The Successful Trader
by
Phil Duke Ph.D.


Introduction

Hello fellow traders: I am an independent stock market and commodity futures analyst, technician and trader. My trading began part time in 1954.

There is no charge for the educational information I post.

There is a charge for my services providing in depth detailed analysis, specific financial advice, money management, corporate board membership etc. Let me know what you are interested in.

As time allows I will
reply to brief questions or comments.

Disclaimer

The information contained herein is provided in good faith, but no claim is made concerning its accuracy, completeness, or relevance. I assume no responsibility whatsoever for the results of applying this information in any way whatsoever. Use entirely at your own risk.

Post One: Trading Background Information

This Post provides general background information on trading. Subsequent posts will provide detailed information on specific trading subjects, such as trend, pattern and gap analysis.

The Successful Trader Defined

The successful trader shows a profit consistently, in both bull and bear markets. Some years are better than others, but every year shows a profit. Showing a profit in a bull or bear market alone does not qualify.

Capabilities Of The Successful Trader

The successful trader understands (mental ability) the methods of price prediction called Technical and Fundamental analysis.

The successful trader acts (emotional ability) by placing orders consistent with his/her price predictions. Positions are entered and exited predominantly on mental, not emotional considerations; losses are taken promptly, and profits are maximized.

The Great Obstacle To Becoming A Successful Trader

I consider it easier to become a successful brain surgeon than a successful trader. How many successful traders are there? Not many. To overcome the great difficulties of becoming a successful trader, a trader trainee must be strongly motivated, to continue despite the many disappointing trades while learning over sizable times. These disappointments are the great obstacle to success.

Reasons For The Great Obstacle

Uncommon mental and emotional abilities both enter into the makeup/training of a successful trader. In my opinion there are two reasons for the great obstacle of many disappointing trades.

  • The subject itself is quite difficult and demanding. Both an extensive knowledge of technical and fundamental analysis, plus unusual emotional stability and control, are required.
  • Formal complete training in the subject of trading is essentially unavailable.


People may learn something about trading several ways; by lengthy apprenticeship with a broker or exchange, by exposure to limited, incomplete courses of instruction, by reading books and articles, by communication with other traders, etc. But, just as in any other field, there is no substitute for learning by actually doing, so people learn to trade mostly by trial and error while trading. It is unpleasant to learn while being punished by losing your money. But every trader I know has done this. Welcome to the Club!

Deceptive Ease Of Trading

It is deceptively easy to begin trading. The market is like a lady of easy virtue; all you need to get acquainted is a little money. There is no other requirement. Education, training, experience, forget it, not necessary. Due to this ease of trading entry, everyone who enters the market and trades is in the beginning quite unprepared to make the difficult mental/emotional evaluations/decisions necessary for success. And so new traders rapidly lose their trading money. That is why paper trading, trading without money at risk, should be employed at first (see following on Paper Trading).

Considering all the above it is no wonder that there are so few successful traders. The wonder is there are any. After making and losing several fortunes in the markets, the great speculator Jesse Livermore said toward the close of his life, that "it was impossible for any man to take money consistently from the markets."

I maintain it IS possible. But it is NOT easy.

Paper Trading Highly Recommended

Paper trading is highly recommended. All new and relatively new traders, and also traders in a losing streak (it happens), paper trade only. To do this assign yourself an entirely realistic amount of money on paper, an amount you would be prepared to lose entirely by actual trading. Then trade with this on paper, employing just as much analysis and care as if this paper were real money. It is important that you make every trade with full, careful, detailed analysis. Keep track of and carefully evaluate all the trading results. Learn as much as possible from both winning and losing trades.

When and if you show a consistent paper trading profit over time and number of trades, then, IF you are prepared to lose it all, try actual trading, again with an amount you are prepared to lose entirely. Be aware that actual trading results, with money, are almost always worse than paper trading results.

This is because the emotions of fear and hope, generated by the prospects of losing and gaining wealth, are the major obstacles to success. To be successful these emotions must be dominated by intellectual considerations regarding probable future prices.

Again, people who begin trading with real, not paper money, always lose most or all of it. Then they leave off trading and many never return. It would have been much better for them if they just began with paper trading. And, traders in a losing streak should paper trade until the losing streak ends. Paper trading is highly recommended. Just do it.

In an especially risky, unclear price analysis situation a professional may ask "what if?" and paper trade, just to evaluate the analysis. This can become a good learning situation.

How Price Is Determined

Stock Price is not determined by supply and demand, as many people think. In fact price is determined by how the present price and future prices are perceived by those involved. Not by the relations of present and future prices to reality, the real, economic world. This reality price is often unknown. And even when the reality price is known, it is often disregarded, due to the powerful emotions of greed and fear. These may result in "irrational exuberance," a term coined by Alan Greenspan. It can also result in irrational fear. Even panic.

Buying and Selling Pressures Determine Market Prices

The perceptions by traders of present and future prices cause some traders to place orders. The orders have the result of producing buying and selling pressures. The buying and selling pressures impact on prices, and are what change prices. I define these pressures as follows:

Buying Pressure equals the sum of [(Trader Number wanting to buy) times (Trader Desire to buy) times (Trader Financial Ability to buy)].

Selling Pressure substitute the word sell for buy.

Trader Desire to buy/sell is determined by how high/low a price the trader is willing to pay/receive to buy/sell.

Buying and selling pressures are rarely equal for any appreciable time period during active trading. During active trading there are frequent price movements as the price adjusts to the constantly changing buying and selling pressures. Buying and selling pressure imbalances constantly readjust the price, resulting in a dynamic equilibrium at every moment.

What Determines Changes In Buying And Selling Pressures

When buying pressure increases the price rises. When selling pressure increases the price falls. These pressures change due to changes in trader attitudes towards the trading vehicle. The changes in trader attitudes are related to the following.

(1). New bullish or bearish news. New news continually enters the market and as it becomes known affects prices. The bullish or bearish nature and importance of news is evaluated by its affects on prices. As a rule the more fundamentally important the news is perceived to be, the greater and more prolonged its affects on prices.

(2). Contrary unexpected news. Contrary unexpected news may enter the market at any time. This is the greatest single weakness of Technical Analysis. Even if your analysis were perfect, new, unexpected News can always enter the market at any time, and completely invalidate prior analysis. For example, the tragic events of 9-11-01 quite unexpectedly threw many markets into sharp declines.

(3). Incomplete News evaluation. News constantly enters the markets in such quantity that no one can be fully aware of it. You can only try to be aware of (all)? news relating to your trading vehicle.

(4).Inaccurate News evaluation. The News cannot be accurately evaluated because the human mind cannot accurately perform the required numerous, weighted and subtle comparisons. All that can be done is to attempt accurate evaluation based on valid general principles and past experience.

(5). Trader emotional reactions caused by price movements over time. At first it's follow the crowd (price movement), later on the movements become enough to end themselves. The strains of seeing price movements over time periods result in many decisions over time to buy or sell. The most common time periods are 1- 3 days. After moving in the same direction for 1- 3 days, many stocks will then reverse price, if only partly/temporarily.

Again, most traders trade on their attitudes towards a trading vehicle; do they like it, what is their gut feeling about it, etc.

(6). Trader attitudes change due to changes in trader brain biochemistry. Many factors impact on and produce changes in trader brain biochemistry. These factors include such things as illness, fatigue, day/night cycle positions, biorhythm cycle position, day of the week, major events such as Holidays, the weather, the season, phases of the Moon, etc. For example, traders may be puzzled when prices are down on the close, and the next day open up, without any relevant news. Numbers (5) and (6) above present likely reasons. Things often look different after a good night's sleep.

Price Extremes - Bubbles And Crashes

Since the human mind is an imperfect mode of perception, prices may travel surprisingly far from reality, at least for a while. In extreme cases such price travel upwards is called a bubble, downwards a crash. Eventually however the reality of prices in relation to the real, economic world, outside the human mind, returns to control the price of everything. Both bubbles and crashes are characterized by continuing, extreme and unjustifiable price movements. They are very risky. They can also be very profitable.

Price Prediction Is Required

The successful long trader must buy low/sell high. Profitable trading requires that the trading vehicle exhibit minimum price change in the desired direction within the maximum allowed time frame. To do this it is required to predict future prices, at least to the minimum necessary for profitable trading.

Future prices however cannot be predicted with certainty.

This is basically because all physical phenomena are generated in terms of probabilities. There are no specific certainties in this universe, only probabilities. Therefore in theory there can never be certainty about future prices. Price predictions can be generated only in terms of approximate probabilities. According to probability theory an improbable event can occur on the first trial. This is unlikely but still quite possible. An acquaintance held an accurately researched heavy position ahead of a USDA Commodity Report. The Report was quite different than expected, and he was wiped out. Not long after it was disclosed the Report was in error. The Successful Trader protects against all situations where being wrong has catastrophic consequences.

Fundamental and Technical Analysis

The main methods of price prediction are Fundamental and Technical analysis. Fundamentals and technicals look respectively at financial and price related number changes over time. Both methods have strengths and weaknesses. They are best used together. Future postings will emphasize Technical Analysis.

The Successful Trader will have mastered and when trading always applies both methods of analysis.

Entering and Exiting Positions

When satisfied with the price prediction a position is entered. Entrance is made at and only at the optimum analysis position. This is termed "Entering on Support." IF the analysis is approximately correct, and IF no new price impacting considerations enter, the price will move approximately as predicted. Then when the profit objective is reached the position is exited. If the price does not advance as expected, the reason for this is immediately sought. Based on the reason's expected future affects on the price, decision is made to maintain or exit the position. If the reason is not immediately found the position is exited. Once the decision is made to exit, do so immediately. If your evaluation is correct it rarely pays to wait. The longer you wait the harder it becomes to act effectively.

Orders

The successful trader knows what types of orders to employ and when to apply them. Briefly- I suggest the use of limit NOT market orders. Market orders generally invite trouble. You may be surprised at the fill price of your market order. Market orders can be used in extreme situations, where you don't care about the order fill price.

The (only) advantage of the market order is the added assurance that your order will (eventually) be executed. Along with you. Use mental not actual stop loss orders. When price action warrants exiting, exit by means of a limit, stop loss, or market order. A stop loss order when triggered becomes a market order. To avoid order errors write orders down and look at what is written before entering. If you use a live broker he/she should repeat the order before entering it.

That's probably plenty for now. Following are 18 Old Trader Sayings for your amusement and possible edification. Take them for what they are worth to you.

Profitable trading and good luck to all.

-- Phil Duke Ph.D.



18 Old Trader Sayings



(1). Enter long positions on the strength of price support. Exit long positions on the weakness of no price support.

(2). Trends are friends. Trade with not against the trend.

(3). Buy on the rumor. It's not already in the price. Sell on the news. It's already in the price.

(4). Scared money loses. Don't be afraid just because it's you. The market doesn't know or care about you.

(5). Diversify. Never put all your eggs in one basket.

(6). Overtrade and lose. Trouble sleeping you are overtrading.

(7). Figures don't lie but liars figure. Remember Enron.

(8). Luck is with the better trader. The poorer trader has bad luck.

(9). Bulls and bears can make money, but not pigs. Greed (and fear) are the enemies of success.

(10). Enter at extreme positions.

(11). Exit at reasonable positions.

(11). Cut losses and let your profits run.

(12). Price advances weaken the market.

(13). Price declines strengthen the market.

(14). Sucker money is always welcome.

(15). Beware, the market is a whore, it will take your money and you will be sorry.

(16). Trading is a zero sum game. Your loss is their gain.

(17). Eat or be eaten.

(18). Kill or be killed.

The End For Now.








"Fear is the greatest obstacle to success in trading and in life."

-- Christina Nikolov, Founder ChartWatchCentral

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