TradingHabits:39oftheWorld’sMost

PowerfulStockMarketRulesBySteveBurns&HollyBurns

ContentsWhendidIstarttrading?ThePowerofHabitsRule1-15

TheFoundationRule16-27

MindOverEmotionRule28–39

TheKeystoProfitabilityBeabettertrader

©Copyright2015,StollyMedia,LLC.All rightsreserved.Nopartof thispublicationmaybereproduced,distributed,ortransmittedinanyformorbyanymeans,withoutthepriorwrittenpermissionof the publisher, except in the case of brief quotations embodied in criticalreviewsandcertainothernoncommercialuserspermittedbycopyrightlaw.

Disclaimer:Thisbookismeanttobeinformationalandshouldnotbeusedastradingadvice.All traders should gather information from multiple sources, and create theirown trading systems. The authors make no guarantees related to the claimscontainedherein.Pleasetraderesponsibly.

WhendidIstarttrading?Lookingbackatmylife,Idon’trememberatimewhenIwasnotinterestedinthe markets. As a teen I was fascinated by compound return tables, and themagicofgrowingcapitalovertime.BeforetheInternet,Irememberlookingatstockquotesinthenewspaper.Mylovefortradingandthemarketscontinuedtogrow.

Ihavespentthelast20+yearsinvestingandtrading.MydrivetobeasuccessfultraderleadtoreadinghundredsoftradingbooksandputtingwhatIlearnedintoaction.Becausethelearningcurvewassosteep,Idecidedtocreateashortcutfornew traders; the kind of information I wish I could have studiedwhen I wasgettingstarted.Ihavecondensedallthekeyprinciplesthatanewtraderneedstoknowintoaneasilyunderstandableformat.Mygoalistogetanewtraderuptospeedquickly,andtradingsuccessfully,withverylittlerisk.

IhopeyouwilljoinmeasIshowyouhowtobuildandgrowyourowncapital,with low stress and minimal risk. It will most likely be one of the mostrewardingthingsyoueverdo.Itwasforme.

-SteveBurnsstephen@NewTraderU.comwww.NewTraderU.com@sjosephburns

ThePowerofHabits“The right trading behaviors start as rules and evolve into habits.” – BrettSteenbarger

In athletics, business, and entertainment, the top performers are those thatcarefullyconsidereveryactiontheytake.Theelitehavetrainedthemselvestobenimble; habitually doing the right thing, at the right moment. Their years ofstudyandpracticehavetaught theirmindandbodytoreactwithouthesitation,regardlessofpressureoruncertainty.

When first studying a winning technique, the process is mechanical andthoughtful. “DoA, thenB, and youwill likely arrive at C”. Speed in actioncomesfromknowingexactlywhattodoonadeeper,subconsciouslevel.Onceyouknow the rightmove tomake, the final step is tocommit toa regimenofdedicatedpractice.Onlythenwillyoubeabletooutperformyouropponents.

Intrading,thefirststepistolearnwhatyouneedtodoinordertobeprofitable.Educationshouldbeyourfirstpriority.Nurturingyourcomprehensionoftradingvocabularyiscriticaltoyoursuccess.Tradingmethods,tradingsystems,tradingplans, risk/reward ratios, and win rates can sound mysterious to newcomers.Findgoodsourcesoftradinginformationandlearnasmuchasyoucan.

Continuedlearningthroughchartstudies,backtestingpricepatterns,interactingwithexperiencedtraders,andreadinggreattradingmaterialisarethebesthabitsanewtradercandevelop.

Alwaysfocusonbeingbettertodaythanyouwereyesterday.

Another way to gain an advantage over your opponents is to trade withdiscipline.Mosttradersaretradingbasedontheirownpredictions,opinions,andemotions.Thesearetheworsttradingsignals.Instead,developtradingrulesthatwillguideyou.Replaceyouropinionswithtradesignals,youregowithpositionsizing,andyouremotionswithatradingplan.

When you have the right set of rules and follow them long enough, theywillslowly become part of your trading personality and style and youwill followthem on a subconscious level. You will know that you have reached trading

maturity, when it becomes uncomfortable to break your trading rules. Thissignifiesthattheyhavebecomesecond-naturetoyou,andthey’remorepowerfulthanyouremotionallydrivenimpulses.

Developing and practicing powerful trading habits hasmademe successful inthestockmarketformorethan20years,andtheycanhelpyou,too.

Rule1-15TheFoundation

1.Awinningtradingsystemmusteitherbedesignedtohavealargewinningpercentage,orbigwinsandsmalllosses.Therearetwopathstoprofitabletrading,accuracyofwinningtradesandsizeofwinning trades. A trading system with equal size wins and losses must havemorewins than losses. Thismay seem like common sense, but highwin ratesystemscanquicklybecomeunprofitablewhenlossesareallowedtogetoutofhand.Manyofthesesystemsgivelosingtradestoomuchroomtorun,andtheyachievetheirhighwinratebyholdinglongenoughforthetradetocomebacktoeven,orbecomeprofitable.

Highwinratesystemsnolongerworkwhenamarketenvironmentchangesfromrangeboundtotrending,becauselosingtradesdon’talwaysbounceback.Thesesystemsmustbebuiltontheaccuracyofanentryandtheprobabilityofsuccess,ratherthanholdingandhopingthatalosingtradewillcomeback.Itiscrucialtocut losers short, even in high win rate trading systems, because a large lossdoesn’tgivebackpreviouslyearnedprofits.

Highwinningpercentagesystemshavetobebuiltontheoddsthattheprofitablepricetargetisreached,orthetrailingstopishitforaprofitbeforethestoplossisreached.TheoldWallStreetsaying“Youcan’tgobroketakingaprofit”isnottrue.Ifyoutakeonlysmallprofitsitonlytakesafewbiglossestobreakyou.

Incontrast,therearesystemswithlesswinsthanlosses,buttheyareprofitableoverthelongtermbecausethelossesarekeptsmall,andthewinningtradesarelarger than the losing ones. Lower winning percentage systems are generallyused by long term trend followers, breakout traders, and option buyers. Thebiggertheirwinningtrades,thelowertheirwinningpercentagecanbetostillbeprofitable.

Thekeyiscappingthedownsideriskwhenyou’rewrong,butleavingtheupsideprofitpotentialopen.Inotherwords,cutyourlosersshortbutletyourwinnersrun. A stop loss is your insurance against having any big losers. You can letwinning trades trend as far as possible, capturing those unexpected, outsizedmovesthatareoutsidethebellcurveofnormalpricemovement.

Tobeprofitableinalowwinratesystem,youdon’thavetoberighteverytime,youjusthavetorightbigandwrongsmall.Ifyou’reright,youstayrightforaslongaspossible,butifyou’rewrong,yougetoutwithasmalllossandwaitforthenextopportunity.Cuttingwinnersshortatthebeginningofatrendandlettinga loser run on the wrong side of a trend, are the two biggest causes ofunprofitability.

1:1risk/rewardratiorequiresgreaterthan50%winrateforprofitability.1:2risk/rewardratiorequiresgreaterthan33%winrateforprofitability.1:3risk/rewardratiorequiresgreaterthan25%winrateforprofitability.1:5risk/rewardratiorequiresgreaterthan17%winrateforprofitability.

Thebiggeryourwins, the feweryouneed tobeprofitable.Themoreaccurateyourentriesandexits,thelesslossesyouwillendure.Youcanbeprofitablewithfewerwinsaslongaslossesarekeptsmall.Largelossesarethefastestpathtobeingunprofitable,regardlessofcircumstances.

2.Yourtradingsystemmustbebuiltonquantifiablefactsandnotopinions.

Fewnewtradersgraduatefromtradingopinionsandpredictions,totradingpriceaction and signals. New traders may take trades based on feelings, butprofessionalsbasetheirtradesonfact.Asignalisaquantifiablereasontotakeatradebasedonpriceaction,atechnicalindicator,atrendline,orapricepattern.Even when using psychology of the market to your advantage, you mustconsiderthesetechnicalstrategies.

“Buyingadip”isnotasignal.ButbuyingapullbackintheS&P500Indextothe50daySMA,or theprices reaching the30RSIon adaily chart inside anuptrendoverthe200daySMA,isbasedonquantifiablefacts.Signalsshouldberesearchedonhistoricalchartsorbacktestedtoseetheprofitabilityoftradingoffthesignal.Historicalpricepatternstendtorepeatthemselves,andcreatetradablesignalsforcapturingtrendsandreversals.

Othertypesofsignalsaremorediscretionaryandcanrelyonpurepriceactionand buying breakouts of price ranges, trend lines, and chart patterns. Tradingbreakoutsofranges, lines,andpatternsarequantifiable,but theyleavea lotofdiscretioninthehandsofthetrader,andaredifficulttobacktest.Tradershavetostayconsistentwithhowtheydrawtrendlines,identifychartpatterns,andreadpriceaction,sotheydon’tstartseeingwhattheywanttosee.

Breakouttradingistryingtocapturethebeginningofanewtrendaspriceleavesthe previous trading range and signals a potential change in trend. Having areasonfortakingatradeisstillbetterthantradingoffahunch,abelief,afeeling,or a prediction. I personally prefer usingmore quantified trading signals, likepricesupportandresistancelevels,movingaverages,MACD,andRSI.

Itisimportanttohaveaspecificreasonforenteringatradethatwillputtheoddsin your favor. This gives you potential for a good winning percentage,risk/rewardratio,andagreatchancetobeontherightsideofthetrendinyourtimeframe.Tradingwithoutquantifiablesignalsmeansyou’retradingrandomly.Replace your discretionary trading with quantifiable signals that give you aspecific reason for entering a trade. Beliefs and predictions about what themarket will do, should do, or can’t possibly do, is not a trading system.Quantifiedentriesandexitsinatestedtradingsystemisthepathtoprofitability.

3.Look for lowrisk,highreward,andhighprobability setups. –RichardWeissman

Whenenteringatrade,youwantalowprobabilitythatyourstoplosslevelwillbe triggered. If you buyApple stockwhen the price is 1% over the 200 daySMA, andApple has not closed below the 200 day SMA in 18months, thenthereisagoodchancethatyourstoplosswillnotbetriggeredifyousetitasacloseundertheApple200daySMA.Youshouldhavealowrisktoyouraccountifyourstoplossishit.Buying100sharesofAppleat$120ashareina$100,000tradingaccountwithanendofdaystop loss$1.20away fromyourentry, isalowrisksetup.(Ofcourseitislowriskaslongasearningsaren’tbeingreleasedthenextdaywhileyou’restillholdingthisstockposition).

Itisagreatrisktorewardratioifyourpricetargetisa6%pricerallybacktothe50daySMA,or a10%rallyback touptrendhighs.Eachentry shouldhaveagreatstoplosslevelthathasalowriskofbeingtriggered.Yourpositionsizingshould have low risk so that in the event of a big loss, youwill live to fightanotherday.Yourrewardshouldbetwoorthreetimeslargerthanyourcapitalatrisktomakethetradeworththerisk.Thismaygiveyouasmallerwin,butyoushouldhavethatpotential.

Tradesothatwhenyou’rewrongyourlossesaresmall.Lookfortradeswiththepotentialofbeingbigwinners.Enterwhentheoddsarelowthatyourstoplosswill be hit before you’re profitable enough to exit. Use trailing stops whenpossibletomaximizewinningtrades,exitawinnerwhenyouhaveareasonto,andnotbecauseopenprofitsmakeyounervous.

4.Theanswertothequestion,“What’sthetrend?”isthequestion,“What’syourtimeframe?–RichardWeissman

Thebestwaytoprofitinthestockmarket,oranyfinancialmarket,istocaptureatrendinyourtimeframe.Thereareotherways,likesellingoptionpremiumorhedging production by selling futures contracts. But the majority of marketparticipantsaretryingtocaptureatrendontheirowntradingorinvestingtimeframe.Buyandholdinvestorsarebettingonthelongtermuptrendofthestockmarket over the courseof theirworking life.Day traders try to capture trendsfrom the time themarketopens,until the time it closes, all inoneday.Swingtradersare looking tobuya lowand thensell itas it trendshigherovera fewdays,orsellahighpriceshortandcoveritatalowerpriceoverafewdays’.

Ihavefoundthatthelongerthetimeframe,thesimpleritistocapturethetrend.Long term trend followers filter out the noise and capture trends on daily orweeklycharts,andstrivetoavoidtherandom,intradaynoise.Differentsystemswillworkbasedon thevelocity andvolatilityof the trend in aparticular timeframe.

In a strongly trendingmarket that consistentlymakes higher highs and higherlows eachday forweeks at a time, trend followers dowell.Markets that stayinsideadefinedrangeofresistanceandsupportonthedailychartforweeks,willproveprofitableforswingtraders.Daytraderslikeintradayvolatility,asitgivesthemchancestobeprofitable.

Anytradingsystemonanytimeframeisjustasetofrulesthatgivethetraderahigh probability to capture a trend. When building a trading system anddevelopinga tradingplan,yourgoal is todiscoverways tocapture trends inawaythatmakesyoucomfortablepsychologicallyandfinanciallyprofitable.

5. Startwith theweeklyprice chart to establish the long term trend, andthen work down through the daily and hourly charts to trade in thedirectionofthattrend.Theoddsarebetterifyou’retradinginthedirectionofthelongtermtrend.

Trendsarecreatedonthelongtermchartsbytheaccumulationordistributionofa stock, commodity, or even a whole asset class. During the time an asset isbeingaccumulated,buyersarepurchasingandthenholdingthatasset,removingmuchofthedownwardsellingpressurefromthatmarket.Thehigherhighsandhigherlowsonthechartwillshowthis.Ittakeshigherpricestobuy-in,becausethe current holders of the asset aren’t selling and have removed the inventoryfromthemarket,loweringthesupplyfortheexistingdemand.

Mutualfundsaccumulateastockovertime,becausetheywanttoestablishitasamajorholding.Largemoneymanagerscan’tbuymillionsofsharesofastockatonetime.Instead,theybuyinstagessotheydon’tpushthepriceuptoofastandmakeittooexpensivetoaccumulate.Theywillusedipsinpricestoaddtotheirholdings.Onekeylevelisthe50daySMAforgrowthstocksinuptrends.Muchofthesupportforstocksatkeymovingaveragesiscausedbymoneymanagersaddingtotheirlongtermpositionsbybuyingat50daySMApullbacks.

Accumulation iswhen assets are bought as long termholdings or investmentsandheld,creatinglongtermtrendsofhigherhighsandhigherlows.Itisdifficultto shortmarkets under accumulation because the pullbacks are very short andbuyersarewaitingtogetinatanypullback.Itiseasiertogowiththeflowofthecapitalintothemarketthantofightagainstit;tradingtheshortsideandbettingonareversalatanearlystage,isatoughonetowin.Thisdiffersfromamarketthatisbeingtraded,creatingresistancewherethemarketrunsoutofbuyersataspecificpricerange,andthenhassupportatalevelwhereitrunsoutofsellersatlowprices.

Thedistributionofamarketistheoppositeofaccumulation.Thisiswhatcausesalongtermdowntrend.Holdersofanassetwantout.Bigmoneymanagersandinvestorsstartsellingtheirholdingsslowlysotheydon’tpushthepricedowntoofast. In a market or stock under distribution, price consistently makes lowerhighs and lower lows, as sellers overwhelm buyers and keep lowering theirprices to find new ones. As key support levels are broken, stop losses aretriggeredcausingmoresellingandevenlowerprices.

Dip buyers become overwhelmed with sellers forcing prices lower and shortsellersstartsteppingintoaddtothepressureofselling.Downtrendingmarketstendtobemorevolatilethanuptrendingones,asshortcoveringrallieshappenatoversoldlevels,anddipbuyerscomebackinlookingtocatchthebottom.

Markets under distribution tend to see selling into the rallies and then thedowntrend resumes. In downtrends, it is possible to catch some reversals andreversionsbacktoaprevioussupportlevel,buttryingtobuyduringadowntrendshouldbe forquick trades,becauseyou’regoingagainst the longer term trendandflowofcapitaloutofamarket.

Marketsneedaccumulationforlongtermuptrendsanddistributionforlongtermdowntrends.Pricerangesoccurwhenamarket isbeing traded,and thecurrentholders and active traders have established limits in prices onwhere theywillbuy and sell. Long term, the stock market has a bullish slant because it hasdemandfrombuyersofmutualfunds, retirementaccounts,companybuybacks,andinvestors.Inanymarketyoutrade,youshouldlookforcluesastowhetheritis being accumulated or distributed, or just traded actively by themajority ofparticipants.Makeahabitoftradingonthesideoftheflowofcapitalintooroutofyourmarketofchoice,insteadofresistingtherealityofpriceaction.

6.Themoretimesasupportorresistancelevelistested,thegreatertheoddsthatitwillbebroken.Oldresistancecanbecomethenewsupport,andtheoldsupportmaybecomethenewresistance.

Whatcausespriceresistanceandsupportoncharts?Pricehasmemory.Ifpricemakes a new high, then reverses and goes lower,many people left holding astockatlowerpriceswilldecidethatifthestockreturnstothatpricelevel,theywillsell it immediately.Theseholderscreateagroupofsellerswaitingfor theoldpricehightobetheirselltarget.Whenpricereturnstotheold,higherpricelevel, theseholders sell and feel relieved.They’rehappy that theydidn’tmisstheir second opportunity to get out at the higher price. This selling sends thepricebackdownagain.

Asimilarthinghappenstocreateapricesupportlevel.Agroupofpeoplewanttobuyastockfor$98,andwhenthepricepullsbackbrieflytoapricelevellike$100, thenmovesup to$105, those thatwanted tobuycheap,missed thefirstopportunity.Frustrated,theydecidethatifitpullsbackto$100againtheywillbuy at that price. This creates willing buyers at the new support level, justwaiting for the opportunity to get in. This is what causes key support andresistancelevelsforstocks;thememoriesandgoalsofthemarketparticipants.

Supportandresistancelevelscanplayoutoverandoveragain,untilabreakouthappens to a new trading range for prices, or the market begins to beaccumulated or distributed. This creates a trend that overwhelms the activetraders,andthelongtermholderstakeoverbybuildingpositionsordistributing,creatinganewtrendofconsistentlyhigherorlowerpricesthatreplacestheoldrangeofsethighsandlows.

Whenabreakoutofatradingrangeoccursandbigdistributorsoraccumulatorstake over amarket they cause it to trend, but it doesn’t just go straight up ordown.Thereisstillapatternofamarketmovinginonedirection,thenmeetingsupplyanddemandandretracing.Ifastockhadanold$105resistancelevelanditsuddenlybreaksoutto$108,theoddsaregoodthatitwillreturnatleastonemore time to $105. It will find buyers at that price who wanted to buy thebreakout over $105, but theymissed the original opportunity.Given a secondchance, theywillbuyapullback to thebreakout levelof$105.When theydo,this creates support, so old resistance becomes new support in an uptrend.Momentum and trend traders that missed the initial breakout buy the firstpullbackforanopportunity togetaboardanewtrend, inanewhigher trading

range.

Oldsupportworksthesamewaybecauseholdersbecometrappedinapositionastheoldsupportlevelislost.Theydecidethatgivenanotheropportunity,theywill get out if price rallies back to old support. This creates selling pressurebecauseholdersofastockthatlostmoneyarelookingforarallytogetoutwhenthepricereturnstotheoldsupportlevel.

Themoretimesresistanceandsupportsaretested,thegreatertheoddsthattheywill break into a trend as the market works through the current holders of astock,andnewpeopleenterthestock.Makeahabitidentifyingoldsupportandresistance levels and trading off them as long as they hold in a range boundmarket,thenlookattradingabreakout.

7.Movingaveragescanquantifytrendsandcreatesignalsforentries,exits,andtrailingstops.

Moving averages on charts is the quickest way to quantify the direction of atrendinanytimeframe.Movingaveragessmoothoutthepriceactioninatrend,andshowwhatsideoftheaveragepriceisoninanytimeframe.Theslopeanddirection of the moving average shows the direction and the power of priceaction.

Ifpriceiscurrentlyabovethe5daymovingaverage,thenatraderknowsthatthepriceisgoinghigherinthe5daytimeframe.Theeasiestwaytoidentifyatrendistolookfortheuptrendashigherhighsandhigherlows,andthedowntrendaslower highs and lower lows.Aquickway to identify a trend is to look at thepriceactionversusthemovingaverageinyourtradingtimeframe.Priceabovethekeymovingaverageshowsanuptrendandpricebelowitshowsadowntrend.

Iliketousemovingaveragesfortrendidentificationovertrendlinesandpricepatternsbecausetheyare100%quantifiable.Amovingaverageismath.Youcanchooseafasteroneonalowertimeframelikethe10daySMA,orasloweroneona longer timeframe like the200daySMA.Youcanhaveone thatchangesfast by giving more weight to newer prices by using an exponential movingaverage,oronethatisanaverageofpricesoveratimeperiodwithanSMA.

Whilemoving averages aren’t theHolyGrail of signals, they can play a veryimportantroleinyourtradingsystem.Theycanbebacktestedonhistoricaldatausedas tradingsignals,orusedonhistoricalcharts to studyhowprice reactedaroundthem.Movingaveragescanalsobeusedinpairstocreateentryandexitsignalswhenashorttermmovingaveragecrossesalongtermone.

Movingaveragescanbeusedasentrysignalswhenpricebreaksabovethem,orstoplosseswhenpricebreaksbelowthem.Theycanbeusedastrailingstopsasyouletawinningtraderun,andtheyaretrendidentificationtoolsthatworkbestwhen combined with other technical indicators. Moving averages canoutperformmostpeople’sopinionsbecause they followpriceaction insteadofprediction.

AllofthebesttradersIknowhavetradingrulesformovingaverages,andutilizethemtosomeextentintheirtradingsystems.Istronglyurgeyoutomakeahabitofstudyingmovingaveragesystems,backtestingthem,andusingthemonyour

chartstoseewhatishappeninginthemarketyou’retrading.

Thereisalotmoretolearnaboutmovingaverages,butIwon’tgointogreaterdetailhere,becauseIhavewrittenanotherbookdedicatedtothesesignals.

Moving Averages 101: Incredible Signals that will Make You Money in theStockMarket

8. Bullmarkets have no long term resistance, and bearmarkets have nolongtermsupport.

Many sellers and ‘weak hands’ get washed out of a bearish market afterexperiencinglowerlowsoveralongperiodoftime.Duringa20%dropinpricesinto a bear market, key support levels are lost repeatedly. Stop losses aretriggered, ralliesaresold into,andfearslowly takesholdaspeopleseemoneydisappearingfromtheiraccounts.

Lowerhighsandlowerlowsistherecognizablelongtermpatternaspeoplepileoutof theirholdings.Adowntrendingmarket is thebestway to shakeout themostholders, and setup theopportunity forprices to stabilize.Startinga trendback up will alleviate a lot of the selling pressure toward the end of thedowntrend.Themajor changewithprice actionduringmarket corrections andbearmarketsisthatdipsstopbeingbought.Theyarereplacedwithfurtherdipsinpricewithoutbuyerscausingbounces.

Buying key support levels doesn’t work because supports don’t hold and areinsteadbreakoutsofpricerangestothedownside.Theoddsareonyoursidetosellstrengthshortinbearmarketssoyoustayontherightsideofthetrendandflowofcapitaloutofthemarket.AbearishStockMarketisusuallyshortlived,typicallylastingforayearortwo.Bigralliesinbearmarketsarecausedbyshortcovering rallies to lock inprofitsafteradeepplunge inprices.Theseare thenchasedbybottompickers.

Theendofabearmarketarriveswhensellingisfinallyexhausted.Withmanylonger term position holders left onboard, and with dip buyers becoming themajorityofthenewholdersthatgotinatmuchlowerprices,thesenewholdersarelessapttobestoppedoutoftheirnewpositions.Thisistheformationofanewbottomthatholds.

Big trends in bull or bear markets are usually followed by a time of priceconsolidation. Prices stabilize and find new ranges to trade inside of. Supportandresistancebeginstohavemeaningagain,andthemarketasawholestartstogosideways,withneitherabigreturnnorlossinthestockmarketindexes.Thisisthetimeperiodofneutralityanduncertainty.Tradersandinvestorsdon’tknowifthelasttrendisoverorwhetheritwillresume.Thisisamarketistradedbackandforthwithoutaccumulationordistributiontocreatetrends.

Theprimarycharacteristicofabullmarketistheabilitytorepeatedlybreakouttonewhighs.First,witha52weekhigh,andthenall-timehighs.Shortsellersget hurt during bullish conditions because resistance no longer holds back theadvancing prices. As resistance is broken again and again, short sellers areforced to cover. This sets off more momentum, which in turn draws in themomentumtraderstobuythestrength.

In bullmarkets, buying is eventually rewarded.Buying dips gives traders andinvestorsthechancetocatchthenexttriptoall-timehighs.Beingstubbornwithlongpositionsisrewardedintheend.Bullmarketsusuallylastforseveralyearsandarethesourceofmostofthecapitalappreciationforthelongtermreturns.Learningtogetoutofinvestmentsattheendofabigbullrunwilldramaticallyimprove the returns of long term buy and hold investors. Traderswho switchfrom buying price strength in stocks, to shorting them in downtrends, willsignificantlyimprovetheirreturns.

Having trading rules that identify price patterns for range bound markets,uptrends, and downtrends so you can trade according to the environmentwillimproveyourprofitability.

9.The larger themarketgaps, thegreater theoddsof continuationandatrend.–LindaRaschke

Pricegapsonachartaregenerally trend indicators in thedirectionof thegap.Thisisespeciallytrueforgrowthstocksandcommodities.Mostgapsarefilled,butitcantakemonthsorevenayeartofillagap.Youcancatchanicetrendinthemeantimeifthegapturnsouttobea“gapandgo”thatleadstoatrendoverdays,weeks,ormonths.

A“gapandgo”meansthatthelowofthedayofthegapholdsandatrendsetsinoverthenextfewdays.Whengapsinpricefailandmovebacktofillthegapinpriceonthedayofthegap,theycanbecalleda“gapandcrap”.Ifgapsdon’tfillinthefirsthouroftrading,theoddsarethattheyaren’tgoingtofill,andpricewillcontinueinthedirectionofthegapfortheremainderoftheday.

Thebestwaytotradeagapistobuythefirstpullbacktothelowofthegapday.Thisgivesyouabetterrisk/returnratioonentry,butthedownsideissometimesgapsaresopowerfultheydon’tretrace.Youcanbuyintothegapinthemorning,butthereismoreriskbecauseyoudon’tknowifthegapwillhold.Youcanalsobuythegapattheendofthedaywithyourstopasaclosebelowthelowofthegapupday.Thisisatradebasedontheprobabilityofstrongmomentumandatrendcontinuation.

Therearefewthingsasbullishasagapuporasbearishasagapdown.Thisisastrongsignaland isnot tobe ignored.Theoddsaren’tgood tobetagainst thedirection.Beawarethatgapsatopenhaveovercometheentirestringofbidandasks for an entire range of prices, and it’s important to listen to what this istellingyou.

Thelocationofagapandgoshouldalsobeconsidered.Agapupinthe$SPYETFoutofadowntrendfromanoversold30RSI toa40RSI level,willhavebetteroddsoftrendingthanagapupin$SPYlateinanuptrendfroma60RSItoa70RSIintooverboughtterritory.

TheRSI(RelativeStrengthIndex)inthe$SPYtypicallyrangesfromalowof30oversold,toahighof70overbought.Agrowthstockgappingdowntothe200daymovingaveragewilllikelyfindbuyerstosupportit,assellinghasbecomeoverdone.Gaps late into a long trendcan signal the endof a trend.These arecalledexhaustiongapsandusuallyoccuronlargevolume,endingthedaymuch

lowerthantheopeningpriceorthehighoftheday.

Commodities and growth stocks can go farther and trend more than stockindexes or big cap stocks, so gaps in trending types of markets should berespectedevenmore.Tradersshouldhavesolidrulesabout tradinggaps in themarketsontheirwatchlist.Findingasuccessfulwaytotradegapscanbeveryprofitable.

10. The last hour often tells the truth about how strong a trend truly is.“Smart” money shows their hand in the last hour, continuing to markpositions in their favor.As long as amarket is having consecutive strongcloses, look for anuptrend to continue.Theuptrend ismost likely to endwhen there is a morning rally first, followed by a weak close. – LindaRaschke

Inthestockmarket,thefirsthouroftradingisoftentimesamateurhour,whiletheclosinghourislikealiedetector.

Newtradersareluredintotakingthewrongsideoftradesattheopen,butmostofthesmartmoneywaitstoseehowthemarketclosesbeforemakingadecision.Inbearmarkets,themarkettendstoopenhigheronthehopeofareversalofthedowntrend,andthencloselowerondistributionwhenitdoesn’toccurduringthetradingday.Inabullmarket,themarketusuallytendstoopenlowandgoloweronprofittaking,closinghigheronaccumulation.

Inmy experience, traders would be better served by getting into the habit oftakingprofits in themorning,andmakingentrydecisionsbasedon the last30minutesofthetradingday.Themorningpriceactionoftenreverses,andtheendof day entries give a clear picture ofwhat happened in the context of the fulltradingday.

Endofdaytradingisalsobetterpsychologicallybecauseyouavoidtheintradaynoiseofday traders andautomatedalgorithmsbattling it out.Youget abetterperspectiveofthelongertermaccumulationanddistributionofthelargemoneymanagersinthemarket.EndofdaytradingwastheprimarymethodthatNicolasDarvas,EdSeykota,andTomBassousedtobuildtheirwealth

Endofday is the timewhenmanytrendfollowers take theirownsignals.Youcanalso considerwhetheryou takeprofits at theopen, entries at the close, ortradeendofdayonly.Getinthehabitoftradingyourtimeframeinadisciplinedmanner,whateverstrategyyouchoose.

11.Above the 200 day iswhere bulls create uptrends.Bad things happenbelow the 200 day; downtrends, distribution, bear markets, crashes, andbankruptcies.

Theultimatelineinthesandthatseparatesalongtermuptrendfromalongtermdowntrend, andabullmarket fromabearmarket, is the200daySMAon thedaily chart. For long term trend followers that look at higher time frames, asimilarlinetowatchwouldbethe40weekmovingaverageontheweeklychart.

Whilemanyprofessionaltradersandinvestorswatchthislineandinitiatesellingandbuyingaspriceapproachesit,thereisnothinginherentlymagicalaboutthe200day.Whatitdoesisidentifythefactthatpriceistradingaboveorbelowitsaverageforthepast200days.Thisisaneffectivewaytoquantifyitslongertermtrend.

Foramarket todrop20%intoabearmarket,or ‘meltdown’,or ‘crash’ itwilltypically first fall through its200daymovingaverage.The200day isa trendtrader’sfirstwarningsignthatthetrendhaschanged.Buyandholdinvestorscanreducetheirdrawdownsintradingcapitaliftheyexittheirlongpositionswhenpriceclosesbelowthisline.

Traderscanimprovetheirtradingwinratebylookingforshortsidetradeswhenpriceclosesbelowthe200day,andfails torallyandclosebackoverthis line.Priceusuallyfindssupportonthefirstfewtripstothe200day,andbullslooktobuythisdipforaninitialbounceandagreatrisk/rewardratio.Inayoungbullmarket,thisisgenerallytheearlysupportline.Laterinabullmarketwhenthe200dayislost,pricewilltendtorallybackoverthisline.

Forstocksthatlosethislineandbegindowntrends,theywilloftenrallybacktothe 200 day repeatedly, before further distribution takes over and the stockplunges.The200dayisawaytoquantifyalongtermuptrendfromalongtermdowntrend.Theoddsarebetterforlongpositionsinmarketsabovethislineandsellingshortbelowthisline.

The200daycanbeusedasa trading system filter, actingasanotherqualifierbeforetakingentrysignals.$SPYbreaksoverthe50RSIANDpriceisoverthe200 day, for example.Traders should get in the habit of thinking about goinglong above the 200 day, and selling short below it inmost cases.Waiting forstockindexpricestostartclosingbackoverthe200daycanbeakeylevelfor

investorstogetbackinafteraprolongedbearmarket.Thisisbethefirstsignofanewbullmarket.

12.Itismucheasiertowatchafewthanmany.–JesseLivermore

The best way to develop a strong edge in trading is to study, test, trade, andmasteraspecific thing. It ishard tobeatanexpert inaspecificmarket, setup,chartpattern,tradingsystem,orstock.Youwillhaveamuchbetterchanceifyouhaveasmallwatchlistofspecificstocksorsetups.

Knowinghowyourstocksmovearoundkeymovingaveragesandindicatorscangiveyouanedgeoverothersthataretradingtheiropinions.Studyinghowyourspecificmarketmoved aroundkey technical indicators over the past ten yearsshouldprovideyouwiththenecessaryinsight.

Developa robust systemfor tradingpriceactionacrossmultiplemarkets.Thissimplyamatteroffindingtheentrysignalsandpatternsyou’relookingforthatwillgiveyoumoretradingoptionsifyoursmallerwatchlistdriesup.Getinthehabit of trading a specific winning price action based system, so that yourtradingbecomesasimplesearchfortherightsignals.

13.Trendsneverturnonadime.Reversalsbuildslowly.Thefirstsharpdipalways finds buyers and the first sharp rise always finds sellers. – AlanFarley

It is important for traders to understand that trends don’t go straight up orstraightdown.Instead,theytendtozigzagbackandforthfromanewhigh,backtoalowerhigh,toahigherhigh,andbackdown.

Marketsandstocksrarelyplungestraightdowndayafterday,orgostraightupinprice.Eventhestrongestuptrendsinstocksandmarketstendtopullbacktothe5dayexponentialmovingaveragerepeatedlyontheirwaytonewhighs.

Downtrending stock indexes usually bounce a few times at the 30RSI beforecontinuing lower.Bearmarkets almost always have strong rallies back to keymovingaverageslikethe200daySMAbeforetheyfinallyrolloveranddropformultipledaysinarow.Itisimportanttostepbackfromyourdailytradingandgetaperspectiveof thedailychart’s longer term trend.Youhave to findgoodkeypricelevelstoenterwhereyoucanpositionyourstopstonotbehitbeforeyou’reabletocaptureapieceofthelargermarkettrend.

In stock indexes, downtrends tend to bounce near the 30RSI,while uptrendstend to stall near the 70 RSI. The MACD (Moving average convergencedivergence)technicalindicatorattemptstomeasureachangeintrend,andsignalapossibleentryatthebeginningofanewshorttermtrend.Atradercandecidehowmuchofatrendtheywanttotrytocaptureintheirchosentimeframe,andhowmuchofaprofitgivebacktheyarewillingtorisktocapturemoreofatrend.

Traders should get in the habit of findingways to capture trends as the pricezigzagsandthencontinuesintheprimarymarketdirection.Abilitytofilteroutnoise and capture a trend is a trader’s primary responsibility during systemdevelopment.

14.Successfultradingisaboutconsistentlydoingthedifficultthingsooftenthatitbecomessecondnature.–RichardWeissman

The easy trade is usually the losing trade. When a trader feels the mostcomfortableenteringatradetogetonboardatrend,itisusuallyclosetotheend.It’sdifficult to takeentrysignalswithgreat risk/reward ratiosbecauseofdeepdipsinprice.Thisistypicallyduetofearinthemarket.

Thebestdipbuyingopportunitieshappenatkeysupport levelsdue toextremefearofanevent,whichtriggersaplungeinprices.Thevastmajorityofthetime,the feared event doesn’t happen and a large rally occurswhen the end of theworldisavoided.

Traders and investors often say they want to buy a key support level or bigpullback,andevenhaveaspecificpricetarget,butoftentimesthepullbackanddipoccursduetomarketfears.Thepotentialdipbuyergetssoconsumedbyfearthattheycan’ttaketheirdesiredentrysignalbecausetheiremotionstakeover.

Maximum buying opportunities happen at the height of these false fears thathave littlebasis in realityof the futureprice.Ofcourse, fear isnota signal initself. Fear is what creates trading signals as price reaches extreme oversoldlevels,keylongtermmovingaverages,andoldpricesupportzones.

Anotherdifficultentrytotakeis tobuyabreakout tonewhighsoutofapricerange.Theinitialbreakoutoverresistancewillfeellikeyou’rebuyingtoohigh,chasing,orbuyinglate.Atrenduptonewall-timehighscanonlyhappenafterabreakouttoanewpricelevel.Momentumtradersandtrendfollowers’besttradesareusuallythosethatareenteredataninitialbreakoutintoanewpricezone,andthentrendoverweeksandmonthstohigherhighsorlowerlowsfordays,weeks,ormonths.

Thetwomostprofitablewaystotradearetobuyextremelowsthatarecausedby unfounded fears, or to buy breakouts or momentum at the beginning of alargetrend,ridingittobigprofits.Botharedifficulttodobecauseatradermustovercometheirownfear.

All the things that make a trader profitable are difficult to do. Buy initialstrength,shortinitialweakness,buybreakouts,sellbreakdownsshort,andletawinner runwith a trailing stop loss, cut a loser short and acceptwhen you’re

wrong.

Financialmarketscanbecounterintuitivebecausewhenthingsappeartobethemost obvious, that is typically when the opportunity has passed. Opportunityexists in a state of uncertainty, when themajority is waiting to seewhatwillhappen,andwherepricewillgonext.Pricewillgenerallygointhedirectionthatcauses the most financial and emotional pain to the majority, because themajorityisusuallywrongoverthelongterm.

15.Thebesttradesworkalmostrightaway.–ArtOfTrading.net

Thebesttradesaretheonesthatfityourentrysignalparameters,andhaveastoplossataprice level that isunlikely tobehitbefore the trade issuccessfulThebest trades are those that you fully understand and accept the risk/returnpotential.Whenyourpositionsizeissetupsothatthestoplossplacementlimitsthe size of your potential loss, it is a good trade out of the gate.But the besttradesarethosethatimmediatelygoinyourfavor,becauseyourentrywasattherightmoment.

There is little stress associated with these trades because it is immediatelyprofitable,andyourstoplossissafefromthestart.Yourealizequicklythatthiswill be awinning trade, andyour focus shifts from if itwill be successful, tohow tomanage yourwinner.Your time and energywill be spent on how andwhentoexitthetradetolockinyourprofits.

Theoddsofhavingawinningtradefromthebeginningincreasesifyouwaitforaninitialmoveinthedirectionyouwanttoenter,insteadofsteppingintocatchafallingknife,orsellarocketshortthatisblastingupwards

Rule16-27

MindOverEmotion

16.Wishfulthinkingmustbebanished.–JesseLivermore

Hopeisadangerousemotioninthestockmarket.Hopeforabigwinningtradecausespeopletotakepositionsizesthataretoolarge,andopensthemuptoevenbigger losses. The misplaced hope of a loss becoming profitable, leads sometraderstoignoretheirinitialstoplossandstaypositionedonthewrongsideofatrendforfartoolong.

Thestrongerthehopeofturningasmallaccountintoabigaccount,thegreaterthechancethatatraderengagesinriskytradesandtakestheirsmallaccounttozero.Hopeisapowerfultoolwhenitfuelsatrader’spassiontolearn,study,andgrowwithpatienceandperseverance.However,hopeisn’tatradingplan,itisn’tasignal,andisn’taguideonwhattodo.

Whenitcomestomakingdecisionsaboutyourtradingaccount,tradersmustgetin thehabitof tradinghopefor factsandemotionsfor tradingrules.Hope isagreat tool for personal goal setting, but a terrible guidewhenmaking tradingdecisions.

17. Money is made by discounting the obvious and betting on theunexpected.–GeorgeSoros

The obvious trades that everyone thinks are a no-brainer, usually don’t workbecause when a trade becomes obvious, it’s too late. As the winning tradersprepare their exit strategies to lock in profits, the unprofitable traders arepreparingfortheirentriestochasealatetrend.

The unexpected happens regularly as growth stocks go higher than anyonebelievedpossible,buttheearlybuyersandbearmarketsgodeeperthanexpectedbecause fear of loss begins overriding any fundamental valuation. Wheneveryoneagreeswithyourlongtrade,beware.Whoislefttobuy?

Ifeveryonethinksyou’renutsforbuyingadeepdipinpricebecausetheworldcould end, then most of the selling pressure should already be gone, and amarketshouldbedueforarally.The“everyonehatesyourtradeindicator”isagoodbecauseitshowsthatthemajorityhasalreadymadetheirmove,andyou’rethefirsttospotanewtrendorreversal.

Extremesinsentimentareasignthatthemajorityhavealreadymadetheirmoveandanewmovecouldbenear.Obviousorunexpectedaren’ttradingsignals,soyou need to look for technical signals that line up with the extreme marketsentiment.

Get in thehabitofbeing thecontrarian.When themajority thinks thata trendhastostopimmediately,orthatitwillgoonforever,youneedtobeware.Tradeyourbestsignalswhenthemajoritythinksyou’recrazy.

18.Alosingtradecostsyoumoney,butlettingalosingtradegettoofaroutofhand can cause you to lose yournerve.Cut losses for the sake of yournervesandyourcapital.

Atradercancomebackafterlosingmoney,losseshappen.Alotofgreattraderscameback,evenafterlosingentiretradingaccounts.It’smuchmoredifficultforatradertocomebackaftertheylosetheirconfidence.

Aterribleuseoftimeandenergyislettingatradegoagainstyou,throughyourstoploss, thenholdingitasitgetsbiggerandbigger.Spendingadaysweatingandstressingoveralosingtradehopingitwillcomeback,istimewasted.Itisalwaysbettertotakeyourlosswhereyouplannedandmoveonwithyourlife.

Letting a small loss turn into a big loss is expensive both financially andemotionally. If youwant to be a trader for the long haul, it’s crucial that youalwaystakethesmalllosswhereyouplannedforthesakeofstressmanagement.There are more productive ways a trader can spend their time than watchingeverytickoftheprice,andprayingthatitreversessotheycangetbackout.

Getinthehabitoftakingyourinitialstoplosstolimitlossofyourmentalcapitalandyourmostvaluableasset,time.

19.Never trade position sizes so large that your emotions take over yourtradingplan.

Youhave to tradewith aposition size that you canhandle, bothmentally andemotionally.Manytradershavetobuilduplargerpositionsizesoveraperiodoftime, because the stress of trading and risking their capital creates unpleasantreactions.Youhave to tradewithapositionsize thatkeepsyouremotionsandegoincheck.

Themomentyoustarthaving trouble followingyour tradingplanbecauseyoudon’twant to takea loss,or admityou’rewrongandexit, youhaveenteredadangerzone.Yourtradingshouldbeconductedlikeabusiness.Whenyouhaveanacceleratedheartbeatandsweatypalms,thensomethinghasgonewrong.

Lower your position size so awin is stillmeaningful but you can trade in anunemotional state. Don’t trade 500 shares of a stock that you should only betrading100sharesof.Mosttradershavenoproblemlosing$50or$100,buttheideaoflosing$500,$1000,ormoremakesthemphysicallyill.

You can’t trade with a position size that impedes your ability to follow yourtrading plan. Find the size that removes the emotional dynamic from yourtrading.If500sharesstressyou,godownto300orlessuntilyoucantradeinarelaxedstate.Rememberthateachtradeisjustoneofyournext100.Itisjustatrade.

Getinthehabitoftradingapositionsizethatkeepsyouemotionallyneutral.

20.Tradethemarket,notthemoney.–RichardWeissman

Trading decisions should be made based on price action and not the need tomakemoney.A stop lossmust be basedon the price level that you’re provenwrong,notatthelevelwhereyouhavelostallthemoneyyoucanstandtolose.

Profit targets have to be set at technical levels of price resistance, and not onyourownprofittarget.Tradebasedonyouractualtradingsystem,ratherthantheamount lostorgainedona trade.Youdon’texita tradebecauseyouhave lostover$100;youexita tradebecauseyourstop losswashit.Youdon’tsetyourstoplossarbitrarilyata1%lossofyourtotaltradingcapital;youfindthepricelevelthatwillshowyouthatyourtradeiswrong,andpositionsizesothatyourmaximumlosswouldbe1%ofyourtotaltradingcapital.

Professionals inother fieldsdon’t stopandcalculate themoney that theyhavemadeinthemiddleoftheday;theyaretoobusyfocusingonprocess.

Getinthehabitoffocusingonyourtradingsystemandfollowingtheprocessforentries,exits,andpositionsize,ratherthanthemoneyyouaremakingorlosingatanyparticularmoment.

21.Whenthere’snothingtodo,donothing.–RichardWeissman

Traderslosemoneybyenteringtradestheyshouldn’tduetoboredomorbecausethey’re trying to make something happen. The motivation for taking a tradeshouldbeagoodsignalwithagoodrisk/rewardratioandprobabilityofsuccess.

Badtradesareusuallybecauseatraderisimpatientandwantstomakemoneyasquicklyaspossible.Losingtradeshappenwhenagoodentrysignalleadstoyourstop loss beinghit,while a bad trade is one that you shouldn’t be in to beginwith. The ability to stopmaking bad trades can benefit the trader asmuch astakingthegoodtrades.

Atraderhastoallowthemselvestobeboredandwaitforjusttherightmoment.Beingearlytoatradecancostyoumoney,becauseyou’refrontrunningasignalthat may never happen. It’s also dangerous to chase a trade late in a move,becausetherisk/rewardratiowillnotbeasfavorableasatrendadvances.

The ability to do nothing unless there is a signal is a powerful and profitablehabittodevelop.Self-control,patience,andimpulsecontrolwillsaveyoualotoftime,money,andsanity.

22.Tradewhat'shappening...notwhatyouthink isgonnahappen.–DougGregory

There is a big difference between predictive technical analysis and reactivetechnical analysis. Predicting is trying to forecast where prices will go in thefutureandtakingtradesbasedonthatbelief.Reactivetradingisbasedontakingatradeafterasignalhasindicatedthebeginningofatrend.

It ispredictive tobelieve that thestockmarket iscomingoutofabearmarketandbuybasedonthatbelief.Itisreactivetradingtoplantobuyintothestockmarket when a key index breaks over and closes above the 200 day movingaverage,becausethisisthefirstindicationthatthemarketiscomingoutofthebearmarket.

The biggest leap to profitability comes when we stop taking trades based onwhatwe think shouldhappen in themarket, and instead learn to trade signalsthatreacttowhatishappening.Chartpatterns,movingaverages,andbreakoutsofrangesaredesignedtocapturetrendsbasedonsignals.

You should trade quantitative signals that give you good probabilities ofcapturing a trend in your timeframe. The market doesn’t care about youropinion.Itwillgowhereitwantstogobasedonalloftheparticipants’actions.

Get in the habit of goingwith the flow, and avoid trying to predictwhere theflowisgoing.

23. Develop systems based on the kinds of “pain” (weaknesses) enduredwhen they aren’t working or you’ll abandon them during drawdowns. –RichardWeissman

Oneofthemostimportantquestionsatradercanaskbeforetheystarttradingishowmuchofadrawdownincapitaltheycanendurebeforequitting.Ifyoustartwith$100,000intradingcapital,willyoustoptradingyoursystemafteryou’redown10%?Is$90,000themostpainyoucanhandleinadrawdownbeforeyouquit?Canyoukeeptradingat$85,000or$80,000?Thisisacrucialquestionthatmustbeansweredbeforeyoubeginyourtradingjourney.

Structureyourtradingsoyouhavealowprobabilityofbeingbrokenbyasingledrawdown.Tradershavetosetparametersfortheirreturns,targeting20%annualreturnswithmaxdrawdownsof5%,forexample.Moreaggressivegoalsmightbe30%annualreturnswith10%maximumdrawdowns.Theaggressivenessofyour returnswill be correlatedwithyourdrawdowns.Thebiggeryourdesiredreturn, themoreyouhavetorisk,andthegreater thechanceofexperiencingadrawdownduringlosingstreaks.

Yoursystemdesignforwinningpercentageandriskexposureshouldbecreatedwith your risk tolerance and return goals in mind. If you want your maxdrawdownfromanequityhightobe5%,yourriskpertradeneedstobe½%to1%pertrade.Yoursystem’swinningpercentageshouldbehighenoughsothatseverallosersinarowwon’tgiveyoumorethana5%drawdown.

A drawdown is based on any new equity high. If you go from $100,000 to$110,000andbackto$99,000,thatisa10%drawdownfromanewequityhigh,even though it is only a 1% drawdown from the original starting equity of$100,000.Many tradersmake themistake of gamblingwith profits from theirstartingequitybecausetheythinkofitas‘thehouse’smoney’.Profitsareyoursoncetheygointoyouraccount,andifyouwanttokeepthem,youwillneedtotreatthemwiththesamecareasthemoneyyoustartedwith.

Getinthehabitofrememberingthemaximumdrawdownintradingcapitalthatyoucanmentallyandemotionallyendure,anddesignyourtradingsystemwithposition sizingand riskexposure inaway thatyounever reachyourbreakingpoint.

24. Remain flexible and go with the flow of the market price action.Stubbornness, egos, and emotionsare theworst indicators for entries andexits.

Emotions and egos are the worst trading signals. The majority of marketparticipantsoperatebasedontheirfeelingsratherthanidentifyingthetrendinamarket.Youshouldfocusonfindingthetrend,andthentradinginthedirectionof its accumulation or distribution. Thiswill give you a substantial edge overother,lessdisciplinedmarketparticipants.

Whenyourcompetition is selling late inadowntrendbecause they fear losingmoney, you can buywith a great risk/reward ratio.Whenpeople are afraid tobuy a breakout of a price base to all-time highs, you can take themomentumsignaltobuyhighandsellhigher.

Downtrends, uptrends, and range boundmarkets have different characteristics,and successful traders identify what kind of market they are in and trade thepriceactionasitunfolds.

Get in the habit of taking good signals based on price action, and leave youropinionsandpredictionsatthedoor.

25.Atradercanonlybesuccessfulaftertheyhavefaithinthemselvesasatrader, their trading system as a winner, and know that theywill remaindisciplined.

Faithinyourselfwillcomeafteryouhavedoneyourhomework,andyouhaveproventhatyoucanbetrustedtofollowyourtradingplanwithdiscipline.Thebiggest reason new traders tend to fail in their first year, is that they putconfidenceintheirtradingabilitiesbeforetheyhaveanycompetenceintrading.

Faithinyourselfasatraderiscrucialforyoursuccess,butithastobewarrantedfaith.Youmusthaveatradingsystemwithanedge,youmustmanageyourrisk,andyoumusthavetheself-controltoavoidblowingupyouraccount.Aboveallelse,whenyoulearnwhattodoinagivensituation,youmusttrustyourselftodotherightthingsintheheatoftrading.

Withoutconfidence,youwillbeunabletoentertradeseffectively,butwithtoomuch confidence, you will trade too big and destroy yourself. Have faith inyourself thatyouwillnotonlydo the right things,butyouwill alsoavoid thewrongthings.

26. One thing I have learned over the years trading is that crisis =opportunity.–DeanKarrys

The strongest downtrends that short sellers love, usually come during aperceivedcrisis.Thedeepdips that tradersbuyduringbullmarkets,where thestock indexes drop to near the 30 RSI or 200 day moving average, typicallyoccurinanenvironmentofmaximumfear.

The best margin of safety for value investors looking to buy into individualstocksatgreatvaluationsusuallyoccurduringacrisis inthemarket.Theycanalsohappenattheindividualcompanythatcreatesasteepdropinpricebasedonfearofloss,ratherthanfundamentalvaluations.

Theopportunitythatcomesfromacrisisistosellshortearly,buythefearlater,andsellthereliefrallywhentheworlddoesn’tend.Butyoucan’tjustbuyintoacrisis.Youhave towait for thecrisis tocause the right signals that tellyou tobuyorsellshort.Yoursignalsmustbebasedoffreactivetechnicalanalysis,pastsupportandresistancelevels,chartpatternconfirmation,andtechnicaltoolsliketheMACD,RSI,andkeymovingaverages.

Look for opportunity in every crisis. Ask yourself where the best risk/rewardratioslieinsellingshort,buyingthedeepdip,andtradingreversalsandgaps.

Get in thehabitofdevelopingyourown reactive technical trading signals andtradethemwithdiscipline.

27.Goinguponbadnewsordownongoodnewsareamongthestrongestmarkettells.–RichardWeissman

Ifunexpectedbadnewscan’ttakeamarketuptrenddown,thenwhatcan?Whatcan send a downtrendingmarket back up, if not unexpected good news? It isbullishwhenmarketsgouponbadnews,andbearishwhenamarketgoesdownon good news. It shows that themarket participants are stayingwith a trend,evenwithnewsthatgoesagainsttheirpositions.Thisisafiltertoconsiderwhenusingadiscretionarytradingsystem.

Getinthehabitofwatchinghowthemarketreactstonewsthatiscountertotheexistingtrend.Newsitselfisnotasignal,butitcanbecombinedwithatradingsignaltoreinforceatrade’sviability.If$SPYralliedoffthe30RSIonbadnewsinsidea long termuptrendover the200day, itwouldreinforce the tradesetupandgivemoreconfidenceofasustainedbounce.

Rule28–39

TheKeystoProfitability

28.Managelossesandmaximizegains.

Allyourtradesshouldendinoneoffourways:asmallwin,abigwin,asmallloss,orbreakeven.Youshouldneverexperienceabigloss.Ifyoucangetridofbiglosses,youhaveagreatchanceofbeingprofitableforyearstocome.Tradersjuststartingoutoftendiscoverthatbiglossesaretheonethingthathurttheiroverall longtermreturns themost. If thosefewbiglosseswereremoved,theirreturnswouldgoupdramatically.Thefastestwaytoimproveyourtradingreturns is to immediatelystophaving the fewbig losses that forceyou togivebackweeks,andsometimesmonthsofwinningtradingprofits.

The use of a stop loss on every trade is the one thing that can stop you fromhavinghugelosses.Astoplossisthecostofinsuranceyoupaytoavoidbeingcaughtonthewrongsideofalargemarkettrend.Itmaybefrustratingtohaveasmall loss, then themarket reverses andgoes inyourdirection.However, it isstillbettertoinsurethatyouhaveasmalllossthanriskabigone.

Stop losses should be placed at a price level that will not be easily reachedunlessyourtradeisnotgoingtoworkout.Stoplossesshouldbeplacedoutsidetherangeofnormalpriceactionandoutofthereachof‘noise’.Whenyouenteradiscretionarytrade,findthespotwhereyousay“Ifpricegetstothislevel,thenIamprobablywrongaboutthedirection.”

Trailingstopshelpyoumaximizegainsbyraisingyourstopsasawinningtradetrendsinyourdirection.Instrongtrends,the5dayEMAor10daySMAcanbeanexcellentendofdaystopifpriceclosesbelowtheselevels.

Get in the habit of knowingwhere your stop loss will be before you enter atrade.Smalllossesisoneoftheprimarywaystoexperienceprofitabletrading.

29.Thekey to long-term survival andprosperityhas a lot todowith themoneymanagementtechniquesincorporatedintothetechnicalsystem.–EdSeykota

It is position sizing, and not the brilliance of entries and exits, that willultimatelydetermineatrader’slongtermprofitability,totalriskexposureatonetime,andtheirexposuretotheriskofruinduringalosingstreak.Thequickestandeasiestwaytoanswerhowgoodtheparametersofyourmoneymanagementsystemare,willbetofigureouthowmanylosingtradesyoucanhaveinarowandsurvive.

Regardlessofwhatyouperceiveyourwinningpercentagewillbe,realitycouldbemorepainfulthanexpected.A50%drawdownincapitalisdifficulttorecoverfrombecauseitwill takea100%returnjusttogetbacktoeven.Andtheoddsare that ifyoursystem isbadenough toallowfora50%drawdown, thenyouwillbeatzerobeforeyoucanrecover.

Yoursuccessasatraderwilllargelybebasedonyourabilitytoeitherhavealowwinningpercentagewithbigwinsandsmalllosses,orahighwinningpercentagewithsmallwinsandsmalllosses.

Havingamoneymanagementsystemthatcontinuouslyexposesyourcapital totheriskoflargelosseswillcatchupwithyouatsomepoint,regardlessofyourpreviouswinningstreaks.

30. Be disciplined in risk management and flexible in perceiving marketbehavior.–RichardWeissman

Whiletradingpriceactionrequiresanopenmindandtheflexibilitytoadjusttowhat is happening, risk management is a strict discipline of doing what youplannedtodo,withoutdeviation.

Once a stop loss is chosen, it must be set in stone. It can be deadly to youraccount todecidenot to takeyour initial stop losswhen it’s triggered.This isespeciallytrueingrowthstocks,becauseoncetheyareunderdistribution,theirplungecanbedevastatingtotradersonthewrongsideofthemove.

When a well-placed stop loss is triggered, it may mean that a breakdown isunderway, and you’re on the wrong side of a parabolic move against yourposition. Stop loss set at a close below the 30 RSI or the 200 day movingaverage isa lowprobabilityevent insideabullmarketuptrend,butonce theselevelsareclosedbelow,itshouldsetoffsignsofaparabolicmovedownasthesekeylevelsarelost.

Develop thehabitofnot arguing,bargaining,orhopingonceyour stop loss istriggered.Getoutofthetrade,becauseyourlongtermprofitabilitydependsonit.Onceyouhavesetaqualitystoplosswithalowprobabilityofbeingreached,youmusttakeit.

31.Positionsizingcanbecorrelatedtothequalityofatradesetup.

Regardless of setup, it is important to have different position size parametersbasedonthequalityofyourentryandtherisk/rewardparameters.Itisabetterstrategy to risk your maximum position size on your best setups, and yoursmallestpositionsizeonyourlesslikelytrades.All long term traders should have some top notch trade setups that have thehighestprobabilityofsuccess.Thosearethetradestheyshouldenterwiththeirmaximumsize,becausetheyareprettyrare.Thetradercanalsohaveanormaltradesizethatiscommonlyuseddaytodayonotherhighprobabilitysetups.Thenmoveontothesmallestpositionsizeforentriesthatmeetyourparameters,butcouldbethefirstsignaloutofaperiodofatradingrangeorvolatility,andthatmaynotworkthefirsttimearound.Iknowtradersthathavegottenintothehabitofswingingthehardestatthefatpitchesthatareovertheplate,andtheyhavesubstantiallyincreasedtheirreturnsbydoingso.Get in the habit of making your best trades be your biggest trades, and yourlosingtradesthesmallest.Masteringthisstrategywilldramaticallyimproveyourperformance.

32.Neverlosemorethan1%ofyourtotaltradingcapitalonanyonetrade.

Theonepercentruleissomethingthatnewtradersstruggletounderstand,butitisoneof themost importantdynamicsofactive trading.The1%ruledoesnotmean only tradingwith 1% of your trading capital, and it doesn’tmean onlyrisking1%ofthestockyou’retrading.

Ifyou’re tradinga$100,000account, thenno losing tradeshouldeverbeover$1,000. This means that if you trade 500 shares of Apple, with a $100,000account,youcanonlyrisk$2onthistrade,becauseifAppledrops$2andyouown 500 shares, you will lose $1,000. This is a simplified example, but itillustratestheprinciple.

The1%rulemeansyouneverlosemorethan1%ofyourtotaltradingaccountonanyonelosingtrade,throughtheuseofproperpositionsizingbasedontherighttechnicalstoplosslevelfortradingaparticularstockorindex.

If you make the 1% rule one of your trading habits, each trade willmathematicallybe1ofthenext100trades.Itishardtohavealargedrawdownincapitalifafivetradelosingstreakresultsin5%drawdownintradingcapital.Forbiggeraccounts,1%maybetoomuchriskpertrade.Ifyouthinktheruleistoostrict,thenyouraccountsizemaywellbetheissue,ratherthantheprinciple.

Many of the best traders believe in and practice this rule, and it makes theirtrading careers long and profitable.With this rule, you don’t have to fear bigdrawdownsoraccountblowups.Itwillremovetheemotionalrollercoasterfromyourtrading,andturnitintoabusiness.Richtradersusethe1%ruletobecomerich,because theyneverblewup theiraccount,andeven inunpleasantmarketconditions,theysurvivedtotradeanotherday.

33.Firstfindtherightstoplosslevelthatwillshowyouthatyou’rewrongaboutatrade,thensetyourpositionssizebasedonthatpricelevel.

Ifyoubuy500sharesofAppleat$120,andthekeysupportlevelisat$118nearthe200daymovingaverage,thenthe1%rulemakessense.However,thisruleisnottobeusedsolelyforplacingstoplosses.Youmustfirstfindthepricelevelofsupportor resistance that shouldhold if your trade isgoing towork, and thenpositionsizebasedonthe1%rule.

Ifyourstoplossneedstobe$5underthecurrentAppleprice,closetothe200daymovingaverageinsteadofthepreviousexample,thenyoucouldonlytrade200sharesofAppleat$120.Youwillbringyourmathematical riskof ruinasclose tozeroaspossiblewith the1%rule.Youdon’twantyourstop tobe tootight;stoplossesinobviousplacestendtobetakenout.Itisbetternottosetahardstopwithyourbrokerexactlyatthe200day.

Ipersonallyuseendofdaystopsandsmallerpositionsizestoavoidthemajorityoftheintradaynoiseandkeepfrombeingstoppedoutprematurely.Youshouldsetastoplossalittlebeyondamovingaveragelike1%below,orasanendofdaystoptoavoidhavingyourstoptriggeredbeforethereversalinyourfavor.

Get in the habit of setting stop losses just a little beyond the most obvioussupport or resistance levels to avoid being stopped out prematurely, and onlywhenyou’redefinitelywrong.Evenwithendofdaystops,IstepinandtakemylossifIamdownover1%intotaltradingcapitalatanypointintraday.Thatisrarewithmypositionsizingandstoplevelsbasedonthecurrentvolatility.

34.Never losemore than 3% of your total trading capital on yourworstday.

Irecommendthatyouneverhavemorethanthreetradesopenatanyonetime,riskingnomore than1%oneach.You’re relatively safe ifonyourworstday,whenallyour tradesgoagainstyou,you’reonlydown3%.At thatpoint,youstillhavetheopportunitytocaptureamarkettrend.

3% should be your maximum risk exposure when all your signals line up.During volatile or directionlessmarkets, you can also have 0% risk exposure.Thisgivesyouflexibilitywithhowmuchriskyouwant,andwhenyouwantit.Italso limits the drawdowns thatmany investors see in bearmarkets, because atrader doesn’t have a portfolio of investments, they have a few trades on at atime.

Getinthehabitoflimitingyourtotalcapitalatriskexposuretoamaximumof3%atanyonetimeandyouwillavoidbig,onedaydisasterswheneverythinggoesagainstyou.

35.WhenIamtradingpoorly,Ikeepreducingmypositionsize.Thatway,Iwillbetradingmysmallestpositionsizewhenmytradingisworst.–PaulTudorJones

Theworse you’re trading, the smaller your trades should be. Conversely, youshould be at your maximum position size during winning streaks. Tradersusually have losing streaks because the market environment has changed itsnaturefromvolatile tonotvolatile, fromanuptrend toadowntrend,orfromatrendtorangebound.

Analyzealosingstreakorawinningstreaktohelpyouunderstandthetypeofmarket you’re currently trading. To maximize your current opportunity orminimize your potential formore losses, adjust your position sizing and totalriskexposure.

Getinthehabitofbeinglessaggressivewhenlosing,andmoreaggressivewhenwinning.Letthemarkettellyouwhenyou’rerightorwrong.

36.Losersaveragelosers.

Itisadeadlyhabitforatradertoaveragedownonalosingtradewhentheyarealready provenwrong.Being rewarded for this behaviorwith a rallywill justreinforcethebadhabit,andtherewillcomea timewhenitneverrecoversandtheaccountisdestroyed.

Adding toa losing trade is fightinga trend,notacceptingwhenyou’rewrong,andtyingupcapitalthatcouldbeusedtomakemoneyongoodtrades.

Getinthehabitofneveraddingtoalosingtrade,learningfromtheexperience,andmovingontothenexttrade.

37. Never allow a statistically significant unrealized gain to turn into astatisticallysignificantrealizedloss.–RichardWeissman

Onceyouhaveasizeablewinningtrade,itneedstostayaprofitabletradewiththeuseoftrailingstoplossesorpricetargetsforprofittaking.Theonlywaytoexit with a profit is to have an exit strategy that enables you to lock in thatmoneywhileitisstillonthetable.

Thereisawindowofopportunityforlockingingains,andyouhavetoestablishparameters for this because winning trades have shelf lives, and they usuallyreturntowheretheystarted.Ifyou’relongthe$SPYasitapproachesthe70RSI,it’sagoodtimetolookatlockinginaprofitfromanuptrend,forexample.

Ifyou’relongastronggrowthstockthathasbeengoingupfortendaysstraight,itfailstomakeanewhigh,andisgoingtoclosebelowthe5dayEMAforthefirsttimeintendays,it’stimetoconsiderlockinginyourprofits.Manytradersfocusontheentries,butmoneyisonlymadeontheexits.

Get in the habit of having a plan to lock in profitswith awinning trade, andneverallowabigwinningtradetoreverseandturnintoalosingtrade.

38.Understandthenatureofinstabilityandadjustyourpositionsizefortheincreasedriskduetovolatilityspikes.

Knowthetradingrangeofyourstockorindexoverthelasttendaysandpositionsizeaccordingly.Youshouldbeabletohandlea50%increaseinatradingrangewithouthavingadevastatingloss.

Get in thehabitofpositionsizingfor theworstcasescenario,andnot thebestcase scenario, or the status quo. Always manage risk and be ready to adjustquicklywhenfacedwithvolatilemarkets.

39.Placeyourstoplossesoutsidetherangeofnoisesoyou’reonlystoppedoutwhenyou’rewrong.

Findthepricelevelforyourstoplossthathasahighprobabilityofneverbeinghit,soyouhavethetimetoexityourtradeprofitably.Onceyouknowwherethatlevel is, you can enter your trade when that level is near, and position sizecorrectlysotheworstcasescenarioisasmallloss.

Manytraderschoosetolookforthehighestprobabilitysetupstotakeentries,butif your stop loss is a low probability exit, you have a potentially great tradebecauseyourstoplosswon’tbehit,andyoucanletawinnerrun.

Get in the habit of finding low probability stop losses as much as highprobabilitysetups.

Just like in athletics, business, and entertainment, the top traders have spentthousands of hours developing and successfully implementing their tradingplans.Whatstartoutasrulesarepracticeduntil theybecomedeeperandmoremeaningful;theybecomehabits.

It takesdisciplineandperseverancetoreachthislevelofsuccess,butitcanbedone.AndIpromise that ifyoucommityourself toa regimenofdaily tradingrituals,andpracticethemfaithfully,youwillbeabettertrader.

The purpose of this book is not tomake you adoptmy trading habits, but toshowyoutheimportanceoffollowingaplanthatwillempoweryoursuccess.Ihopethatyounowfeelconfidentaboutcreatingyourownhabits,andthattheyhelpyouachieveyourtradinggoals.

SpecialthankstoRichardWeissman,DeanKarrys,andDougGregoryforlettingus use some of their quotes and rules. They are some of the best, and aninspirationtotraderseverywhere.

BeabettertraderIntheNewTrader101e-course,you’llget:-13highqualityvideoscoveringhowandwhytotrade-Realtradeexampleswithdetailedcharts-AnactivememberforumwithhundredsofongoingconversationsVisitNewTrader101andjoinothertradersjustlikeyou!

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TableofContentsWhendidIstarttrading?ThePowerofHabitsRule1-15Rule16-27Rule28–39