Better Stock Trading E-Book

Daryl Guppy

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 416

Veröffentlichungsjahr: 2011

Beschreibung

An in-depth examination of money management methods for consistent trading success In Better Stock Trading, Daryl Guppy shows readers how to improve returns by using good money management techniqueâ??not by increasing risk in trying to win more trades. Readers will learn how to level the market playing field by using the best money management strategies for their particular account size. From the straightforward two percent rule, to pyramiding methods, and overall portfolio management, Guppy presents a selection of strategies, which will allow any independent trader to capitalize on a rising market and protect funds when the bear takes over. He also shows readers how to study their own trading history and use this information to improve their trading future. Trading skill counts, but money management gives independent traders the edge. Daryl Guppy (Australia) is an experienced and highly successful private trader. A member of IFTA and the Australian Technical Analyst's Association, he is a popular speaker at international trading seminars in Australia and the Asia Pacific region. He is the author of five highly successful trading titles, including Market Trading Tactics (0-471-84663-5), and is the Editorial Director of The Investors' International Bookshelf.

Leseprobe

CONTENTS

Foreword by Martin J. Pring

Preface: Cash stacks

Part 1: Performance Profiling

Chapter 1: Boom or Bust?

How Can I Improve My Trading?

Work Smarter, Not Harder

Hard Work

Smarter Management

Chapter 2: Risk With Style

Risk

How Much?

The 2% Rule

Entry and Exit

Risk With Style

Position Trading

Aggressive Trading

Conservative Investing

Chapter 3: MIX ‘N’ Match

Types of Opportunities

Trend Trading

Trend Trading Tools

Breakout Trading

Rally Indicators

Trend Breakout Rallies

Breakout Trading Tools

Support and Resistance Trading

Support and Resistance Trading Tools

A Plethora of Choices

Chapter 4: Risk in Time

Time Counts

Timing The Market

Return On Capital

Chapter 5: Equity Curves

Equity Curve Construction

Using The Equity Curve

How Many Steps Back?

Losing Trade Profiles

Winning Trade Profiles

Appendix: Constructing An Equity Curve Using A Spreadsheet

Part 2: Protect Capital

Chapter 6: Risk and Uncertainty

Probability Or Prediction?

The Risk of Prediction

Probability

Taming Market Risk

Setting The Stop Loss

Calculating Risk and Reward

Chapter 7: Flinch Points

Celebrity Corner

The Coward in Every Trader

Measuring The Flinch

Phase Transition

Reality Bites

Approaching The Deep End

The Deep End

Your Own Curve

Chapter 8: Securing Capital

The Zero Cost Averaging Strategy

The Sell Half Strategy

Protecting Profit

Rising Markets

Falling Markets

Multiple Trades Trigger Investments

Zero Cost Growth

Chapter 9: Danger on the Detour

Margin Trading

Types of Leverage

Trading Detours

Falling and Losing Control

Part 3: Protect Profits

Chapter 10: Exit Greed

Greed and The Exit

Optimum and Actual Exits

Hoping For New Highs

Chapter 11: Profit at Risk

Fast Movers

Working The Profit Squeeze

Selecting The Best Exit

Chapter 12: Winning Additions

A Successful Trend Trade

Pyramid Building Blocks

Chapter 13: Trending Toward Risk

Trading With Hope

Trading The Young Trend

Trading With Confidence

Trading With Certainty

Risk Captures Reward

Chapter 14: Exploiting Trends

Robust Trading

Trading With Maturity

Competing Pyramids

Chapter 15: Ordering Profits

Stand in Line

Opening Ticks

Buy Side

Singapore Pre-Open

Order Structure and E-Trading

Chapter 16: Ordering U.S. Profits

International Exchange Traded Funds

Direct Access Technology and ECNS

Superdot and Nysedirect

Routing Orders

Island

World Impact

Chapter 17: Asian profits on Order

Order Entry

Order Matching and Target Prices

Best Buy and Best Sell

Odd Lots

Part 4: Protect Portfolios

Chapter 18: Made to Measure

Measuring Returns

Fun With Funds

Hedging Returns

Chapter 19: Risk and Diversity

Volatility

The Investor

The Trader

When The Chips Are Down

Diversification and Allocation

Cumulative Risk

Volatility For Real

Chapter 20: Slicing Risk

A Swiss Roll Strategy

Top Stocks With Top Yields

Better Yields

Better Pool Selection

Getting The Most Jam

Making Dividends Work

Chapter 21: Swiss Curves

Portfolio Equity Curves

Portfolio Protection

Managing Cumulative Portfolio Risk

Chapter 22: Active Investing

Quality Stock

Rate of Return

Range Indicator

Holding and Taking A Profit

Applying The 2% Risk Rule

Chapter 23: No Sweat

Index

Copyright © 2003 by John Wiley & Sons (Asia) Pte Ltd

Published in 2003 by John Wiley & Sons (Asia) Pte Ltd 2

Clementi Loop #02-01, Singapore 129809

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop, #02-01, Singapore 129809, tel: [phone], fax: [phone], email: [email protected].

This publication is designed to provide general information in regard to the subject matter and it is sold with the understanding that neither the Publisher, Editor or Author are engaged in providing legal, accounting or other professional advice or services and do not in any way warranty the accuracy or appropriateness of any of the formulae or instructions discussed in the Publication nor provide any warranty that use of any of the same may not cause injury, illness or damage to the user. Readers should seek appropriate advice from suitable qualified professionals or obtain independent advice or verification of the relevance and appropriateness of the use of any formula or instructions prior to use of these in relation to any of their activities.

All charts created by MetaStock®

® Daryl Guppy 2002

Email [email protected]

Internet www.guppytraders.com

Disclaimer

The material in this publication is of the nature of general comment only, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without considering (and if appropriate, taking) professional advice with due regard to their own particular circumstances. The decision to trade and the method of trading is for the reader alone. The author and publisher expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this publication.

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• Library of Congress Cataloging in Publication Data

ISBN 0-470-82101-9

Foreword by Martin J. Pring

Author of Getting Started in Technical Analysis

There are many books available that make wild claims about the ease of making money in the financial markets. Others offer trading “secrets” revealed for the “first” time. The implication from all these texts is that it is a snap to trade your way to a financial nirvana. Just read the book and collect the profits. Unfortunately, as any professional will tell you, the reality of the marketplace is quite different. I won’t deny that there are some situations where the neophyte will hit it rich with a lucky streak—but that’s all it is: luck. It is surprising how good luck can unexpectedly reverse on a dime, as yesterday’s financial genius is exposed for the inexperienced neophyte that he really is.

In Better Stock Trading, Daryl Guppy tells it the way it really is. No hype, no tripe—just cold, hard facts from someone who has been there and done it. It is really summed up in the closing paragraph of the preface: “How we manage risk determines how well we trade.” I couldn’t agree more. Those who give precedence to earning profits over managing risk are doomed to failure. In my seminars, I often make this point using the following example.

The importance of managing losses

The starting amount of capital is $ 100. The first trade is a losing one that returns a loss of 50% and leaves an ending balance of $50 to begin the next trade. The next four trades are winners. The second trade increases by 50%, or $25, and leaves us with an ending balance of $75. The next three trades each make 10%. This gives us a total percentage gain in four trades of 80%. You would think that being down 50% and then up 80% would offer a great rate of return, yet when the calculation is made you are no further ahead. We are still a fraction under our starting capital. Concentrating on managing risk and cutting that initial loss would have returned a much higher rate of return.

This book is conveniently laid out in four parts. Part 1, “Performance Profiling,” introduces us to the concept of risk and examines how different categories of traders deal with it. Traders apply a variety of trading strategies. This part of the book describes three important ones: trend, breakout, and support/resistance. Daryl Guppy tells us that there is a distinction between timing the market and time in the market. Charles Dow, the father of technical analysis, once said words to the effect that pride of opinion has been responsible for more losses than all other opinions combined. What he meant was that many traders, when they enter a position that subsequently goes against them, become converts to the “buy/hold” approach as they quickly decide that they are now in it for the “long term.” Daryl Guppy explains that this is a cop-out and demonstrates that, in most situations, because of the time element, it leads to sub-par returns.

It is no coincidence that the subject of Part 2, protecting capital, precedes protecting profits, the subject of Part 3. That is because the number one objective of all professionals is to maintain principal. If you lose all your capital, you are out of business. By the same token, it is still necessary to protect profits as much as possible, because we are all subject to the temptations of greed and expect profitable positions to continue to grow. However, all trends eventually reverse, and unless profit protection strategies are put in place, it’s likely that black ink will quickly dissolve into red.

The final part of the book, titled “Protect Portfolios,” teaches us that portfolio risk overrides the risk management of individual trades. As a shopkeeper you can write off some of the inventory and survive, but you cannot write off the store and continue in business. The same is true for traders. Managing individual trades is fine, but you must also ensure that you keep an eye on the big picture by managing the portfolio. This part also explains the concept of diversification, along with how to judge performance against specific benchmarks.

Better Stock Trading won’t make you rich overnight, or even over two or three nights! However, Daryl Guppy has laid out the rules, which, if faithfully followed, will enable you to achieve above-average returns, and that is all any serious market participant can ever hope to achieve.

Martin J. Pring

International Institute for Economic Research, Inc., Sarasota, Florida, United States

December 2002

Martin J. Pring (www.pring.com) is the author of Breaking the Black Box and Getting Started in Technical Analysis.

CASH STACKS

Most of us dream of having a love affair with money. For many years I resisted this temptation. I subscribed to the view that money is made round to go around. No sooner did my pay check arrive than it was gone, spent on recreation and daily necessities.

It was a frugal farmer’s wife who introduced me to the idea that money is made flat to stack. She believed that every spare dollar should be stacked away in a bank account. It took 10 years for this idea to sink in before I started banking spare cash instead of spending it.

It took a little longer for me to discover how money multiplies when it is stacked in just the right place. In the financial market it has a real opportunity to multiply. Correct stacking turns good trades into fabulous winners. Just cutting losses quickly is not enough to turn trading income into wealth. Money management techniques magnify returns, but most methods apply to institutions and funds.

Private traders who trade just their own account are most often undercapitalized. We simply do not have enough money in the market to achieve the diversity, the economy of scale, or the size of investment required to effectively apply many institutional money management techniques. Some private traders turn to derivatives, futures, options, and warrants markets to achieve the leverage they need to magnify returns. Often they also unwittingly magnify the risk in a trade.

This book examines a small selection of money management methods suitable for private traders. Some have been mentioned briefly in magazines, including Stocks and Commodities, Active Trader, and Your Trading Edge. They are examined in much greater detail here. The book is not written for those with millions of dollars invested in the stock market. It is written for those with $21,000, $60,000, $ 150,000 or so in the market.

Most of my income comes from trading Australian and some Asian markets. These are the methods I use, and many of the examples in the chapters that follow are personal trades. These methods are not perfect, although they are battle tested across many international markets. I offer them as possibilities you might like to consider for your own journey from Trader Average to Trader Success. You may disagree with some of the methods, but the general principle remains true for all markets: we grow capital by carefully managing losses. We do not grow capital by concentrating on profit.

This book is not intended to be a comprehensive guide to money management. Readers looking for more detailed analysis, and for a variety of methods, should turn to the other authors mentioned in the following chapters. Please remember that many of their methods require significant modification for use with small accounts.

FOUR TRADERS

We enlist the help of some typical traders throughout the book to demonstrate various techniques. They are Traders Novice, Average, Success, and Superstar. There is a little of each of them in every reader. We also have the occasional visit from Trader Lucky.

The differences between Trader Novice and Trader Superstar come from the way they understand and manage risk, The amount of money they have, their relative skill levels, and the number and size of their winning trades will also contribute to their performance, but the heart of the matter is the way they manage risk. The distribution of returns from successful trades is generally the same for each of these traders, as shown in the figure opposite.

Most trades deliver average returns of around 10%. The analysis is correct, but the trade does not perform well. A reasonable number of trades return between 20% and 30%. The bonus returns come from just one or two exceptional trades where everything comes together. The trade analysis is correct, price leverage helps increase profits, and the exit timing is excellent.

Trading performance

We cannot identify these exceptional trades in advance. When they happen, we need to recognize them quickly. Then we use one of several money management strategies to boost the trade performance and its contribution to our annual trading results. Trader Novice does not understand these skills, so he adds perhaps 10% to his portfolio capital during the year. Trader Superstar has a similar distribution curve to Trader Novice, but uses money management to collect a far superior return on portfolio capital. Understanding these methods is the subject of this book.

Our purpose is to explore some approaches to risk and money management that do not depend on technical and chart analysis. We assume you are already skilled at locating a trend change, recognizing an up trend, and eventually deciding when the trend changes to a downtrend. We do not cover trading techniques in detail. Instead, we explore the way money manipulation improves, or hinders, your trading performance no matter what your skill level.

We do not intend to tell you there is only one way to approach money management issues. There are many different approaches suitable for small accounts. Our objective is to show you some of the ways trading performance is boosted by better money management and by a better understanding of risk and its impact on your portfolio. Ultimately, you may choose to select just one or two, if any, of these techniques. The choice is yours and the choice is as individual as every trader.

Our focus is on the stock, or equity, market. This is the bread and butter of trading. We ignore the fancy toppings with twists and twirls available from trading options, warrants, futures, and other derivatives. These have different risk profiles and different money management strategies based on the leverage they offer. Traders interested in these particular strategies should turn to Schwager on Futures by Jack Schwager, or Options as a Strategic Investment by Lawrence McMillan, for more specialized and expert analysis.

SPREADSHEETS

The exploration of money management rests heavily on spreadsheets. In this book we keep these to a minimum and summarize results in chart displays. We use 12 Excel spreadsheet templates. They are available as the Better Trading pak from www.guppytraders.com. They are quite simple in their construction. We have not used macros or complex programming to create an eye-catching spreadsheet. We want users to modify these templates to suit their own purposes, or to use them as a base for further development. The templates are not password protected. They are locked. To unlock them, simply go to TOOLS and select PROTECTION. Then select UNPROTECT WORKSHEET.

The price charts in this book are created by MetaStock. Data comes from Just Data, KeyQuotes, and Partitech. The charts in Chapter 22, contributed by Alan Hull, are created by SuperCharts.

Our objective is to build better trades by applying leverage. The shape and content of this book has been greatly improved by the leveraged assistance provided by others. Good friends and fellow traders, Robert Deel in the United States and Sunny Low in Malaysia, contributed specialist chapters detailing the tactics used in their markets to turn analysis to success by better trade execution. Eminent technician, author, and colleague, Martin Pring, prepared the foreword. My office assistant, Leehoon Chong, ploughed through the early drafts, diligently correcting spelling and unusual grammar, and highlighting obscure passages. Ivy Batten verified mathematical accuracy. My mother Patricia proofread the final draft while noting that inserting punctuation marks in the same muddled way as letters was taking dyslexia to extremes. Without a suggestion from Dianne Maurer the title for the book might have been different. The people who read our weekly newsletter and visit www.guppytraders.com have all contributed to the production of this book. I hope it meets your expectations.

We have many newsletter subscribers, all of whom are allocated passwords with which to download the newsletter each week. To a good Chinese friend in Singapore, Nicholas Teo, I allocated a password including the combination 8884. The combination of three eights is auspicious, but the number four should be avoided. When spoken, it sounds similar to , the character for the Mandarin word meaning “death.” Nicholas asked if the number could be changed. I explained I had deliberately included a four in the combination to remind him that every trade carries a risk of financial death.

How we manage risk determines how well we trade. Money management is the key to better trading. This book introduces you to a selection of techniques suitable for traders with small accounts. It shows you some ways to stack your trading returns so that they multiply. Please read on and prosper.

Daryl Guppy

Darwin, Northern Territory, Australia December 2002

Part 1

Performance Profiling

ONE

Boom or Bust?

Rich or poor? Boom or bust? The choice is often ours, but what really makes the difference to the result? In the financial markets the difference comes from money management. This can be learned, and it uses techniques mastered with simple spreadsheets and easy rules. The objective is to take a small amount of cash and, by trading the market, consistently turn it into a larger pile. In this book our focus is on better ways to turn cash into capital through better trading.

We delude ourselves with comforting lies if we think the difference between wealth and poverty is just about being born with money. This does not explain how money is used to make money.

We all start with some cash, and we need to keep it so that it can grow. The financial markets are the most effective way of putting money to work. They are also a very effective way of losing money very quickly if you place faith in blind luck, in selected blue chip companies such as Enron or WorldCom, or in investment funds which focus on fees and commissions just for matching the performance of the market.