The ART of Trading E-Book

Bennett A. McDowell

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

Seitenzahl: 310

Veröffentlichungsjahr: 2010

Beschreibung

An expert in the field of finance reveals his proven tradingsystem As a trading coach and financial advisor, Bennett McDowell has usedhis own proprietary trading system--Applied Reality Trading or ARTto enhance the performance of his clients' portfolios. Now McDowelloutlines the unique benefits of his system and makes the case fortrading the reality--not the fantasy--of financial markets. Readerswill discover the importance of simplicity in a trading approach;how to develop "The Trader's Mindset;" how to use ART(r) technicalanalysis software; and much more. The ART of Trading will enlightenreaders in how to use reality to enrich both their financialportfolio and their own financial psychology.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Preface

Acknowledgments

Disclaimer

Introduction

APPLIED REALITY TRADING IS KNOWN AS ART

REVOLUTIONARY LEARNING EXPERIENCE

THE “ART PIE”

LAYOUT OF THIS BOOK AND DVD VIDEO

ALL CHARTS IN THIS BOOK WERE CREATED WITH THE eSIGNAL ART PLATFORM

A NOTE ABOUT DATA FEEDS AND YOUR 30-DAY FREE TRIAL OF THE ART SOFTWARE

Epigraph

PART I - Reality

CHAPTER 1 - It’s All About Reality

REALITY-BASED TRADING AND INVESTING

TAKE ART FOR A TEST DRIVE!

YOUR THOUGHTS CREATE YOUR REALITY

THE IMPORTANCE OF THOUGHTS

IT ALL STARTS WITH A THOUGHT!

LIVE MARKET DATA

CHAPTER 2 - The Reality of Price and Volume

WHY ARE PRICE AND VOLUME REALITY?

THE CASE FOR SIMPLICITY IN A TRADING SYSTEM

DANGEROUS OPINIONS AND INDICATORS: A WORD ABOUT MACD AND STOCHASTICS

OVERBOUGHT AND OVERSOLD CONDITIONS

INEFFICIENT MARKETS VERSUS EFFICIENT MARKETS

CHAPTER 3 - Managing Risk Always Set a Stop-Loss Exit

THE NEED FOR MONEY MANAGEMENT

ACCEPTING RISK

SEVEN BASIC STOPS

NOT SETTING STOPS

WHAT HAPPENS WHEN YOU DON’T HAVE A STOP-LOSS EXIT STRATEGY?

SETTING MENTAL STOPS

MOVING STOPS

CHAPTER 4 - If It Sounds Too Good to Be True . . .

SYSTEM RATES OF RETURN ARE MEANINGLESS

ART IS NOT A “BLACK BOX” SYSTEM

WHY DO 90 PERCENT OF ALL TRADERS LOSE MONEY?

CHAPTER 5 - Personal Methods to Increase Trading Success

WRITE IN YOUR “SUNRISE TRADING JOURNAL”

ENTER A “CONTRACT FOR SUCCESS”

FAX OR MAIL-IN “CONTRACT FOR SUCCESS”

GUIDELINES FOR COMPLETING YOUR “CONTRACT FOR SUCCESS”

CHAPTER 6 - Identify Your Personal ART Profile

EXPERIENCE LEVEL

TRADING STYLE

TRADING FREQUENCY

ART PROFILES—HOW THEY WORK

HOW TO VISUALIZE YOUR ART PROFILE

PART II - Art

CHAPTER 7 - Design Your Business Plan

RUNNING YOUR TRADING AND INVESTING AS A REAL BUSINESS

YES, TRADERS AND INVESTORS ARE ARTISTS

YOUR BUSINESS PLAN

CHAPTER 8 - Selecting a Financial Market

TABLE OF MARKETS

GREAT DAY TRADING MARKETS

ATTENTION OPTION TRADERS

USING STOCK SECTORS AND GROUPS TO BETTER YOUR ODDS

CHAPTER 9 - Selecting a Time Frame

CHAPTER 10 - Selecting an ART Platform, Broker, and Data Feed

CHAPTER 11 - Psychology and the Trader’s Mind-Set

100 TRADERS AND INVESTORS—EACH IS UNIQUE

SELF-AWARENESS

15 COMMON DESTRUCTIVE PSYCHOLOGICAL TRADING ISSUES AND THEIR CAUSES

HERE IS WHAT YOU’LL FEEL AFTER ACQUIRING THE TRADER’S MIND-SET

CHAPTER 12 - Artistic Simplicity

IT IS POSSIBLE TO RECEIVE TOO MUCH INFORMATION

SIMPLIFY AND FLOW WITH THE MARKET

GUIDELINES TO SIMPLIFY YOUR TRADING AND INVESTING

TRADING ERRORS, ARTISTIC BLOCKS, AND OVERCOMING THEM

CHAPTER 13 - The Art of Paper-Trading

EVERY FINANCIAL MARKET IS A CHAMPIONSHIP ARENA

FIGHTER PILOTS AND FLIGHT SIMULATORS

PART III - Science and Math

CHAPTER 14 - Calculating Proper Trade Size

THE 2 PERCENT RISK RULE

IMPORTANT NOTE

THE PSYCHOLOGY BEHIND TRADE SIZE

YOU’RE RIGHT 60 PERCENT OF THE TIME

GOING BUST!

TRADING DRAWDOWN

OVERTRADING

CHAPTER 15 - Other Formulas and Recipes

10 PERCENT RISK RULE

6 PERCENT RISK RULE

2 PERCENT PER SECTOR RISK RULE

SCALING OUT 33 PERCENT

CHAPTER 16 - The Human Brain

ANATOMY OF THE BRAIN

LEFT BRAIN AND RIGHT BRAIN

WHOLE BRAIN THINKING

NEUROPLASTICITY

NEURONS AND NEURONETS

YOU CAN REWIRE YOUR BRAIN AND YOUR TRADING

KEEP AN OPEN MIND

PART IV - ART System Basics

CHAPTER 17 - ART Is the Total Solution

THE FOUR ART SIGNALS

LOADING YOUR ART SOFTWARE

ART SIGNALS

EXACT ENTRIES AND EXITS GIVE YOU STRUCTURE AND DISCIPLINE

CHAPTER 18 - Pyramid Trading Points (P and MP)

PYRAMID TRADING POINT RULES

MOMENTUM AND NEW INFORMATION

PYRAMID TRADING POINT REQUIREMENTS

1. TREND DIRECTION

2. TREND-TRADE ENTRY POINTS

3. TREND-TRADE EXIT POINTS

4. TREND EXHAUSTION

5. MARKET TRUTHS

6. HOW TO IDENTIFY TREND CORRECTIONS USING THE MINOR PYRAMID TRADING POINT

7. HOW TO TRADE FROM A “BRACKETED MARKET”

CUSTOMIZING THE ART SOFTWARE TO TAILOR IT TO YOUR NEEDS

ADJUSTING THE MINSCORE FOR A PYRAMID TRADING POINT

ADJUSTING THE AUDIO TECHNOLOGY FOR YOUR PYRAMID TRADING POINT

IDENTIFYING TREND EXHAUSTION

GETTING AGGRESSIVE

PYRAMID TRADING POINT SUMMARY

CHAPTER 19 - Market Truths: Price Bars and Volume

THE FIRST MARKET TRUTH IS PRICE

ART PRICE BAR POSSIBILITIES

SEVEN ART PRICE BAR DEFINITIONS

ELONGATED PRICE BAR

THE SECOND MARKET TRUTH IS VOLUME

THE MEANING OF VOLUME

CHAPTER 20 - ART Reversal Bar Signals (1B and 2B)

THREE METHODS OF MONITORING AN ART ONE-BAR REVERSAL TRADE

UNEXPECTED TRADES IN THE OPPOSITE DIRECTION

USING THE INSIDE PRICE BAR TO GET AN EARLY ENTRY

ART TWO-BAR REVERSAL

ART REVERSALS TELL YOU WHEN THE TREND ENDS

CHAPTER 21 - Trend-Trading Rules

10 ART RULES FOR TREND TRADING

REMEMBER, THE TREND IS YOUR FRIEND; FEAR IS YOUR ENEMY!

CHAPTER 22 - Countertrend-Trading Rules

FIVE ART RULES FOR COUNTERTREND TRADING

CHAPTER 23 - Scalping Rules

SCALPING VARIATIONS

PART V - Advanced Techniques

CHAPTER 24 - When to Use Advanced Techniques

TWO DEFINITIONS

WHEN TRADING ART WITH UNGROUNDED ASSESSMENTS, FOLLOW GUIDELINES A AND B

USING TREND CHANNELS

CHAPTER 25 - Scaling Out and Scaling In

SCALING OUT OF POSITIONS

KEEP RISK WITHIN 2 PERCENT

SCALING OUT EXAMPLE

SCALING IN TO POSITIONS

CHAPTER 26 - How to Trade Bracketed Markets

WHAT’S ANOTHER NAME FOR A BRACKETED MARKET?

CONSOLIDATIONS: A TEXTBOOK DEFINITION

THE NATURE OR PSYCHOLOGY OF BRACKETED MARKETS

FINDING AND MONITORING BRACKETED MARKETS

MEASURING THE LENGTH OF BRACKETED MARKETS

USING BRACKETED MARKETS TO TREND TRADE

USING THE ART SOFTWARE TO DEFINE BRACKETED MARKETS

MANUALLY IDENTIFYING BRACKETED MARKETS

SCALPING BRACKETED MARKETS

USING OPTIONS ON BRACKETED MARKETS

CHAPTER 27 - Software Optimization and Average True Range (ATR)

DETERMINE VOLATILITY USING ATR

RULES FOR ART SOFTWARE OPTIMIZATION

CHAPTER 28 - Stop and Reverse (SAR)

REENTRY PATTERNS

THE DIFFERENCE BETWEEN SARs AND REENTRY PATTERNS

TRADING BETWEEN ART REVERSAL BAR SIGNALS

CHAPTER 29 - Higher-Time-Frame Filter

TIME FRAMES TO TRACK THE TREND USING THE HIGHER-TIME-FRAME FILTER

USING TREND LINES AND THE HIGHER-TIME-FRAME FILTER

S&P E-MINI DAY-TRADING EXAMPLES USING THE HIGHER-TIME-FRAME FILTER

EXAMPLE A

EXAMPLE B

EXAMPLE C

CHAPTER 30 - Other Filter Techniques

FILTER FOR TRADING THE E-MINI

ACCUMULATION/DISTRIBUTION

USING ON-BALANCE VOLUME (OBV)

PRICE OSCILLATOR HISTOGRAM

TRADE ONLY AFTER THREE CONSECUTIVE LOSSES

TRADE IN THE DIRECTION OF YOUR FORECASTING METHOD

CHAPTER 31 - Elliott Wave—Ungrounded Assessment

ELLIOTT WAVE GUIDELINES

CHAPTER 32 - Other Ungrounded Assessments

PRICE OSCILLATOR HISTOGRAM

FIBONACCI STUDIES

RELATIVE STRENGTH INDICATOR (RSI)

Epilogue

About the DVD

APPENDIX A - ART Software Quick-Start

APPENDIX B - ART Tips

APPENDIX C - ART Software Technical Support

APPENDIX D - Resources

Glossary

About the Author

Index

CUSTOMER NOTE: IF THIS BOOK IS ACCOMPANIED BY SOFTWARE, PLEASE READ THE ...

Copyright © 2008 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.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our Web site at www.wiley.com.

Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration.

Library of Congress Cataloging-in-Publication Data:

McDowell, Bennett, 1957-

The art of trading: combining the science of technical analysis with the art of reality based trading / Bennett McDowell. p. cm. - (Wiley trading series)

Includes index.

ISBN 978-0-470-18772-2 (cloth/dvd)

1. Investment analysis. 2. Speculation. 3. Stocks. I. Title.

HG4529.M385 2008

332.63’ 2042-dc22

2007049357

For my children, Heather Frances and Brady Bennett, with love and affection.

Foreword

This is not your ordinary “get rich quick” book about trading the stock market. Rather, it is a guide to a multimedia approach to learning and trading, using the Applied Reality Trading® (ART®) method of trading. This book and the accompanying DVD explain the concepts and methodology. In addition, the purchase of this book includes a one-month time frame in which to actually learn to trade the system and apply it in real time. This is done by including the ART software for one month, including access to live streaming data and access to a few, designated brokerage firms that can trade directly through the software. In essence, everything that the reader needs—for learning and for seeing how the system works in actual markets—is included with this book.

The ART trading methodology is built on software recognition of several time-tested patterns that can be easily identified for the user. While they are called specific names in the software, these are essentially breakouts and reversals—the meat and potatoes of technical trading. The chart patterns identified can be applied to any type of bar chart—daily, five-minute, weekly, and so on. Moreover, they can be applied to stocks, futures, indices, and forex—or any other market that can be charted.

What separates this methodology from many other computer-generated trading systems is that this is not a 100 percent mechanical “black box” system. Rather, this book (and the multimedia associated with it) teach the individual how to apply the various trading signals to the style of trading with which he feels most comfortable. Position traders can trade the trend signals from the software, while short-term swing traders may prefer to take minor signals generated along the way—even trading within a trend, if desired. If you are uncertain which trading style might best suit you, the “ART Profile” exercise in this book will aid you in determining the style best suited to your personality.

Risk control is stressed throughout—determining effective position size, setting stop-loss exits, and more. Exact entry and exit points are given with the signals, so that you can judge your risk beforehand, and therefore determine position size as well. One of the many unique features is that stops are based on market conditions (chart patterns and volatility) as opposed to an arbitrary dollar amount. Therefore, the stops are more logical in terms of market mechanics, which prevents one from being stopped out prematurely, as might happen with “percentage risk” stops.

Finally, the techniques can be applied to option trading as well. I have long espoused the idea that any successful stock trading technique can be translated into a profitable option trading strategy, as long as one acts rationally in choosing the expiration month and striking price of the options to be purchased.

This multimedia approach to learning may be new to many readers, but the concepts and techniques associated with the ART software are well-suited to such an approach, and the benefits should be great for those who are willing to embrace the ART methodology and fit it into their “trading personality.”

—LAWRENCE G. Mc MILLAN Author, McMillan on Options, 2nd Edition

Preface

This book, The ART®of Trading, is a unique opportunity for you, the trader or investor, to benefit from four fabulous things:

1. A sound trading system and software (Applied Reality Trading or ART) that gives you high probability entries, exits, and risk control—you get a free 30-day trial of the ART software with this book

2. Live streaming data direct from the markets to provide you with the truth and the reality of the financial markets—you get a free 30-day trial of live data with this book

3. The education on how to use the first fabulous two to generate profits

4. Superb brokerage services to execute your trades and investments once you have mastered the ART system

Best of all, you get this right here in just one book. This means that for the price of one book, you will be able to experience the reality of technical analysis software and data to generate greater profits. You’ll see firsthand how technical analysis can enhance your fundamental analysis. Or, if you do not use fundamentals, you will see how ART can be used as a stand-alone decision maker for your trading and investing.

Maybe you are currently making entry and exit decisions by looking at fundamental information that you can gather from news, corporate earnings, Fed statistics, or any other multitude of reports that are available to you on CNBC and in the Wall Street Journal.

The reality is that those reports can be subject to distortion (a corporation carefully manages how the numbers are revealed so as to look their best); exaggeration (it’s a slow news day and a commentator may need to enhance a story to make it newsworthy); and, of course, interpretation (a trader interprets a poor earnings report and panics out of a position to find out that the stock goes up, and up and up).

How do we determine what is reality? How do we know when something is exaggerated or distorted? How do we make sense of the information and the world around us to determine how to make profitable financial decisions? That is where “reality-based” trading and investing come in. ART, Applied Reality Trading, can help you decipher the information that you receive from the market so that you can clearly understand it and act on it intelligently.

This does not mean that you will be following someone else’s reality. Instead, you will be creating your own reality and personal financial approach that works for you and makes you profits. Think about Columbus setting off to sail into the distance in 1492, when everyone else thought that the world was flat. That didn’t stop Christopher; he had his own reality, and he followed it and succeeded. Despite the naysayers, he was courageous enough to try a new approach—which is what you will be doing. You will be an explorer and you will discover your reality, and you will use that as your edge in the financial markets.

The gift that ART and technical analysis can also give to you is clarity. You can include the ART trading software in your approach to confirm, or deny, an entry or exit. ART gives you the reality because it is based on the truths of the market—price and volume—and these cannot be distorted.

My personal approach happens to be purely technical analysis using the ART software, but many of my students do combine fundamentals with ART. You will decide what is right for you, and this book is designed to bring you up to speed in trading with ART® and technical analysis. If you have never used technical analysis and charts to make better entry and exit choices, there is no time like the present! This book, The ART of Trading, gives you everything you need to get started.

Enjoy the benefits of “reality-based” trading and technical analysis. I wish you all the best in everything that you do!

BENNETT MC DOWELLSan Diego, California January 2008

Acknowledgments

Thank you to David Pugh at John Wiley & Sons for discovering us in New York City in February 2007. David, you are a master of the art of publishing, and without you this book would not be possible. Your gift of knowing how to bring the pages together to make them the best they could be is greatly appreciated. And, thanks to Stacey Small (David’s right-hand assistant) for her patience, kindness, and many hours of expert templating. Also thank you to Larry McMillan, a friend and brilliant trader, for writing the Foreword.

TradeStation was one of the first two compatible platforms that the ART software was available on when released in 2003. A huge thank you to Janette Perez for her support of The ART®of Trading and for letting her TradeStation clients know about the value of using the TradeStation platform with the ART software and system. Also, thanks to Ray Fitzgerald at eSignal data services (also one of the first two platforms available for ART) for giving our clients that personal service they have come to appreciate over the years.

Also, I’d like to send a warmhearted thank you to Peter Smith at TD AmeriTrade. The newest ART platform available as of today is QuoteTracker (which makes ART compatible with TD AmeriTrade), and, Peter, you made that into a reality. Your persistence and creativity are an inspiration. Another new platform is NinjaTrader, which has expanded our compatibility tremendously, and thanks to Raymond Deux for making that a smooth integration.

So many folks have helped us along the way, and I’d like to send a special thank you out to: Ed Schramm and Yves Pittleoud. Your friendship and support have made the journey a fun and rewarding one. And, of course, thanks to our many wonderful clients who have helped to shape the educational content we’ve developed since 1998.

Last, but most certainly not least, thanks to the women in my life. To my mother, Frances McDowell: Thank you for your encouragement, support, and love every step of the way—and also for being so nice. And to my wife, Jean McDowell, for your love, for taking care of the kids, and for being my best friend and a great partner all in one.

My deepest thanks go to all of you for making my journey a fun and exciting one!

Disclaimer

The information in The ART®of Trading 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 only use 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 under- 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

One of the benefits of purchasing this book is that you will be able to experience firsthand the value of trading with the Applied Reality Trading software free by using your 30-day trial that is included with the book. This is a unique opportunity for you to get in the driver’s seat and test drive the software on the markets and time frames you like to trade.

Plus, the software is ideal for any market and any time frame, which means whether you are an investor, day trader, or position trader, Applied Reality Trading will give you exact entries and exits into the market and will take the guess work out of your finances. This introduction outlines briefly how the book is laid out and what the companion DVD video program will do to help you with your trading and investing.

APPLIED REALITY TRADING IS KNOWN AS ART

The ART®of Trading will introduce you to a new way of trading and investing with a technical analysis system called Applied Reality Trading. Also known as ART, this system is a comprehensive trading methodology including software that labels the ART signals on financial charts so that you can easily see exact trade entries and exits. In addition, the software has voice technology that alerts you when to enter trades and exit trades.

The ART software is easy to use, and it processes complex algorithms and market information to give you high-probability trades and investment information. ART answers the questions of when to buy and when to sell. ART also answers the question of how to protect yourself from large losses by using effective risk control and money management.

While ART adds structure to your trading and investing, it also allows you the flexibility to tailor it to your personal style and experience level. You can use ART to trend trade, scalp, or countertrend trade. Or you can use the system to time your investments. ART is capable of doing all this since it is not a “black box” (100 percent mechanical) trading system.

The flexibility built into Applied Reality Trading allows you to integrate your financial beliefs with ART to create your own unique system that allows you to be a true artist in the financial markets. That is when you can become a master of the “Art of Trading.”

REVOLUTIONARY LEARNING EXPERIENCE

You are about to embark on a revolutionary learning experience—one that will simplify the financial markets for you, and very well may simplify how you live your life. With Applied Reality Trading, you will learn how to focus on reality. The entire ART program is built around six major concepts:

1. No one can predict the markets with any true consistency.

2. To be a successful trader and investor you must look at the current market reality as it is happening and not rely on opinions, theories, or fantasies about what will happen.

3. The market will tell you exactly how to trade and invest, if you know how to listen to what it is saying.

4. Money management is essential.

5. Obtaining “the trader’s mind-set” is a prerequisite for trading and investing with any approach or system to be successful.

6. Successful trading and investing requires that you align your unique personality with your chosen system.

The ART of Trading will show you how to use these six concepts to help improve your performance. Have an open mind as you process the material. Some concepts may challenge the inner core of your current belief system. While you read this book, try to be open-minded and receptive so you can fully explore the possibilities of Applied Reality Trading.

THE “ART PIE”

Trading and investing can be divided into four major areas. Think of an apple pie cut into four slices, and call this your “ART Pie.” In order to be successful, you will need to understand and master each piece of pie. See Figure I.1.

FIGURE I.1 ART Pie

This is where so many people fail. They do not master the entire pie. Look at the pie diagram. If you master your system but do not master money management, you will have a hard time winning. If you do not work with true “risk capital” (money you can afford to lose), then you are more susceptible to emotional trading and investing. You need to be proficient in every slice of the “ART Pie”!

This book will show you how to master all four slices of the “ART Pie.”

LAYOUT OF THIS BOOK AND DVD VIDEO

The book is laid out into five parts plus the companion DVD so that you can quickly find the right information as you travel along the path of Applied Reality Trading. Here is a summary of the parts so you will have an understanding of where to look for what you need at any given point along your journey:

Part I: Reality

The ART system is based on reality, and here you will find specifics on how to use reality to improve your financial performance. With technical analysis and live streaming data from the markets, you will see how to minimize distortions in your financial decision making. By using price and volume, the true realities of the market, ART enables you to find consistent high-probability entries and exits that are not based on opinion. Plus, you will learn about the reality of financial risk and how to effectively manage that risk to generate greater profits.

Part II: Art

ART is an acronym for Applied Reality Trading. It is a fitting acronym since the Applied Reality Trading philosophy is built on being able to use the science of technical analysis and combine it with the art of your unique financial approach. Each of us has a different belief system that affects the way that we look at the financial markets. Given the right tools to start with, you must use your own creativity to master the tools and make them work for you. Much of this has to do with your financial psychology and self-awareness.

Part III: Science and Math

Science and math play an important role in financial success. The science of technical analysis combined with the math of proper money management is crucial. By using these concepts and integrating them into your own creative approach you will be able to develop a superior personal system based on what works for you.

Part IV: ART System Basics

This section lays the groundwork for using the ART software. In a very straightforward style, you will learn everything you will need to use ART. For both the novice and the master alike, Part IV shows you how to use the software to determine entries, exits, and risk control. You’ll see how to use the flexibility of the software to customize your approach to suit your specific financial needs.

Part V: Advanced Techniques

It is recommended that you master Part IV before delving into the advanced techniques in this section. These techniques are best used by more experienced traders and investors. With that said, these advanced techniques are a gold mine of ideas, any one of which can boost your bottom line dramatically. It is highly recommended that you paper-trade these techniques before going into the market live with real money.

Companion DVD Video Program

On the inside back cover of the book is a DVD video program that will bring the ART software to life. In this DVD video you will benefit from a variety of material including classroom training with the author that will clarify and bring home all the concepts outlined in the book.

ALL CHARTS IN THIS BOOK WERE CREATED WITH THE eSIGNAL ART PLATFORM

Unless otherwise noted, all ART charts shown throughout this book were created using the eSignal ART platform. These charts are used here with the permission of eSignal.

You will note various icons such as triangles, squares, and diamond shapes on these charts. Generally, all of the ART platforms create a very similar appearance and function in the same way.

Note to TradeStation users: Your charts will have circles to identify the ART reversal bars instead of squares and diamonds. The ART software user’s manual that you download upon registering for your free ART software trial will have complete information so that you will be able to easily read your charts with this minor variation in the visual icons.

A NOTE ABOUT DATA FEEDS AND YOUR 30-DAY FREE TRIAL OF THE ART SOFTWARE

Each of you reading this book may select a different ART platform, which may provide you with a different data feed to use with your free 30-day trial of the ART software. It is important for you to understand that due to very slight variations on data supply from each of the data suppliers available to you, if you ran two different platforms side by side on the same market and same time frame, you might possibly on occasion have different ART signals appear on your chart.

The software, if it receives different input, may produce different signals. This is not due to any change or modification of the ART software; it is only due to each live data provider’s input, which may vary slightly from provider to provider.

FIGURES ARE INCLUDED ON THE DVD IN COLOR

The charts in this book are best read in full color. We have reproduced them in the text to allow you to follow the concepts as they are described—without interruption. To enhance the reader experience, we have also included all of these charts on the accompanying DVD. Though the material can certainly be understood without color, we have placed an icon next to text where we believe the reader will most benefit from referring to the DVD.

Also, please note that we have provided the ART ® Chart Number for each of the figures. This reference will be of use for all TradersCoach.com subscribers.

Hopefully, this introduction has given you a brief understanding of The ART of Trading. I’d like to personally welcome you to the world of reality-based trading. If you have any questions or comments as you journey along The ART of Trading, feel free to call us at 858-695-0592 or e-mail me via [email protected].

After a certain high level of technical skill is achieved, science and art tend to coalesce in esthetics, plasticity, and form. The greatest scientists are always artists as well...

—Albert Einstein

PART I

Reality

CHAPTER 1

It’s All About Reality

REALITY-BASED TRADING AND INVESTING

Applied Reality Trading—ART—is all about reality. The foundation of this technical analysis system and software is built on the realities of the market—price and volume—and the entire philosophy is centered on facing the honest truth about your money and the markets.

Now, reality can be an elusive thing. Our perceptions can sometimes get in the way and cloud what deep down we know to be true. This is why it is important to constantly focus on looking to the heart of the matter to find the truth and the reality of every situation, market, and methodology that we encounter.

We may sometimes be seduced by illusions. As humans, it is hard to resist a charming and convincing offer of “. . . an easy profession that takes little to no investment of capital but rewards you with big profits instantly....” You’ve seen the infomercials on television. Sounds good enough, don’t you think? But in your heart you know that if it sounds too good to be true, it probably is too good to be true. And it can be a tough pill to swallow when you realize that the fantasy you invested in may be unobtainable.

How about if we take a different approach? Instead of chasing fantasies (that with common sense we know are not true), how about if we follow our dreams and make them come true, and make them into reality? The distinction is that a dream is a genuine goal with realistic opportunity. It might require work and perseverance, but it is well worth the investment once you create the reality toward which you are working.

That is what this book is all about.

We want you to realize your financial goals and dreams and make them into realities by using concrete tools based on the realities of the market. You will learn about money management and risk control so that every step of the way you are on solid ground with an intelligent plan—designed by you specifically for your personal needs.

TAKE ART FOR A TEST DRIVE!

This book offers you a unique opportunity to test-drive the ART technical analysis software for 30 days. This way, you can see how trading the realities of the market with sound risk control and state-of-the-art software can significantly enhance your trading and investing profitability.

Whether you have experience with technical analysis or not, you’ll have a chance to apply these ART techniques to your own trading and financial plan. You’ll see the benefits of obtaining high-probability entry and exit signals that the ART software will provide you in your trading and in your investing.

Our Applied Reality Trading clients are a diverse group, including many very sophisticated hedge fund managers around the world that use the ART software to manage multimillions of dollars. Then, at the other end of the spectrum, we have many individual investors who just want more control over their own finances by getting reliable signals based on reality. And the beauty of the software is that it works on any time frame and in any market. This flexibility enables you to change markets when you want to and to use it for both day trading and investing.

What we will do in the following chapters is take you step by step through the ART methodology and system so that you will have all the tools and knowledge you need to benefit from a reality-based financial approach and software tool.

YOUR THOUGHTS CREATE YOUR REALITY

You will not develop the trader’s mind-set, which is the “Holy Grail” to trading and investing until you master your mind!

THE IMPORTANCE OF THOUGHTS

Our thoughts shape our beliefs, which create our reality. In trading, this has profound implications. If we think or have a nagging thought that we may fail, then we create the seed that shapes our beliefs and manifests failure, all because we just think it!

High achievers maintain a philosophy that failure is not an option and that it pays to be a winner! They think of positive outcomes and “see” themselves as being successful.

Traders and investors who experience thoughts of failure should not take them lightly. Instead, they must find out what is causing these thoughts and take action to nullify them. Traders who fear failure will ultimately fail. Traders who fear success will not succeed. If you have these thoughts, then don’t trade until these thoughts are dealt with and you are able to control them. You must confront them and remove their power so they don’t occupy your thoughts.

Fear of failing, or fear of success, must be dealt with and removed from your thoughts before you will be successful at anything you try and do. If fear remains in thought and is energized by emotions that cause stress and anxiety, it will have an impact on your beliefs and ultimately manifest itself as your reality. It will sabotage you until your worst fear is realized—failure!

IT ALL STARTS WITH A THOUGHT!

Your thoughts shape your beliefs!

And your beliefs in turn shape your thoughts!

Your beliefs shape your emotions such as fear and greed!

Emotions such as fear and greed are relative, based on your unique beliefs!

Fear and greed drive markets and life itself!

Ultimately, you live your beliefs, which create your reality!

Trading is nothing more than a vehicle you choose to create your reality by trading your beliefs!

So choose and protect your thoughts carefully!

LIVE MARKET DATA

When trading with the ART software, you will be using minute-by-minute live streaming data that will be delivered to you from the market on which you decide to work. There is no greater reality in the universe than your live market data.

It will tell you the current price and volume any minute, any day, and any year. There is no middle man (other than your data provider) that will distort the data, no news announcer on television to “interpret” the data for you by adding their own opinions to the formula. Nope, your live streaming market data is the real thing. You’ll be able to lay your eyes on the unaltered truth.