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Trading for a living in the forex market.pdf

How to Make a Living Trading Foreign Exchange,About How To Day Trade For A Living

WebTrading for a Living in the Forex Market - Free download as PDF File .pdf), Text File .txt) or read online for free. Scribd is the world's largest social reading and publishing site Web13/7/ · The title of FOREX TRADING FOR A LIVING: The Ultimate Guide: How To Make A Passive Income From Home Every Day In The Currency Market Investing With WebTài liệu Trading For A Living In The Forex Market_(pdf) pdf Bạn đang xem bản rút gọn của tài liệu. Xem và tải ngay bản đầy đủ của tài liệu tại đây ( MB, 75 trang) WebIt is possible to gain a success on it only after a certain training including a familiarization with the structure and kinds of Forex, the principles of currencies price formation, the WebThe global forex markets trade 24 hours a day, 5 and a half days per week, allowing you to exercise your skills and increase your knowledge at almost any time you wish. So, head ... read more

Major currencies The U. Dollar The Euro The Japanese Yen The British Pound The Swiss Franc 2. Trade systems on Forex Trading with brokers Direct dealing 3. Fundamental analysis by trading on Forex 3. Indicators for the fundamental analysis Economic indicators The Gross National Product The Gross Domestic Product Consumption Spending Investment Spending Government Spending Net Trading ° All training material found in this manual and provided by Trading Intl.

are held proprietary to Trading Intl. and Any duplication or reproduction is strictly prohibited and must be surrendered on demand. Trading International LLC Direct Fax Email support tradingintl. Forex dependence on financial and sociopolitical factors The Role of Financial Factors Political Crises Influence 4. Technical analysis 4.

The destination and fundamentals of technical analysis Theory of Dow Percent measures of prices reverse 4. Charts for the technical analysis Kinds of prices and time units Kinds of charts Line Chart Bar Chart Candlestick Chart 4. Trends, Support and Resistance lines Trend Line and Trade Channel Lines of Support and Resistance 4. Trend Reversal patterns Head-and-Shoulders Inverted Head-and-Shoulders Double Top Double Bottom Triple Top All training material found in this manual and provided by Trading Intl.

com 2 Triple Bottom Round Top, Round Bottom, Saucer, Inverted Saucer 4. Trend Continuation patterns Flags Pennants Triangles Wedges Rectangles 4. Gaps Common Gaps Breakaway Gaps Runaway Gaps Exhaustion Gaps 4. Fibonacci constants and Elliott wave theory 5. Fibonacci constants 5. Elliott wave theory All training material found in this manual and provided by Trading Intl. com 3 1. Foreign exchange as a part of the world financial market Forex — What is it? The international currency market Forex is a special kind of the world financial market.

The exchange rates of all currencies being in the market turnover are permanently changing under the action of the demand and supply alteration.

The latter is a strong subject to the influence of any important for the human society event in the sphere of economy, politics and nature. Consequently current prices of foreign currencies, evaluated for instance in US dollars, fluctuate towards its higher and lower meanings. Forex is different in compare to all other sectors of the world financial system thanks to his heightened sensibility to a large and continuously changing number of factors, accessibility to all individual and corporative traders, exclusively high trade turnover which creates an ensured liquidity of traded currencies and the round — the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open.

Just as on any other market the trading on Forex, along with an exclusively high potential profitability, is essentially risk - bearing one. It is possible to gain a success on it only after a certain training including a familiarization with the structure and kinds of Forex, the principles of currencies price formation, the factors affecting prices alterations and trading risks levels, sources of the information necessary to account all those factors, techniques of the analysis and prediction of the market movements as well as with the trading tools and rules.

An important role in the process of the preparation for trading Forex belongs to the demo-trading that is to trade using a demo-account with some virtual money , which allows to testify all the theoretical knowledge and to obtain a required minimum of the trade experience not being subjected to a material damage.

A short history about the origin and development of the currency exchange market. Currency trading has a long history and can be traced back to the ancient Middle East and Middle Ages when foreign exchange started to take shape after the international merchant bankers devised bills of exchange, which were transferable third-party payments that allowed flexibility and growth in foreign exchange dealings.

The modern foreign exchange market characterized by periods of high volatility that is a frequency and amplitude of price alteration and relative stability formed itself in the twentieth century. By the mids London became the leading center for foreign exchange and the British pound served as the currency to trade and to keep as a reserve currency. After the World War II, where the British economy was destroyed and the United States was the only country unscarred by war, U.

dollar, in accordance with the Breton Woods Accord between the USA, Great Britain and France became the reserve currency for all the capitalist countries and all currencies were pegged to the American dollar through the constitution of currency ranges maintained by central banks of relevant countries by means of interventions or currency purchases.

All training material found in this manual and provided by Trading Intl. com 4 In turn, the U. Thus, the U. dollar became the world's reserve currency. In accordance with the same agreement was organized the International Monetary Fund IMF rendering now a significant financial support to the developing and former socialist countries effecting economical transformation.

To execute these goals the IMF uses such instruments as Reserve trenches, which allows a member to draw on its own reserve asset quota at the time of payment, Credit trenches drawings and stand-by arrangements. The letters are the standard form of IMF loans unlike of those as the compensatory financing facility extends financial help to countries with temporary problems generated by reductions in export revenues, the buffer stock financing facility which is geared toward assisting the stocking up on primary commodities in order to ensure price stability in a specific commodity and the extended facility designed to assist members with financial problems in amounts or for periods exceeding the scope of the other facilities.

At the end of the s the free-floating of currencies was officially mandated that became the most important landmark in the history of financial markets in the XX century lead to the formation of Forex in the contemporary understanding. That is the currency may be traded by anybody and its value is a function of the current supply and demand forces in the market, and there are no specific intervention points that have to be observed.

Foreign exchange has experienced spectacular growth in volume ever since currencies were allowed to float freely against each other.

While the daily turnover in was U. Main factors influences on this spectacular growth in volume are mentioned below. A significant role belonged to the increased volatility of currencies rates, growing mutual influence of different economies on bank-rates established by central banks, which affect essentially currencies exchange rates, more intense competition on goods markets and, at the same time, amalgamation of the corporations of different countries, technological revolution in the sphere of the currencies trading.

The latter exposed in the development of automated dealing systems and the transition to the currency trading by means of the Internet. In addition to the dealing systems, matching systems simultaneously connect all traders around the world, electronically duplicating the brokers' market. Advances in technology, computer software, and telecommunications and increased experience have increased the level of traders' sophistication, their ability to both generate profits and properly handle the exchange risks.

Therefore, trading sophistication led toward volume increase. Regional reserve countries. Along with the global reserve currency — U. dollar, there are also other regional and international reserve countries.

In , the nine members of the European Community ratified a plan for the creation of the European Monetary System managed by the European Fund of the Monetary Cooperation. By these countries, which constituted so- called Euro zone, have implemented the transition to the common European currency - the euro see Figure 1.

The euro bills are issued in denominations of 5, 10, 20, 50, , , and euros. Coins are issued in denominations of 1 and 2 euros, and 50, 20, 10, 5, 2, and 1 cent. com 5 All training material found in this manual and provided by Trading Intl.

com 6 The euro is a regional reserve currency for the euro zone countries and the Japanese yen — for the countries of Southeast Asia. The portfolio of reserve currencies may change depending on specific international conditions, to include the Swiss franc. Federal Reserve System and Central banks of other G-7 countries on Forex. All central banks and the U. Federal Reserve System FRS as well, affect the foreign exchange markets changing discount rates and performing the monetary operations as interventions and currency purchases.

For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future usually within 15 days , and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the national currency should weaken. The repurchase agreements may be either customer repos or system repos.

Matched sale- purchase agreements are just the opposite of repurchase agreements. When executing a matched sale-purchase agreement, a bank or the FRS sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future generally within 7 days.

This arrangement amounts to a temporary drain of reserves. The impact on the foreign exchange market is that the national currency should strengthen. Monetary operations include payments among central banks or to international agencies. In addition, the FRS has entered a series of currency swap arrangements with other central banks since For instance, to help the allied war effort against Iraq's invasion of Kuwait in , payments were executed by the Bundesbank and Bank of Japan to the Federal Reserve.

Also, payments to the World Bank or the United Nations are executed through central banks. States foreign exchange markets by the U.

Treasury and the FRS is geared toward restoring orderly conditions in the market or influencing the exchange rates. It is not geared toward affecting the reserves. There are two types of foreign exchange interventions: naked intervention and sterilized intervention. Naked intervention, or unsterilized intervention, refers to the sole foreign exchange activity. All that takes place is the intervention itself, in which the Federal Reserve either buys or sells U.

dollars against a foreign currency. In addition to the impact on the foreign exchange market, there is also a monetary effect on the money supply. If the money supply is impacted, then consequent adjustments must be made in interest rates, in prices, and at all levels of the economy. Therefore, a naked foreign exchange intervention has a long-term effect. Sterilized intervention neutralizes its impact on the money supply. As there are rather few central banks that want the impact of their intervention in the foreign exchange markets to affect all corners of their economy, sterilized interventions have been the tool of choice.

This holds true for the FRS as well. The sterilized intervention involves an additional step to the original currency transaction. This step consists of a sale of government securities that offsets the reserve addition that occurs due to the intervention. It may be easier to visualize it if you think that the central bank will finance the sale of a currency through the sale of a number of government securities.

Because a sterilized intervention only generates an impact on the supply and demand of a certain currency, its impact will tend to have a short-to medium-term effect.

Risks by the foreign exchange on Forex As it was mentioned above trading on the Forex is essentially risk-bearing. By the evaluation of the grade of a possible risk accounted should be the following kinds of it: exchange rate risk, interest rate risk, and credit risk, country risk. Exchange rate risk is the effect of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position.

For the period it is outstanding, the position will be subject to all the price changes. The most popular measures to cut losses short and ride profitable positions that losses should be kept within manageable limits are the position limit and the loss limit.

By the position limitation a maximum amount of a certain currency a trader is allowed to carry at any single time during the regular trading hours is to be established. The loss limit is a measure designed to avoid unsustainable losses made by traders by means of stop-loss levels setting. Interest rate risk refers to the profit and loss generated by fluctuations in the forward spreads, along with forward amount mismatches and maturity gaps among transactions in the foreign exchange book.

This risk is pertinent to currency swaps; forward outright, futures, and options See below. To minimize interest rate risk, one sets limits on the total size of mismatches. A common approach is to separate the mismatches, based on their maturity dates, into up to six months and past six months. All the transactions are entered in computerized systems in order to calculate the positions for all the dates of the delivery, gains and losses.

Continuous analysis of the interest rate environment is necessary to forecast any changes that may impact on the outstanding gaps. Credit risk refers to the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by a counter party.

In these cases, trading occurs on regulated exchanges, such as the clearinghouse of Chicago. The following forms of credit risk are known: 1. Replacement risk occurs when counterparties of the failed bank find their books are subjected to the danger not to get refunds from the bank, where appropriate accounts became unbalanced.

For more information about Wiley products, visit www. Why Trade? What Is Price? What Is the Market? Is This an A-trade? It remains at the top of many reading lists, as friends recommend it to friends and trading firms give it to their new hires. All these years, I resisted revising my book because I trusted and liked its internal logic. I traded, traveled, wrote other books, and taught a few classes. In planning this update, I thought of a building complex in Vienna, Austria called the Gasometer.

At its core are multistory storage tanks, erected by Austrian bricklayers in When modern technology made huge gas cylinders obsolete, architects converted them into modern apartments. They punched wide openings in brick walls, creating panoramic views, installed floors and elevators, and added glass-enclosed penthouses. I used to stay in one of them and wanted my new book to follow that model of blending old craftsmanship with new technology. Psychology is important.

Since I was actively practicing psychiatry while writ- ing the original Trading for a Living, its psychology part stood the test of time and I changed it very little in this new edition. Market analysis is very important—but remember that when we look at a chart, we deal with only five pieces of data—the open, the high, the low, the close and volume. Piling up masses of indicators and patterns on top of those five values only increases confusion.

Less is often more. I also added a section on stops, profit targets and other practical details. Money management is extremely important because financial markets are hot- beds of risk. That was the weakest part of the original book, and I completely rewrote it. Psychology, trading tactics, and money management are the three pillars of success, but there is the fourth factor that ties them together.

That factor—which integrates all others—is record-keeping. Keeping good records will enable you to learn from your experiences. Keeping good records will make you your own teacher and a better trader.

Trading—The Last Frontier You can be free. You can live and work anywhere in the world. You can be indepen- dent from routine and not answer to anybody. This is the life of a successful trader. Many aspire to it but few succeed. An amateur looks at a quote screen and sees millions of dollars sparkle in front of his face. He reaches for the money—and loses.

He reaches again—and loses more. Traders lose because the game is hard, or out of ignorance, or from lack of discipline. If any of these ail you, I wrote this book for you. How I Began to Trade In the summer of , I drove from NewYork to California. Little did I know that a dog-eared paperback, borrowed from a lawyer friend, would in due time change the course of my life. That friend, incidentally, had a perfect reverse golden touch—any investment he touched went under water. I gulped down the Engel book in campgrounds across America, finishing it on a Pacific beach in La Jolla.

I had known nothing about the stock market, and the idea of making money by thinking gripped me. I grew up in the Soviet Union in the days when it was, in the words of a former U. Now I could break free! I jumped the Soviet ship in Abidjan, Ivory Coast.

I ran to the U. Embassy through the clogged dusty streets of an African port city, chased by my ex-crewmates. I spoke some English, but did not know a soul in this country. I had no idea what stocks, bonds, futures, or options were and sometimes got a queasy feeling just from looking at the American dollar bills in my wallet.

In the old country, a handful of them could buy you three years in Siberia. Reading How to Buy Stocks opened a whole new world for me. When I returned to New York, I bought my first stock—it was KinderCare. A very bad thing hap- pened—I made money on my first trade and then the second one, leaving me with a delusion that making money in the markets was easy. It took me a couple of years to get rid of that notion.

My professional career proceeded on a separate track. I completed a residency in psychiatry at a major university hospital, studied at the New York Psychoanalytic In- stitute, and served as book editor for the largest psychiatric newspaper in the United States. I still have my license, but my professional practice these days is at most an hour or two per month. I am busy trading, love traveling, and do some teaching. Learning to trade has been a long journey—with soaring highs and aching lows. In moving forward—or in circles—I repeatedly knocked my head against the wall and ran my trading account into the ground.

Each time I returned to a hospital job, put a stake together, read, thought, did more testing, and then started trading again. My trading slowly improved, but the breakthrough came when I realized that the key to winning was inside my head and not inside a computer.

Psychiatry gave me the insight into trading that I will share with you. Do You Really Want to Succeed? For many years I had a friend whose wife was fat. She was an elegant dresser, and she had been on a diet for as long as I had known her. She said she wanted to be slim, but remained fat. The short-term pleasure of eating was stronger for her than the delayed pleasure and health benefits of weight loss. People deceive and play games with themselves.

Lying to others is bad, but lying to yourself is hopeless. Bookstores are full of good books on dieting, but the world is still full of overweight people. I can give you the knowledge.

Only you can supply the motivation. And remember this: an athlete who wants to enjoy risky sports must follow safety rules. When you reduce risks, you gain an added sense of accomplishment and con- trol. The same goes for trading.

You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply. Psychology Is the Key Remember how you felt the last time you placed an order? Were you anxious to jump in or afraid of losing? Did you procrastinate before entering your order?

When you closed out a trade, did you feel elated or humiliated? The feelings of thousands of traders merge into huge psychological tides that move the markets. Getting Off the Roller Coaster The majority of traders spend most of their time looking for good trades.

They ride an emotional roller coaster and miss the essential element of winning—the management of their emotions. Their inability to manage themselves leads to poor risk management and losses. If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, you have no chance of making money trading. All winning professionals know the enormous importance of psychology. Most losing amateurs ignore it. Friends and students who know that I am a psychiatrist often ask whether this helps me as a trader.

Good psychiatry and good trading have one important principle in common. Both focus on reality, on seeing the world the way it is. To live a healthy life, you have to live with your eyes open. To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on fantasies, regrets, and wishful thinking.

Brokerage house records indicate that most traders are male. The files of my firm, Elder. com, confirm that approximately 85 to 90 percent of traders are male.

The percentage of women traders among my clients, however, has more than doubled since the original edition of Trading for a Living was written twenty years ago. Of course, no disrespect is intended to the many wom- en traders. As a matter of fact, I find that the percentage of successful traders is higher among women. As a group, they tend to be more disciplined and less arrogant than men.

How This Book Is Organized The three pillars of successful trading are psychology, market analysis, and risk man- agement. Good record-keeping ties them together. This book will help you learn the essentials of all these areas. Part One of this book will show you how to manage emotions in trading. I discov- ered this method while practicing psychiatry.

It greatly improved my trading, and it can help you too. Part Two will focus on crowd psychology of the markets. Mass behavior is more primitive than that of individuals. Part Three will show how chart patterns reflect crowd behavior.

Classical techni- cal analysis is applied social psychology, like poll-taking. Support, resistance, break- outs, and other patterns reflect crowd behavior. Part Four will teach you modern methods of computerized technical analysis. Indicators provide a better insight into mass psychology than classical chart patterns. Trend-following indicators help identify market trends, while oscillators show when those trends are ready to reverse.

Volume and open interest also reflect crowd behavior. Part Five will focus on them as well as on the passage of time in the markets. Crowds have short attention spans, and a trader who relates price changes to time gains a competitive advantage.

Part Six will focus on the best tools for analyzing the stock market as a whole. They can be especially helpful for stock index futures and options traders. Part Seven will present several trading systems. Part Eight will discuss several classes of trading vehicles. It will outline pluses and minuses of equities, futures, options, and forex, while blowing away the promotional fog that clouds some of these markets.

Part Nine will lead you into the all-important topic of money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your risk management is poor, then a short string of losses will destroy your account.

Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, and scanning. These practical details will help you implement any system you like. THE ODDS AGAINST YOU 5 Part Eleven will guide you through the principles and templates of good record- keeping.

The quality of your records is the single best predictor of your success. Last but not least, this book has a separate Study Guide. It asks over questions, each linked to a specific section of the book. All questions are designed to test your level of understanding and discover any blind spots. You are about to spend many hours with this book. When you find ideas that look important to you, test them in the only way that matters—on your own mar- ket data and in your own trading.

You will make this knowledge your own only by questioning and testing it. The Odds against You Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage. You pay commissions for entering and exiting trades.

Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or better, or not at all. Most amateurs are unaware of the harm done by commissions and slippage, just as medieval peasants could not imagine that tiny invisible germs could kill them.

The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets, while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry.

A Minus-Sum Game Winners in a zero-sum game make as much as losers lose. A single bet has a component of luck, but the more knowl- edgeable person will keep winning more often than losing over a period of time.

For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. Commissions and slippage are to traders what death and taxes are to all of us.

They take some fun out of life and ultimately bring it to an end. A trader must sup- port his broker and the machinery of exchanges before he collects a dime.

You have to be head and shoulders above the crowd to win a minus-sum game. Commissions Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value. Fortunately for traders, commission rates have plummeted. Without proper care, even seemingly small numbers can raise a tall barrier to success.

Shop for the lowest possible commissions. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time.

Design a trading system that will trade less often. A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade. Slippage Slippage means having your orders filled at a different price than what you saw on the screen when you placed your order.

It is like paying 50 cents for an apple in a grocery store even though the posted price is 49 cents. There are two main types of orders: market and limit. Your slippage depends on which of these types you use. If prices of apples are rising when you place your order, you may well pay more than you saw on the screen when you pushed the buy button.

You may get hit by slippage. Slippage on market orders rises with market volatility. When the market begins to run, slippage goes through the roof. Do you have any idea how much slippage costs you? There is only one way to find out: write down the price at the time you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts. Needless to say, you need a good record-keeping system, such as a spreadsheet with columns for each of the above numbers.

We offer such a spread- sheet to traders as a public service at www. Remember that good record-keeping is essential for your success. You have to keep an eye on your wins and an even sharper eye on your losses because you can learn much more from them. Earlier we talked about commissions raising a barrier to success. The barrier from slippage is three times higher. There are thou- sands of stocks and dozens of futures contracts. Do not overpay! I almost always use limit orders and resort to market orders only when placing stops.

When a stop level gets hit, it becomes a market order. Get in slow but get out fast. Go long or short when the market is quiet, and use limit orders to buy or sell at specified prices. Keep a record of prices at the time you placed your order. Demand your broker fight the floor for a better fill when necessary.

Bid-Ask Spreads Whenever the market is open, there are always two prices for any trading vehicle—a bid and an ask. A bid is what people are offering to pay for that security at that mo- ment; an ask is what sellers are demanding in order to sell it. A bid is always lower, an ask higher, and the spread between them keeps changing. Bid-ask spreads vary between different markets and even in the same market at different times.

Bid-ask spreads are higher in thinly traded vehicles, as the pros who dominate such markets demand high fees from those who want to join their party. The bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day in an actively traded stock, future or option. They grow wider as prices accelerate on the way up or down and may become huge—dozens of ticks—after a severe drop or a very sharp rally.

Market orders get filled at the bad side of bid-ask spreads. A market order buys at the ask high and sells at the bid low. Little wonder that many professional trad- ers make a good living from filling market orders.

The Barriers to Success Slippage and commissions make trading similar to swimming in a piranha-infested river. The cost of computers and data, fees for advisory services and books—including the one you are reading now—all come out of your trading funds. Look for a broker with the cheapest commissions and watch him like a hawk. Design a trad- ing system that gives signals relatively infrequently and allows you to enter markets during quiet times.

Use limit orders almost exclusively—except when placing stops. Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.

Trading appears deceptively easy. A beginner may cautiously enter the market, win a few times, and start feeling brilliant and invincible. People trade for many reasons—some rational and many irrational. Trading offers an opportunity to make a lot of money in a hurry.

If you know how to trade, you can make your own hours, live and work anywhere you please, and never answer to a boss. Trading is a fascinating game: chess, poker, and a video game rolled into one. Trading attracts people who love challenges. It attracts risk-takers and repels those who avoid risk. An average person gets up in the morning, goes to work, has a lunch break, returns home, has a beer and dinner, watches TV, and goes to sleep.

If he makes a few extra dollars, he puts them into a sav- ings account. A trader keeps odd hours and puts his capital at risk. Many traders are loners who abandon the certainties of the routine and take a leap into the unknown. Self-Fulfillment Many people have an innate drive to achieve their personal best, to develop their abilities to the fullest. This drive, along with the pleasure of the game and the lure of money, propels traders to challenge the markets.

Good traders tend to be hardworking and shrewd people, open to new ideas. The goal of a good trader, paradoxically, is not to make money. His goal is to trade well. Successful traders keep honing their skills as they try to reach their personal best. He is so focused on trading right and im- proving his skills that money no longer influences his emotions. The trouble with self-fulfillment is that many people have self-destructive streaks. Accident-prone drivers keep destroying their cars, and self-destructive traders keep destroying their accounts.

Markets offer vast opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is a very expensive proposition. Traders who are not at peace with themselves often try to fulfill their contradic- tory wishes in the markets. One can squeeze only so much from a small piece of land. There is, how- ever, a field in which grown-ups let their fantasies fly—in trading. When I tried to show him the futility of his plan, he quickly changed the topic.

A successful trader is a realist. He knows his abilities and limitations. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional trader cannot afford illusions. Once an amateur takes a few hits and gets a few margin calls, he swings from cocky to fearful and starts developing strange ideas about the markets.

Losers buy, sell, or avoid trades due to their fantastic ideas. They act like children who are afraid to pass a cemetery or look under their bed at night because they are afraid of ghosts.

The unstructured environment of the market makes it easy to develop fantasies. Most people who grow up in Western civilization have several similar fantasies. This fantasy seems to explain the un- friendly and impersonal world. REALITY VERSUS FANTASY 11 In talking to hundreds of traders, I keep hearing several universal fantasies. They distort reality and stand in the way of trading success. A successful trader must iden- tify his fantasies and get rid of them. That fantasy helps support a lively market in advisory services and ready-made trading systems.

At an investment club we used to have in New York, I often ran into a famous financial astrologer. His main source of income remains collecting money for astrological trading predictions from hopeful amateurs. It is nowhere near as demanding as taking out an appendix, building a bridge, or trying a case in court.

Good traders are shrewd, but few are intellectuals. Many have never been to college, and some have dropped out of high school. Intelligent and hardworking people who have succeeded in their careers often feel drawn to trading. Why do they fail so often? The Undercapitalization Myth Many losers think that they would trade successfully if they had a bigger account. People destroy their accounts either by a string of losses or a single abysmally bad trade.

Often, after the loser is sold out, unable to meet a margin call, the market reverses and moves in the direction he expected. He starts fuming: had he survived another week, he would have made a fortune instead of losing! Such people look at market reversals that come too late and think that those turns confirm their methods. They may go back to work and earn, save, or borrow enough money to open another small account. But even if they raise more money, they lose that, too—as if the market were laughing at them!

A loser is not undercapitalized—his mind is underdeveloped. A loser can destroy a big account almost as quickly as a small one. An acquaintance of mine once blew out over million dollars in a day.

His broker sold him out—and then the market turned. He takes risks that are too big for his account size, however small or big. No mat- ter how good his system may be, a streak of bad trades is sure to put him out of business. Amateurs neither expect to lose nor are prepared to manage losing trades.

Calling themselves undercapitalized is a cop-out that helps them avoid two painful truths: their lack of a realistic money management plan and lack of discipline.

A trader who wants to survive and prosper must control losses. Learn from cheap mistakes in a small account. The one advantage of a large trading account is that the price of equipment and services represents a smaller percentage of your money. The Autopilot Myth Traders who believe in the autopilot myth think that the pursuit of wealth can be automated. Some people try to develop an automatic trading system, while others buy systems from vendors.

Men who have spent years honing their skills as lawyers, doctors, or businessmen plunk down thousands of dollars for canned competence. Most are driven by greed, laziness, and mathematical illiteracy. Systems used to be written on sheets of paper, but now they get downloaded on a computer. Some are primitive; others are elaborate, with built-in optimization and even money management rules.

Many traders spend thousands of dollars searching for magic that will turn a few pages of computer code into an endless stream of money. People who pay for automatic trading systems are like medieval knights who paid alchemists for the secret of turning base metals into gold. Complex human activities do not lend themselves to automation.

Most human activities call for an exer- cise of judgment; machines and systems can help but not replace humans. Had there been a successful automatic trading system, its purchaser could move to Tahiti and spend the rest of his life at leisure, supported by a stream of checks from his broker.

They form a small but colorful cottage industry. If their systems worked, why would they sell them? They could move to Tahiti themselves and cash checks from their brokers! Meanwhile, every system seller has a line. REALITY VERSUS FANTASY 13 programming better than trading.

Others claim that they sell their systems only to raise capital or even out of love for humanity. Markets are always changing and defeating automatic trading systems. A competent trader can adjust his methods when he detects trouble. An automatic system is less adaptable and self-destructs. Airlines pay high salaries to pilots despite having autopilots. They do it because humans can handle unforeseen events. When a roof blows off an airliner over the Pacific or when a passenger jet loses both engines to a flock of geese over Manhat- tan, only a human can handle such crises.

These emergencies have been reported in the press, and in each of them, experienced pilots managed to land their airliners by improvising solutions. No autopilot can do that. Betting your money on an automatic system is like betting your life on an autopilot. The first unexpected event will make your account crash and burn.

There are good trading systems out there, but they have to be monitored and ad- justed using individual judgment. You have to stay on the ball—you cannot abdicate responsibility for your success to a mechanical system.

Traders with autopilot fantasies try to repeat what they felt as infants. Their mothers used to fulfill their needs for food, warmth, and comfort. Now they try to recreate the experience of passively lying on their backs and having profits flow to them like an endless stream of free, warm milk. The market is not your mother. It consists of tough men and women who look for ways to take money from you rather than pouring warm milk into your mouth.

When I was growing up in the former Soviet Union, children were taught that Stalin was our great leader. Later we found out what a monster he was, but while he was alive, most people enjoyed following the leader. He freed them from the need to think for themselves. There are three types of gurus in the financial markets: market cycle gurus, magic method gurus, and dead gurus.

Cycle gurus call important market turns. Method gurus promote new highways to riches. Still others have escaped criticism and in- vited cult following through the simple mechanism of departing this world. Market Cycle Gurus For many decades, the U. stock market has generally followed a four-year cycle. The broad stock market has normally spent 2.

A new market cycle guru emerges in almost every major stock cycle, once every 4 years. The reigning period of each guru coincides with a major bull market in the United States. A market cycle guru forecasts rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronounce- ments.

A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads. Everybody wants a dark model, or a woman with a birthmark on her face.

Gurus always come from the fringes of market analysis. They are never establish- ment analysts. Institutional employees play it safe—afraid to stick their necks out— and almost never achieve spectacular results.

A market cycle guru is an outsider with a unique theory. A guru remains famous for as long as the market behaves according to his the— ory—usually for less than the duration of one 4-year market cycle.

At some point, the market changes and starts marching to a different tune. A guru continues to use old methods that worked so well in the past and loses his following. All market cycle gurus have several traits in common. They become active in the forecasting business several years prior to reaching stardom. Each has a unique theory, a few followers, and some credibility, conferred by sheer survival in the ad- visory business.

When the theory becomes correct, the mass media take notice. When a theory stops working, mass adulation turns to hatred. When you recognize that a successful new guru is emerging, it may be profitable to jump on his bandwagon. All gurus crash—and by definition, they crash from the height of their fame. The mainstream media is wary of outsiders.

When several mass magazines devote space to a hot market guru, you know that his end is near. Mass psychology being what it is, new gurus will continue to emerge. Traders always look for an edge, an advantage over fellow traders. Like knights shopping for swords, they are willing to pay handsomely for their trading tools. No price is too high if it lets them tap into a money pipeline. REALITY VERSUS FANTASY 15 A magic method guru sells a new set of keys to market profits—speedlines, cy- cles, Market Profile, etc.

It may have an edge in the beginning, but as soon as enough people become familiar with a new method and test it in the markets, it inevitably deteriorates and starts losing popularity. Oddly enough, even in this era of global communications, reputations change slowly. A guru whose image has been destroyed in his own country can make money peddling his theory overseas.

That point has been made to me by a guru who com- pared his continued popularity in Asia to what happens to faded American singers and movie stars. They are unable to attract an audience in the United States, but they can still make a living singing abroad. Dead Gurus The third type of a market guru is a dead guru.

The dead guru is no longer among us and cannot capitalize on his fame. Other promoters profit from his reputation and expired copyrights. One dear-departed guru is R.

Elliott, but the best example of such a legend is W. I interviewed W. He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. He could not afford a secretary and made his son work for him. When W. The legend of W.

Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers. The Followers of Gurus A guru has to produce original research for several years, then get lucky when the market turns his way. While some gurus are dead, those who are alive range from serious academic types to great showmen. To read about scandals surrounding many gurus, try Winner Takes All by William R. When we pay a guru, we expect to get back more than we spend.

We act like a man who bets a few dollars against a three-card Monte dealer on a street corner. He hopes to win more than he put down on an overturned crate. Only the ignorant or greedy take the bait. Some people turn to gurus in search of a strong leader. They look for a parent-like omniscient provider. The public wants gurus, and new gurus will come. As an intelligent trader, you must realize that in the long run, no guru is going to make you rich.

A guru is someone claiming to lead the crowds across the desert for a donation. No such pitches here! I always begin by explaining that there are no magic methods, that the field of trading is as huge and diverse as that of medicine, where one needs to choose one specialty and work hard to become good at it.

I chose my path a long time ago, and what I do in front of a class is simply think out loud, sharing my modes of research and decision making.

Trade with Your Eyes Open Wishful thinking is stronger than dollars. Recent research has proven that people have a prodigious ability to lie to themselves and avoid seeing the truth. Duke University professor Dan Ariely describes a clever experiment.

Needless to say, they score above the rest. Next, everybody is asked to predict their grades on the next IQ test, in which there will be absolutely no cheat sheets—and those who predict correctly will get paid. Surprisingly, the half of the group that scored higher with cheat sheets predicted higher results for the next test.

The cheat- ers wanted to believe they were very smart, even though their incorrect predictions of success would cost them money. A successful trader cannot afford wishful thinking—he must be a realist. There are no cheat sheets in the markets—you can see the truth in your trade diaries and equity curves. To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan.

These are like three legs of a stool—remove one and the stool will fall. It is a typical beginner mistake to focus exclusively on indicators and trading systems. You have to analyze your feelings as you trade to make sure that your decisions are sound. Your trades must be based on clearly defined rules. Self-Destructiveness Trading is a very hard game. A trader who wants to win and remain successful in the long run has to be extremely serious about his craft. He cannot afford to be naive or to trade because of some hidden psychological agenda.

Unfortunately, trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. The markets are un- forgiving, and emotional trading always results in losses.

It exists in all societies, and most people have gambled at some point in their lives. Freud believed that gambling was universally attractive because it was a substitute for masturbation. The repetitive and exciting activity of the hands, the irresistible urge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of guilt link gambling and masturbation.

Ralph Greenson, a prominent California psychoanalyst, has divided gamblers into three groups: the normal person who gambles for diversion and who can stop when he wishes; the professional gambler, who selects gambling as his means of earning a livelihood; and the neurotic gambler, who gambles because he is driven by unconscious needs and is unable to stop. A neurotic gambler either feels lucky or wants to test his luck. Winning gives him a sense of power.

He feels pleased, like a baby feeding at a breast. In the end, a neurotic gambler always loses because he tries to recreate that omnipotent feeling of bliss instead of concentrating on a realistic long-term game plan. Women tend to gamble as a means of escape. Losers usually hide their losses and try to look and act like winners, but are plagued by self-doubt.

Trading stocks, futures, and options gives a gambler a high, while looking more respectable than betting on the ponies. Gambling in the financial markets has a greater aura of sophistication than playing numbers with a bookie.

Gamblers feel happy when trades go in their favor. They feel terribly low when they lose. The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month. This will give you a chance to re-evaluate your trading. If the urge to trade is so strong that you cannot stay away from the action for a month, then it is time to visit your local chapter of Gamblers Anonymous or start using the principles of Alcoholics Anonymous, outlined later in this chapter.

Self-Sabotage After practicing psychiatry for decades, I became convinced that most failures in life are due to self-sabotage. We fail in our professional, personal, and business affairs not because of bad luck or incompetence, but to fulfill an unconscious wish to fail.

A brilliant friend of mine had a lifelong history of demolishing his success. As a young man, he was a successful pharmacist but lost his business; became a broker and rose near the top of his firm but was sued; turned to trading but busted out while disentangling himself from previous disasters.

He blamed all his failures on envious bosses, incompetent regulators, and an unsupportive wife. He had no job and no money. He borrowed a quote ter- minal from another busted-out trader and raised capital from a few people who had heard that he had traded well in the past. He started making money for his pool, and as the word spread, more people invested. My friend was on a roll.

At that point, he went on a speaking tour of Asia but continued to trade from the road. He took a side trip into a country famous for its brothels, leaving a very large open position in bond futures, with no protective stop. By the time he returned to civilization, the market had staged a major move and his pool was wiped out. Did he try to figure out his problem?

To learn? No—he blamed his broker! After- wards I helped him get an attractive job at a major data company, but there he be- gan to bite the hands that fed him and was fired. In the end, this brilliant man was going door to door, selling aluminum siding—while others made money using his techniques. When traders get in trouble, they tend to blame others, bad luck, or anything else.

It hurts to look within yourself for the cause of your failure. A prominent trader came to me for a consultation. His equity was being demol- ished by a rally in the U. dollar, in which he was heavily short.

He had grown up fighting an abusive and arrogant father. He had made a name for himself by betting large positions on reversals of established trends. This trader kept adding to his short position because he could not admit that the market, which represented his father, was bigger and stronger than he was.

These are just two examples of how people act out their self-destructive tenden- cies. We sabotage ourselves by acting like impulsive children rather than intelligent adults.

We cling to our self-defeating patterns. They can be treated—failure is a cur- able disease. The mental baggage from childhood can prevent you from succeeding in the markets. You have to identify your weaknesses and work to change. Keep a trading diary—write down your reasons for entering and exiting every trade.

Look for repetitive patterns of success and failure. The Demolition Derby All society members make small allowances to protect one another from the conse- quences of their mistakes. When you drive, you try to avoid hitting other cars, and they try to avoid hitting you.

If someone cuts in front of you on a highway, you may curse, but you will slow down. If someone swings open the door of a parked car, you swerve. You avoid collisions because they are costly for both parties. Almost all professions provide safety nets for their members. Your bosses, col- leagues, and clients will warn you when you behave badly or self-destructively. There is no such safety net in trading, which makes it more dangerous than most human endeavors. The markets offer endless opportunities to self-destruct.

Buying at the high point of the day is like swinging your car door open into the traffic. When your order to buy reaches the floor, traders rush to sell to you—to tear off your door along with your arm. Other traders want you to fail because when you lose they get your money. Every trader gets hit by others. Every trader tries to hit others. The trading highway is littered with wrecks. Trading is the most dangerous human endeavor, short of war.

Controlling Self-Destructiveness Most people go through life making the same mistakes decade after decade. Some structure their lives to succeed in one area, while acting out their internal conflicts in another. You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad luck or on others, and take responsibility for your results. Start keeping a diary—a record of all your trades, with reasons for entering and exiting them.

A trader needs a psychological safety net the way a mountain climber needs his survival gear. I found the principles of Alcoholics Anonymous, outlined below, to be of great help at an early stage of trader development. Strict money management rules also provide a safety net, while the diary helps you learn from your mistakes as well as successes.

Trading Psychology Your success or failure as a trader depends on your emotions. You may have a brilliant trading system, but if you feel arrogant, frightened, or upset, your account is sure to suffer.

In trading, you compete against the sharpest minds in the world. Commissions and slippage slant the field against you. Now, on top of that, if you allow your emo- tions to interfere with your trading, the battle is lost.

My friend and partner in SpikeTrade. Many traders with good systems wash out because psychologically they are not prepared to win. Bending the Rules Markets offer enormous temptations, like walking through a gold vault or through a harem. Those feelings cloud our perceptions of market reality. Most amateurs feel like geniuses after a short winning streak.

It is exciting to believe that you are so good that all your trades are sure to be winners. Traders gain some knowledge, win, their emotions kick in, and they self-destruct. The hallmark of a successful trader is the ability to ac- cumulate equity. Be sure to follow money man- agement rules. Keep a spreadsheet listing all your trades, including commissions and slippage. At the early stages of your trading career, you may have to devote as much energy to analyzing yourself as analyzing the markets.

When I was learning to trade, I read every book on trading psychology I could find. Many writers offered sensible advice.

Plan a trade, and trade a plan. Change your plans when markets change. Others advised being open-minded, keeping in touch with other traders, and soaking up fresh ideas. Each piece of advice seemed to make sense, but they contradicted one another.

I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected—until I had a sudden insight. The idea that changed how I trade came from psychiatry. The Insight That Changed My Trading Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program.

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The Triple Screen trading system is my own method. There is a collection to cover expenses-most people give a dollar. This self-discipline is critical to your success. Most drunks do not want to give up that pleasure. They are like a driver whose car spins out of control on a mountain road.

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