Books bySteveBurns

New Trader,RichTrader

ShowMeYourOptions

How I Made$2,000,000 In

The StockMarket. NowRevised AndUpdated ForThe 21stCentury

How I MadeMoney Usingthe Nicolas

DarvasSystem

How to GetFollowers onTwitter

Books byJannaBurns

New Trader,RichTrader

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CONTENTS

ForewordIntroduction

PartI:ManagingtheMind to Stay in theGameChapter 1 A good trade is

taken with completeconfidence andfollows your tradingmethod; a bad tradeis taken on anopinion.

Chapter 2 A good trade istaken with adisciplined entry andposition size; a badtrade is taken towinback losses themarketowesyou.

Chapter 3. A good trade is

taken when yourentry parameters lineup; a bad trade istaken out of fear ofmissingamove.

Chapter 4 A good trade istakentobeprofitableinthecontextofyourtrading plan; a badtrade is taken out ofgreedtomakealotofmoneyquickly.

Chapter 5 A good trade istaken according to

your trading plan; abad trade is taken toinflatetheego.

Chapter 6 A good trade istaken without regretor internaly conflict;a bad trade is takenwhen a trader isdouble-minded.

Part II: Creating aRobustMethodology

Chapter 7 A good trade isbasedonyourtradingplan; a bad trade isbased on emotionsandbeliefs.

Chapter 8. A good trade isbased on your ownpersonal edge; a badtrade is based onyouropinion.

Chapter 9 A good trade ismadeusingyourowntimeframe; a badtrade changes

timeframe due to aloss.

Chapter 10 A good trade ismade in reaction tocurrent price reality;a bad trade is madebased on personaljudgment.

Chapter 11 A good trade ismade afteridentifying andtrading with thetrend; a bad tradefightsthetrend.

Chapter 12 A good trade ismade using thetrading vehicles youare an expert in; abad trade is whenyou trade unfamiliarmarkets.

Part III: ManagingRisk to Stay in theGameChapter13Agoodtraderisks

only 1% of totaltradingcapital;abadtradedoesnothaveasetamountofrisk.

Chapter14Agoodtraderisks$1tomake$3;abadtrade risks losingmorethanitplansonmakinginprofits.

Chapter 15 A good tradefollowsatradingplaneven during drawdowns in accountequity;abad trade is

a big trade made toquicklygetevenafterastringoflosses.

Chapter16Agood tradehasa limited downsidebut an unlimitedupside; a bad tradehas unlimited riskandalimitedprofit.

Chapter17Agood tradehasan optimum positionsize for that tradesetup; a bad trade isbased on feelings,

financial need, orconfidenceinatrade.

FOREWORD

I havehad thegreat honorof knowing Steve Burns forseveralyearsnowandsowasthrilled to hear of theauthoring of a sequel to histradingclassic, “NewTrader,RichTrader”.Throughoutourfriendship, Steve hasconsistentlydemonstrated theuncanny ability to analyze

various problems and biasesof the New Trader andarticulate such issues in aunique and accessiblemanner.As a result, when Steve

and Janna askedme to writetheForwardto,“NewTrader,RichTrader2”,IknewIwasin for an entertaining andinsightfuljourney.Theirbookdidnotdisappoint.Incontrasttoitsprecursor,“NewTrader,

Rich Trader”, where NewTrader struggled with basicissuessuchasdevelopmentofa positive expectancymethod, position sizing aswell as determining whichassets to trade; in thismanuscript all those issueshavebeen resolvedand so atthe book’s inception onemight imagine New Traderwould simply be relating hissuccessestoRichTrader.

As anyone who hassuccessfullytransitionedfrom“New Trader” to “RichTrader” can attest, this is notthe case and our authorsbrilliantly navigate NewTrader’s journey fromknowing how to trade “intheory” towards flawlessimplementation of hispositive expectancy modeldespite draw downs, missedopportunities, price shockevents,andsoon.Asinallof

Steve’s books, I amconsistently amazed at howdespite his obvious masteryof our business he can recallwith intimate detail what itwas like to make the fullgamut of “New Trader”mistakes.“New Trader, Rich Trader

2” will have New Tradersreachingfortheirhighlighterswhile Rich Traders smileknowingly at distance

memoriesofpainfulmissteps.Wherever you are in thejourney from New to RichTrader, this book is anindispensable tool filledwithlots of “Aha” moments. ToSteve and Janna,congratulationsona jobwelldone, to all theNewTradersreading this, pat yourself ontheback forhaving foundanindispensable aid in yourjourneyfromnovicetopro.

Richard L. Weissman,Professional Trader andAuthor,TradeLikeaCasino

“Trading is not thepath to free money;profitsmustbeearnedthrough homework,discipline, courage,patience, andperseverance in themarkets.”

–RichTrader

INTRODUCTION

There are many questionsthat a trader has to answerbeforeenteringatrade.Thereis abigdifferencebetweenagood trade and a bad trade.The primary differencebetweengoodtradersandbadtraders is that good tradersconsistently make goodtrades, while bad traders

makeconsistentlybad trades.Agoodtradedoesnotalwaysmakemoneyandabad tradeis sometimes profitable.However, this does notchangethedefinitionsofrightand wrong, good or bad.Trades should be measuredby the quality of thereasoning for taking them. Iftraders consistently taketradesthatexercisetheiredgeover the markets, they willmakemoneyinthelongterm.

The worst thing that canhappen for a new trader isbeing rewarded for a badtrade.Thisshort-termwincanresult in long-term failurewhen his luck runs out andthemarketchanges.My purpose and goal in

this book is to show thereaderthedifferencebetweenagoodtrade,onethatismadeinside the parameters of atrading plan with an edge,

and a bad trade that isemotionally based on greed,fear, or opinion. In the longterm, tradersarea successorfailurebasedonthequalityoftheirtrades.The creation of bad trades

is easy: trade your opinion,trade big, don’t cut yourlosses,justholdonandhope.Bad trades fight trends; theyput out a lot of money withthe risk ofmaking little.The

entryandexitsignalsforbadtradesarehopeandfear,withthe ego stepping in andrefusing to honor the stoploss.Good trades require work.

The right trades come onlyafter doing the requiredhomework: chart studies,researching historical priceaction, or back testing alongwith research of chartpatterns. In markets, price

actioncanstayinsidearangeor theycan trend.The jobofthe trader is to discover howto profit from these patternsover the long term. Tradingprice action is only the firstpart of a good trade;withoutrisk management anddiscipline no trade is a goodtrade.Thepurposeofthisbookis

totakethereaderthroughtheprinciplesand thedifferences

betweengood tradesandbadtrades.

PARTI

MANAGINGTHEMINDTOSTAYIN

THEGAME

“Dramatic andemotional tradingexperiences tend to be

negative; pride is agreat banana peel, asare hope, fear, andgreed. My biggestslipups occurredshortly after I gotemotionally involvedwithpositions.”

–EdSeykota

Chapter1

Agoodtradeistakenwithcompleteconfidenceand

followsyourtradingmethod;abadtrade

istakenonanopinion.

“It’s not themathematical skillthat’s critical towinning; it’s thediscipline of beingable to stick to thesystem.”

–BlairHull

New Trader walked

through the rain to RichTrader’s front door. Heknocked twice. When RichTrader arrived at the door,whatasightNewTraderwas:drenched and dripping wetfromheadtotoe.“Can you not afford an

umbrella?” Rich Traderasked.“Ican,itistheplanningto

keep one with me that I fallshorton,”heanswered.

“Well, come in out of therain. It has been awhile,”Rich Trader motioned himinside.AfterNewTrader tookoff

his wet coat and shoes andgot settled in a comfortablechair, he sat drinking hot teaby the fireplace, ponderingthe past year. Rich Traderappeared as comfortable asever in loafers, a polo shirt,andslacks.

“What brings you to myhumble abode today? It hasbeenquiteawhile,”heasked.“Well,Ididnotwanttobe

a nuisance after you sogenerouslygavemesomuchof your time last year. Youtaughtmeallthefundamentalprinciples for successfultradingandIfeltitwasuptome to go use them,” NewTradersaidappreciatively.“So how did you do?” he

asked.“I finished up 22% last

year inmy trading account,”New Trader answeredproudly.Rich Trader gave him a

look of disappointment. “Ididn’taskaboutyourreturns,I asked how YOU did. Oneyear’sreturnhasverylittletodowithyou;thatcanbepurerandom chance. My concernis you, your discipline, your

focus,yourriskmanagement,yourstressmanagement,yoursystem-building and system-following skills. So how didyou do?” Rich Trader askedagain.“It was a learning

experience.With real moneyonthelineIdiscoveredthingsaboutmyself that I thought Ihadmovedpast.Ionceagainexperienced fear of losing,greedofwanting to trade too

big, my ego wanting to beright. I found myself tradingmore against my ownnegativeemotionalstatesthanthe market’s pricemovements, “New Traderexplained.“That is a normal

experience with new tradersmovingfromtheclassroomtothearena.Youwant toprovesomething to yourself and toothers.Atrader’sgoalistobe

above those impulses whichlead you to making wrongdecisions. Instead, mosttradersallowtheirfear,greed,and ego to send theirmoneyto the accounts of thedisciplined traders whosimply follow the priceaction,”saidRichTrader.“Isn’t that the truth! The

more I traded, the more Irealized trading is a mentalgame,notanumbersgame. I

found myself making upexcuses tooverridemyrules,only to discover that thisinterference only hurt myperformance in the longterm,”heresponded.“The best trader you will

ever be is that person whodoes research anddevelopment outside markethours. The worst trader youwill ever be is someonewhosits on a stringof losses in a

drawdown and wants to getback to even. While themarket is closed, you as thetradinganalystandresearchermust decide what you thetrader will do when themarket isopen.Yourentries,exits, and position sizingshouldbedeterminedbyyourmind when the markets areclosed, not by your fear,greed, and ego while themarket isopen,”RichTradersaid.

“Mymistakeshavebeeninmy management of my ownmind; that is where mytroublestarted.TradingisjustnotasfunasIhadimagineditwould be. Profits can betaken back after they aremade so there is not reallymuch to celebrate duringwinning trades. The losseswere out of my control. Themarket goes where it wants.All I cando is to respectmystops and choose the size of

my losses,” New Traderresponded.“Exactly, and you are not

your trading; you are thetrader. You are simplyfollowing your plan. Tradingisoneof the fewprofessionswhere even most successfulpractitioners have lowwinning percentages. Mostprofessions, like being adoctor,alawyer,engineer,orthe like, demand huge

winning percentages. For adoctor to fail in surgery is acatastrophe.Thebestlawyerswin a large percentage oftheir cases. Traders aredifferent. Some of the besttrend-following traders havelowwinpercentageslike30%or less, but stillmakemoneybased on their huge winsbeing greater than all theirlosses. Oddly enough thereare options sellers with 90%win rates who end up losing

money in the long runbecause one loss in ten isbigger than the other ninewins; worse, the optionssellerblowsupwithonehugelossduetoover leverageandthe unexpected move thathappens when they have nohedge in place. They highwinning percentage tradersare the rare ones and eventhey must keep their fewlossessmalltostayprofitable.Mosttradershave50%orless

winningpercentagesandtheirprofitability emerges fromtheir wins simply beingbiggerthantheirlosses.Most traders aremore like

batters in baseball than anyother profession. Regardlessof how good a batter is,hittingandgettingonbase isonly accomplished one-thirdof the time. Batters have tofollow their process of whento swing and when to not

swingforthegreatestoddsofgetting ahit.Two strikeoutsin a game are quicklyforgiven if the third at-batresults in a grand slamhomerun. The bestprofessional baseball playersdo not have a self-esteemcrisis after a strikeout or afewinarow;theyknowwhotheyare andhow theygot tothe big leagues andmove ontothenextat-bat.Thesuccessof a trading career and of a

baseball career is based onthe long-term process ofsticking with what works,”RichTraderexplained.NewTrader replied: “That

isthehardpart,stickingwiththe process when you loseover and over again. It iswhendoubtaboutmyselfandmysystemcreepsin.”“The fuel that takes anew

trader from wanting to be asuccessful trader to being a

success is desire, passion,faith, resources, andknowledge. If one of theseelements ismissing, the newtrader may not make it overthe bridge to get the prize.Desireknowswhatyouwant.Theoddsofyougettingwhatyou want start increasingonce you have a target.Desire is the fuel that givesyoutheenergytodotheworkrequired to be a successfultrader.

Passion gives you theenergy to research, do backtests, and not stop until youfindthesystemthatworksforyou. Passion is the fuel ofperseverance. With enoughperseverance, the only thingthat separates you from yourgoalsistime.Faith knows the outcome

before you begin.You knowwhoyouwillbecomeandyouarewilling todo thework to

get there. Faith is a verypowerful force. Many timesyourlifewilllineupthewayyou believe it will; throughthe power of your actions,your subconscious startstakingyouwhereyouwanttobe.Traders have to have the

resourcestomakethejourneytosuccess.Youhavetobuildyourselfenoughcapitaltogetinthegame.Youneedaccess

to therightmentorsandlike-minded traders for support.Youhave tohave thementalresources todealwith failureto get through to success.You need to build up yourknowledge through study –the study of successfultraders, the study of charts,price action, and riskmanagement. Mentors canhelp you build thefoundational knowledge ofwhat works with trading the

markets. Mentors can onlyteach you and show you andtell you how to swim. Youhave to swim over the riveryourself.So why are you having

trouble consistentlyswimming over the riverusing the right form?” RichTraderasked.NewTraderansweredafter

three minutes of staring atRich Trader with a puzzled

look.“Fear of drowning, fear of

waves,fearofwhetherornotIamagoodswimmer.”“So does your problem

with trading a systemconsistently lie within yourownmindorwiththequalityof your chosen tradingmethod?”heasked.New Trader paused again,

andthenanswered.

“I am the problem, orbetter yet, my lack ofcontrolling my thoughts andemotionsistherootofallmyproblems.”“The trader is the weakest

link in any trading system.The trader, more than eventhesystemheistrading,istheultimate determiner ofsuccess or failure. Once arobust system has beenchosen,itistheabilitytotake

entries and exits consistentlywith discipline whilemanagingriskwhichmakesaskilled trader. This is whatleads to tradingsuccess.Thisis the Holy Grail so manytraders seek, yet so manycan’t even understand,” RichTraderconcluded.NewTradersatbackinhis

chair listening to the firecracklinginthefireplacewithanemptycupof tea inhand,

ponderingwhyRichTrader’sexplanation sounded so easyyet was so hard to do withrealmoneyontheline.

Chapter2

Agoodtradeistakenwithadisciplinedentryandpositionsize;abadtradeistakentowinbacklossesthemarket

owesyou.

“Ninety-fivepercentofthe trading errors youare likely to make –causing the money tojust evaporate beforeyour eyes – will stemfrom your attitudesabout being wrong,losing money, missingout, and leaving

moneyonthetable.”–-MarkDouglas

“Iwillberightback,”NewTrader said, getting up fromthecompanymeetinghewasattending.Oneof theothermanagers

senthimaknowingfrownashe left, but he really didn’tcare. The market wasdropping, and it was all he

couldthinkabout.So, for the third time inas

manyhours,hepulledouthisphone – which he normallylovedbuthatedtheapp’stinystupid buttons – and lookeduphisstock.It had dropped another

point, and his stomachdropped.Pull out. His mind was

screaming, don’t lose anymore money! Forget the

signal,justgetoutnow!He gulped, his palms

feelingsweaty…hisplansaidto wait for the signal, but ithadbeengoingdownalldayand it was almost at thestoppingpoint.He pressed the buttons,

feelingamigrainecomingon.It was too late now, though,andhehadlostabout$1,300.Well, that and thecommissions.

When he left that daycheckinghisphone,hecouldhave smacked himself. Infact,healmostdid. Ifhehadfollowed his plan, he’d havebeen up almost $1,000 andstillrising.Stupid, stupid, stupid!

Follow the plan, not yourfear!Hescowledashedrove to

the little cafe he and RichTrader usually met at. Once

he got there, he found hismentor and greeted himwithatightsmile.“Thanks for coming to

meetme.”“Well, of course. I do

ratherenjoyeatinghere, theyhavethebestcoffee.”NewTradersmiledathim,

leststrainedthistime.“What’s troubling you?”

the olderman asked, sipping

his coffee as his eyessearchedforthewaitress.“Oh,it’snothing,I just…”

hebeganwithasigh.“Ididitagain.I letmyfear takeoverandIlostalotofmoney;butif I had followedmy systemand waited for the signal, Icouldhavemademoney!”Rich Trader shook his

head.“Butthat’snotthemostimportant part. It’s not aboutthe actual money gained or

lost; it’s aboutdiscipline andcontrolling emotionalimpulses.Though this is alsoa prime example ofwhyyoushouldfollowyoursystem.”“Yeah, I know…” New

Trader said with a sigh,stirring the coffee RichTrader had already beenconsiderate enough to orderhim. “But now it’s just…how did you deal withlosses?”

“Well, first I had to learnthe hard way that I didn’tknowbetterthanthemarket,”Rich Trader began with achuckle. “I would sit here atthis very cafe and watch themarket riseor fall, thinking Iknew it all, that I couldpredictthemarketbetterthanmy plan that I had spenthours upon hours making.OthertimesthemarketwouldscreamatmetogoshortasIcontinued to buy support

levelsevenastheybrokeoneafter another.Then itwas allhope, not thought. Mypredictions and my pridereplaced the reality of whatwastakingplace.”Hepaused to take a sip of

coffee. “And then you alsohave to consider what a lossactually is. Forme, a loss isnot when I lose money; it’swhen I don’t follow myplan.”

New Trader smiledguiltily.“So in that respect, it is

veryrarethatIloseanymore.I might lose money, but Idon’t lose confidence. Ah,thankyou,Jane.”Theirusualwaitresssmiled

athimasshegavethemboththeir usual: the Tuesdayspecial,minusthesauce.“No prob, boys,” she said,

winking at New Trader

playfullyassheleft.“She’s a rather nice girl,”

Rich Trader commented andhis younger companionscowled.“Ihaveagirlfriend,thanks.

Anyways, it doesn’t matter.How do I deal with thesestrings of losses?” NewTrader asked, taking a bite.“Well, unprofitable trades, IsupposeIshouldsay.”“Well, I would beginwith

shrinkingyourpositionsizes.This means that as you losemoney you lose less and areat your smallest positionsizing, aswell asminimizingyour exposure during losingstreaks.Thenyouwouldstartto grow your position sizeagainasyoustarttowin.Theway I trade in volatile,choppy, and range-boundmarketsistoriskverylittleorstayfullyincash.Iwaitforabreakoutortrendtoemerge.I

willalsobuyintoreversalsatkey levels that have a highprobability edge. I’m in nohurry to rush into anything.I’llstilleatifItrade.There’sno reason to rush into morelosses. Much of our tradingcomes down to a battlebetweenourpatienceandourimpulses.”“That… makes sense,”

New Trader said, ponderinghiswords as he stared at his

food.“Itmakesperfectsense,actually. I hadn’t thought ofthat as an angle for positionsizing. Most people new totrading increase position sizeto get back to even duringdraw downs but end uphurting themselves in everyway – financially, mentally,and emotionally. It makessense to turn down the heatwhen you’re gettingsmoked.”

Rich Trader chuckled,mildlyimpressed.“Thatisanexcellent analogy there, forsure.”New Trader continued,

encouraged by his mentor’spraise.“Soit’sreallyjustmypassion fanning the flamesandmakingmewoundupandtense… how should I coolmyselfoff?”“Passions have to be

channeledintowhatwillhelp

you the most: research,development, and furthereducating yourself. Livetrading is where strongpassionsanddesiresare leastneeded. Improperly used,passion and desirewillmakeyou want to push for moreand take bigger risks. Thecalm, rational trader is thebest trader. He won’t pressand want things to happen;this isdangerous.We cannotwillthemarkettodowhatwe

want,wecanonlywatchandwait. So save your intensityand use it outside markethours,whereyourrealmoneyisn’tatrisk.”New Trader nodded.

“Right, it’s all about gettingcentered and following theprocess.Not trying to hit theball out of the park everyswing. It’s about form andcomposure and taking therightswingsattheplate.”

Rich Trader chuckled.“Yourememberedthat?”“Of course,” New Trader

said. “I remembereverythingyou teach me… I just don’talwayslearnittheeasyway.”“Fairenough,”RichTrader

saidwithafondsmile.“Well,when a trader has the rightprocessdown, theirwinsandlosses are defined by theirability to follow that system.That’swhenthebreakthrough

occurs. A trader isn’t theirresults or their P&L; they’rejust the witness of what’shappening to their system.Losses should inspirecuriosity,notacrisisoffaith.And once you’veaccomplished that feat, atrader will cross the roadfrom the majority to theminority with a mental edgeovertheotherparticipants.”New Trader finished his

meal, restinghis napkinoverhisplate.“Trading isn’t just about

shorttermprofitability…”hemurmured thoughtfully.“Profits come from traders’consistency in trading themarkets they’re in, whetherthat’sdaily,weekly,monthly,or over the course of theirlives.”“Exactly,” Rich Trader

said, back to sipping his tea.

“Trend followers do great intrends, option sellers makemoney when the strike priceisn’t reached in their shortoption, and reversion-to-the-mean traders do well insiderangeboundmarkets.It’snotthe trader, it’s the system.Our jobas traders is tobuildthose systems and tradewitha methodology that we canfollow consistently throughdifferent marketenvironments.”

“When the stars align wehavetobetheretocollectourbucket of money,” RichTrader saidwith a smile thatbordered on a smirk.“Trading is not aboutoutcomes; it’s about theprocess. Outcomes can berandom but the processmustbe robust. A good tradingprocess will lead to capitalappreciation over the longtermaslongasthetradercanfollow that process and not

drift from it in unfavorablemarketenvironments.”“Sobasically,agoodtrader

is one who finds the robustsystem, then trades it withdiscipline and focus? Andthat’s the game? Profits andlosses are completely out ofourhands?”“Of course not… Traders

choosethesizeoftheirlosseswhen they honor theiroriginal stops. Traders also

choosetohavebiggerwinsiftheyallowawinningtradetorun and let a trailing stopdecidewhentherunisover–ratherthandecidingbasedona target, opinion, or fear oflosing profits. And all thesechoices should be madeahead of time, inside atrailing plan and outsidemarkethours.”“So the tradingplan ismy

boss?” New Trader said

blandly.“Well, I suppose inaway.

But it’s a boss that youhavefull control over, whereasyour emotions and ego is aboss you would be hard-pressedtorestrain.”“SoIamaplannerfirstand

foremost?”NewTraderaskedas the bill arrived and theirplatesweretakenaway.“Well,it’sthefirstpieceof

thepuzzleperhaps.Whatwill

most determine your tradingsuccess is your ability tobuild a robust system basedon a method with an edge.Thenyouformulateatradingplan which follows thatsystem in a way that can beprofitable in the long term.The hardest part is actuallyfollowing your plan andlettingitplayoutwithoutfearorpridegettingintheway.““Right,” New Trader said,

leaving his usual tip on thetable. “That sums it all uprather nicely. I’ll get right toit.”Rich Trader laughed,

shakinghishead.He remembered those

days.

CHAPTER3

Agoodtradeistakenwhenyourentry

parameterslineup;abadtradeistaken

outoffearofmissingamove.

“Essentially,whatyoufearisnotthemarketsbut rather yourinability to do whatyou need to do, whenyou need to do it,withouthesitation.”

–MarkDouglas

“So it’s really about the

mindset,notyourpredictions.LikewhenI…”Hecouldseeithappening.Hereyes staredto glaze, her head tilted, andwhenhewasdoneshewouldsay…“That’s great, honey. It’s

so good that you’re makingall that money on the stockmarket.”He gave her a dull look.

That wasn’t even what hesaid.Butmostpeopleseemed

togooffintotheirownworldonce he started talking abouttrading, so it really wasn’tthatsurprising.“Right.”“Maybe one day you can

quitanddoitfulltime!”“Yeah, thatwouldbenice.

I’dgettowearmypajamastowork!” he saidwith a laugh,though the look on her facesaid she wasn’t fond of theidea.

“You’d make so muchmore money doing thatanyways.Whydon’tyoujustdoit?”shesaid–adiscussionthey’dhadmanytimes.“Because I still want a

steady income to supplementmy losses; I’m notcomfortabledoingthatyet.”She rolled her eyes. “Buy

low, sell high… it can’t bethathard.”

For a moment, he had noreplytohercomment.“Then why don’t you do

it?”“I don’t have enough

money to start an account,and it all looks socomplicated. But youunderstand all those chartsand things, so you shouldmakemoneylikecrazy!Isn’tthat what you’re alwayssaying?”

“It is so much morecomplicated than that! Wereyou listeningat all towhat Iwas just saying? It takesdiscipline and… You knowwhat? Let’s just drop this.There’s no reason to argueand I’mabout to run late formylunchwithRichTrader.”“Oh,Isee.”“What?”“You’regoingtosee‘Rich

Trader,’right?”

“Yes.”She rolled her eyes.

“Whatever.”Hegaveheranincredulous

look before leaving for hisusualcafe.Women.When he arrived, Rich

Trader was laughing atsomethingJanehadsaid.Shelooked up as New Traderentered,smilingathim.

“Theusual?”Henodded, his smile back

strained.She left,hiscoffeealready

onthetablewithtwopacketsofsweetener.“So, how are you on this

beautiful afternoon?” RichTraderasked,stirringhistea.“Fine. Just trying to figure

everythingout.”“You mean with your

tradingmentality?”NewTradernodded.“Well, what were your

biggesterrorslastyear?”“Well…Iwasn’tpatient. I

wouldn’t wait for the rightentries or I’d start chasingaftersome trades.Sometimesit worked out, but notusually.”Rich Trader laughed.

“Good trades are like buses.

Ifyoumissone,youjustwaitforthenextonetoarrive.Theworldisfullofbusesandjustas full of good setups fortrading.Asatradebreaksoutatyourbuysignal,thefurtherthe move away from its keylevelandthemorerisksthereareinchasingit.”“Yeah,andifyoumissthe

entryyoumightalsomissthebulk of the move,” NewTrader said, thanking the

waitresswhenshebroughthisfood.“Evenwhen a trend really

runs it will usually give youanother shot at entry as itpulls back to the nearestsupport on the way to goingback up. In the long run,patience pays better thanboldness for traders,” RichTrader said. “The ability toconsistently trade only thehighest probability entry

setups will be one of thedeterminants of a trader’slong-term success in themarkets. Continuouslychasing moves that arealready out of the gate is asure way to grind youraccountdownwithlosses.”RichTradertookamoment

to sip his coffee beforecontinuing.“The reason the vast

majorityofnewtradersnever

makeitisthattheytakeentrysignals based on theiremotions. They’re afraid tomiss a move so they chaseafterastockafterit’salreadybroken out and run. Itbecomes too tempting afterthey’vewatcheditdayinandday out, so they just can’ttakeitanymoreandbuy.Andthis low probability trade is,many times, right at the timeother traders who entered attherightpricelevelaretaking

their profits and exiting. Sothemove isoveror thepriceisgoingbacktobase.”New Trader nodded. “Or

going shortwhenyoushouldbegoinglong.”RichTradernodded. “Yes.

The wrong time to short isusually when a stock isfinallybreakingoutofapricebase into all-time new highsandthenewtrader thinksit’stime to go short. What the

newtraderdoesn’tunderstandisthatthestockisgoingfromrange-bound to trending andthey are shorting when theyshould be going long. Thebreakout signals that sellersin the old price range havebeen overcome by buyerswanting in, and the stock isunder accumulation so it’ssearching for a new pricerange and will trend until itfindsone.Usually, a short atall-time highs is ego-based

becausethenewtraderwantstobetheonewhocansaythattheyshortedatthehighs.”New Trader nodded,

finishinghismouthfuloffoodbeforereplying.“It’s strange how my

emotionsflood to thesurfacewhen it’s time to takeentriesand exits. Fear, greed, ego…theyallwantmetostrayfrommywrittentradingplan.”“Yes,butyourtradingplan

is written to make money inthe long term, while youremotionsaretryingtoprotectyou from losses in the shortterm. Your fear is trying toprotect your profit fromturningintoaloss,whileyourtrading plan wants a smallprofittoturnintoabigprofit.Your greedwants to chase atrade that has alreadyhappened while your tradingplan wants to enter a tradebefore it has the big moves.

Your ego wants to be rightabout a trade in the shortterm,whileyour tradingplanwants to makemoney in thelongterm.”“So,basically,asusual,my

biggest battle is trading myactual plan, not myemotions.”Rich Trader chuckled.

“Yes…very frustrating, isn’tit?Findinganedgeoverpricemovements isa jobinandof

itself; don’t compound thedifficulty of trading with anedgebyhavingtobattleyouremotions. Coming up with atradingplanisnotthehardestpart of trading; once you getthis far, following it withperseverance, discipline, andrisk management is whatseparates winning tradersfromlosingtraders.”“So after you’ve gone

through all the trouble of

doing research anddevelopment and built yourtradingplan,thenyouhavetoactually follow what it’stelling you. The researcherandscientistinyoudidallthework; now it is up to thetrader within to do what it’sbeingtoldtodo.”Rich trader nodded. “You

have to root out all thereasons why you broke yourtrading plan. Look inside

yourselfandask:Why?Whatcaused me to panic, sell,chase, risk toomuch, try toohard, and generally do whatmost losing traders do? Youhave to answer thesequestions if you are to besuccessful.”They paused to eat their

food. Minutes later, RichTraderbrokethesilence.“Do you know the single

primarydetermineroftrading

success?”“…Selfcontrol?”“Yes.Yoursuccesswillbe

based on your ability tocontrol yourself in yourtrading.”New Trader paused in

thought.“IfI’mnotincontrol,then

my emotions are: myimpulses, bad attitude,preconceived beliefs about

howthingswork,thefightorflight instinct, maybe even aself-constructedegothatfeelsthreatened by failure or evenbysuccess.”Rich Trader nodded.

“You’renoneofthesethings;don’tletthemtakeyouover.”“Yet… if none of these

things are me, then whatexactlyamI?”“Youarethewitnessofall

these things. If you change

perspective and see thesethings forwhat they are, youarenot them;youarehumanconsciousness witnessingwhat arises in your field ofconsciousness. You can letthemtakeoveroryoucanseethem for what they are andmakedecisionsbasedonyourmindandyourwill.Youcanmake decisions that take youwhere youwant to go in lifeor you can let externalelements influence you and

take you where you don’twant to go. It’s a choice ofstayingincontrolorallowingyourselftobesweptawaybywaves of external factorswhich warp your decision-makingprocess.”Sofollowingatradingplan

is to simply trade it in thepresent moment without anyothermeaningsattachedtoit?It’sjustonetradeofmany?”“Exactly, to follow a

trading plan you have todisconnect any one trade’smeaning from anything otherthan what it actually is. It isnot a battle for self-worth. Itisnotthedeterminantofyourfinancial future. One tradeshould not have any impactonyour emotionsor life; it’sjustonetradeofthenext100if you’re doing it right. If ithas more meaning than justone trade of the next onehundred,thenyouaretrading

too big. Your system’s drawdowns are too big, you havetoomuchriskatonetime,oryou are trading for a livingwhenyoushouldbebuildingyour capital and paying offbills.”“So trading should just be

trading. There should be nointernal story, no externalmeaningbeyondtheP&L?”RichTradernodded.“Yes. If there’s more to

yourtradingthanjusttrading,you’re doing somethingwrong. Find out what it is,correctit,andthenmoveon.”

CHAPTER4

Agoodtradeistakentobeprofitableinthe

contextofyourtradingplan;abadtradeistakenoutofgreedtomakealotof

moneyquickly.

“Experienced traderscontrol risk,inexperienced traderschasegains.”

–AlanFarley

“Whathappenednow?”New Trader looked at his

girlfriend with a newfoundsenseofannoyance.

“I lost money,” he said.Besttokeepitsimple.“Again?”sheaskedwitha

frown.“I told you it would take

time to learn. And no onewinseverytime!”“Well, maybe you

shouldn’t be doing it then!It’s just gambling away yourmoney.”He groaned, rubbing his

temples. “No, it’s… I reallydon’t want to have thisconversationagain.”She narrowed her eyes at

him.“Fine.Don’tlistentomeandjustgambleallyourhard-earned money away!” sheexclaimed before stormingoff.He rubbed his eyes.

Sometimesshejustmadehimsotired.It’s like themorehetried, the worse everything

got.Sort of like my trades

recently, he thought with aninner laugh. He and RichTrader had talked about itrecently.“Greedy trading is bad

trading,” Rich Trader hadtold him. “You want toalways be trading theprobabilities, not what youwant to happen. The worseentry signal that any trader

can take is based on theirgreed. The worse exit signalisbasedon fear.Entriesandexits have to be built aroundtheprobabilityofwinning,noon what profits you want tomake.”It was strange, because he

remembered Jane standing infront of the table for a goodwhile before collecting theirplates.“You canwork as hard as

you want in research todevelopatradingsystemanda plan that works for you.However, you then have tofollowthatplan.Athletescantrain and practice all theywant,butwhentheyentertherealgametheyhavetofollowthe rules or they won’t win.Breaking your own tradinggamerulesdefeatsyou.”He thought about it some

more.

“Trading in more like asport of finesse than a sportofeffort.Golferswinbecauseof the right technique andmethod,notbytryingharder.If you are a bad golfer,practice and effort meannothing in a game. You aresimplyreinforcingbadhabitsandwastingtimeandenergy.Therealpointofgolfingandtrading is to have the righttechnique, then use it withdiscipline and mental

toughness over and overagain. Success comes fromusingwinningprincipleswithperseverance and disciplineover a long period of timeuntil they pay off in a bigway.“He remembered reiterating

thefactthatwork,effort,andhomeworkwereforwhenthemarketwasclosed;disciplineand self-control were forwhenthemarketwasopen.

“A trader is like a surferwhocannotcontrolthesizeofthewaves.Allhecandoistoride the waves the best hecan.Hecanstudythetimesofday and weather conditionsthat create different-sizedwavestogetanedgeonwhatto expect, but all he can doafter all the practice andstudyisridethewaves.”His own wanting to make

money had led him to make

the mistakes of trading toobig and risking too much,putting effort where thereshould have been patienceand trading when he shouldhavewaited.Once again, he was the

weakest link in his owntradingsystem.Heseemedtohave two trading impulses:the Analyst and the GreedyTrader. The Analyst wentthrough the charts and back

tested calmly, seeing whatworked over long periods oftime. The Analyst was calmand self-controlled. Heenjoyed trading and lookedforward towhen themarketsopened.Then there was Greedy

Trader who wanted to makemoney at all costs. Hebelieved he was muchcleverer than the othertraders, though there was

littleevidenceofthis.GreedyTrader believed he couldoverride Analyst’s tradingplan and do whatever heliked.Greedy Trader liked to

trade big, with falseconfidence in his skills as adiscretionary trader. Heproved to be a fool in mostcircumstances but continuedtotrytomakebigprofits.NewTraderhad tokill the

egoism that gave life to thisaggressive, internal GreedyTrader before it killed hisaccount – sort of like hisgirlfriend who sometimestried to kill his checkingaccount.Hesighed.Hewantedtobe

a successful and profitabletradersobadly.So he knew what he

needed to do. He needed tofocus on self-control and

processandlettheresultsfallwhere they may. He neededto give up control of resultsand focus on his role in theprocess.His truefocushadtobeto

manage risk, follow hismethod, and stay mentallydisciplined, letting theresultsfall where they may. If hewanted to rework his systemortradingplan,thathadtobedone in the off-market hours

and planned before thetradingdaybegan.Of course, as Rich Trader

told him, his desire to makemoney was misplaced. Heshould desire to be a greattraderwhofollowsprocess.Afterall,tradingprofitsare

the outcome of following arobust process, not trying tomake sudden decisions withno context. Your mind mustbe that of an entrepreneur

running a business, not themind of a gambler at theroulettewheel.Traders get themselves in

troublewhen they stray fromthe risk/reward probabilitiesof a situation and tradeaccording to their self-delusions of being a specialtrader who can outsmart themarkets. Eventually andinevitably, that will endbadly.

“Iamabusinessman,notagambler,” he said quietlybefore getting up towork onhissystem.

CHAPTER5

Agoodtradeistakenaccordingtoyourtradingplan;abadtradeistakentoinflatetheego.

“The most important

change in my tradingcareer occurred whenI learned to divorcemyegofromthetrade.Trading is apsychological game.Mostpeople think thatthey’replayingagainstthe market, but themarket doesn’t care.

You’re really playingagainst yourself. Youhave to stop trying towill things to happenin order to prove thatyou’re right. Listenonly to what themarket is telling younow. Forget what youthought it was telling

you five minutes ago.The sole objective oftradingisnottoproveyou’re right, but tohear the cash registerring.”

–MartinSchwartz

“Do you know what atrader’s biggest obstacle to

success is?” Rich Traderasked, stirring his sweetenerintohiscoffeeashewatchedthesundisappearintothesea.The days always seemed toendsoearlynow.What answer was he

looking for? Riskmanagement,tradingwiththetrend, not fighting themarket? It could be somanythings…“Fighting the actual price

action?”“Close,” Rich Trader said

with a smile, sipping hiscoffee."Notmanagingtheriskof ruin?’ New Trader triedagain.“Why would you fight

price action or trade so bigthat you could blow up youraccount?” the older manaskedgenuinely,browraised.“Because I really want to

make a lot of money and I

don’twanttoadmitwhenI’mwrong.”“And what causes you to

want tomakea lotofmoneyand hold on to a losingposition?”“I want to prove I’m a

great trader tomyself and tomyfamilyandfriends?”“Is that a question or an

answer? And if it’s aquestion,why?”

“IsupposebecauseI’mnotyetsuremyself.”“These are all things that

youmustknowbeforeputtingrealmoneyatrisk.Tradinginthe markets is a veryexpensive place to ‘findyourself.’Counselingismuchcheaper than trading. Fear,greed, and ego are veryexpensive monkeys to haveon your back while trading.They spend all day telling

you to let losing trades run,cutwinners short, and forgetyour trading plan to proveyou are right. Your biggestcompetitor in the markets isnotothertradersbutyourself.Youdetermineyourentryandexitplan,nooneelse.”“So my trading success is

all about my own self-control?”NewTraderasked.“If you listen to nothing

elseIsay,hearthis:Youhave

thepropersequenceofeventsreversed. First, realize youarea trader.That iswhoyouare and what you decide tobe. Then your identity is notbasedon trading results; it isbased on who you are. Youhave nothing to prove toyourself or to anyone else.There is a big differencebetween knowing who andwhat you are and hoping tobecome it in the future. Anacorn will become an oak,

regardless of any otheropinions. The potential isalways there. With thepotential inside,all that’s leftis for the acorn to grow andbecomewhat itwasmeant tobe. An acorn simply grows,unleashing what is insidewith no self-doubt orreinforcement from otheracorns.If a crop fails, a farmer is

still a farmer. He doesn’t

have to question his ownidentity based on results. Afarmer’s self-worth is notshaken by a bad drought orstormbecausehehasdecidedto be a farmer. While theremay be pain of loss andfinancial battles, he stillknowswhoheisthroughbothsuccessandfailure.”Rich Trader paused,

looking over the landscapebeforesettlingdeeperintohis

loungechair.“If you trulywant to be a

trader, you must know whoyou are andwhere youwantto go. Once you believe inyour own identity and knowwhat your goals are; onlytimeseparatesyoufromyourdestination.Onceyouarefreefrom internal conflict andself-doubt, you have energyto do the work required totake you where you want to

go. Trading is a difficultgame to learn and besuccessful at continually.Traders do not have theluxury of being double-minded about themselves.Either we are or we are nottraders.Everydaywehavetomake that choice and get towork. Our self-worth andidentity cannot fluctuatewithouraccountcapital.”“HowIseemyselfandmy

internalidentityisasourceofso much of my stress andinner conflict. I can certainlysee how that can lead toanxiety.”“The traders who really

make it in this businessstarted out trapped in a newtrader’s body with a newtrader’saccounttoworkwith.You will notice that didn’tstopthemfromrealizingtheirpotential. The key was that

they made a decision basedon their conviction thattradingiswhattheywouldbedoing.Most had no Plan ‘B’or had a strong motivationnever tohave touse it.Theymade their decision of whatthey were before any resultsconfirmed that they wouldsucceed.Thebigsecretisthatonce they decided on theirpath, the only thing thatseparated them from theirgoalswastime.Iftheygotup

every morning and madedecisions that kept themgoinginthedirectionoftheirpassions and dreams, theywere literally unstoppablefrom the outside; only theycould stop their ownmomentumfromtheinside.Itisveryhardtobeatthetraderwho never stops learning,never stops growing, andnevergivesup.”“So beingmentally locked

into a long-term goal couldreally ease much of thestress,” New Trader saidthoughtfully.“Yes, a new trader must

understandthatatradeisjusta trade;hehas toknowhe isplaying for the big picture –histradingcareer.Andthatisa long process that shoulddilute much of the dailystress.Onedayshouldbejust1/365th of a year of trading,

and one trade should just beone of the next 100 trades.The ego should not evenshow up on the charts. Thecharts should be traded forwhat they are, and thetrader’s emotions and egoshould never becomeentangledwithpriceaction.”“Keeping that principle in

mind, it’s like having avolume dial on youremotions. Putting any one

trade into that kind ofperspectivemakes it lose theegotistic and emotionalinterference.”“Exactly,” said Rich

Trader. “Trading successcomes from first researchingwhattherightdecisionsaretobe profitable and then beingable to stick to those rightdecisions when the timecomesandnotbestoppedbyinternalbarriers.”

New Trader nodded; thenhisphonebuzzed.When are you coming

home?Hefrowned.“Themisses?”RichTrader

asked.“Yeah, I guess I should

headhome.Asalways, thankyou for your wonderfuladviceandcoffee.”“Any time,” Rich Trader

said as he watched his pupilleave with slumpedshoulders.

CHAPTER6

Agoodtradeistakenwithoutregretorinternalconflict;abadtradeistakenwhenatraderisdouble-minded.

“Adoublemindedmanis unstable in all hisways.”

–James1:8KJVBible

It was a beautifulafternoon, the sky bright andclear.Thebirdswere singingandNewTraderwasenjoyinghis weekly meal with RichTrader.

“Most traders make themistake of focusing on atrading method when theyfirst start out, when theyreally need to focus onthemselves,” Rich Traderbeganastheirfoodwastakenawayandtheirusualwaitressfilled their drinks. “Thedividinglinebetweenwinnersand losers in the markets isnot their tradingmethod; it’stheir self-control and abilityto manage risk. The trader

can’t control the profitableoutcome of a trade, only thedownside stop if they’rewrong–andalltraderswoulddo well to focus on the areaunder their control. This isgood news because thesuccess and failure of anytradingmethod isdeterminedby risk management andposition sizing more thananythingelse.”“Isee,”NewTradersaidas

hisphonebuzzed.His girlfriend was calling

himagain.He sent it to voicemail

before they continued theirconversation.“There are many robust

systems that can be foundwithdiligentresearchthroughback testing historical pricedata, but a system in and ofitself is not as important asthe trader trading it.

Boredom, impatience, fear,and greed are typically atrader’s undoing, not theirmethod,” Rich Trader said.“Mostnewtradersgettostepone, having a method, andthink they’re done, whenreally that’s when the workbegins: trading that methodwith discipline, consistency,andself-controloverandoveragain without quitting whenthey meet resistance andfailure.”

New Trader nodded,waiting for the inevitableanalogy.“That’s where the rubber

meets the road. Not in somefancy delusion of finding themagic Holy Grail toprofitabletrading.Ifsomeoneeverdidfindfreemoneytheywould quickly becomewealthy beyond imaginationuntil they were unable toscale it any higher due to

tradingsize.I’mfairlycertainthat the Holy Grail traderwould not be selling it for$19.99 online. The day atrader quits looking for amagic recipe and just tradesthe best system available,that’sthedayhegrowsup.”“So it seems the biggest

problem I’ve had in the pastyearisthatIstoppedfocusingonmymethod and put it onmyself instead. It was all

about me and how my self-esteemwas connected tomyresults. Ibecamemy trading;my wins made me a winnerand my losses made me aloser. I got too emotionallywrappedupinthemoneyandlostmyperspective.”“Yes, that’s it exactly.

Traders can’t mix theiremotional capital with theirfinancial capital. Thoseaccountsneed tobe separate.

Your wins and lossesshouldn’tbemakingdepositsor withdrawals from youremotional accounts. Thosecurrencies should never beexchanged. They should bemaintained far apart fromeachother.”“And how should I do

that?”“Just likeonetradeisonly

one of the next 100, yourtradingshouldonlybeasmall

percentage of your life. Ifyour entire self-worth is tiedup in being a successfultrader, itwill greatly amplifyevery win and loss. Everyweekly, monthly, and annualP&L will have a greaterimpact on you emotionallyand mentally,” Rich Tradersaid. “If your life isdiversified,ifyou’reaspousein agoodmarriage, aparent,enjoy timewithfriends,havehobbies,enjoysocialsettings,

entertainment, take care ofyour health through diet andnutrition, and continue tolearn and improve yourself,then trading resultswillhavefarlessimpact.Thebeautyoftradingisthatformosttradersthere is forced downtime,when themarkets closeor inmarket environments that arenot conducive to the trader’smethodology. We have totake some time off fromactive trading. And if you’re

trendtradingandjustridingawave, you have plenty oftimetogoenjoylifeandthencheckinattheclose.”“Well, that is another

problem I had: Too muchunnecessary screen time andtoo much obsessing overresults 24/7. So basicallyyou’represcribingmea‘chillpill’?”“I’m saying always do

what you should be doing,

and part of that processinvolves doing nothing attimesandbalancingyour lifetoavoidburnoutordamagetoyourmentalhealth.Thesameworkethicanddrivethatcanmake us successful can alsohurt us if we don’t stayfocused on why we aretradinginthefirstplace.Thereal reason we trade is topursue happiness, whateverthat looks like for us. Someenjoy the game itself while

othersdoitforfreedomorasa lifestyle choice. The thingis, we’re going in the wrongdirection if we becomeunhappy as a result oftrading. We are not tradingfor the pursuit ofunhappiness; when that darkcloudcomes,itistimetostopand reevaluate what we’redoingwrongandwhyweareonthewrongpath.”“I suppose the parameters

of risk/reward andmaximumequity draw downs play ahuge part in this pursuit ofhappiness.”“A robust trading method

doesa tradernogood if theycan’t mentally andemotionally deal with thestress of trading it,” RichTrader said with a quietlaugh. “You have to tradewithin your own comfortzone and only add position

sizing andmore risk as yourstrengthtohandleyourstressisnolongeranissue.Tradingis a process of growth, notquantumleaps.Nothinggoodcomesfromtradingabovethelevel you are comfortablewith.”“So what else do you

prescribe for strengtheningthe weakest part of thetrading system, otherwiseknownas‘me’?”

“Each trader has to find apersonal philosophy that’sbiggerthantheyaretogroundthem and give them internalstrength and faith. Sometradersunderstand theirplacein the greater universe andthat gives them perspectiveonthesizeoftheirproblems.Others seek a spiritual paththatleadstoincreasinglevelsof enlightenment about whothey are. Many traderspractice daily meditation to

understand how to bring theinternal chatter of thoughtsand emotions under control,or they find power inpracticing mindfulnessthroughout the day. Sometradersfindcomfortinprayerand faith in a higher power.These practices bringperspective to how big of adeal trading really is in thegreaterschemesofthingsandmay make it easier to takeyourentriesandexits.”

NewTradernodded.“Isee.I’llthinkaboutthis.”“Of course,” Rich Trader

said, relaxing in his seat,evidently in no rush to leaveastheirchecksweredeliveredbyasmilingJane.New Trader’s phone

buzzed again, and this timewhen he looked down hisexpression quickly shifted toone of surprise, thenconfusion, before going

blank.It’s over. I’m done.

Seriously.For a moment it felt

crushing,devastating.But then he felt a huge

weight lifted off hisshoulders. He shouldn’t feelthis way about his girlfriendofthreeyears.Butreally,thishadbeenalongtimecoming.

PARTII

CREATINGAROBUST

METHODOLOGY

“In order ofimportance tomeare:1)thelong-termtrend,

2) the current chartpattern,and3)pickinga good spot to buy orsell.”

–EdSeykota

CHAPTER7

Agoodtradeisbasedonyourtradingplan;abadtradeisbasedonemotionsand

beliefs.

“To anticipate the

market is to gamble.To be patient andreact only when themarketgivesthesignalistospeculate.”

–JesseLivermore

NewTraderwasoutat thecoffee shop feelingstrangely… at peace. Hisgirlfriendhadmovedoutand

hecouldfocusonhistrading.Butsomethingstillfeltout

ofplace…“Well, hello there,

stranger.”He looked up to see a

prettygirlinabluedress.Her brow rose. “Don’t

recognize me? I’m Jane…fromthecafe?”“Oh! Right, Jane, the

waitress!”

She rolledhereyes, takinga seat besidehim. “Yes, Janethewaitress…”He chuckled nervously,

feeling uncomfortable. It’snot like theyhadever sharedanyrealconversation.“So how’s your trading

beengoing?”“…What?”heaskedaftera

slightpause.“How’s your trading been

going?”sherepeated.“IhearyouandRichTradergoingonaboutitallthetime.”“Well…” he replied

slowly, trying to make surehe had it figured out beforehe spouted off like hesometimes did for RichTrader. “I think I’veimproved, but I’m still myownworstenemy.”“Whatdoyoumean?”“I think I get in my own

way,” he said with a laugh,expecting theconversation toquickly degrade or becomeawkward.Tohissurprise,shecontinued with a thoughtfulexpression.“You know what Rich

Trader told me once? Thewisdomisinthepriceaction,notouropinions.Ourskillsintradingarebasedonhowwellwe’re able to hear what thechartsaretellingusandtrade

accordingly. It’s when westart to predict what’s goingto happen instead of reactingtowhatactuallyhappens thatthings start togobad forourequitycurve.”“Yeah…” New Trader

agreed. “Our opinions andbiases are basedon illusions,not actual price action. Andour job is to trade the priceaction that unfolds, not ouropinions,predictions,oregos,

which get in the way of ourabilitytomakemoney.”She laughed. “Yeah,we’re

traders,notfortunetellers.”“We’re traders?” New

Traderthoughttohimself.Helikedthesoundofthat.“We have to… let’s see,

how would Rich Trader putit?Surfingthewavesisgood,but flowing like thewaves isbest. The most money ismadebyfollowingwherethe

market takes you, notguessing or hoping orbelieving or fighting thecurrent. Even most traderswho play off reversals waituntil it’s actually happeninginstead of trying to play offextremepeaksandvalleys.”“So you consider yourself

a reactive trader and not apredictivetrader?”“Well, when we take an

entrybeforeasignalisgiven,

we’re predicting it will begiven later.Whenwe trade astockat$600simplybecausewebelieveitwillgoto$700,wearepredicting.”She nodded. “Yeah, the

best way to discover atrader’s motivation is to askthem WHY they entered atrade.Iftheysay:‘Iboughtitbecause it can’t go anylower,’ or ‘I bought itbecauseIbelieveitwillgoto

$100,’ or ‘I sold the stockshort because it just can’t goany higher,’ then they arepredicting not reacting. Areactive trader says thingslike: ‘I bought it because itbrokeoutoverresistanceofa3monthpricebasetoall-timehighs,’ or ‘I shorted itbecause it broke down underlong-term price supportlevels,’ or ‘I bought itbecause it bounced up off akey support level or it broke

out over short-termresistance.’”Shetookadaintysipofher

coffee.“A reactive trader needs a

reason to take a trade basedoffapriceactionthatappearsto give them a probability ofsuccess; a predictive traderneedsonlyabelieforopinionto take a trade. A reactivetrader trades based onexternal reasons and chart

price action; a predictivetradertradesbasedoninternalreasons and beliefs. Reactivetraders trade for specificreasons, letting the chartsguide them in entries, exits,andpositionsizes.”“Yes,” New Trader said.

“A typical long entry for atrend trader would be basedoff of strength in the pricemove overcoming a keyresistance area. If a stock

goes from $100 to $200, ithas to firstgo to$101,$102,$110, $150, etc. If a growthstock is trading between an$80 support level to a $100resistance level for threemonths and then afterearnings closes at $103, allthe sellers have beenovercomebelow$103andtheodds are that it will go evenhigher. Before the breakouthappens, there’s no realreason to expect a stockwill

go higher than $100. Manystocks never break out andcouldfallbackto$70or$50.A trend trader is looking tobuy a stock that is makinghigherhighsandhigher lowsdayafterday.Thatisproofofa trend. A break aboveresistance proves it has gonehigher and it is possible tokeepgoinghigherandcangohigherstill.Forswingtraders,abounceoffasupportlevelisconfirmation to buy if the

bouncedoesnot lose supportand roll over. The reactivetrader is looking forconfirmation. A predictivetrader is just guessing,”NewTrader said, his excitementpalpable.Jane nodded and smiled

her eyes clear and bright asshecontinuedhisthoughts.“Areactivetraderwillexit

a losing tradewhen thepricemoveproves theyarewrong.

A reactive trader also exits awinning trade when it stopsmovingintheirfavor,notatatarget price. Say a stockmovesfrom$103to$200andnever falls back below a $5trailing stop until it goes to$200 and reverses to $190.The trader didn’t exit at a$125 price target or a $150pricetargetbecauseherodeitallthewayuntilitfinallyhasa strong reversal backthroughakeysupportlevelat

$190. Of course, these areprinciples that you need intrading. You need a betterreason for an entry than awarm, fuzzy feeling and anebulousbelief.”Helaughed.“Yeah,yourpositionsizing

should also be a function ofthe volatility of the stock’spricerange.Ifyouaretradinga$100,000accountandwantto risk no more than 1% in

any one trade, or rather a$1,000 loss, then the recenttrading range will help yourposition size. If your stockmoves$10adayonaverage,then you can only trade 100sharesof thestockandriska$10 move against you. If ittrades in a $5 daily range,thenyoucantrade200sharesand risk a $5 move againstyou.Ofcourse,youmaywantto trade smaller and ensurethat your entry is at a spot

where amoveagainst you inthose dollar increments willnot just be noise inside thetrend you are trying tocapture. The bottom line isthat if you want to be asuccessful trader there mustbe a reason for everythingyoudo,basedon thefactsofactualpriceactionandonthecharts.”She nodded. “Being a

factual trader is much more

profitable than being afictionaltrader.”“Traders who start telling

themselves stories andbelieving their own bullgenerallyheaddowntheroadof capital destruction. Theremustbeaquantifiablereasontotakeatrade.Theremustberealreasonsforentries,exits,position sizing. Trading on awhim almost never works.Tradingbasedonactualprice

action,ontheotherhand,hasa great chance of workingbecauseyou’reflowinginthesamedirectionasthemarkets.Themarkets don’t care whatwe think or believe. They’relike a train. We can eitherridethemorberunover.”Janesighed.“Isupposethis

means I’ll have to throwawaymycrystalball…”New Trader laughed. “I

guesswebothwill…Ididn’t

knowyouwereatrader.”Shegavehimahalfsmile.

“Yes… a bit… I’m workingat the cafe to bring up mycapital.Mygoalistobeableto trade full time. I’ve beentalking to Rich Trader too, abit.He’sanamazinghelp.”“I know, he’s a veritable

fountainofknowledge.”“Youhaven’tbeenbyfora

while. Did somethinghappen?”

He looked at her, not sureif he really wanted her toknow or if she really evenwanted to know, but hedecided to go ahead and sayit.“I broke up with my

girlfriend.”“Oh…I’msorry.”He shrugged. “At least I

didn’tmarryher.”She laughed. It wasn’t the

usual response he got,especially from women, buthe found that he ratherenjoyed it – as well as thecompany of another traderwho wasn’t quite soseasoned.

CHAPTER8

Agoodtradeisbasedonyourownpersonaledge;abadtradeis

basedonyouropinion.

“Atradershouldhave

no opinion. Thestronger your opinion,the harder it is to getout of a losingposition.”

—PaulRotter

“Doyouknowwhatoneofthe hardest things for newtraders to wrap their mindaround is?” Rich Trader

askedwhenNew Trader hadfinally settled in to acomfortable chair as heshowed up tomeetwith himagain.“What’sthat?”“That the best traders are

very flexible in theiropinions,” the older mancontinued.“Thevastmajorityofrichtradersaren’ttryingtopredict what will happen orhowfarapricemovewillgo;

they’re trying to understandwhat’s happening in thecurrent market and what hashappened historically. Richtraderstrytomergetheirowntrading with the chart andprice actions, trying tomovein sync with the marketmoves. They understand thatthemarket doesn’t carewhattheir individual opinion is.You don’t become a richtrader by forming an opinionbut by seeing the pattern

prices have formed and mayform again based on thenature of the humanpsychology of greed andfear.”NewTradernodded.“Because the market will

gowhereitpleasesandtrendswillfeedoffthemselves.”“Exactly, trying to trade

against a trend withmomentum is like trying toargue with a speeding train.

The train will eventually runout of fuel and stop but it isunprofitable to bet against amoving train until you canidentify it isactuallyslowingdown and losingmomentum.Thekey is that trades shouldbe made based on facts, notpersonal opinions. The mostdangerous thing a trader cando is develop a mental biasandletthebiasaffectthewaythey see price action andchartpatterns.Astoplossand

a trailing stop are powerfulways to follow actual priceaction and avoid opinions.Many great traders let stoplosses and trailing stops dotheheavyliftingforthem.”“So a trader has to know

why they entered a trade,what the signal was, andwheretheexitsignalis.”“Yes… There are three

main types of traders. Thefirst are purely mechanical

traders who have done theirhomework in back-testinghistoricalprice action, seeingwhatworksandwhatdoesn’t.Mechanical traders do theirdiscretionary work inbuilding their trading modeland then let the model run.They know 100% what theywill do under different priceaction circumstances. Theirdiscretionary work continuesafterthemarketclosesfortheday, when they question the

continued validity of theirsystem. Mechanical tradersdo a lot of homework beforechanging a mechanicalsystem. They do not tradetheir opinions; they trade thevalidity of the opinions theyback-tested that werehistoricallyrobustindifferentmarket environments. Thediscretion happens in theresearch so that the tradingcanbemechanical intheliveaction of the markets,” Rich

Trader said, taking a sip ofcoffeebeforecontinuing.“The next group is rule-

based discretionary traders.While these traders believethat their own decision-makingprocessgivesthemanedge, they still trade inside aframework of rules that keepthem safe and profitable.Discretionary traders candecide if theywant to take asignal or not and how many

trades to put on at any onetime along with positionsizing. Most traders haverulesabout riskmanagement,maximum risk exposure,draw downs, entry signals,exit parameters, and evenrules about their tradingpsychology. The rules arebased on many years ofpersonally learning whatworks and what doesn’t andare created as a safety net toavoid past mistakes. The

trading rules aren’t meant tokeep traders from thefreedom to trade; they aremeant to keep traders safefromthemselves.”“And I suppose the last is

Mr. Know-it-all?” NewTradersaid.RichTradernodded.“That is the mindset of

most new traders against therocks of reality. Even someprofessionalmoneymanagers

trade their own opinionsabove any real research ortradingeducation.TheKnow-it-allTraders’strategyisverysimple. They buy what they‘like’andsellwhat‘hastogodown.’ They believe theirintellectandgamingskillsarefar greater than the majorityoftradersandthemarketasawhole,eventhoughtheyhavenofactsconfirmingthis.Theyare loudandopinionatedandbelieve deeply in their

convictions of what priceactionwillhappennext.Theirtrading is little more thanspur-of-the-momentdecision-makingbasedontheirbeliefs.These are the traders whothink they are special andvery clever; unfortunately,many times they start theirtrading careers in marketsthat are conducive to theirstyles. Many times theyconfuse bull markets withstock-picking skills and

personal genius. Theyconfusehugemonthlyreturnswithbeingsmartwhenreallythey are setting up for aneventual account blowup dueto positions sizing and toomuch open risk,which givesthem big returns but whichalso gives them big losseswhen the market dynamicchanges. They confuse theirfeelings of superiority duringlongwinningstreakswiththementalstrengthtocomeback

from draw downs in capitalandlosingstreaks.Theknow-it-all-traderhasnoedge–justaluckyrabbit’sfootandself-delusion. While this tradermay be profitable for manyyears, eventually themarketstakebackeverypennyof theprofits given away by luck,and lucky money is takenback much faster than it isgiven away. These luckytradersslowlyclimbthestairsof profitability but then fall

down the elevator shaft asthey quickly give back allprofits and learn the dangersof leverage and positionsizing as all profits arereturned to the market andmaybe even most of theoriginal trading principle dueto a lack of respect forextremeriskevents.”“So which have you

been?”NewTraderasked.Rich Trader chuckled.

“Why, I’vebeenall of them,ofcourse.Thebetterquestionis…whichareyou?”“IsupposeI’mstillstuckin

the know-it-all phase… I’veletmyopinionsdrift intomytrading, and it’s one of mybiggestadversaries.Iget intotroublewhenIstartfightingatrend I should be following,or buying support levelswhen I shouldbewaiting fora snap back rally with

strength.MybiggestproblemisthatIdriftfrommytradingplanwhilethemarketisopenand think I’m smarter thanthetradingplanIwrotewhilethemarketwasclosed–eventhough I have proven timeand time again that I’m not.My opinions have been…expensive, to say the least.And it also seems that thestronger my opinion is, themoreprone Iam to trade toobig, and that almost never

ends well since I don’t wantto stop out and admit I’mwrong. Further, the biggersize of the trade, the moreengaged my emotions are,which compel me to dofoolish things that I wouldnever do when tradingsmaller.”“The key to trading

without opinions hurtingtrading performance is totrade using a systematic

approach. You need to havequantifiable reasons for allentriesandexitsthatarehardto get around if you followyour trading plan. Manytraders find a mechanicalapproach easier to followbecause it removes thediscretionary, emotionaltrader entirely, which ofcourse is the weakest link toany trading system. Adiscretionary trader needs tohaveentryrulesthatputthem

on the right side of themarket: break outs, tradingaboveakeymovingaverage,focusing on higher highs orlower lows in their timeframe,etc.”“Replacing my opinions

with a systematic approachseemstobeanedgeinitself.”“Exactly, the ability to

follow the price actionwithout a personal bias is avery powerful edge that few

traders ever get to or evenunderstand. Always seek toride the wave that isoccurring now as best youcan rather than sit backwithopinionsonhowfarthewavewill go or when it will endand miss the ride altogether.Inthemarketsmoneyismadebytrendcaptureinyourtimeframe, not opining on whatshouldbehappeningnow.”New Trader nodded,

glancingaroundthecafe.He was strangely

disappointednottoseeJane.

CHAPTER9

Agoodtradeismadeusingyourowntimeframe;abadtradechanges

timeframeduetoaloss.

“The key isconsistency anddiscipline. Almostanybody can make upa list of rules that are80percent as goodaswhat we taught ourpeople. What theycouldn’t do is givethemtheconfidenceto

stick to those ruleseven when things aregoingbad.”

–RichardDennis

“A good trade is based onpredetermined parameters,”Rich Trader began as theydrank their favorite coffee inthe quaint coffee shop NewTraderhaddiscoverednottoo

long ago. It was nice andquiet, decorated in subtleblues with comfy chairs andquality beverages – a perfectplacetomeetandtalk.“That means the trader

knew the position size theywould trade before theyentered. The trader had aquantified entry signal basedon price action at the rightlevel, andwould thepositionbehelduntilthestoplosswas

hitand taken,acknowledgingthatthetradewaswrong.Thestop loss would be triggeredat a price level that showedthe trader they were wrongand it was time to exit. Theamount ofmoney lostwouldbe within the guidelines oftotaltradingcapitalthatcouldbe risked and lost on onetrade without putting thetraderintheriskofruinzoneover the course of manytrades. The trading vehicle

that was traded was on aprevious watch list and thetrader had researched priceaction history to understandwhat did and did not work.Thatistheformulaforagoodtrade.Abadtradeiswhenthetraderstraysfromquantifyingatradetofollowingopinions,emotions,andego.”“So basically, a trade is a

serious business transaction,based on the risk/reward

ratio, probabilities,possibilities, and managedrisk? You should knowexactlywhat you’re doing inevery single move in everysingletrade?”RichTradernodded.“Creating the trading plan

isn’tusuallytheproblem.Theproblems generally beginwhen the trader tries to staydisciplined while the marketisopen.Greed,fear,ego,and

stressweren’t therewhen theplans were created, but allshowupandwanttobeheardwhen the market is open. Agoodtraderisdisciplinedandable to follow a plan ratherthan emotions and opinions.That’shardenough,butwhenthe market environmentchangesandastringoflossesoccur, that amplifieseverything. The trader has topre-plan how to handle drawdowns in capital by trading

smaller, by having fewerpositions at one time, or byjustnottradinguntilthereisasignal indicating that themarket environment may befavorable again. Traders findoutveryquicklythattheyarethe weakest link in anytrading system the momentthey go live and it’s time tofollow the predeterminedplan.”“So most traders lose

because they just can’t sticktotheoriginalplan?”Rich Trader took a sip of

hishotcoffeebeforereplyingwith a sigh. “Theymayhavea great trading system andjust be in a bad market.Insteadofgettingthroughthemarket environment, they trytofittheirsystemandstyletothe market they are in. Thatreallystartsmessing themupwhenatrendfollowertriesto

day trade or a swing tradertriestostartsellingoptions.Ittakes a lot of time andworktogetanedge inany typeofmethod and it is not easilytransferred to trading on adifferent timeframe. If youwant to trade multiplesystems with differentmethods,that’sfine,buteachmust be researched properlybefore they’re needed. Amajorchange in tradingstylebased on the market

environment should bepreplanned,notaspur-of-the-moment adjustment becauseof a losing streak. Largesamples of trades should beresearchedbeforeconsideringadjustments to back-testedtradingsystems.”“I see. So you’re saying

plan, trade on paper beforeyou tradewith real capital. Ineed to make well thought-out decisions based on facts

and not just based on losingmoney or losing control ofmy emotions. My decisionsshould grow out of researchand planning rather thanreactingtooutcomesthatmayberandomandtemporaryandjust noise in the greaterscheme of the next 100trades.”“Style drift in trading

usually doesn’t work out,whileresearchingandtrading

multiple methods is all rightifyouhaveputintheworktodetermine that they haverobust back test history. Ofcourse, risk exposure has tobe determined with all openpositions,aswellasthelevelthat the trading vehicles arecorrelated to determine totalopen risk exposure. I thinkBruce Lee summed it up thebest.”“BruceLee?”

Rich Trader chuckled.“’Knowingisnotenough;wemust apply. Willing is notenough; wemust do”. BruceLee may not have been atrader,butheknewathingortwoaboutdiscipline.”“That’s the real difficulty,

leaping from theory topractice, from learning todoing, from principles toaction. It’s a lot like trainingfor a sporting event with

plenty of time for reflectionand practice but then havingto compete live with all thestress and strain ofperformance. It’s a verydifferent experience; the liveeventisthetimetodoordie.Results will be judged onsuccess and failure yetemotions and stress show upthat were not there duringpractice.There’s anaudienceand there are expectationsfrom the fans and the

athlete.”“Yes,” Rich Trader said.

“What usually separatesathletes at the highestprofessional level is theirmentaledge.Allprofessionalathletes aregiftedphysically,but the winner is usually theonewhoisabletofunctionatthe highest level at the mostimportant time.Many tradershave an audience such as aspouse, a family, or other

traders who add to thepressure of success.At least,that has beenmyexperience.Study and research had littleto do with my live trading.My trading with actual largeamountsofmoneyseemedtobeanexerciseinmyabilitytobe disciplined and managestress.”New Trader sighed. “Yes,

well,Idon’thavemuchofanaudience right now, except

you,ofcourse.”“Well, don’t let it bother

you. It was probably for thebest in any case. After all,target practice is a verydifferent experience than agun fight. The best traderscomedown to thosewhoareable to manage stress thebest, persevere, and keeptheir egos in check.The bestchartreadersandanalystsarerarely the best traders.

Tradingisperformingliveonstage;analyzing is likebeinga judge on the sidelines.Judges are paid for showingup at work while performerson stage are paid forperformance over the longterm.”“I’ve learned that a top

traderskillistheabilitytodoin real time what you hadplanned to do before themarket opens. Following a

trading plan seems simpleuntil green and red numbersare flashing in front of youreyesandmoneyisgrowingorevaporating.I’vealsolearnedthat my real test as a tradercomes after strings of lossesand strings of wins. Losingstreaks activates my ego towanttotradebigandgetbackthose losses quickly and mybigwinsandwinningstreaksdecreases my fear of lossesandmakesmefeel invincible

andlikeageniuswhohasnoneed for risk management. Ihave to grow up and stopgoing down either of thesepaths and just focus onconsistency.Allthishasbeengolden advice today.Thanks.”“Ofcourse,anytime,”Rich

Tradersaidwithakindsmile.“I always enjoy our littletalks.

Chapter10

Agoodtradeismadeinreactiontocurrentpricereality;abadtradeismadebased

onpersonaljudgment.

“Pure price systemsare close enough tothe North Pole thatanydeparturetendstobring you farthersouth.”

–WilliamEckhardt

“Quantify, quantify,quantify, you must know

whereyou’llbegettinginandwhere you’ll be getting outonceyouare in.Youhavetoknow your numbers; yourentry price, your exit price,your positions size and whatyou’ll be trading. No tradeshouldbe takingplace in thereal world until it’s firstplanned out on paper. Theprice is your guide and yourplanshavetobebasedonthepotential probabilities ofdifferent price action

scenarios playing out,” RichTrader began. “It’s your jobas a trader to plan how youwill react to different priceaction,patterns,andincreasesin volatility. Your plans canmake you money becauseyou’re not trying to predictwhat will happen; you’readjustinginrealtimetowhatishappening.Inessence,youare not trying to beat themarket;insteadyouaretryingto be the market. There is a

bigdifference.”“SoIhavetohavea laser-

like focus on trading price,not emotions, not opinions,andcertainlynotmyego.”“Reactively trading price

action as it unfolds versustrying to predict what willhappeninthefutureisoneofthe biggest secrets of richtraders. Rich traders knowthat theydon’thaveacrystalballortimemachineandthey

understand that they’re notprophets. And it seems thatmany new traders, talkingheads,andgurusskippedthatday of trading school.Whilebad traders go in search of“market calls, “hot stockpicks,” “gurus,” and “HolyGrail trading systems,” richtraders are busy studyinghistorical price action, pricepatterns, back testing tradingsystems, and studying chartaction for clues as towhat is

actually happening in thepresentmoment.”“Isee…Sorichtradersare

more like scientists thantraders,andbadtraderssoundmore like gamblers thantraders. Rich traders try toscientifically figure out whatworks through experimentsand confirming data, whilebad traders look to pick upeasy money lying on thestreet.”

“I can tell you frompersonal experience there’snoeasymoneyintradingthatwill just jump into yourpocket. I know now that alltrading profits come fromwork, taking on risk, andmanaging positions in therightway,”RichTradersaid.“You need to always betrading the facts about priceaction.Don’tletyourviewofthepriceactionbeskewedbythe open position you are

holding.Always dowhat theprice says to do inside theparameters of your systemand timeframe. Take theentry, ride the trend, buy thebounce,trailthestop,taketheloss. Price action needs todrive your trading bus. Yourjobistomakesureyouareontherightbus.”“Money is made in the

markets by going with thecurrent flow. A profitable

strategyislearningtoidentifythe potential for a trend andthencapturingthattrendwiththe right entry; letting yourwinner run until you arestopped out as the pricebreaks near term supportlevels for the trend in yourtimeframe. Trend capture isbest done by following priceaction,nothavinganopinion.Amarketcanrunfartherthanyouexpectanditcanalsofailto trend. A mechanical stop

set at aprice level indicatingyouarewrongcansaveyoualot of mental and financialcapital. A stop that tells youto exit is a better plan thanarguingwiththemarketpriceaction.It is much better to let a

bounce off the bottom of alow price level happen first,thentakeapositionlongafterconfirmation has happenedinstead of trying to predict

whenithasgonetoolowandis“due”forabounce.”“So one key to trading

price action is to wait forconfirmation for an entry,instead of just anticipatingwhat I think is going tohappen.”“Yes,exactly,youroddsof

asuccessful tradeareusuallybetterbybuyingintostrengthand selling short intoweakness. This way you’re

going with the flow of yourtimeframe. The next step istrailingthewinnerwithastopor taking a stop loss at thelevel that shows you arewrong. It’s not aboutprediction; it’s aboutreacting.”“A big mistake many

traders make is trying to goshortinabullmarketbecausetheythinkpricesaretoohigh.Inabullmarket, indexesand

individualstockstendtohavesupport levels but not longterm resistance bull markettrends tend to keep makinghigherhighsandhigherlows.Easymoneyismadetotheupside until the market rollsovertolosesupportandgoesintoadowntrend.Whilesomereally good day traders canscalp shorts intra-day, themajorityoflonger-termswingtraderswoulddobettertobuyat support levels than try to

sell resistance levels short.And of course, trendfollowers should stay long inthe trend as it continues tohold up.Always trade in thedirection of the longer-termtrend of your time framewhere the easiest money islocated.Bettingona reversalof a longer-term trend iswrongmoretimesthanright,”RichTradersaid.“Runningwith thebulls in

abullmarketandridingwiththe bears in a down trendseems like it would be abettertradingexperiencethantrying to fight against theflow of price action,” saidNewTrader.RichTradernodded.“Another consideration for

traderswho are trading priceactionisthatmarketsgofromlow volatility to highvolatilityincycles,withdaily

price range expansion, gaps,and sharp quick reversals inprice action trends. Manytrading systems fall apart involatile markets, especiallyshorter-term trend tradingsystemswhich key off short-term moving averages.Others, like long optionstrangles and straddles, doverywellifexitedattherighttime. There are even traderswho sell options to get thebigger implied volatility

premiumthatispricedinandprofitwhenthevolatilityfallsback to lower levels and ispricedoutoftheoptions.Justas price trends, volatility,chart patterns, and traderpsychology also trend in themarkets.”

Chapter11

Agoodtradeismadeafteridentifyingandtradingwiththetrend;abadtradefightsthetrend.

“The answer to the

question, ‘What’s thetrend?’isthequestion,‘What’s yourtimeframe?”

–RichardWeissman

“I know that tradingfollowingatrendiswherethemoney is made and that ishowItrytotrade,buthowdoyou identify the trend?”New

Trader asked one sunnyafternoon as he sat on RichTrader’spatio.“Well,itdepends.Thefirst

thing the trenddependson isyour timeframe.A long-termtrendfollowingtradermaybelong based on the weekly ormonthly chart, while a daytradermaybe shortbasedontheintra-day15minutechart.Both make money in theirposition when they exit. The

keyislookingatthedirectionof the price in yourtimeframe. Examine andquantify support andresistance levels along withmoving averages. SometradersalsouseElliottWavesandFibonaccipricelevels.”“There are many ways to

measure the path of leastresistance,” Rich Trader saidas he led the younger traderto his office and sat at his

computer, pulling up dailycharts from his favoritewebsite.

Movingaveragesareoneway to quantify wherethe current price is inrelationtoanaverageofprices over a specifictimeframe.Ifthecurrentday’spriceisoverthe5-day moving average, itcouldbesaidtobeinan

uptrend in thattimeframe on the dailychart.

Chart courtesy ofStockCharts.com

With higher highs andhigher lows over a timeframe it could be saidthat the market is in anuptrend.

https://Chart courtesy of StockCharts.com

Chart courtesy ofStockCharts.com

Lower highs and lowerlowsareanindicationofadowntrend.

https://Chart courtesy of StockCharts.com

Chart courtesy ofStockCharts.com

Abreakoutofa tradingrange with a new priceabove or below theestablished range ofsupport and resistancecanalsobe a signal andindicate a new trendemerging out of a priceconsolidation period. A

https://Chart courtesy of StockCharts.com

break down out of atradingrangethatmakesa new low means thatbuyers are no longerwillingtopaytheaskingpriceofsupportandthatsellersarewillingtosellfor less than support inthattimeframe.

Chart courtesy ofStockCharts.com

In a break out overresistancesellerswillnolonger sell for less thanresistance and buyershave to pay more thanresistancetogetin.

https://Chart courtesy of StockCharts.com

Chart courtesy ofStockCharts.com

“A trend is best entered atthe point where somethingquantifiably changes in priceaction,likenewhighsornewlows in a trader’s timeframe.All-time highs and all-timelows is a favorite break outstrategy for many trendtraders. Really, all traders,

https://Chart courtesy of StockCharts.com

regardless of their method,are trying to profit byunderstanding and betting ona trend,” Rich Trader said,continuing his impromptulecture.

Buying all-time highs istrying to capture abreakouttrend.Selling short all-timelows is trying tocaptureabreakdowntrend.

Buyingastrongreversaloff the bottom is anattempttocapturearallybacktoresistance.Selling short abreakdown at resistancelevels is trying to profitfrom a retracement tosupport.Atraderwhoshortsoverextended markets ineither direction is tryingtocapturea trendwherethe market reverts back

toitsmean.Out-of-the-moneyoptionbuyers are betting on astrong trend to theirstrikeprice.Option premium sellersarebettingthatthetrendisalreadypricedintotheoption they are sell