Successfully reported this slideshow.

Secrets of successful_traders

6,320 views

Published on

Published in: Education

Secrets of successful_traders

  1. 1. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 1 Secrets of Successful Traders Make Money From The Stock Market…Guaranteed
  2. 2. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 2 TABLE OF CONTENT From The Desk of CEO The Game Plan Chapter 1 Why Trade In The Stock Market Chapter 2 Path To Profits Chapter 3 It Begins With You Chapter 4 Roadmap To Profitable Trading Chapter 5 Question Answer Session Chapter 6 How Stock Market Works Chapter 7 Some Key Terms You Must Know Chapter 8 Trading Secrets Chapter 9 How to Select A Good Broker Chapter 10 Trading Rules
  3. 3. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 3 FROM THE DESK OF CEO First of all, I would like to thank you for taking the time to download and read this E-Book and secondly I would like to congratulate you. What you are about to read might be the answer to help you to make more money in your life. To make the learning process easier and more enjoyable, I've presented the lessons with the help of examples and images. You'll find it more entertaining. If you are a 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 physical act of trading is easy but making money consistently is not; otherwise everyone would be rich. The tips we're about to give you probably won't make you millionaires OVERNIGHT. But They WILL give you that tasty edge you need over your other traders. Reminding You that "Knowledge Is Power" A FEW ASSUMPTIONS ABOUT YOU 1. You haven't 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 in the 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 you are going to learn in this EBook is not at all complicated but it would require some concentration and consistent effort.
  4. 4. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 4 If you make half-hearted attempt to complete to complete the tasks and small assignment then please do not expect to get extra-ordinary results. To your trading success 2StockTrading Team Website: http://www.2stocktrading.com Email: support@2stocktrading.com
  5. 5. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 5 THE GAME PLAN…!! The book is broken up in two sections. The first section is called “Skills You Need” and is made up of all the skills you must have to be successful in the trading business. These include ideas like setting and accomplish goals, skills you need to be successful and lot more. This section is also going to reveal that Killer Strategy that is going to make 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 Wall Street people don’t want you to learn. This section begins with the basics of stock market- how does stock market functions and cover everything else you need to know about it.
  6. 6. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 6 SECTION 1
  7. 7. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 7 WHY TRADE IN THE STOCK MARKET…!! Somebody has rightly said - "If you don't 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 being a trader? Do you want to do a part-time trading or a full time trading? Or maybe you just want to secure your future. For some traders, it's 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 about only one thing... ...Making A Profit
  8. 8. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 8 But making profit doesn't mean that you'll double your money every few weeks and start dating Hollywood movie stars with your newfound wealth. If anyone tells you that, please laugh at him loudly. Trading is NOT A Get-Rich-Quick Scheme. It takes time to earn money and become successful. The most basic problem that we have found most traders struggling with is lack of direction. Traders come into the market hoping to make money, but without any strategy. Many traders fail because their plan is too shallow or they don't 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 the market, 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 or consistency. These traders believe that the "End justifies the means", which means that making money, despite bad habits and reckless trading is good enough for them. They end up losing everything.
  9. 9. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 9 Trading is a perfect business. And the best part is you can do it full time as well as part time. The choice is completely yours. But both type of trading requires a different set of rules, 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? STOP I want you to do a little exercise and please don’t skip this. If it is here then it is important. Close your eyes and visualize what being a successful trader means to you. See yourself doing trading and making money consistently days after days and week after weeks. Imagine the feeling of happiness it creates when you see money keeps on going to your bank 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 a solid, worthy, personal goal and keep you motivated and focused throughout this EBook. ASSIGNMENT NO#1 Write down one primary goal you want to accomplish by trading in the stock market.
  10. 10. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 10 Take that goal and write it (-It is important) on a 3 X 5 card and put it where you see it when 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 aloud each morning and before you go to sleep each night. Believe me, this technique really works. This is not some "corny" technique I am writing here- this is one of the key technique Napoleon Hills teaches in "Think and Grow Rich", the classic book on how to turn your thoughts into riches. REMEMBER I’ve included this excellent EBook in the package as a bonus. Must have for everybody…!! 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. Let's move on to the next part...
  11. 11. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 11 Have you completed the assignment given in the lesson # 1? If not, please complete it before you go ahead. THE PATH TO PROFIT Recently we conducted a survey. We asked a very simple question to thousands of traders- "What is the one thing you must start out with to become a successful trader?" 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 you need to hit the bull's eye. And none of them did. The bull's eye answer is – Sound Preparation- An Excellent Trading Strategy
  12. 12. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 12 It is amazing to see how so many people think they can enter into this business and be successful 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 an engineer? Can he beat Ricky Ponting or Sachin Tendulkar in cricket without practice and lot of hard work? No way, it takes knowledge and training. Well, it's the same in trading stocks.So here's your first very important trading lesson. In just seven words- The Path To Profit Begins With Preparation There are a lot of people these days investing and making money in the stock markets all over the world. It can really be profitable, safe, fun, very exciting and sometimes, it's almost fascinating. Trading in the stock market is the world's fastest route to freedom Yes, get it right and trading is the world's fastest way for you to get rich and be free. Get up when you wish, go out where you want. Meet up with friends or spend time with the family. You could just sit around and do nothing! And that's 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 no surprises to learn that over 90% of the traders FAIL to make money from the stock market.
  13. 13. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 13 Reason….!! Quite often, the problem begins with the Preparation. Traders are so eager to enter the market and make money; they sometimes forget one very important thing Sound Preparation. We have designed this book that will take you through the entire trade preparation process. 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 can't guarantee that you will become an expert trader instantly after reading this book. What we can guarantee is that if it's in here, it's important. Don't skip a line. Read the book online. Or print it out. But either way, read it when you don't have a lot of other things to do and can concentrate.
  14. 14. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 14 I am not saying that you have to read the whole book in one sitting. It doesn't matter how long it takes you; what matters is that you do work through it, understand it - and apply the lessons. The fun and the cash come after the foundations are properly laid. The wrong mindset and lack of preparation only leads to one thing….FAILURE
  15. 15. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 15 IT ALL BEGINS WITH YOU…!! Ready to start..? Great! Let's get started... Let me share this funny abstract from Norman Hallett's Mental Fitness For Traders. The story given below may sounds little bit funny to you but this is how most of the traders trade in the stock market. I will also tell you the reason why I am sharing this abstract with you. But first, you go through this... A Typical Trading Scenario You've done your homework. Countless hours of seeking out the right guru (or piecing together your own system). Weeks of monitoring your guru's daily trade picks (or paper-trading and back-testing your homemade system) No seat of the pants trading for you! OK, now you're confident. It's time to put your money where your homework is. You've had your coffee and your first trade signal is before you. Confidence high. Trade made. First loss. Not a problem.
  16. 16. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 16 You understood before you started that successful traders both win and lose and "losing is part of the overall winning". You've also heard more than once that "successful traders don't 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 then the market rebounded and would have hit your profit target if you weren't stopped out. You double check. Yep, you placed the stop where your trading system told you to place it. You kind of had a feeling that the early weakness in the market was just profit-taking from the previous day's trading, but you're trading a system and you must stick to it. Wounded, but resilient. After a good night's sleep and a few mouse clicks, your new daily trades are in front of you. Hey, this one looks good! It's a little bit more risk than yesterday's trades had, but look at that profit potential! With a smiling face, the trade is executed. With a nice start to the trade, you're feeling good and you've 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?
  17. 17. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 17 Your confidence turns to doubt. You decide to "watch" the next trade... I mean, isn't it wise to make sure the system gets back on track before you "throw good money after bad?" Isn't 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 matter what"... and here you wimped-out and missed a big winner that would have gotten you even. What's happening…? “What's happening is that you are out of control. Your emotions are ruling your trading.” Did you like the story? Click Here To Claim Your Free Copy of Mental Fitness For Traders But do you know why I shared this story with you? Because, the above scenario plays out in every trader from time to time... newbie and veteran alike. And hence, trading in the stock market doesn't begin with the trading.
  18. 18. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 18 ...It begins with you You have to know yourself before even you think about the stock market. To become a successful trader, you must have what it requires. There are certain qualities, which you need to develop in yourself. It's not talent, not luck that decides how much money you can make from the stock market, but self-motivation, enthusiasm and discipline. Any successful trader bound to have qualities like- focus, direction and commitment. To trade like the professional traders, you are going to need all these skills. Do you have these qualities? Determination Enthusiasm Focus
  19. 19. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 19 Adaptability Discipline Money Management Self-Motivation Patience Commitment Perseverance Become successful is a major commitment. If you're afraid of long hours, hard work, hate risk, aren't committed to doing whatever it takes to win - Do yourself a favor: Stop reading and send this book on to a friend. I don't know you, but I do know one very important thing about you: You don't have what it takes. Face it, and get on with your life. But those who are still reading this book, here's some good news- You can minimize the risk involved in the stock trading by following the advice in the book. Your decision to become a successful trader indicates that you are determined to win. You are a person with positive mind. Successful trading requires all the above-mentioned qualities and you must acquire them in order to come under the 10% category of the successful traders. Remember, 90% of the traders fail to make money from the stock market.
  20. 20. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 20 Do not expect to be successful at trading instantly, you have to learn this business as well, the same way you learn any other. Your attitude towards trading will affect your outcome. Trading is a business, so treat it like one. Being over confident could cost you money, just as being under confident could mean you miss opportunities. REMEMBER When trading goes right, it can be a great feeling. When trading goes wrong it can be a nightmare Fortunes are made in a matter of weeks and lost in a matter of minutes". Why the failure rate is so high? Why can't we start trading without any planning and preparation and why 90% of people fail to make money from the stock market? And most importantly, is there any way to make “Sure-Shot money” from the stock market without taking much of risk?
  21. 21. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 21 ROADMAP TO PROFITABLE TRADING…!! So let's begin our journey of knowledge and profit with a very simple question. How Much Money Do I Require To Invest In the Stock Market? Isn't it simple? But the answer is not that simple. Do you know, thousands of people don't even invest in the stock market because they think that to earn BIG you need to invest a lot of money into the stock market. Let's take an example to get the better understanding of the concept. Example Suppose you want to earn $10,000 from the stock market. Now out of hundreds of companies listed in the stock exchange, you found out one company that can give you 100% return on your investment. So what is the minimum amount you will have to invest so that you can make $10,000 even if the company gives you 100% return on investment? Yes. It is $10,000 Sounds like TRUE??? But would you believe if I say that this is one of the BIGGEST mistakes you can ever make as a trader.
  22. 22. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 22 Firstly, how many companies do you know that can give you 100% return on your investment? Moreover, stock trading is always risky, no matter how well you trade. Majority of people end up losing after an initial earning. You can lose your whole investment in the stock market. So, wouldn't it be nice if you can start trading with a small amount of your hard-earned money and can still make huge profit? Always remember, the more money you use, the more emotional fuel you are pouring onto the fire. And as I already explained that to trade successfully you need to remove all emotional influences. Any emotion that you have in the trading equation, spells bad news. QUESTION So what method can you use to reduce emotions in the trading? Yes, I know it's not easy for beginners to start making money from trading stocks without any knowledge. I know the frustration of losing because I was once a beginner and lost all 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 engineering school 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...
  23. 23. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 23 Newsletters, bulletin boards, books, courses, software, data services, tips and more. I tried everything. Oh man, give it a rest! I tried all trading strategies Day Trading, Swing Trading, Trend Trading etc. And the trading results? Well if there had been an award for the world's worst trader, I would have got the prize annually. Week after week, month after month, I was losing all my money. In fact I was only days from being forced to quit trading because my account was nearly dry. The stress was intolerable. But then one day it happened, I made Money. Yes, I have discovered a unique Fail Proof trading strategy and I started earning money consistently. Within few months profits started rolling in. Initially few hundred dollars, then few thousand and more. It just kept on going - I was amazed and wondered where it was going 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?
  24. 24. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 24 Okay, No more suspense. Here is the secret of my success. Remember, it could be yours. 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 you can- "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 your target of 1 Million in JUST 1.9 Years
  25. 25. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 25 QUESTION What do you mean by average interim? Average Interim is the time gap between two profitable trades. For example, if you earn 1% on Monday and another 1% on Thursday, then your average interim time would be 3 days. Shocked? Need Some Math Calculations? Okay, let’s do it. Let's 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.
  26. 26. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 26 Open your windows calculator by clicking on Start > Programs > Accessories > Calculator. Now set your calculator on scientific view by clicking on the "View" tab at the top 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) NOTE Please remember this formula. We are going to use it quite often To calculate the logarithm of a number, you need to enter the number and then press the LOG button in the calculator.
  27. 27. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 27 Log 1,000,000 = 6 Log 2,000 = 3.301 Log (1+0.01) = 0.00432 Put 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 $1,000,000 6 - 3.3 ---------- = 625 times (With $2000) 0.00432 Just Imagine 1% return on your investment then re-investing it all over again and doing the exact same thing for just 625 times can turn your little investment of $2000 into $1 Million. NOTE You 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 to earn 1% profit For example, if you start with $3,000 instead of $2,000, then number of times you need to earn 1% profit would be: Log 1,000,000 = 6 Log 3,000 = 3.477 Log (1+0.01) = 0.00432 Put these values into the formula,
  28. 28. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 28 6-3.47 ---------- = 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 time gap 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 Interim NOTE Please remember this formula. We are going to use it quite often We 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. Let's say your average interim time is 5 days. (By average interim time of 5 days I mean that there is a time gap of 5 days between two profitable trades. Or in other words, you are earning 1% profit every 5th day a week)
  29. 29. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 29 Therefore, 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 that's not all. What will happen if you can earn this 1% profit every 3rd day instead of 5th? Hummm.... Let's find it out. Average Interim = 3 days Therefore number of days = 625 X 3 = 1875 days or 5.1 Years Amazing. Isn't it? ONE GREEDY QUESTION What will happen if I manage to earn 1% profit every day? Don't be ashamed. Little bit of greediness is acceptable. After all, you have just got an amazingly powerful and proven strategy. So let's try to find the answer for you.
  30. 30. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 30 You are asking, what will happen if you can 1% every day or 7 times a week. It means that now your average interim is now just 1 day instead of 3 days. Let's put the values into the formula, Number of days = 625 X 1 = 625 days or 1.7 Years NOTE The time you will take to become a millionaire is directly dependent on your average interim and amount of money you are starting with. The more frequently you average those profitable trades, the lesser time you will take to become a millionaire. Similarly, the more money you begin with, the fewer the years. Let’s repeat the whole process again but this time you are starting with $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)
  31. 31. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 31 Log 1,000,000 = 6 Log 1,000 = 3 Log 1.01 = 0.00432 Put 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 Interim Let’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.
  32. 32. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 32 Enough Reading. Let me give you an assignment now. ASSIGNMENT NO # 2 You want to start investing in the stock market. The initial amount you want to invest is $15,000. Calculate number of years you are away from your goal of $1 Million if your average interim period is 3 years. I will give you the answer in the next lesson…
  33. 33. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 33 Have you completed the assignment given in the lesson # 4? If not, please complete it before you go ahead. QUESTION ANSWER SESSION Okay, here's the answer to the question we asked in the previous question. Answer Number of Times = (Log 1,000,000 – Log 15,000) / Log (1+0.01) = (6 – 4.17) / 0.00432 = 423.6 or 424 Number 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, I'm sure you probably have some unanswered questions and concerns. 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 to lose.
  34. 34. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 34 And 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 and can still make huge amount of money. With this trading method, it doesn’t matter whether 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. NOTE This is one very important rule of trading- Never trade with the amount you can’t afford 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 you follow 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 your money, 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 stocks using anyone’s strategy. Stock market is always risky, no matter how you well invest. Please remember, whether you follow this method or not, these years are 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 $1 Million goal. If you do that, the whole system will get disturbed.
  35. 35. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 35 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 will depends 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 $1 Million Similarly, 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 much less time. For example, if you are starting with $10,000 then you just need to earn 1% profit 463 times. And if your average interim time is 3 days, then you are just 3.8 years away from your goal. But that doesn’t mean, you cannot repeat the same result if you have less money to get started. You can achieve even better results with the lesser amount but then you need to be 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 average interim time is 2 days, then… Number of days = 625 X 2 = 1250 days or 3.42 years Isn’t it interesting?
  36. 36. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 36 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 and sell commission. So in order to get past your broker's commission either you sell you stocks 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 in account. But if you don't have $2000 to start trading with, don't worry. NOTE In chapter 10- How to Select a Broker, I have given you a list of some of most cheapest yet reliable brokerage firms. Their commission rates are quite reasonable and some of them won’t even ask you for any opening balance. You can literally get started with no money - $0.00! This can be a standard interest-earning trading account or any kind of IRA. We have not considered the commission into the formula because it varies a lot. The day when you are trading with $25,000 in your account, this $20 commission would be insignificant. Forget about everything else. You just have to keep earning 1% or more...
  37. 37. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 37 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 idea to consider 2% return instead of 1% in the initial stage if you starting out with a low balance like $2000 and wish to recover your commissions in order to meet the goals of the system. QUESTION NO # 5 Will this system really works? This system is incredibly simple. Anyone can use it. You can get started with practically very less amount of money and the risk is almost zero. You don't need special training or even a high school education. It doesn't matter how young or old you are and it will work for you at home or even while you are on vacation but there is a catch.... It only works if you have an investment strategy that can produce 1% gains or more on a regular 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’s impossible.
  38. 38. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 38 Profit and loss are the part of trading and you cannot avoid losses in any condition. No trading system in the world can claim to be 100% profitable. And hence it is the average interim we are focusing on. Your focus should be on earning 1% PROFIT regularly as frequently as you can rather that 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/reward ratio 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 the amount 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.
  39. 39. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 39 NOTE 1*A1/100 is the 1% of whatever amount we have entered into the cell A1. Go to cell A2 and type =A1+B1 NOTE A1+B1 is the sum of the “1% of whatever amount we have entered into the cell A1” and “your initial amount”. This will actually give you the amount you will get after adding 1% into your initial amount. That’s it. Now point your mouse cursor at the bottom right hand side of the cell A2 – it should change your pointer to “+” kind of symbol and drag it down the page (at least up to 630 rows down). Do the same with cell B1 - take your mouse pointer at the bottom right hand side of the 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 you have 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 625 times and on 626th time you will have $1Million in your account if you are starting with $2000. NOTE You can replace $2000 with any figure of your choice. For example, if you wish to start 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.
  40. 40. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 40 PLEASE REMEMBER… You are not required to use this excel sheet at all. This is just to verify that 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 and doing the exact same thing for just 625 times can turn your little investment of $2000 into HUGE 1 Million. Still not impressed? Well, let me tell you initially even I wasn't impressed with a small 1% either. I wanted to make "MONSTER TRADES", ones that would produce bigger returns like 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 much easier 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 don't have to make the “Monster Trades" to make big profits. The greatest feature about this trading system is that you can make a one-time investment payment into your trading account and never make another payment from your own personal budget — and you can still become a millionaire easily because of how this system works. Even if you opened your trading account with as little as $2000 or as much as you want. Just be consistent and keep locking in the small profits. Over time the power of compounding can achieve some eye-opening results!
  41. 41. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 41 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 you wish 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 as much as you want). Place the sell order above 1% as soon as your order gets confirmed. This way you don't have to watch the stock market again for the whole day and you can get on with your life. Actually many people find it difficult to watch the market 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 or very short term trading. Here you are looking for better profit margins of 5-15% with a holding period of 1-2 weeks. It is very simple. Nothing can be better than this. You are slowly but consistently increasing your money using our 100% Proven and easy to implement 1% rule and at the 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 money consistently is NOT.
  42. 42. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 42 You will require a fail proof strategy to achieve the target of 1% profit on your trades consistently. You cannot expect to become a professional trader just by reading this EBook. 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 sure shot method, you will not only use it but will also be telling everyone you know. Read all the steps given below CAREFULLY. Now I want you to have a look at the following chart. This stock was upgraded before the open on 25th May. Now if you look at the stock carefully you will find one very interesting thing and trust me, it is something that I found occurred in almost EVERY single stock’s performance chart that I examined (and I examined a lot) on the day the given stock is upgraded. American Mortgage Acceptance Company (AMC) You’ll notice that the stock had closed the day before at about 9.9 (The dotted red shows the Prev Cls line). You’ll also notice the stock shot up to 10 on open in the morning. But
  43. 43. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 43 then 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 9.9 dollars per share, then set a limit sell order for just $10 per share, you would have had your sell order filled in just about 40 minutes. A 1% gain. I did it. And you can probably guess 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 at precisely 10:00 AM New York Time and sell at 1% profit every third day, you’ll turn 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 (and I will explain these qualifications shortly) upgraded stock doesn’t climb on open or appear to dip, a 10:00 AM purchase of that stock normally will net you your 1% profit anyway, easily within a 7 day period on average, sometimes in a day, and often in just minutes. Now, this doesn’t mean you can just plunge into any randomly chosen upgrade after you learn about it on the Web as long as you buy into it at 10:00 AM and expect to see miracles happen. There are a few pre-screening steps needed to ensure that your speculation is safe first. Now I know there is one question that must be coming to your mind and you want me to answer that as soon as possible. Well, let’s do it.
  44. 44. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 44 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 a year. You see, one year is quite a good amount of time and anything can happen in between. You just cannot predict the future and your investment may erode before their eyes. But here in this strategy we are not going to buy any randomly chosen stock without doing proper research. I will tell you all the necessary steps that you need to perform so that you can choose that winning stock among all other losers. And remember, one of the very important rules of trading is that- “never to put money into a trading account that you can’t afford to lose”. I’m only recommending that you begin with $2000. If the unthinkable happened and you lost it, you can decide that, well, it is after all only two thousand dollars. You can always earn it again. If you find that attitude unthinkable, then you have no business buying stocks using anyone’s strategy. 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 require little bit research. This is accomplished by following these steps:
  45. 45. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 45 STEP 1 Check upgrade / downgrade listing of the stock in MSN Money or any other online financial website and make a checklist of the stock symbols. One key condition of purchasing any upgraded stock is that another firm has not also simultaneously downgraded it. Stocks that are both upgraded and downgraded the same day make poor picks, and often fall. Upgrade: A positive change in the rating of a security. For example, an analyst may upgrade a stock rating from 'buy' to 'strong buy', Downgrade: A negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook or industry. An analyst may downgrade a stock from a buy to a sell, after the company released information about a Securities and Exchange Commission investigation into the company's operations. NOTE I have taken MSN Money into consideration. If you use another service, you may not find some of the features we are going to discuss very soon, so I do suggest using 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. Here is the URL that you can use for your purpose: http://moneycentral.msn.com/investor/calendar/ratings/current.asp
  46. 46. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 46 Upgrades / Downgrade: May 25 Write down the symbols so that you can use it as a checklist in order to facilitate the elimination of disqualified stocks. You can either use your computer’s notepad or a paper for this purpose but I want you to keep these stock symbols available because we are going to need them very soon.
  47. 47. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 47 STEP 2 Determine 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 an online 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 box and search for it. http://moneycentral.msn.com/investor/research/welcome.asp This 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.
  48. 48. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 48 Here, we need to look at the one - year performance chart of the stock. So we’ll click on “SNAPSHOT” which located at the right hand side of the page. (See Red Arrow in the above shown picture). Now as soon as you click on the ‘Snapshot” link, it will open a new page which would look like this:
  49. 49. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 49 IMPORTANT Following are some of the points that you must take into consideration while 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 better understanding of all the points given above: RESULT: Doubt REASON: The stock has started rising up recently but has not been performing very well for the last one year. ELIMINATE IT
  50. 50. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 50 RESULT: Pass REASON: The stock has been an excellent performer over the last one year TAKE IT RESULT: Fail; REASON: The Highly volatile stock ELIMINATE IT
  51. 51. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 51 NOTE Repeat this step for each stock in the list and eliminate or disqualify the ones who 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 of BMC Software Scout Rating Summary:
  52. 52. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 52 You would also like to check for the recent headlines. Make sure that they are saying nothing of a recent downgrade. Repeat the steps until you have left with just a few stocks 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 a determination of which of the day’s upgrades are suitable, if any. Earning per share & P/E Ratio
  53. 53. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 53 The P/E ratio is the Price to Earnings ratio, which tells us, in the example above, that BMC Software stock price, is currently trading at 33 times its most recent earnings per share. This is also called a stock’s multiple. If the stock had no earnings, the Earnings per Share would be zero or a negative number and the P/E would read N/A or something similar to that. If there are earnings shown, that is all we need to OK it. No earning shown means DISQUALIFY THE STOCK. Earning Growth Rates Now, 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 “Earning Estimates” 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 estimated percentage figure is: a) Not zero or a negative number b) 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 expectations for its competitors and that a subsequent downgrade or decline is less likely. The snapshot of BMC Software Inc. from MSN Money will give you some idea about “Earning Growth Rates”. Please have a look at that:
  54. 54. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 54 As you can see in the picture that earning growth rate of BMC Software Inc, is greater than the respective industry growth rate and therefore we will keep this stock for the further consideration. The second thing we need to look at is “Consensus EPS Trend” which can be found on the same page. Make sure that EPS Trend for this quarter from 90 days, 60 days, 30 days, 7 days and current must be flat or rising. Let’s compare Eldorado Gold Corp. and Palm Harbor Homes, Inc. in order to have a better understanding of EPS Trend.
  55. 55. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 55 RESULT: Pass REASON: Consensus EPS trend is FLAT TAKE IT
  56. 56. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 56 RESULT: Fail REASON: Consensus EPS trend is FALLING DOWN ELIMINATE IT Analyst Rating Next, (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 that average brokerage recommendation should be “Buy” or “Moderate Buy”.
  57. 57. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 57 RESULT: Fail REASON: Average brokerage recommendation is HOLD ELIMINATE IT
  58. 58. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 58 RESULT: Pass REASON: The average brokerage recommendation is MODERRATE BUY. TAKE IT Disqualify a stock that is even or outweighed in the opposite manner, i.e. in favor of 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 more valuable than another. If you get to this point but have difficulty deciding on one over another, look deeper, if you like.
  59. 59. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 59 Check recent news for any negativity in the stocks using the financial resource content provider. Disqualify the one with the most recent mention of anything negative in its news stories. The idea is to select the qualifying stock based upon these tests. It may come about that no stocks that morning fit within the specified criteria. In that instance, simply sit out that session’s trading. This is not day trading; we do not gamble blindly on any stock which has seemingly favorable news, or plunge in with an attitude that we simply must be in some security each 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 the recommendation rating of an equity, thereby producing in the marketplace an actual short-term addition of value for the security, not just a positive news story open to interpretation 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 test for, and which gives us the needed safety to risk going after the short-term gain from the stock’s newly upgraded status. What’s Next…!! Wait until exactly 10:00 A.M NYT before placing the buy order. You can also place the sell order immediately above 1% + brokerage of your buy price. This way you don't have to watch the stock market again for the whole day and you can get on with your life.
  60. 60. 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, technical skills or complex mathematical formulae. It may look like a lot of work but trust me, it is extremely SIMPLE. Do it yourself for couple of times and I am sure you will find it very easy and interesting. But if you are still finding it difficult to earn 1% profit consistently, I can suggest you an easier way. Wouldn't it be nice if you could simply place your trades before the market even opened, and then go about your life - free of being forced to watch the stock market? You could have the potential of making serious amounts of money with minimal effort. You see, me and my 5 other colleagues have recently launched an exclusive stock market community. This is our dream project and we're committed to make this one of the biggest stock market communities in the world. It's called 5MinuteTrader.com The website is already live and doing extremely well but we want to make sure that our subscribers are getting at least 1000 times the value for their money. And therefore we're looking for some beta-testers who can help us to add some more value to the membership area. And this is where you come into the picture because without your help it is not possible for us to know what exactly are you looking for and where are we lagging behind?
  61. 61. What else can we offer you to make this exclusive membership even more valuable? Your feedbacks not only motivate us but they also help us to improve and serve you better. And to encourage you to take part in this exclusive stock market community, we would like to offer you a deal. Here's it is – You give us your feedback and let us know what do you like about this membership, what else do you expect and what can be done to make it even better... I’ll give you 50% discount on the subscription fees. Plus, every time you'll renew the subscription, you’ll be paying just 50% of the subscription fees. So that's 50% LIFETIME discount. Click here to know more about the 5MinuteTrader.com Click 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, technical skills or complex mathematical formulae. In fact, a 10 year old kid can understand and implement it easily. But there is one problem – It may not work every day.
  62. 62. There are about 5 very simple steps described in EBook which you need to perform to find out the wining stocks but sometimes you won’t find any stock passing our selection criteria. And in that case, we recommend you to skip trading for that day. And there’s nothing 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 stock market 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 you've ever seen or heard about. Each and every section of the membership area will contain priceless information that will have you scratching your head. You'll constantly be saying to yourself, "Why didn't I think of that?" Believe me or not, this surely going to be one of the biggest stock market communities in the world. And I hate to sound 'cheesy' but I truly think there's a 99.99999% chance that if you just follow what I'm saying right now it will...
  63. 63. CHANGE YOUR LIFE! Yes, that sounds a bit "hypey" and bold but it's the truth. You must be thinking how can I say it with such a confidence? Because... 5MinuteTrader.com™ is going to give you so much stuff to learn and sharpen your trading skills that you just can't stop loving it. Note: Please remember, 5MinuteTrader.com has nothing to do with our strategy and you are not bound to take their subscription at all. We’re telling you about 5MinuteTrader.com, just to give you one more option to make money from the stock market. Our strategy is really simple and you can follow it yourself without any help. The only thing which is required from your side is consistency. As I already told you that you don't have to make the “Monster Trades" to make big profits. Click here to know more about the 5MinuteTrader.com Click here to subscribe at a discount price of $48.50 Please note: This $48.50 special price is only available for "secrets of successful traders" customers. You won't find it anywhere else on this internet
  64. 64. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 62 A Quick Review
  65. 65. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 63 SECTION 2
  66. 66. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 64 HOW THE STOCK MARKET WORKS…!! Well, I am in no mood to write 100 pages just to tell you how the stock market works. I think 10-20 pages would be sufficient to give you the clear picture. So let's not waste time... Let's imagine that you want to start your own pizza shop. Now starting the pizza shop would require some investment. For example, you would be investing in equipments, land, furniture, food supplies etc. All the money that you invest to start your pizza shop business is called as capital. Let's say, you would be requiring the investment of $2000 in order to start your pizza shop business. But what will happen if you do not have the investment of $2000 in order to start your pizza 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, let's take both the situations one-by-one and find out the advantages and disadvantages with them.
  67. 67. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 65 Take Loan from Somebody Disadvantages 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 Stocks Advantages 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.
  68. 68. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 66 Disadvantages 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 the expansion and growth of the business. The business founders give up part of their ownership in exchange for this needed cash. The total number of shares will vary from one company to another, as each makes its own 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 billion shares such as IBM and Ford Motor Company. The very first sale of stocks to the public is called Initial public offering (IPO) and occurs on primary market. I know there is one question coming to your mind and you want to know the answer before 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?
  69. 69. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 67 Advantages to Shareholders When you buy stock in a corporation, you own part of that company. So as a part of a corporation, 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 corporation's 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 their money is going to grow with the company, they won't mind investing in your pizza shop. Example If you have invested $1000 to buy 100 shares of a company at $10 each and the share price rose to $13 each, you would gain $300. That is equivalent to 30% return. Why People Sell Stocks There can be so many reasons behind that. A person may just need the money. He or she may have watched the stock price go up, and have a feeling that this is the right time to get out of the trade and lock in some profit.
  70. 70. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 68 Any bad news about the company or the industry, or a disappointing company's earning report can also motivate him to sell the stock. He may also sell stocks because he sees a better opportunity in some company. For example, one may sell IBM shares, which is not moving, because he thinks he can make better profit in Microsoft. Most of time, investors sell the stocks because they have watched the price fall and in panic, they just want to get out of the trade before they lose even more. The Process of Issuing Stocks Corporations sell stock to public as one way to raise capital. They are not allowed to sell shares of stock on the open market without the approval of the Securities and Exchange Commission (SEC). A 20 days wait is required before it can sell the stock. Companies may make their statement public with a preliminary prospect called "Red Hearing". Basic information about the new offering is provided including how many shares are being offered, which brokerage company will distribute the stocks to the public. Now the company cannot sell the stock directly to the company. So they hire an investment banker to help it sell its stocks. The process is called "Underwriting". The investment banker works as a intermediary between the company and the public. In most cases, underwriter purchases the stocks from the company for resale to the public at higher price.
  71. 71. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 69 The difference between the price the underwriter pays and the price the public pays is called 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 Prospectus Prospectuses are legal documents that explain the financial facts important to an offering. They must precede or accompany the sale of a primary offering.
  72. 72. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 70 The law requires companies selling primary offerings to send prospectuses to anyone who wants to buy a primary offering. Customers should read a prospectus carefully before 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
  73. 73. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 71 SOME KEY TERMS YOU MUST KNOW…!! Ask The lowest price a seller is willing to accept when selling a security (stock). This is the opposite of bid, which is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid. The terms "bid" and "ask" are used in nearly every financial market in the world covering stocks, bonds, currency and derivatives. An example of an ask in the stock market would be $5 x 1,000 which means that someone is offering to sell 1,000 shares for $5. Bear An investor who believes the market as a whole or a particular stock will decline. Bears attempt to profit from a decline in prices. Bears are generally pessimistic about the state of a given market. A bear is the opposite of a Bull. Bid An offer made by a trader to buy a security. The bid will specify both the price at which the buyer is willing to purchase the security and the quantity to be purchased. This is the opposite of the ask, which stipulates the price a seller is willing to accept for a security and 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 is willing to purchase 1,000 shares at the price of $25. If a seller in the market is willing to sell that amount for that price, then the transaction is completed.
  74. 74. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 72 Book Value The Book Value is simply the company's assets minus its liabilities. Book Value = Assets – Liabilities In other words, if you wanted to close the doors, how much would be left after you settled 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 book value for its ability to generate earnings and growth. Broker A person that buys or sells an investment vehicle for you (securities, bonds, commodities, etc.,) in exchange for a fee, which is called a commission Bull An investor who believes the general market or a particular stock is going to increase in price. Buy Back The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.
  75. 75. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 73 Cash Dividend Money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors, and are taxable income to the recipients. Long-term investors who want to maximize their gains should consider re-investing the dividends. Most brokers offer a choice as to whether you wish to reinvest or take cash dividends. Closing Price The final price at which a security is traded on a given trading day. The closing price represents the most up-to-date valuation of a security until trading commences again on the next trading day. Dividend A portion of a company's income that is paid out to shareholders on a quarterly or annual basis. The Board of Directors declares dividends. Dividends may be in the form of cash, stock, or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this. Earning Per Share (EPS) Suppose there are 2 companies- A and B. Both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company's stock do you want to own?
  76. 76. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 74 It 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 the outstanding shares. EPS = Net Earnings / Outstanding Shares Using 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 50 shares 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 the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn't tell you whether it's a good stock to buy or what the market thinks of it. An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number but one could do so with more equity. This tells investors that the company 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 of the earnings number. It is important not to rely on any one financial measure but to use them in conjunction with statement analysis and other measures. Earning Yield The 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.
  77. 77. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 75 Face Value The nominal value of a security stated by the issuer. For stocks, it is the original cost of the 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 the first time. Joint Stock Company An organization that falls between the definitions of a partnership and corporation. This type 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 to the liquidity and financial reserves of stock markets, but also has the restrictions of a partnership. Market Capitalization A company's market capitalization (or "market cap") is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share. It is the amount of money you would have to pay if you bought every share of stock in a company. No. of Outstanding Shares X Current Price Market Cap = ----------------------------------------------------------------------- Share Purchase Price
  78. 78. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 76 The price that an investor pays for a security. This price is important, as it is the main component 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 purchase price of $35 to the price the investment was sold at or the current market price for XYZ. Share Certificates representing ownership in a corporation. Shares are also known as stocks or equities. P/E Ratio The P/E ratio is how much money you are paying for $1 of the company's earnings. If a company were currently trading at a P/E of 20, an investor would be paying $20 for $1 of earnings The P/E looks at the relationship between the stock price and the company's earnings. You calculate the P/E by taking the share price and dividing it by the company's EPS. P/E = Stock Price / EPS In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $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]
  79. 79. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 77 In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, or to the market in general, or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. Price / Earnings To Growth - PEG Ratio A ratio used to determine a stock's value while taking into account earnings growth. The calculation is as follows: PEG Ratio = Price to Earnings ratio / Annual EPS Growth PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG 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 Selling The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
  80. 80. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 78 Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price. Stock Stock is ownership. A business is divided up into shares of stock and parts of the company (the shares) are sold to investors to raise money. A holder of stock (a shareholder) has a claim on a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1000 shares of stock outstanding, and one person owns 100 shares, that person would own and have claim to 10% of the company's assets. Stock Signals These are recommendation given by the experts about any stock. Various types of recommendations are given below: Strong Buy: Very high recommendation given by the analyst to purchase a specific security. Buy: A recommendation to purchase a specific security. "Buy" is better than neutral but worse than "strong buy. Buy and Hold: A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.
  81. 81. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 79 Hold: An analyst recommendation to neither buy nor sell a security. Exact definitions vary by brokerage, but generally this rating is better than sell and worse than buy. The hold rating is right in the middle of the rating system. It means that if you own a security you still shouldn't sell, but you also shouldn't buy the security if you don't own it already. Also known as neutral. Sell: A recommendation to sell a particular security. This rating is generally worse than neutral, but better than strong sell. Stop Limit Order An order placed with a broker to buy or sell at a specified price (or better) after a given stop price has been reached or passed. This is essentially a combination of a stop order and a limit order into one order and allows the investor to better control their entry or exit price of a security. A stop order is an order that becomes executable once a set price has been reached and is filled at the current market price. A limit order is one that limits the entry or exit price to a set price or better. By combining the two orders it prevents the stop order from being executed at the market price which could be much different then what the investor originally 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 a stop-limit order to buy at $45. If the price of ABC Inc. moves above $45 the stop order to buy the security becomes executable but because there is also a limit order attached it limits 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 upward momentum behind (moving from $40 to $45).
  82. 82. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 80 Stop-Loss Order An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's 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 stock would limit your loss to 10%. It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time. Under performed An analyst recommendation that means a stock is expected to do slightly worse than the market return. Also known as market under perform moderate sell, or weak hold. Exact definitions vary between brokerages Upgrade A positive change in the rating of a security. For example, an analyst may upgrade a stock rating from 'buy' to 'strong buy'.
  83. 83. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 81 TRADING SECRETS…!! Although I can't discuss in very detail because of time and volume constraint, but for those of you who are either considering starting, or have already started trading in the stock market I would like to share few very essential elements of trading. To begin with, let's 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 trading system (entry, exit & trading rules). If you can master these three techniques, money will surely flow into your hands. I call them secrets NOT because very few of us are aware of them, but because very few of us use them. Have a look at the pie chart given below.
  84. 84. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 82 It has been found that the entire trading process can be divided into these 3 elements. Trading Psychology Money Management Basic Stock Trading System I am going to reveal these secrets one-by-one. And I want you to pay some special attention here. Let's begin with Psychology... TRADING PSYCHOLOGY- KNOWING YOURSELF IS A KEY
  85. 85. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 83 Let me share a story with you- This story is about two young men. Both of them graduated from the college on the same day. Both of them have a passion towards stock trading, both were intelligent, both of 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 with the precise rules for entry and exit. But after one month, there was a difference in the amount they have earned during that month trading stocks. After one month, one trader gone broke and other returned with 25% 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 of the stock market that is not available to others...? Is it that they have some kind of positive winning attitude...? ...a better computer and software? It's none of the above! The difference lies within you. Psychology plays a very important role in your way to trade. It is the relationship between your thoughts and actions that will determine how successful 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 a brilliant trading system, but if you feel frightened, arrogant, or upset, your account is sure to suffer.
  86. 86. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 84 When you recognize that a gambler's 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 on which you compete has been slanted to ensure your failure. If you allow your emotions to interfere with your trading, the battle is over. You are responsible for every trade that you make. A trade begins when you decide to enter the market and grids only when you decide to take yourself out. Having a good trading system is not enough. Most traders with good systems wash out of the markets because 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 trading depends upon your psychology. As traders we have to realize that we have no control over the market and we cannot influence the direction of the market. You must develop the mindset (and the true understanding) that you are a winning trader whether you are experiencing a run of losing trades or winning trades. Treat yourself as a professional trader. Know what motivates you, understand your limitations and become familiar with your strengths. This will help you to move smoothly through 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 ! Can't I do anything right ! What will my wife say if I lose this one !”
  87. 87. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 85 They are willing to spend thousands of dollars on "use-less" systems and out-of-town seminars, but are totally neglecting mental conditioning. You should be training as hard on your mental fitness as you do on preparing your trading signals. Don't get emotional about trading. Always remember, the current trade is only one of a long series. You are in this business for the long term. Remember that and don't, ever, get too attached to any one trade. It is highly unlikely that you will become a successful trader if you allow your emotions to control your trading decisions. Identify The Blocks To Winning Psychology The most destructive emotions leading to poor trading decisions are: Greed Fear Pride. Let’s talk about them one-by-one:
  88. 88. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 86 GREED Greed tends to keep a trader from closing out a position when a reasonable profit has already 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 made 100 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 get themselves 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. A greedy person will never be satisfied; he will always look for more no matter how much he 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 risk etc.) and apply them to the market and their trades. But it makes no sense because your non-market factors will NEVER decide that which way market should move. So your non-market decision like I want to buy a fancy watch from 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-market decisions make you greedy. Your greed makes you want more than the market may be offering and it certainly influences you into not acting in your own best interest.
  89. 89. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 87 ALWAYS REMEMBER Wishing and hoping is never going to take you anywhere. Be practical. Do what market is telling you to do… Staying in the market for too long (hoping for a huge windfall) is a strategy that backfires more often than not. Greed also tends to result in rash or impulsive trades. FEAR Fear will have traders selling existing positions too soon or avoid buying a stock that should be bought. In other word, fear leads to trading decisions becoming "paralyzed". Mark Douglas's four fears are: Fear of Loss Fear of being wrong Fear of missing out Fear of leaving money on the table I was once sitting in a room and trading futures. There I met a guy. I noticed that he was very unhappy and distressed. I asked him the reason. He had bet the farm shorting a strong bull market. He said- "I don't know why I just didn't cut the position earlier; anyone would have seen the strength- why didn't I?" I never saw him again.
  90. 90. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 88 That is the effect of fear - it drives out knowledge; it leads to shortsightedness, it immobilizes 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, and consequently generate an intense fear or even terror whenever he encounters any dog in the future. The child’s fear of all other dogs other than the one that bit him is real. He has no way of making a distinction between a friendly and a dangerous dog because his personal experience leads him to believe that all dogs are dangerous. However, the truth is something else…not every dog is dangerous. In fact, some of the dogs 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 further whenever he encounters any other dog. He thinks that the source of his fear lies in the outside world. But that’s not the case here. His fear actually lies within himself. He has a wrong perception 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 mind powerful direction. We could then end up with those same loses that we are trying so hard to avoid. Winning and losing are the part of the game. If you fail to make money once, it doesn’t mean 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.
  91. 91. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 89 PRIDE Pride tends to keep a trader in a losing position for too long because of unwillingness to admit that the original trading decision may not have been the right one. Let's take an example to have a better understanding of Greed, Fear and 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 doesn't have proper knowledge, equipments, tools and strategies. The figure given below illustrates the way our trader Harry follows while trading in the stock market Behavior of an Inexperienced Trader
  92. 92. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 90 The typical inexperienced member of trading Harry enters the market at point A. At the point A, the price of the stock is increasing and due to this increase in the price; he buys it and wants to earn some money out of an ongoing rally. Once a trade is entered, stock immediately moves strongly in his favor. Harry will suddenly 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 and decides to let it go.” Greed has now completely taken over his trading decisions and the previous plan (if any) is ignored. Of course, markets rarely move in one direction for long so trade starts moving against him because experienced traders start to cash in (Profit booking) on their profits and the rally quickly starts running out of steam. When the market turns, the greed turns to fear as the dream slips away and Harry tries to hold on until the price gets back to where it was. The daytrade becomes a position trade... Now Harry will fear that he has made a mistake. He fears making loss so he waits and hopes that the market moves back in his favor. The fear of taking loss now controls his trading decision. He is expecting that market will bounce 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 long term 'buy and hold' strategy. When the stock declines to the point where Harry cannot take any more pain he gets out at point B, just before the stock finally hits its bottom. If for some reason he didn't exit at point B, he will most likely exit at point C being happy to recover some of his losses.
  93. 93. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 91 Our trader Harry is exactly the kind of "herd" trader that successful traders 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 that's just great, there's plenty that won't. To trade successfully you need to remove all emotional influences. Here's a little exercise for you and believe me it can do wonders. So read it carefully.
  94. 94. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 92 At the start of each trading day, before the market opens, take a few minutes for yourself. Close your eyes. Start visualizing the market. See the real time chart on your computer 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. Notice you see the big picture. You are unemotional. Completely calm You put on another trade. Again, another smaller loss. You are still calm. Next a winning trade. Again, you are relaxed. It's all part of the job. This takes practice. And you must do it regularly to get the maximum benefit. Try it every morning, and any time you even begin feel stressed or you lose you focus. The advantage of this technique is it's FREE. And payoff is excellent.
  95. 95. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 93 MONEY MANAGEMENT…!! Warning ... money and portfolio management is one of the most important parts of successful trading. In this Ebook we are only going to touch upon money management. Let's first define money management: Money management evaluates the risk and reward of a trade and determines the best use of investment money. It tells you how many shares to purchase and how much money to place at risk. It is the difference between great trading performance and poor performance. It will make the difference between making money and going broke. Smart money management doesn't just involve risking the right amount on every trade, it also involves managing a winning trade from start to finish. This is an important part of any good trading methodology that is often overlooked by beginning and expert traders. One of the main ideas behind money management is to preserve capital so as to enable one to live to trade another day. Before you ever enter a trade, the first thing you should ask 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 that can put you out of business. The second goal is to earn a steady rate of return, and the third 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.
  96. 96. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 94 You have to know in advance how much you can lose - when and at what level you will cut your loss. Professionals tend to run as soon as they smell trouble and re-enter the market 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 "Don't let a winning trade turn into a loss," "You'll 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 TOO GENERAL!!! A beginning trader cannot be left filling in the blanks. Everything must be defined. That is why a complete trading strategy must include specifically how winning trades will be managed until the position is closed. Believe it or not, many people have trouble closing-out a profitable trade. It is a greed problem. If you are showing a large profit and you are a beginner, you got lucky. Go ahead and take the profit! To wait, just to see the profit disappear, is a classic beginner's mistake. Don't end up saying, "I should have sold when I was up".
  97. 97. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 95 One of the most common mistakes new and inexperienced traders make is that they start trading without any planning. They don't have any clue about the amount of money they can afford to lose if the trade does 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 Ratio Risk / reward ratio is a measure of reward obtained from the trade compared to the amount of risk taken for the trade. Let's take an example to understand the concept of risk / reward ratio. Example Harry purchases 100 shares of a company "A" at $10. His initial stop on this trade was set to $9.5 which means that, he will sell all his shares if the price of "A" drop to $9.5. Hence, Risk = Cost Price - Selling Price (Stop Loss) = (10 X 100) - (9.5 X 100) = 1000 – 950 = 50 Therefore, the amount he is risking on this trade is $50.
  98. 98. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 96 Now 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 = 200 Therefore, his reward for this trade is $200. To calculate the risk / reward ratio, we will determine ratio of risk taken in the trade to the reward. Risk / reward = 50 / 200 = 1 / 4 This 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/reward ratio of 1:3, or in other words, reward should be 3 times a risk. This is a BIG NO in today's trading scenario. The trouble with that approach is that in the real world of trading, such trades are usually only successful less than 35% of the time. That means 65% of the time the trade is a loser and that the probability of losing 5 trades in a row is about 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.
  99. 99. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 97 In this scenario, 35% of the trades will be losers and probability of 5 losing trades in a row is only about half percent (0.5%). Most traders would be happy to win 65% of the time with 1 to 1 risk reward ratio with little chance of an extended losing streak. You should understand that every time you enter a trade you take a certain amount of risk. 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 can trade 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 into 3 parts Entry Exit Stop Loss Let's begin with Entry and Exit
  100. 100. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 98 Without a specific entry & exit system, traders are like soldiers without a mission. The system 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 even harder. 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 our entry 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 the moment you enter a trade. Taking a profit requires more thought. When the market moves in your favor, you need to decide whether to stay put, get out, or add to your position. An amateur can tie his mind into a knot trying to decide what to do about a profit. He multiplies the number of ticks by their dollar value and feels a surge of greed: Let the trade run, make even more money. Then the market ticks against him, and he is hit with a jolt of fear: Grab that profit now, before it melts. A trader who acts on his emotions cannot make rational decisions.
  101. 101. SECRETS OF SUCCESSFUL TRADERS 2007 Edition 99 NOTE You can go back to the Greed and Fear example we have discussed earlier if you need a quick revision. One of the worst mistakes of traders is counting money while they have an open position. Counting money ties your mind into a knot. It interferes with your ability to trade rationally. If you catch yourself counting paper profits and thinking what you can buy with them -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. He decides to hang on the next time, overstays a trade, and loses money. If a beginner misses a profit because of a reversal, he grabs the first profit on the next trade and may well miss a major move. The market tugs on the amateur's emotions and he jerks in response. A trader who responds to his feelings instead of external reality is certain to lose. He may grab a profit here and there but will eventually bust out, even if his system gives him good 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 a good entry look bad and good exits can make a bad entry look good. ...Always have a proper Entry and Exit prices before even entering the trade.

×