is not to worry about the others, but to figure out what they are
thinking and act upon it.
Very few people know that although the markets move through phases of expansion and
phases of contraction (bull markets and bear markets), the ratio of winning and losing days
for stock indices is 50/50. This is the Dow Jones Index closing prices – illustrated on a chart –
over the last 30 years.
You can see the distribution of winning and losing days is identical. What are the
implications of this chart? The Dow Index may have the best day or the worst day ever, but
the day after, anything can happen. It would be wrong to assume that the market will
continue what it did, statistically speaking.
It reminds me of 24 th December 2018. The Dow fell 500 points, while the world was celebrating the festive season. On the 26 th December,
when the Dow opened again, after the holiday, the index had its best
bes t point day ever, rallying 1100 points.
Hypothetical Questions
Testing a hypothesis in a market can be quite an interesting and stimulating exercise. Sure, it
can also lead you to chase ideas that don’t
don’t produce what you are looking for. What are you
looking for? Anything that can uncover a “behavioural tendency”, anything that can give you
an insight into a “pattern of behaviour” which can give you an edge.
Some of the questions I have asked myself are : How often does the Dow “gap up” or “gap
down” in a year? Is there any truth to the “As Wednesday goes, so too goes Friday”? Is there
a rhythm to the markets – 5 days on, 2 days off? How often is Monday the low and Friday
the high? Does it help to know Fibonacci as a day-trader in Dow? Is there any merit to the
“strong Friday, strong Monday”? How many days a year are “trend days”? Is there any merit
to “what Monday starts, Wednesday continues”? Is there any truth to the 32 -calendar day
cycle?
Here are some of the questions I would like to answer for you today. The research is
conducted over 256 trading days in the Dow Jones index. During the time period I
investigated, the 256 trading days, the market went through some explosive moves up and
down, as well as settling into narrow trading ranges.
Some Random Sample Questions
1. If Thursday is higher than Friday, then what does the following Monday look like?
2. If you only traded “extended bars”, would you make money?
3. How often is a low or a high made in the first 30 minutes of the day?
4. How often do gaps occur? Do they always fill, as the saying goes?
5. How often does the market have trend days?
6. How do you trade a trend day?
7. Are there common denominators between strong* trend days?
8. Is there support for the comment that strong Fridays means strong Mondays?
9. If Tuesday is lower than Monday, then what does that mean for Wednesday?
These are some of the questions that I have asked myself and have set out to answer. The
reason should be obvious. If I can gain a deeper understanding of a pattern in the markets,
which shouldn’t even be there, at least not to the naked eye, then I have gained an edge
and a deeper understanding of how the markets trade.
Let me illustrate it with an entirely hypothetical example: what if you could prove with a
high statistical probability that whenever a Wednesday coincided with an even numbered
date, Thursday always gapped up in the Dow. Now I know this is a ludicrous example, and of
course there is no truth to that hypothesis at all, at least I don ’t think there is, but it sure
would give you an edge knowing this. You would most likely go home with an overnight
position on the long side, hoping that the market would gap up the day after.
As I said, this is the hypothetical example, one that is a little silly. However, some of the
things that I have uncovered also seemed silly on paper but once I started researching it,
they turned out to highlight something that wasn’t visible to the naked eye.
For example, I discovered that if Friday’s trading was u nable to trade above the high of
Thursday’s trading, then the probability of Monday the following week trading below the
levels of Friday were above 85%. That is the kind of statistics that blows my mind. It gives
me a much deeper understanding of how to trade under certain circumstances, and that is
what I want to share with you now.
I’m going to start off with an example which unfortunately didn’t yield any spectacular
results. This happens. It would be nice if every single idea that you decided to test, every
single hypothesis you decided to expend time and effort to uncover, yielded an amazing
edge. Unfortunately, this is not always the case.
How often is Monday the high/low of the week?
It isn’t often that Monday marks the high of the week or the low of the week. In a moment,
after we have gone through this initial research, I will show you a much more important
pattern. For now, I will state the facts. Over the last year, Monday has marked the high of
the week, or the low of the week, 31 times, in the Dow Jones Index.
31/52 = 60%
This information by itself is not particularly helpful. However, say you prepare for trading for
a Thursday, and you see that Monday is so far the highest day of the week, could that help
you?
Is Thursday special?
Let me rephase the question to make sure you get the proper context. Imagine you are
preparing your trading plan ahead of the market open on a Thursday in the Dow Jones
index, and you see that both Wednesday and Tuesday traded below the high made on
Monday. Would that in any shape or form influence the way the market trades on a
Thursday?
If the markets are truly random, it would probably not mean anything. I didn’t expect to find
a pattern either. Nevertheless, I did the test and I was quite surprised to see the result of
the research.
The results I share with you is the result of hundreds of hours of manual testing. It means I
go through many print outs of charts. I am certain I could do it much quicker if I had a
programmer to do the testing for me. However, while I am checking for data, I also take in
other pieces of information.
If Monday is the high, how will Thursday fare?
What I have asked myself here specifically is this question: If Monday so far is the highest
traded point for the last 3 days, i.e. Monday Tuesday Wednesday, then how often is
Thursday going to trade below the low of Wednesday?
I found, out of the 256 trading days (about 65 weeks), there were a total of 25 times, when I
was confronted with this possibility, i.e. Monday was so far the highest point of the week,
and Tuesday and Wednesday were weaker than Monday.
Out of those 25 times, the Dow traded below the Wednesday low a total of 21 times. To me
that is a significant piece of information. Let me show you some examples, and some close
calls.
21/25 = 84%
Monday is the high of the week, by the time we are finished with trading on the Wednesday. The theory then states that when this hap pens,
the odds are high – 84% - that Thursday will trade below the low of Wednesday.
So, although the close on Wednesday was strong, the market still fell on Thursday.
A similar example where Monday is the high of the week, by the time trading starts on Thursday. The Dow index then goes on to trade below
the low of Wednesday.
I really like the example below, because even though Wednesday was stronger than Tuesday, prices were unable to get above the highs of
Monday.
On the chart below you can clearly see that Thursday traded below the lows of Wednesday.
The next chart, below, is a different example, one that highlights the fact that even though Thursday was weak, the market actually rallied all
day. Yes, the statistics worked, but unless you had been short from Wednesday evening, you would not have made money from the short sid e
on the Thursday.
I should make sure at this point that you understand that I am only showing the Dow from the NYSE open until close. I call this the “Regular
Trading Hours.” I am not showing the Dow market outside of those time frames. My argument is that this kind of testing can uncover patterns
which will give you an edge as you prepare for the trading day. In this case, as you prepare for the trading day on a Thursday, you may want to
consider that it is highly likely that the Dow will trade below the lows of Wednesday.
Here is an example that failed. The decline on Wednesday
Wednesda y was severe, but there was no follow through during Thursday.
The Weekend Effect
Does the weekend make people forget?
I mentioned earlier that I work on “scenarios” which I then test. Another scenar io that I
have dreamt up is the idea of weakness going into the weekend. Specifically, what happens
to “Monday” if the previous Friday trades below the highs of Thursday?
What happens when we start out trading on a Monday, and the previous Thursday’s high
was higher than Friday’s high?
Over the last 52 weeks, there were 21 instances where the price action on Friday was
unable to trade above the highest point of the previous day, Thursday. I then looked at what
happened on the following Monday. If there was a holiday on the Monday, I would view the
price action on the Tuesday.
Considering the random nature of the markets on a day by day basis, there shouldn’t be a
pattern, and if there is, I have found an edge to exploit. I was surprised to find that on 20
out of the 21 occurrences, the Dow
Dow traded lower on Monday, often lower than Friday’s low.
Let me show you some examples.
I am not in the business of deluding
d eluding people, so here is an example where it does not work.
Monday did not get below the lows of Friday.
And here is one I traded earlier in August 2019. I went home short over the weekend –
always a very risky strategy – and I was rewarded for it (this time!).
I assume you notice that there are often gaps associated with the Thursday/Friday/Monday
pattern. Gaps are an inevitable part of trading life. I would like to discuss gaps next.
Gaps in the Dow Jones Index
Gaps are common in the stock index markets. A stock closes on one day at one particular
price, and then news is released about the stock. The market will bid up or offer down the
stock of the open the next day. That leaves a “gap” on the price chart.
How many days did the Dow gap in the last year?
Common knowledge dictates that all gaps get filled because they are uneconomical for the
exchanges and unhealthy for good “price discovery” in the market. Out of 256 trading day,
how many days did the Dow make a meaningful gap of more than 10 points up or down? I
have ignored gaps of less than 10 points. The answer is 206 days.
In other words, most days the Dow index would make a gap – 80% of days to be exact. This
information is not particularly interesting by its own merit. I need to dissect this result.
The questions I asked were directed at developing trading setups. I wanted to know how the
market reacted to gaps.
1. How often does the Dow make a gap and this gap is then filled the same day?
2. How often does the Dow make a gap, which is not filled on the same trading, but
within the next two trading days?
3. How often does the Dow make a gap which is not filled ove
overr 3 trading days?
Out of the 206 days where Dow made a gap of more than 10 points, it closed the gap on the
same day on 120 occasions.
120/206 = 58%
There is a 58% chance the Dow will fill the gap on the day. There were 86 times it didn’t
close the gap on the same day. How many times did it close the gap in the next 2 trading
days, if it failed to close the gap during the same trading day of the gap?
The answer is 42 times.
42/86 = 49%
I can now conclude that gaps in the Dow will either close on the day or close within the next
2 trading days on 162/206 = 78.60%.
Did you know that there are 78 bars of 5 -min duration during the regular Dow index trading
trading session? If the markets were truly random, each
one of those 78 bars should have exactly the same probability of being the high or the low of the day. However, this is not the case. You are
much more likely to see the high or the low of the day in the first 30 minutes of trading. I have compiled some stats for you below.
The Good and the Bad Trades
I would like to take you through a handful of slides from a trade that I executed.
executed . Admittedly,
it is a winning trade, which is a little bit of a cliché, and quite predictable as well. The ego
has a tendency to never want to portray ourselves from a weak side. Therefore, you will see
two examples, one of which is a winning trade, and one of which is a losing trade. I think it’s
very important that you get a balanced perspective of trading.
I certainly don’t want to be the person who contributes to the enormous database
dat abase of wrong
information surrounding trading. It is not an easy task to make money trading.
At the end of the day, you are not trading against some higher intelligence form. You are
simply trading against the best and the brightest. They are people like you, who wants to
make a living from trading.
Most of the people we are trading against, or with,
w ith, are institutions. I don’t think that makes
our job any easier or any harder. Institutions are after all run by people and algorithms are
created by people.
Sure, some have more manpower than you have. Computers don’t get tired. However,
you’re not looking to catch every single move in the market an
anyway.
yway. You are hoping to be in
the market long enough to make a great living from trading, but you are happy to close your
computer down at night. You have the ability to walk away and to be able to say enough is
enough. You don’t have to make a market like a market -maker, and although there is
pressure on you to make money, I can assure you that trading from an institutional point of
view isn’t without pressure to perform as well.
I will now take you through the slides for the trade I executed.
This is slide 132. On this chart the Dax is in a downtrend. I’m making a comment on the chart that if there are buyers around, they haven’t
been able to exert their strength particularly well. All we have seen so far is one or two bull bars on the five -minute chart.
At this moment in time, I have two scenarios to select from. I can buy the Dax because it is a
double bottom. The risk is probably
p robably relatively small, because I can put a stop loss just on the
opposite side of the most recent low.
The odds of success on this particular trade is most likely not great. The market is after all in
a downtrend, but my risk reflects the chances of success. I may not have a very high chance
of winning the lottery, but the cost of buying a lottery ticket reflects my risk. If I lose, I lose a
pound or a dollar. If I win, I am most likely going to become a millionaire. So the risk versus
the reward is compelling, although I am not one to buy lottery tickets in the first place.
Alternatively, I can sell short the Dax, because I have a philosophy that states that I must
keep pressing the trend. The trend today is down. Do you recall the slide that I showed you
of the statistics of the Dow Jones over the last 30 years? Well, those numbers hold true for
the Dax as well. Dax may very well be in an uptrend on the daily chart, but right here right
now, on this five minute chart, the trend is very much down. This is the trend that matters
to me.
The problem with executing a short position at this moment in time is not that you are not
trading with the trend. The problem is that finding a place for your stop loss is a trickier
proposition. Let us go through the scenarios that are available to you:
1. You can place a stop loss just above the high of the most recent bar. Your risk is tiny,
but you are almost certainly going to get stopped out.
2. You can also place a stop loss just above the high of the last swing high some 12 to
15 bars earlier. The odds of getting stopped out now is smaller than before, but the
flipside is, you now have more risk.
3. You can place your stop loss above the highs of the day. The chance of getting
stopped out now is relatively small, but if you do get stopped out, you will suffer a
loss which is proportionally
p roportionally high.
4. You could also trade without a stop loss. Then there is absolutely no chance that you
will get stopped out. I don’t recommend that you trade without having a stop loss
somewhere.
The next five-minute bar is a bear bar, and it closes at its low. The bulls are looking to buy the double bottom, while the bears are pressing for
the trend to continue lower. This pattern you are seeing here should lead to more selling, it should lead to lower prices.
I don’t know if I made that clear above, but I am short this market. I am fully aware that the
burden of proof is on both sides. It means that even though the market looks negative, this
can very quickly change, if the bears take their foot off the accelerator.
Training an Unorthodox Way
The way I teach my students and the way I train myself is to show charts where you don’t
see the full story. I only show a few bars at a time. In fact, most of the time I only reveal one
bar at a time. While the trend is lower, the last 10 bars have overlapped, and the market is
not trending lower.
What you should notice on this chart is what happens on the fourth last bar. When a market
has a lot of overlap candles, or bars, but it is within the context of a bull trend or a bear
trend, and the market then makes a new high or a new low, which quickly reverses, this
makes me very suspicious.
If I at this point am not already in a position, this is what could make me jump into the
market. In this short position I am getting concerned that this market is ready to move
higher, maybe temporarily, maybe initiating a new trend higher. The odds of it happening
are small but seeing a market that makes a new low after a sideways range, only to
immediately be followed by three bull bars,
ba rs, is no longer looking so bearish.
I traded a setup similar to that today in Sterling Dollar. I think I should come up with a fancy
name for this setup. Either way, fancy name or not, this setup is a “mis“mis -direction” move. I
have included a “before” and an “after” chart below.
The setting was as follows. Sterling Dollar had traded sideways throughout the night. The
date is the 25th September and Boris Johnson, the sitting Premier Minister is in trouble. The
Supreme Court of the United Kingdom has ruled that his suspension of Parliament was
unlawful.
Some news or other pushed the Sterling Dollar higher initially. However, the very bearish
looking red bar that followed is a clear indication that no one is buying Sterling Dollar. The
red bar completely engulfs the previous bar’s body, and it closes right at its lows, below the
low of the previous two bars.
Anyway, I am getting ahead of myself here. Let me show you the DAX chart first. Then I will
show you the Sterling Dollar chart.
I am sorry to jump from one instrument to the next, and then jump back again. I hope you can follow my reasoning for doing so. This is the
chart of Sterling Dollar. It shows a good Sell Short set up. The set-up dictates for a sell short position immediately. The risk can simply be
determined to the point where this market shows strength again. I would assess that point to be above the high of the bar just a moment
earlier.
The outcome was favourable. When you are in a winning position the real work begins. You need to consider when to add to the winner and
when to move your stop loss, and when to close the trade. All these decisions are on top of when to get into the trade. Many argue it is a lot
harder to exit a trade well than to enter a trade well. I have to agree with that opinion.
We are back to the DAX chart. The next
n ext bar is not a complete surprise. It is not threatening the bear case either, but of course at this point my
position is losing. When you are watching this chart here, you have two options. You can sell short, hoping that the trend wi ll resurrect itself,
and the market will push lower.
The odds are probably good here, because we have a micro trading range, and we have
reached the top of that range.
If you sell short here, you have to consider where to put your stop loss. You can put your
stop loss some arbitrary number of points away, or you can place your stop over the
secondary top, or the highest top to the extreme left of the chart.
The further your stop is away from your entry point, the less risk you have of getting
stopped out, but you risk more of your capital. It is as simple as that.
Alternatively, you can buy the Dax. If you buy the Dax, you are trading against the current
trend, but your risk is relatively small, especially if you bet on the Dax going up to the high of
the day.
The problem I have right now with being short the market is not that I think I am necessarily
wrong. However, I think there might be a good chance that the market is going to make me
sweat a little more.
Over the next few pages
p ages you will see the charts in their full size. I have annotated them for
you.
As you can see, I haven’t put any comments on this chart. I purposely decided to give you an opportunity to make up your own mind. I know
you can glance to the next chart, but if you were confronted with this chart during the trading day, would you be bullish here, or would you be
bearish here?
If I had seen the previous chart, I would sell short immediately. I think this is a bearish
pattern. The last bear is a bearish bar, and it is longer than the bars that comes before it. I
call that an “expansion bar”. What I find amusing is what happens over the next 12 bars –
which is an hour’s worth of trading.
The market goes into a tight range. This kind of trading range is enough to take the
enthusiasm out of even the most alert day trader. The market just goes dead. There is even
a saying, that springs to mind here: “don’t short a quiet market”.
And to add to the worry and insult, the market then begins to move higher again.
Just as the Dax is testing the double top - the top of the trading range - we begin to see the sellers come in again. This bar below – the last bar
– is again longer in length, thus indicating more conviction and more volume, and hopefully a more determined move lower.
“Wig” is another word for “tail” on a candle. The DAX has made a low that has not been seen for some 25 bars.
These kinds of bars, the last three black bars, are very often indicative of an acceleration in trend, or a trend reversal. I would not hesitate to
sell short here, if I was not already short. I would add to my short position here too.
What I would like you to be aware of on this chart is that the market moves from being in a
trading range into trending. During the trading range there are many candles or bars that
overlap. Once the trend begins the bars from an isolated point of view begins to look as if
they are freestanding.
This is my favourite setup. This is a situation where I would become aggressive in my
shorting. I would add to my winning trades, as the market prices lower. The reason why you
are adding to your winning positions is because you are reinforcing a positive behaviour.
You are not adding to a losing position. You are not taking half your profits either. You are
pressing the winners. You are pressing the trend.
The reason why I brought this example to you is because I want to show you, in a tedious
and drawn-out way,
way, how taxing it can be on one’s patience. You had the advantage of
sitting with a printout in front of you. You do not have to sit for an hour in front of a screen,
observing the market do absolutely nothing.
A Set-up Which Failed
The previous trade was a good trade. There was no way of knowing that in advance. You
hope for the best and you assess what the market has to offer you. The previous trade made
good money. The next trade does not fall into the “good money category” even though it
was similar in many respects.
Stock indices tend to be correlated. This correlation can provide opportunities. One such
opportunity played itself out in the DAX and it is shown on the next chart. The DAX index
was in a downtrend on this particular day. I had a chart of both the Dow index and the DAX
index, side by side, on my screens.
This pattern is easy to understand once you “get it”, but the explanation of it is a little less
“easy” to get across.
1. The Dow is making a “new high” within the context of a down -trend. It means that
even though the Dow is trending lower, it managed to get above the high of the last
counter-trend high.
2. The Dax index also tried to make it above its recent counter-trend high, but it fell
hopelessly short of achieving that goal.
My conclusion is that Dax is very weak, and I want to sell short the weak index. You could
argue that I have traded one index using information from two indices. That would be
correct. I am shorting the Dax index because it didn’t manage to make up to or above its
most recent swing high, while the Dow did.
Hopefully you should be able to see that the DAX makes a lower high two bars before the current bar shown, while the Dow Index (in the black box
inserted) actually makes a new high above the previous high. In other words, two correlated assets are moving in tandem up and down during the day, bu t
the Dax is weaker because it is unable to make it above the most recent high, while Dow did. I call this “index divergence”.
However, this trade would go on to test my patience in a major way.
Eventually I was stopped out.
So, You Want the Money?
Earlier in the book I wrote the following words:
“Atrophy is not just a bodily concept. It iiss also a mind concept. You need to strengthen that
mind of yours by repetition. I’m going to provide you with a brilliant way of getting control of
your mind. I will present that idea towards the end of the book.”
The time has come to follow through on that comment.
Accountability
I have a certain trade style. This trade style is responsible for my financial well-being. The
trade style does not come natural to me. My natural trade style is that of a sscalper.
calper. I can and
do make money from scalping, but from experience I know that the big money is made from
running and aggressively adding to positions.
Running positions when I want to take profits is a mental obstacle that becomes easier once
I am mentally tuned into what I want to achieve. It is a question of living out the philosophy
of how you want to trade.
To illustrate this, I invite you to let me take you through a trade. After I have done that, I will
take you through how I prepare for a trading day. I think today is a perfect day to illustrate
my routine. I am tired. I am not well rested in body and mind. I stayed up past my normal
bedtime, because I wanted to see how Donald Trump reacted to his impeachment
investigation. In short, I am not all “singing and dancing”. I wish I was, but you can’t control
every aspect of your life, no matter how hard you try to prepare.
Mohammed Ali once said that the fight was won or lost far away from witnesses – in the
gym, and out there on the road, long before he danced in the ring under the spotlight. His
point was that it might seem he was born and destined to dance in the ring, but Ali knew
that it was his training that created the illusion of dancing in the ring. I like that quote
because it reminds me that our trading success is the result of our commitment to the
outcome, we want to create for ourselves.
So here I am, on a wet dark Thursday morning at 5am, going ove
overr the trades from yesterday,
like the one shown next.
next. I can’t stress this enough. It is not what we do every now and then
that defines our lives. It is what we do all the time. I find that to be true in everything.
everything . In life,
in relationships, in business, and in trading.
The reason why I go over my past trades are two-fold.
1/ I get to see if I have made a mistake or if my discipline is becoming weak.
2/ I get warmed up for the trading day ahead.
I would like to provoke a thought response from you, while you read this. I want to set the
scene and then ask you a question. There is no right or wrong answer. There is only a right
answer for you. It is just a question for you to think about.
Yesterday I was short the Dow. I have illustrated this on the previous chart. It shows my
entrance, my add-ons and my exits. At one point I am plus 200 points on the position. The
Dow index, however, violently reverses, and my position ends up with zero. Those are the
facts. There is no pretending that I got out at or near the lows. I was plus 200 and I got
nothing at the end of the trade.
After the trade was completed, I had some people contacting me, asking me various
questions, and suggesting I should have taken profits. I accept that it must be tempting to
point fingers, when you have all the facts in front of you, after the fact. However, when you
are sat in the trade, it is an entirely different proposition, and that is where it is good to
have a philosophy to one's trading.
As you are going to read this in weeks and months from now, I need to set the tone for the
trade. I do that by showing you what I saw the moment I went short.
On the next page you will see exactly what I saw, when I went short. I am aware that there
is a higher low right behind me, but I decide I want to sell short the double top. It is as
simple as that. I am not making it more complicated than it is. There are no indicators to
guide me. There are no moving averages to confuse me. There are no Bollinger Bands or
Keltner Channels or whatever else traders will put on their charts.
Although this is not the right time to talk about this, I will just spend a few lines on the
matter. I do not use indicators, because all indicators or band etc are made up from the
three building blocks of the market: Price, Time, Volume.
I don’t need to see a distorted image of the reality, when I have the reality right in front of
me!
So now you know what I saw. Here is the question I want to ask you.
Scenario 1
You are short the Dow - like yesterday - and you are plus 200 in open profit - but the market
reverses and you get nothing for your effort.
HOW DO YOU FEEL?
Scenario 2
You are short the Dow - like yesterday - and you take profit on the spike lower. You are
happy. However, Dow continues lower for another 400 points? Your profit, the 200 points,
would have been a 900-point trade.
HOW DO YOU FEEL?
Do you remember what this whole manual is about? It is about trading the proper way, by
acquiring the right kind of mindset for it. It is what I wanted to know 20 years ago, if
someone would have told me. My argument is that I would rather be short and experience
the pain of seeing a lot of my profit disappear, than I would want to be short, take my profit,
only to see the market move much further in my favour. That would cause me much more
pain, than the pain I would get from being stopped out for very little profit.
I associate more discomfort with the prospect of missing out on a good move in my existing
position than I receive comfort and joy from closing a position
p osition with a profit.
As I said, there is no right or wrong. It is just a philosophy to trading. There are many
nuances to the example above. I hear people say
# "I could jump back in again"
# "you can't go broke
b roke taking a profit"
I accept there are nuances, but how you answer this question will define the kind of trader
you are.
There is nothing wrong with taking profits, but the art to trading is not so much the entry as
it is the exit. There was no way of knowing or anticipating that the Dow would reverse as
violently as it did. Those who say they took profits down there would be the same people
who would take profits at other times when the market will continue lower and they would
be scratching their heads, wondering why they are not short.
My trade was true to the moment, and after the fact, we are all perfect traders. I think it is
dangerous to think you cannot go broke from taking a profit. If you are anything like the
90%, you will have a tendency to run your losses longer than your profits.
By telling yourself it is ok to take profits and telling yourself that no one ever went bust from
taking a profit, you are probably acting from a perspective which is based on fear rather
than opportunity. If your profits are smaller or the same as your losses, then trading will
never really become the thing you want it to be. You literally have an opportunity every
single day, on every single trade, to practise and strengthen your “trading muscle”. Just
don’t expect it to be easy, if you are anything like the normal 90%.
Your focus should be to build a level of consistency, not in trading, but in thought. If you
don’t have a place where you train that consistency, a routine to counter-act the
“normalities of thinking”, then that muscle will weaken.
God, I sound like a drill sergeant, shouting at the new recruits. I assure you that I am far
from perfect myself, if that is any help, but I train with an awareness of what my weak
points are. By being aware of my natural tendencies, by being aware of what my
weaknesses have been and still is, I may be able to recognise it in “real“real -time” and have a
chance of building new neural pathways that facilitates my new behaviour.
b ehaviour.
Expertise Comes with Experience
Last night I watched Roger Federer play Stefanos Tsitsipas at the Swiss Indoor semi-finals. I
will readily admit that I admire Roger Federer, and I watch him whenever I can. I watched
him play Rafael Nadal in the Wimbledon final in 2007 and I have been a fan ever since. It
was the greatest tennis match I have ever seen.
What I noticed more than anything was his patience and his aggressiveness. In the final
throes of a challenging match for both gladiators in London that evening I saw Roger
Federer eye an opening in the armour of Rafael Nadal, and when he did, his demeanour
became aggressive and focused like a laser beam. The parallels to trading are uncanny.
Roger won 51.08% of all the points played.
As I sat watching the young Tsitsipas and the older Federer battle it out, I was battling with
how to finish (or even start) this chapter, the final chapter in the book. After the match was
over, I sat down trying to write. My mind was blank though, and I went to bed and fell
asleep. I think the last thought I had before I fell asleep was if it was even possible to
describe what goes on in my head
h ead when I am trading.
I woke up during the night and the first thing I became conscious of was fear. Specifically,
how I had trained myself to trade bigger size. I will explain this in a second. First I want to
dismiss some common misconceptions about reaching a goal.
Motivational Talk
I am not a trained psychologist. I have no formal training. I have read a significant volume of
material on behavioural patterns, including depression and anorexia. I have also read my
fair share of self-help books, written by people who are most certainly not psychologists.
Their use of anecdotal evidence is frightening, in particular the notion that behaviour can be
changed by talking positively to oneself.
You would think that the annual ritual of making promises to oneself on New Year’s Eve
would put an end to the ludicrous notion that positive self-talk has an ability to change
people’s behaviour, but apparently not. The idea we can become profitable traders and let
profits run and cut losses purely by repeating a mantra are as ludicrous as believing in the
tooth fairy. Yet people do it, even though there is no research that supports this argument.
In my thirties I read a number
nu mber of books by inspirational authors. Napoleon Hill and his “Think
and Grow Rich” was one of the first I came across. Then there was Zig Zigler on audio tape.
He had quite an enigmatic way of telling stories, which I enjoyed. Then of course there was
Tony Robbins and his Unlimited Power and then his Awaken the Giant Within.
I enjoyed the books so much I decided I wanted to attend one of these inspirational
workshops. The first one in my town was a “workshop” with Tony Robbins. I use the word
“workshop” in a very liberal sense, because I run trading workshops too. When I run
workshops, I train at the most 10 people at a time. That is why I call it a workshop. You
literally are there to be personally trained by me. The Tony Robbins workshop had some
9,000 people attending.
In hindsight I am not sure it was the best idea I ever had. I have quite a low tolerance
threshold to hype and bullshit. I am just not a fan of the adulation of a guru. I am all for
guidance and inspirational education, but you are not going to reach someone personally in
a crowd of 9,000. It was a waste of my money. Damn, I could have bought a lot of books,
really useful
useful books, for the £700 I paid for that ticket. There is an inherent “time” problem
with self-help
self-help gurus. I see it in my own industry. If you can’t promise change in a person
within a very short time frame, you are not going to sell your product. Change has to be
instant to sell – even though it is bullshit.
Course headlines like “Become a millionaire trader by attending our weekend workshop” or
“How to cure depression instantly” are catchy, and they sell. I accuse them of promoting a
short-cut ideology, where success is somehow achievable through hacks and cheap
gimmicks.
There is simply no amount of chanting that made Roger Federer into who he is, or his upand-coming super-star
super-star opponent Tsitsipas in last night’s tennis match. Chanting “Now I am
the voice,
voice, I am a force for good, I will lead and not follow” will not make you good at
anything. You might get psyched up, and you might be flooded with feel-good hormones,
but they will wear off, and that is when your true self emerges. If you don’t have a
compelling
compe
lling argument for change, your commitment will falter like a New Year’s resolution
on the 2nd or 3 rd of January. I tell my son that a compelling argument is that thing that will
propel you forward long after your enthusiasm has worn out.
The Change Process
The decision to change can be instant, but change itself is a marathon, success is a
marathon, achievements are a marathon, and anyone who has truly achieved success in life
has treated their goals as such. I find documentaries much more inspiring than attending
hyped up mega-events featuring toothpaste smiling gurus. I want to think for myself and I
want to achieve my goals by stealth, not by making big arm movements.
So, I diverted from the original theme of this chapter, by writing about inspirational gurus
on a big stage, so that you understand that trading success is not a one-off exercise but a
commitment to excellence. However, commitment is not the only ingredient in the recipe of
a successful trader.
Take for example Stephen Hendry. He is not a trader, but he sure is an inspiration to me.
Stephen Hendry is a retired snooker player from Scotland. For those of you who don’t know
what snooker is, here is a quick description of it: think of a traditional sized pool table; now
make it twice as big; now add twice as many balls as a traditional pool game, and then
appreciate that the balls needs to be potted in a very particular order. Welcome to snooker,
an almost impossible game to play with any degree of competence
co mpetence and success for a novice.
Yet Stephen
Stephen Hendry and Ronnie O’sullivan and the likes of them make it look so easy. I
watched a documentary about the arrival of Stephen Hendry to the global snooker stage,
and how he got there. He trained and he trained. He put himself in the most difficult
situations during his practise sessions, until he was able to get out of those situations more
than 7 times out of 10. His training sessions lasted 6-7 hours a day, every day.
It is October 2019 as I write this. I flew to London last week to give a speech on scalping at
the London Investor Show. Explaining scalping is exceptionally difficult and I had brought a
video of me scalping over an afternoon session in the Dow Jones. I thought it would help to
show how I do it, and thus perhaps bridge the theoretical instructions with the practical
applications.
After I showed the video, I had people comment on how easy I made it look. Well, I said, it
has taken me many years to make it look easy. I had to overcome many challenges. If I
sound like Donald Trump now, you have permission to shoot me. I am not trying to glorify
my achievements. I am doing my absolute best to make you understand that trading is so
much more than just watching a chart and placing a trade.
Fear or Hope?
I have worked 20 years in the CFD industry. I have seen too many people come and go. They
arrived in the hope of easy money and they left considerably worse off. They simply never
stood a chance against the much better capitalised and much better prepared colleagues in
the marketplace. I would have gone the same route, had it not been for a lot of luck and
meeting the right kind of people at the right time. I hope to God that this book comes to you
at the right time.
The key turning point for my trading was when I began working on my fears. Let me put it in
a way you will understand instantly: I can make you a very competent technical trader very
quickly, but if you begin to tremble with fear the moment you increase your trading size,
you will never fulfil your true potential.
If you are normal, you will experience what I experienced. If you are normal, you will
experience what everyone else is experiencing. Why don’t we start there? Why don’t we
start at that point where most people fail?
Most people can acquire the necessary technical knowledge to trade well. Most people can
afford a good trading course or a good trading book. If you can’t, then email me. I am very
happy to give you the material you need to get a good technical foundation. You just need
to bring your own commitment. So let us assume that you are a good technical trader, and
let us assume that you are patient as well. Let us assume that when you are trading small
size, you are able to hold on to your trades, and you even know how to add to the winning
trades.
If 90% of all traders are unsuccessful, you can be damn sure they are unsuccessful for the
same reasons. There are not that many reasons why people fail. Those 90% can be put into
relatively few categories.
1. They are technically inept.
2. They are technically competent, but they are impatient.
i mpatient.
3. They are technically competent, but they are fearful when the profits increase.
4. They are technically competent, but they are fearful when the stake size increase.
5. They are technically competent, but they are hopeful at the wrong time.
Trading psychology is a bit of a cliché. So are the many sayings surrounding fear. Fear is an
essential ingredient for survival when you are trapped in a burning building. Fear doesn’t
make the building burn any less or any slower, but your mind sends a signal to your body to
pump adrenaline into your blood, which in turn will make you think and respond at a
heightened level.
“Out of control” fear is called panic. In a panic situation you are unable to think and you
tend to act from reflex. People have literally died from smoke inhalation just inside the door
of a burning building, because they panicked. The door was unlocked, but instead of pulling
the door open, they pushed and pushed until they were overcome from smoke and lost
consciousness.
I said that I think trading psychology is a bit of a cliché. To me the reality is that psychology is
not about fixing a problem. It is not about treating a problem. It is about making changes
through the expansion of people’s mind and perception. I knew I had to deal
dea l with my fear of
losing open profits before I could begin to make more money trading. I used fear and
disgust for that.
I have a good knack for making short-term predictions on a chart. I have used this skill
extensively for my scalping and short-term trading. This skill was developed through looking
at a 5-min chart every day for years.
However, it really is tedious to trade “singles” all day long. A “single” is going for a few
points here and there. You may disagree as long as there are enough of the “s ingles” in your
trading. I contend though that there is more money in “sitting” than in “doing”. There is
more money in taking a position and running it than constantly moving in and out of the
market.
Then what do you do with that knowledge when you realise
real ise that you can’t run positions?
You begin to think deeply about the issue of the problem. You meet another trader who
does not have this problem. You listen to his philosophy. You hear what he is thinking when
he is in profitable positions.
I run a risk of opening myself up way more than I had intended to, when I started writing
this book. It feels like I am letting every man, woman and child peek into my inner workings,
with all its flaws and insecurities. How did I make the change when so few seem to be
unable to do so? How do I control behaviour and sustain motivation to change? The answer
is many-fold, but the primary driver may surprise you. I became disgusted with myself. I
became utterly disillusioned and disgusted with myself.
Disgust
Many years ago, I had girlfriend. She was my first real girlfriend and I was her first real
boyfriend. We were young, and we were very much in love. My girlfriend was a little round
bodily, which I found very attractive. She, however, did not like her body image, so she
began to diet. She had dieted before, but she had always failed to sustain a weight plan.
Now she was in love, and her motivation shifted into another gear. The weight loss became
dramatic, quite dramatic, and it led me and her family down a path that pains me to write
about.
Anorexia is a serious psychiatric disorder, but (and forgive me here for using a tragic story to
illustrate a point about behavioural change) it is an interesting motivational phenomenon.
We are hard-wired to eat. We need no training to eat. Yet somehow this hard-wired pattern
is overridden by a social
s ocial motivation: the desire to not b
be
e fat. This force, this motivation is so
strong in patients with an eating disorder that it proves to be immune to both medical and
psychological treatment.
What is the basis for this powerful force of motivation? It isn’t chanting, and it isn’t positive
self-talk. As I understand it, my girlfriend was motivated by disgust. She was disgusted by
anything that looked and felt fat and overweight. This force was so strong it could keep her
away from a hard-wired pattern of eating food.
As humans we are driven forward by forces. Those forces can be born out of a desire to
move away from something, or they can be born out of a desire to move towards
something. I happen to be a person who is primarily driven towards a goal in order to move
away from something.
In my belief system and in my experience, “away orientated” goal setting is a much stronger
motivational force than “towards orientated” goals. You c an test this for yourself, using a
simplistic scenario. What would compel you to lose weight more: a picture of you where
you are in a perfect shape or a picture of you where you are obese?
I asked my circle of friends what they would prefer, and all agreed that they would find the
“obese” picture a stronger motivator than the “perfect” picture, although a few did
comment that they would probably still like to have both. Fair point.
I believe that disgust is a much stronger emotion than joy and happiness. We all have
reasons to be happy every day, but we tend to forget that. However, disgust is not
something we are likely to forget. You won’t forget the rotten milk you drank by mistake,
nor will you forget the client of yours who had such repugnant breath that you nearly threw
up. That is a powerful motivator right there.
Ed Seykota once said that everybody gets what they want from the markets. When I read
that, I dismissed it. I wanted to win, but I wasn’t, so I clearly wasn’t getting what I wanted.
End of story. It annoyed me that he had said that. The thought of never being able to trade
profitably consumed me. I had spent so much time studying, researching, testing,
formulating plans, calculating ratios that I really didn’t know what more I could do.
If you look around in your life, you are likely to be able to find examples of dramatic
changes, induced by disgust. What gets a person to finally commit to a goal is reaching the
point of disgust. I got disgusted with my trading over a long period of time. The pattern was
always the same: trade like a wizard, become over-confident, lose the account. I became so
sick of it. Positive
Po sitive intentions, sticky notes on my trading monitor with mantras, and self
self-help
-help
exercises don't nearly possess the motivational force of physical disgust with oneself.
If disgust can turn eating into a behaviour to be avoided, and if disgust can turn an
alcoholic's drinking into a thing of the past, then disgust can also turn you into the trader
you would be proud of looking at in the mirror. I am sorry if I have shocked you. Those of
you who know me well will probably be taken back by my extreme steps to ensure my
pattern of behaviour in the trading arena is exemplary. I am not going back to the roller
coaster ride I was on in my early trading days. I was so disgusted with the amount of money
I lost. I was embarrassing.
We are most apt to change a pattern once we become truly disgusted by it. Would you
continue to do business with someone who violated your trust and your contract with him
and stole your money? No, you'd become so disgusted with such a dishonest character that
you would cut all ties with him.
Well, that person is you when your own patterns violate your contract with yourself and
cause you to lose money. Once you become truly disgusted with your own patterns, you'll
shun them altogether.
A trader is losing and continues to lose because he doesn’t want to change. Change is hard
work. I began plotting my trades on the chart when the day was over. I put a marker where
my entry was and where my exit was. It was horrible. It was like incriminating yourself over
and over. I was disgusted with my recklessness.
I had to face up to the fact that I was actually an awful trader. I was like the guy who could
recite the entire technical analysis syllabus for the Master Technician exam, but I could not
stop myself from
1. Overtrading out of boredom.
2. Overtrading out of anger and a desire to get revenge.
reve nge.
3. Impatient trading – jumping the gun.
4. Trading against the trend – trying to buy the low in a move.
5. Fearful trading – by cutting my winners short because I was scared the money would
disappear.
6. Constantly averaging in lower and lower – i.e. adding to losing trades.
Do you have any idea how horrible it is to come face to face with your own demons? Have
you ever truly opened yourself up to criticism? I remember vividly standing up at a meeting
saying, “My name is Tom Hougaard, I am an alcoholic.”
It was horrible. It was demeaning. It was belittling. It was so embarrassing. You are
outwardly a success. You drive an Audi R8, a £100k car. You have two university degrees.
You are admired by your peers, loved by your clients, and yet you are an abject emotional
wreck.
It is like being stripped naked for the whole world to see your fat ass, your tiny willy, your
saggy boobs, your cellulite, your scars, your spots, your pimples, your swellings and
whatever else that happen to our bodies. It is absolutely everything you don’t want, and you
have a hall full of eyes watching you.
But the truth is an entirely different story. You break
b reak yourself down, so that you can survive,
so that you can get reborn into the person that you really want to be. You strip away the
proverbial wallpaper of the rooms in your castle so that you can start over. Fresh start.
Clean canvas. The walls are ready to be decorated how you want it. It is exactly the same
process elite soldiers are trained. They are pushed beyond their breaking point. Then they
are put back together again, stronger, wiser and with an unshakable faith in their own
strength, their own abilities, their determination to get a job done, no matter what.
You know as well as I that what I just described is extreme. No one in their right mind likes
to expose themselves like this. It is why we get defensive. It is why we fight our corner. Our
identity is being questioned. Call it ego, call it what you want, but no one likes having their
intelligence questioned. It is a lot less painful to continue down the known path than to
stop, evaluate, and turn around.
There is the slightly nagging pain of continuing down the known path, but you soothe
yourself by reminding yourself that you are not alone. There is power in numbers, even
when everyone is wrong. Or you stop, and you evaluate, and you turn around, and the pain
is relentless because everything is new, and you are naked, and exposed.
And yet that is power! There is power in being honest. There is power in standing up and
saying to the world and yourself: this is who I am, I don’t like it, I hate it, I am embarrassed
by it, but it is what it is. It is a clean slate. It is a fresh start. It is like a forest fire. It clears the
debris. New growth can start.
I am not talking to you because I think you want to make a bit of extra cash from trading. I
don’t care if you make a little or a lot of cash. I am talking to you because you are the 90% ,
which probably should be called the 99% and you want to be a 1%. I get it, and I want to
hold your hand until you don’t need my hand anymore.
The successful traders are consistent in their approach and they work hard to stay
s tay there. My
systems and approaches
approaches evolve but they don’t change. There is no need to change once I
have a method that resonates with me. That is the hard part of trading; to find a system that
is compatible with who you are.
The Drifter Mind
How our minds work is fascinating. Our brains can be our best friend or our worst enemy.
My mantra is written on virtually every page of any presentation I give. Control your mind –
control your future.
You have to want to do what you do. You can live a life which is authentic to your soul, or
you can live a life which is what you think people will want you to live. You can be authentic
and own your life and take responsibility for everything you do. If you don’t take ownership
of your life, you are not the boss. You have to take full responsibility for everything that you
do.
Why would you live a life any other way? Why be subservient? You must be the master of
your own kingdom. But brace yourself. You will be forced to make many difficult decisions,
and you cannot count on your mind to back you up,
up , if your determination wanders a little.
You can't just walk through life or into things with your eyes half open. You have to know
where you are going, and your eyes have to be fully opened. You have to take possession of
your life, but as I said, you can’t
c an’t rely on your friends or your family or even your own bloody
mind to help you. You have to know your weaknesses, and your weakness is that your mind
will wander.
You will drift. Your mind will drift. It is perfectly natural, unfortunately. The solution is trivial
but powerful. You have to constantly reaffirm your purpose. Whether you mediate, or shave
in the morning, or brush your teeth, there needs to be some period in your day where you
remember your purpose.
I am not a sucker for punishment, but I know I am a person who is compelled more by fear
and disgust than by pleasure. I am more prone to procrastination if you tell me I will
accomplish great things if I behave in such and such
su ch a way. If however, you tell me that I will
lose everything I have worked for, you can be sure I will act. You can be sure I will get off my
ass and behave in the right way.
This is the reason why I start my trading day with the exercise which I call Worst Case
Scenario. I really don’t care about analysing the markets. My eyes
e yes can spot a Fibonacci ratio
a mile away (not that I use it), it can read a chart in a nanosecond, and I will have a good
idea whether I want to be a buyer or a seller. That ability came from the thousands of hours
of chart reading. Thankfully that knowledge stays there.
What doesn’t stay there is my ability to always act in my own best self-interest. My mind
needs constant guidance and direction. I don’t know why that is, but it is. I suspect the
majority of the population on planet earth is put togethe r like I am. They just haven’t come
to realise it, and therefore they drift through life, rather than taking charge of their life. It
doesn’t mean you can’t be financially successful, but wouldn’t it be nice to be both
financially and spiritually fulfilled? Your job after all is that thing that you do the most,
outside of sleeping.
I am a professional trader. I cannot afford to go into the trading ring without being 100%
prepared mind wise. My profession is a mind game like nothing else. If I want to win, I have
to focus on what is important now. So Ed Seykota was right, much to my chagrin. I did get
what I deserved, because I was only good at one part of the game. I was good at the
technical part. I don t like this metaphor, but being good at the technical part of trading is
like being good at putting together a sniper rifle, but what good does that do you, when you
go into combat and you don’t know how to handle yourself.
I have a girlfriend now. She is beautiful. I mean just stunning. There is not a day that goes by
where I don’t compliment her, and there is not a day that goes by where she doesn’t lament
about the size of her ass or her belly. It is quite sad to see the people you love put
themselves down. That is the narrative of the outer world. It will make you feel bad about
yourself, through the comparison of someone who has what you haven’t got, and then you
buy the solution, whatever that may be.
I actively take control of my inner world. I have to give myself enough confidence to
reassure myself that we have enough to go out and kick ass in the markets every day. To
make that challenge even more real, I post my trades for the world to see. I have never
consciously thought about why I do it, until recently, when I was asked. Why do you do it? I
do it because it keeps me accountable. It keeps me focused.
I have been as lost as they come, and the essence of the story was not to inspire you to get
lost, nor is it to evoke sympathy, nor is it to tell a tale of “rags to riches”, but to make sure
you understand that exposing your weaknesses will be a good thing. Your mind is a tool. If
you let it delude you into thinking all is well, you will not get the success you want in trading,
or in life.
I mentioned my girlfriend a moment ago. I remember her going to Weight Watchers. There
was a weekly meeting where you would go and weigh yourself. She didn’t like it when the
scales went the wrong way. That is understandable. Who likes to expose themselves to the
world? Who likes to be weighed and have to admit that you hit the help-yourself
help -yourself buffet over
the weekend pretty hard? Who likes to stand up and admit you failed yet again, and you
drank yourself silly? No one! Who likes to admit to themselves they have yet again blown a
trading account because they are incapable of handling their own emotions? No one!
Losing and failing might be a knock to the ego, but it is rocket fuel for growth. It sounds like I
am trying to write a self-help manual for procrastination, a best-selling inspirational book.
Rubbish. I am describing honesty. When you are honest with yourself, in the company of
yourself, or on a podium in front of 40 alcoholics, or whatever the setting may be, you just
took a step that 99% of the population don’t ever contemplate taking. You already started
the journey to winning.
So, the journey starts with the technical knowledge acquisition and the journey continues
indefinitely with the constant evolving of both the technical and the mental training.
Technical training is part of my day-to-day job, but the mental part needs more dedicated
focus. Otherwise it gets lost in the noise of the outside world. I need dedicated time to
muscle work that brain of mine. Here is the best example I can find for you right now.
Luckily this is a while ago, but it could happen
hap pen any day of the week if I don’t mentally
prepare myself. I short a double top off the open. I am so certain that my research is right.
The market will fall.
I don’t have a problem with the first short position. I have a problem with the 4 next ones. I
could even forgive myself for the last one, because at least I am shorting weakness. This is
unstructured and undisciplined trading. I don’t care how certain I am of something
happening. If it isn’t happening, don’t pursue it as if it is. Showing you is so embarrassi
e mbarrassing!
ng!
This is part of my preparation. It has been the most useful tool to build mental stamina, and
discipline. It reminds me of everything that is weak in me. It reminds me of how my mind, if
left unchecked and untrained, will go on a rampage to seek ex
excitement
citement and gratification.
One of the best ways to increase profits is to do goal setting and visualisations in order to
align the conscious and subconscious with making profits. I use fear to achieve my goals. I
imagine trading a size which even in my mind makes me uncomfortable. I sit quietly in my
bed or in my office. The world is quiet, and if it isn’t, I stick a pair of ear plugs in my ears. I
imagine I am trading, and the market is moving against me. I see myself cut the loss. I
imagine I bought the XYZ, and I see it going my way. I feel the brain sending me signals to
close the position to crystallise the profit. I see myself doing nothing, as I continue to watch
the profit increase and decrease. I see a big profit turn into a small profit. I smile and accept
it, and I move on, telling myself it is ok. I place my brain under as much stress as I can with
imagined scenarios. I am long and the market is going my way, and a sudden news story
breaks the market. I observe my fear shooting through the roof as my P&L turns into a
bloodbath. I see myself closing the positions and going in the opposite direction. I see
myself not getting unhinged just because the market is moving against me.
I have no idea how you are going to react to this. I wonder if you think it is brilliant or maybe
useful but with a few personal tweaks. I wonder. Understand though that I learn visually. I
get a message when I see it visually. If you tell me not to trade against the trend, it will not
mean any more to me than when a cat meow. Show me a chart where my trades are
plotted on, and I am trading against the trend, and preferably repeatedly, then I get the
message.
This is my therapy. This is like seeing a psychologist every morning. I get fired up. The
therapist expands my mind and my horizon. The goal is to remind myself of what behaviour
I want to enact. It is about making changes and keeping the changes.
As I said, I am not sure I really want to publish this. You read about all the negative events in
my life, just so you can make money trading. Well, I am a trader, but in writing this book I
have to become a storyteller too, and if my purpose for writing the book is to make you a
better trader, then so let it be it. I guess I will have to trust that all will be o
ok.
k.
So how can I be so sure this will work for you? Behaviour is patterned. How we think, feel,
and act have a pattern to them, and that patterning is what makes us who we are. The sum
total of our patterns is our personality.
Sometimes our patterns interfere with our goals and dreams in life. They prevent us from
being who we want to be or accomplishing what we want to accomplish. We are sometimes
our own worst enemy, and seemingly we can’t stop ourselves when we are in the moment.
A man has anger issues, and yet
ye t when he becomes angry, he can’t stop himself. A woman
has eating issues, and yet she can’t stop herself when she is in the moment of eating. A
trader is fighting the trend all day and his account is suffering, but he can’t stop himself. He
is simply incapable of turning his position and trade in the direction of the trend. Only
afterwards is he disgusted with himself.
hi mself.
The purpose is not to take away everything that is bad in our lives in one swift move. The
purpose of my warm-up
warm-up is not to guarantee I won’t
won’ t mess up. The purpose is to focus on
what I want to achieve or become, while being mindful of the things that will most certainly
sabotage my goals. The wonderful part is that I am almost certainly guaranteed success if I
avoid the failures. I was guaranteed success with my weight goal if I could cut out all the
coca cola I drank. I just had to be mindful of that, and the pounds began to come off. I didn’t
have to do anything else.
I don’t have to be certain that my trade is going to work out. I just have to be certain I am
mindful of my mind wanting to do things that is not in my own best interest. So I don’t add
to my losing trades. That in itself means I just need to be mindful of the one variable I can
control.
My action in the morning is about changing the patterns that do not serve me. It started by
observing another very successful trader and asking myself what was holding me back from
becoming him? My technical abilities were just as good as his. I don’t think he was
financially much better off than I, but he was seemingly fearless. How do I become fearless
in trading? Do I even want to be fearless?
I came to the conclusion that the trader I wanted to become was patient and aggressive
when the time was right. It was like Federer playing in the Wimbledon final in 2007. He was
patient and then he became aggressive. Now it was a question of reminding myself of that
goal every day, and if necessary, several times a day. That is how habits are built, through
repetition.
As I grow wiser to the ways of life,
life , I realise that there are a lot of truths to John Lennon’s
quote “life is what happens to you while you’re busy making other plans”. We become so
engaged in our day to day life, with responsibilities at work and home that the big picture of
of
our lives stays in the background.
Day after day, year after year we busy ourselves with work and routines, only later in life to
realise that opportunities have passed us by. So the first question to address in a change
process is, "What do you want to change?" Or, stated otherwise, "How would you like your
life to be different?".
I want to dedicate the time to trade well, to combat my natural inclinations that stand
between me and successful trading. I want to prepare my mind every morning through a
series of meditations and visual exercises. I will train my mind to act calmly through
visualising myself in the situations and focus on my breath. I will calmly put myself through
stressful situations to ensure I react how I would want to react, if circumstances were real.
Making changes entails far more than simply engaging in positive thinking or getting positive
images in your head. I didn’t want positive images. I wanted a portrait of dire hell if I didn’t
change. It may seem like a negative state of being, but it really
reall y isn’t. It is immensely positive,
albeit a rather tense way of getting what you want. What is the saying: “the end justifies the
mean”? I have turned conventional thinking on its head. I do so because I know what
compels me more. Roses don’t compel me. Thorns
Th orns compel me to action.
Consider the market itself. It is not so unlike us in its behaviour (because we are it – we are
the market). It climbs the wall of worry, but it slides down the slope of hope. It might be a
Wall Street saying, but it says a whole lot more about humans than it says about the
markets. All I have done is used fear and disgust as my protagonist – my major motivator.
Well, this is it. I am finally at the end of this journey. I hope my experiences and my battles
with the “self” can inspire
inspi re you to find a more fulfilling path in your trading.
So, rather than making a big fuss and a grand closing statement, I simply want to wish you
Godspeed.
Yours sincerely
Tom Hougaard
Examples of my warm-up slides.
[dust jacket]
TRUTH
OF
THE STOCK TAPE
A STUDY OF THE STOCK AND COMMODITY MARKETS
WITH CHARTS AND RULES FOR SUCCESSFUL
TRADING AND INVESTING
By
William D. Gann
____________
Ap
practical
ractical book written by a successful Wall Street man who
who has
proved his theory in actual trading. He writes from twenty years'
experience and gives examples of his rules by the Case System.
This is the only book published covering the investment and
speculative field of Cotton and Grain as well as Stocks. It is fully
illustrated with 22 charts showing plainly the successful method of
trading.
In four books under one cover:
Book I
Book II
Book III
Book IV
Preparation for Trading.
How to Trade.
How to Determine the Position of Stocks.
Commodities, including Cotton, Wheat and Corn.
TRUTH
OF
THE STOCK TAPE
A STUDY OF THE STOCK AND COMMODITY MARKETS
WITH CHARTS
ANDAND
RULES
FOR SUCCESSFUL
TRADING
INVESTING
BY
WILLIAM D. GANN
IN FOUR BOOKS
EMBRACING
The Preparation and Knowledge
Required; Methods of Operating
And Determining Position of
Stocks and Commodities
FINANCIAL GUARDIAN PUBLISHING CO.
91 WALL STREET
NEW YORK.
This E-Book is not to be sold.
It is a free educational service
in the public interest
published by
Gann Study Group
DEDICATED
TO
MY SUBSCRIBERS WHO HAVE ENCOURAGED ME
AND TO THE
THOUGHTFUL STUDENTS OF FINANCIAL ECONOMICS
WHO DESIRE TO FOLLOW
FOLLOW PRACTICAL RULES FOR TRADING
INSTEAD OF GUESSWORK AND GAMBLING METHODS
PREFACE
“Receive my instruction, and not silver; and knowledge rather
than choice gold. For wisdom is better than rubies, and all the
things that may be desired are not to be compared to it.”-- PROV.
8: 10-11.
_______
In addressing you on the subject of investing your surp
surplus
lus
funds, I might state that there is no other subject which I
could select that so closely concerns your welfare and regarding which you might receive valuable assistance from my instructions.
In the United States a stupendous sum, reaching into
millions of dollars, is wasted annually in foolish speculations
and unwise investments. This senseless waste can be traced
to one and only one source,
s ource, namely, lack of knowledge. Men
and women who would not attempt to treat the slightest
ailment, or even adjust so common a thing as a kitchen faucet,
but would hand each difficulty over to its respective specialist,
the doctor or the plumber, will on the spur of the moment
and without the slightest preparation, undertake the investinves tment of thousands of dollars in enterprises about which they
understand absolutely nothing. Is it any wonder then that
they lose?
I offer you suggestions and advice in the science of speculation and investment in the same spirit as the physician. He
would not think of guaranteeing
guaranteeing you perpetual life or insuring you against the common ills to which the flesh is heir.
But in your difficulties he brings to your aid the accumulated
experience of his profession, and a skill
s kill and knowledge which
required years to accumulate and is ready for your instant
use. I do not offer you a beautiful theory which will not
work in practice, but give you invaluable advice, which if
followed, will insure success in practical everyday Wall Street
speculations and other fields of investment.
v
vi
It has been wel
welll said that a writer who writes
writes first for
remuneration and secondly because he believes what he
writes, will never achieve enduring
enduring fame, and that the salesman who does not believe in his goods will never make a
success. I believe in the theory and rul
rules
es that I have laid
down in this book for you to follow, because I have tested
and proved them.
It is my object in this work to facilitate and focalize the
essential principles for practical use. My knowledge comes
from over twenty years' experience, in which I have traversed
the rough and rugged road that the inexperienced trader's
foot must press before he reaches the goal. Hence my object
in writing this book is to give to the public something new
and practical, not theory alone which would fail in practice.
Read this b
book
ook carefully several times; study each chart
and subject thoroughly, and a new light and knowledge will
come to you every time you read it.
If I succeed in teaching only a few to leave wild gambling
alone and follow the path of conservative speculation
s peculation and
investment, my work will not have been in vain and I will
have been amply repaid for my efforts.
W.D. GANN.
NEW YORK CITY,
January 27, 1923.
CONTENTS
BOOK I
PREPARATION FOR TRADING
CHAPTER
PAGE
I. WHAT IS TAPE READING?
2
II. CAN MONEY BE MADE IN WALL STREET? OR
CAN THE STOCK MARKET BE BEATEN?
3
III. HOW TO READ THE STOCK TAPE
5
IV. HOW THE TAPE FOOLS YOU
8
V.
16
HOW STOCKS ARE SOLD
VI. YOUR WEAK POINTS
20
VII. ESSENTIAL QUALIFICATIONS
22
BOOK II
HOW TO TRADE
VIII. RULES FOR SUCCESSFUL
SUCCESSFUL TRADING
28
IX. METHODS OF OPERATING
40
X. CHARTS AND THEIR USE
51
XI. TH
THE SEVEN ZONES OF ACTIVITY
55
XII. HABITS OF STOCKS
59
XIII. DI
DIFFERENT CLASSES OF STOCKS
XIV. HOW TO READ THE TAPE CORRECTLY
68
76
XV. WHEN THE TAPE FINISHES
FINISHES AND
AND GIVES
GIVES FINAL
FINAL
S
SIIGNALS
83
vii
viii
BOOK III
HOW TO DETERMINE THE POSITION OF
STOCKS
XVI.
POSITION OF GROUPS OF STOCKS
88
XVII. GENERAL TREND OF THE MARKET
90
XVIII. HOW TO TELL THE STOCKS IN STRONGEST
POSITION
93
XIX.
HOW TO TELL WHEN STOCKS ARE IN WEAK
POSITION
99
XX. JUDGING FINAL TOPS AND BOTTOMS
103
XXI. NUMBER OF TIMES A STOCK FLUCTUATES
OVER THE SAME RANGE
114
XXII.
CROSSING OLD LEVELS
117
XXIII.
TOPS AND BOTTOMS ON RAILROAD STOCKS
127
XXIV. BOTTOMS AND TOPS ON INDUSTRIAL STOCKS 135
XXV. ACCUMULATION OF LOW-PRICED STOCKS
143
XXVI. HOW TO WATCH INVESTMENTS
146
BOOK IV
COMMODITIES
XXVII.
XXVIII.
XXIX.
XXX.
XXXI.
XXXII.
HOW TO TRADE IN COTTON
152
PROPER WAY TO READ THE COTTON TAPE
158
HOW TO DETERMINE A CHANGE IN TREND
165
THE BOLL WEEVIL
168
WHEAT AND CORN TRADING
170
JUDGING ACCUMULATION AND DISTRIBUTION
ZONES
173
SELECTING A BROKER
185
ix
CHARTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12
12..
13
13..
14.
15.
16a.
16b.
Dow-Jones’ Averages: Yearly Hig
igh
h and Low
66
20 Industrial Stocks: 1896-1922.
20 Railroad Stocks: 1885-1922.
Studebaker Weekly High and Low
77
September 4, 1920, to January 6, 1923.
U. S. Ru
Rub
bbe
berr Month
onthlly Hi
High
gh and Low
Low: 19
1914
14-1
-192
922
2. 84
Conti
ontine
nent
ntal
al Can Month
onthlly Hi
High
gh an
and
d Lo
Low
w: 19
1914
14-1923
91
New York Central Swing Chart: 1896-1922
922
96
U. S.
S. Ind
Indus
ustr
tria
iall Alc
Alcoh
ohol
ol Month
onthly
ly High
High and Low:
Low:
1914-1922
100
U. S.
S. Ste
Steel
el -- 3-p
3-point
oint Moves
oves:: O
Oct
ctob
ober
er 2, 1191
916,
6, to
December, 1917
105
Ame
meri
rica
can
n Sm
Smelti
eltin
ng a
and
nd Re
Refi
fini
ning
ng Mont
Monthl
hly
y Hig
High
h and
and
Low
: 1901-19Monthly
08
Corn
Products
High and Low: 1906-1922107
110-111
Republic Steel Monthly High and Low: 1913-1922.
118
Dow-Jones’ Averages -- Monthly High and Low -20 Railroad Stocks: 1896-1922
128-131
DowDow-Jo
Jone
nes’
s’ Av
Aver
erag
ages
es -- Mo
Mont
nthl
hly
yH
Hig
igh
h and
and Low
Low --20 Indust
strrial Stocks: 1897-19
-1922
136-13
-139
Octo
Octobe
berr C
Cot
otto
ton
nW
Wee
eekl
kly
y Hig
High
h and
and Low:
Low: Nove
Novemb
mber
er,,
1919, to January, 1923
160-161
May Wheat Monthly High and Low: 1895-1922
1895-1 922
174-176
May Wheat Swing Chart: 1895-1922
178
May Wheat Weekly High and Low: April 16,
1921, to January 6, 1923
182
May Daily Wheat High and Low: December 13
to 29, 1922
182
Perhaps one of the wisest things Emerson ever said:
"Many times the reading of a book
has made the fortune of a man -has decided his way in life.
"To use books rightly is to go to them for help;
to appeal to them when our knowledge and power fail;
to be led by them into wider sight and clear
conception of our own."
TRUTH OF THE STOCK TAPE
BOOK I
PREPARATION FOR TRADING
“No man can learn what he has not preparation
preparation for learning,
however near to his eyes is the object. A chemist may tell his most
precious secrets to a carpenter, and he shall be never the wiser -- the
secrets he would not utter to a chemist for an estate.” -- EMERSON.
_______
In 1917 w
when
hen the United States was forced to enter the
war against Germany we heard on every hand “w
“wee are unprepared for war.” Wilson’s period of “watchful waiting”
instead of preparing for the inevitable had at last brought
us face to face with war without being ready.
Lawyers, d
doctors,
octors, engineers and professional
professional men who
make a success spend anywhere from two to five years’ time
studying and preparing to practice their profession before
they begin making any money.
Men enter into speculation in Wall Street without any
preparation. They have made no study of it whatsoever.
They try to deal in something they know nothing about. Is
it any wonder then that they lose?
Speculators a
and
nd investors who simply guess, follow tips,
rumors, newspaper talk and so-called “inside information"
have no chance of ever making a success. Unless they follow
some well-defined plan based on Science and Supply and
Demand, they are sure to lose.
Over twenty years of study and experience places me in
a position to give you a definite, practical set of rules and
instructions which will lead to success if you follow them.
No great success or gain
gain can be
be expected unless a man
is willing to study and learn by past experience. You cannot
get something good for nothing and must pay with time,
money, or knowledge for success.
1
CHAPTER I
WHAT IS TAPE READING?
READING?
Tape reading is a study
study of fluctuations
fluctuations of stocks as they
Tape reading is a study
study of fluctuations
fluctuations of stocks as they
appear on the stock tape and the ability to judge the ones
that
are in a strong
or weak
position
determine
theable
psychological
moment
to buy
or sell. and
We must
also be
to determine the stocks that are inactive and show no definite
trend.
Tape reading is psychological because the mind acts and
is influenced by everything it sees, hears, smells, tastes or
feels. In reading the tape, we are not influenced alone by
what we see, but by what we feel or sense, w
which
hich cannot
always be explained or a satisfactory reason given because
it is “intuition.”
What is intuition? You often hear traders say “I am
buying or selling this stock on my intuition. The best definition I can give of intuition is that it is instantaneous reasoning.
It is that something which tells us when we are right or
wrong before we have time to reason it out. The way to
benefit through intuition is to act immediately, and not stop
to reason or ask why. That is what a good tape reader does.
The tape registers the dominating force currents from
business all over the country. It contains
contains the condensed
opinion of the majority and weighs the hopes and fears of
manipulators, the public, and business men. That is why it
is a reliable guide and business barometer, if you know how
to read it correctly. And here is where the “rub” comes.
The tape tells the truth, if you can interpret it correctly.
Tape reading requires a strong will power and a mind
that, when it once sees the trend of the market, cannot be
changed until the tape shows the change and is not influenced
by news, false rumors, tips, or hearsay. Being able
able to read
the tape correctly and act on your judgment
j udgment is an entirely
different proposition, which I will explain later on.
2
CHAPTER II
CAN MONEY BE MADE IN WALL STREET?
OR
CAN THE STOCK MARKET BE BEATEN?
You have often heard the expression “99 out of every
100 who go into Wall Street lose.” Then one man out of
every hundred must win. Therefore, my answer is that Wall
Street can be beaten and that you can make money by speculating and investing along conservative lines and by trading
in a few selected stocks.
But how are you going to do it? You must
must have knowledge and science. Know! Know !! Know!!! more than
th an
the other fellow or the common trader. Find out how successful men in Wall Street have made their fortunes; then
go and do likewise. Remember that “Knowledge is Power.”
Statistics show that 98 per cent of business men fa
fail
il
sooner or later. Then why do men go into business? Because 2 per cent of them make fortunes out of general business and keep them.
Just ask yourself the question, “Who gets all the money
that is lost in Wall Street?” It does not evaporate; for
every dollar lost some one makes a dollar. Then the way
to make it is to trade the same way the fellow does who
gets what you lose. Remember that every time you buy some
one sells and every time you sell some one buys.
The majority of people who buy stocks lose money in the
end. Why? Because they guess, follow newspaper dope,
fake tips or inside information. They do not make safe
investments; they gamble on 10 or 15 points’ margin. They
nearly always buy near the top, and, of course, nothing can
keep them from losing.
3
4
The general public do not sell stocks short; therefore
they are always wrong in a Bear market. When a man loses
money buying stocks and refuses to sell short, he can always
look back and say “if I had only sold when I bought, look
how much profit I would have made.” Then, why doesn’t
he learn to sell short? (In another chapter I will show you
the proof that it is safe and practical to sell short.)
At the p
present
resent time, there are over 700 stocks listed on
the
Yorkheadings,
Stock Exchange,
and
you20
group
themgroups.
under
theirNew
proper
there will
be if
over
different
If you study the action of all the stocks in one group and
watch them on the tape, you will find it is too much for y
you,
ou,
and that you cannot make money trading in all of the stocks
in any one group, much less by trying to trade in several
groups.
Tape reading requires patience, and the essence and value
of it is concentration. There is no such thing as a man being
born with a mind that can concentrate on 10 things at one
time, much less 700. Then success depends upon selecting
a few stocks and concentrating upon them.
CHAPTER III
HOW TO READ THE STOCK TAPE
The general opinion prevails with the public, especially
especially
among traders outside New York City, that the proper way
to read the tape is to stand at the ticker and watch every
quotation as it comes out. Nothing is more erroneous.
Expert tape readers are very few and far
far between. It
is a study of a lifetime. While the tape shows the trend of
the market, there are so many minor changes and quick
reversals that the average man can not tell whether the big
trend has turned or whether it is only a minor change that
will last a few hours, a few days, or a few weeks before the
main trend is resumed again.
If a trader goes into a broker’s
broker’s office to watch
watch the tape,
he will find anywhere from two or three to a dozen traders
standing around the ticker, all talking from time to time and
expressing their opinions or what they hear on different
stocks. He must also listen to the gossip that comes over
the news ticker, floating rumors from the
th e street, and information about buyers and sellers that comes from the floor. With
all of these disturbances, there is not one man in a million
that can concentrate enough to tell anything about what
stocks are going to do.
Besides, if he is able to pick a winner, and
and starts to buy
buy
or sell, he will be influenced by what someone says who is
standing around the ticker and the result is that he will not
act at the right time. Then it is impossible to beat the
market by tape reading in a broker’s office.
No matter how strong a man's will power may
may be, he is
influenced, consciously or unconsciously, by what he hears
h ears or
sees, and his actions or executions are interfered with accordingly. This is the reason why a few big traders, like Livermore, have a private office with a ticker, where they can be
5
6
away from all outside influences and watch the tape, form
their impressions, and act on them without being influenced
by things they do not want to hear. But only traders who
have a very large amount of money and can devote all of
their time to the market and tape reading can afford to have
an office and a ticker where they can study the tape alone
without interference. The average man
man cannot afford this.
Then it is necessary to know how to read the tape without
seeing it, or without watching it all the time. Market movements of importance, i.e., the long swings, require weeks and
sometimes months to get ready, or for accumulation and
distribution to be completed. There is always plenty of time
to buy or sell one or two days after a big move gets under
way. Therefore it is not necessary to watch the tape every
day, or every hour, in order to determine what stocks are
going to do. It can be read just as easy and better after the
market closes. The tape is simply a record of prices, and if
you have this record of high and low prices made during the
day, you can form your judgments from it.
Market movements depend up
upon
on Supply and D
Demand.
emand.
It requires volume of trading in proportionate large or small
amounts to move stocks up or down. The volume of sales
to the stock market is the same as the steam is to the locomotive or the gasoline is to the automobile. The sales are the
motive power which drives prices up or down.
For example: United States Steel has five
five million shares
of common stock, and it requires a very large volume of sales
to move this stock up or down very much. General Motors
has fifty million shares of common stock and its fluctuations
are confined to a very narrow range, because the buying or
selling of 100,000 shares will not move it more than a point,
if that much, while the buying of 100,000 shares of Baldwin
will often move it up or down five or ten points, because
because there
are only 200,000 shares of Baldwin outstanding and seldom
ever over 100,000 shares of stock floating in the street.
Therefore, in order to understand the meaning of
volume, you must know the total capital stock outstanding
and the floating supply of the stock you are trading in. Mex
Pete for several years has made moves of from 50 to 100
points while U. S. Steel has not moved 10. The reason was
7
that the floating supply of Mex Pete was very small while
the floating supply of U. S. Steel was very large.
Another thing the tape reader must know is the financial
financial
position of the stock, whether it is weak or strong. It is not
easy to frighten investors and traders and start a selling
move in a stock which is generally known to be in a very
strong financial position. Neither is it easy to force a stock
by manipulation to very high levels that is generally known
to have very little intrinsic value. Many stocks, known as
“Mystery Stocks,” which are supposed to have large
large concealed assets, often have big moves up or down because the
public buy or sell on the hope that something favorable is
going to happen or on the fear that something unfavorable
is going to happen.
As a rule, a stock that pays
pays extra dividends or cuts a
melon, is talked about and rumors circulated months and
even years before the actual event takes place. Then, of
course, when the good news comes out, it has been anticipated
and discounted and the stock declines instead of advancing,
as the public expect.
The tape is the great scale in which
which the weight of all
buying and selling is weighed and
and the balance of Sup
Supply
ply and
Demand shown by the loss or gain in prices. When Supply
exceeds Demand, prices decline to a level where Supply and
Demand are about equal. At this stage fluctuations become
narrow and it may require weeks or months to determine
which way the next move will be. When Demand exceeds
Supply, prices advance.
Then how ca
can
n the man
man who stands
stands over the ticker day
by day determine a big
big move before it starts? He can not.
The ticker will fool him once or twice each day while
it is getting ready. It requires time to buy a large amount
of stock when accumulation is taking place, and it requires
time to distribute a large amount of stock at the top. One
day, one week, or one month is not enough for a big move.
Sometimes it requires several months, or even a year, to
complete accumulation or distribution. While this process
is going on, you can keep up a chart of the stock you are
interested in and judge much better when the big move starts,
than you can by watching the ticker every day.
CHAPTER IV
HOW THE TAPE FOOLS YOU
The tape is used to fool traders, for often when stocks
look the weakest on the tape, they are the strongest as
accumulation is taking place. At other times when they are
booming and very active and appear the strongest, they ar
aree
really the weakest, because the insiders are selling while
everybody is enthusiastic and buying.
The man who watches the tape daily is influenced
influenced by his
hopes and fears. He can not help it. Suppose that the
market has been strong all day, and the very stocks that he
is interested in are gradually moving up, when suddenly,
around 2:30 P.M. the market starts to break. It goes down
for fifteen minutes and active stocks are off a point from the
highs all around. It does not rally and by five minutes to 3,
or closing time, they are off another point. The volume is
heavy and he decides that something is wrong and he sells
out at the close. The next morning stocks open up from
1/2 to 1 point. Why? Because the selling in the last half
hour the day before was simply the result of profit taking
and all of the traders who were scared sold out at the close
rather than carry them over night, the result being that the
supply of stocks to be offered next morning was limited,
and the reaction had in no way interfered with or changed
the main trend.
One great
great mistake the man makes w
who
ho watches the ticker
all the time, is that he trades too often. He gets in and out
sometimes several times during the day, and each time he
pays commission. If he buys or sells higher or lower each
time, even though he has made profits on his trades, he is
increasing the percentage against him. A man who makes
300 trades in the year, or, say,
s ay, one for each market day, must
pay an average of 1/2 point getting in and out. It cannot
8
9
be done for less. Then 1/2 point
point on 100 shares 300 times,
is 150 points for expenses during the year. Where is the
man who can make money with such a handicap? Suppose
a man makes one trade each month, or twelve trades during
the year. His expenses are only six points against the
scalper’s expense of 150.
Another important fact traders overlook is that the more
times a man gets in or out of a market, the more times he
changes his judgment. Therefore, the percentage of his
being wrong increases. In a bull
bull or bear market, there are
often big reverse moves opposite to the main trend, from
which big profits can be made,
made, but a man can not catch them
by jumping in and out every day. He must wait until
until he
has a real cause and sufficient reasons, based on facts, before
he makes a trade. If he jumps in or out on hope or fear,
he will not only make losses, but he will miss the real opportunity when it comes. The daily moves generally mean very
little to the main trend of the market.
OVERNIGHT BUYING OR SELLING ORDERS
As a rule, out-of
out-of-town
-town buying orders accumulate
accumulate over
night. If the buying orders are in excess of the selling,
stocks will advance for the first thirty minutes, while the
public’s buying orders are being filled. Then a reaction will
take place. Prices may go lower than they were at the
opening; drift along in an uncertain way until about 2 :30
P.M. when the professional crowd on the floor decide to
even up; then either advance or decline for thirty minutes,
according to whether the floor traders are long or short.
Remember that the professional floor traders
traders have no
commission to pay. You can buy a stock that goes up 1/2
point; then sell out and you are just about even, after paying
taxes and commission, while the scalper on the floor makes
1/2 point, because he saves the commission.
The newspapers on Sundays usually carry a review of
the market for the past week and the public, after reading
all of the news, send in their buying and selling orders for
Monday morning. If the orders are very heavy, they will
influence the market for thirty minutes and sometimes one
10
hour. After this, the trend of the market will be the opposite.
A market
thatthe
haslatter
been part
strong
during
the
week
or especially
during
of the
week
and
closes
strong
on Saturday, is likely to open strong Monday and finish the
advance in the first hour on Monday. Therefore, be very
careful about buying stocks on Monday morning’s strong
opening. Public buying orders which accumulate over Sunday are all executed Monday morning and as soon as this
demand is supplied professionals start selling and the market
has a reaction in proportion to its condition and position at
the time.
Even if it is a bull market
market and going higher you will be
able to buy cheaper on Monday afternoon or Tuesday when
the professionals are hammering prices down after the public
buying wave has been satisfied.
The above rule is rever
reversed
sed in a declining market. If
stocks have been weak all the week or during the last two
or three days of the week, and close at the low on Saturday,
forced selling by the public will come in Monday morning
and cause lower prices during the first 30 minutes to one
hour. After this pressure is off, the market will rally. Therefore, it pays to sell on a strong rally Monday or to buy on
a weak market on Monday morning. This rule of course
applies to normal markets.
FALSE HOPES
Another point, when a man is long or short of the ma
market,
rket,
and has a loss, it is but human nature to hope that the trade
will go his way. Suppose
Suppose he is called for margin early
early in
the day. He tells his broker that he will either put up the
margin before the close or sell out his stocks. The result is
he waits all day, and the market fails to rally. The last hour
comes, and hope gives away to despair and he sells out at the
close, which causes the market to close weak and near the
bottom, because hundreds of people
people are doing the same thing
at the same time.
The same rule applies to people who are short of the market. Stocks start advancing early in the day, and they wait for
11
a reaction on which to cover. They look for a reaction around
the noon hour, but it fails to come. Again around 2 :00 P.M.
P .M.
the market is stronger, and they hope for a reaction, but the
advance continues, with the result that near the close all of
the shorts get frightened and buy in their stocks. Of course,
the market closes on top and is left in a weak technical position, and the next day the reaction comes.
For a trader to succeed, he must
must study hu
human
man nature and
do the opposite of what he finds the general public does.
The first day of a decline no one worries much, because they
consider it a natural reaction. A market will often start
declining on Wednesday. On Thursday the decline continues,
and the traders begin to sit up and take notice and think they
had better get out on the next rally. But Friday comes, and
no rally; instead stocks get weaker. Why? Because people
who would not sell on the first
first or second day of the decline
begin to sell on the third day, and by Saturday the whole
crowd gets scared and decides to get out and not go over
Sunday. The result is that prices will break badly in the last
hour
and
close
near
bottom,
while
the first
wiseindication
trader or tape
reader
who
knew
histhe
business
sold
on the
of
weakness the first day and did not wait until everybody was
selling.
This same rule applies to declines and advances lasting
weeks or months. The longer the market
market goes one way or
the other the greater the buying or selling in the last stage,
because hope or fear increases as the market advances or
declines, and it is hope and fear, not sound judgment, that
most people trade on.
STOCKS DISCOUNT FUTURE EVENTS
The stock mar
market
ket is an accurate barometer
barometer of business
conditions.
Stock
prices areconditions.
nearly always
to twelve
months
ahead
of business
Firstsix
bond
prices rise;
second stocks advance; third comes business boom. The
same happens in a decline. Stocks will be down six to eight
months while business is booming, because they are discounting the future business depression.
Market movements, that is, the main swings, are the
12
result or effect of causes which, as a rule, exist long before
the effect is known to the general public. In most cases, news
is discounted before it comes out and seldom has much effect
after it is generally known. Either good or bad news that
is expected usually falls flat as far as the effect on the market
is concerned.
For instance, an extremely good or bad quarterly
quarterly or
annual report on a stock comes out and the market does not
go up or down on it for the reason that it is not news to
those on the inside. They knew it thirty to ninety days beforehand. Therefore, when the public gets the news and acts
on it, it is too late, for those on the inside who “know” have
already discounted it.
If bad news comes out suddenly and stocks start
start selling
off in large volume, then it is safe to assume that the market
is going lower, that the public is long of stocks and the
insiders are out. If good news appears and stocks start
down, it shows that it has been discounted. Your charts
will show whether the market is in a period of distribution
or accumulation.
SUDDEN UNEXPECTED NEWS
Sometimes sudden, unexpected events happen
happen unforeseen.
unforeseen.
For instance; the earthquake in San Francisco in
i n 1906 was
wholly unexpected and unforeseen by either the public or the
insiders. It caused great loss and damage to property, and
the market started breaking immediately after it, and declined for several weeks until it discounted the damage done
to the various properties affected in that territory. When
news of this kind comes out, that the market has not had
time to prepare for, its full weight and effect must be felt
after it comes out.
On February 3, 1917 Germany
Germany suddenly and without
warning declared the U-Boat
U-Boat war against the United S
States.
tates.
The stock market had not fully discounted this event because
neither the general public nor the insiders knew it was coming.
Once the news was out, everyone knew that it meant that the
United States must enter the war against Germany. Therefore, it was bad news which had
h ad not been fully discounted
13
and the market had yet to measure its effect. The result was
that stocks opened off anywhere from 5 to 20 points, but
supporting orders had been placed and the buying by shorts
s horts
afforded enough support to stop the decline in the first hour
of trading.
When
of making
this kinda occurs
and aitmarket
opens
away
upaormove
down,
wide range,
i s always
is
well
to sell out long stocks or cover shorts and wait, because in
doing this you are following what the
th e big traders do. On
February 3rd, after you saw the market open down on
heavy selling and you watched it for thirty minutes and saw
that prices did not get much lower than the opening, it would
be an indication that prices had opened at a level wher
wheree there
was support and that a rally would come. If you were short,
the proper thing to do would be to cover at the market, then
wait and see how stocks acted on the rally that day a
and
nd the
following day. If the rally was small and stocks again
declined easily and began to break the low levels made on
the day the bad news came out,
o ut, it would be an indication that
prices were going lower.
ELECTIONS
You will find it of great va
value
lue if you will go back over
the years of Presidential elections and study the action of
the market and the formation of it on the chart in the early
part of the year and again just previous to the election and
following it. In most cases you will find that the event,
whether considered good or bad, was discounted beforehand.
There is seldom ever a presidential year but what at
some time there is a scare and severe decline. Public sentiment gets mixed. They decide the Democrats are going to
win and the market starts in to discount it. However, it
makes no difference whether there is a Democratic president
or a Republican. If stocks have been distributed and are in
the hands of the public, they will go down during a Republican administration. We have had just as many panics when
a Republican president occupied the White House, as have
occurred when the Democrats were in power. It all depends
upon at what level prices are, and the condition of affairs
14
throughout the country. This will be plainly registered by
the tape and your chart will show it. If not, wait until you
get a clear indication.
An extreme decline occurred in July and August, 1896,
which was known as the “Silver Panic.” The whole country
got scared and decided that Wm. J. Bryan was going
goi ng to be
elected and that his silver dream would become a reality.
Investors and traders sold stocks regardless of value and on
August 8th, the average prices of industrial and railroad
stocks reached a level which was the lowest from that day
until the date of this writing.
In 1912, w
when
hen Wilson was
was elected ffor
or the first time, the
stock market advanced in September and October previous
to the election, because the Republicans were convinced that
the Democrats would not win. Therefore, they did not
create any scare to start the public selling stocks. Of course,
after Wilson was elected, which really was an unexpected
event to investors who believed and feared that the “d----Democrats” would ruin the country, they then began to sell
stocks and discount the Democratic administration. The war
followed in 1914 and completed the liquidation and made
it
evenwould
worse have
than taken
it would
have
been.
But this
decline in had
stocks
place
even
th ough
though
a Republican
been in power, for the good and sufficient reason that prices
prices
were high, and that stocks had passed from strong hands
into weak, and the general condition of the country was not
such as to warrant the existing level of values at the time of
the election.
AFTER-ELECTION RALLIES
When any important election, either presidential or
otherwise, takes place, and the market has pretty well discounted it, but the general public throughout the
th e country
figure that the event is favorable, they, of course, send in
buying orders the next day after election and stocks are
strong
this
demand
satisfied.
It and
will see
always
pay you
to wait until
two or
three
days is
after
election
whether
the
market continues to move in the same direction after election
as it did before. Stocks were strong the first day after
15
Wilson was elected the first time, but
but the decline started
promptly after public buying orders had been filled. Always
be careful of buying on top of after-election rall
rallies.
ies. In the
same way, if stocks open off and decline the first two or three
days after election, be careful about selling them, as it may
be only the public selling because they are scared and the
insiders may support the market and start an advance.
CHAPTER V
HOW STOCKS ARE SOLD
When new companies are formed and capital is needed,
the stock has to be sold to the public, and there is no difference in the method of selling stock and the method used by
business men in selling their goods. A good business
business man
advertises his goods and that is what the manipulators do.
When they wish to distribute stocks and get them into the
hands of the public, they use the newspapers in every way
possible to advertise the stock. Their fluctuations are given
wide publicity and everything
everything possible is done to attract the
public.
It requires w
wide
ide fluctuations and activity to entice the
public to take a hand. They may pay very little attention
to a stock selling around 40 when it is only fluctuating 5 or 6
points in three or four months, but when this same stock
reaches 150 and begins to fluctuate 5 and 10 points each day,
everybody talks about it. They see great opportunities for
making big profits and begin to trade in it. The result is
that the wide publicity and advertising induces the public to
buy all the stock at a high price. Then the decline starts.
They hold on and hope, and nothing much is said about it
until the stock gets near the bottom, when all the bad news
comes out and everybody talks about it.
THE WISH IS FATHER TO THE THOUGHT
When you read the opinion of any man, whether it be
a newspaper writer, the president of some big bank or the
head of some large corporation, consider and give due weight
to the fact that when he talks optimistic, he has something
to sell to the public and is not likely to talk in a way to hurt
his own business.
16
17
Many years a
ago
go there was a Mr. B. in Wall Street who
gathered a lot of information and sometimes wrote for the
newspapers. He was well known and often visited different
brokerage offices, and traders
traders eagerly sought his opinion.
They would say “Mr. B., what do you think of Union Pacific?” He would reply: “I think it is going up; anyway,
I hope it does, for I am long of it.” Now, that was his
reason for thinking the stock would go up. He owned some
of it, and his hope and wish was that it would advance. He
certainly did not feel like telling the other fellow that he
believed it was going down. If he did, he might start a
selling wave that would hurt his own interest.
OVER-OPTIMISM
If you have read the newspapers carefully over a long
period of years, or if you will go back and look up records,
you will find that prominent
prominent business men who are heads of
large corporations, are nearly always optimistic. Panics
come, and depressions lasting from one to five years, with
stocks declining anywhere from 25 to over 100 points, yet
these men are always optimistic. Do you believe that they
are so far wrong in their judgment that they can not see the
trend at the time? Certainly not. They have goods to sell.
They must conceal it from the public and talk for their own
interests.
I can not reca
recall
ll the time when the officials of the U. S.
Steel Corporation were ever pessimistic. Yet, the stock has
passed its dividend several times and suffered severe depressions, which as far as the records are concerned, were all
unforeseen by the directors.
It is a good thing to be an optimist, but whether it be in
business or the stock market, it is the truth that
that helps and
protects, and not false hopes and unwarranted optimism.
Hopes will not keep the margin call away from you in a
panic. The only way to avoid these uncomfortable conditions is to go with the trend of the market and not against it.
The newspapers, as a rule, are against printing anything
of a pessimistic nature. In 1920 and 1921 when I issued
my forecast on general business conditions, I had based it
18
on the truth and scientific facts. It showed that very depressing conditions were coming in 1920 and 1921, but most
of the newspapers refused to publish my predictions. Yet
they were all fulfilled with remarkable accuracy.
Forewarned is forearmed! It is certainly better to tell the
public before depressing conditions start that they are coming and let them prepare for them, than to wait until the
crisis is on and then tell them -- as the newspapers do -- what
caused all the trouble. Every effect is the result of a cause,
and the cause must exist long before the effect can be seen
by the general public. The proper thing to do is to deter
determine
mine
the cause and act on it, for if you wait until you can see the
effect, loss in the stock market is certain.
TRADERS APE
After a man has been around Wall Street for twenty
years and watches the actions of traders and listens to what
they talk about, he will be convinced that the origin of man
was certainly from the monkey or the ape, because the
average trader simply apes some leader, repeats what he
heard some great man say, believes it and applies it to his
own case to increase his hopes or assuage his fears.
The late Mr. Morgan once said, “A man who is a bear
on this country will go broke.” I have often heard traders
in a brokerage office talking bullish and buying, say,
s ay, when a
conservative man would warn them that bulls sometimes
make money and bears sometimes make money but that a
hog never makes anything: “Don’t sell stocks short. A man
who is a bear on this country will
will go broke.” When Mr.
Morgan, whose opinion as a business man is worthy of
respect, made this statement, he was not talking about the
stock market at all. If he had been, he would have said
that the man who is a bull at the top of markets, which occur
every few years, is sure to go broke, and the man who is a
bear at the bottom is sure to go
go broke.
If traders would only use a little “horse sense” and do
their own thinking, stop aping and swallowing
s wallowing all the newspapers tell them and analyze the reason or the motive behind
the men who talk optimistic at the top and pessimistic at the
19
bottom, they would make a great deal more money. To
make success in the stock market you must do your own
studying and thinking. Be neither a bull nor a bear, and no
matter whose opinion you follow, you will be much better
off if you can verify it by your own study of charts, which
show the conditions as revealed by the tape, and the thoughts
and opinions registered by the majority, and not the opinion
of one man or one group of men, no matter how strong they
may be.
The Standard Oil interests might be very bullish, and
talk bullish. They might be honest and conscientious about
it, and might be backing up their
th eir opinions by buying Standard
Oil stocks, but the tape will register the buying and selling
of all the
people
in the
United
and ifofthat
supply
and
demand
shows
thatStates,
the selling
theforce
manyofis
greater than the buying of the few, the stock will decline until
it reaches a level where demand exceeds supply.
SIGNS OF THE TIMES
The Bible says “There is a time for everything.” All
the laws of Nature teach this. There is a time to sow and
a time to reap. The four seasons of the year teach us that
there is a reaping time and a sowing time, and that we can not
reverse this order of Nature’s laws. Man does not try to
grow oranges on Greenland’s icy mountains; neither does he
expect to cut ice from the tropical rivers in Florida, because
it is out of season, time, and place. It is the same with the
stock market. There is a time to buy and a time to sell, and
when this time comes, neither bunches of bears
bears nor bevys of
bulls with hot air, hope, optimism,
optimism, extreme pessimism, depression or bad reports, can force prices above or below the
zones of Supply and Demand, out of season. You must learn
to go with the tide, and not against it. Discern the signs of
the times, and do not get caught in the undertow when the
tide is flowing out. Those who hesitate and are late in
buying or selling in the last stage invariably have to take
losses.
CHAPTER VI
YOUR WEAK POINTS
Man know thyself! It has been well
well said that the greatgreatest study of mankind is man. Experience is the only school
in which most of us learn. Therefore it is necessary to
analyze the cause of our mistakes much more carefully than
our successes. A great success, either in business or the stock
market, is not attained over night.
“The heights by great men reached and kept
Were not attained by single flight,
flight,
But they while their companions slept
Were toiling upward in the night.”
Mushroom growth is followed by mushroom decay. A man
who suddenly becomes wealthy over night or by a master
lucky stroke in the stock market, seldom keeps it. It is the
old story: “Easy come, easy go.” The man who makes a
success and keeps his money is the man who, after years of
experience, has profited by his mistakes and schooled himself
against his weak points.
To make a success in speculation, you must master yourself. You will find that you are either
e ither a natural born Bull
or a natural born Bear, i.e., you either always hope and
believe that stocks will go higher than they do, or you hope
and believe that they will decline lower than they do. Then,
you must discount your weak points in trading, and know
that a lot of your judgment is
i s not judgment at all, but the
result
yourLearn
natural
for one
or the of
other.
to weakness
see thingsor
ininclination
a normal state
andside
do
not exaggerate either on the bull or bear side.
Some men will find that they have too muc
much
h nerve; are
are
too hopeful; therefore they overtrade. Others will find that
they lack nerve or courage and are afraid to buy or sell
20
21
enough
at the
right
time.
Theseso
weak
must
come. You
must
learn
to trade
thatpoints
there will
bebe
nooverhope
and no fear when you enter the market. You enter it as the
result of deliberation and upon what you believe to be the
proper basis for buying or selling. But you must remember
that you can be wrong and that the way to protect yourself
against wrong judgment is to place a stop loss order at the
time you make the trade. Then you do not have to hope it
will go your way or fear that it will go a
against
gainst you, for you
know that your loss is limited, and if the loss comes, you will
be in a position to make another trade later which will p
probrobably prove profitable.
CHAPTER VII
ESSENTIAL QUALIFICATIONS
PATIENCE
Patience is a virtue, especially in the stock market. Acquire it if you can. You must have patience to wait for the
right opportunity to come, and not be overanxious and get
in too soon. Once you buy or sell a stock and it starts
moving in your favor, you must have patience to hold it until
there is a good reason or sufficient cause for closing the trade.
Never close a trade just because you have a profit; do not
become impatient and get out for no real reason. Every act,
either in opening or closing a trade, must have a sound basic
cause behind it. Hopes and fears must be eliminated. There
is no use selling a stock because you fear it is going down,
nor buying it because you hope it is going up. Look at your
charts and see which way the trend points and follow it. If
no definite trend is shown, use your patience and wait.
NERVE
Nerve is just as essential as patience; in fact, nerve is
the equal of capital. In getting my experience, I have been
broke over 40 times, i.e., I have
have lost all of my money, but
but
there never has been a time yet when I lost my nerve. Years
ago, when I was experimenting and working on methods for
forecasting the market, I would get in the market wrong
and lose all my working capital, but I never let it get my
“goat.” I studied very carefully how I made the mistake
and what the cause of the loss was. In this way, I profited
by every mistake and loss, and
and was enabled to per
perfect
fect my
method of forecasting and trading so that
th at I could make a
success.
22
23
Looking backwa
backward
rd brings nothing but regrets. I always
believe in facing the future with nerve and hope. But let
the nerve and the hope be based on some sound principle
that will prevent costly mistakes of the past. During my
career I have seen many traders who had made one mistake
after another and suffered severe losses, and still
sti ll had some
capital to work with but when an opportunity appeared, they
lacked the nerve to act. In cases of this kind, the nerve
would have been more valuable
valuable than capital.
KNOWLEDGE
In the early part of my career I made some great successes, and what might be called lucky strikes. I made a lot
of money easily and then I spent or lost it easily. But I did
not give up or lose my nerve. I always figured that I was
a better man after each reverse, because I had acquired
experience.
Experience is the only school to learn
learn in and the burnt
child is the one who knows the pain from having put his
fingers in the fire. Mistakes are all right and hard to avoid.
They are good for us, because if we profit by them, they
prove valuable. But it is wrong to make the same mistake
the second time. Therefore, use every mistake as a stepping
stone to progress; analyze each mistake you make and the
cause of every loss, in order to avoid repeating the same
error in future.
With each exp
experience
erience I had,
had, good or bad, I accumulated
knowledge, and after all, knowledge is the greatest power
of all, for capital will always come to knowledge. Several
years ago a brokerage failure
failure occurred suddenly and
and unexpectedly, and I lost all of my money. To the ordinary man's
way of figuring I was
was broke, but as a friend of mine expressed
it at the time, “He may be without cash, but the knowledge
that he has of the stock market is worth hundreds of thousands of dollars and in a short
sh ort time he will turn that
th at knowledge into cash.” I did come back quickly in a few months’
time on a small capital, because I had a greater knowledge
of the stock market than ever before, and knowing, by experience, that I had a method based upon mathematical
24
science which could be depended upon to forecast the stock
market, I had the nerve to pyramid and press the market
hard when my science showed that I was on the right side.
What would have been the result
result had I been without knowledge and only filled with hope? I would have stayed broke,
as other traders do who follow the
th e fairy phantom of “hope”
in Wall Street trading.
HEALTH AND REST
Good health is essential to success in any line. It is one
of the great assets for success in the speculative market. At
least twice a year a man should
sho uld close up all of his trades,
get entirely out of the market, and go away for a vacation
or stay away from the market and rest up. Let your mind
rest and your judgment get clear. The man who continually
sticks to any business too long without a rest or change gets
his judgment warped. He gets in a rut and sees things from
a one-sided point of view.
When you are in the market on either side, it is but
human nature for you to hope that it will go your way, and
you, therefore, give greater weight
weight to any event that seems
to indicate a favorable move to your side. When you are
out of the market, you are able to see things as they really
are, and judge the market without a distorted view, with
hope and fear eliminated. Traders who are continually in
the market day in and day out and never allow any time to
elapse between trades, sooner or later lose all their money.
I know on
onee trader who follows scientific forecasting and
and
makes a success. He never makes more than five or six
trades in the year. If he buys stocks during the winter or
early spring for a rise, and the advance materializes as he
expected, he sells out and takes his profits. Then he leaves
the market alone, sometimes for several months. In the
summer, if he sees indications of a bull or a hear market
starting, he gets in again, and if the market moves his way,
he may follow it up and pyramid for several
s everal months. When
he gets an indication that the end is near, he closes up his
trades, takes his profits, and like the wild geese, wends his
way to the sunny South. Sometimes
Sometimes he stays all winter in
25
Florida, hunting and fishing; then goes over to Hot Springs,
Arkansas, takes a course of baths; returns to Wall Street
in good health and fit for another tilt with the Bulls and
Bears.
He makes a specialty of trading in certain favorite
stocks. He studies them closely and watches for certain
signs that he considers almost infallible. When these signs
come, he acts. He does not hurry until the time comes, but
when it does, then there is no hesitation -- he buys
buys or sells.
He keeps cool, calm and collected, and waits for the time
to open or close a trade.
Another thing he never does is to expect any fixed amount
of profits or set any specific time for getting out. I have
often seen him make a trade and it would go against him.
He would get out and say, “Well, I guess I’ll go back to
my office and watch them for awhile.” Sometimes it would
be days or weeks before he made another trade, but
but when
he did, it was based on some good sound reason, and 90 per
cent of the time the second trade proved a winner. But
suppose he had held the first trade he made and hoped it
would move his way. His judgment, being biased, would
have become more unreliable all the time. There is nothing
like being out of the market and looking them over from an
impartial viewpoint. When there is no definite trend, stay
out, watch and wait, and your patience will be rewarded.
BOOK II
HOW TO TRADE
“The greatest achievement w
was
as at first a
and
nd for a time a dream.
The oak sleeps in the acorn; the bird waits in the egg; and in the
highest vision of the soul a waking angel stirs. Dreams are the
seedlings of realities.” -- ALLEN.
_______
Have a well-defined plan
plan before you start trading, then
follow that plan, as the architect does in building a house,
or the engineer in constructing a bridge or driving a tunnel.
The man who changes his ideas or his plans, which
which are
based on something practical, for no other reason than that
he hopes or fears the market will do something different,
will never make a success.
Don’t guess or follow tips. Very few people from the
inside ever give out good information. Have a reason for
every trade; don’t trade on hope. If that is the only reason
or excuse you have for holding a stock, get out quickly and
you will save money. Conditions
Conditions change and you must learn
to change your mind.
First find out if a rule is practical; if it is based on sound
reasoning. Go back over past records and convince yourself
that it pays to use it. The valuable part of the rules that
I have laid down and the theory that I am teaching is that
it can all be proved. You do not have to accept my word
for it. Look up the records; examine the facts and satisfy
yourself.
27
CHAPTER VIII
RULES FOR SUCCESSFUL TRADING
If you can not follow a rule, do not begin speculating or
investing, as you are sure to lose.
Learn to adhere strictly to a rule or do not follow it
at all.
The following rules should be carefully studied and applied in your trading:
1ST: CAPITAL REQUIRED
You would not try to run an automobile and start out
to travel several hundred miles unless you knew how much
gasoline it required to run a given number of miles. Yet,
you go into speculation without knowing
knowing one of the most
important things, -- the amount of capital required to succeed
and make speculation a business.
Do not try to get rich in a few months or a year. A man
certainly should be satisfied if he can acquire a competent
fortune over a period of ten to twenty years. Often we have
one year when a man with nerve and knowledge and a small
amount of capital can make a fortune. I have been able to
pile up
profits
in a shortand
time
by not
pyramiding,
but
this
canenormous
not be done
continuously
I do
claim to be
able to do it. What I am trying to teach you is a safe, sure
way, which will yield more profits than any other business
on earth if you will only be conservative and not make speculation a wild gamble.
A man may go into business and lose all of his money
and then years pass before he has another opportunity to
make a large amount of money in that or any other business.
Yet, in the speculative markets opportunities
opportunities return every
28
29
year, provided a man
man has studied enough to see them when
they appear. The chances for gain are so
s o unusual and so
many great opportunities do come in Wall Street that the
average man gets greedy, gambles and does not wait between
times for the real opportunity.
People expect more profits in speculation than in any
any
other business. A man who would be satisfied with a return
of 25 per cent per year in a business is not satisfied if he
doubles his capital every month in Wall Street. Many people
are satisfied with 4 per cent in a savings bank, but when they
come to Wall Street and put up $1,000.00
$1 ,000.00 they expect to
make $1,000.00 in two or three weeks. They are the people
who buy on a 10-point margin
margin and always lose.
Do not expect the impossible in speculative markets.
markets.
Great and unusual opportunities, when you can start at the
th e
bottom or top of a move, pyramid and make a fortune, occur
every few years. Two or three times each year, when stocks
are at the extreme high or low, there are opportunities for
making 10 to 40 points’ profit.
You may think an average of 1/2 point a day, or 3 points
a week, is too small a profit to bother with. Yet, in 52 weeks
it would amount to 156 points, or $1,560.00 a year, on a
10-share trade. Make speculation a business, not a gamble.
Go into it to stay, not to gamble all on a few trades, lose and
quit. Be patient. If you can double $1,000.00 the first year
and keep doubling it for ten years, you would have over a
million dollars.
Active leading stocks make m
major
ajor moves of 10 to 40
points three to four times a year. If you are able to catch
half of these major moves on conservative trades, your
profits will be enormous. Do not try to catch all the minor
fluctuations. The inside manipulators themselves do not get
one-tenth of the minor fluctuations. Why should you expect to?
In beginning to trade in stocks the most important thing
to know is the amount of capital required. Many traders
make the mistake of thinking that about 10 points margin
is enough. Nothing is more erroneous. The man who starts
trading on 10 points’ margin is gambling, not even making
safe, speculative ventures. When you start to trade use your
30
capital as you would in a business, and in such a conservative
way that you can continue.
continue.
For trading in stocks selling at $100.00 per share or
over, you should have $5,000.00 for each 100 shares you
trade in; $2,500.00 for trading in stocks selling
s elling over $50.00;
$1,500.00 for stocks selling around $25.00; $1,000.00 for
stocks selling at $10.00 to $15.00. This amount of capital
is not to margin stocks and let them run against you 10 to 30
points. It is to be used to make a large number of trades
and pay small losses when they occur. You should always
limit your loss on each trade to about 3 points and never
more than 5 points.
If you have only $300.00 to start trading with, when you
buy or sell a stock, place
place a 3-point stop loss order on it. This
will allow you to make
make ten trades on your capita
capital.
l. Suppose
you make five consecutive trades and
and lose, your capital w
will
ill
be half gone, but if on the next trade you are right and
make 15-points’ profit, you will regain all of your losses; or,
if you make three trades with 5 points’ profit, they would
wipe out the losses of five trades with 3 point losses on each.
2ND: LIMIT YOUR RISK
A strong w
will
ill power is just as essential as p
plenty
lenty of
capital. If you have not the firmness, will power, and determination to protect every trade with a stop loss
loss order, do not
start trading, for you will fail.
I have often heard traders say “If I place a stop loss
order at a certain point the market is sure to catch it. Yet
they realize afterward that the stop loss order being caught
was the best thing that could happen
happen to them. There is
nothing better than getting out quickly when you are wrong.
The man who refuses to get out when he is wrong usually
stays until his money is gone and the margin clerk sells him
out.
A lot of people do not know how to place a stop loss
order on a trade when they make it. A stop loss order is an
order given to the broker that becomes a market order when
the stock reaches the price at which it is placed. For
example:
31
We will assume that you buy 100 shares of U. S. Steel
at 106. You feel that 2 points is enough to risk on the trade
And that if it declines to 104 you would sell it out. It is not
necessary for you to sit in a broker's office and watch the
ticker until Steel declines to 104
1 04 and then get up and tell
the broker to sell 100 Steel at the market. When you buy
the stock simply give your broker an order reading as follows:
Sell 100 U. S. Steel at 104 Stop G. T. C.
which means “good till cancelled.”
cancelled.” Now, suppose that Steel
declines to 104. When it reaches this price, your broker
sells 100 at the market. He may get 104 for it or he may
get 103 7/8 or 103 3/4, but you know that when it reaches this
price your stock will be sold. A broker can not guarantee
to sell your stock at the limit of your stop loss order, but he
does sell it immediately at the next best price after your stop
loss order price is reached.
Suppose that you sell U. S. Steel short at 1o6 instead of
buying it, and that you want to protect yourself a
against
gainst loss.
You give your broker an order to buy 100 U. S. Steel at 108
stop G. T. C. If it reaches this price, he buys in the stock.
If your stop is not reached and the market goes in your
favor, you must then cancel your stop loss order when you
close out your trade with a profit. You can, of course, give
a stop loss order good for one day, one week, or any specified
s pecified
length of time, but the best way to place the order is G. T. C.;
then you do not have to worry about it.
3RD: OVERTRADING -- THE GREATEST EVIL
Overtrading is the cause of more losses than anything
else in Wall Street. The average man does not know how
much capital is required to make a success and he buys or
sells more than he should. Therefore he is forced to get out
of the market when his capital is nearly exhausted and probably misses opportunities for making profits. Make up your
mind how much loss you can afford before you make a trade
and not afterward.
32
Stick to smal
smalll quantities. Be conservative. Do not overtrade, especially at the bottom or top of long moves. Fortunes are lost trying to catch the last 3 to 5 points in extreme
moves. Keep cool. Avoid getting overconfident at tops
and bottoms. Study your charts carefully and do not allow
your judgment to be influenced
influenced by hope or fear.
Many a trader has started out trading in 10 shares and
and
made a success because he started near top or bottom; then
when the market had reached extreme, he began trading in
100-share lots and lost all of his profits and capital too,
because he violated the conservative principle
principle which helped
him to make a success.
If you make one trade and it starts to go against you,
you are wrong. Then why buy or sell more to average a
loss? When things are getting worse, day by day in every
way, why do your best to make them get worse in every way?
Stop the loss before it is eternally too late. Every trader
should remember that the weakest point of all is overtrading,
and the next, failing to place a stop
st op loss order, and the third
fatal mistake of all, averaging
averaging a loss. Eliminate
Eliminate these three
mistakes and you will make a success. Cut short your losses,
let your profits run, pyramid or increase your buying or selling when the market is moving in your favor, not when it is
going against you.
Remember that wild, active
active markets are brought about
by feverish manipulation, and that they increase the imagination, exaggerate your hopes, and take away all sense of
reason and proportion. Therefore, in extreme markets try
to keep a cool head. Remember that all things come to an
end, and that a train going 6o miles an hour will cause a
greater smash-up if it leaves the track than one traveling
5 miles an hour. Therefore, in a wild runaway market,
jump before she bumps, for
for you will never be ab
able
le to get
out once the crash comes. When everybody wants to sell,
and no one wants to buy, profits run into losses fast.
The great bull market of 1919 shows plainly wha
whatt happens when everybody gets crazy bullish, and can see no top
in sight. This bull market reached a point where everybody
was bullish and buying, and no one on the outside dar
dared
ed to
sell short. It was one of the fastest markets in history. And
33
what happened? When the “bubble
“bubble busted” in the early
days of November and the decline started, some stocks were
off 50 to 6o points in two weeks’ time, and the profits made
during the whole campaign that year were wiped out in
i n ten
days. The man who waited for a rally to get out on after
the move started down never had a chance, because everybody was trying to get out,
out, and the further prices dec
declined,
lined,
the more people there were forced to sell out, with the result
that the market got weaker as it declined lower.
4TH : NEVER LET A PROFIT RUN INTO A LOSS
More traders are ruined by violating this rule than any
other, except overtrading. When you buy or sell a stock
and it shows you a profit of 3 to 4 points, what is the sense
or reason for ever risking any more of your capital on it?
Place a stop loss order where you will get out even or better;
then you have all to win and nothing to lose. If the trade
continues to move in your favor, you can follow it up with
a stop loss order.
People often buy or sell a stock and it shows them a good
profit, but they are “hoggish,” expect more, hold
ho ld on and
hope and let it run into a loss, which is very poor business,
and the man who follows it will not succeed in the end. Always protect your principal
principal in every way possible.
5TH: DON’T BUCK THE TREND
The way to make money is to determine the trend
trend and
then follow it. When you are in a Bear market and the
long trend is down, it is
i s always much safer to wait for rallies
and sell short than to buy. If you are in a big Bear market
where stocks are going to break from
from 50 to 200 points, you
can miss the bottom several times on the way down and lose
all of your capital.
The same a
applies
pplies to a Bull market. You should never
sell short on an advancing market. It is better to wait for
reactions and buy than to try to pick tops for selling. Big
profits are made by going with the trend and not against it.
One of the most vital and important things for either an
34
investor or a trader to learn is to take a loss and take it
quickly. When you see that you are wrong there is no use
putting up more margin and holding on and hoping. If you
take a small loss quickly and get out of the market, your
judgment will be much better and you can see an op
opportunity
portunity
to get in again and make profits.
6TH: WHEN IN DOUBT GET OUT
When you buy or sell a stock and it d
does
oes not act right
immediately or start to move in your favor within a reasonable length of time, get out of it. Your judgment gets worse
the longer you hold on and hope for the market to go your
way, and at extremes
extremes you always do the wrong
wrong thing. It is
much better to take a quick loss of 2, 3, or 5 points than to
hold on and hope and eventually take anywhere from a 10
to a 50-point loss.
Stocks are not going to stop going up
up or down once they
start just for your benefit. Always remember what Jim
Keene said: “If stocks won’t go your way, you must go their
way.” Always go with the tide; never buck it. If you
you were
on a railroad track and saw a train coming at 6o miles an
hour, would you stand there and hope that the train would
stop before it hit you, or
o r would you hope that maybe you
could knock it off the track? Of course you wouldn’t. You
would get out of the way
way and do it quick. Y
You
ou should do
the same thing in the stock market -- Get out; let them go
by, or get aboard and ride with them.
7TH: TRADE IN ACTIVE STOCKS
Always conf
confine
ine your trading to standard, a
active
ctive stocks
listed on the New York Stock Exchange. Outside stocks
have
spurts,
but the
active
leaders
yieldYork
more
profits
in the
long run.
Stocks
traded
in on
the New
Stock
Exchange
always have a good market and you can get in and out when
you want to. Ninety per
per cent of the unlisted and cu
curb
rb stocks
disappear sooner or later. Leave the pups, cats and dogs,
and mining stocks alone.
The same gr
group
oup of stocks over a long period of time do
35
not remain leaders. Changing conditions in the country cause
certain groups to lead for a time, then become laggards,
while new groups become public
public favorites and leaders.
It is the same thing with individual stocks of the different
groups. As a rule, a stock that becomes a favorite and a
leader will continue active anywhere from five to ten years.
After this period of time, it will
will pass into the hands of
investors and its activity will cease. Fluctuations will become
narrow because investors do not jump in and out every day.
They hold for a long time, and finally when they do start to sell
out for some good reason, or get scared, then the old time
leaders become active on the down side until liquidation has
been completed.
Of course, the big money is always made in trading in
stocks that fluctuate over a wide range. For this reason,
you must always be on the lookout for a new leader
leader that
will give opportunities for making big profits. Be up-to-date,
keep up with the new stocks as they are listed, watch their
development, and you will be able to pick the new live leaders
and discard the old, inactive stocks. Big money is made, not
from dividends but from fluctuations, if you know how to
trade quickly. That is why it pays to trade in active stocks
that make a wide range. If you have to take a loss in stocks
of this kind, you can make it back very quickly, because
opportunities occur often.
8TH: EQUAL DISTRIBUTION OF RISK
There is an old saying, “Never put
put all of your eggs in
one basket.” And in the stock market it is a very good rule
to follow. If you are in position to do so, select as many as
four or five stocks, one from each of the different groups.
Buy or sell in equal amounts.
Divide your cap
capital
ital up so that you can make seven to ten
trades with it. Suppose you have $5,000.00.
$ 5,000.00. Trade in 100share lots and limit risks to 3 to 5 points. You would be
able to stand five or six consecutive losses and still have
capital to work with. By letting your profits run one big
profit will often wipe out four or five small losses. But, if
36
you take big losses and small profits, you have no chance of
gaining in the end.
If you can only trade in 50 shares, take 10 shares each
of five different stocks. Place stop loss orders on these
trades from 3 to 5 points away, according to the indications
on the stocks you are trading in. Two of these stocks may
go against you and catch your stop while the other three
may not. This will leave you part of your holdings and if
they move in your favor, will make back your losses on the
others and show profits.
If you get into the market right and with a reason,
records show that it very seldom occurs that you would get
the stops caught on all of your stocks. You may not always
make as much profit as you would to trade in one or two
of the active, fast moving stocks, but you will be safer. That
is my aim: To teach you safety; help you protect yourself
and cut short your losses in every possible way and let your
profits run.
9TH: FIXING A PRICE OR POINT TO BUY OR SELL
The majority of people have a habit when they buy or
sell a stock, of fixing in their minds a certain figure at which
they expect to take profits. There is no reason or cause for
this. It is simply a bad habit based on hope. When you
make a trade, your object should be to make profits and there
is no way that you can determine in advance how much profits
you can expect on any one particular trade. The market
itself determines the amount of your profit, and the thing
that you must do is to be ready to get out and accept a profit
whenever the trend changes and not before. Remember the
market is not going to act to please you or go to certain
figures just because you want to buy or sell at those figures.
Many trader
traderss lose big profits by fixing the p
price
rice at which
which
they intend to sell. Stocks sometimes go within 2, 3 or 4
points of their selling price and start to decline. They hold
on and hope. Just because it does not reach the point that
they have fixed in their minds, they often hold on and hope
until they lose all the profits and take a loss, refusing to see
that the trend has changed. Hope will ruin any man who
37
follows it in the stock market. To succeed you must face
facts, and facts are often cold and stubborn and do not agree
with your hope, but you must accept them for your own good.
In nearly every bull or bear campaign in the market the
general public gets certain fixed points in their heads where
stocks are going to make tops or bottoms. The newspapers
talk about certain favorite stocks going to 100, 125, 150 or
175. Everybody gets the idea that these prices are going
to be made and they become “hope” prices, but are never
realized.
To illustrate this: During the fall of 1909, when the
bull campaign in stocks was
was at its height and Steel common
had advanced to around 90, the newspapers began to talk
of 100 for “little Steel.” The public all got the idea in their
heads that Steel was sure to make 100 and that was the place
they were going to sell and take profits. The writer predicted
that Steel would advance to 94 7/8 and no higher, which it
did, and he sold out, while the
th e “hope” crowd held on and
eventually took losses, for U. S. Steel declined eventually to
38. Several years later when it did reach 100, it was the
place to buy and not to sell,
se ll, for it immediately advanced to
129 3/4.
The man who tr
tries
ies to get the last
last point or the top or
bottom eighth generally loses all his profits.
profits. You do not
have to get in at the bottom and out at the top to make big
money. All you have to do is to look over the list of the active
leading stocks and you will find that they make moves of from
50 to 150 points between bottom and top every few years.
Then, if you can get in after the stock has advanced 10 points
from the bottom, and sell out within 10 points of the top,
you certainly will be able
able to accumulate plenty of profits.
Never get the idea in your head that you can or will hold
a stock until it goes your way. This is nothing but pure
stubbornness and is not based on any sound logic or reasoning. In case of doubt, get out.
o ut. Do not hesitate. Delays
are always dangerous. Do as the insiders do: If they can
not get what they want, they take what they can get; if the
market will not take what they have to offer, they offer what
it will take; if the market will not go their way, they go its
way. A wise man changes
changes his mind, a fool never.
38
10TH: WHEN TO TAKE PROFITS
Never close a trade just because you have a profit. The
time to hold on is when the tide is running in your favor.
When tempted to close a trade
trade just because you have a profit
profit
ask yourself the questions: “Do I need the money?” “Is the
move over?” “Do I have to sell?” “Why should I take
profits?”
Look at your charts; do what they tell you. If they do not
show a change in trend, wait. Protect profits with stop
loss order, but do not take a profit too soon. This is just
as bad as taking a loss too late. Patience to hold on when
you are right and nerve to get out quickly when you are
wrong will make a success.
11TH: ACCUMULATE A SURPLUS
A surplus must be accumulated before
before you increase your
trading quantities. Margins are not to hold on with, only
“lambs” do that. If big risks are required, do not make
the trade. Wait for an opportunity when you can buy or
sell and place a stop loss order 3 to 5 points away. It is
financial suicide to take big losses when they can be prevented.
You must not expand until after you have made profits.
Every important business concern carefully creates a surplus
and is proud to publish it. No business is run without a loss
at some time and a speculator or investor must expect losses.
Therefore, he must create a surplus out of which he can pay
losses and still continue to trade.
In very a
active
ctive markets, when trading in high priced
stocks, as a rule it does not pay to take a loss amounting to
more than two consecutive days’ fluctuations. If stocks go
against you two days, they are likely to go more. Take your
loss out of your surplus and leave your capital unimpaired
and wait for another opportunity.
12TH: BUYING FOR DIVIDENDS
A great many people make the mistake of always wanting to buy stocks that will pay dividends. Do not buy stocks
39
just because they pay dividends, nor sell them because they
do not. Often people hold stocks because they continue to
pay big dividends, only to see their capital half or more
wiped out; then the dividend is cut or passed altogether.
Look to the protection of your capital, not for dividend
returns. Trade for points of profit, not dividends. Fluctuations yield more money than dividends and you will be able
to tell when stocks are being accumulated or distributed for
an advance or a decline.
If a stock is selling very low or out of line according to
the dividend it pays, there is probably something wrong and
it is a better short sale than a purchase. If a stock is selling
very high and pays no dividend,
dividend, there is a reason for it and
you should not sell it short. Probably
Probably it is going to pay a
dividend or it is in a very strong position. Otherwise it
would not be selling at a high price.
Manipulation for a time will force stocks above or below
their intrinsic value, but in the end Supply and Demand
govern the course of prices, and values are based on these
factors. I intend to teach you how to tell when Supply and
Demand show the place where you should buy or sell.
The word “dividend” means a division of profits or earnings,
but often when you buy Curb or mining stocks the word
means “divy,” or that you divide up your capital with the
other fellow and later lose all.
CHAPTER IX
METHODS OF OPERATING
After you have learned the rules for successful trading,
it is then necessary to determine the best methods for
operating either on the buying or selling side. All of these
factors help you to overcome the weak points and enable
you to make a better success.
BUYING OUTRIGHT
Many people think that the only safe and sure way to
make money on stocks is by buying outright. This is a sad
mistake and has caused many a trader to come to grief.
Study the records of past movements and you will find ample
proof of my statement. You need only to refer to the great
depressions that have occurred during the past forty or fifty
years to prove that it can cost the entire amount of the price
you pay when buying outright, i.e., stocks will not only go
down to nothing, but they can be assessed.
How many people have you heard say “I ow
own
n my stocks
outright; I have nothing to worry about.” They are just
the people who should worry. Every year many stocks go
out of existence or are assessed.
asses sed. How do people know that
they have the one safe, good stock on the list?
At present there are about 700 stocks listed on the New
York Stock Exchange. In five
five or ten years from this time
conditions may so change that over 25 per cent of these
stocks will be worthless or have declined enough to ruin any
man who buys them outright and holds them.
You must have something better than buying outright to
protect you in order to make money. It is just as safe to
trade on conservative margin, and you will make much
40
41
greater profits when you know the right stock to buy or sell
and the right time.
In the boom which culminated in the Fall
Fall of 1919, many
stocks had advanced in nine months from 25 to over 100
points. Suppose people bought any of these stocks
s tocks outright
within 20 to 50 points of the top and held them through the
decline of 1920 and 1921. Some stocks declined 100 to 180
points. There were no exceptions. All stocks suffered tremendous losses, and many of them will never sell again at
the prices they reached in 1919.
The man who sold stocks short in 1919 and played the
short side in 1920 and 1921 until the summer of 1921 was
the
man
the
Below
I give
you in
the1921,
high
prices
of who
somemade
stocks
inmoney.
1919 and
the low
prices
which will prove to you what
what can happen to a man
man who buys
stocks outright and feels safe:
American Woolen
Am. Intern’l
Atlantic Gulf W. I
Crucible Steel
General Asphalt
Kelly Springfield
Mexican Pete
High
1919
Low
1920 & 1921
Points
decline
169 1/2
132 1/4
192 1/4
278 1/2
16o
164
264
55 1/2
21 1/4
18
49
32 1/2
25 1/2
84 1/2
114
111
174 1/2
229 1/2
127 1/2
138 1/2
179 1/2
Republic Steel
Studebaker
145
151
41 1/8
37 3/4
103 7/8
113 1/4
Transcontinental Oil
U. S. Food
U. S. Rubber
62 5/8
91 3/8
143 3/4
5 5/8
2 3/8
40 1/2
57
88 5/8
103 1/4
Most all of the above stocks w
were
ere still paying
paying dividends
when they had declined 25 to 50 points from the top and
they no doubt looked attractive to a lot of people who bought
them either on margin or outright. How many men will
have the nerve to hold on when they see their capital shrink
from 50 to 75 per cent? Very few of them, and a man
would be a fool if he did.
This is another proof that you must place a stop loss
order for your protection, because when a stock starts to go
against you, it certainly can go enough to cost you all of your
margin and exhaust your patience, causing you to sell out,
probably just at a time when you should buy.
42
have and
not picked
as an exception
excep
of abecause
Bull
Bull market
orI 1920
1921 as1919
exceptional
Beartion
years,
they
are not. These same kind of declines have occurred in
1857, 1873, 1893, 1896, 1903, 1904, 1907, 1910, 1914,
and 1917, and they certainly will occur again. Therefore,
be a Bear in a Bear
Bear market and a B
Bull
ull in a Bull market.
market.
Don’t forget the fact that when stocks start to go against
you, they can go a long
long way in either direction, and that the
man who buys outright near the top and thinks he is safe,
or the man who sells short near the bottom and puts up 50
points margin and thinks it is enough, can both be wiped out.
You might a
argue
rgue that a man who buys outright in panic
years near the bottom is perfectly
perfectly safe and doing the right
thing. My answer is that the man who buys on margin at
the bottom of a panic is just as safe and can make more
money because he can carry more stock and I intend to teach
you how to tell when stocks reach
reach top or bottom.
SELLING SHORT
I am not going to tell you that it pays to sell short; I
am going to prove it to you by indisputable records covering
over thirty years of market movements.
A lot of p
people
eople trade in the market for years and never
seem to realize that there are two sides to it. I have often
heard people remark when stocks were declining fast, “I
can not sell short.” The man who is a born Bull, chronic
to the core, will never succeed; neither will a chronic Bear
succeed any better. You must have no sentiment in the way
you make money in the market. Your aim and object should
be to make profits and you should have no choice of how you
make them, whether it be on the buying or selling side. The
Royal Road to Success is to be a Bear in a Bear market and
a Bull in a Bull market.
If you only trade on the Bull side of the market, you
have 50 per cent more against you than if you trade on both
sides. What chance has a Bull in Bear years or years of
panic and depression? He may buy near the bottom of a
break, but unless he grabs
grabs profits quick, he will soon have
losses; while the Bear who sell stocks short on every rally,
43
covers them on the breaks and waits for rallies to sell again,
is sure to pile up big profits because he is going with the
trend, which you must always do.
Study the charts and convince yourself that at the right
time there is just as much money on the short side as there
is on the long side. Then make up your mind, if you expect
to succeed, that you will sell short when conditions warrant.
Your friends, brokers, and the newspapers tell you that
it is dangerous to sell short; that there might be a “corner.”
The chances for a corner in a stock are about one in a
thousand. There have been only two important
i mportant corners in
the last 30 years, -- Northern Pacific was cornered in 1901,
when it went from 150 to 100o
100o per share; Stutz Motors was
was
cornered in 1920 and advanced from around 200 to around
700.
Stocks are made to sell and the insiders sell them near
the tops just as fast as they can. You are always safe in
doing what the insiders do. Stocks with large capitalization
are perfectly safe to sell short, because there is a large floating supply of stock and it is impossible to corner them.
The newspapers tell you what the insiders want you to
know, not what you need to know. Watch the newspapers.
When things are the worst and it is time to buy stocks, they
never tell you anything about the good times that are coming,
but when stocks are top and
and the insiders want to unload all
all
they bought at the bottom, the
th e newspapers tell you about
dividends, extra dividends, melons, rights, and large earnings, when they should tell you that you are picking “lemons”
and are getting “wrongs” not rights on your stock.
A wise ma
man
n does not expect something good for nothing,
and only fools expect the fellow who is on the inside of the
game, playing against them, to tell them what he is doing.
The sentiment among brokers is a
always
lways bullish near the
top and bearish near the bottom. The average broker knows
no more about the market than you do, and there is no reason
why he should. His business is to buy and
and sell stocks for
commissions. That is the way he makes his money, and a
broker who does this well earns all
all you pay him. His business is too confusing. He hears too much on both sides of
the market to make his judgment any good.
44
In December, 1920, when stocks were declining rapidly
rapidly
on two-million share days, the newspapers told you about
high money, frozen credits, depression in business, unemployment, buying power reduced, people unable to buy luxuries,
automobiles, etc. At this time Studebaker sold at 37 3/4,
which was the bottom. It steadily advanced,
advanced, and not much
was said about it until it got above 100.
Now, for several months past,
past, every few days the newspapers tell you about the wonderful earnings of Studebaker.
Tips are all around Wall Street that Studebaker is going to
175 or 200 a share. Why tell the outsider all this good
news now after Studebaker is up nearly 100 points, and what
will be the story told to the suckers who buy the stock at
present levels, when it again sells down around 50 or 6o,
which it will in the latter part
part of 1923 or 1924? It is the
writer’s opinion that the man who
who sells Studebaker and pa
pays
ys
the dividend for the next year will make more money than
the people who buy it and get the dividends. This applies
to other stocks as well as Studebaker.
PYRAMIDING PROFITS
Many a tra
trader
der has begun at the bottom of a Bull market
market
to trade conservatively and accumulated a large amount of
profits. Finally he begins to pyramid too heavily
h eavily and too
fast near the top, with the result that when the trend turns
he gets caught overloaded and loses all the profits he has
made and probably a lot of his capital. Sad experience has
taught me that it is better to be safe than sorry. In speculation let “safety first” be your motto.
In trading, your first risk should be your greatest. Suppose on your first trade you risk 5 points, which, if lost,
comes out of your capital. We will assume that the stock
moves 5 points in your favor. You can then buy a second
lot and place a stop loss order 5 points away, and if it is
caught, you will still be only loser 5 points, because you will
be even on your first trade.
trade.
Pyramiding all dep
depends
ends on where you get in on a stock, -whether near the bottom when a move starts upward or nea
nearr
the top when it starts downward. On active stocks, as a
45
rule, it is safe to pyramid every 10 points up or down, but
you should decrease your trades
trades and never increase them.
Suppose10
your
first then
tradeyou
is 100
and and
the market
advances
points;
buyshares
50 shares
it advances
10 points more; you buy 30 shares and it advances 10 points
more; you buy 20 shares and it advances 10 points more,
and you buy 10 shares. After that every 10 points up you
buy 10 shares more. In this way,
way, if you follow up with a
stop loss order, your profits will always increase while your
risk will decrease. Your last trade may show a loss of 3
to 5 points according to how you get out on stop loss orders,
but all of your other trades will show big profits. It is
always safer to pyramid after a stock moves out of accumulation or distribution zones.
Learn to adhere strictly to a rule or do not follow it at
all. One thing you must not overlook, that every time a
stock moves in your favor 5 or 10 points, the chances against
it moving further in your favor have decreased. This does
not mean that the stock will not go a long way in your favor,
but it is the percentage against
against you that must not be overlooked.
BUYING AND SELLING ON A SCALE
Many investors and traders have the idea
idea that the only
successful way to trade is to buy or sell on a sscale
cale up or down.
I have never yet seen a scale method that would beat the
market. Some one asked Russell Sage if he believed in buying on a scale. He said that there were only three men who
had money enough to buy on a scale, -- Carnegie, Morgan
and Rockefeller, and they had more sense than
th an to do it.
A scale method will not work for the reason that you
add to your holdings when the market is going against you,
thus increasing your risk. If the market is going against you
on the first trade and it looks like you are in wrong, the thing
to do is to get out quickly and not buy or sell more. The
time to take additional risk is when the market is moving
in your favor, as shown in my pyramiding plan. It is all
right to buy or sell more if you are doing it when you are
making profits, but when you are trying to average, with
46
losses piling up against you, you are sure to make a serious
mistake, which will sooner or later cost all of your capital.
HEDGING IN STOCKS
Traders who buy a stock of one group and it starts to
move against them, figure that they can even up by hedging
or selling something short in another group. This very seldom pays. It is much better to take a loss and take it quickly
on the trade that is going against you, and start a new deal.
There are some instances, or have been in the past,
past, where
rails and industrials spread apart and then come together
again, but to make a play of this kind requires a long period
of time. For example:
In November, 1919, when 20 industrial stocks were selling on an average of 119, the Dow-Jones 20 rails were
selling at 82, the industrials being 37 points higher than the
rails. The writer figured that the industrials would sell
lower than the rails within two years, which they did. In
August, 1921, the rails were selling at 70 and the indu
industrials
strials
at 66, the rails being 4 points higher than the industrials,
or a difference of 41 points in favor of the rails in 21 months.
Of course, a trader who sold the high-priced indu
industrial
strial
stocks short and bought rails, even at the top in 1919, would
have made money, but this is not the way to trade, for the
rails declined about 18 points while industrials were declining
55 points.
Therefore, the proper wa
way
y to trade
trade would have been to
keep short of industrials as long as the trend was down, and
not do any hedging. The great fundamental rule that you
must learn in order to be a success is to follow the trend of
the market. If you can not determine a definite trend, get
out and wait until you can. You can always make plenty of
money after the trend is well defined.
FAILURE TO FOLLOW RULES
The long sw
swings
ings in the stock market last on an
an average
of two years, or approximately 6oo market days. If you
stand at the ticker and watch the
th e fluctuations, it will make
47
you change your mind 1200 times in two years. Ninety per
cent of the time you will be wrong, because you are not
changing your mind for any good sound reason, but simply
because a minor move, which may last but a few hours or a
few days, has changed the appearance of the position
positio n of the
stock to the man who views it from short range, standing
over the ticker.
Every time you change your mind and change your position, you increase the percentage against you, because you
are paying taxes, interest and commission. If you get in
wrong, the ticker will keep you wrong because it will make
some minor moves every few hours or every few days that
will renew your hope and
and keep you in. On the other hand,
if you are in right, and are watching the ticker daily, some
of these minor moves that mean nothing will get you out
and you will lose a good position. Then, you must realize
that you have very little chance to make any money watching
a ticker, changing your mind and being wrong 90 per cent
of the time.
The stock tape moves in mysterious ways the multitude
to deceive, because the public are influenced by their hopes
and fears. They sell on fear and buy on hope, thus getting
in or out near the top or bottom, while the man who trades
on some well-defined plan buys when the public sells and
sells when the public buys. The stock market does not beat
you. You beat yourself by following your own weaknesses,
by listening to the man who knows less than you know, by
reading the newspapers, following the gossip of the Street,
all of which is put out to influence you in the wrong direction.
When the aver
average
age trader comes to Wall
Wall Street he is
looking for information. He asks the
th e bootblack “What do
you think of the market?” He also inquires of the waiter
in the hotels, the office boy, his broker, friends and strangers
around the broker’s office. I am conservative when I say
that the average floating trader asks the opinion of 10 to 12
people every day, most of whom are all guessers and know
no more about the market than he does. If their opinions
agree with his, he considers it good information and follows
it, and of course, loses money. If half of the people he talks
to disagree with him, he probably does not act on his own
48
48
judgment, and later finds
finds that it was right. He says to himself “If I had only bought when I intended to, I would have
made money, but I talked it over with the broker and the
boys, and they convinced me that
that I was wrong.”
“A wise man changes his mind, and a fool never.” A
wise man also investigates and then decides;
decides; a fool just
decides.
The man
who
is fixed
his opinions
stocks,A
either
a born
Bull or
Bear,
will in
never
make anyon
money.
man must always be of open mind, ready to change his mind
and act quickly when he finds that there is a good reason to
do so. In Wall Street the man who does not change his mind
will very shortly have no “change” to mind.
I know of a trader now in Wall Street who is an old
man, probably eighty years of age. He has made several
small fortunes in his day and some of his big profits were
made when he got in stocks that moved quickly 50 to 100
points. After that, he would lose all of the money that he
had made, trying to catch another move where he could make
50 to 100 points quickly.
This man had been broke for several years prior to 1915.
When the great war boom started,
started, he got hold of a few
hundred dollars capital and started buying stocks and
pyramiding. He got in at the right time, on the right stocks,
i.e., he bought near the bottom; stocks began to advance and
he began to pyramid. He bought Baldwin below 50, Crucible
Steel below 40, Beth. Steel below 50, Studebaker below 60.
He was fortunate enough to get into the real “war babies.”
He was trading in odd lots in the beginning and when
the market reached top in the fall of 1915, he was carrying
thousands of shares. His equity with the broker was over
$200,000. I said to him “Now is the time to turn your
paper profits into cash.” At that time Baldwin showed him
over 100 points’ profit, Crucible over 100 points and Beth.
Steel several hundred points’ profit on his original trades.
But he had gotten so bullish and so full of hope that he
thought everybody was crazy and that every stock
st ock on the
list was going to be a Beth. Steel and go up to 700.
I remember one day in October, 1915, when Baldwin
advanced to 154, which was the top, and the market was
very wild and excited. I said to him “Now either sell out
49
all of your stocks or protect your profits with close stop loss
orders.” He said “Stocks haven’t started to go up good
yet” and he gave me an order to buy 500 more Baldwin.
He said “I am going to sell Baldwin around 250, not 150.”
That afternoon Baldwin declined to 130, and all of his other
stocks in proportion, but he held on and hoped. Stocks continued to go down, and in a few months Baldwin was back
around 100 and he was forced to sell out his big line of
stocks, and his profits of $200,000 were reduced to where
his account showed less than $1o,ooo.
Now, where is the mistake with this kind of trading?
This man saw the opportunity at the right time. He bought
small amounts of stocks at the right time and he pyramided
right. But he failed to get out at the right time. A profit
is never a profit so long as it is on paper. It must be turned
into cash. This man refused to see the market as it really
was. He was so bullish that he could not believe a 20 or
30-point reaction showed that the trend had turned, at least
temporarily. Once a man has a profit and protects it with
a stop loss order, he knows that that much money is safe
and he is sure to get it, but if he holds on and hopes, and
increases his buying at the top, he is sure to lose.
This man, a
after
fter making and losing money, again went
broke in 1917, and as yet
yet has not come back, because he is
getting too old, and he is too hopeful. To this day, he will
listen to the advice of any clerk in a broker’s office or, in
fact, anyone around a brokerage office, who will tell him of
a stock that is going up 1oo points, and he will believe it.
Why? Because he hopes to get in again on a stock that will
go up 100 points or more, pyramid it and make a fortune.
If you tell him that you know of a stock that is sure to go
up 5 or 10 points, he will pay no attention to you. He is not
interested in making 5 or 10 points. He wants to make 100.
Some people never learn by experience. This man has
been trading ever since before the Civil war, and in over
50 years has not learned that abnormal markets, where prices
advance over 50 to 100 points in a few months, occur only
three
or every
four times
in a lifetime.
He isshould
expecting
happen
year which
experience
havethings
taughttohim
are not likely to happen more than once in 20 years. He
50
does not see that markets are normal most of the time,
and fluctuate in a normal way. Therefore he does not reason
right or do any sound thinking. He works on an exaggerated
bump of hope, and of course, meets with disappointments
and losses.
You must always learn that normal profits must be accepted in normal markets, and in abnormal times you can
try for abnormal profits, but protect your trades whether
they show profits or not, with stop loss orders, and be ready
to change your mind when conditions change.
CHAPTER X
CHARTS AND THEIR USE
_______
WHAT YOU SHOULD KNOW ABOUT A STOCK
It is all well enough to know the history of a company,
whether it is old or new, its earnings
earnings over a long period of
years, also
how whether
long it has
paover-capitalized
paid
id dividends andoritswhether
future prospr
os-capipects;
it is
the
talization is conservative or not. But all of the information
that affects the future price of the stock is contained in its
fluctuations and you need nothing more than its record of
prices.
A lot of p
people
eople say that charts are of no value in determining the future; that they simply
s imply represent past history.
That is correct; they are records of the past, but the future
is nothing but a repetition of the past. Every business man
goes on the past record of business in determining how to
buy goods for the future. He can only judge by comparison
comparison
with past records. We look up
up the record of a man, and
if his past has been good, we judge that his future will be
good.
Charts are simply a picture, which show plainer than we
can convey in words. The same thing could be told in words,
but you grasp it quicker when you see it in chart form. You
would recognize a man and his good or bad qualities quicker
from seeing his photograph than from reading a description
of him.
I want no better authority on anything than the Bible.
“The thing that hath been, it is that which shall be; and that
which is done, is that which shall be done; and there is no
new thing under the sun.” This shows that history is but
a repetition of the past and that charts are the only guide
51
52
we have of what stocks have done
done and by which we may
determine what they will do.
If a machine instead of a human
human being made the market,
then it might be different, but to those of us who know how
to read the signs of what the manipulators are doing and of
what they intend to do, charts
charts and past records are of great
value.
Therefore, you should have a chart of monthly high and
low prices as far back as you can get them; then a chart of
weekly high and low prices
prices anywhere from 6 to 12 months
back, and last a chart of daily high and low prices 30 to 6o
days back. This will show you what the tape tells about
the past, present and future condition of the stock. If the
indications are not clear, you will have to wait a little while
until the tape shows which way the balance of power lies and
whether supply or demand is equal or one is overbalancing.
overbalancing.
VOLUME
Do not overlook the volume of sales, for this is what
tells whether supply or demand is strong enough to move the
stock up or down. Consider the daily, weekly, and monthly
volume of sales according to the total
total amount of stock outstanding. For instance:
If you look up U. S. Steel for the llast
ast three months of
1922, you will find that it was in a narrow range for several
weeks and the total sales only 300,000 shares. You can not
expect any big movement will take place either way immediately. Why? Because there are five million shares
s hares of
U. S. Steel and one million or more shares must change hands
before any big move will take place from any resistance level.
The greater the volume of stock the longer the time required
to accumulate or distribute a line sufficient to cause a long
swing move up or down.
WHAT VOLUME TELLS
The volumes of sales on ea
each
ch individual stock show the
percentage that is being bought and sold. That is why the
tape and fluctuations tell the truth, provided you interpret
53
the tape correctly. Certainly a stock cannot be distributed
or accumulated without a large volume of sales. Some one
must buy and sell a large per cent of the capital stock near
bottom or top in order to cause
cause a big move in either direction.
Therefore, study volume closely, the time required to sell a
large amount of stock, the number of points which it moves
up or down while the volume of sales is accumulating.
Suppose U. S. Steel has advanced 20 or 30 points, and
it reaches a level where there
th ere are 200,000 shares in one day,
but the stock only gains one point. The next day there are
200,000 shares and it makes no gain. This is plain enough
that at this point the supply of stock exceeds the demand, or
at least that buyers are able to get all the stock they want
without bidding prices up. In a case of this kind, the wise
thing to do is to sell out, watch and wait. If all the stock
at this level is absorbed after a reasonable length of time,
and it moves up to new high prices, it will then, of course,
indicate still higher.
In a b
big
ig bull market, when stocks reach the distributing
zone, they will fluctuate over a wide range and the volume
of sales will run several times the total outstanding capital
stock. For instance: In the latter part of 1919 and spring
of 1920, Baldwin Loco. sales ran from 300,000 to 500,000
shares per week, while the stock was fluctuating between 130
and 156. This was when distribution was taking place, and
the public was full of hope and buying regardless of price.
After that, a long decline started and Baldwin
Baldwin reacted
to 62 3/8 during the week ending June 25, 1921. It was down
93 points from the high of 1919. During the last week of
the decline, it went down from 70 to 62 3/8, over seven points,
and the total sales for the week were less than 110,000,
which showed that liquidation had about
about run its course and
that there was very little stock pressing for sale. The amount
of sales at this time in one week were about half of the
capital stock and probably about as much as the floating
supply, while when the stock was nearly 100 points higher,
the capital stock was changing hands about twice each week.
After Baldw
Baldwin
in reached the low level
level of 62 3/8 in June,
June,
1921, notice it began to rally on small volume, which showed
that there was not much stock for sale and that it did not
54
require heavy buying to put it up. The supply of stock in
the hands of the public having passed into strong hands, it
was easy to start the advance
advance in this stock which continued
until it reached 142 in October, 1922, where distribution
again took place. This is how volume shows you when
accumulation or distribution is taking place.
CHAPTER XI
THE SEVEN ZONES OF ACTIVITY
The stock mar
market
ket can be divided into seven Zones which
determine the different stages of activity. There are three
Zones above normal and three below.
The Normal Zone represents something near actual intrinsic value, as far as human judgment can be depended
upon and as far as the ticker tape can analyze it from supply
and demand. The line marked “normal” we consider as a
place where buying and selling is about equal and fluctuations
are very narrow, there being no incentive or reason apparent
for any wild speculation up or down. Either accumulation
or distribution may take place around the Normal Zone.
Investment stocks or gilt-edge bonds may start downward
from this zone, while speculative issues, which have prospects
or exaggerated hopes of big earnings, may start up from
this zone.
The First Zone above Normal marks the period of quiet
advancing prices which attracts very little attention. This
Thi s
zone may last one month, three months, six months or a year,
according to the cycle the market is passing through in
general conditions, because from Normal to the Third Zone
at one time may be reached in twelve months and at another
time may not be reached for five or ten years, viewing the
market from a long swing standpoint.
The Second
Zone
above
marks aup
period
of You
greater
activity
when
poolsNormal
begin marking
stocks.
will hear reports of better business and the public will become
interested in the market and buy on a small scale, but most
people will wait for a reaction back to Zone I to buy. Of
course, this reaction seldom ever comes.
The Third Zone or highest above Normal marks a
period of distribution. In this zone great activity takes place
55
56
and extremely wide fluctuations. Stocks are very feverish;
the
public are
buyincreased
madly; reports
of big
earningsdeclared.
come in; Everydividends
and stock
dividends
thing is optimistic. Prominent men talk of the greatest prosperity ever known. Weeks and months go by and stocks
continue to advance. Reactions are very small. People
P eople who
wait for reactions become discouraged
discouraged and buy at the ma
market
rket
at any price. You hear of fortunes being made by the office
boys, the bootblack, bookkeepers, stenographers. Everybody is rolling in wealth and
and all of them are dreaming
dreaming of
fortunes yet to be made. Most of the fortunes that they
are counting on, of course, is paper profits. They have not
yet cashed in, and not 10 per cent of them ever do ca
cash
sh in
at this stage of the game. They get too full of hope to sell.
This stage of the market occurred from August until the end
of October, 1919. Many of my readers know what happened to them.
In this stage, for weeks and months, every few days
stocks will open up anywhere from 1 to 5 points higher and
keep on going up without much reaction. After this has
happened and the end is near, although no one can see it,
traders all go home some night, hopeful with the sky clear
and not a sign of disturbing
dis turbing cloud, and come down next
morning and find stocks opening off anywhere from 1 to 5
points. There may be no news out or any reason at all for
the decline, but the real cause of it is that the market has
reached the stage where Supply exceeds Demand. Everybody has bought to full capacity and there not being any
large amount of buying orders in at the opening to support
prices, they open off. This is your first sign of the end.
Take warning! Get from under, for with this first lightning
strike, you may know that the storm is gathering, and it
behooves you to protect yourself. After this first sign of
the end, stocks may go lower for a while and then rally up
near the high points and hold for a time, but it is the warning
that the “saturation point” is about reached, and the wise
man will get out in time.
The history of the world shows that there never has been
a time when there was a great demand for anything, whether
it be a product of the mine, factory, or farm, that sooner or
57
later, a supply in excess of that demand did not develop.
Just as soon as any business becomes profitable enough for
a few men to make big money, enough people will get into
it to cause overproduction and force prices down. This is
but a natural law.
law. It is caused by the weakness
weakness of human
flesh and it applies to the stock market the same as to any
other business. When stock prices reach this third zone
above normal, fluctuations are so wide and rapid that fortunes or big profits can be made very quickly. This attracts
all classes of people to the market. They buy and continue
to buy, and prices continue to rise until somebody from the
inside, outside, top side or bottom side, supplies the demand,
and the whole crowd find themselves at the saturation point
loaded with stocks, looking for a buyer, and he is not there.
Then follows the deluge back to Normal and on down to
the final and third stage below normal.
The First Zone below Normal
Normal is marked by a quiet
decline from high prices and what might be termed the first
bad shake-out
the
holders.
A rally
bis
utstill
stocks
become of
dull
onweak
the rally
because
thefollows
Supplybut
greater than the Demand and distribution is still going on.
A lot of people who miss the market in the third stage above
normal are wise enough to sell out in the first stage down,
and professional traders, seeing that the bull market has
terminated, go short of the market on every rally with the
result that prices begin to work lower slowly.
The Second Zone below Normal.
Normal. -- Liquidation increases,
breaks become bigger and rallies
rallies smaller; reports of fa
falling
lling
off in business come to light and a more conservative spirit
underlies general conditions. People are less hopeful,
h opeful, become more conservative and stop buying. The result is that
the market is without much support and gradually works
lower.
The Third and final Zone below Normal is exactly the
opposite of the third zone above. It marks a period of
panicky conditions, extreme pessimism; investors lose confidence and start selling out. There is great excitement
throughout the country and reports of poor business;
dividends are passed or reduced and even the men who were
optimistic at the top, now begin to sound a word of caution
58
and hint that things may get worse before they get better.
The supply of stocks seems unlimited; everybody is a seller;
no one wants to buy. You hear
h ear people say that they are not
worth the paper they are
are written on. They are talking about
the same stocks that they bought 50 to 100 points higher.
When this stage is reached, it is the time to cover shorts and
buy stocks when nobody wants them. In this stage, it may
be necessary to watch and wait for several months until you
see that liquidation has been completed and that accumulation is taking place, as there is always plenty of time to buy
after the quiet advance starts. Remember, it is always darkest just before dawn, and it is always brightest at noontime,
just before the sun starts to recede.
CHAPTER XII
HABITS OF STOCKS
The stock mar
market
ket is driven by human energy, i.e., prices
are made through buying and selling of human beings, and
as human beings have certain habits, certainly the market
or the individual stocks reveal the habits and methods of the
men who make markets. You should become thoroughly
acquainted with the stocks you trade in,
i n, and by studying them,
you will learn their individual
individual moves which are peculiar to
themselves. This is caused, as I have explained elsewhere,
by a certain group of men or pools that operate in a stock
for a long number of years.
Investigate and learn all you can about the stock that
you trade in before you make a trade, not a
afterward.
fterward. Study
the number of points each individual stock makes in its moves
up or down. Note carefully the volume of sales
s ales on which
it culminates in major or minor moves. Note whether it
makes it bottoms or tops by a very fast run up or by a slow,
creeping movement. Some stocks make sharp tops
to ps and bottoms, some make round tops, other make square tops, some
make double tops and bottoms, some make triple tops and
bottoms, while others only make the single, or sharp top
and bottom. By a double or triple top I mean a stock reaching a certain level, then having a big reaction and moving up
to the same high level a second or third time, and vice versa.
TOPS AND BOTTOMS-FLAT OR SHARP
Stocks are no different than human beings -- they have
their peculiar habits and moves. It is just as easy to tell
what a stock will do by
by getting acquainted with it and watching its moves over a long period of time, as it is to tell what
59
60
a human being will do under certain conditions after you
have known him for many years. Remember that stock
market movements are made by human beings; therefore
they reflect what the human mind thinks
th inks and reveal the
actions, desires, hopes, wishes and aims of the men who
manipulate special groups of stocks that they are interested in.
Stocks do n
not
ot all move alike. Some are leaders, others
are laggards; some are fast movers, some slow movers.
The stocks that lead and reach top first make what we
call on a chart flat tops -- that is, they reach a level and
remain there for several weeks or months, fluctuating up or
down over a wide or narrow range according to the kind of
a stock, but never getting much above the level where distribution started. These stocks, of course, are the first to
lead a decline when a bear market starts.
The stocks which are late movers and start their advance
advance
after the general market is about top are rushed up fast and
make what is known as a sharp top. They do not remain
long at top levels, but decline quickly, because the
th e general
market has already turned downward, and, of course, the
late
which selling
is goingpressure
against the
trend,
must
naturally
meetmover,
with greater
at high
levels
than
the
stock which is already down considerably from the top.
Then the question might be asked, “Where does distribution take place in stocks that make sharp tops?”
They are distributed as they run up and are also sold
on the way down. After making a sharp
s harp top, they usually
break back 10, 20 or 30 points and then halt. At this level
most people think they are down too much to sell short and
have reacted enough to be good purchases; therefore they
buy them. In a case of this kind, distribution often takes
place 20 or 30 points below the top in the late movers, while
the stocks which lead the advance are distributed within 5 to
10 points of the top.
The leaders make the same level ma
many
ny times, some stocks
as much as 10 or 15 times, while the late mover is more of
a volcanic eruption. It shoots up to the top and never makes
the same high price the second time, because when the explosive buying power is over, it recedes quickly to a level
61
that might be termed semi-normal. It is a quick recession
from high temperature.
TIME REQUIRED FOR DISTRIBUTION
The time required to distribute stocks depends upon
upon the
stock, the amount of shares outstanding, general conditions
and how well the stock is known or advertised among the
public.
For instance: In a market like 1919, when trading
trading averaged two million shares per day for over sixty days, it would
be easier to distribute a million shares of stock in sixty days
when the public were all
all wild and madly bullish, buying
everything in sight, than it would be to distribute them in
one year’s time in a normal market. When stocks reach a
level where distribution is taking place, they make rapid
moves up and down. There is a large volume of trading
and both short selling and buying is
i s taking place. People
are attracted to the stock that makes fast moves up or down,
because there are great opportunities
opportunities for making money.
People once convinced about a thing remain convinced
for a long time. For example: A stock moves from 120 to
150 seven or eight different times -- that is, every time it
comes down around 120 it rushes up again to 140 and 150.
The public finally become convinced that every time it gets
down around 120 it is a sure buy for quick profits. Now,
eventually, after the stock has been thoroughly distributed,
it declines to 120 and fails to rally. Everybody is long of it,
holding on and hoping. It goes down 10, 30, 40, or 50
points, until investors and traders become disgusted, scared
and sell out.
Some of the surest signs of distribution are fast moves
up and down on large volume, increased dividends, stock
dividends and special privileges to stockholders, which really
is the bait that catches the sucker and in the end causes a
big loss.
MISJUDGING THE TIME OF ACCUMULATION OR
DISTRIBUTION
It requires d
different
ifferent lengths of time in various stages of
the market to accumulate or distribute stocks. A pool may
62
form in the early part of the year and buy a large amount
of stock, expecting a spring rise. The advance comes in
April or May, and
and the pool sells out, distributing its lline
ine of
stock to the public. A break occurs in June or July and the
public gets scared and sells out the stocks they bought at the
top. Then this same pool, or another one, buys back the
stocks, and another advance comes. This may go on for
three or four different times with the stock being distributed
at the different stages, which are only minor periods of distribution, and finally when the extreme high or final zone of
distribution is reached and everybody is so bullish, the stock
is distributed for a long bear campaign.
The same occu
occurs
rs on the way down. The market halts
and holds at one level for some time, then rallies, where the
bears put out a line of shorts and the stock continues downward, going through two or three different stages of liquidation before the final stage is reached where accumulation
takes place for another big bull campaign. This is all fully
shown on the Charts Nos. 11 and 12, showing the different
tops and bottoms on the Averages of the railroad and industrial stocks.
Bull or bear markets all move in sections of three to
four waves up or down, individual stocks working out their
high or low points according to their Time factor and individual vibrations. See chart on Industrial Alcohol which
shows the different levels or sections on the way down. Each
resistance level might have been considered a bottom, but it
was only a temporary bottom, as it shows plainly that it
failed to make higher tops on each succeeding rally.
Many stocks will halt near the end of a bull or bear campaign and make a level which looks like accumulation or
distribution, and appears to be the final top or bottom, but
if the public buy heavily, or shorts
sh orts all cover around a level
of this kind, there may be built up, even at a very high or
very low level, a weak
weak long or short interest which will ca
cause
use
a final drive making the final top or bottom, as the case
may be.
Often when stocks are nearing final
final top, professional
shorts will put out a big line of short stocks; then something
will occur to cause them to get scared and start to cover,
63
and their buying, together with public buying, will force
prices to a level a little higher than previous tops, all of
which is plainly shown on the charts Nos.
Nos. 11 and 12 on Rails
and Industrials. This rule is also fully explained in the
example given in regard to Retail Stores and its bottom of
December, 1920, and the next bottom February and March,
1921.
RESISTANCE LEVELS
Before you start trading in any stock, get a chart on it
for several years back, if you can. Study it closely. Note
the levels at which bottoms and tops have been made. Find
out where its previous resistance points have been made.
Then you will be able to determine whether you are entering
the market at a safe or dangerous level.
Suppose in 1921 you wished to buy
buy a railroad stock which
paid a good dividend and had prospects of advancement.
We will presume that you made up a chart on New York
Central from 1896 to date. (See Chart No. 5.) Now
read about New York Central under chapter “How to Tell
the Stocks that are in the Strongest Position.” Thus you
will see that by having a record of stocks, you get acqu
acquainted
ainted
with their movements and are able
able to know whether you are
buying near the top or bottom
bottom of a move.
Suppose you ma
make
ke up a chart of a stock and find that it
has advanced from $10 a share to $50 and is selling at
$40. This would not be a safe place to buy, because it is
too close to the high price and too far away from the low
price. Of course, this does not mean that many stocks which
have reacted from $50 to $40 are not good purchases. I
am merely giving you an example of a place of safety in
buying or selling. No matter whether it is a small move
or a large move, before you buy or sell you should wait until
the stock shows that it is meeting with resistance one way
or the other. Always remember that you should have a
reason for making a trade. Do not buy or sell on hope;
that is pure gambling and gamblers always lose sooner or
later.
64
WHEN TO BUY OR SELL
SELL AFTER EXTREM
EXTREME
E TOPS OR BOTTOMS
The way to tell when to buy
buy or sell after
after stocks are away
from extreme tops or bottoms is to watch reactions and
rallies. The average stock reacts 5 to 7 points, sometimes
10; low priced stocks 2 to 3 points.
Watch the time required to complete major or minor
moves. In very active markets stocks will seldom react more
than two days or the third
th ird day they will sell higher. Buy
on the second day’s reaction and stop three points.
If stocks get dull or narrow near
near bottom or top,
top, wait for
activity, then buy or sell.
After a stock has held below a top or bottom for two
weeks or more, gets active and makes a new high or low,
then buy or sell as soon as it gets active in new territory.
GETTING IN WHEN THE MOVE STARTS
Many people see a stock start advancing and wait for a
reaction on which to buy. The reaction does not come and
they get left. Reactions, cross-currents and reverse moves
they get left. Reactions, cross currents and reverse moves
take place during the accumulation stage. When this is completed and the stock moves up out of the accumulation zone,
it does not react much. Why? Because the insiders have
bought all of the stock that they want and their next objective
point is to move it up to the distributing level where they
can start to sell. They do not come back to let you or anyone
else get on once the move starts.
He who hesitates in Wall Street is lost.
lost. Therefore when
you see a stock starting to move, if it is very active and the
volume of sales large, do not wait; buy at the market.
market.
The same ru
rule
le applies to selling. When once a stock
breaks out of the distribution zone, if you are long of it, sell
out at the market and go short. There is no use holding
on and hoping. The stock is not going to move back to a
high level just to let you sell out, no more than the 20th
Century train will back up to the Grand Central station to
let one passenger get on after it is twenty miles out. You
must get on when they holler “All Aboard” or you are left,
and this certainly applies to the stock market.
65
Of course, you must study the stocks and b
bee able to
determine when these big moves start. As a rule, when
accumulation or distribution is finished and the move is under
way, you can make
make more money in one to two months’ time,
while the run is on, than you can trading for the narrow
swings in six months’ time.
NARROW FLUCTUATIONS AND DULLNESS
Markets nearly always culminate at the top of Bull movements with wide fluctuations and large volumes of sales,
which may keep up over several months, finally culminating
with several days of two to three million shares. When these
signs come, take warning, for the end is near.
Bear markets, which are very rapid and fast, also wind
up with wide fluctuations and large volumes of sales.
s ales. For
instance: On December 22, 1920, stocks declined rapidly
and the volume of sales reached 3,000,000, which was the
largest day of the year. The market had
h ad been declining for
several weeks and the volume of sales had been running high.
This was the final culmination, from which a big rally started,
and many stocks have never sold lower than they sold on
that date.
For many years when sales of two to three million have
occurred at top or bottom, it has
h as always marked the turning
point one way or the other. When a stock or group of stocks
on Averages remains for a long time in a narrow range and
the volume of sales is small, it is a sign that either distribution or accumulation has run its course and the market is
getting ready to turn. After short weeks, months, or years,
watch which way the market turns and go with it.
Averages. -- The range on Railroad stocks in 1921 was
only 11 points on Averages. The market was down to 66
on Averages against a high price of 138 in 1906. This was
the shortest year’s fluctuations since 1912 and indicated that
liquidation had run its course, because Railroad stocks
s tocks became very dead and inactive and everybody afraid to trade
in them. Then the upward move started.
In comparing the position of Railroad stocks with Industrial stocks, note on Chart No. 1 of Yearly Averages that
67
both Rails and Industrials made extreme low prices in 1896;
that Industrials made a higher bottom in 1903 and a still
higher bottom in the panic of 1907, and declined to the same
level in the 1914 depression; in 1917 made a still higher
level and in 1921 went only two points lower than the low
of 1917, while Railroad stocks declined below the level of
every year, except 1898.
This shows that Industrials were receiving better support
support
and were in position to advance faster than Rails. They
have advanced 40 points on Averages from the low point
of 1921, while Rails have advanced only 27 points. This
is the way to compare the Averages of different groups or
individual stocks to determine the ones that are in the weakest or strongest position.
Many stocks when they reach low levels and accumulation is taking place remain in a very narrow range for many
months, but once they break out of this range, great activity
develops and you should watch the trend and go with it. For
example:
Mexican Pete. -- In 1918 advanced to 98 in February;
reacted to 90. Traded between 98 and 90 until May, 1918;
then advanced to 102. Reacted to 91 ; advanced to 102
again in June; then reacted to 96; advanced to 103 in July;
then in the month of August traded in a range from 100 to
102, only two points, which was the shortest month of fluctuations in its history. This short month of extreme dullness
at the top of an advance showed
s howed that accumulation was
taking place and that the insiders were simply waiting, giving
everybody an opportunity to sell all the stock they would and
to encourage a big short interest before starting the big
advance.
Therefore, this showed that it was getting ready for a
big move one way or the other. In September it reacted to
98, then advanced to 104, which was above all previous tops
since January, 1917. The advance continued, with only small
reactions, until the stock reached 194 in October, 1918. It