Survival Guide for Traders E-Book

Bennett A. McDowell

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 441

Veröffentlichungsjahr: 2011

Beschreibung

The must-have guide for anyone considering entering the exciting world of trading from home The biggest stumbling block for people looking to launch their own trading businesses from home is a failure to understand the complexities of the "back office" operations needed to be successful. Survival Guide for Traders is here to help. Packed with strategies for building a successful home trading business, and featuring answers to questions most up-and-coming traders would never think to ask, Survival Guide for Traders is required reading for anyone who wants to start and sustain a trading business from home. * Explains how to create a trading business plan, set up an office, implement a trading system, use margin, deal with legal and financial issues, and keep appropriate records * Examines the opportunities and challenges of handling a home-based trading business * Details the process of setting up and organizing your trading business * Includes a comprehensive "Trading Business Plan Template" that you can customize * Written by Bennett McDowell, a highly regarded trader and trainer of traders The book for anyone even thinking about entering the exciting world of trading, the Survival Guide for Traders offers practical solutions that anyone can use in order to build a lasting, thriving home trading business.

Leseprobe

Contents

Foreword

Preface

Acknowledgments

Disclaimer

Introduction: Survival of the Fittest

Part I: Survival Basics

Chapter 1: It’s a Jungle Out There!

Brawn, Brains, and Technology

Technological and Innovation Time Line

Don’t Bring a Knife to a Gunfight

Right in My Own Backyard

Chapter 2: Managing Your Money Is Serious Business

Trust and Financial Advisers

Tips on Selecting a Qualified Financial Adviser

So, Who Are You Going to Trust?

Creating Your Own Business Plan Will Strengthen Your Ability to Prosper

Trade, Invest, and Live within Your Means

Chapter 3: Accountability, Setting Stops, and the Rogue Factor

Traders are the Ultimate Entrepreneurs and Must Be Held Accountable

Setting Stop-Loss Exits is Essential

The Infamous Rogue Trader Named Nick Leeson

Watch the Rogue Trader Movie

Insurmountable, Large Losses Usually Start as Small Losses

Chapter 4: What’s Your Net Worth?

Net Worth Statement

Creating Your Financial Profile

Are You Moving Forward, Falling Backward, or Standing in Place?

Chapter 5: The Life of an Entrepreneur

New Start-Up Businesses have High Failure Rates

What does It Take for a New Business to Succeed?

Small Businesses are the Backbone of the Economy

Reduce Your Expenses and Increase Your Revenue

How to Reduce Expenses

A Penny Saved is Really One and a Half Pennies Earned

It’s all about the Revenue

Chapter 6: Understanding Financial Markets

Buyer and Seller Agree on Price, but they Disagree on Value

Buyers and Sellers and the Financial Order Flow Process

Types of Orders

Using Margin and Leverage

The Importance of Liquidity and Volume

Zero Liquidity

Volatility and Market Gaps

How can the Bid and Ask, Spreads, Fills, and Slippage Affect Your Profits?

You Can Parallel Test Your Broker and Data Feeds

“I Feel the Need for Speed”

So Many Markets to Choose from

Ticker Symbols at a Glance

How to Choose the Best Data Feed for Your Needs

How to Choose the Best Broker for Your Needs

How to Choose the Best Front-End Platform for Your Needs

Manias, Panics, and Crashes

Chapter 7: Adapting to Changing Market Cycles

Four Major Market Cycles

It’s all in a Name

Using Trend Lines to Identify Market Cycles

Using Elliott Wave Analysis to Identify Market Cycles

Pitfalls of not Identifying Market Cycles Correctly

Chapter 8: Education and Support

A Few Classic Trading Books

Learning Styles

Repetition, Repetition, Repetition

Paper Trading is an Essential Learning Tool

Do it Your Way

You can Learn from Your Mistakes and Failures

Life Mentors, Professional Mentors, and Trading Coaches

Chapter 9: Writing a Business Plan

Business Plan: Blank Template

Front Matter: Title Page, Table of Contents, and Mission Statement

1. Summary

2. Strategy

3. Operations

4. Financials

Business Plan Tips

Part II: The Financial Pie

Chapter 10: The First Slice

Develop and Test Your System

Perseverance is the Holy Grail

Failure is not an Option

Creating Your Trading Rules Profile

A Note about Day Trading versus Position Trading

Holding Trades Overnight and Assuming Overnight Risk

My Definition of Scalping

Sample Trading Rules to Start With

Combining Fundamental and Technical Signals in Your Trading Rules

Technical Analysis Signals

Fundamental Analysis Signals

Value Investing in a Bear Market

The Importance of Paper Trading

Set Up Multiple Brokerage Accounts to Monitor Your Trading Results

Chapter 11: The Second Slice

Technical Scanning Techniques

Fundamental Scanning Techniques

Opportunity is Always Abundant in the Markets

Stocks

Options

Futures

Forex

Exchange-Traded Funds

Chapter 12: The Third Slice

What can Money Management do for You?

Three Ways to Control Risk

Risk Factors to Develop Your Plan Around

Stop-Loss Exits can Save the Day

Your Survival Depends on Having a Healthy Respect for the Risk of Ruin

Optimal f Formula: Information Similar to the Risk of Ruin Tables

Comparing Optimal f Equation Results to the Risk of Ruin Tables

The 2 Percent Risk Amount Formula

Using the Trade Size Formula

Trade Size Formula Using Leverage

Using the Trade Size Calculator

Good Record Keeping and Performance Analysis are Essential

Without Risk, There is no Opportunity . . .

Chapter 13: The Fourth Slice

The Trader’s Mind-Set

Even Good Change can be Stressful and Emotionally Challenging

Looking at 15 Destructive Psychological Trading Issues and their Causes

Optical Illusions Show how Our Minds can Mislead Us

Epilogue

Appendix A: Online Bonus—Survival Guide Central

Appendix B: ART Basics

Appendix C: Resources: Front-End Platforms, Brokers, Data Providers, and More

Appendix D: Suggested Reading and Education

Appendix E: Market Exchanges

Glossary

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2012 by Bennett A. McDowell. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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 permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

McDowell, Bennett, 1957-

Survival guide for traders : how to set up and organize your trading business / Bennett A. McDowell. — 1st ed.

p. cm. — (Wiley trading)

Includes index.

ISBN 978-0-470-43642-4 (hardback); ISBN 978-1-118-15941-5 (ebk); ISBN 978-1-118-15940-8 (ebk); ISBN 978-1-118-15939-2 (ebk)

1. Electronic trading of securities. 2. Online stockbrokers. 3. Investments. 4. Finance, Personal. 5. Small business—Management. 6. Home-based businesses—Management. I. Title.

HG4515.95.M395 2011

332.640285'4678—dc23

2011025466

To each and every trader who has the perseverance and courage to live their dreams and turn those dreams into reality.

Godspeed to you all on this miraculous and rewarding journey.

Foreword

Butter!” we’d yell, our eyes glued to flashing level II screens on our monitors. “Bu-utter!”

It was the mid-1990s. About two dozen of us jeans-clad traders sat at long tables littered with keyboards and banks of monitors. We pounded out trades as we yelled. “Butter” was our code word for a rapidly melting level of ask prices on our level II screens. It meant gluttonous bulls were slicing through—buying—each price level of stock offered for sale—and fast. Our stocks’ prices were soaring. Life was good!

Outside the squat stone office building that housed our trading room, the cold, concrete city spread below. Smokestacks, streets, parking garages, and skyscrapers all reflected the steel-colored New York skies.

In our neon-lit room, however, shades of gray dissolved. Black or white ruled. Why? Because the stock market took no prisoners. Each day, we won . . . or we lost. Our hearts, minds, and trading accounts flew high on the white wings of each victorious trade. Or they descended into black holes of despair on the agony of trades gone sour.

What did we trade? “Any four-letter stock that moves,” we declared staunchly. Of course, we were referring to the four-letter symbols of the high-flying stocks listed on the NASDAQ exchange. Most were Internet bubble stocks—but we didn’t know about bubbles back then.

We did know that they exploded 20, 30, or more points a day (higher or lower), fueled by the high-octane energy twins, volume and volatility.

Ask any of us if we knew to which sector or industry group our stocks belonged, and you’d usually get a shrug. Who cares? If it moved, we traded it.

Miraculously, my trading account and I survived those go-go days. Of course, I learned a lot of lessons, some more enjoyable than others. I do know that had I and my trading buddies been given access to the commonsense content now put forth in Survival Guide for Traders, our losses would have been leaner and our wallets fatter.

In Survival Guide for Traders, author and trading expert Bennett McDowell offers you the framework of decision-making tools you need to establish and execute a successful trading business. And make no mistake. Trading is a business.

After all, who would we nominate for “Most Likely to Succeed”? The trader who has set up and organized his or her trading business with the kind of well-thought-out planning Bennett details in this book? Or would we nominate the “I’m-gonna-get-rich-by-Friday” trader, who jumps into trades without forethought of account size, share size, protective stops, and other risk management tactics that Bennett reveals in these pages?

Survival Guide for Traders tells you how to set up and organize your trading business in the best possible way. In each chapter, you will find a virtual cornucopia of helpful graphs, tables, and information you can personalize and apply to your trading business.

Survival Guide for Traders is divided into two parts: (1) Survival Basics and (2) The Financial Pie. Five appendixes at the book’s conclusion provide the reader with additional resources, from online brokers to books and movies that feature trading and Wall Street themes to discussions of Bennett’s ART trading platform.

In Chapters 1 and 2, Bennett warns traders that “It’s a Jungle Out There,” and advises readers of the importance of formulating a business plan.

Too many times, novice traders jump into the market with a fistful of cash and a burning desire to “beat the Street.” Either they aren’t aware that successful trading demands a business plan or they don’t think that kind of planning is necessary. The mind-set that accompanies that approach lacks discipline. Result? The stock market drools, smacks her lips, and eats those unlucky traders before the closing bell chimes.

Chapters 3 and 4 help you create your net worth statement. Such a statement is a vital action for all of us to complete. For traders, knowledge of your exact net worth is essential for creating your financial profile. Moreover, Bennett kindly provides several Sample Financial Profile templates for you to choose from. You can also study the Sample Net Worth Curve table; it can assist you in anticipating and guiding the direction of your discretionary capital.

In Chapter 5, the discussion centers on the entrepreneurial lifestyle. Six points detail actions you can take to ensure that your trading business moves forward in the best way.

Bennett also talks about simple, yet often ignored concepts that are so important to success. For example, “reduce expenses and increase revenue” is a given for any business owner. Yet as traders, it’s easy for us to get so immersed in market action that we forget to keep an eye on everyday business expenses that drain our funds. Confession: I am guilty of subscribing to too many expensive financial newspapers, some of which I haven’t time to read each morning. I just canceled those extra subscriptions. Thank you, Bennett, for the valuable reminder to use money management in every area of our trading business.

In Chapters 6, 7, and 8, Bennett spotlights the order flow process, types of orders, margin and leverage, the bid-ask spread, data feeds, and more—essential information traders need to begin executing trades. He goes on to talk about the four types of market cycles and shows readers how to recognize them. Again, here is more vital information that will help you excel.

The content in Chapter 9 provides readers with a comprehensive business plan. Bennett also includes a Vision Statement form, and ones for Money Management Strategy, Order Execution, and Profit and Loss History, among others. This is another chapter in Survival Guide for Traders that I wish I’d had access to a dozen years ago. Taking the time to fill out these planning tools embeds the seriousness of our trading business into our psyches.

Chapter 10 delves into trading and investing rules. If you apply these to your trading plan and use them with discipline and forethought, your trading results can improve nicely.

In Chapters 11 and 12, Bennett discusses scanning tools for both technical and fundamental analysis. While many traders do not incorporate fundamental analysis into their daily trades, I’m delighted to see that Bennett’s view aligns with mine—that applying at least the most basic fundamental knowledge to trades can give you an edge. Bennett also moves into one of the most neglected—but most important—aspects of trading, risk management. He offers a comprehensive list of all types of protective stops, which every trader should have at his or her elbow. As Bennett says, using risk management in the form of planning and placing stops “allows you to be wrong and not go bust.” Well said and so true!

Chapter 13 is devoted to the trader’s mind-set. Bennett furnishes readers with several checklists to consider, and they all pertain to establishing the proper mind-set with which to approach the markets. To me, this chapter alone is worth the price of the book. We’ve all seen traders who have rows of monitors and the best trading platforms money can buy. Know that all the equipment—and even gobs of financial knowledge—works only when those traders approach the markets with an appropriate frame of mind.

Survival Guide for Traders shows traders efficient and effective ways to build a strong and lasting foundation for their trading careers. Read it, then reread it and take full advantage of the fountain of information in these pages. This book belongs in every trader’s library as a timely and compelling guide to success.

Toni Turner

Author, A Beginner’s Guide to Day Trading Online,

A Beginner’s Guide to Short-Term Trading,

Short-Term Trading in the New Stock Market;

President, TrendStar Trading Group, Inc.

www.ToniTurner.com

Preface

Survival is at the heart of this book, more than getting rich quick or making a fast killing. Maybe on the surface that idea appears to lack ambition, but many of you who have been caught off guard even once by the power and speed of the financial markets know and understand the need for caution when entering even a routine investment or trade. Surgeons will say that there is no such thing as “routine” surgery. The same applies in the financial markets—there is no such thing as a routine transaction. Even deceptively safe vehicles can surprise the individual who is not alert and respectful of the markets’ overall supremacy.

What this means is that you cannot control the markets; instead you have to learn to listen to the markets and follow their lead, whether they be in a bullish cycle or a bearish one. The markets have the ultimate power to do as they desire despite any of us who may hope and wish for them to behave as we want them to. Much like Mother Nature, the markets can wield their strength swiftly and unexpectedly. For this reason it is best to study the markets, to be educated and prepared, and to never let your guard down.

Having outlined the goal—to survive (and as a result prosper)—the next step is to look at managing your hard-earned money as a business. It is not a hobby or an afterthought—or a nonexistent thought; your money is most absolutely serious business, and this book, Survival Guide for Traders, is going to teach you how to survive and prosper by treating it that way.

You’ll learn how to run a profitable trading business by keeping your eye on the ball and keeping expenses down and revenue up. Most important, we’ll show you why the old fashioned buy and hold strategies are not as effective as they used to be and why we all need to take more control over our finances—and even if we have qualified advisers, why we need to be in the driver’s seat. With the ammunition in these pages, you’ll have tools that can guide you through any market moving up, down, or sideways, and safeguard your trading and investment portfolio against unnecessary risks.

Ultimately, this book is intended to teach you how to personally build a profitable business using all your assets—financial, physical, and intellectual—that will succeed and last a lifetime.

Bennett A. McDowell

San Diego, California

September 2011

Acknowledgments

The very first edition of the Survival Guide for Traders was self-published back in the year 2000. The goal of the first survival guide was to outline the formula for success in the business of trading, and that first paperback edition covered the basics in less than 100 pages.

Fast-forward to the year 2011, as we’re just sending off the manuscript to the publisher for this new John Wiley & Sons edition of the Survival Guide for Traders, and my editor tells me this edition will be more than 300 pages. The growth of this book is symbolic of the fact that we’ve come a long way in the past decade. And that is in no small part thanks to the many fantastic clients, business partners, and family members who have been supportive all along the way. You have all helped shape the content of this book, and I thank you.

The journey started in 1998 when I first obtained the domain name for my website at www.TradersCoach.com back when the Internet was just taking off. At the time my brokerage business kept me busy with clients who liked active trading, and my methodology, now known as the ART® software, was what I used to trade their accounts for them. If you can believe it, back then I drew all my charts by hand to determine entries and exits.

We later transformed my manual approach into the ART software so that my clients could follow along at home, and that was released in 2003. Since then we have seen the popularity of the ART software grow to where it is today used by clients in over 50 countries around the world. The journey continues to 2008, when my first two John Wiley & Sons books were released. Their titles are The ART of Trading and A Trader’s Money Management System.

This brings us to 2011 and the release of this new book. My thanks go out to the entire staff at John Wiley & Sons, the greatest publisher on the planet. Laura Walsh, my editor, thank you for being so nice, patient, and professional—you are a gem! Judy Howarth, you are terrific at keeping everything right on track and Claire Wesley you are my production super hero! And of course thank you to David Pugh for your cherished friendship and for discovering us in New York City back in 2007.

Thanks also go out to a number of industry partners who were generous with their time in giving me input on a number of the chapters in the book, especially Chapter 6. John Gromala and Ryan Sindelar at NinjaTrader, Julie Craig at eSignal, Mark Grieco and Michelle Moore at TradeStation, Glen Larson and Pete Kilman at Trade Navigator, and Matt Verdouw at Market Analyst, thank you all for your generous feedback—it is greatly appreciated.

Then of course there are a number of wonderful educators in this industry that I am fortunate to have worked with over the years and to whom I am sincerely grateful. These exceptional people include Larry McMillan, Steve Nison, Stan Dash, Larry Pesavento, Bill Williams, and Leslie Jouflas, to name a few. Thank you all.

Thank you also to Ed Schramm and Jayanthi Gopalakrishnan from Technical Analysis of Stocks & Commodities magazine and Larry Jacobs from Traders World magazine. You are my favorite media moguls.

And of course, thank you so much to Toni Turner. It is an honor for her to write the Foreword to this book—in this business of trading geeks, she is one of the few traders who is a fabulous writer as well. (And I love having her as a neighbor here in southern California!)

Last but not least, thanks to my terrific partner and wife, Jeannie. Many of you have met her at the trade shows or talked to her on the phone. I will let you know that without her this book might not have been finished, since she did all the tables and organizing of the manuscript. Thank you, sweetheart; you are the best!

Just as with running a successful trading business, writing a book takes more than just one player to pull it off. Teamwork from my wife, industry partners, and my fantastic clients has all contributed immensely to this work. Thank you all for making the Survival Guide for Traders a reality!

Bennett A. McDowell

San Diego, California

September 2011

Disclaimer

The information in this book, Survival Guide for Traders, is intended for educational purposes only. Traders and investors are strongly advised to do their own research and testing to determine the validity of any trading idea or system.

Trading in the financial markets involves substantial risk, and TradersCoach.com, Bennett A. McDowell, or affiliates assume no responsibility for your success or failure in trading or investing in the markets. For this reason you should use only money you can afford to risk. Furthermore, past performance does not guarantee future results. Thus, even if you were successful with your trading and investing in the past, you may not be successful in the future. TradersCoach.com and Bennett A. McDowell make no performance representation or guarantee of any kind or nature. TradersCoach.com encourages you to conduct your own research and engage in numerous practice trades prior to risking any actual money.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, results may have undercompensated or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs and ideas in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed.

INTRODUCTION

Survival of the Fittest

By striving to be the fittest, you may not be the biggest, but you can develop your unique strengths to outperform the average financial market participant. Sometimes the smaller fish is more nimble and can adapt to changing environments more efficiently. The smaller trader or investor may realize he or she has a smaller margin for error and may in turn be smarter than the larger fish that may carelessly lose money in the markets, simply because they can afford to.

Regardless of your portfolio size, be smart. Work smarter, not harder. Your survival and prosperity depend on it. This will be your edge in the market.

YOUR FINANCIAL PIE

Many of my students have heard me talk over the years about the “financial pie” concept when it comes to successful trading and investing. The illusion that so many novices in the market believe is that all they need is one magic system, or adviser, or software package, or market tip. The reality is that it takes a lot more than that to be consistently successful in the markets.

Take a look at Figure I.1, and you’ll see the four essential slices of the “financial pie” you will need to master in order to be successful in the markets. They are your: (1) trading and investing rules, (2) scanning for opportunities, (3) money management, and (4) financial psychology. We cover all of these four important slices of the pie in detail in the coming chapters, but let me plant the seed of an idea in your mind: that you must approach the market with a broad view and an open mind.

FIGURE I.1 Financial Pie

You will need to master all four pieces of the “financial pie” to become consistently successful in the markets.

You will see how to improve your portfolio’s performance by acquainting yourself with a variety of techniques and tools, all of which are important to the process. It is the weakest link that will hinder your development, so try to identify where you need the most improvement and dive into that area until all the links have uniform strength.

LAYOUT OF THIS BOOK

This book is laid out into two parts plus five Appendix sections in a way that takes you step-by-step through the most important aspects of preserving your capital and growing your capital. The format is meant to help you get at the survival basics quickly before you have a chance to get into trouble.

For that reason, the book is written in simple, clear language and does not go into enormous depth on any one topic. There are other books that you can turn to once you have fully absorbed the topics covered here. The main focus is to highlight the most essential areas for study so that you develop a vocabulary that you can expand on at your own pace.

In addition to the hard copy of this book, you will have access to a website link that will be constantly updated with the latest and most current information. This link will provide you with free videos, printable PDF files, and other related survival guide information. You will also have access to free trials to a number of TradersCoach.com software products. You can access all of this current Survival Guide Central information and free software trials by going to the following link:

www.traderscoach.com/survivalguide.php

Part I: Survival Basics

This part introduces you to the most important aspects of survival in the markets. Here you will learn how important it is to treat your trading as a serious business and you will determine how to implement a process to monitor and evaluate your progress. This includes setting up accountability procedures, determining what your net worth is, and learning how to best utilize all of your natural resources.

You’ll learn the importance of always keeping an eye on revenue and expenses, the core of any business. These two line items can sneak up on you if you’re not paying attention, and it is crucial to keep costs down and revenue up at all times.

Then we help you understand financial markets from order flow to data feeds to getting the most value from your broker. You will find out about the nature of a variety of market cycles and how they can dramatically affect your profitability. And last, you will see how to design an effective business plan that will get results.

Part II: The Financial Pie

Successful trading or investing is not dependent on just one single skill, approach, or idea. Instead, it is achieved by mastering a number of areas that are all equally important. My way of explaining this concept is to break it down into four equal parts of a pie, which is what I call the “financial pie.” (See Figure I.1.) Part II of this book covers all four of these important “financial pie” areas and shows you how to master them.

1. The first slice of the pie is designing a set of trading and investing rules that are consistently profitable. Designing your trading and investing rules requires that you match your own unique personality and experience level with an appropriate approach that you can effectively implement. This means you have to know yourself, and identify your strengths and risk tolerance, to find the right combination of tools and strategies in order to become consistently profitable. In Chapter 10 you will learn about a variety of approaches to use to achieve this goal.

2. The second slice of the pie is scanning for market opportunities. The key to any successful financial approach is finding high-probability opportunities in the market. Traders must learn that the markets offer us infinite opportunity—it is just a matter of developing the skills to uncover the highest-probability trades at any given moment. Chapter 11 shows you fundamental and technical ways to find opportunities. You will learn about ways to use technology to do the heavy lifting of scanning for the best trades every day.

3. The third slice of the pie is money management. This area of the markets is so often ignored and yet is one of the areas where you will generally see the quickest progress when properly implemented. In Chapter 12 we talk about all areas of money management from record keeping to managing risk. You will learn to use some simple formulas that will help keep you out of harm’s way and maximize your profit potential.

4. The fourth slice of the pie is financial psychology. Psychology is by far the most difficult and abstract piece of the financial pie to master and in Chapter 13 we address this very important topic. Very often we can be our own worst enemy in financial endeavors, and understanding this will enable us to secure our own survival. What is it that motivates us to succeed? How do fear and greed factor into our decision making? How dedicated and persistent are we at attaining our goals? These questions are the tip of the iceberg, and opening up the discussion will surely start you on the road to a better understanding of yourself.

All four of these pieces of the pie are important to master. The trading success chain is only as strong as its weakest link, so you need to self-evaluate to determine which of these four areas needs the most attention. You will find information in Part II that can assist you in fine-tuning all four of these areas.

WWW.TRADERSCOACH.COM/SURVIVALGUIDE.PHP

This website, www.traderscoach.com/survivalguide.php, combined with your purchase of this book is your free access ticket to Survival Guide Central, SGC. This feature will enable you to keep your copy of the Survival Guide for Traders current for years to come. Plus, you will have access to a printable version of the business plan found in Chapter 9. Just visit this website and you will find these features, along with access to the free software trials that the purchase of this book entitles you to. Be sure to have a copy of your Survival Guide handy when visiting this link, as you will be asked a security question to ensure that you are a current owner of this book before gaining free access to Survival Guide Central. If you have any questions or need assistance in registering for this special online feature, you can call us at 858-695-0592 or e-mail us via [email protected].

YOU CAN SURVIVE AND PROSPER IN TODAY’S FINANCIAL MARKETS

It is all up to you, and there is no doubt in my mind that if you apply yourself and are persistent you will be able to use these ideas and will look at your trading and investing in a new way. This will open up infinite possibilities for your financial future. You can reach me at any time with questions and comments by sending an e-mail to [email protected].

PART I

Survival Basics

Chapter 1 It’s a Jungle Out There!

Chapter 2 Managing Your Money Is Serious Business

Chapter 3 Accountability, Setting Stops, and the Rogue Factor

Chapter 4 What’s Your Net Worth?

Chapter 5 The Life of an Entrepreneur

Chapter 6 Understanding Financial Markets

Chapter 7 Adapting to Changing Market Cycles

Chapter 8 Education and Support

Chapter 9 Writing a Business Plan

CHAPTER 1

It’s a Jungle Out There!

It doesn’t matter what country you live in, or what business or company you work in, or what financial market you invest in—it’s a jungle out there! And by that I mean to survive financially you will need to identify and focus on your top priorities with precision and be wary of possible adversaries, competitors, and obstacles that exist in each respective environment.

Around the world in each country, there are political developments that to one degree or another affect your livelihood for better or worse. In every business or company there are individuals who may exploit your weaknesses to further their own survival or prosperity. And of course in every financial market there are “sharks,” as I like to refer to them, who will gladly eat you alive if they can so that you are on the losing side of a trade or investment and they are on the winning side.

The only law of the jungle is survival, and that is the focus of this book. With your trading and investing you will of course be following the rules of law in your country and whatever your personal ethics are. But within that framework you need to be diligent and be absolutely determined to survive and prosper. In this day and age, you need to be more involved and aware than ever to advance your personal financial prosperity, and there are many effective ways to do so. We cover these techniques in the coming chapters.

BRAWN, BRAINS, AND TECHNOLOGY

Historically when talking about survival of the fittest, it comes down to the strongest, biggest, and most intelligent creatures that are at the top of the food chain and that outlive the others. For example, in the jungle the lion is the king of the beasts because of his strength and size. But, in contrast, man is king of the planet because he has used his brain to ultimately outsmart all other living creatures.

The intellectual superiority of the human race is really what adds technology and strategy to the mix. It’s not their physical brawn, but instead it is their brains that have elevated the human race to this current position of power. Consider the invention of fire on demand, the wheel, weaponry, transportation, and computers. Once a given invention is introduced, again it reverts back to the prevailing creature that is most able to put the technology to effective use with either brawn or brains. And it comes down to which individuals have access to new technology as well. In underdeveloped regions computers are not readily available, where as the more developed regions have greater access to technology and as a result have a greater opportunity to survive and dominate. As Bill Gates, Microsoft’s creator and the world’s richest man, has so accurately said, technology and computers will determine which modern cultures will survive and excel.

So really strength and intelligence and access to technological opportunity are equally important in the game of modern day survival, and individual circumstances determine which is needed most at any given time or place. (See Table 1.1.)

TABLE 1.1 Survival in the Financial Arena Depends on Using All of Your Available Assets and Resources, Including Brawn, Brains, and Technology

BrawnBrainsTechnologyConfidenceExperienceComputersEmotional strengthHigh IQSoftwarePersistence and focusEducationNews feedsFinancial strengthStreet smartsFast order executionStamina and enduranceStrategic skillsLive market data

The paradox around brawn versus brains makes me think about a program that appeared on the History Channel. It was about the Vikings in Europe during a global climate change. The strength and physical size of the legendary Viking warriors, which were exceptional compared to the attributes of some other cultures during the same time period, were not enough to ensure their survival. What sadly happened was that the Viking culture became extinct because they did not adapt to the changing climate, which was becoming much colder in their region. Strategically they did not move their villages south and were unable to develop enough technology to obtain food in the new colder climate that offered declining crops and less wildlife to feed them.

There were other cultures in that region during the end of the Viking era that were less impressive in physical size and strength, but they fared better than the Vikings due to their ability to adapt to the changing environment around them. They used their reasoning and intelligence to develop primitive but effective techniques for obtaining food and shelter and to move to different locations to escape the challenges that they had faced in the changing climate of their former homes. They were able to identify a changing environment and adapt in order to survive.

This example shows that it is not imperative that you be the biggest and strongest to survive and prosper. It is imperative, though, that you use every asset at your disposal to continually improve and protect your financial ground. You may in fact be more nimble as a smaller investor or trader than some of the bigger financial giants and Vikings that have fallen in recent times.

This is due to the fact that you have less red tape and political quagmires to navigate through than the huge institutions. You can take immediate action at a moment’s notice and you need no sign-off or approval from a committee of bureaucrats. The bottom line is you need to be quick on your feet and to identify changing circumstances and effectively adapt to them.

TECHNOLOGICAL AND INNOVATION TIME LINE

Technology and innovation throughout the ages have changed the course of history. Table 1.2 illustrates a time line of developments that have impacted the way humans live their lives. These innovations and discoveries have also enabled humans to survive and prosper in a constantly evolving world.

TABLE 1.2 This Time Line of Technological Developments throughout History Illustrates the Impact That Technology and Innovation Have Had on Our Survival and Prosperity

YearTechnological Innovation or Discovery500,000 B.C.Fire tamed by Homo erectus20,000Invention of the bow and arrow3500First wheeled carts used in Mesopotamia and Central Europe3000Abacus invented by the Chinese700First purpose-made sundials appear650Standardized coins used by the Greeks400Greeks invent the catapult, the first artillery weapon1180 A.D.Windmills introduced in Europe1440Printing press invented by Johannes Gutenberg1492Columbus discovers the New World and proves the world is not flat1800Electric battery invented by Alessandro Volta1821Difference engine, first primitive computer, invented by Charles Babbage1876Telephone invented by Alexander Graham Bell1880Lightbulb invented by Thomas Edison1888Kodak camera invented by George Eastman1889Automobile invented by Karl Benz1895Wireless telegraph (radio) invented by Guglielmo Marconi1903Airplane invented by the Wright brothers1913Mass production developed by Henry Ford1925Television invented by John Logie Baird1927Charles Lindbergh makes nonstop solo trans-Atlantic flight from New York to Paris1936Multiplane animation camera invented by Disney studios used to produce animated cartoons1940First McDonald’s fast-food restaurant opened by Ray Kroc1958U.S. Defense Advanced Research Projects Agency (DARPA) created (agency that began the Internet)1962First Wal-Mart discount department store opened by Sam Walton1966Handheld calculator invented by Jack Kilby1969U.S. NASA Apollo 11 mission lands the first two men on the moon1970First Intel i1103 computer chip released1975Charles Schwab starts offering discount brokerage services1984Microsoft Windows operating system released by Bill Gates1984First Macintosh computer and first mouse introduced by Apple Computer, Inc., which was founded by Steve Jobs and Steve Wozniak1991World Wide Web invented by Tim Berners-Lee1998Google Internet search engine founded by Sergey Brin and Larry Page2004Facebook social networking site launched by Mark Zuckerberg

Necessity is the mother of invention, as well as the mother of technology and innovation. That is how all good ideas are born; they are in answer to a need. And technology is often developed in answer to a need for military and transportation products first, and then, once developed, these products are applied to other everyday endeavors.

You can see how some of the more modern innovations such as the computer, Internet access, and search engines have changed the way that traders conduct business. Now information and data are more accessible than ever before to the average individual. Technological innovations have leveled the playing field. We as traders must apply the latest available technology in our day-to-day operations. We must also be aware of the constantly changing and evolving technological advances, since our survival depends on it. You want to be on the cutting edge whenever possible regarding technology.

DON’T BRING A KNIFE TO A GUNFIGHT

As we saw in Table 1.2, technology has been developing and changing the world since the beginning of time. Anyone with a computer today knows that the minute you open the box of your brand-new super-spectacular computer, it is already outdated. It seems every time I open the box of the latest and greatest new multiple-core computer of mine, an e-mail arrives in my inbox moments later for another with twice the speed and functionality; and such is life.

With this understanding, remember that when entering the financial markets it is important to obtain the best technology you can afford at the time, as this will improve your odds for success. If your competitors in the market are using technical analysis and live streaming data from the markets, you will want to be similarly equipped. And, if they have access to up-to-the-minute news and fundamental information, you will want that information as well if your approach requires it.

Don’t bring a knife to a gunfight, and don’t bring antique technology and information to the markets when you are trading and investing. Get as up-to-date as you can so that it’s a fair fight.

RIGHT IN MY OWN BACKYARD

Night after night I’m reminded of the reality of nature and the struggle of all living things to survive. We live on a hilltop overlooking a canyon here in southern California, and there are acres and acres of wide-open spaces all around us. When we first moved here in 1997 from New York City, which is the ultimate concrete jungle, the sounds of the night in my own backyard here in San Diego were new and fascinating to me.

The variety of wildlife you can see right out there beyond the fence range from deer, coyotes, bobcats, and raccoons to quail, owls, bats, and rattlesnakes—hardly the type of wildlife I’d been used to in the big city. The most you would see in New York City might be some pigeons, squirrels, or ducks in Central Park. Here on the canyon, it’s like getting a front-row seat for the National Geographic channel and all the inner workings of our ecosystem. And the brains and brawn issue comes up when you can see that each species has certain skills, strengths, and weaknesses.

All these animals coexist and live in balance as they have done for hundreds of years. And for those of us, like me, who have lived in mostly residential areas, it is rare that we see up close the brutal realities of nature and what maintains the balance. There’s a food chain; some of my backyard animals are herbivores, some carnivores, and others omnivores. Just the other day there was a blue jay on my fence that was chomping on a beautiful monarch butterfly. And then there is this giant flying egret that visits our pond every so often to feast on our goldfish, much to my children’s dismay.

In one sense it seems harsh, but in another way it’s just nature—very much like when the coyotes use their cunning and shrewd strategies to trap a much larger deer down there in that canyon. You can hear the “yip-yip” howls of the coyotes as they work themselves into a frenzy, until there is total silence and you know they are feasting on their latest kill.

The markets are no different; in fact, they are exactly the same. It is the cycle of life—there are winners and losers, and that is the reality. Maybe it is not exactly life and death in the markets in a physical sense, but it can be your financial life and death. To help protect you in the jungle of the financial markets, we are going to educate you step-by-step about the brawn, brains, and technology you need in order to compete with the kings of the financial jungle and to help you come out ahead.

CHAPTER 2

Managing Your Money Is Serious Business

Often we, as a society, are so focused on the day-to-day job of earning a living that we forget the fact that managing our overall finances is important business. It is just as important as our day job. We can get in a rut and without even realizing it become like hamsters on a treadmill.

In grade school when we’re kids, there are really no required courses that highlight the importance of personal finance. Rather, as children growing up, we are left to figure it out on our own. We’re required to take general courses in math, science, English, and such, but there are no required courses that teach us how to manage the big picture from a purely financial standpoint. Instead, we are prepared to identify a vocation and a job and to make a living at that job. But what about how to manage the money we earn at our day job and how to manage our home finances? Your home in essence is like a mini corporation. You could even call your household “Home Incorporated.”

It seems that every kid in high school should be required to take a course in personal finance to show them how serious this business is from the very start. And in doing that they’d need to learn basics like how to balance a checkbook, identify (and increase) revenue, identify (and reduce) expenses, develop a budget, and plan for the expected (and unexpected) future. This course would teach kids the value of making difficult choices in order to stay on track and achieve their own planned goals.

Sounds a lot like a business plan, doesn’t it? Well, yes, in my mind the world would be a better place, financially at least, if every household prepared a business plan and followed it. If you treat your money like a hobby or an afterthought, you are not giving it the attention it deserves. Now is the time to take control and treat your personal finances and your trading and investing as the serious business that it is.

TRUST AND FINANCIAL ADVISERS

Before Charles Schwab came onto the scene and enabled the average investor or trader to place their own trades, things were different than they are today. The only way for the layman to enter and exit the market was for them to work through an adviser or broker, and pay this person commission fees that were astronomical compared to what they are today.

During those times, most folks hired a broker to manage their money and to make entries and exits into the market. They trusted the broker to do what was best for their financial stability.

In reality, most brokers are basically salespeople, and if you go into a firm and ask, “Who is the best broker here?” you’ll most certainly be directed to someone in a private office who has the largest portfolio of assets under management. The problem is that the broker may not be delivering a high annual yield on clients’ accounts; instead that broker is just talented and the best at acquiring lots of new and big clients.

In a bull market, most financial advisers like this all look pretty smart. It is during a bear market that you can really pick out the truly talented advisers from the mere salespeople. The truly talented advisers see the bear coming, convert a large portion of your account to cash, and preserve your capital. They’ve got your asset allocation in line with your goals, take into account your age and tolerance for risk, and have your best interests at heart. They’ve got a contingency plan, and they’ve probably given you a “business plan,” or “investment management plan,” to review and comment on. This plan outlines the goals and objectives for your portfolio over the next five, 10, and 20 years.

In contrast, the pure salespeople do not have your best interests in mind, will attempt to churn your account, and will sell you whatever the head of their firm is pushing that week regardless of whether it is the right move for you. And they probably have not taken the time to map out your plan for you on paper, because that frankly will take time away from the cold-calling for new prospects that their boss insists they do every day.

How do I know this? Simply because I’ve been there, been a registered securities broker for the big wire houses, and been in the position of doing what’s right for my clients regardless of what the firm wanted. There’s a conflict going on in the big brokerage houses that the average client doesn’t ever see. The conflict is that the brokerage firm’s primary goal is to increase its revenue, which sometimes is in direct conflict with increasing the client’s revenue.

Now, this is not to say that there are not amazing and talented financial advisers available to you. It is to say, however, that they are few and far between and you’d best do your homework before handing over your portfolio to a broker at a big firm. If you do take on an adviser, continue to closely monitor the activity in your portfolio on a quarterly basis. As the saying goes, past performance does not guarantee future results.

TIPS ON SELECTING A QUALIFIED FINANCIAL ADVISER

Selecting a qualified financial adviser is a task that deserves your undivided attention. If you have a sizable net worth, you owe it to yourself to bring a specialist onto your team who has experience in portfolio management and can guide you. There are costs involved in hiring a specialist, but a competent adviser is well worth the investment. Remember, you are the boss. Make it clear to your adviser that you have goals and expectations and the portfolio’s performance will be monitored.

Here are some tips that will serve you well in finding the right person for the job:

Interview two or three advisers in person at their offices prior to making your final choice.Have a list of questions to ask such as: What is your investment strategy? What are your credentials? Are you a Certified Financial Planner (CFP)? How many years have you been a financial adviser? What fees would be charged? Do you use risk control? How do you diversify a portfolio? What kinds of annual returns do you get on your clients’ portfolios?Ask for references of other clients you can talk to, and if references are available, call them and ask questions such as: How long have you been using this adviser? Are you happy with the adviser? Can you name one strength and one weakness of the adviser? What kind of annual return have you received on your portfolio while using the adviser? What kind of monthly statements or reporting are you receiving?Outline a list of priorities that you want the adviser to address and ask how the adviser would handle them.Check to see if there are any complaints registered on the adviser made with the National Association of Securities Dealers (NASD) or the Securities and Exchange Commission (SEC).