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    Secrets of successful_traders Secrets of successful_traders Document Transcript

    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Secrets ofSuccessful Traders Make Money From The Stock Market…Guaranteed 1
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition TABLE OF CONTENTFrom The Desk of CEOThe Game PlanChapter 1 Why Trade In The Stock MarketChapter 2 Path To ProfitsChapter 3 It Begins With YouChapter 4 Roadmap To Profitable TradingChapter 5 Question Answer SessionChapter 6 How Stock Market WorksChapter 7 Some Key Terms You Must KnowChapter 8 Trading SecretsChapter 9 How to Select A Good BrokerChapter 10 Trading Rules 2
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition FROM THE DESK OF CEOFirst of all, I would like to thank you for taking the time to download and read this E-Bookand secondly I would like to congratulate you.What you are about to read might be the answer to help you to make more money inyour life. To make the learning process easier and more enjoyable, Ive presented thelessons with the help of examples and images. Youll find it more entertaining. If you area quick reader, you might read through the whole book in less than 4 hours.Lot of people has the misconception that trading the stock is an easy task. The physicalact of trading is easy but making money consistently is not; otherwise everyone wouldbe rich.The tips were about to give you probably wont make you millionaires OVERNIGHT. ButThey WILL give you that tasty edge you need over your other traders.Reminding You that "Knowledge Is Power"A FEW ASSUMPTIONS ABOUT YOU1. You havent spent your last dime to buy this EBook. You will need some money(though a lot less than any traditional stock trading system, say $1000) to trade inthe stock market following the strategies I am going to discuss in this EBook.2. You need to have a burning desire to make money from the stock market. What youare going to learn in this EBook is not at all complicated but it would require someconcentration and consistent effort. 3
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIf you make half-hearted attempt to complete to complete the tasks and smallassignment then please do not expect to get extra-ordinary results.To your trading success2StockTrading TeamWebsite: http://www.2stocktrading.comEmail: support@2stocktrading.com 4
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition THE GAME PLAN…!!The book is broken up in two sections. The first section is called “Skills You Need” andis made up of all the skills you must have to be successful in the trading business. Theseinclude ideas like setting and accomplish goals, skills you need to be successful and lotmore.This section is also going to reveal that Killer Strategy that is going tomake your $1000 into $1,000,000 in 5 years or less…The second section is called “Insider Secrets” and is made up of trading secrets WallStreet people don’t want you to learn. This section begins with the basics of stockmarket- how does stock market functions and cover everything else you need to knowabout it. 5
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition WHY TRADE IN THE STOCK MARKET…!!Somebody has rightly said -"If you dont know where are you going… …you will probably end up nowhere."So the question you should ask yourself is:Why should I start trading in the stock market?Is it the fun and excitement? Do you want to be rich? Perhaps you enjoy status of beinga trader? Do you want to do a part-time trading or a full time trading? Or maybe you justwant to secure your future.For some traders, its an escape. They hate the world around them-their job, their boss,their spouse. No matter what is your reason behind trading, but trading has to be aboutonly one thing......Making A Profit 7
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionBut making profit doesnt mean that youll double your money every few weeks and startdating Hollywood movie stars with your newfound wealth. If anyone tells you that, pleaselaugh at him loudly.Trading is NOT A Get-Rich-Quick Scheme. It takes time to earn money and becomesuccessful.The most basic problem that we have found most traders struggling with is lack ofdirection.Traders come into the market hoping to make money, but without any strategy. Manytraders fail because their plan is too shallow or they dont even have a plan.Planning is a critical ingredient in a successful trading decision. It is rightly said-Failing To Plan Is Planning To Fail".We know quite a few traders who have made a tremendous amount of money in themarket, but within a year or two, they lost all of it.What Is The Reason...!!These traders viewed trading as a "Get rich quick scheme" and not as a real business.Their only true objective was to make as much money as possible, without any plan orconsistency.These traders believe that the "End justifies the means", which means that makingmoney, despite bad habits and reckless trading is good enough for them.They end up losing everything. 8
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionTrading is a perfect business. And the best part is you can do it full time as well as parttime. The choice is completely yours. But both type of trading requires a different set ofrules, strategies, mindset and lot many things.We will talk about that in the later section of this book. But for now, you must decide-Why do you want to trade?STOPI want you to do a little exercise and please don’t skip this. If it is here then it isimportant.Close your eyes and visualize what being a successful trader means to you. Seeyourself doing trading and making money consistently days after days and week afterweeks.Imagine the feeling of happiness it creates when you see money keeps on going to yourbank account. How does it feel getting richer every passing day?This is really a great exercise and works in almost any situation. It helps you formulate asolid, worthy, personal goal and keep you motivated and focused throughout this EBook.ASSIGNMENT NO#1Write down one primary goal you want to accomplish bytrading in the stock market. 9
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionTake that goal and write it (-It is important) on a 3 X 5 card and put it where you see itwhen you wake up in the morning and before you go to sleep each night.If you really want to burn this goal into your subconscious mind you should read it aloudeach morning and before you go to sleep each night.Believe me, this technique really works. This is not some "corny" technique I am writinghere- this is one of the key technique Napoleon Hills teaches in "Think and GrowRich", the classic book on how to turn your thoughts into riches.REMEMBERI’ve included this excellent EBook in the package as a bonus. Must have foreverybody…!!You can see this technique live in action in some of the books written by marketing guru-Yanik Silver.So do you have your goal clearly stated and written down?Good. Lets move on to the next part... 10
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Have you completed the assignment given in the lesson # 1? If not, please complete it before you go ahead. THE PATH TO PROFITRecently we conducted a survey. We asked a very simple question to thousands oftraders-"What is the one thing you must start out with to become a successfultrader?"We got answers like - Good knowledge, Determination, Insider news, Patience,Technical Analysis.... The answers are all on the target. But in trading to score big youneed to hit the bulls eye. And none of them did.The bulls eye answer is –Sound Preparation- An Excellent Trading Strategy 11
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIt is amazing to see how so many people think they can enter into this business and besuccessful without any training, knowledge, or plan of attack. Think about it.Can a person living next door just open up an office and be a successful doctor or anengineer? Can he beat Ricky Ponting or Sachin Tendulkar in cricket without practice andlot of hard work?No way, it takes knowledge and training. Well, its the same in trading stocks.So heresyour first very important trading lesson. In just seven words-The Path To Profit Begins With PreparationThere are a lot of people these days investing and making money in the stock marketsall over the world. It can really be profitable, safe, fun, very exciting and sometimes, itsalmost fascinating.Trading in the stock market is the worlds fastest route to freedomYes, get it right and trading is the worlds fastest way for you to get rich and be free. Getup when you wish, go out where you want. Meet up with friends or spend time with thefamily. You could just sit around and do nothing!And thats just the start......Imagine All Those Things That You Can Achieve Trading Successfully.But at the same time, trading could be the fastest way to go bankrupt. It should be nosurprises to learn that over 90% of the traders FAIL to make money from the stockmarket. 12
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionReason….!!Quite often, the problem begins with the Preparation. Traders are so eager to enter themarket and make money; they sometimes forget one very important thing SoundPreparation.We have designed this book that will take you through the entire trade preparationprocess. This book will provide you the enough information to put you into the top 10%of traders who consistently make money from the stock market.We cant guarantee that you will become an expert trader instantly after reading thisbook. What we can guarantee is that if its in here, its important. Dont skip a line.Read the book online. Or print it out. But either way, read it when you dont have a lot ofother things to do and can concentrate. 13
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionI am not saying that you have to read the whole book in one sitting. It doesnt matter howlong it takes you; what matters is that you do work through it, understand it - andapply the lessons.The fun and the cash come after the foundations are properly laid. The wrong mindsetand lack of preparation only leads to one thing….FAILURE 14
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIT ALL BEGINS WITH YOU…!!Ready to start..?Great! Lets get started...Let me share this funny abstract from Norman Halletts Mental Fitness For Traders.The story given below may sounds little bit funny to you but this is how most of thetraders trade in the stock market.I will also tell you the reason why I am sharing this abstract with you. But first, you gothrough this...A Typical Trading ScenarioYouve done your homework.Countless hours of seeking out the right guru (or piecing together your own system).Weeks of monitoring your gurus daily trade picks (or paper-trading and back-testingyour homemade system)No seat of the pants trading for you!OK, now youre confident. Its time to put your money where your homework is. Youvehad your coffee and your first trade signal is before you.Confidence high. Trade made. First loss. Not a problem. 15
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYou understood before you started that successful traders both win and lose and "losingis part of the overall winning". Youve also heard more than once that "successful tradersdont win on every trade."Moving on, still confident. Next trade made. Another loss, but...This one hurt your pride a little because you got stopped out early in the trade, and thenthe market rebounded and would have hit your profit target if you werent stopped out.You double check.Yep, you placed the stop where your trading system told you to place it. You kind of hada feeling that the early weakness in the market was just profit-taking from the previousdays trading, but youre trading a system and you must stick to it.Wounded, but resilient.After a good nights sleep and a few mouse clicks, your new daily trades are in front ofyou. Hey, this one looks good! Its a little bit more risk than yesterdays trades had, butlook at that profit potential!With a smiling face, the trade is executed. With a nice start to the trade, youre feelinggood and youve moved your stop to breakeven, just like your system said.Surprise piece of news! Market reverses - blows through your stop – an"unexpected" loss.Is something wrong with the system? Has the overall market "personality" changed,affecting your system to the core, rendering all your back-testing irrelevant? 16
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYour confidence turns to doubt.You decide to "watch" the next trade... I mean, isnt it wise to make sure the system getsback on track before you "throw good money after bad?"Isnt that what a conservative trader does?Trade watched. It wins!In your head, you beat yourself up a little because you know that when you started your"live" trading, you made an agreement with yourself to take the first 10 trades "no matterwhat"... and here you wimped-out and missed a big winner that would have gotten youeven.Whats happening…?“Whats happening is that you are out of control. Your emotions are ruling yourtrading.”Did you like the story?Click Here To Claim Your Free Copy of Mental Fitness For TradersBut do you know why I shared this story with you?Because, the above scenario plays out in every trader from time to time... newbie andveteran alike.And hence, trading in the stock market doesnt begin with the trading. 17
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition...It begins with youYou have to know yourself before even you think about the stock market. To become asuccessful trader, you must have what it requires. There are certain qualities, which youneed to develop in yourself.Its not talent, not luck that decides how much money you can make from the stockmarket, but self-motivation, enthusiasm and discipline.Any successful trader bound to have qualities like- focus, direction and commitment. Totrade like the professional traders, you are going to need all these skills.Do you have these qualities? Determination Enthusiasm Focus 18
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Adaptability Discipline Money Management Self-Motivation Patience Commitment PerseveranceBecome successful is a major commitment. If youre afraid of long hours, hard work,hate risk, arent committed to doing whatever it takes to win -Do yourself a favor: Stop reading and send this book on to a friend. I dont know you,but I do know one very important thing about you: You dont have what it takes. Face it,and get on with your life.But those who are still reading this book, heres some good news-You can minimize the risk involved in the stock trading by following the advice in thebook. Your decision to become a successful trader indicates that you are determined towin. You are a person with positive mind.Successful trading requires all the above-mentioned qualities and you must acquirethem in order to come under the 10% category of the successful traders.Remember, 90% of the traders fail to make money from the stockmarket. 19
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionDo not expect to be successful at trading instantly, you have to learn this business aswell, the same way you learn any other.Your attitude towards trading will affect your outcome. Trading is a business, so treat itlike one. Being over confident could cost you money, just as being under confident couldmean you miss opportunities.REMEMBERWhen trading goes right, it can be a great feeling. When trading goes wrong itcan be a nightmareFortunes are made in a matter of weeks and lost in a matter of minutes". Why the failurerate is so high? Why cant we start trading without any planning and preparation and why90% of people fail to make money from the stock market?And most importantly, is there any way to make “Sure-Shot money” from thestock market without taking much of risk? 20
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition ROADMAP TO PROFITABLE TRADING…!!So lets begin our journey of knowledge and profit with a very simple question.How Much Money Do I Require To Invest In the Stock Market?Isnt it simple? But the answer is not that simple.Do you know, thousands of people dont even invest in the stock market because theythink that to earn BIG you need to invest a lot of money into the stock market.Lets take an example to get the better understanding of the concept.ExampleSuppose you want to earn $10,000 from the stock market. Now out ofhundreds of companies listed in the stock exchange, you found out onecompany that can give you 100% return on your investment.So what is the minimum amount you will have to invest so that you canmake $10,000 even if the company gives you 100% return on investment?Yes. It is $10,000Sounds like TRUE???But would you believe if I say that this is one of the BIGGEST mistakes you can evermake as a trader. 21
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionFirstly, how many companies do you know that can give you 100% return on yourinvestment?Moreover, stock trading is always risky, no matter how well you trade. Majority of peopleend up losing after an initial earning. You can lose your whole investment in the stockmarket.So, wouldnt it be nice if you can start trading with a small amount ofyour hard-earned money and can still make huge profit?Always remember, the more money you use, the more emotional fuel you are pouringonto the fire. And as I already explained that to trade successfully you need to removeall emotional influences. Any emotion that you have in the trading equation, spells badnews. QUESTION So what method can you use to reduce emotions in the trading?Yes, I know its not easy for beginners to start making money from trading stocks withoutany knowledge. I know the frustration of losing because I was once a beginner and lostall my money trading stocks.In high school, I was interested in the stock market. But because I was an ordinary guy,without any special advantages, I had no money to invest. I went through engineeringschool and I invested my savings into the stock markets.You know what; I lost all that hard earned money.It wasn’t a very good situation... 22
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionNewsletters, bulletin boards, books, courses, software, data services, tips and more. Itried everything. Oh man, give it a rest!I tried all trading strategies Day Trading, Swing Trading, Trend Trading etc. And thetrading results? Well if there had been an award for the worlds worst trader, I wouldhave got the prize annually.Week after week, month after month, I was losing all my money. In fact I was only daysfrom being forced to quit trading because my account was nearly dry. The stress wasintolerable.But then one day it happened, I made Money.Yes, I have discovered a unique Fail Proof trading strategy and I started earningmoney consistently.Within few months profits started rolling in. Initially few hundred dollars, then fewthousand and more. It just kept on going - I was amazed and wondered where it wasgoing to end. And all of this from an account that was only days away from total wipeout.Can you imagine the feelings of happiness this creates? 23
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionOkay, No more suspense. Here is the secret of my success. Remember, it could beyours. But you have to promise that you will not disclose this to everybody.So here we go...Earn only 1% profit on your trades on an average interim of 5 days a week and youcan- "SAFELY Turn $2,000 into the HUGE 1 Million in 5 years or Less"Stop…!! I’m not done yet.Earn 1% profit every 3rd day a week and you can be a millionaire in just 5.7 years.But if you can earn this 1% profit on your trade 7 days a week, you can achieve yourtarget of 1 Million in JUST 1.9 Years 24
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition QUESTION What do you mean by average interim?Average Interim is the time gap between two profitable trades. For example, if you earn1% on Monday and another 1% on Thursday, then your average interim time would be 3days.Shocked?Need Some Math Calculations?Okay, let’s do it.Lets assume that the initial amount you want to invest in the stock market is $2,000. STEP 1 Let’s calculate number of times you need to earn 1% profit to safely convert $2000 into $1 Million. 25
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionOpen your windows calculator by clicking on Start > Programs > Accessories >Calculator. Now set your calculator on scientific view by clicking on the "View" tab at thetop and then "Scientific". (See Below)Now the formula to calculate the number of times is given below PROVEN FORMULA (Log 1,000,000 – Log 1,000 -------------------------------------------- Log (1+0.01)NOTEPlease remember this formula. We are going to use it quite oftenTo calculate the logarithm of a number, you need to enter the number and then pressthe LOG button in the calculator. 26
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionLog 1,000,000 = 6Log 2,000 = 3.301Log (1+0.01) = 0.00432Put these values into the formula and you will get number of times you need to earn 1%profit to convert your initial amount of $2,000 into $1,000,0006 - 3.3---------- = 625 times (With $2000)0.00432Just Imagine 1% return on your investment then re-investing it all over again and doingthe exact same thing for just 625 times can turn your little investment of $2000 into $1Million.NOTEYou can replace $2000 (your initial amount) with any amount of your choice.Increase the initial amount to reduce the number of times you are required toearn 1% profitFor example, if you start with $3,000 instead of $2,000, then number of times you needto earn 1% profit would be:Log 1,000,000 = 6Log 3,000 = 3.477Log (1+0.01) = 0.00432Put these values into the formula, 27
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition6-3.47---------- = 586 times (With $3000)0.00432 STEP 2 How long will it take to convert your initial amount into $1 Million?Well, that depends a lot on your average interim. As I already told you, this is the timegap between two profitable trades.Lesser the gap, sooner the target...Number of days you are away from $1 Million can be calculated using this formula: PROVEN FORMULA Number of Days = Number of Times X Average InterimNOTEPlease remember this formula. We are going to use it quite oftenWe have already calculated that if you are starting with $2000 then you need to earn 1% profit 625 times in order to convert that into $1Million.Lets say your average interim time is 5 days. (By average interim time of 5 days I meanthat there is a time gap of 5 days between two profitable trades. Or in other words, youare earning 1% profit every 5th day a week) 28
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionTherefore, number of days = 625 X 5 = 3125 days or 8.5 Years CONGRATULATION…!! If you can earn 1% profit every 5th day, then re-invest it all over again and do the exact same thing for 625 times. I guarantee...you will have $1 Million in your account after 8.5 Years.And thats not all.What will happen if you can earn this 1% profit every 3rd day instead of5th?Hummm.... Lets find it out.Average Interim = 3 daysTherefore number of days = 625 X 3 = 1875 days or 5.1 YearsAmazing. Isnt it? ONE GREEDY QUESTION What will happen if I manage to earn 1% profit every day?Dont be ashamed. Little bit of greediness is acceptable. After all, you have just got anamazingly powerful and proven strategy.So lets try to find the answer for you. 29
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYou are asking, what will happen if you can 1% every day or 7 times a week. It meansthat now your average interim is now just 1 day instead of 3 days.Lets put the values into the formula,Number of days = 625 X 1 = 625 days or 1.7 YearsNOTEThe time you will take to become a millionaire is directly dependent on youraverage interim and amount of money you are starting with.The more frequently you average those profitable trades, the lesser time you willtake to become a millionaire. Similarly, the more money you begin with, the fewerthe years.Let’s repeat the whole process again but this time you are startingwith $1000 instead of $2000 or $3000. STEP 1 Calculate number of times you need to earn 1% profit to safely convert $2000 into $1 Million. Proven Formula (Log 1,000,000- Log 1,000) -------------------------------------------- Log (1+0.01) 30
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionLog 1,000,000 = 6Log 1,000 = 3Log 1.01 = 0.00432Put these values into the formula,6–3-------- = 694 Times.0.00432 STEP 1 Calculate number of days you are away from your $1 Million goal. Proven Formula Number of Days = Number of Times X Average InterimLet’s say, your average interim is 3 days. Put these values into the formula,Number of days = 694 X 3 = 2082 days or 5.7 year If you start with $1000 and earn 1% on an average interim of 3 days, I promise, you will have $1 Million in your account after 5.7 years. Remember, whether you do it not, these years are anyways going to pass away. 31
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionEnough Reading. Let me give you an assignment now.ASSIGNMENT NO # 2You want to start investing in the stock market. The initial amount you want toinvest is $15,000. Calculate number of years you are away from your goal of $1Million if your average interim period is 3 years.I will give you the answer in the next lesson… 32
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Have you completed the assignment given in the lesson # 4? If not, please complete it before you go ahead. QUESTION ANSWER SESSIONOkay, heres the answer to the question we asked in the previous question. AnswerNumber of Times = (Log 1,000,000 – Log 15,000) / Log (1+0.01) = (6 – 4.17) / 0.00432 = 423.6 or 424Number of Days = Number of Times X Average Interim = 424 X 3 = 1272 Days or 3.4 Years $15,000 To $1,000,000 in just 3.4 Years…But before we go further, Im sure you probably have some unanswered questions andconcerns. And you want me to answer all of them one-by-one.So let’s take your questions one-by-one and try to answer them.. QUESTION NO # 1 I am slightly confused, Can you suggest me an amount I should start trading with?Well, if you ask me I would say you should always trade the amount you can afford tolose. 33
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionAnd that’s not only me saying this. You go and ask any successful trader and I’m sure,everybody would be telling you the same thing.The beauty of this system is you can actually get started with any amount you want andcan still make huge amount of money. With this trading method, it doesn’t matterwhether you have $2000 in your trading account or you are starting trading with $50,000.But this should be the money you can afford to lose.NOTEThis is one very important rule of trading- Never trade with the amount you can’tafford to lose.I recommend you to begin with a smaller amount until you build trust on this system.$2000 or even $3000 is not a very big amount of money that you can’t live without. If youfollow this system correctly, you are bound to succeed. There is no way to fail.But if you happen to be the most unlucky person in the world and you lost all of yourmoney, it is after all only two thousand dollars. You can always earn it again.And if you can’t afford to take this much risk, then you have no business trading stocksusing anyone’s strategy. Stock market is always risky, no matter how you well invest.Please remember, whether you follow this method or not, these yearsare anyways going to pass away.But there are two conditions you need to fulfill -1. You have to be consistent in making 1% PROFIT.2. You cannot withdraw any amount from your account until you have reached your $1Million goal. If you do that, the whole system will get disturbed. 34
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition QUESTION NO # 2 What will happen if I start making 1% profit more frequently?As I told you in the previous chapter as well, the time you will take to earn $1 Million willdepends upon these two factors-1. The time gap between the two profitable trades.2. Amount of money you are starting with.Lesser the gap between two profitable trades, sooner the target of $1MillionSimilarly, if you are starting with bigger amount of money, then you need to earn 1%profit less number of times and hence you can achieve the target of $1 Million in muchless time.For example, if you are starting with $10,000 then you just need to earn 1% profit 463times. And if your average interim time is 3 days, then you are just 3.8 years away fromyour goal.But that doesn’t mean, you cannot repeat the same result if you have less money to getstarted. You can achieve even better results with the lesser amount but then you need tobe little bit more frequent in earning 1%.Let’s say, you are starting with $2000. So number of times you need to earn 1% is 625.Now if you can earn 1% every second day a week, or in other words, if your averageinterim time is 2 days, then…Number of days = 625 X 2 = 1250 days or 3.42 yearsIsn’t it interesting? 35
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition QUESTION NO # 3 Brokers like Ameritrade charges $20 as combined buy and sell commission. If I start with $2000 and go for 1% rule, there will be nothing left for me. What should I do?Yes, it is true that there are some brokers who charges you $20 as a combined buy andsell commission. So in order to get past your brokers commission either you sell youstocks at 1% + Commission or you can start with any amount greater than $2000.This is the reason why I recommend people to start trading with at least $2000 inaccount. But if you dont have $2000 to start trading with, dont worry.NOTEIn chapter 10- How to Select a Broker, I have given you a list of some of mostcheapest yet reliable brokerage firms.Their commission rates are quite reasonable and some of them won’t even ask you forany opening balance. You can literally get started with no money - $0.00! This can be astandard interest-earning trading account or any kind of IRA.We have not considered the commission into the formula because it varies a lot. Theday when you are trading with $25,000 in your account, this $20 commission would beinsignificant.Forget about everything else. You just have to keep earning 1% ormore... 36
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition QUESTION NO # 4 Can I go for 2% profit instead of just 1%?Yes certainly.If you wish, you may definitely stay for 2% gain as well. In fact, it would be a better ideato consider 2% return instead of 1% in the initial stage if you starting out with a lowbalance like $2000 and wish to recover your commissions in order to meet the goals ofthe system. QUESTION NO # 5 Will this system really works?This system is incredibly simple. Anyone can use it. You can get started with practicallyvery less amount of money and the risk is almost zero.You dont need special training or even a high school education. It doesnt matter howyoung or old you are and it will work for you at home or even while you are on vacationbut there is a catch....It only works if you have an investment strategy that can produce 1% gains or more on aregular basis. QUESTION NO # 6 I cannot make profit every time I trade. What to do?You are absolutely correct. Nobody can make profit every time he trades. That’simpossible. 37
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionProfit and loss are the part of trading and you cannot avoid losses in any condition. Notrading system in the world can claim to be 100% profitable. And hence it is the averageinterim we are focusing on.Your focus should be on earning 1% PROFIT regularly as frequently as you can ratherthat worrying about the losses.It is the average interim of 3 days that is turning your $2000 into$1,000,000 in 5.1 years.In the coming chapter, we will talk about how to minimize the loses, what is risk/rewardratio and lot many things but for now just remember- It is the average that spells the future. QUESTION NO # 7 Okay, give me the proof that this formula is correct?Good Question. I’m glad, you asked this.Okay, to find out the genuineness of this formula, let’s take some help from Microsoft.After all, they can’t be wrong.I want you to open Microsoft Excel Sheet. Now in the cell A1, I want you to enter theamount you are going to start with say, $2000.Now go to the cell B1 and type =1*A1/100 in the formula bar located just above that. 38
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionNOTE1*A1/100 is the 1% of whatever amount we have entered into the cell A1.Go to cell A2 and type =A1+B1NOTEA1+B1 is the sum of the “1% of whatever amount we have entered into the cellA1” and “your initial amount”. This will actually give you the amount you will getafter adding 1% into your initial amount.That’s it. Now point your mouse cursor at the bottom right hand side of the cell A2 – itshould change your pointer to “+” kind of symbol and drag it down the page (at least upto 630 rows down).Do the same with cell B1 - take your mouse pointer at the bottom right hand side ofthe cell B1 and drag it down the page (at least up to 630 rows down)Now your next task is to locate the figure that says 1,000,000 in the column A. If youhave done everything correctly, then you should get this on the cell number A626.That’s exactly we were looking for, This shows that you need to earn 1% profit for 625times and on 626th time you will have $1Million in your account if you are starting with$2000.NOTEYou can replace $2000 with any figure of your choice. For example, if you wish tostart with $10,000, simply enter $10,000 instead of $2000 in the cell A1.Similarly, if you wish to stay for 2%, type =2*A1/100 in the cell B1 instead of=1*A1/100. 39
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionPLEASE REMEMBER…You are not required to use this excel sheet at all. This is just to verifythat the formula we are using above is correct.So, what are you waiting for?Choose any reputed broker of your choice and give him a cheque of $1000 or maybe$2000 to start trading.Just Imagine 1% return on your investment then RE-INVESTING it all over again anddoing the exact same thing for just 625 times can turn your little investment of $2000 intoHUGE 1 Million.Still not impressed? Well, let me tell you initially even I wasnt impressed with a small 1%either. I wanted to make "MONSTER TRADES", ones that would produce bigger returnslike 100%, 200%, 300%, 400%, even 500% or more.But when I began to look much closer at the power of compound interest, I found it mucheasier to earn 1 % return consistently instead of waiting for the stock to go up by 50%.Forget about the huge returns, because the point I am trying to bring home here is...You dont have to make the “Monster Trades" to make big profits.The greatest feature about this trading system is that you can make a one-timeinvestment payment into your trading account and never make another payment fromyour own personal budget — and you can still become a millionaire easily because ofhow this system works. Even if you opened your trading account with as little as $2000or as much as you want. Just be consistent and keep locking in the small profits. Overtime the power of compounding can achieve some eye-opening results! 40
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition QUESTION NO # 8 Hey…! Can you suggest me a way to ADD some more spice into this?Yes.There’s even a better strategy if you are already trading into the stock market or if youwish to divide your money in two parts.You can divide your money in 2 parts. Follow this 1% rule with half of your money (or asmuch as you want). Place the sell order above 1% as soon as your order getsconfirmed. This way you dont have to watch the stock market again for the whole dayand you can get on with your life. Actually many people find it difficult to watch themarket for whole day due to their jobs or studies...Now the remaining half of your money can be invested in the stocks for swing trading orvery short term trading. Here you are looking for better profit margins of 5-15% with aholding period of 1-2 weeks.It is very simple. Nothing can be better than this. You are slowly but consistentlyincreasing your money using our 100% Proven and easy to implement 1% rule and atthe same time, you are making even more money using swing trading stocks. QUESTION NO # 9 So, how do I earn 1% or more profit EVERYDAY trading stocks?Well, I want to be honest to you. Earning money is an easy task but earning moneyconsistently is NOT. 41
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYou will require a fail proof strategy to achieve the target of 1% profit on your tradesconsistently. You cannot expect to become a professional trader just by reading thisEBook. It takes little bit of time, knowledge and practice.But once you see how easy it is to make money from the stock market following our sureshot method, you will not only use it but will also be telling everyone you know. Read allthe steps given below CAREFULLY.Now I want you to have a look at the following chart. This stock was upgraded before theopen on 25th May. Now if you look at the stock carefully you will find one very interestingthing and trust me, it is something that I found occurred in almost EVERY single stock’sperformance chart that I examined (and I examined a lot) on the day the given stock isupgraded. American Mortgage Acceptance Company (AMC)You’ll notice that the stock had closed the day before at about 9.9 (The dotted red showsthe Prev Cls line). You’ll also notice the stock shot up to 10 on open in the morning. But 42
    • 2007 SECRETS OF SUCCESSFUL TRADERS Editionthen it gets interesting: the price of American Mortgage Acceptance Company (AMC)dipped considerably in the period between the open at 9:30 am and 10:00 am.In fact, had you bought this security at precisely 10:00 AM New York time at about 9.9dollars per share, then set a limit sell order for just $10 per share, you would have hadyour sell order filled in just about 40 minutes. A 1% gain. I did it. And you can probablyguess where I’m going with this.Virtually every upgraded stock, (with significant research qualifications in place),dips around 10:00 AM in this fashion. And if you can place an buy order atprecisely 10:00 AM New York Time and sell at 1% profit every third day, you’llturn two thousand into one million in just 5.1 years.The dip is caused, naturally, by intraday profit-taking. In fact, even when a qualified (andI will explain these qualifications shortly) upgraded stock doesn’t climb on open orappear to dip, a 10:00 AM purchase of that stock normally will net you your 1% profitanyway, easily within a 7 day period on average, sometimes in a day, and often in justminutes.Now, this doesn’t mean you can just plunge into any randomly chosen upgrade after youlearn about it on the Web as long as you buy into it at 10:00 AM and expect to seemiracles happen. There are a few pre-screening steps needed to ensure that yourspeculation is safe first.Now I know there is one question that must be coming to your mind and you want me toanswer that as soon as possible. Well, let’s do it. 43
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition ONE URGENT QUESTION How safe is it to put your whole account balance into one stock?Okay let me ask you a question, how safe it is to invest in some blue chip stock for ayear. You see, one year is quite a good amount of time and anything can happen inbetween. You just cannot predict the future and your investment may erode before theireyes.But here in this strategy we are not going to buy any randomly chosen stock withoutdoing proper research. I will tell you all the necessary steps that you need to perform sothat you can choose that winning stock among all other losers.And remember, one of the very important rules of trading is that- “never to putmoney into a trading account that you can’t afford to lose”. I’m only recommendingthat you begin with $2000. If the unthinkable happened and you lost it, you can decidethat, well, it is after all only two thousand dollars. You can always earn it again. If youfind that attitude unthinkable, then you have no business buying stocks using anyone’sstrategy. The market is risky no matter how you invest. QUESTION How do I find the upgraded stock that will rise 1% from my purchase price at 10:00 A.M?I am glad you asked this question. Finding that winning upgraded stock would requirelittle bit research. This is accomplished by following these steps: 44
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition STEP 1Check upgrade / downgrade listing of the stock in MSN Money or any otheronline financial website and make a checklist of the stock symbols.One key condition of purchasing any upgraded stock is that another firm has not alsosimultaneously downgraded it. Stocks that are both upgraded and downgraded the sameday make poor picks, and often fall.Upgrade: A positive change in the rating of a security. For example, an analyst mayupgrade a stock rating from buy to strong buy,Downgrade: A negative change in the rating of a security. This situation occurs whenanalysts feel that the future prospects for the security have weakened from the originalrecommendation, usually due to a material and fundamental change in the companysoperations, future outlook or industry.An analyst may downgrade a stock from a buy to a sell, after the company releasedinformation about a Securities and Exchange Commission investigation into thecompanys operations.NOTEI have taken MSN Money into consideration. If you use another service, you maynot find some of the features we are going to discuss very soon, so I do suggestusing MSN Money. The service is free, fast and accurate as well.The picture shown below is a snap shot of MSN Money for upgrade/downgrades. Hereis the URL that you can use for your purpose:http://moneycentral.msn.com/investor/calendar/ratings/current.asp 45
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionUpgrades / Downgrade: May 25Write down the symbols so that you can use it as a checklist in order to facilitate theelimination of disqualified stocks. You can either use your computer’s notepad or apaper for this purpose but I want you to keep these stock symbols available because weare going to need them very soon. 46
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition STEP 2Determine one year performance chart of each and every stock available In your checklist and eliminate those who do not meet our criteria.Next, one at a time, copy and paste each of the symbols from your checklist into anonline financial website like MSN Money, Yahoo Finance! Etc.Here’s the direct URL of MSN Money where you can paste the stock symbol into the boxand search for it.http://moneycentral.msn.com/investor/research/welcome.aspThis snap shot will give you a better picture…Let’s take BMC Software (BMC) to continue the process. We will paste the symbol,BMC, into the “Name or Symbol” field and click on go. This is what going to come up. 47
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionHere, we need to look at the one - year performance chart of the stock. So we’ll clickon “SNAPSHOT” which located at the right hand side of the page. (See Red Arrow inthe above shown picture). Now as soon as you click on the ‘Snapshot” link, it willopen a new page which would look like this: 48
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition IMPORTANTFollowing are some of the points that you must take into considerationwhile looking at the one-year performance of the stock:1. It should not be a low priced or a penny stock.2. It should not be under-performing for a longer duration of time.3. It should not be downgraded in the past week.4. It should not be a highly volatile stock.Let’s have a look at the one year performance of some stocks to have a betterunderstanding of all the points given above:RESULT: DoubtREASON: The stock has started rising up recently but has not been performingvery well for the last one year. ELIMINATE IT 49
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionRESULT: PassREASON: The stock has been an excellent performer over the last one year TAKE ITRESULT: Fail; REASON: The Highly volatile stock ELIMINATE IT 50
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionNOTERepeat this step for each stock in the list and eliminate or disqualify the oneswho does not meet the criteria. STEP 4 Determine the stock ranking with the help of “StockScouterRating” and eliminate the one who are below five.Now your next step would be to check out the rating of the stock. Here’s the snap shot ofBMC Software Scout Rating Summary: 51
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYou would also like to check for the recent headlines. Make sure that they are sayingnothing of a recent downgrade. Repeat the steps until you have left with just a fewstocks that have not been disqualified. STEP 5 Determine the Earning per share, P/E ratio, Earning growth rates and Analyst rating for the remaining stocks.Now, for each remaining stock we need to know just a few more things before making adetermination of which of the day’s upgrades are suitable, if any.Earning per share & P/E Ratio 52
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe P/E ratio is the Price to Earnings ratio, which tells us, in the example above, thatBMC Software stock price, is currently trading at 33 times its most recent earnings pershare. This is also called a stock’s multiple. If the stock had no earnings, the Earningsper Share would be zero or a negative number and the P/E would read N/A orsomething similar to that.If there are earnings shown, that is all we need to OK it. No earning shownmeans DISQUALIFY THE STOCK.Earning Growth RatesNow, the next two tests are absolutely the most important tests you will perform. First,we need to examine Earnings Growth Rates. This can be found using the “EarningEstimates” under Fundamentals on the right hand side of the same page.Look for the Earnings Growth table on the Research page. Make sure that the estimatedpercentage figure is:a) Not zero or a negative numberb) Greater than the figure presented for its Industry for the current financial year.This helps ensure that the business is expected to perform at or above the expectationsfor its competitors and that a subsequent downgrade or decline is less likely. Thesnapshot of BMC Software Inc. from MSN Money will give you some idea about “EarningGrowth Rates”. Please have a look at that: 53
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionAs you can see in the picture that earning growth rate of BMC Software Inc, is greaterthan the respective industry growth rate and therefore we will keep this stock for thefurther consideration.The second thing we need to look at is “Consensus EPS Trend” which can be foundon the same page. Make sure that EPS Trend for this quarter from 90 days, 60 days, 30days, 7 days and current must be flat or rising.Let’s compare Eldorado Gold Corp. and Palm Harbor Homes, Inc. in order to have abetter understanding of EPS Trend. 54
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionRESULT: FailREASON: Consensus EPS trend is FALLING DOWN ELIMINATE ITAnalyst RatingNext, (and on the same web page in MSN Money) take a look at the “Analyst Rating”.Here we can see the rating given by analyst to any particular stock. Make sure thataverage brokerage recommendation should be “Buy” or “Moderate Buy”. 56
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionRESULT: FailREASON: Average brokerage recommendation is HOLD ELIMINATE IT 57
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionRESULT: PassREASON: The average brokerage recommendation is MODERRATE BUY. TAKE ITDisqualify a stock that is even or outweighed in the opposite manner, i.e. in favorof Hold, Hold/Sell, and Sell.That’s it!Simply compare the equities on the list in these areas, and choose the one that “wins.”In every case there are invariably items of criteria that cause one stock to be morevaluable than another. If you get to this point but have difficulty deciding on one overanother, look deeper, if you like. 58
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionCheck recent news for any negativity in the stocks using the financial resource contentprovider. Disqualify the one with the most recent mention of anything negative in itsnews stories.The idea is to select the qualifying stock based upon these tests. It may come about thatno stocks that morning fit within the specified criteria. In that instance, simply sitout that session’s trading.This is not day trading; we do not gamble blindly on any stock which has seeminglyfavorable news, or plunge in with an attitude that we simply must be in some securityeach day. We carefully do the research.The fact is, the upgrade behaves as a signal to us of two things. It tells us someone else,hopefully more educated than us, has risked his or her reputation on improving therecommendation rating of an equity, thereby producing in the marketplace an actualshort-term addition of value for the security, not just a positive news story open tointerpretation which may or may not already be priced-in.And, it signals the possibility of a strongly valued stock in the long term, which we testfor, and which gives us the needed safety to risk going after the short-term gain from thestock’s newly upgraded status. What’s Next…!!Wait until exactly 10:00 A.M NYT before placing the buy order. You can also place thesell order immediately above 1% + brokerage of your buy price. This way you dont haveto watch the stock market again for the whole day and you can get on with your life. 59
    • Question I cannot do that alone, can you help me with this?Our strategy is extremely simple as it does not involve any chart reading, technicalskills or complex mathematical formulae. It may look like a lot of work but trustme, it is extremely SIMPLE. Do it yourself for couple of times and I am sure youwill find it very easy and interesting.But if you are still finding it difficult to earn 1% profit consistently, I can suggestyou an easier way.Wouldnt it be nice if you could simply place your trades before the market evenopened, and then go about your life - free of being forced to watch the stockmarket? You could have the potential of making serious amounts of money withminimal effort.You see, me and my 5 other colleagues have recently launched an exclusive stockmarket community. This is our dream project and were committed to make thisone of the biggest stock market communities in the world.Its called 5MinuteTrader.comThe website is already live and doing extremely well but we want to make sure thatour subscribers are getting at least 1000 times the value for their money.And therefore were looking for some beta-testers who can help us to add somemore value to the membership area. And this is where you come into the picturebecause without your help it is not possible for us to know what exactly are youlooking for and where are we lagging behind?
    • What else can we offer you to make this exclusive membership even morevaluable?Your feedbacks not only motivate us but they also help us to improve and serveyou better. And to encourage you to take part in this exclusive stock marketcommunity, we would like to offer you a deal. Heres it is –You give us your feedback and let us know what do you like about thismembership, what else do you expect and what can be done to make iteven better...I’ll give you 50% discount on the subscription fees. Plus, every time youllrenew the subscription, you’ll be paying just 50% of the subscription fees.So thats 50% LIFETIME discount.Click here to know more about the 5MinuteTrader.comClick here to subscribe at a discount price of $48.50 What benefits does this have over the “Secrets of Successful Traders” EBook?Our strategy is extremely simple as it does not involve any chart reading, technicalskills or complex mathematical formulae. In fact, a 10 year old kid can understandand implement it easily.But there is one problem – It may not work every day.
    • There are about 5 very simple steps described in EBook which you need to performto find out the wining stocks but sometimes you won’t find any stock passing ourselection criteria.And in that case, we recommend you to skip trading for that day. And there’snothing wrong about it – you just can’t trade the market every single day.And this is where 5MinuteTrader.com can be of great help.It is an exclusive membership that is going to provide you 89.3% accurate stockmarket recommendations in any market condition with exact entry price, exit price& stop loss...along with hundreds of articles, interviews, tutorials, EBooks, Videos, Quizzes,Forum, Discount and much more.Yes, it will be something that will hold-your-hand and put you among those 10%traders who consistently make money from the stock market no matter what.This membership is going to blow you away. It will be unlike anything youve everseen or heard about.Each and every section of the membership area will contain priceless informationthat will have you scratching your head. Youll constantly be saying to yourself,"Why didnt I think of that?"Believe me or not, this surely going to be one of the biggest stock marketcommunities in the world.And I hate to sound cheesy but I truly think theres a 99.99999% chance that ifyou just follow what Im saying right now it will...
    • CHANGE YOUR LIFE!Yes, that sounds a bit "hypey" and bold but its the truth. You must be thinking howcan I say it with such a confidence?Because... 5MinuteTrader.com™ is going to give you so much stuff to learn andsharpen your trading skills that you just cant stop loving it.Note: Please remember, 5MinuteTrader.com has nothing to do with ourstrategy and you are not bound to take their subscription at all. We’retelling you about 5MinuteTrader.com, just to give you one more option tomake money from the stock market.Our strategy is really simple and you can follow it yourself without anyhelp. The only thing which is required from your side is consistency. As Ialready told you that you dont have to make the “Monster Trades" tomake big profits.Click here to know more about the 5MinuteTrader.comClick here to subscribe at a discount price of $48.50Please note: This $48.50 special price is only available for "secretsof successful traders" customers. You wont find it anywhere else on thisinternet
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionA Quick Review 62
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition HOW THE STOCK MARKET WORKS…!!Well, I am in no mood to write 100 pages just to tell you how the stock market works. Ithink 10-20 pages would be sufficient to give you the clear picture. So lets not wastetime...Lets imagine that you want to start your own pizza shop. Now starting the pizza shopwould require some investment.For example, you would be investing in equipments, land, furniture, food supplies etc. Allthe money that you invest to start your pizza shop business is called as capital. Letssay, you would be requiring the investment of $2000 in order to start your pizza shopbusiness.But what will happen if you do not have the investment of $2000 in order to start yourpizza shop? In that situation, you have 2 options. 1. You would take a loan from somebody that need to be paid with interest. Or, 2. Issue stock (or share the ownership in the company) to people who may be willing to invest in your pizza shop in return for a proportional share of profits that your pizza generate.Okay, lets take both the situations one-by-one and find out the advantages anddisadvantages with them. 64
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionTake Loan from SomebodyDisadvantages It is not very easy to take loan. In our example, if we want to take loan from anybody, then the first thing we would be doing is to convince the person that his money is safe and we will be able to return his money back. The person who is giving us loan would certainly be interested in knowing about the future plans of the business and lot more things. Next, we will have to return all the money that we have taken as a loan with interest. This interest would increase as the time passes. The more time we take to repay the principal amount, the more interest we would be paying.Advantages You do not have to share the ownership of the company.Issuing StocksAdvantages A company can raise more money than it can borrow. You do not have to make periodic interest payments to your creditors. And you do not have to make the principal payments. 65
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionDisadvantages You have to share your ownership with the other shareholders Your shareholders have the voice in company’s policies that affects the company operation.So we can say that...Companies sell stock (pieces of ownership) to raise money and provide funding for theexpansion and growth of the business. The business founders give up part of theirownership in exchange for this needed cash.The total number of shares will vary from one company to another, as each makes itsown choice about how many pieces of ownership to divide the corporation into.One corporation may have only 2,500 shares, while another may issue over a billionshares such as IBM and Ford Motor Company.The very first sale of stocks to the public is called Initial public offering (IPO) andoccurs on primary market.I know there is one question coming to your mind and you want to know the answerbefore you go ahead. QUESTION Why would anybody invest (or buy stocks) in my pizza shop? What if my company fails?Your question is quite right. Why should anybody invest in your company? 66
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionAdvantages to ShareholdersWhen you buy stock in a corporation, you own part of that company. So as a part of acorporation, shareholder will be entitled to share the profits of the company.Now all the shareholders can be benefited by 2 ways: When a company pays out profits to the shareholder, the money received is called a "dividend". The corporations board of directors chooses when to declare a dividend and how much to pay. Or when performs well, the stock price will go up and shareholders can sell their stocks at a profit. This will happen when more investors want to buy stock in a company than wish to sell.So if someone sees a good future of your pizza shop and they can expect that theirmoney is going to grow with the company, they wont mind investing in your pizza shop.ExampleIf you have invested $1000 to buy 100 shares of a company at $10 each andthe share price rose to $13 each, you would gain $300. That is equivalent to30% return.Why People Sell StocksThere can be so many reasons behind that. A person may just need the money. He orshe may have watched the stock price go up, and have a feeling that this is the righttime to get out of the trade and lock in some profit. 67
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionAny bad news about the company or the industry, or a disappointing companys earningreport can also motivate him to sell the stock. He may also sell stocks because he seesa better opportunity in some company.For example, one may sell IBM shares, which is not moving, becausehe thinks he can make better profit in Microsoft.Most of time, investors sell the stocks because they have watched the price fall and inpanic, they just want to get out of the trade before they lose even more.The Process of Issuing StocksCorporations sell stock to public as one way to raise capital. They are not allowed to sellshares of stock on the open market without the approval of the Securities and ExchangeCommission (SEC).A 20 days wait is required before it can sell the stock.Companies may make their statement public with a preliminary prospect called "RedHearing". Basic information about the new offering is provided including how manyshares are being offered, which brokerage company will distribute the stocks to thepublic.Now the company cannot sell the stock directly to the company. So they hire aninvestment banker to help it sell its stocks. The process is called "Underwriting". Theinvestment banker works as a intermediary between the company and the public.In most cases, underwriter purchases the stocks from the company for resale to thepublic at higher price. 68
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe difference between the price the underwriter pays and the price the public pays iscalled as "Underwriting Spread".A stock issue can be underwritten by several methods. The underwriter can act as an agent, in which it tries to sell as much of the issue as it can at market prices. This is a best effort arrangement. The issuing company can also agree to issue new stock on the condition that all of it is sold. If all of the stock is not sold, then it will withdraw the issue. This is an all-or-none arrangement. A negotiated underwriting is when the issuer and the corporation negotiate the terms of the issue, the price, the size and other details. The issue may be subject to competitive bids from investment bankers. The top bidder underwrites the issue and resells it to the public. When a public company issues more of its stock, it must first offer that stock to existing shareholders; that is their preemptive right. A standby is the public sale of whatever stock the existing shareholders have not yet purchased. A firm commitment arrangement is when an investment banker buys all of the stock from the corporation and then resells it to the public at a higher price. A private placement is an offering in which the company sells to private investors and not to the public. Private placements do not have registration fees.The ProspectusProspectuses are legal documents that explain the financial facts important to anoffering. They must precede or accompany the sale of a primary offering. 69
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe law requires companies selling primary offerings to send prospectuses to anyonewho wants to buy a primary offering. Customers should read a prospectus carefullybefore purchasing any primary offering.Prospectus must include but are not limited to the following: Offering Price Legal Opinion about the issue Underwriting Method The history of the company Other costs related to the investing in the stock The management Team The handling of proceeds 70
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition SOME KEY TERMS YOU MUST KNOW…!!AskThe lowest price a seller is willing to accept when selling a security (stock). This is theopposite of bid, which is the price a buyer is willing to pay for a security, and the ask willalways be higher than the bid.The terms "bid" and "ask" are used in nearly every financial market in the world coveringstocks, bonds, currency and derivatives. An example of an ask in the stock market wouldbe $5 x 1,000 which means that someone is offering to sell 1,000 shares for $5.BearAn investor who believes the market as a whole or a particular stock will decline. Bearsattempt to profit from a decline in prices. Bears are generally pessimistic about the stateof a given market. A bear is the opposite of a Bull.BidAn offer made by a trader to buy a security. The bid will specify both the price at whichthe buyer is willing to purchase the security and the quantity to be purchased. This is theopposite of the ask, which stipulates the price a seller is willing to accept for a securityand the quantity of the security to be sold at that price.An example of a bid in the market would be $25 x 1,000, which means that an investor iswilling to purchase 1,000 shares at the price of $25. If a seller in the market is willing tosell that amount for that price, then the transaction is completed. 71
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionBook ValueThe Book Value is simply the companys assets minus its liabilities.Book Value = Assets – LiabilitiesIn other words, if you wanted to close the doors, how much would be left after yousettled all the outstanding obligations and sold off all the assets.A company that is a viable growing business will always be worth more than its bookvalue for its ability to generate earnings and growth.BrokerA person that buys or sells an investment vehicle for you (securities, bonds,commodities, etc.,) in exchange for a fee, which is called a commissionBullAn investor who believes the general market or a particular stock is going to increase inprice.Buy BackThe buying back of outstanding shares (repurchase) by a company in order to reducethe number of shares on the market. Companies will buyback shares either to increasethe value of shares still available (reducing supply), or to eliminate any threats byshareholders who may be looking for a controlling stake. 72
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionCash DividendMoney paid to stockholders, normally out of the corporations current earnings oraccumulated profits. All dividends must be declared by the board of directors, and aretaxable income to the recipients.Long-term investors who want to maximize their gains should consider re-investing thedividends. Most brokers offer a choice as to whether you wish to reinvest or take cashdividends.Closing PriceThe final price at which a security is traded on a given trading day. The closing pricerepresents the most up-to-date valuation of a security until trading commences again onthe next trading day.DividendA portion of a companys income that is paid out to shareholders on a quarterly or annualbasis. The Board of Directors declares dividends. Dividends may be in the form ofcash, stock, or property. Most secure and stable companies offer dividends to theirstockholders. Their share prices might not move much, but the dividend attempts tomake up for this.Earning Per Share (EPS)Suppose there are 2 companies- A and B. Both earn $100, but company A has 10shares outstanding, while company B has 50 shares outstanding.Which companys stock do you want to own? 73
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIt makes more sense to look at earnings per share (EPS) for use as a comparison tool.You calculate earnings per share by taking the net earnings and divide by theoutstanding shares.EPS = Net Earnings / Outstanding SharesUsing our example above, Company A had earnings of $100 and 10 shares outstanding,which give an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50shares outstanding, which equal an EPS of 2 ($100 / 50 = 2).So, you should buy Company A with an EPS of 10, right? Maybe, but not just on thebasis of its EPS. The EPS is helpful in comparing one company to another, assumingthey are in the same industry, but it doesnt tell you whether its a good stock to buy orwhat the market thinks of it.An important aspect of EPS that is often ignored is the capital that is required togenerate the earnings (net income) in the calculation. Two companies could generatethe same EPS number but one could do so with more equity. This tells investors that thecompany with the most equity is less efficient at using its equity to generate income.Investors also need to be aware of earnings manipulation that will affect the quality ofthe earnings number. It is important not to rely on any one financial measure but to usethem in conjunction with statement analysis and other measures.Earning YieldThe earnings per share for the most recent 12 months divided by market price per share.Earnings yield is the inverse of the price-earnings ratio. 74
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionFace ValueThe nominal value of a security stated by the issuer. For stocks, it is the original cost ofthe stock shown on the certificate.Initial Public Offer (IPO)It stands for Initial Public Offering. An IPO is when a company sells stock in itself for thefirst time.Joint Stock CompanyAn organization that falls between the definitions of a partnership and corporation. Thistype of company issues stock and allows for secondary market trading; however,stockholders are liable for company debts. This is a type of company that has access tothe liquidity and financial reserves of stock markets, but also has the restrictions of apartnership.Market CapitalizationA companys market capitalization (or "market cap") is calculated by taking the numberof outstanding shares of stock multiplied by the current price-per-share. It is the amountof money you would have to pay if you bought every share of stock in a company. No. of Outstanding Shares X Current PriceMarket Cap = ----------------------------------------------------------------------- Share Purchase Price 75
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe price that an investor pays for a security. This price is important, as it is the maincomponent in calculating the returns achieved by the investor.For example, if an investor buys XYZ at $35, then this would be the purchase price.When looking at the return on the investment, the investor would compare the purchaseprice of $35 to the price the investment was sold at or the current market price for XYZ.ShareCertificates representing ownership in a corporation. Shares are also known as stocks orequities.P/E RatioThe P/E ratio is how much money you are paying for $1 of the companys earnings. If acompany were currently trading at a P/E of 20, an investor would be paying $20 for $1 ofearningsThe P/E looks at the relationship between the stock price and the companys earnings.You calculate the P/E by taking the share price and dividing it by the companys EPS.P/E = Stock Price / EPSIn other words, if a company is reporting a profit of $2 per share, and the stock is sellingfor $20 per share, the P/E ratio is 10 because you are paying ten-times earnings[$20 per share dividend by $2 per share earnings = 10] 76
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIn general, a high P/E suggests that investors are expecting higher earnings growth inthe future compared to companies with a lower P/E.However, the P/E ratio doesnt tell us the whole story itself. Its usually more useful tocompare the P/E ratios of one company to other companies in the same industry, or tothe market in general, or against the companys own historical P/E.It would not be useful for investors using the P/E ratio as a basis for their investment tocompare the P/E of a technology company (high P/E) to a utility company (low P/E) aseach industry has much different growth prospects.Price / Earnings To Growth - PEG RatioA ratio used to determine a stocks value while taking into account earnings growth. Thecalculation is as follows:PEG Ratio = Price to Earnings ratio / Annual EPS GrowthPEG is a widely used indicator of a stocks potential value. It is favored by many over theprice/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lowerPEG means that the stock is more undervalued.Keep in mind that the numbers used are projected and, therefore, can be less accurate.Also, there are many variations using earnings from different time periods (i.e. 1 year vs.5 year). Be sure to know the exact definition your source is using.Short SellingThe selling of a security that the seller does not own, or any sale that is completed bythe delivery of a security borrowed by the seller. Short sellers assume that they will beable to buy the stock at a lower amount than the price at which they sold short. 77
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionSelling short is the opposite of going long. That is, short sellers make money if the stockgoes down in price.StockStock is ownership. A business is divided up into shares of stock and parts of thecompany (the shares) are sold to investors to raise money.A holder of stock (a shareholder) has a claim on a part of the corporations assets andearnings. In other words, a shareholder is an owner of a company. Ownership isdetermined by the number of shares a person owns relative to the number ofoutstanding shares.For example, if a company has 1000 shares of stock outstanding, and one person owns100 shares, that person would own and have claim to 10% of the companys assets.Stock SignalsThese are recommendation given by the experts about any stock. Various types ofrecommendations are given below:Strong Buy: Very high recommendation given by the analyst to purchase a specificsecurity.Buy: A recommendation to purchase a specific security. "Buy" is better than neutral butworse than "strong buy.Buy and Hold: A passive investment strategy in which an investor buys stocks andholds them for a long period of time, regardless of fluctuations in the market. An investorwho employs a buy-and-hold strategy actively selects stocks, but once in a position, isnot concerned with short-term price movements and technical indicators. 78
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionHold: An analyst recommendation to neither buy nor sell a security. Exact definitionsvary by brokerage, but generally this rating is better than sell and worse than buy. Thehold rating is right in the middle of the rating system. It means that if you own a securityyou still shouldnt sell, but you also shouldnt buy the security if you dont own it already.Also known as neutral.Sell: A recommendation to sell a particular security. This rating is generally worse thanneutral, but better than strong sell.Stop Limit OrderAn order placed with a broker to buy or sell at a specified price (or better) after a givenstop price has been reached or passed. This is essentially a combination of a stop orderand a limit order into one order and allows the investor to better control their entry or exitprice of a security.A stop order is an order that becomes executable once a set price has been reachedand is filled at the current market price. A limit order is one that limits the entry or exitprice to a set price or better. By combining the two orders it prevents the stop order frombeing executed at the market price which could be much different then what the investororiginally wanted by putting a limit on the price.For example lets assume that ABC Inc. is trading at $40 and an investor has put in astop-limit order to buy at $45. If the price of ABC Inc. moves above $45 the stop order tobuy the security becomes executable but because there is also a limit order attached itlimits the price that the shares can be purchased to $45 or less.In terms of buying a stock it allows investors to buy when the stock has upwardmomentum behind (moving from $40 to $45). 79
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionStop-Loss OrderAn order placed with a broker to sell a security when it reaches a certain price. It isdesigned to limit an investors loss on a security position. This is sometimes called a"stop-market order".In other words, setting a stop-loss order for 10% below the price you paid for the stockwould limit your loss to 10%.Its also a great idea to use a stop order before you leave for holidays or enter a situationin which you will be unable to watch your stocks for an extended period of time.Under performedAn analyst recommendation that means a stock is expected to do slightly worse than themarket return. Also known as market under perform moderate sell, or weak hold.Exact definitions vary between brokeragesUpgradeA positive change in the rating of a security. For example, an analyst may upgrade astock rating from buy to strong buy. 80
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition TRADING SECRETS…!!Although I cant discuss in very detail because of time and volume constraint, but forthose of you who are either considering starting, or have already started trading in thestock market I would like to share few very essential elements of trading.To begin with, lets me ask you again-Why few people always make money in the stock market?These people have few unknown amazing secrets of successful traders. In this chapter,I am going to disclose all those secrets. So keep reading...The secrets are trading psychology, proper money management and basic stock tradingsystem (entry, exit & trading rules). If you can master these three techniques, money willsurely flow into your hands.I call them secrets NOT because very few of us are aware of them, but because veryfew of us use them. Have a look at the pie chart given below. 81
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIt has been found that the entire trading process can be divided into these 3 elements. Trading Psychology Money Management Basic Stock Trading SystemI am going to reveal these secrets one-by-one. And I want you to pay some specialattention here. Lets begin with Psychology... TRADING PSYCHOLOGY- KNOWING YOURSELF IS A KEY 82
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionLet me share a story with you-This story is about two young men. Both of them graduated from the college on thesame day. Both of them have a passion towards stock trading, both were intelligent, bothof them were full of aspirations and wanted to become successful in the stock market.Both of them started trading at the same time. They started trading with same capital,same type of trading software and tools along with the same type of trading system withthe precise rules for entry and exit.But after one month, there was a difference in the amount they have earned during thatmonth trading stocks. After one month, one trader gone broke and other returned with25% returns on his investment.Any guess work???What makes this kind of difference in their trading results?Do winning traders have some special talent...? Do they have some inside knowledge ofthe stock market that is not available to others...? Is it that they have some kind ofpositive winning attitude...? ...a better computer and software?Its none of the above!The difference lies within you. Psychology plays a very important role in your way totrade. It is the relationship between your thoughts and actions that will determine howsuccessful you are as a trader and ultimately how much money you make.Your feelings have an immediate impact on your account equity. You may have abrilliant trading system, but if you feel frightened, arrogant, or upset, your account is sureto suffer. 83
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionWhen you recognize that a gamblers high or fear is clouding your mind, stop trading.Your success or failure as a trader depends on controlling your emotions.When you trade, you compete against the sharpest minds in the world. The field onwhich you compete has been slanted to ensure your failure. If you allow your emotionsto interfere with your trading, the battle is over.You are responsible for every trade that you make. A trade begins when you decide toenter the market and grids only when you decide to take yourself out. Having a goodtrading system is not enough. Most traders with good systems wash out of the marketsbecause psychologically they are not prepared to win.You must win the BATTLE WITHIN YOURSELF first, before you can win in the markets.The pie chart given in the beginning of this chapter shows that 50% of your tradingdepends upon your psychology. As traders we have to realize that we have no controlover the market and we cannot influence the direction of the market.You must develop the mindset (and the true understanding) that you are a winningtrader whether you are experiencing a run of losing trades or winning trades.Treat yourself as a professional trader. Know what motivates you, understand yourlimitations and become familiar with your strengths. This will help you to move smoothlythrough losing streaks so you can be there for the winning streaks.Most new and "intermediate" traders do NOTHING about their mental trading fitness.And this is how they trade in the market:"My god, Here I go again ! Cant I do anything right ! What will my wifesay if I lose this one !” 84
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThey are willing to spend thousands of dollars on "use-less" systems and out-of-townseminars, but are totally neglecting mental conditioning.You should be training as hard on your mental fitness as you do on preparing yourtrading signals. Dont get emotional about trading. Always remember, the current trade isonly one of a long series. You are in this business for the long term.Remember that and dont, ever, get too attached to any one trade.It is highly unlikely that you will become a successful trader if you allow your emotions tocontrol your trading decisions.Identify The Blocks To Winning PsychologyThe most destructive emotions leading to poor trading decisions are: Greed Fear Pride.Let’s talk about them one-by-one: 85
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionGREEDGreed tends to keep a trader from closing out a position when a reasonable profit hasalready been made, in the hope that the stock price will go even higher.It’s very easy to be greedy in this business. You always want more. If you have made100 points profit in a trade, you want 200. And the moment you have 200 points profit,you start looking for 300. This lack of satisfaction is one reason why some people getthemselves in trouble.So how would you avoid this feeling of greediness?To avoid being greedy with your trading, you may want to know the reason behind that-why is it so easy to be greedy with the trading?Greed stems from a belief that there’s never enough and there won’t be enough. Agreedy person will never be satisfied; he will always look for more no matter how muchhe already has.It seems that the reason people are greedy when trading is because they take non-market factors (like how badly they want money, why they want it, can they afford to risketc.) and apply them to the market and their trades.But it makes no sense because your non-market factors will NEVER decide that whichway market should move. So your non-market decision like I want to buy a fancy watchfrom this trade is not at all going to change the market direction.Market will move the way it wants to move.So when you cannot change the direction of the market, don’t let your non-marketdecisions make you greedy. Your greed makes you want more than the market may beoffering and it certainly influences you into not acting in your own best interest. 86
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionALWAYS REMEMBERWishing and hoping is never going to take you anywhere. Be practical. Do whatmarket is telling you to do…Staying in the market for too long (hoping for a huge windfall) is a strategy that backfiresmore often than not. Greed also tends to result in rash or impulsive trades.FEARFear will have traders selling existing positions too soon or avoid buying a stock thatshould be bought. In other word, fear leads to trading decisions becoming "paralyzed".Mark Douglass four fears are: Fear of Loss Fear of being wrong Fear of missing out Fear of leaving money on the tableI was once sitting in a room and trading futures. There I met a guy. I noticed that he wasvery unhappy and distressed. I asked him the reason. He had bet the farm shorting astrong bull market. He said-"I dont know why I just didnt cut the position earlier; anyone wouldhave seen the strength- why didnt I?"I never saw him again. 87
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThat is the effect of fear - it drives out knowledge; it leads to shortsightedness, itimmobilizes us and leads to inaction.Let me share an example offered in “The Discipline Trader”.A child bitten by a dog would quite often associate all dogs with the threat of pain, andconsequently generate an intense fear or even terror whenever he encounters any dogin the future.The child’s fear of all other dogs other than the one that bit him is real. He has no way ofmaking a distinction between a friendly and a dangerous dog because his personalexperience leads him to believe that all dogs are dangerous.However, the truth is something else…not every dog is dangerous. In fact, some of thedogs are quite friendly and wants to play with the child.But the child has no idea about that and his fear continues to grow even furtherwhenever he encounters any other dog. He thinks that the source of his fear lies in theoutside world.But that’s not the case here. His fear actually lies within himself. He has a wrongperception that ALL DOGS ARE DANGEROUS.The same goes to stock market. We could experience the similar fear during trade.When we focus on our losing trades, mistakes, etc. we give our subconscious mindpowerful direction. We could then end up with those same loses that we are trying sohard to avoid.Winning and losing are the part of the game. If you fail to make money once, it doesn’tmean that you not make money from any stock you trade in the future.This type of feeling makes no sense and you can get yourself in trouble while trading. 88
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionPRIDEPride tends to keep a trader in a losing position for too long because of unwillingness toadmit that the original trading decision may not have been the right one.Lets take an example to have a better understanding of Greed, Fearand Pride.Our Trader Harry is an inexperienced trader like most of the traders in the stock market.He is a kind of trader who wants to earn money from the stock market but he doesnthave proper knowledge, equipments, tools and strategies.The figure given below illustrates the way our trader Harry follows while trading in thestock market Behavior of an Inexperienced Trader 89
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe typical inexperienced member of trading Harry enters the market at point A. At thepoint A, the price of the stock is increasing and due to this increase in the price; he buysit and wants to earn some money out of an ongoing rally.Once a trade is entered, stock immediately moves strongly in his favor. Harry willsuddenly start seeing a villa in the sun or a new sports car flashing before his eyes.“This trade is going to the moon so he removes his price target anddecides to let it go.”Greed has now completely taken over his trading decisions and the previous plan (ifany) is ignored.Of course, markets rarely move in one direction for long so trade starts moving againsthim because experienced traders start to cash in (Profit booking) on their profits andthe rally quickly starts running out of steam.When the market turns, the greed turns to fear as the dream slips away and Harry triesto hold on until the price gets back to where it was. The daytrade becomes a positiontrade...Now Harry will fear that he has made a mistake. He fears making loss so he waits andhopes that the market moves back in his favor.The fear of taking loss now controls his trading decision. He is expecting that market willbounce back and he refuses to get out of the trade- the day trade becomes a position trade of a few days and then it becomes a longterm buy and hold strategy.When the stock declines to the point where Harry cannot take any more pain he getsout at point B, just before the stock finally hits its bottom. If for some reason he didntexit at point B, he will most likely exit at point C being happy to recover some of hislosses. 90
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionOur trader Harry is exactly the kind of "herd" trader that successfultraders prey upon.On the other hand, The successful trader will have tested their strategy extensively and will be aware that a losing is also a part of the game. They will also measure their success on whether they place the trade according to their system rather than whether it is purely a winner or a loser. The fear is removed from the trade because they know that several losers in a row is to be expected. The successful trader has set a target, either a certain price or a timed exit and will stick to it. If the trade only takes 5 minutes then thats just great, theres plenty that wont.To trade successfully you need to remove all emotional influences. Heres a littleexercise for you and believe me it can do wonders. So read it carefully. 91
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionAt the start of each trading day, before the market opens, take a few minutes foryourself. Close your eyes. Start visualizing the market. See the real time chart on yourcomputer screen.Watch as the price goes up and down.See yourself entering the trade. Notice you feel relaxed. You are alert but calm.Completely non emotional. Observe how the price moves after you enter.How it comes close to your stop loss.Mentally place a number of trades. Follow them through. You get a losing trade. Noticeyou see the big picture. You are unemotional. Completely calmYou put on another trade. Again, another smaller loss. You are still calm. Next a winningtrade. Again, you are relaxed. Its all part of the job.This takes practice. And you must do it regularly to get the maximum benefit. Try it everymorning, and any time you even begin feel stressed or you lose you focus.The advantage of this technique is its FREE. And payoff is excellent. 92
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition MONEY MANAGEMENT…!!Warning ... money and portfolio management is one of the most important parts ofsuccessful trading. In this Ebook we are only going to touch upon money management.Lets first define money management:Money management evaluates the risk and reward of a trade and determines thebest use of investment money. It tells you how many shares to purchase and howmuch money to place at risk.It is the difference between great trading performance and poor performance. It willmake the difference between making money and going broke.Smart money management doesnt just involve risking the right amount on every trade, italso involves managing a winning trade from start to finish.This is an important part of any good trading methodology that is often overlooked bybeginning and expert traders.One of the main ideas behind money management is to preserve capital so as to enableone to live to trade another day. Before you ever enter a trade, the first thing you shouldask yourself:How much money am I risking here and can I afford to lose it?The first goal of money management is to ensure survival. You need to avoid risks thatcan put you out of business. The second goal is to earn a steady rate of return, and thethird goal is to earn high returns- but survival comes first.Attempting to get the big win may be exciting, but failure in the attempt can wipe you out. 93
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionYou have to know in advance how much you can lose - when and at what level you willcut your loss. Professionals tend to run as soon as they smell trouble and re-enter themarket when they see fit. Amateurs hang on and hope."What do I do after I enter a trade and it begins to make money?"You hear so-called experts often make general comments such as "Dont let a winningtrade turn into a loss," "Youll never go broke taking a profit" or "The trend is your friend"and other similar remarks.These general pieces of advice can do more harm than good because -THEY ARE TOOGENERAL!!!A beginning trader cannot be left filling in the blanks. Everything must be defined. That iswhy a complete trading strategy must include specifically how winning trades will bemanaged until the position is closed.Believe it or not, many people have trouble closing-out a profitable trade. It is a greedproblem. If you are showing a large profit and you are a beginner, you got lucky. Goahead and take the profit! To wait, just to see the profit disappear, is a classic beginnersmistake.Dont end up saying, "I should have sold when I was up". 94
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionOne of the most common mistakes new and inexperienced traders make is that theystart trading without any planning.They dont have any clue about the amount of money they can afford to lose if the tradedoes not go in their favor.There is a term associated with the money management called "Risk / reward ratio",which plays a very important part in your trading.Risk / Reward RatioRisk / reward ratio is a measure of reward obtained from the trade compared tothe amount of risk taken for the trade.Lets take an example to understand the concept of risk / reward ratio.ExampleHarry purchases 100 shares of a company "A" at $10. His initial stop onthis trade was set to $9.5 which means that, he will sell all his shares if theprice of "A" drop to $9.5.Hence, Risk = Cost Price - Selling Price (Stop Loss) = (10 X 100) - (9.5 X 100) = 1000 – 950 = 50Therefore, the amount he is risking on this trade is $50. 95
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionNow suppose, the trade goes well and he sells all his shares in the company "A" at $12.Hence profit = Selling Price - Cost Price = (12 X 100) - (10 X 100) = 1200 – 1000 = 200Therefore, his reward for this trade is $200.To calculate the risk / reward ratio, we will determine ratio of risk taken in the trade to thereward.Risk / reward = 50 / 200 = 1/4This means that for every $1 risked in this trade, he was rewarded with$4.The conventional wisdom is that you should only take trades that deliver a risk/rewardratio of 1:3, or in other words, reward should be 3 times a risk.This is a BIG NO in todays trading scenario.The trouble with that approach is that in the real world of trading, such trades are usuallyonly successful less than 35% of the time. That means65% of the time the trade is a loser and that the probability of losing 5 trades in a row isabout 11%.On the other hand, our 1% rule follows the strategy that delivers at least a 1 to 1 risk /reward ratio. This strategy has the potential to be profitable about 65% of the time. 96
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionIn this scenario, 35% of the trades will be losers and probability of 5 losing trades in arow is only about half percent (0.5%).Most traders would be happy to win 65% of the time with 1 to 1 riskreward ratio with little chance of an extended losing streak.You should understand that every time you enter a trade you take a certain amount ofrisk. A prudent approach to trading is to identify this risk before the trade is entered.This will help you to place the stop loss and preserve your capital to make sure you cantrade another day.We will talk about the Stop loss later. BASIC STOCK TRADING SYSTEM…!!A well defined trading system is essential in trading. Trading system can be divided into3 parts Entry Exit Stop LossLets begin with Entry and Exit 97
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionWithout a specific entry & exit system, traders are like soldiers without a mission. Thesystem has to specify when to get in and when to get out of a position.Taking a loss can be emotionally hard, but taking a profit can be evenharder. The outcome of every trade is dependent on the exit.If we enter in a timely fashion and then exit poorly, the trade is likely to be a loss. If ourentry happens to be poor but our exit is good we might still save some profit.You can take a small loss automatically if you have the discipline to set a stop themoment you enter a trade. Taking a profit requires more thought. When the marketmoves in your favor, you need to decide whether to stay put, get out, or add to yourposition.An amateur can tie his mind into a knot trying to decide what to do about a profit. Hemultiplies the number of ticks by their dollar value and feels a surge of greed: Let thetrade run, make even more money. Then the market ticks against him, and he is hit witha jolt of fear: Grab that profit now, before it melts. A trader who acts on his emotionscannot make rational decisions. 98
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionNOTEYou can go back to the Greed and Fear example we have discussed earlier ifyou need a quick revision.One of the worst mistakes of traders is counting money while they have an openposition. Counting money ties your mind into a knot. It interferes with your ability to traderationally. If you catch yourself counting paper profits and thinking what you can buy withthem -get rid of those thoughts!“If you cannot get rid of them, get rid of your position.”If a beginner cashes out too early, he kicks himself for leaving money on the table. Hedecides to hang on the next time, overstays a trade, and loses money. If a beginnermisses a profit because of a reversal, he grabs the first profit on the next trade and maywell miss a major move. The market tugs on the amateurs emotions and he jerks inresponse.A trader who responds to his feelings instead of external reality is certain to lose. Hemay grab a profit here and there but will eventually bust out, even if his system gives himgood trades. Greed and fear destroy traders by clouding their minds.The only way to succeed in trading is to use your intellect.The exits, not the entries, determine the outcome of our trades. Bad exits can make agood entry look bad and good exits can make a bad entry look good....Always have a proper Entry and Exit prices before even entering thetrade. 99
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionStop LossThis is the point where you admit you were wrong. No one can pick winning stocks100% of the time. Accept this fact. You can only play the odds.In trading, a stop loss is a must. Before entering a trade, the trader must know preciselywhen he is getting out if the trade goes against him. A trader has to be very disciplinedabout this.Trading without a stop is like walking down Fifth Avenue in Manhattanwithout pants on. It can be done, I have seen people do it, but it is notworth the trouble.A stop will not protect you from a bad trading system; the best it can do is slow down thedamage.ExampleLets say Harry buys a stock at $20 with the plan that it will go up to $24.Now he has to decide what to do if the stock does not go up, but suddenlystart falling. 100
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionHe decides that if the stock moves below $19, he will accept that he was wrong aboutthe direction of the stock, sell the position immediately, and take a small loss.By taking small losses, he preserves his trading capital, which allows him to trade againtomorrow. In other words, setting a stop-loss order for 5% below the price you paid forthe stock would limit your loss to 5%.Finally, always remember that if the trade is not going in your favor,there is only one thing to do - Get Out!You cant win every time. As a reminder, a big and costly loser usually starts-off as asmall one. Generally, if you are out more than one point you are in real trouble.Some people don’t like using Stop-loss when trading. For some strange reasons, theyget caught up in thinking that the market will hit their stop order and then immediatelystarts moving in their direction after they’re stopped out.You know what, this will happens sometimes. But I still insist you to use stop loss.On the other hand, there are few people who like to place mental stop-loss. They think,they can call their broker and get out of the trade if it starts moving against.There is nothing wrong in that but you have to stick to that. I’ve found thousands ofpeople feeling hesitant to call their brokers and get out of the losing trade. t usually costthem lot of money as they do not act in their best interest.The biggest reason people don’t want to use stop order is because theyfail to accept that “THEY WERE WRONG”. 101
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThere is nothing wrong with having a manageable losing trade. The difficulty comes inwhen you have an unmanageable losing trade. This can easily happens because if youtake too much risk on a particular trade by not using a protective stop order.Don’t let a losing trade turn into a HUGE losing trade.Breakeven OrderThe first few days in a trade are the hardest. You have done your homework, found atrade, and placed an order. It has been filled, and you placed a stop-loss order. There isnot much else you can do-you are like a pilot strapped into his seat for takeoff. Theengines are blasting at full power, but the speed is low, and there is no room tomaneuver-just sit back and trust your system.As soon as prices start to move in your favor, move your stop to a breakeven level.When the takeoff is completed, your flight is at a safer stage. Now you get to choosebetween keeping your money or gaining more, instead of choosing between a loss and again.When you move a stop to a break-even level, you increase the risk of a whipsaw.Amateurs often kick themselves for "leaving money on the table." Many amateurs allowthemselves only one entry into a trade. There is nothing wrong with re-entering a tradeafter getting stopped out.Professionals keep trying to get in until they get a good entry, using tight moneymanagement. 102
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition HOW TO SELECT A GOOD BROKER…!!Investing in the stock market can be complex sometimes. The assistance of a goodstock broker can be an essential element in your stock market success.A stock broker is an employee of a brokerage firm.Most markets require that all traders must place their trades through any brokerage firm.So your broker is the one who will trade on your behalf. And since you cannot sit in frontof the stock market terminal in order to watch your trade, a good broker can play quitean important role in your trading success.Types of BrokersThere can be two general categories of the brokerage firms-1. Full Service Brokers2. Discount BrokersFull Service BrokerA full service brokers not only trade on your behalf but they will also recommend specificsecurities that suits your financial situation. These brokers begin with financialassessment of your personal situation to determine your needs and suitability of variousinvestments.Full service brokers charge you on the basis of number and size of transactions in youraccount. This service is good if you dont have time or not following any trading system. 103
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionBut If you are following your own trading system, such broker may create confusion foryou.Discount BrokerOn the other hand, discount broker is an order taker. He does not give you any tradingadvice and you will trade yourself. You only need to call your broker and tell them whatto buy, when to buy and how much to buy and they will execute your order.You can place your order either online or phone. Since discount brokers are not doingany research work and not recommending any stock to you and hence they chargelower commission than full service brokers.Find out how reliable is your brokerAsk your family, friends, relative and business associate for the names of brokers theyuse. This will help you to find out the track record of your broker.Do your own researchInterview perspective brokers and firms. Do not go with the first broker you interviewbecause your broker will be working for you and you will be paying him. Compare thefeatures and commissions of various brokers before finalizing the deal with anyone.Check out the broker and the firm. Ask for their track record. How long has the firm inbusiness? What is the background of the broker? How about the complaint against thebroker and the firm?You can also get the official report on the firm and the broker at www.nasd.com 104
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionCheck out their current clientsReferences are important. Ask the broker to give you the names of 10 current clients.Call them all. Ask a lot of questions. Good brokers will provide references.Find out their commission ratesCommissions count. Ask for the total fees and commissions you will be paying beforeyou invest in anything. Advertised rates for the companies may vary. It is better to knoweverything before you start trading with the broker.Are there any extra fees?Many companies charge extra "Hidden" fees which can add significant cost to eachtrade. These hidden charges may be transferring fees, insurance, administrationcharges, late payment penalties and many more.Do you need to start with large deposit?This is very important to find out the minimum amount of money you are required toopen an account. Check out different brokers and compare which suits your need.Although most tradition full-service brokerage houses such as Merrill Lynch, DeanWitter, and Paine-Webber, and giant "discount" brokers such as Fidelity and CharlesSchwab require some opening balance,I have located 10 brokers who will establish your account with nomoney - $0.00! This can be a standard interest-earning trading account or any kind ofIRA. 105
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition MB TradingMB Trading provides services for clients who demand the highest level of reliability,speed and order execution.http://www.mbtrading.com/ Muriel Siebert & Co., Inc.Commissions as low as $14.95 for up to 1,000 shares. 1.5 cents per share over 1000shareshttp://www.siebertnet.com/index.html FidelityFidelity, a mutual fund powerhouse, offers a variety of brokerage services. Commissionof 2 cents per share over 1,000 shares.http://www.fidelity.com/ Brown & Co.Brown & Co offers $5.00 per trade for up to 5,000 shares.http://www.brownco.com/ 106
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Charles & SchwabCharles Schwab offers a wide array of brokerage services. Commissions as low as$14.95 for active traders, or $29.95 over the internet for normal trading.http://www.schwab.com InvestradeTrade online for as little as $7.95 per trade (unlimited shares).http://www.investrade.com/ E*Trade SecuritiesE*Trade offers trading in stocks, options and mutual funds. Commissions as low as$14.95. Power E*Trade is also available for active traders.http://www.etrade.com/ ScottradeScottrade has 75 local offices, commissions as low as $7 for online trades.http://www.scottrade.com/ 107
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition TD WaterHouseTD Waterhouse offers commisssions as low as $9.95. Free research, quotes and more.http://www.waterhouse.com/NOTEWe do not attempt to represent any brokerage firm. The list of brokers givenabove is just for the informational purpose and you must do the research yourselfbefore applying for their services. Commission offered by the brokers wereapplicable till the time of printing and may vary from time to time.If you are still not sure about how to start searching for the broker of your choice, I havesetup a special search engine that can help to find one.Check out our Exclusive Search EngineSpend some on the search page and check out their trading fees, services, andavailable research. Click on the link given below and type "discount broker" or "discountbroker stocks" and click search.Open a notepad and copy all the information that you get and come to the search againand try other keywords. You can also find out the information about the brokers I havementioned above. Click Here To Start Your Search Now 108
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionDo you need to pay extra to trade over the phone?Most of the brokers give you both the features; you can either trade online or use yourphone. But some firms may charge you extra if you want to place the trade over thephone, using live broker.In some cases you are forced to so because of the poor internet connection. So look intothis matter carefully before selecting any broker.Thats all for now. Its time for your assignment.ASSIGNMENT NO # 3Find a good broker and open an account. Click Here to begin your search now. 109
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition Have you completed the assignment given in the lesson # 9? If not, Click Here to begin your search now. TRADING RULESAs you already know, 90% of traders fail to make money from the stock market. Butthose 10% who consistently make money from the stock market have one thing incommon.“All of them are disciplined and follow their set of rules”Trading gives you a lot of freedom. You can get in whenever you want. You can get outwhenever you want. You can add and subtract to your existing trade. Or you can simplystop trading whenever you want.The only thing that could stop you from participating is lack of money. But with ourtrading method that is no longer a problem now. I mean, you can now start with as muchmoney as you want.Not many businesses give you a freedom to enter and exit whenever you want. Andsince there are literally no rules in the trading, you have to create your own set of rules.“Yes, you need to make your own set of rules. I can just give you someguidelines”.Freedom is good but excess of anything is not good. So you need to have a structuredfreedom. Trading rules will help you to be more consistent with your trading. 110
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe 15 trading rules given below are not a "Get Rich Quick" scheme. They are a set ofguiding principles that will help you learn how to save, invest, make money and toachieve your financial goals.I cannot guarantee that they will make you a millionaire overnight but I promise you willnot be successful if you decide to trade without any trading rule.Over time you will quickly see the benefits of these rules and your financial prosperitywill grow SIGNIFICANTLY !!! TRADING RULE # 1, 2Understand that knowledge is the key to successThere is no book you can read that will teach you how to trade successfully. You mustunderstand the market yourself. Knowledge is one of the key ingredients to success inthis field. And the more knowledge you acquire, I believe, the more you reduce the riskin trading.Only trade with risk capital and be aware of therisk of losingTrading in the stock market is always risky. No matter how well you trade.I would never suggest to anybody to trade with the rent money. DO NOT start tradingwith the amount you cant afford to lose. 111
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionI recommend you to begin with a smaller amount until you build trust on this system.$2000 or even $3000 is not a very big amount of money that you can’t live without. If youfollow this system correctly, you are bound to succeed. There is no way to fail.But if you happen to be the most unlucky person in the world and you lost all of yourmoney, it is after all only two thousand dollars. You can always earn it again. TRADING RULE # 3Always plan your tradeThe most basic problem that we have found most traders struggling with is lack ofplanning and direction.Traders come into the market hoping to make money, but without any strategy. Manytraders fail because their plan is too shallow or they dont even have a plan.Planning is a critical ingredient in a successful trading decision. It is rightly said- FailingTo Plan Is Planning To FailTrading is a perfect business. And the best part is you can do it full time as well as parttime. The choice is completely yours. But both type of trading requires a differentstrategies, mindset and lot many things.Have a look at the example given below:You want to buy XYZ corporation which is trading at $100. Now before you even enterthe trade, here are the few questions you need to ask yourself: 112
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionQ1: How many shares am I going to buy?Q2: How much money am I willing to lose? Or where should I place my stop-loss order?Q3: If trade goes in my favor, what would be my strategy? Will I add some more sharesor will I take profit and exit out of the trade?Q4: If I add shares, how many shares am I going to add?Q5: Where do I finally want to exit?Q6: If the stock does not move much, how long can I afford to hold?Q7: If I had to exit the trade after taking loss, will I re-enter the trade or look for someother stock?Once you have all the answer, go ahead and start trading. I promise, you would be muchmore relaxed and satisfied. TRADING RULE # 4Learn From Your MistakesIf you win or lose without understanding why, you will never develop a winning strategy.If you have made profit from any trade, try to find what did you do right?But if it is a losing trade, it becomes even more important to find out - what did you dowrong? Maybe you were wrong in your assessment of the market. That would be easyto correct. 113
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionBut suppose you were right in your judgment of the market and still lost money? Wasyour timing wrong? Did you over trade? Did other information change your opinion? Wasyour management of your account wrong? Did another position in your account forceyou to liquidate? These and other questions must be asked and answered if you are tolearn and if you are to ever turn your trading account into a profitable venture.Develop this habit and I’m sure you will be benefited by this. This will do two positivethings for your trading: You will not repeat this same mistake again. It will help you to build your confidence and you will be much more confident. TRADING RULE # 5Say Goodbye To EmotionsHope, fear and greed are not strategies: they are emotions. Any emotion that you havein the trading equation, spells bad news. Positive emotions could cause us to fail toapply risk precautions. Negative emotion could cause us to hesitate.In trading you can’t control the market. No matter how much you want market to go inyour direction; there is nothing you can do to make it go in your direction.So, if you cannot control the direction of the market, you need to control yourself in orderto be successful. You need to train yourself to go with the market. Trading is apsychological game. Never get emotionally involved with your trades as emotions oftenwork against you. 114
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition TRADING RULE # 6Make Your Own Set of RulesDon’t be influenced in your trading by what others are saying. This will only createconfusion.Once you have formed a basic opinion, stick to it and don’t let other people’s opiniondistract you. Listen to everybody but do whatever you feel like doing.If it were really possible to "Buy Low Sell High" or "Cut your Losses and Let yourWinners Run", then almost everyone would be making money rather than losing it.99% of technical analysis is junk. Technical analysis can help you in the long -terminvestment strategies but in trading it has no role to play. Throw it away and get down tobasics. TRADING RULE # 7Start SlowlyWhy do beginners rush in where experts fear to trade? Maybe its because novices donthave the required patience. Theres absolutely no rush. The markets will be theretomorrow. Just be sure you are there to trade them and in the proper frame of mind. 115
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionThe rewards of successful trading do not come easily. Theres a price you must pay.There are skills you must develop. Thats why you must be patient and allow yourselfsometime. TRADING RULE # 8When You Are Not Sure, Don’t Enter The TradeIt is not written anywhere in any trading book in the world that you need to tradeeveryday.Sometimes I’ll just leave the market alone and forget about it. It usually refreshes me.The beginning trader is tempted to trade everyday and this is a costly tendency. Youneed to develop patience and discipline to wait for the right opportunity.“Relax with your trades. If it’s not fun and enjoyable, it’s not worthdoing it.” TRADING RULE # 9Always limit your losses - use stop orders.Losses are a simple cost of doing business. Dont try to justify a bad trade by convincingyourself that it will sooner or later turn into a good trade. Accept losses easily! Prices 116
    • 2007 SECRETS OF SUCCESSFUL TRADERS Editionkeep changing and generate other opportunities. The goal of trading is make a net profitafter a sequence of trades. It is, therefore, necessary to accept some losses and to lookforward without punishing oneself. TRADING RULE # 10, 11Never Over TradeI have found that an amazingly high percentage of traders are forced out of positionsbecause of over trading. Over trading tends to put traders on thin ice, and can eat intovaluable trading equity.Never add to a losing position.A losing position means you are wrong. If you are buying, then each new buy price mustbe higher than the previous buy price. This rule is to be adhered to without question.However, some traders don’t agree with this rule, believing in “Price averaging”. But itis quite risky to hope that stock will bounce back and I would not recommend you to wait. TRADING RULE # 12, 13, 14, 15 Do not try to profit on every trade. It is the total profit you make that matters not the number of individual wins. 117
    • 2007 SECRETS OF SUCCESSFUL TRADERS EditionHave a strong relationship with your broker.Develop and maintain an exit plan. Follow this plan with rigid discipline.The key to wealth in trading is simplicity. Avoid techniques you dont understand. 118
    • 2007 SECRETS OF SUCCESSFUL TRADERS Edition IMPORTANT DISCLAIMER Copyright 2StockTrading.com. All Right ReservedNo part of this publication may be reproduced, stored in or introduced into a retrievalsystem, or transmitted, in any form, or by any means (electronic, mechanical,photocopying, recording or otherwise) without the written permission of the publisher. Alltrading involve risk. You should never trade with the money that you cant afford to lose.Data and information are provided for the informational purpose only. By using this bookyou acknowledge that you understand there is always risk of a loss of principal wheninvesting in securities. You also agree to accept those investment risks as your ownunder all circumstances. Always consult your financial advisor before making investmentdecision. Although every effort has been made to assure accuracy, the publisherscannot assume responsibility for errors or omissions. In no event our website or itscontent providers be liable for any damages of any kind. No guarantees, implied orotherwise, are made with regard to your investment results. 119