like a productive way to learn does it. If we follow the leaders’ advice and they havea winning trade, they think they are the smartest people in the world. Ifwe follow their advice and they are wrong, then it is our fault becausewe did not do our homework. Either way, they come out as winners andwe are still sheep because we haven’t learned anything. Unfortunately,learning what is good news and what is hype only can come with experience of watching stock action relative to what traders are saying. If thestocks tend to do what they are saying, maybe they have credibility. Ifthey do not and often go in the opposite direction, maybe it’s time tore-evaluate.Again, avoid rooms that have instructors, room leaders, or evenmembers who are hyping stocks, touting gains, mentioning the samestock over an over again to attract attention, ridicule or berate their members, and offer no sound trading advice. These room leaders are simplynot out to help anyone but their own bottom line and provide no basisfor trust. Their ambiguity is astonishing to read sometimes in how theyapproach the trading and the comments that they make include no discernable information from which to make a clear trade or learn a highpercentage method. Review and compare and make an informeddecision.Several years ago I suspected that this type of manipulation wasgoing on and sent my staff into these rooms to monitor. My suspicionswere confirmed when I saw room leader after room leader calling entriesinto trades at certain prices when there was no possible way to get thetrade at that price. Then I would see them hyping the stock to no endand call an exit that was unattainable. I even saw the same calls beingmade in several rooms at one time using the exact same verbiage, whichconfirmed my belief that not only are they hyping individual rooms,but multiple rooms at the same time. Be wary of hype; it is real and itis out there; and if you fall prey to it, you will lose some or all of yourportfolio before you know what happened to you. Good rooms have a
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moderator who doesn’t hype his or her stocks, his or her own trades, andtalks in a sane and professional manner. They do not talk of conspiracytheories or other external information that is out of the control of thetrader.This being said, I still believe that free chat rooms have value if youunderstand the dynamics involved. Free chat rooms should be used asa source of supplemental information, but I look at every bit of it with asuspecting eye and never believe it unless I see it myself. Chat rooms alsohelp to judge the overall daytraders’ interest in a stock and can be usedas a source of news just in case I missed a good news release on my newsscanning service. This does not happen very often because I have a fullteam of news readers on staff using the latest scanning software packages as well as our members, 450 sets of eyes diligently scouring the newsfor gems that cause momentum. Chat rooms are a great source of information with highly professional traders that are all looking for the sameset of trading parameters from which to trade. This way most stock activity is noticed and if a trade is valid, the room will find it.
TRADING MENTALITYSimply put, trading stocks for a living is not for everyone. It takes a certain type of mentality and personality to succeed. Before you enter intothis profession, you must assess yourself and take a good long honestlook at yourself to see if you have what it takes. The rewards can be phenomenal and the freedom is like nothing else, but if you do not have thetools internal to yourself, you will fail. Books have been written on thisone subject about trading psychology. Let me just reiterate that tradingis a large part of how you think about the markets and unless you dealwith who you are and can be honest, you will not make it no matter howhard you try.You must have the ability to admit when you’re wrong and not letego interfere with your decisions. Trading is a very mechanical process,weighing the rewards and calculating the risks. If you do not have theability to admit when you’re wrong, you let emotion enter into your trading decisions and you are destined to lose in the long run. You must bedisciplined. Traders who cannot stick to a disciplined approach tend totake more chances, chase after bad trades, and are more apt to veer fromwhat works to what they hope will work.Hindsight is the number one enemy of a trader. I hear the following two phrases constantly:
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“I should have held that stock. It is up 10 points from where Isold it.”“I could have bought that stock when I saw the news.”Hindsight is a killer to many traders early in their learning process.It is a killer because it shows what you should have done and leads to astraying from the discipline that you need to survive in the long term. Itis very easy to see what one should have done after the fact. It is not thateasy to participate in the present. When I see traders continually beatthemselves up over a missed opportunity, I fear they are headed for biglosses. Here is an example of why.I see traders in the beginning rationalize their trading so that eachloss was not their fault and each gain was due to their intelligence.Assume a trader buys a stock at $45 a share with expectations for $50 ashare where he wants to sell it. As the stock rises to $50, the trader sellsthe stock at his target for a nice $5 per share profit. The trader is excitedbecause his expectations were met and his intelligence was proven right.However, minutes later, the stock is at $60 a share and the trader has aconflict. He was intelligent enough to sell at his target, but now he seeshimself as stupid because he didn’t hold for an extra $10 a share on histrade. It is not stupid to take surest profits when expectations are met.The stupidity lies in allowing hindsight to dictate your trading. Allowingthis to happen leads to big losses. Let’s elaborate.Suppose the trader takes his $5 per share gain on this stock andenters another one at $60 a share. His expectation is for $65 a share. Asthe stock hits $65 a share, he decides that the last time he sold, he missedout on a $10-per-share gain by selling and decides to hold. Now the stockmoves up to about $70 a share and the trader is confident that he did theright thing. However, now the stock begins to drop to $65 again. Thetrader figures he still has $5 in profit in the stock and he is not going tosell on this profit-taking. Shortly after this, the stock trades at $62. Nowthe trader sees the stock up only $2 a share from his entry instead of his$10 in profit just minutes earlier. He decides he wants to get it back andholds the stock. Eventually, the stock is trading at $55 and then at $50 ashare due to market nervousness or whatever. The trader can’t stand itanymore and sells at $50 a share for a $10 loss.When reviewing this trade, he let hindsight turn his $5 dollar pershare expected profit into a $10 loss per share. He saw one stock runanother $30 per share and assumed this one could do the same. Stocksmove in an independent fashion relative to historical data in these examples. No correlation suggests that because my last stock went up another
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$30, this one will too. The next mistake that was made was the rationality that he was up $10 and now only up $5 a share and that he shouldhold it to regain his missed opportunity. This all occurred because he lethindsight in one trade affect his decision making in another. Trades arenot related from one to the next. Hindsight is killer. Don’t let it allow youto stray from your discipline.The second hindsight comment serves to feed the egos of those whowere proven right by their speculation. Many analysts, room leaders,market timers, and financial powerhouses are guilty of these comments.To take this to a micro level, let’s focus on room leaders or members ina chat room. Many times you will see comments such as these:“Did anyone catch my call on DELL at 40? It is at 45 now. I hopesomeone got it with me.”“Oh yeah! This stock is up 45 points from where I alerted it. Ialways get them early.”“Congratulations to those that bought this stock at 10 when Ialerted it. It is at $20 now. Can I call the doubles and triples orwhat?”Hindsight alerts stem from several things. One reason is that members want to feel the need for appreciation. They wouldn’t mention thehindsight trade otherwise. Hindsight statements provide no benefit foranyone because the trade is already over. It only serves to inflate the egosof the people making the statement and their need for attention.Moreover, many of these statements you will see are only the ones thatwere profitable. Notice how the big gains are mentioned but none of thelosses. You hardly ever see the following comments:“Hey, sorry about that trade at $50 a share. It is at $10 a share. Ihope no one rode this down with me.”“I was wrong about this stock at $50; it has never gainedmomentum, so I am dumping it right now at $45.”I tend to have more respect for those who post their losses or admittheir shortcoming in public forums. One way to stay in touch with(or realize) your losses is to post both entries and exits to your trades inreal time as you are making them. We monitor the attainability of thesetrades to ensure they are accurate because it serves no purpose other thanhyping a stock if they are not real time. We use posting our entry and exitsas a learning experience to our members instead of a vehicle to hypeegos and trades as you will see in many other places. It educates ourmembers to the value of stop losses and highlights the educational part
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of trading. Trading the stock market is not as easy as some make it outto be, and showing only the gains and none of the losses tends to breakthe confidence of those watching and shatters their disciplined approachwhen they find they are not making the same phenomenal gains as everyone else is touting. To post real-time entries for yourself either in a forumor by yourself, simply write down the time you made the trade and atwhat price, and keep this journal handy. Some even have a tradingbuddy that they share these journal entries with so that they haveaccountability.
EXPECTATIONSMany traders’ favorite question when they start is how much can theymake? This question is very hard to answer because trading the marketis very difficult and everybody’s abilities are not the same. Many havevery steep learning curves and lack the knowledge or willingness to putthe time in to educate themselves properly. They are looking for the curefor cancer, the easy way out. When this lack of education is coupled withthe fact that they are trading against the best traders in the world, withdeeper pockets, the odds are stacked against them right from the beginning. Although I have seen gains of over 700-percent by one trader, I haveseen losses that have forced bankruptcy proceedings. The question is noteasy to answer as it depends on many factors and the following aspectsof choosing trading as a career should be taken into account.First, identify your expectations. For example, do you expect to getrich quick? Forget it, trading is not a get-rich-quick scheme. Trading isabout learning how to create a stable uptrend in your portfolio over time.If you expect to make easy money in a few short trades, I can guaranteeyou the biggest surprise of your life. Keep your expectations sane andrealize that you have a rough road ahead.Then you need to determine if you have enough starting capital togive yourself a reasonable chance at success. I have seen figures reporting that 70- to 80-percent of all traders who enter the game consistentlylose money and are forced out. The difference between the winners andlosers is education and a disciplined approach to trading. Those whoeducate themselves properly and stick to a disciplined approach emergeover time as the winners; those who don’t, lose and leave.When figuring out how much money is needed to start trading, itis important to take a big overall view of your current financial situation.The best thing to do is develop a basic business plan. This should includeat least six months’ worth of planning that entails living expenses,
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initial capital outlay for equipment and data, portfolio size, and unforeseen events. Everybody is different, and I have seen several great tradersmake a very decent living off of $12,000 to $15,000 portfolios, pulling$5,000 in profits every month to live on. But not everybody is or can bea great trader. The best thing to do is not strap yourself in the early stagefinancially. Figure out how much money you need to live on a month andhow much risk capital you are willing to lose during the process. If therisk is too great, then active trading may not be for you. If the risk is possible to incur, then you have a better foundation to move forward.You can certainly learn to trade on much less, and many learn witha portfolio between $5,000 and $10,000, but it will not feed the familywhile you are learning. A portfolio of $25,000 to $40,000 is ideal. Thisamount does a few things, but most importantly it enables traders tomake small mistakes over the period of the 6 months while learning.Small mistakes will not break the bank, but it will let you evaluate after6 months if this is worth sticking with or not. I have seen traders with$500,000 decrease that by half simply by trading a huge amount ofshares and taking big losses on each trade without adhering to strict stoploss principles.The idea that the more money a trader has, the easier trading getsis dead wrong. Having more money can distract traders from disciplinebecause they feel that they can afford a few big losses and feel they caneasily make it back later on. This gives them the feeling of being invincible to big losses due to the large amount of initial capital. Having to$40,000 gives many traders the ability to trade most of the momentumstocks each day with enough shares for profit potential. How theyprogress from their capital base depends on their ability to learn andapply theory to practice.The learning curve of trading is large for several reasons. The primary reason is preconceived ideas of the market’s functionality. Theirinvesting acumen is a far different approach to momentum trading.Many have been weaned on the buy and hold mentality that hasrewarded many investors for the last few decades. However, in the realmof daytrading, the buy and hold approach is seriously detrimental toone’s long-term performance. This mainly relates to the fact that momentum traders often are focusing on shorter horizon time periods for gains.Therefore, their profits per trade are much smaller.If one were to take smaller profits and larger losses over a periodof time, then his or her ability to sustain the bigger losses would begreatly jeopardized over time. Even if one trades at a 90-percent successrate, it will only take one large loss to offset those gains. I have one
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student who told me that over a period of time he took 80-percent of hislosses on only two trades. This is not a disciplined approach and aninability to stick with a safe stop loss program can seriously do mentaland monetary damage.When I first began to teach, I had a star pupil who was very aggressive and traded at a very high percentage. It seemed as though her trading got better with each day and she was very excited about her futurebecause trading was her passion. One Monday we went long on a stockthat was down over 20-percent from the previous day’s closing price. Wegot stopped out of the trade as the Nasdaq went into a tailspin to a recordlow. She failed to keep a stop loss on the trade and lost around $10,000and it scared her so much that she drew into a shell. I could not get herout of it as she allowed the trading freeze to disable her trading talents.Her husband would even stay home from work and try to force her totrade my intended targets, but she finally dropped out of the tradingscene.Losses are a problem for many traders as they can’t seem to find thestrength to turn a small loss into reality. This often leads to making asmall loss a large one. You must have the strength to adhere to stop lossprinciples or your account will look like a roller coaster. Every trader haslosses; it is a part of the business, but large losses will end your careerbefore it even starts. Keep them small.Undisciplined traders tend to allow emotions to be a big part of theirtrading. They tend to view each trade as a life and death situation in theirtrading career. This approach to each trade clouds decisions of when toenter and exit. Many feel that trading is a reflection of their personal self.They tend to think that all losses reflect a loser and that all profits reflecta winner. This is far from the truth; trading is inherently difficult. We havesaid previously that active traders go up against the best in the businessand they have deeper pockets. Everybody takes losses in trading; our jobis to limit the losses and maximize the gains. Losses are part of trading.When a disciplined trader exits a trade with a loss, he or she does notget upset and refer to the loss in a negative way; the trader should thinkabout that trade in a positive light. Traders do this because they prevented a small loss from becoming a larger loss. This protects trading capital and allows them to continue to learn how to trade over a longerperiod of time.Small losses certainly do not guarantee success over time, but theygive the trader a longer time period in which to study the market andlearn from their mistakes. One large loss can easily take a trader out ofthe game. I’d much rather see a trader take 10 small losses so that he
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or she has experience with more trades to learn from. One huge losssimply does not give active traders experience.If one can approach the trade with an indifference to the trade,removed from emotion, then he or she can focus more on the price actionand understand when it is time to exit the trade. If traders exit the tradewith a small loss, then they do not get frustrated or upset. If they exit thetrade with a profit, they do not get jubilant or excited. They are neitherlosers nor winners. One trade does not make a successful trader. Profitsover time in a consistent and disciplined manner are the key to long-termsuccess. One large loss will not allow this possibility to occur.If you entered this business to make a killing overnight and get richquick, leave now and save yourself time, money, and frustration.With that attitude and approach, you will be leaving sooner or later; it’sjust a matter of how much money you will have left when you do. Thesuccessful traders who are at it year after year don’t make overnightkillings; they earn their profits one trade at a time. With a disciplined,unemotional approach they can and will add up.
PAPER TRADINGNo matter what your experience level is, when learning or trying newmethods, paper trading is paramount. Too often traders see the phenomenal gains being made by other traders and jump right in before theyare properly educated and have tested the methods. This usually is at thecost of a large chunk of their portfolios. Paper trading will do three thingsfor you: first, it will protect your capital; second, it will build your confidence; and lastly, it will prove to you that you fully understand themethods and that they work.Paper trade until your winning percentages are 90-percent; thenthrow real money at the trades once you are satisfied you can makemoney. It only makes sense to not throw real money at a method or atrade until you can prove to yourself that the methods are working andprofitable. Otherwise, you are simply gambling, and as with anygambling, the odds are in the house’s favor.To begin paper trading, simply watch the stock setup, write downthe price that is most honestly attainable when the setup occurs, and thenthe exit price of where you would exit the trade. You need to be honestwith yourself. Cheating with entry and exit prices doesn’t hurt anyonebut yourself. You aren’t out to prove anything to us, just yourself. Userealistic prices for entry and exit to judge how well you understand thesystem.
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The biggest transition problem that traders have is from papertrading to real trading. It is very important that one understands andlearns the theory behind each method that he or she chooses to utilize.The theory simply provides the foundation to trading. Ideally, thismethod provides reasoning and discipline behind each trade. Activetraders approach their learning phase in different fashions. Some tradersdo very well with the theoretical portion of the methods.Some traders just jump right in before the basic foundations arelearned. Maybe they understand how to read tops and bottoms andmaybe even understand a basic function of order routing. They can papertrade these methods at a degree of 90-percent or better. They feel theycan move to the next step of the trading process, use real money, andtrade with live shares. Then as they begin to trade real money, the theory and discipline goes right out the window. They hesitate to entertrades and fail to exit at stop levels. Their 90-percent suddenly falls to60-percent or worse and they become frustrated.When I began my learning experience in the stock market, I wouldsit and paper trade until I found a system that would repeat over 90-percent of the time. I would get really excited thinking I had unlocked KingTut’s tomb. I would begin to trade the pattern, only to be disappointedas it changed on me, and then go back to paper trading until I foundanother unlocked secret. The same thing would occur and be very frustrating until one day I saw the same old pattern repeat itself. I was ableto take advantage of an old friend and make my money. It was then thatI learned about repeating patterns that always come back sooner orlater and when they did, I would line my coffers with profits. Withoutgood paper trading techniques, I would never have solved the repeating pattern mystery.Paper trading is a far cry from live trading. In paper trading, all pricelevels are attainable. An execution for a certain price is never missed.Therefore, each trade is much easier to enter and exit and offer the chancefor profitability. Moreover, traders begin to use hindsight in their papertrading. They begin to look back and tell themselves what they wouldhave done in that situation. They fool themselves into thinking that theyare able to trade in a would-have fashion. The market does not offer second chances in a trade. The trade either ends in a profit or loss. Thereare no do-overs. Many traders feel that they can just fix their exit andentry points to bring out that smaller loss or reasonable profit. In realtrading, each trade must be entered and exited with the same indifference described previously and without hindsight telling you what youshould have done. There are no second chances.
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The transition from this paper trading to live trading manifests thehesitation in early trading. Traders who were entering and exiting stockswith ease in paper trading begin to hesitate to press the enter button.They do this because they begin to fear loss; after all, this is real moneynow. They know that they can’t do a would-have trade and hesitate toenter the position for fear of loss if they are wrong. The other reason isthat they are afraid that if they do enter the position, they won’t knowhow to minimize the loss as it pertains to execution routes if they arewrong.Although it is easy to enter and exit stocks on paper, the functionality of trading as it relates to order routing is much more difficult. Thisfear of not choosing the right execution route to exit, especially if thestock is moving against them, causes hesitation to enter the trade.Although a trader may make nearly 100 trades a day on paper, his or hertrading now becomes closer to five trades a day or less when the traderfirst starts trading with real money.As traders begin to move more into live trading, I recommend thatthey do so with smaller shares. This allows them to gain a sense of howeach order route works without the fear of large losses if they are wrong.While they are learning a more experienced approach to order routing,including entering and exiting positions, they are developing this indifference to each trade that is very important. Although their trading maymove to a lower percentage of successful trades early, they are gainingthe necessary knowledge on the difficulty of entering and exiting trades.This allows them to judge which stocks are within their abilities to tradeand which are not.Knowing how to read a stock, find the opportunity price levels, andthen capitalize on that opportunity with the right execution method isthe ideal process by which to trade. Each component of the process takesa fair amount of time to learn. The learning curve is steep for this veryreason. Learning the reasoning and theory of the method takes time.Applying this theory to a simulation of trading takes time to ensure thatthe method is working for them. Finally, trading with real money andincreasing share size as they feel more comfortable with executions takethe most time.The trader who has the ability and time to move through each phasehas a greater advantage over those who simply jump into the marketwith both feet and no reasoning or methodology to their trading. Whenyou decide to become an active trader, give yourself enough time to fullylearn the theory of the method. Then allow yourself enough time to applythat theory to simulation trades.
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Finally, when moving to small shares with real money, enter tradeswith indifference. A profit does not make you successful, nor does a lossmake you a failure. It is simply a learning process. Continue to progressthrough each trade in a separate way so as not to let the previous tradedwell on your thinking and cloud judgment in the current trade. Theyare mutually exclusive. One trade has nothing to do with the next.Approach them in this manner. After one has enough confidence in trading with small shares to gain a sense of execution and price action functionality, they can begin to increase their share size per trade to offerthemselves a chance at better profits over time.I have found that some of the best traders are pilots. Why wouldthat be? Pilots have a very methodical way at looking at procedures andemergency procedures. When an engine catches on fire or a hydraulicpump fails, the pilot immediately goes into a series of emergency procedures. If a happens, then the correct steps are b, c, d, and e. Little emotion is involved; they cannot wish or hope the emergency will go awayor fix itself. They let the events of the emergency dictate their actions.Traders should do the same. Don’t let emotion enter into a trade; followprocedures. If the procedures work over time, changing them becauseyou have a feeling this time it will be different will only lead to losses.This will only reinforce poor trading habits and allow the hindsight monster to trample your disciplined trading program and eventuallydecimate your portfolio.
DECISION TIMEI have talked a lot about the pitfalls of trading, hype, hindsight, chat roomtraps, and maybe even trimmed some of your expectations down a bit.I do this on purpose early on because as I said, not everyone is cut outto be a trader. It is time to take a deep look inside yourself and see if youhave what it takes to press on. If you don’t, there is no shame in turningaway from something that will not work out for you. If you take a goodhonest look and decide it is not for you, you will save yourself a lot offrustration and money that could be better used elsewhere.That being said, I hope your look did reveal that you do havewhat it takes to trade. The rewards can be fantastic and the freedom youexperience by working for yourself, on your own time, and own pace isparallel to none.
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TOOLS OF THE TRADEThis chapter will go into the advantages and disadvantages of onlinebrokers and direct access brokers. Order routing methods are a trader’sedge when trading against thousands of other traders and MarketMakers for the best prices available when your system says to take action.Using the wrong route in certain situations can mean big money lossesif not learned properly. We will also discuss the available tools that willaid traders in their progress to seeing and participating with the marketon a daily basis. This includes charting software, hardware, and softwarerequirements just to name a few.
TRADITIONAL AND WEB-BASED BROKERAGESSince the explosion of active trading by the general public, numerousbrokerages have developed their business plans to tailor to these individuals. Web-based and traditional brokerages such as E*TRADE andSchwab & Company do offer interesting advantages for the trader. Themajor advantage is to the newer trader because the trader does not haveto learn a wide assortment of execution routes required by ElectronicDirect Access Trading Firms (EDATs). He or she simply has to put an orderin, including the ticker and number of shares, and the order routingmethod is chosen for him or her.Although this looks attractive at first, it has several disadvantages.The biggest disadvantage is the speed at which your trade is executedand your order confirmed. With a traditional broker, you must identifya trade, call your broker on the phone, and verbally give your order toyour broker. This can take some time and by the time you reach a real
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Trading on Momentum
live broker, especially in the busy periods, your trade has already comeand gone in many instances.Web-based brokers are a step quicker, but speed is still an issue.Although they are constantly improving their execution speeds and confirmations, it still is not quick enough for momentum traders in all cases.Many times you only have a few seconds to enter a trade after you makeyour initial entry decision before the stock moves on. When E*TRADEfirst came out, it seemed that they were the next best thing since slicedbread, but since then, a newer and faster service emerged. If you’re notplaying with the quickest service available, others are beating you to thepunch.In order to understand the disadvantages to the active trader, weneed to discuss the basic functionality of the majority of online brokers.Using a Web-based broker in active trading has no advantages. They aretoo slow. When we discuss online brokerages (OLBs), we are talking aboutfirms such as E*TRADE, SureTrade, Ameritrade, Schwab, and Datek.These firms work very well for the investor or the trader who makes afew trades a year. However, for the active trader, this system puts a traderat a disadvantage due to the order routing system. The system processprogresses in the following manner. When a trader wants to buy 1,000shares of a stock, he or she must first move around the Web site to theTransaction or Order Placement portion of the site. The trader will thensee several options for intentions. He or she will have the option to buy,sell, short, or cover a position in the stock.For this example, let’s use a buy option. A trader enters in his orderfor 1,000 shares in the Size of Order box. He then clicks the box markedBuy and enters in the stock symbol for the stock he wants to purchase.However, he must still decide some more options. He must decide if hewants to buy 1,000 shares at the market price or a limit price. If he choosesthe market price, he will have his order executed at the best availableprice when his order comes up in the order queue. If he chooses a limitorder, then he is subject to his set price or better. This ensures he neverpays more for the stock than what he has set in his limit box. The otherside of this is that he may never be filled at that price if he is late withhis order, and the market has risen in price on him for that stock.Let’s assume that stock XYZ is trading at 50 on the bid and 50.01 onthe ask. This means that the price to buy the stock is 50.01. If we were toturn right around and sell the stock immediately, we would sell at 50.This would result in a net loss of .01 for the trade. Because we boughtand sold 1,000 shares, we would multiply .01 by 1,000 shares and lose$10.00 on the trade plus commissions. The next screen is a confirmationfor the order asking the individual if he is sure this is the order that he
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wants to place. He then presses the Yes button again to send the order tothe market. He now has a live order sent to the Nasdaq marketplace. Thisis where using a Web-based brokerage gets interesting. When the tradersends his order to the marketplace, he is in essence sending an e-mailmessage to the brokerage company.If the order is a market order, then this company sends this orderto its respective Market Mak