Trend Trading E-Book

Daryl Guppy

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

Seitenzahl: 559

Veröffentlichungsjahr: 2012

Beschreibung

If you have no time to follow the market closely, then Trend Trading is the book for you. Trend trading is one of the most effective and easy-to-use methods for making money in the market. Success depends on identifying the trend with confidence and catching the trend after it has started, and on getting out as soon as possible after the uptrend turns into a downtrend. The book examines in detail the steps in finding, assessing, selecting, managing and monitoring a long-term trend trade. These are proven, successful methods which are easy to understand and apply. Included are the most recent updates and developments in using the count back line and the Guppy Multiple Moving Average. Daryl Guppy also includes a practical look at setting stop loss conditions to protect capital and profits, and a bonus section on Darvas-style trend trading which is the first significant update of this technique in forty years. Trend Trading shows readers how to use and apply the analysis tools to find effective long-term trades. These can be applied to any group of selected stocks, whether chosen on fundamental criteria, from stock tip newsletters, or found using database technical scans. From this starting point, Guppy shows how the better trades are identified, how risk is managed, and how the trades are closed successfully. The book includes examples of Daryl's personal trades.

Leseprobe

Contents

Preface: A Flea on an Elephant

Part I: Gone Fishing

Chapter 1: How do I Start Making Money?

Full-Time or Part-Time?

Trader or Investor?

Trading Time and Risk

Learning Steps

Ranking Resources

Analysis Independence

Reading is Cheap

Chapter 2: Fish Finding

Hot Tips

The Edge of Arrogance

Casting Burley

Performance Bias

Chapter 3: A Hitchhiker’s Guide to the Sharemarket

Partners?

Fleas on an Elephant

Hitchhiking

Stress Testing

Chapter 4: No Secrets

Everybody Wins

Greed

Start Your Test

Test Question One

Part II: Hey Good Looking

Chapter 5: Heads up

Child’s Play Charting

Trend Beauty

Bar Chart Beauties

Beautiful Analysis

Chapter 6: Overcoming Bias

Confronting Guilt

Harm Minimisation

Business Inhibitors

Objective Analysis

No Surprise

Chapter 7: No Secrets

Our Analysis

Test Question

Part III: Line of Lode

Chapter 8: Classic Trend Lines

Trends Are Not Random

Back to The Future

Trend Probabilities

Chapter 9: Line Managers

Trend Line Management

Trend Line Triggers

Trend Line Trading Plans

Chapter 10: Curve Balls

Straight Up or Parabolic?

Ex-Dividend Trend Offsets

Chapter 11: No Secrets

Our Analysis

Test Question

Part IV: Testing Character

Chapter 12: Building Character

Tracking Inferred Activity

Finding the GMMA

Finding Character

Probability and CMMA

Volatility Cluster Behaviour

Asymmetric Volatility

Chapter 13: Tracking Traders and Investors

Investor Behaviour

Trader Behaviour

Cycles of Volatility

Chapter 14: Trend Travellers

Fast Moving Steep Trend

Longer Term Steady Trend With Limited Trading Activity

Long-Term Trend With Consistent Trading Activity

Chapter 15: Using Price Weakness

Minor Pullbacks in Strong Momentum Trends

Rebound Entries After a Significant Collapse in Prices

Safe Trend Entries

Chapter 16: Rally Breaks

Changing Nature

Chapter 17: Breakout Trading

Breaking With The Bulls

Trading with a ‘v’

Rally and Retreat

Expansion and Compression

Chapter 18: Better Exits

Bounce Failure

Multiple Declining Bounces

Bubble Exits

Sharp Drops

Chapter 19: Bubble Baths

Bubble Identification

Speculative Bubbles

Bubbles in a Strong Trend

End-of-Trend Bubbles

GMMA Summary

Building a Gmma Expert in Metastock

Chapter 20: No Secrets

Our Analysis

Test Question

Part V: Price Check

Chapter 21: Breakout Confirmation

Breakout Applications

Entry Application

When to Use the Count Back Line

Chapter 22: Entry Management

Separating Signals

CBL Stop Loss

Maximum Chase Line

Chapter 23: Keeping the Most

CBL Stop Loss

Protect Profit

Nasty Caps

Classic Trend Exits

When To Ignore Exit Signals

Chapter 24: IPO Profits

Fumble The Stop

Intra-Day Applications

Chapter 25: No Secrets

Our Analysis

Test Question

Part VI: Calculating Size

Chapter 26: Three Figures

Foundation Rules

Application

Chapter 27: Stop

Setting Better Stops

Keeping It Tight

Reward Does Not Equal Risk

Taming Volatility Risk

Minimising Loss

Chapter 28: A Danger to Ourselves

Assuming Risk

Recognising Change

Style And Risk

Chapter 29: No Secrets

Trade Management

Our Analysis

Test Question

Part VII: Modern Darvas

Chapter 30: Boxing the Trend

Ignore The Classics

Why Darvas?

Buy High, Sell Higher

Construction Rules

Trading The Classic Darvas Box

Chapter 31: Building a Box

Setting The Top

Setting The Bottom

Tricky Bits And Warnings

Special Case

Box Limits And Triggers

Darvas Exploration For Metastock

Chapter 32: Classic Darvas

Darvas Tests

Running The Stop

Chapter 33: Modern Darvas

Ghost Boxes

Nervous Volatility

Handling Failure

Darvas Dividends

Chapter 34: Playing with the Edge

Mid-Trend Modifications

Chapter 35: Technical Darvas

Chapter 36: No secrets

Our Analysis

Test Question

Part VIII: Performance Plus

Chapter 37: Personality Blues

Running From Mr Hyde

Hyde and Seek

Internal Solutions

Social Solutions

External Solutions

Chapter 38: Lucky you

Tracking Luck

Ditching Luck

Comparing Systems

Chapter 39: No Secrets

Keep Creed at Bay

No Secrets – Really

Our Analysis

Chapter 40: Found in Translation

Index

Daryl Guppy is also the author of:

Chart Trading*

Share Trading*

Trading Tactics*

Trading Asian Shares

Snapshot Trading*

36 Strategies of the Chinese*

and the Australian editor/contributor to:

The Day Trader’s Advantage* by Howard Abell

Options—Trading Strategies that Work* by William F. Eng

*Available from John Wiley & Sons Australia, Ltd

First published 2004 by Wrightbooks,

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton, Qld 4064

Office also in Melbourne

© Daryl Guppy 2004

Internet: <[email protected]>, <www.guppytraders.com>

The moral rights of the author have been asserted

Reprinted 2004, 2005, 2006, 2007, 2009, 2010 and 2011

National Library of Australia Cataloguing-in-Publication data:

Guppy, Daryl, 1954–.

Trend trading.

Includes index.

ISBN 0 7314 0085 2.

1. Stocks—Australia. 2. Investments—Australia. I. Title.

332.63220994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover design by Rob Cowpe

Acknowledgments: All charts created by Metastock© and Ezy Chart© using data supplied by Just Data and Online Trading Systems.

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

PREFACE

A FLEA ON AN ELEPHANT

Trend trading is not about timing the market. It is about doing at least as well as the general market, and outperforming it. The task is not as difficult as the fund managers would have us believe. This book examines some of the tools investors and traders use to ride the rising ride, and lift above it. You have advantages as a small investor and we show you how to use them effectively.

Between March and September 2003 over 400 stocks listed on the Australian Stock Exchange increased in value by more than 30%, but only a few traders and investors were able to find and lock-in these trend-driven returns. Some caught a ride with a big opportunity, but lost it, turning a winning trade into a much smaller profit, or even in some cases into a loss. We examine some easy-to-apply trend trading methods to find these opportunities and to capture these types of profits. You can do this, and this book shows you how.

Many people invest in the market with the assistance of professional fund managers. You see the managers’ advertisements in the newspapers proclaiming their expertise. They tell readers it is not possible to time the market. It is possible to participate in a rising trend. Ask a simple question of your fund manager or superannuation provider: did they match the broad market return in any year? Often the answer is a resounding and disappointing ‘No’. Think for a moment about this answer. It means their team was unable to float with the rising tide, let alone add extra value through professional management.

I have given up trying to understand why people behave as they do in the market. Intelligent, sane, experienced, skilled people make serious errors. Losing money does not seem to be a deterrent and it does not modify their behaviour. Such reactions are beyond my understanding. I do not waste even my spare time in trying to understand why people do these things in the market.

I do, however, spend a lot of time trying to understand how people behave in the market. Shift to this focus and an entirely new range of relationships emerges. The study of the market becomes a study of human nature and crowd behaviour. The activity is tracked effectively in the patterns of buying and selling, in the structure of the price charts. They tell me little about the company, but speak volumes about the crowd of buyers and sellers. Tighten the focus a little more, and we discern a set of statistical or probability relationships.

Some are as simple as the propensity of a stock to continue rising after it has been mentioned in Shares magazine. We look at this in Chapter 2. Other relationships allow us to hitch a ride with a strong trend in the same way that a flea hitches a ride with an elephant. We do not create the trend, so we look for a crowd surging in the same direction we want to travel. They push a bow wave of profit ahead of them and we use their behaviour to successfully trade the market.

Working with the crowd, but not being part of the crowd, is a strange experience. There is a danger of being sucked into the whirlpool of emotion only to emerge, like so many others, financially poorer for the experience. Our skill and trading discipline protects us from disaster, and in this book we explore seven steps to build one particular approach to market success and survival. This is about trend trading. These are trades which may last weeks, or months, or years. The objective is to find a trend and hitch a ride for a defined period, for a defined return, or until we are aware the trend is no longer moving up.

We do not create the trend, and the level of our trade participation alone is not enough to maintain the trend. For trend continuation we must rely on the activity of many other traders and investors. Understanding what they are thinking and how they are behaving is the most significant aspect of successful trend trading. Understanding how we are going to manage the trade once we buy the stock underpins our trading profitability.

Mastering these aspects of trading is the focus of this book. Of the many different approaches, we have selected the approach we find most useful. Use this as a guide, but not as a universal solution. Understand how we bring together various indicators and analysis approaches to establish our trading solution. When it comes time to build or refine your own approach we hope these ideas will help you create a better solution for your own particular circumstances.

Stock Selection Success

Good investors and traders know they cannot predict the market and they also know the outcome of any trade is not a 50/50 proposition. However they are a little more skilled at identifying the balance of probability. This is not guesswork. It makes the best possible use of technical and charting indicators to identify where the balance of probability lies. They recognise many of the popular indicators, and other indicators derived from them are very unreliable. Many of these indicators get it right 50% of the time and sometimes even less. People who use them must expect failure because the tools are flawed.

In addition to understanding the role probability plays in the market, successful traders and investors also match trade management with better money management created by good stop loss control. This turns a successful trade into a major contributor to portfolio returns. This ensures an unsuccessful trade has just a minor impact on portfolio returns.

Confused and common thinking is a major barrier to trading successes. Here is a list of inaccurate and confused assumptions:

A trade can only move up or down, so the chance of a trade moving up is always 50%.Therefore it is very difficult to get the direction of a trade right more than 50% of the time.Consistent successful trade selection of better than 60% is suspicious because we know there is only a 50% probability of a stock moving upwards.Trading is really about prediction and we use charting and technical analysis to predict what will happen.All successful trades must be very large winners to overcome the 50/50 balance of winners and losers.Common indicators are reliable. They must be because they are so widely used and referred to.Common thinking leads to uncommon results.

These widely held ideas may help to explain why so many people fail in the market. They are not ideas we use and they do not underpin the way we approach the market.

Let’s take the first cluster of misconceptions — a trade can only move up or down, so the chance of a trade moving up is always 50%.

The diagram in Figure 1 shows why this assumption is incorrect. It shows a stock that has been moving sideways for an extended period. The price action is confined to the thick box. Nothing has changed at the point shown by the end of the box. The stock price has three choices — not two. It may continue to move sideways, move up, or move down. Here we make an assumption drawn from Newtonian physics. Newton’s law says the object — price — will continue to travel in the same direction until it meets an opposing force. Once it meets this force the direction of travel is deflected. In market terms this may be an important news event which has enough force to deflect or change the direction of the trend.

Figure 1 Probability while moving sideways

We cannot predict, estimate, know or guess at the news event from the information shown in this diagram. The event is unknowable so we must work with what we have, and it suggests a spread of the balance of probability as shown. There is an equal chance that prices will go up or down, but this balance is not 50% of all the available price options. Instead there is an overwhelming weighting towards a continuation of the existing price movement.

We show this continuation as a 70% probability. We are happy to admit this is informed guesswork based on our close observation of market activity. The principle underlies the way we approach the market in our weekly Tutorials in Applied Technical Analysis newsletter, and this observation is verified by results from the ongoing, real-time monitoring of the notional case study portfolio. You might like to put this probability at 80% or even higher, but we suggest readings at this level do not leave enough room for the impact of significant events. A lower reading does not reflect the tendency of prices to continue to move as a continuation of their previous price direction.

If we have a 70% probability of the price continuing to move sideways then it leaves only 30% for alternative price moves up or down. Here we are happy to accept there is a 50% probability of an up or down movement. This means in terms of the total range of price movement we split the balance — 30% — evenly to suggest a 15% probability of rising prices and a 15% probability of falling prices.

Here is the most important point, usually missed by those who accept common understandings of the market, market behaviour, and the relationship the trader has with this and probability. There is a 70% probability of the current trend continuing. The diagram in Figure 1 shows this price activity as a sideways movement. This means it is quite easy to get the direction of a trade right more than 50% of the time. Just by trading in the direction of the sideways movement you have an 85% probability of prices continuing to move sideways or upwards (70% continuation + 15% up = 85%). This is an 85% probability of making a successful trade where price ends equal to or higher than your entry price.

Tipping The Trend of Probability

When we tip the trend in one direction we get a very important change in the balance of probabilities. A sideways pattern is not dynamic. A sloping uptrend is very dynamic. This shows activity with a crowd of people very interested in buying the stock and this keeps pushing the price upwards.

Our interest is, as always, in the right-hand edge of this chart. The end of the price box shows us all the information we have. Newton’s laws of physics still apply. Prices are most likely to continue in the same direction until they are met by an opposing or stronger force. This changes or deflects the direction of the previous price movement and changes the balance of probability.

A rising trend in prices is a measure of price acceleration and increases the probability of uptrend continuation. In Figure 2 we show an increase to 75%. In some cases, when combined with additional selection criteria like those discussed in the following chapters, this is increased to 80%. This plain, clear thinking stands diametrically opposed to mainstream and common thinking about market and price behaviour. In a trend there is not a 50/50 chance of price moving up or down. There is a 75% probability of the existing trend continuing. This trend acceleration also increases the probability of a price ‘pop’ or ‘bubble’ above the trend line. This is very important.

Figure 2 Probability trends

Unlike the sideways movement in Figure 1, the probability of an up or down move is not 50% of the balance or 15% each way. The probability of a higher price rise remains at 15% but the probability of a trend reversal — a drop in prices — is lowered to 10%. The overwhelming balance of probability is 90% in favour of the trend continuing, either at current levels or at slightly higher prices (75% continuation + 15% upwards = 90%). This is the raw power of trend trading. Pick a stock like this and the balance of probability is overwhelmingly on your side. Select a stock where the balance of probability is 90% weighted towards a continuation of the uptrend and it should come as no surprise that the overall trading success rate of stock selection in our newsletter case study portfolio is 73% or higher. If trend continuation is this high then why doesn’t the newsletter show a 90% success rate? The answer is simple. It is called human error, or more accurately, the tendency of traders to try to pick the bottom of downtrends by applying breakout trading techniques. These are exciting because they can lead to very large returns. They are also extremely high risk because we trade against the balance of probabilities. We use a range of specialist techniques and indicators to try to increase the probability of success, but we acknowledge this style of trading is inherently riskier than trend trading. The diagram in Figure 3 shows why.

Figure 3 Probability trends

With apologies again to Newton, we borrow his idea of gravity. Prices feel the impact of gravity, falling much faster than they rise. Compare any downtrend with an uptrend. The overwhelming majority of downtrends are much faster and swifter, and this changes the balance of probabilities.

A downtrend has an 80% probability of continuing and the dip probability remains around 15%. This is an acceleration of the existing trend, and our observations over many years of trading suggest the probability of these dips remains relatively constant. Combine these and you have a 95% probability of a downtrend continuation (80% continuation + 15% dip = 95%).

At any point in time in a downtrend there is only a 5% probability the trend will stop, reverse, and change into a new uptrend. We can work in that 5% probability area and increase our probability of success by applying a range of tools. However, on balance, we acknowledge the failure rate here is much higher than with other styles of trading. This failure rate is part of what drags our newsletter case study performance down to around 73% success. We also examine a range of other trading strategies in the newsletter and some are included in the case studies just to show how they do not work. The results are included in our portfolio tally and this further reduces the success rate.

A better understanding of the balance of probability in market behaviour makes it easy to understand why the two assumptions below are wrong:

1 Consistent successful trade selection of better than 60% is suspicious because we know there is only a 50% probability of a stock moving upwards.

This is wrong because the balance of uptrend continuation is much higher. When we trade with the strength of probability we achieve a higher success rate.

2 Trading is really about prediction and we use charting and technical analysis to predict what will happen.

Despite its frequent repetition by many investment writers, this remains inaccurate and untrue. It is common and uncritical thinking and it leads to mediocre performance or failure. It rarely leads to consistent success or market outperformance. Most people do not seriously examine the assumptions they bring to their understanding of the market. They dismiss the idea of prediction because it is fashionable — and then they spend hours looking for a system, a broker or an investment manager with a high success rate because they subconsciously believe this means they can predict the future.

Others are a little more advanced in their understating of probability. They believe there is a 50/50 chance of an up move or a down move so they are happy with a 55% success rate. Trapped by their own limited understanding, they cannot understand how it is possible to achieve consistent stock selection with success rates of 70% or better and so miss the real opportunity to build trading success.

Risk Does Not Equal Reward

These crippling misunderstandings do not stop with the concept of probability and trend behaviour. A common belief implies all successful trades must be very large winners to overcome the 50/50 balance of winners and losers. This brings together several assumptions, shown in Figure 4.

Figure 4 Ensuring reward is greater than risk

High reward means high risk, or so we are told, and like children warned of the dangers of playing with fire, we accept the warning without question. High reward does equal high risk, but only if we choose to sit back passively and do nothing to manage risk. Investment and trade management is about the management of risk.

The idea that once a trade is selected the reward in the trade is about the same as the risk in the trade is shown in the first part of Figure 4. It comes from the assumption that the probability of rising prices is the same as the probability of falling prices. It further assumes the range of this rise or fall is evenly balanced. We could spend a lot of time showing why this is not correct, but we do not need to.

The error in thinking is resolved by understanding the role of a stop loss and the relationship it has with money management. No matter what the range of the downside risk, shown at the right of Figure 4, the stop loss effectively caps the risk at 2% of total trading capital. Our own action in the market using stop loss orders limits the risk by capping the level of loss.

The stop loss limits our risk and allows the rewards to run. We have simplified this diagram to show how even moderate returns are successful in counterbalancing the very small losses in unsuccessful trades. Successful trades do not need to be large winners to grow portfolio returns. The key to success is the way losses are kept small. Those who fail to understand this also often have a lot of difficulty with the concept that a 60% loss in an individual trade is acceptable if the dollar value of the loss is less than 2% of total portfolio capital. A more detailed discussion of the implementation of these concepts is included in Part VI.

The strongly trending chart in Figure 5 shows the final common assumption blocking market success. Many assume common indicators are reliable because they are so widely used and referred to. Others develop more indicators derived from these common indicators, tweaking them with proprietary and secret modifications. The truth is very few popular indicators are consistently reliable and many give no better than a 50/50 chance. Use them, or indicators derived from them, and it is no wonder trading selection success is around 45% to 55%. Some of these indicators are less reliable than a coin toss, but because they are mentioned in most trading books and endorsed by high-profile writers, we assume they must work.

Figure 5 Daily stochastic

Consider the bar chart with the stochastic display. Of a total of eight trading signals, there are only two completed trades, shown by the thick black arrows. This is the first buy followed by the first sell. With eight signals we could reasonably expect to see four complete trades defined by an entry and exit signal. Here we see two, giving a reliability rating for this indicator of 50%. The real problem is deciding which of the buy signals is a valid buy signal, and then deciding which of the sell signals is a valid sell signal. Easy to do retrospectively on the chart but devilishly difficult to do in real time.

It gets worse. Of the two trades identified, only one is successful and it is a small winner. The other is a large loser. This is despite the major trend change on the price chart with returns of over 30%.

Common thinking leads to common results. Uncritical thinking leads to poor performance. Thinking it is impossible for anyone to do better than yourself limits your ability to improve your trading. In this book we aim to show readers how a better understanding of the role of probability in the market results in a higher success rate in selecting and managing trend trades. It can be achieved consistently, and with better money management techniques, this is turned into better portfolio returns.

Seven Success Steps

Most of the material covered in the book is new, including the work on Darvas, the use of trend lines, the structure of selection processes and tests and the extended applications of the Guppy Multiple Moving Average. Inevitably there is some repeated material and concepts but I trust it is presented in a new way that adds to your understanding. Each part examines the tests required to identify, select and manage a trade.

Where do we start and what do we need? The first part, ‘Gone fishing’, provides a starting point. Common solutions rarely lead to uncommon profits so we spend a little bit of time examining some common ideas to see if they are really useful. This includes several simple methods of finding suitable trading opportunities. The market is complex, but solutions for breaking into it need not be. Simple tools give us access to good profits in the market.

The final chapter in the first part introduces the first of eight ongoing tests for readers. One of the most pernicious and incorrect of common misconceptions about market success suggests we need exclusive information or systems or techniques for success. This series of tests at the end of each part provides all readers with exactly the same information, yet every reader makes a different decision and ends up with a different profit result. The tests are based on similar work we did with newsletter readers so you can compare your results and reactions to theirs.

Sift through any collection of stock charts and some immediately stand out as clear and obvious trading opportunities. We show how this visual test is applied in the second part, ‘Hey good looking’. This is not a complicated task and perhaps this is why so many new investors ignore it. Their preference seems to lie with what can only be described as ugly charts when prices fall dramatically from the top left of the chart to the bottom right. These are investment bargains and they come with an invitation to financial disaster. We discuss ways to avoid these attempts to separate you from your investment capital.

The third part, ‘Line of lode’, introduces a different approach to the application and use of trend lines. These are probability tools directly related to the management of the trade. Many traders use trend lines to define price action, often with a sneaking suspicion that they might be able to predict the future. This part considers these classic applications and then moves beyond them to examine the relationship between the trend line and better trade management. This turns the trend line into a powerful management tool.

Not all trends are created equal and Part IV, ‘Testing character’, includes an updated and complete discussion of the way the Guppy Multiple Moving Average (GMMA) indicator is used to assess a trend. The GMMA was introduced in Trading Tactics in 1997. Since then the indicator has evolved into more advanced and sophisticated applications. For many traders it has become the core way of understanding trend behaviour and indicating the type of trading opportunity. This part provides a detailed discussion of the trading and investment applications of the GMMA.

Before a stock is added to our portfolio we need a price check to more precisely define the trend and our entry point, and to commence the calculations necessary to manage risk. This is examined in Part V. Our preferred tool is the count back line. This was introduced in Share Trading in 1996 and this technique has also evolved with more sophisticated applications. It is used as a stop loss to protect trading capital when a trade is first opened. We show how this is applied to mid-trend entries. We also show how the count back line is combined with the GMMA as a protect profit tool as the trend develops. This is a powerful trend trading combination.

‘Calculating size’, Part VI, covers the key processes in nailing down risk. Risk is the cornerstone of the market, and yet so many people accept the assertion that high reward equals high risk. They believe they are powerless when confronted with the force of the market. This is simply not true and we examine some of the methods designed to effectively manage risk while leaving reward uncapped. The necessary figures are easy to produce, but implementing an effective stop loss or protect profit strategy is much more difficult. Our reaction to risk changes with experience, and unless we recognise these changes we may stumble on the path to success.

‘Modern Darvas’, Part VII, is an important detour. The approach developed by Nicholas Darvas represents an entirely different way of understanding trend behaviour. Originally developed and successfully applied to markets in the mid-1960s this approach was overwhelmed by the appeal of complex computer-driven analysis of the market and by increasing market volatility. We examine the classic Darvas application. We retain the logic of his understanding of trend behaviour and update the technique for application in modern, volatile markets.

We use six tests to select the best trend trading candidate, and no test is complete without a test result. In ‘Performance plus’ we discuss some of the ways our performance is diminished. We start a trade with the best of intentions, and then turn it into a trading wreck. This is Jekyll and Hyde trading where our best laid plans and intentions are thrown overboard when it comes time to act. There are no easy solutions to resolve this behaviour, but our discussion is designed to help you recognise the problem. We also examine a technique to separate luck from skill when assessing your trading results.

This part also concludes the ‘No secrets’ trading tests. Readers who resisted the temptation to flip forward to find the test answers can enjoy the opportunity to measure their performance and reactions against those who took the original test in real time. These test results confirm trading success rests on what you do with information which is also freely available to all your competitors. Success may appear difficult or impossible when everybody knows exactly the same information, but this is just a mirage. Profits come from the way we use information and we can all be successful. This is the true secret of performance plus in trend trading.

Word Trends

Just like prices in the market, words are not random. They string together, first in notes, then in articles and chapters, and finally in parts to form a book. Before the words come ideas formed from trading experience, tweaked and stimulated by questions from people who attend our trading workshops, by questions from newsletter readers and others who have read my books. The ideas are challenged and forged in the heat of the market. They withstand scrutiny from industry professionals in Australia, Asia and the United States as the ideas are presented in professional development workshops.

The subject trend in this book gained impetus from the questions posed by Chen Jing, who wanted to know if the strategies could be applied to her home markets of Shanghai and Shenzhen. Like many new traders she felt success depended on using information not held by others and the ‘No Secrets’ chapters are designed to answer this concern. Additional specialised material was drawn from articles published in our weekly newsletter, Tutorials in Applied Technical Analysis, by Adam Cox, Leon Wilson and Matthew Ford. All have contributed to the ideas included in this book and I thank them for their assistance.

Leehoon Chong gave her time again to rigorously hunt down poor expression and the numerous spelling and typographical errors in the early drafts. My mother Patricia added her unique editing skills, proving old teachers of English never willingly surrender their red marking pens. Neither writing nor trading are possible without the support of my wife and son, who have long resigned themselves to the side effects of extended periods of intense concentration while the first draft is created and subsequent drafts rewritten. The time to write this book, free from the everyday demands of running Guppytraders.com, is made possible by the office work managed by Kathryn Flynn.

The end-of-day charts in this book are created by the Guppy Traders Essentials charting package, or MetaStock. A few charts are created by Ezy Charts. End-of-day data comes from JustData and is downloaded with their Bodhi Freeway service.

Common thinking does not lead to uncommon results in the market. Many market myths, or commonly accepted practices, often stand between us and market success. We look at some of these from new perspectives to show how you can find an edge that delivers better market returns. Your skill makes the difference between successful and unsuccessful trading, but we must remember that, like a flea on an elephant, we are just along for the ride.

Daryl Guppy

Darwin

February 2004

PART I

GONE FISHING

CHAPTER 1

HOW DO I START MAKING MONEY?

There are over 1,500 stocks listed on the Australian Stock Exchange, and with diligent research, you might get to really know perhaps 10 of them, or even 30. This ignores the other 1,470 stocks, many of which offer excellent trading opportunities. You need a short-cut that allows you to use your knowledge, and the actions of others, to guide you to better opportunities. We put together several short-cuts and a combination of solutions in this book.