Beruflich Dokumente
Kultur Dokumente
Foreword by David Bowden ...................................................................................... 2 About Safety in the Market ........................................................................................ 4 Introduction .................................................................................................................. 6 What is a Trading System ............................................................................................ 8 Step 1 Never Put All of Your Eggs in One Basket ................................................... 10 A Tale of Two Traders ............................................................................................. 11 Step 2 Cut the Losers with Stops ............................................................................ 15 A Tale of Two Traders Trade 2 ............................................................................. 18 Step 3 Always Know Your Destination ................................................................... 21 A Tale of Two Traders Trade 3 ............................................................................. 23 Step 4 Never Let a Profit Turn into a Loss .............................................................. 26 A Tale of Two Traders Trade 4 .................................................................................. 28 Step 5 Turn the Odds in Your Favour ...................................................................... 31 A Tale of Two Traders Trade 5 ............................................................................. 34 Step 6 Make Your Own Decisions ........................................................................... 37 A Tale of Two Traders Trade 6 ............................................................................. 39 Step 7 Play it by the Numbers ................................................................................. 41 A Tale of Two Traders Debrief .............................................................................. 43 Conclusion What Does it All Mean? ........................................................................ 45 So What Next? ............................................................................................................ 45 What our students are saying .................................................................................... 46
simplicity, yet he wrote in a complicated style so as to make his students think to make them work for his wisdom. After mastering the lessons of Gann, I set out to simplify his lessons and teach them to those people who had a genuine desire to learn. It was from here that Safety in the Market was born. Through Safety in the Market we have taught people across the globe how to understand and profit from the markets. Although I retired from active duty back in 2001, I still get a kick out of catching up with traders as I travel around the country following my other passion of cars and motor racing. It never ceases to amaze me, the stories I hear from people who have worked with the team at Safety in the Market and how the knowledge they have gained has made an enormous difference to their lives. I am immensely proud of the work the team continues to do to help people who are willing to gain the knowledge and skill it takes to profit consistently from the markets. If learning to make money through trading is something youre serious about, this book is a great place to start.
David Bowden
inveSTMenT Know-how
Investment
Introduction
Why is it that some people are successful investors? After all, they cant be that much different from everyone else, so what is it that allows them to choose investments that are profitable? Imagine if you were to ask this question to ordinary people you met on the street. No doubt youd get a range of different answers. Typically people believe that others are more successful investors because they are rich or because they have inside information on which shares are going up. Some will tell you that its because they are smarter than the average person while others write it off to some investors just being plain lucky. All of these answers are wrong. In reality, the reason some people are successful investors is that these people know how to invest. When you think about it, it makes sense. So how do you get investment know-how? Investment know-how comes from two things. A) Education Investing is like anything else. You have to learn how to do it. B) Experience Once you have learnt the theory you still dont have investment know-how until youve put it into practice for a while...and probably made a few mistakes along the way. So, the short story is that you can get investment know-how but youve got to be prepared to spend some time educating yourself and gaining some experience.
Throughout this book we will be talking about shares but the principles can be equally applied to any financial market investment including managed funds, options, futures or foreign exchange.
If you start making a loss, at what point will you sell the share?
This is the most important question. If you think you will trade and never make a loss, youre better off putting your money into managed funds or in the bank. There is always a risk with any investment and no one ever gets it right all of the time. What differentiates the successful traders is that they admit when they got it wrong and get out quickly rather than hanging on and hoping the stock goes up again. It is important to define the level of risk you are prepared to accept and then stick to this rigidly. The disciplined use of stop losses is a common characteristic of successful traders and well cover this in detail later on.
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If you start making a profit, at what point will you sell the share? The idea that what goes up, must come down can be frequently applied to the share market. The law of gravity still applies. Too many investors have seen dollar signs as a share they own races upwards, only to then watch it plunge back down to below its purchase price. So just as it is important to know how much of a loss you are prepared to take, it is equally important to have a profit strategy and to stick to it. After all, a small profit you have is better than a large profit you might have had.
Step 1
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One of the first things that Michael learnt in the investment course he attended was some of the principles of money management. Only good money management allows you to protect your capital and hang onto any gains you make.
Trade #1
Both Mick and Nev have been following a stock called XYZ and are looking to take a trade. Our traders have identified that XYZ has dropped down $2.00 since the beginning of January. You can see this on the chart below.
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Both the traders reasoned that since the share price of XYZ had fallen so sharply that it would probably be a good buy. Neville jumped right in and bought 1,000 shares at $6.50 costing him a total of $6,500. On the other hand Michael was still studying his stock market course and knew that he probably had more to learn, however he couldnt resist taking the trade, which he felt was a good one. Michael had however learnt some lessons already and he knew that he should not commit such a large portion of his money to one trade. He made sure that he stayed within a limit of 10% of his capital. Consequently Michael bought only 130 shares at $6.50, which cost him $845. This was equal to less than 10% of the $9000 he had in his account. As it turned out the price of XYZ shares did start to move up, but only briefly. The stock was actually in a down trend and after moving up $1.00 it quickly reversed and moved down to $4.50 within a couple of weeks.
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Both Michael and Nev knew that they had made a mistake and sold their shares in XYZ at $4.50. Nev had lost $2,000 but Michael had lost only $260 because he had limited his risk. Even though Michael had lost some money he was pleased that he had used the first money principle that he had learnt and it had worked! He felt that his stock market course had already paid for itself by saving him from losing money. Lets look at the trading accounts of our two traders after their first trade.
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Step 2
In order to do this, well need to say that if the market moves against us well get out and if it goes up well keep it. It sounds simple but it works. Imagine that we take 10 trades. Lets say that in 5 trades the stock goes up and in 5 trades the stock goes down. We can make a rule in your system that says if a stock goes down more than 5% after we have bought it, well see it and take the 5% loss. On the other hand, if the stock goes up, we will hold onto it until it goes up 10% and then sell it. Using these rules, and assuming we are spending $1,000 on each security, our results are as follows: 5 Trades x 5% Loss ($50) 5 Trades x 10% Profit ($100) = Total Loss of $250 = Total Profit of $500
Therefore by using a simple money management technique the total result from our 10 trades is a profit of $250 even if we only have a 50% chance of winning. So remember to add a rule to your trading plan that cuts off your losing trades and makes them little losses before they turn into big losses.
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Placing Stops
Learning to place stops is like learning to drive defensively. Just like putting on a seatbelt as soon as youre behind the wheel, you should always set stops the moment you enter a trade. As time passes, stops need to be adjusted to reduce the amount of money at risk and to protect a bigger chunk of profit. But you should only ever move your stops upwards. In some markets you can tell your broker in advance where your stop is and if the market trades at that level, he will automatically execute the stop for you. In other markets, you will need to record the stop yourself and contact your broker to let him know to close your position.
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Michael calculates that if he buys the stock at $5.80, the maximum loss of 5% that he could accept occurs if the price goes below $5.51.
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He buys 150 shares at $5.80 costing him $870. Nev on the other hand was a little shell-shocked that he lost so much money in his last trade. He has realized that he shouldnt put so much of his money in one trade but he still has no strategy to limit his losses. Nev buys 200 shares at $5.80 costing him $1160. Once again the market makes its own decisions and not long after our traders buy the stock it promptly turns around and heads down. As soon as the market goes down past $5.51, Michael sells all of his 150 shares at $5.50. He has made another loss but it is only small because he got out where he set his limit. Nev on the other hand is not sure what to do. He believes that the share price must surely go back up. He doesnt want to admit that he was wrong and holds onto his shares hoping they will go up. Our chart below shows what happens.
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A couple of weeks later the price of XYZ has slipped all the way to $3.06 and Nev cant stand the pain any longer. He sells his shares and works out that he has recorded a loss of $548. Lets look at the accounts.
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Step 3
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Michael has been very encouraged by his first two trades even though he lost money, because he has seen the effect of his new knowledge in protecting his capital. He has gone further with his studies and has decided to add a 50% profit target. This will mean he has to sell his shares when it goes past $5.32. While this is quite ambitious, Michael has looked back at the way that the chart of XYZ moves and is confident that this is a reasonable objective. He buys 240 shares at $3.55 for a total cost of $852. For Neville it is a different story altogether. After his first two trades he has lost over a quarter of his money and he is not really any wiser. Because he has no plan, he has no yardstick against which to judge and adjust his investment method.
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He decides that he will buy 200 shares at $3.55 for a total cost of $710 because he is sure that XYZ will not go down any further. After entering the trade, both Michael and Nev are very pleased to see the price of XYZ shares move sharply upward. The company XYZ has made an unexpected announcement that will see the companys profits increase sharply. The share price moves strongly up to $4.50 and then, after another positive announcement spikes up to $6.65. This is way past Michaels profit target of $5.32 and so he must sell his shares. This seems very difficult to do because it looks like the XYZ price is going from strength to strength. Michael can feel his greed pushing him to hold his shares and disregard his plan but he forces himself to stick to it and sells the shares at $6.65 for a profit of $744. Neville is sure that he is on a winner this time. He is very excited and tells all of his friends how successful his trade has been (he forgets to mention his two earlier trades of course).
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However Neville has spoken a little too soon. The market starts to move back down again. After going up to $6.80, it then starts going down and continues going down for the next month. Neville has had his emotions in turmoil and finds that he is very indecisive. He does not want to admit that XYZ is going down and hopes it will go back up. Finally he cannot take it any longer and sells his shares at $4.10 for a profit of only $110. If he had sold his shares earlier he could have made a profit of up to $650 but he had no plan as to when to get out. When we look at their accounts, we can see that even though they have both had two losing trades and one winning trade, Michaels trading plan is starting to pay dividends. He has now made a profit of $439 on his $9000. Neville on the other hand is not looking so good, with a loss of $2438 on his $10,000.
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Step 4
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Both our traders decide to enter their fourth trade in XYZ at $3.99. Michael buys 230 shares, being careful to stay within the 10% limit of his portfolio. He sets a 5% stop loss and a 50% profit target. In addition, he has been studying his course and decided to add a profit protection stop to his trading plan. He has decided to use a profit protection stop of 10%.
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On the other hand, Neville is still flying by the seat of his pants. There is nothing really intelligent about the way he is approaching his investments. He is essentially gambling and the only thing he has learnt is that he needs to keep his bets small so he doesnt get wiped out. He decides on 200 stocks for a total investment of $798 (which is still more than 10% of the money he has left). After a couple of weeks the price of XYZ has moved up to $5.98, which is nearly at Michaels 50% profit target of $6.00. He is getting ready to exit his position but he also knows that he has to adjust his profit protection stop of 10%. Michael calculates that he has an unrealised profit of $1.97. Therefore, he calculates that his profit protection stop is at $5.78, which means that if the price of XYZ goes below this level he must sell his shares and keep the remaining 90% profit. The next couple of days sees the market move down to $5.77 and Michael sell his shares because his profit protection stop has been triggered.
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Neville on the other hand, is in the same position he was with his last trade. He is watching his share value plummet but, because he has no plan, he is unsure of what to do. Finally, he sells out a few days later when the price has dipped back to $4.00 for a loss of $2.00. Neville has committed a cardinal sin. He has let a profitable trade turn into a loss. Lets have a look at their accounts after 4 trades.
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Step 5
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Charting Basics
Charting is the primary tool of technical analysis. Share price charts are a visual representation of the price that investors paid for stock at a particular time. This provides a graphical representation of price movements and allows us to take in a lot of information from one single picture. There are many different types of charts including line charts, candlestick charts, swing charts and others. Most investors do this using software that takes the hard work out of drawing them by hand but it is advisable to draw some charts by hand when you begin because it will give you a really good feel for what it really means.
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In this way, technical analysts dont feel it is necessary to know the reasons why prices are moving up or down because they believe that any factors that affect the market price will ultimately be reflected in the market price. The aim of technical analysis is simply to determine the current state of the market and the likely outcome. So, although the newspapers will often tell you what people say they are doing, a chart will reveal what they are actually doing and what this is likely to mean for the future share price movement.
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Based on this information, he decides to enter the trade, buying 190 XYZ shares at $4.98 for a total cost of $946, which is still less than 10% of his account. He also sets a stop loss, a profit target and implements a profit protection strategy. Neville who has no way of identifying trades other than gut feel misses this one and stays on the sidelines feeling rather disillusioned about the whole trading thing. As it turns out, Michaels work has paid off and he has entered the market at the right time. Over the next couple of weeks, the share price of XYZ moves up strongly on good news for the company. Michaels profit target of 50% is $7.47 and by mid April the stock has jumped to $8.15. He feels that the stock has a lot of upward moment and is likely to go higher. It is very hard for Michael to stick to his plan...but he does selling out at $8.15.
Michael feels even more disappointed as he watches the price of XYZ continue on up to nearly $9.50. He vows to review his trading plan to see if he can adjust it so that he does not have to limit himself to a 50% profit target.
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Michael shouldnt feel too disappointed. He has just made a profit of $602 on one trade after investing only $946. Thats equivalent to making 63% in only a few weeks. There is no way he could have made that sort of interest leaving his money in a bank. Nonetheless, from what weve seen of Michael, he seems like a pretty persistent guy and it wont take him too long to adjust his trading plan. Actually, hell learn that you probably never stop adjusting and refining your trading plan. However, the most important thing is to have one to begin with. So, based upon his technical analysis, Michael is working to pick more winning trades than losing trades. It obviously worked for him in this trade and is certainly better than guessing. Importantly though he realises that technical analysis wont get it right every time either and so its critical to have his stops and money management rules in place as well. So after the 5th trade, lets consider the accounts of our two traders.
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Step 6
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Michael never got involved in this trade. His technical analysis had not given any signals on XYZ so hes been off looking for signals in other stocks. As a result we can see what each of their accounts now looks like.
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Step 7
A thorough analysis such as this is the best weapon against emotional trading.
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What we can see is that in a period of only 5 months Michael has been able to generate a return of 16% on his capital. Neville on the other hand has managed to lose 28% of his.
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Michael managed to win on 60% of his trades. This tells us that even if he was winning or losing the same amount of money on every trade, he would be ahead. Even better than that, we can see that Michael has managed to keep his losses small in comparison to his wins. The average winning trade was $580 while the average losing trade was - $150. If Michael could stick to his system and maintain these types of results he could earn a substantial income from trading. As his account grew bigger he could be able to afford to trade larger parcels of shares and his profits would also increase. Neville on the other hand is a different story and unfortunately is representative of a lot of people that try to get involved in trading their own investments. Neville made a few major errors: He failed to properly educate himself He failed to keep any records He failed to do any analysis and learn from his mistakes Consequently he had more losers than winners and his losers were way bigger than his winners. Neville will probably not try trading again. He is very unlikely to take responsibility for the fact that he lost his money and will probably find other people to blame or other reasons why he lost money all because he didnt take the time to get some basic Investment Know-How.
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Conclusion
So What Next?
If you want to find out more about how to develop your own systematic trading plan and the discipline to trade successfully, register for our FREE 2-Hour Trading with Safety Seminar at www.tradingwithsafety.com. au or by calling 1300 387 102. This dynamic and informative event will introduce you to techniques for maximising profit and minimising risk in all market conditions. Register today for a Trading with Safety session!
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With very little experience in the stock market I began trading with the Safety in the Market system 10 months ago.The Safety in the Market team was a huge support. With the Safety in the Market trading plan and support team, we have turned my initial investment of $25,000 into $53,000. Archie M., Queensland
Almost like clockwork the principles that the Safety in the Market team had taught me over the last 18 months started to fall into place. I was thrilled to see that my order had been executed to the tee and my broker sold three March SPI at 75% for a return of $3795. Not a bad start to my trading. Ben P., New South Wales
Each Safety in the Market seminar I have attended has encouraged me to go further with my trading - to open my own trading account, to place my first trade, to start getting experience and to ask as many questions as I want. Ive received heaps of support and encouragement for all the small steps I have taken so far. Deanna R., Victoria
We would like to say how great Safety in the Markets trading system is and how well you guys present all the seminars. Recently we placed some contracts with Newcrest Mining and within three weeks we have more than doubled our trading account from these contracts alone by trading into and out of the significant low. I think it shows how Safety in the Markets system really works! Jamie T., New South Wales
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