in the text.
The nuggets uncovered are still untested in the fire of the market. We consider a new indicator used as An Assay Test – Looking for Life in Chapter 10. This combines our understanding of market behavior with data analysis to identify points of explosive price action. Price data is objective, but our analysis of it is not. There are always Two Sides of the Same Coin and we examine ways to identify and ultimately overcome our personal predisposition for gloom or glee. With this ghost acknowledged we finish the assay test interpretation and application with Index Hunting to match nuggets of trading opportunity with markets.
Discovery is nothing without exploitation. Our selected trading opportunities, mined from our database, come in different shapes and sizes. Not all trades are created equal and in This Nugget Goes to Market we examine the calculations required to rank the candidates from good to better and then best. The best satisfy our financial objectives. We breathe life into risk whenever we open a trade so Pinning a Number on Risk gives us an important advantage in validating financial objectives.
The key to successful exploitation of our hard-won trading opportunities comes in the shape of Using the Internet and Electronic Depth of Market. This unfamiliar collection of figures is too often ignored by traders, yet it opens a wealth of tactical information. We show you some ways to understand and use it to your advantage. This puts profit in our grasp and in Trading Plans we are able to step beyond this analysis to show how all the steps are combined in a real sample trade.
We cannot just go through the motions of trading. It is not a mechanical process. Trading is hard, demanding work. It requires a thorough working knowledge of the market, of trading techniques and of money management. Above all it requires a psychological mastery of ourselves. At some stage every prospecting expedition comes to resemble a pilgrimage. Trading imposes stresses quite different from those experienced in any other job, and many would-be traders find that it is these psychological factors that defeat them.
The way we think about ourselves has a significant impact on the way we trade. Trading slides into Over-Trading when we abandon planning for movement, mistaking activity for purpose. Successful traders recognize this escape mechanism, and put it in the background so it does not distort their trading activities.
Behind every decision the trader makes there lurks a plethora of past sins and prejudices. Failure waits on every trade and there are factors other than the analysis of the trade that have a significant impact on our trading success. Stop-loss is good in theory but difficult in practice. Success depends on knowing the difference between Nerves of Steel – Or Chicken Wire? We look at matching stop-loss points with our nerves to improve stop-loss execution. Some traders, puffed with success from other financial activities, mutate into a market bully, sabotaging their own success. The market ignores Command and Control strategies so if you find yourself nodding in agreement, then heed the warning.
These are hidden hands driving, or sabotaging, our decision-making. Get to know them well because they are our trading companions always hitch-hiking a ride with success. These are hidden attitudes that cast a pall of darkness over our trading activities, shadowing the way to failure. We cannot eliminate or ignore them, so we must learn to live with them.
The most dangerous shadow of all is the unconscious belief that trading is a game of chance where anyone can walk off the street and take money from the market. Gambler or Trader? takes a professional look at trading behaviors suggestive of pathological gambling. Written specially for this book by an American private trader and psychologist, Paul I Munves, this chapter cuts authoritatively to the core of the gambling trader’s self-deception. It is not pretty reading, but nor are the consequences of gambling in the markets.
We are not alone in this expedition. Others search alongside us for nuggets. Some of them are real competitors but most are temporary participants. We want to emulate the survivors but few are initially aware of the Insight and Irony this involves. This book is only an introduction to some of the tools used in trading tactics. It does not complete the question ‘I am a trader because …’ That is your task and the prospecting expedition turns out to be as much about this as it is about finding trading opportunities.
The procedures detailed in the following chapters are only one selection from many ways to approach the task of analysing the market for opportunities. Our purpose is to provide you with an introduction to a variety of approaches to encourage you to think more clearly about your current methods, or to help you make sense of the bewildering volume of market data. We want to provide you with the tools to finance, equip, explore, develop and exploit your own trading opportunities.
I have endeavored to answer many of the questions raised in readers’ e-mail via www.guppytraders.com and in comments from those who attended Trading Workshop seminars. Market data has been supplied by Stock Data Corp in the United States, Key Quotes in Singapore, Winrow Marketing in the United Kingdom, Electronic Information Solutions and ODDS in Australia. Further thanks must go to David Barnes, Bill McMaster, Will Evans and Nayan Ruparelia who were involved in the international edition of this book. Thanks also to my parents, Ted and Patricia, who labored through the original manuscripts. My wife, Marion, continued to demand an impossibly high standard of plain English, particularly in relation to apostrophes.
If you are reading this book I assume you are a serious trader or that you are serious about trading. This book assumes you have a working knowledge of the language of charting. Computerized charting tools sit, or soon will sit, on your desktop. This book will show you how to use them more effectively and give you search formulas to program direct into your computer.
We approach trading as a business so we must be systematic in the way we go about the many tasks associated with trading. This introduction will help you organize these tasks into a daily routine to take you quickly to the best of the current trading opportunities whether they be found in Lasseter’s reef, King Solomon’s gold mines, El Dorado or your own private mother lode of market data.
Every journey begins with a small step. We set out to explore for nuggets of trading opportunity but, like every prospector, we also discover a great deal more about ourselves. Trading involves many perils and this book aims to prevent the first step becoming a stumble.
Run with the bulls. Hunt with the bears. Trade well.
Daryl Guppy
Katherine 2000
Part I
JOINING THE RUSH
Chapter 1
Trading with the Balance of Probability
To trade or not to trade is the basic question. But is profit the only answer? Many novice traders think so.
Experienced traders learn that trading is the aggressive management of risk made possible by understanding the process of finding, exploiting and managing trading opportunities, financially and mentally. Traders regularly journey into the market jungle to mine nuggets of opportunity, returning with them to trade for profit. Successful traders understand the landscape and risk, and are properly equipped. The novice, equipped with little other than enthusiasm and a dream, walks into the jungle with an eye fixed on profit. Lacking tactical survival skills, few return.
The client casualty lists from brokerages fill pages with the names of those who thought profit was the only answer, and failed. This book is for survivors. If you want to keep your name permanently off the casualty list you must equip yourself with the best prospecting equipment. Simply aiming for a profit is not enough.
To protect profits and minimize losses you make better use of your tools, use your time efficiently and listen carefully to the roar and whimper of the market crowd. Like Ulysses, who wanted to hear the call of the sirens but avoid being lured onto the rocks, we consider ways to listen to the siren call of greed without coming to grief. We look at how to identify trading opportunities, some methods to analyze only the most promising and how the supplementary numbers from the market are used to confirm the promise of profit.
Later we examine some ways to detect the sound of distant thunder as the crowd stampedes through