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97f94c499e25-0 | her blog, www.renaissancemoms.com , which covers some interesting ground on a variety of subjects. One thing that clicked into place when I reached, as Maria would say, “intermediate trader status” was that whenever I had a situation that went horribly wrong, it struck me that someone else was having a | Page 309 |
a031742db718-0 | joyous occasion taking all that money away from me. Was there a setup in there somewhere that I had completely missed? We saw in detail how the trading disaster unraveled for Joe Trader. And yet for someone else, this was simply a great trading opportunity. This chart of TASR represents a different view. (See Figure 1.6 .) This | Page 310 |
1742371eca4d-0 | is a common setup that is created when large funds want to get out of a stock. They push the stock to new highs, sucking in the retail crowd, and then they start unloading. They know that the retail crowd will buy the new highs, and they also know that the retail crowd will feel comfortable buying all the way down to support. This gives the institutions ample time to sell their | Page 311 |
ec299e089b72-0 | holdings. By making the stock look great, even though it isn’t great, institutions fool the masses. I call this setup the “fake orgasm.” It certainly looks good, but there really isn’t anything to get excited about. | Page 312 |
1cd80b51fdaf-0 | Figure 1.6 I use it as a fade play for swing trades on stocks. (To fade a market means to take a trade in the opposite direction from the move.) In other words, if a stock is rallying with this setup, then I’m looking to short it. How Does a Person Make Money from a “Fake | Page 314 |
687575418cd7-0 | Orgasm” Setup? These are the rules I use in trading with the fake orgasm setup. I use this setup on individual stocks. Trading Rules for Sells/Shorts (Buys Are Reversed) • Look at stocks that are making new 52-week highs. On December 30, | Page 315 |
693477a88eb2-0 | having made new 52- week highs the day before at point 1, TASR gapped up and hit a new all-time high of $33.45 (point 2). • For stocks making new highs, look for a bearish divergence using a seven-period RSI (relative strength index). When TASR made new highs on December 30, | Page 316 |
2440784110a8-0 | the RSI hit 72.35 (point 4), well below the level it had hit on November 15 when the stock made its last 52-week high (point 3). When prices make higher highs and, at the same time, the RSI makes lower highs, this is called a bearish divergence . The RSI measures the power of the move, and this is telling the trader that the | Page 317 |
ef621f035d60-0 | stock is losing power. • For stocks that are making new highs, look for a significant decrease in volume. When TASR made new 52-week highs, it was on one-fourth of the volume of the last thrust to new highs. This is the equivalent of a car running out of gas. There is no sustained | Page 318 |
d2e7ad2de772-0 | price movement without volume. | Page 319 |
30439eec32dc-0 | Figure 1.7 • Short the stock the day after it closes below the previous 52-week high. On January 3, TASR closed back below $30.98, the previous 52- week high established on November 15. Utilizing this setup, the trader, let’s call her Joanne, goes short 2,000 shares at the open on January 4, | Page 321 |
ca4962e2ac97-0 | getting filled at $30.27. She places a stop 25 cents above the all-time highs. Since the all-time highs are $33.45, the stop is placed at $33.70. This is a stop market order, not the stop limit order that Joe used. • To exit, use a close above the high of the low day while above key support. If key support is | Page 322 |
4546fb60d619-0 | broken, stay in the trade until there is a close above the high of the low hour on a 60-minute chart. We take a look at this briefly here, but this is a concept I talk about in much detail later in the book. • Don’t trail stops. The exit is the price reversal signal. | Page 323 |
d9712589cc4f-0 | Let’s now take a look at Joanne Trader, who was on the opposite side of Joe’s trade. After she entered TASR short, the stock never rallied enough to close above the previous day’s highs. So Joanne was still in the stock short once it broke key support on the daily charts in the form of the key uptrend line. Once it broke this key support level, the selling got ugly. | Page 324 |
49fd32d804bf-0 | Figure 1.7 is a 60-minute chart that shows the increase in volume once TASR broke key support on the daily charts, at point 1. During the three large sell-off days, at points 2, 3, and 4, at no time did the market rally enough to close above the high of the low 60- minute bar. The next day, at point 5, TASR rallied enough to close above the previous | Page 325 |
c7dd9a7c6c69-0 | 60-minute bar, which was the low bar of the entire move down. This close was the signal to cover, and once the next bar opened, Joanne covered her 2,000 shares of TASR at $16.17, pocketing $28,200. She also reversed and went long 4,000 shares at this same level, using the lows of the move as a stop. She stayed in the move until the 60-minute price | Page 326 |
c5a858df121a-0 | action created a close below the low of the high 60- minute bar. This happened the next day at point 6, and Joanne closed out her long at $20.54 for a profit of $17,480. As Joe was berating himself for being such a stupid fool and sitting through his first day of marriage counseling, Joanne was counting her profits, totaling $45,680, and wiring a portion of them out of her | Page 327 |
cfb2e7fe2373-0 | account to pay for a one- week vacation to Maui. When a trader loses money, it isn’t gone. It has just been moved into another trader’s account. This is true even of the great financial crisis of 2008. The money lost by AIG was simply a trading gain on Goldman Sachs’s books. When AIG couldn’t pay the loss, the government was nice enough | Page 328 |
44f93cfd6c30-0 | to step in and lend it taxpayer money so that it could, in turn, pay Goldman Sachs. Nice work if you can get it! What Is the Only Economic Principle That Matters in the Markets? TASR didn’t lose 60 percent of its value in eight trading days because it wanted to. Desperate traders and mutual funds that had loaded up on | Page 329 |
95d51c7c8608-0 | this stock to sell covered calls were the main victims. Covered call writing was one of the most reliable forms of income generation for most of 2004. This was because the market was choppy and didn’t go anywhere. Because this method was doing so well, Wall Street announced plans to start a couple of mutual funds that specialized in covered calls. Although there are no guarantees in the | Page 330 |
32130d3e3946-0 | markets, here is one “almost” guarantee: as soon as Wall Street announces a special vehicle for trading a particular market or strategy, then that market or strategy is done for. Once the covered call funds got started, the markets roared higher during the last two months of 2004, invalidating this strategy as the best way to take advantage of current market conditions. Another | Page 331 |
bb3c33cf4e07-0 | example? Wall Street’s pushing of home-loan- backed CMOs (collateralized mortgage obligations) was a clear signal that the housing market was about to go in the toilet. The moral of the story? When Wall Street decides to package something up, put a bow on it, and sell it to the public, that move is over. But I digress. | Page 332 |
afd16565c7d7-0 | TASR lost 60 percent of its value because a lot of people were caught on the long side, like Joe Trader, and froze. Many of them didn’t make a conscious decision to sell the stock. They held on until they couldn’t take the pain any longer, or their brokers got them out because of margin calls. It was the margin calls that caused the worst of the selling when TASR closed | Page 333 |
7c5200a97f83-0 | near $14.00 a share. These forced market orders caused riplike movements in the stock that resulted in even worse fills for traders like Joe, who were trying to use their skills to finesse their way out of the trade. Disgusted with themselves and red in the face, the victims of these trades stalked off to contemplate the insanity of | Page 334 |
d47b1c2e3d6e-0 | the universe. Meanwhile, as we saw, another group of traders took the opposite side of this “capitulation trade” and made great profits. How does a trader get on the winning side of these trades? To fully understand how to do this, we must first step back and understand how the markets really work, and why traders continually and instinctively sabotage themselves in the first place. | Page 335 |
ab2a67f3cac7-0 | Well, the first part is easy. The markets are not that complex, and they work very simply. Markets rise on a day-to-day basis because current demand exceeds current supply—period. It has nothing to do with being in a secular bear market or a cyclical bull market, high price/earnings ratios (P/Es), or Maria Bartiromo’s choice of a necklace. (For anyone who actively traded during | Page 336 |
820508477f29-0 | the dot.com bubble, traders would look for a rally when Maria wore pearls. Very rational, of course.) It has everything to do with what traders are willing to pay for a particular market or an individual stock today . It doesn’t matter whether the demand is falsely created by a hedge fund “taking the street” (buying large amounts of a single stock to drain a | Page 337 |
0e728510b56a-0 | market maker of its inventory, forcing it to buy the stock back at a higher price), a squeeze that whacks shorts and forces them to cover, or a rumor that a biotech stock is being cornered by Martha Stewart. Demand is demand, and that is what drives markets higher. The inverse is equally true: if there is too much supply in the market, prices will fall. The best source of | Page 338 |
a59d7cdc0fbd-0 | “too much supply” hitting the markets is generally margin calls and other means of forced selling all hitting the markets at once, such as the Joe Traders of the world throwing in the towel and dumping their positions. This is why markets can erase gains so quickly; they take the stairs up, but they ride the elevator down. It is very important for a trader to remember this. Yes, the stock | Page 339 |
b2bc97717c5d-0 | may be acting great and its prospects may be bright, but if there are 1.5 million shares being offered for sale all at the same instant and only 50,000 shares are being sought by buyers, then that stock is going to crash. It isn’t rocket science. It’s supply and demand at its finest. Trading the long or the short side is very easy, once | Page 340 |
b619ca1bcb1a-0 | a trader learns to ignore his own personal opinions, quits trying to be right, and quits trying to make money. And by the way, that’s the hard part. This means pushing aside any and all prejudices about the market and focusing on the current supply and demand situation. When you’re dancing with the market, it’s best to let the market lead. Once traders understand this, the next | Page 341 |
a55173973c3f-0 | thing they need to work on is their own mental trading outlook and how they process this information, and to fully understand how the human brain naturally and emphatically causes traders to do things that make them lose money in the markets. It could be a whopper of a bad trade like Joe Trader’s or a series of smaller bad trades that grind down an account— death by a thousand cuts. | Page 342 |
3c2d09aa3dc0-0 | Either way, it’s the human brain that’s letting it happen. To succeed in trading, you have to get your arms wrapped around the idea that your brain is naturally wired to sabotage your dreams of becoming a trader. And ironically, it’s doing this because it thinks it’s protecting you. Understand this and you have an edge. And that is what we | Page 343 |
188a1b6194cd-0 | discuss in the next chapter. Lose as if you like it; win as if you were used to it. T OMMY H ITCHCOCK, POLO PLAYER When you have got an elephant by the hind legs and he is trying to run away, it’s best to let him run. A BRAHAM L INCOLN | Page 344 |
82e9c592f743-0 | 2 Psychology 101: What Didn’t They Teach About Trading and Investing in School? Only a fool tests the depth of the water with both feet. A FRICAN P ROVERB | Page 345 |
7c2ccc66ba34-0 | Respect your limitations; your limitations will not respect you. S WEDISH P ROVERB Emotions Are Fine at Weddings and Funerals; Why Aren’t They Fine When It Comes to Trading and Investing? Trading is the most deceptive profession in the world. Do you know anyone who has | Page 346 |
ec99c9cc1f5a-0 | recently walked into an airport, jumped into the cockpit of a jumbo jet loaded with passengers, and taken off down the runway without any prior training? Yet people will routinely open an account and start trading without any guidance whatsoever. And that is equally insane. Little do they know that their emotions and the natural functions of their brain are against them right | Page 347 |
199616b6e384-0 | from the opening bell. They are the freshest of meat. Just as a chatty masseur is the enemy of a relaxing spa treatment, emotion is the enemy of successful trading. Remember, the markets are set up naturally to take advantage of and prey upon human nature, moving sharply only when enough people get trapped on the wrong side of a trade. This | Page 348 |
b93964e781b4-0 | sweeps a burst of fear, frustration, and rage into the markets—and creates fabulous trading opportunities for the prepared trader. To head into this adventure called trading (note that it is called trading, not guaranteed income) without having a firm grasp of how human emotions move markets and how human emotions can sabotage your own trading is | Page 349 |
71c7b72ff0fb-0 | like trying to hail a taxi in Manhattan during a thundershower. In other words, the odds are overwhelmingly against you. The whole idea of this chapter is to lay the groundwork for the setups we discuss later in the book. With this foundation, traders will be able to understand how to control their “inner demon” with respect to | Page 350 |
eedd797b999b-0 | trading. This is the creature that mentally blocks them from following the parameters of a particular setup once they are in the trade. It is very similar to the brain freeze that occurred during the river rafting incident discussed in the introduction and to Joe Trader in the TASR trading example. It is also important to remember that every trader has different dominant | Page 351 |
bcb43e7feb56-0 | personality traits that he uses to absorb information and relate to the world around him. Some traders are more visual, others more auditory, and still others more kinesthetic—they relate to the world based on how events make them feel on the inside. These three traits can have a big impact on a person’s trading. Traders who are dominantly kinesthetic are doomed from | Page 352 |
06bda85f6c31-0 | the outset—until they realize that this is how they relate to the world and the impact that it has on their trading. If you buy a stock only when you feel good about it, you are a kinesthetic trader. Your best entries will be the ones that are scary and make you feel nervous. If you buy only when you feel good, the stock is probably near the top of a move. Think about it. Near the end of the book, | Page 353 |
4042a0c460b8-0 | there is a chapter on tips for when trading “isn’t working for you.” In this chapter there is a personality test that can help you determine what type of personality you are and the pros and cons for each personality trait. The cons will work against a trader without her even knowing it —until she learns about them and realizes what’s going on. In addition, the trader | Page 354 |
7dbf6dff6ece-0 | needs to realize the importance of utilizing a specific methodology for each setup, because each setup takes advantage of a different aspect of human emotions. A trader cannot apply the same trading rules to all setups across the board. This is one of the biggest mistakes I see newer traders make. A two-point stop in the E-mini S&Ps can work well with one setup but | Page 355 |
b24b8d1a46f0-0 | cause nearly every trade to get stopped out in another. Trading five lots per $50,000 can work well with one setup but be devastating with another. By understanding the psychology behind the trade, the individual will also then understand the right parameters and the right allocation to use for each setup. Each setup really is unique, and it has to be treated that way. | Page 356 |
e91288898721-0 | The end result of this chapter is for you to develop what I call a professional trading mindset . Although we discuss setups for most of this book, traders have got to have the trading psychology nailed down or their trading experience will be shortlived and painful. The other option, of course, is to go to a purely mechanical system and have your computer trade for you. Although this | Page 357 |
fbfdf72c1cd5-0 | sounds like a good idea, I’ve found that traders who don’t understand the psychology start tweaking the system every time there is a losing trade, which negates the whole idea of having an automated system. The bottom line is that if you understand the trading brain, you have a distinct advantage over (1) those individuals who don’t and (2) those large funds that are trapped in | Page 358 |
77090d6d203c-0 | larger positions that will take them days to liquidate. Why Is a Guy with a System Always Welcome in a Casino? This is an old Las Vegas saying that applies equally well to the financial markets. Having a system gives people a sense of security— nothing can go wrong. Every time I walk into Mandalay | Page 359 |
da52bbb749f7-0 | Bay or Bellagio in Las Vegas, I am reminded that all these fabulous structures were paid for by people who thought they could beat the blackjack tables. The owners of the Luxor borrowed $550 million over 20 years to build their place. They were able to pay it off in less than three. Tell them at the front desk that you have a system, and you’ll most likely get a presidential suite and a | Page 360 |
262d1080f3bd-0 | private table. Why don’t systems work in Vegas? The reason for this is twofold: the house has an edge with percentages, and as soon as the system falters a couple of times, the human mind gets to work trying to tweak it to make it perfect. This eventually screws up the entire process. In the casinos, as in trading, it takes only one stupid bet to blow your | Page 361 |
771f59c64a45-0 | whole wad. Casino owners know this, and this is why they sell the strategy books right there on the property, prominently displayed in their own gift shops. This elevates the concept of the fox guarding the henhouse to a whole new level. Craps is a great game for studying the trading mindset. The board is set up to encourage more of the | Page 362 |
95c05f3c0c58-0 | “stupid bets” as the game goes on. Instead of just focusing on the higher- probability pass and no pass bets, participants get sucked in and start betting the hard ways and all the other exciting, low-probability bets. It’s a crowd mentality case study right before your eyes. Guess who wins consistently in the end? And that’s why the drinks are free. | Page 363 |
cafc01e429d9-0 | It’s the same process with the markets. The odds are against the trader surviving because the market has an edge: it doesn’t have any emotions. Like the river making its way to the ocean, the markets ebb and flow with total disregard for the objectives of the people who are hanging on for the ride. Humans have a tendency to try to imprint their will on the markets. This is like | Page 364 |
4131cd20122e-0 | trying to get a tornado to shift course by yelling at it, or trying to convince your wife that making returns to the department store is not the same as saving money. What Is the Right Mental Outlook for the Markets, and Why Shouldn’t I Turn On My Computer Without It? | Page 365 |
efb99b4965d6-0 | He who conceals his disease cannot expect to be cured. E THIOPIAN P ROVERB I will not allow yesterday’s success to lull me into today’s complacency, for this is the great foundation of | Page 366 |
af22ddc75146-0 | failure. O G M ANDINO First traders must understand the psychology, and then they can learn about the setup. It’s like two pieces of a puzzle, and these two pieces have to snap together snugly in place before a trader can expect to trade for a living without repeating the same mistakes over and over | Page 367 |
e57e4e5bed72-0 | again. I’ve shown many traders setups that work. The ones who don’t get the psychology part always screw it up. Usually this takes place right after their first losing trade: “I wonder what would happen if I added a MACD filter and changed the settings of this moving average. I bet if I’d done that, I wouldn’t have been stopped out.” And a good setup dies an early | Page 368 |
f4f9083da318-0 | death as the trader heads down the path most traveled —that of the never-ending tweak. I’ve spent a lot of my career focused on trader psychology—not only working on myself, but working with hundreds of other traders. I’ve spent a lot of time in large trading rooms with hedge funds and prop traders, executing | Page 369 |
6906dd0a78fb-0 | orders right alongside hundreds of other traders. I’ve watched the fear and the elation and the greed permeate a room and a group of traders like a disease. I’ve literally seen money from accounts on one side of a room flow into the accounts on the other side of the room as each group of traders focused on different setups and parameters. In addition, I’ve worked with hundreds of | Page 370 |
4d7f03c132e3-0 | traders who have come up to my office to sit beside me and watch me trade, and to have me look over their shoulder while they trade. I’m the first to say that I’m not a shrink, but let’s just say that my experiences have left me with a clear road map of the process most traders go through when they first start to trade. Every person is unique, but when it comes to money, the differences are | Page 371 |
50158a190fac-0 | quickly stripped away. Doctor, lawyer, surfer, or engineer—it doesn’t matter. A herd of thirsty cattle will quickly drop all pretenses and stampede to get to water. In addition to my experiences in working with other traders, it shouldn’t be surprising to hear that I learned a lot of this firsthand from the best teacher that the market has to offer: extensive | Page 372 |
34d66f883b99-0 | pain and suffering. By the time I was a senior in high school, I’d saved $1,000 working a $4 an hour job slinging cookie dough and sodas at the local mall and running my own small mail-order business, buying and selling rare coins. My stepfather, Lance, noticed my stash of cash and my entrepreneurial spirit and said, “Have you thought | Page 373 |
92fd2c6fa816-0 | about putting your capital to work?” I had no idea what he meant, but he was a Morgan Stanley broker, and I watched him meet with his friends every Sunday night as they visited and mapped out their Monday morning buying strategy. When they told me they were going to buy Intel call options and asked me if I wanted in, I | Page 374 |
966789b21090-0 | said, “Sure,” even though I had no idea what in the hell a “call option” was. But I was and always have been a risk taker, so the next morning I spent my entire $1,000 savings on 10 Intel calls for a buck each. Four days later, my stepfather told me to sell, and I did … at $1.50 per option, earning a 50 percent profit of $500. I never went back to that cookie store again, at least not as a boy | Page 375 |
0678180cc924-0 | flipping cookie dough for $32 a day, less taxes. I was hooked on putting my capital to work. For eight years, through college and for four years after college, I maintained a routine of staking myself with $10,000 in order to buy and sell low-priced stocks and options until I increased my portfolio to the $120,000 to $130,000 range. During | Page 376 |
b5acf13ba247-0 | those eight years, I repeatedly did a smart thing, followed by a stupid thing, whenever I ran my account up that much. The smart thing I did was when I had built up my account, I would withdraw $20,000 to $30,000 of profits to invest in real estate (this was, of course, before the credit bubble crash, when real estate was actually trending up). | Page 377 |
88645186e284-0 | Minnesota Stupid The stupid thing I did was sit back and say, “Gee, I managed to take $10,000 and turn it into a little over $100,000. Now I’m going to try to take this remaining $100,000 and turn it into $1,000,000. Let’s do this!” The first time I tried this, the experiment ended quickly, much like taking a Band-Aid and ripping it off | Page 378 |
5132d7104e88-0 | with a flick of the wrist. It took all of six weeks to grind my capital down from $100,000 back toward the neighborhood of $10,000. Sure, it surprised me, but I chalked it up to bad luck. I rolled up my sleeves and went back to work. About a year later, I had built up my account to just over six figures, and then I paused and did the same thing. First, I took money out to buy real | Page 379 |
45daeedfc9b7-0 | estate. Next, I decided to try turning $100,000 into a million dollars yet again. This time I lasted four months, but the result was the same: back to $10,000 and change. Hmmm. Third time’s the charm? A few years after graduating from college, I was engaged to be married. I was in a nice swing trading rhythm. I had built up my | Page 380 |
21e3a2780031-0 | small stake back into a $150,000 trading account. I took modest profits out of the account at the end of the month, and I was getting closer to my goal of quitting my job as a financial analyst to become a full-time trader. At the time, my fiancée and I were living in Austin, Texas, but we were contemplating a move to Korea to teach English and just to try something different. We | Page 381 |
6534961fc86d-0 | thought it’d be a bonding experience. Then the company I was working for offered me a promotion and a transfer to Minneapolis, Minnesota. We thought about it, and in our youthful “wisdom” decided that Minnesota was probably a lot like Korea—cold. We moved to Minneapolis in the mid-1990s, during two of the coldest winters in the history | Page 382 |
f48b7afeeeb7-0 | of the city. Outside our apartment, the wind chill hit 40 below zero, and our cars wouldn’t start. Inside our apartment, my fiancée, who had never seen snow before, sat. She was miserable. I took taxis to and from work and came home to find her in the living room with a mask over her nose, sanding the apartment walls for the second time. Even I could | Page 383 |
bf014b23a8ed-0 | see that she was stir-crazy. Then she issued an ultimatum: “Get us a house with a garage so that our cars will start; we’re getting the hell out of here.” It took a few months, but by May, just as the snow had melted, we found a house with a heated garage. I’d never heard of such a thing, but it sounded like the right thing to have. I planned to | Page 384 |
e43fb34655d6-0 | put down $30,000 at closing. About a week before closing, I sat and stared at my $150,000 trading account and wondered how it was going to affect me— psychologically—to take my account down to $120,000. I was in a comfortable rhythm. The money I was pulling out of my account I mostly put into rare coins that I planned to hold for years, so I didn’t have a lot of liquid assets | Page 385 |
09baa7f6b4c5-0 | other than my trading account. I liked my account size. I didn’t want to change it. I had only a week before the closing to decide what to do. As I thought about it more, I chose to make just one big trade, enough to earn $30,000 so that I could take out the down payment and still maintain my $150,000 trading account. It was so | Page 386 |
e881b826e930-0 | logical that I truly thought it was a genius idea. I would do one of my normal setups— just with much bigger size. And I would watch it like a hawk. I started flipping through the charts, and there it was. The OEX 100 was knocking up against a serious downtrend line on the daily charts. The next day at the office, I set up my laptop, poured | Page 387 |
50fd27e3742c-0 | myself a cup of coffee, and watched the charts. (By this time I’d been promoted into my own office, so it wasn’t difficult to do some swing trading while I worked.) The market started to rally, and it hit right into that mega- downtrend line. My heart rate quickened. I phoned my broker and bought 100 OEX puts at $8.00. Immediately, the market came down, and in 20 minutes I was up | Page 388 |
91199a871f0a-0 | $10,000. I thought, wow, this is going to work out faster than I’d hoped! The next thing I saw was a small kickback rally that brought new highs, and the options dropped to $7.00. I believed this was the deal of the century. I mean, I loved them at $8.00! I called my broker and bought 100 more puts at $7.00, which put my entire $150,000 into | Page 389 |
c65d9ea4e715-0 | the trade. I skipped meetings and didn’t go to lunch. I did not take my eyes off the screen. By the end of the day, the market had edged down off its highs and I went home with an open position that was up around $12,000. I wasn’t going to take home a loser, so this fit into my plan of taking a “green” position home overnight. In fact, my thought was that I could close out this trade at the | Page 390 |
c81977409a59-0 | open, hit my goal, and live happily ever after. But when I woke the next morning and turned on CNBC, I saw a green arrow indicating that the Dow futures were up +130 points. I turned off the TV, shook the remote, and turned it back on. The green arrow was still there. Ouch. I was hosed. I’d been trading long enough at this point to realize | Page 391 |
58a4bde8327d-0 | a couple of things. First, I wasn’t going to make $30,000 on this trade. Second, my main goal now was to contain my losses. I knew that this opening gap had a high probability of retracing half its opening range (to where the Dow was only up +65). I calculated that if I sold my puts at that level, I’d be out with about a $20,000 loss on the trade. | Page 392 |
fc8a2f80f6e8-0 | I got to my office. I turned on the charts. I watched and watched, and I waited and waited, but the retracement never came. Dazed, I stared at my account. The next day the markets gapped up again and rallied. For good measure, they did that for the following two days as well. I don’t remember this time at all. I do remember at some point that it was the day before we were supposed to | Page 393 |
9d3041d78f65-0 | close on the house, and I needed to sell out my position so that I could have money to buy the house. I had no idea what the options were even trading for (I couldn’t look). I just told my broker to sell. By the time the dust settled and I was able to check my account balance, I noticed that my $150,000 trading account had evaporated into the tidy sum of $8,000 and change. At this | Page 394 |
5c4a8405983c-0 | point I did what any man in his right mind would do— which means that I sure as hell did not tell my fiancée. For good measure, I stared at the charts a little longer. Maybe I was only dreaming this and I would wake up at any moment. Finally I got up, went to the bank, and maxed out my credit cards in order to get the down payment. I went to | Page 395 |
0e832fe7a3a4-0 | the closing and handed over the $30,000 check, at which point the mortgage officer said, “Wait. I thought this was coming from an investment account. We need to see where this money came from.” I acted ignorant. “Uh, what are you talking about? There’s the money right there. Right in front of you.” My real estate broker started | Page 396 |
40458bd8b60e-0 | to get angry at the closing agent (he didn’t know what was going on). An hour later, the agent finally allowed us to close on the house. I kissed my fiancée good-bye (she had no clue what was going on), drove to the par 3 golf course down the road, and attempted to play a round of nine holes. I drove. I chipped. I putted. And I threw up. I did that for five holes. My nerves were shot, | Page 397 |
34cbb58cd15b-0 | and I felt horrible. After I’d calmed down, I asked myself, “What do I want?” I knew I could raise another trading stake. All I had to do was sell one of my real estate holdings. But did I want to continue to go down this road of uncertainty? How could I quit my job and rely on a trading income if I did stupid crap like this? I loved—and still love— | Page 398 |
dde0c2e8f1db-0 | analyzing the markets. I love placing and managing the trade. It’s an intellectual challenge. And it’s an emotional challenge—not letting your emotions actually zip down your arm and into your fingertips and onto the keyboard. But most of all, it’s where my passion lies, and where it has lain since I placed my first trade. Still, I decided that I | Page 399 |
ad6dd627ac25-0 | wouldn’t trade again until I figured out what I’d been doing right and wrong up to this point. I knew I could make money trading—why couldn’t I keep it? For the next year, I thought, studied, talked to other successful traders, and read. During this time I came across a book by Mark Douglas called The Disciplined Trader . This | Page 400 |
4efa5bba49ff-0 | book was a real eye-opener in that Mark showed how to turn everyday stressful trading situations into “normal” trading behavior. His follow-up book, Trading in the Zone , is also excellent. His books have had a huge impact on me, and they are required reading for anyone I’m working with. Mark’s insights, as well as my long discovery period, finally gave me the answer: | Page 401 |
ba0e597ef14d-0 | whenever I focused on the setups and not the results, I did fine. But whenever I focused on the results and not the setups, I got killed. Why is this? Once I got my hands on a decent-sized trading account, I would start to think things like, “I want to turn this account into a million dollars.” Or even better, “I just need to make a quick 30 grand for the down payment on the house.” | Page 402 |
01e075d0a416-0 | Instead of focusing on the setups, I was focusing on making a million dollars or, in the case of the house, a $30,000 down payment. This caused me to jump into the trading habits that ruin all traders: betting it all on one trade, not using a stop because the trade “had to work out,” and focusing on making a million bucks instead of waiting patiently for a high-probability trade | Page 403 |
8b5340198bb9-0 | setup. All of these habits guarantee trading failure in the long run. Yes, it would have been easier to just blame it on my mother for hitting me with a wooden spoon once when I was a kid, but at some point we have to step up and take responsibility for our own actions. By focusing on “making money,” a trader will see a lot of opportunity where there is none. | Page 404 |
be77137174ed-0 | Once this revelation sank in, I started to do two things differently. First, I started wiring any profits out of my trading account at the end of each week. This kept me focused on producing a smaller, steady income, as opposed to making a grand killing. I later refined this and today call it “cash flow trading,” and I’ll talk more about this specific trading methodology shortly. (In | Page 405 |
c84440a62892-0 | trading, there is trading for cash flow and trading to create wealth—they are very different.) I also discovered that wiring money out was a great way to protect profits—the market can’t have them if they are safely tucked away out of reach. I use these profits mostly for longer- term investments like land and gold, but I also set aside | Page 406 |
39c9756c9287-0 | some of the money for fun— after all, we are only here once, as far as I know. And one important thing I realized from another successful trader is that there is no need to trade every day. I started to notice that there were days when I didn’t take a trade— not because I didn’t want to, but simply because the setup I was waiting for didn’t occur. | Page 407 |
fef7f3eee7e3-0 | Second, I started a competition among the various setups I used. This way, I could measure the performance of every one of my setups at the end of each month. The setups that made money I kept using. The setups that lost money I dumped. This was incredibly important to my trading. The only way I could keep my competition going was to execute my trade setups the | Page 408 |
c83c29604b48-0 | same way each and every time. I did this in blocks of 25 trades. This had the added benefit of removing much of the importance from any trade I happened to be in at the time. It was just “trade 13 out of a series of 25”— no big deal. And any time I deviated from a standard setup, I marked this down in my trading journal as an “impulse trade.” I kept track of my performance on these, | Page 409 |
aa279c06bc03-0 | too. After about six months of tracking my impulse trades (wow, this market is going higher; I have to get in), I realized that they were not making me any money and were in fact preventing me from making a living as a trader. Yes, they were fun. But they weren’t helping. In working with other traders, I see impulse trading as one of the most common | Page 410 |
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