Trader's Thread 01 (May 08 - Dec 08)

[millionairemind]

Never Have So Many Short Sellers Made So Much Money With Stocks

By Alexis Xydias
July 21 (Bloomberg) -- Investors worldwide are betting more than $1 trillion on a collapse in stock prices.
Managers from William Ackman to Jim Rogers made a total of at least $1.4 billion in July with wagers against U.S. mortgage financiers Fannie Mae and Freddie Mac, according to data compiled by Bloomberg. Harbinger Capital Partners staked $665 million that U.K. mortgage lender HBOS Plc would drop and Sao Paulo-based hedge-fund manager Francisco Meirelles de Andrade's short selling of Cia. Vale do Rio Doce is also paying off.

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $447 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets.

``It's a huge amount of money,'' said Peter Hahn, a London- based research fellow for Cass Business School and a former managing director at Citigroup Inc. ``Shorts have come a long way. They are getting into the mainstream, and long holders need to understand the shorts are not evil.''

$11 Trillion

While U.S. and U.K. regulators tighten rules on short sellers amid concern they're accelerating more than $11 trillion in global stock losses this year, countries from Indonesia to India are opening up to the practice, which involves borrowing stock to sell it on the expectation it can be purchased at a lower price before paying back the loan.

Assets at so-called 130/30 and 120/20 funds, or those that are allowed to both hold stocks and short them, may climb to $2 trillion by 2010 from $140 billion in 2007, according to a study last year by Westborough, Massachusetts-based Tabb Group. Spitalfields estimates these funds may borrow an additional $600 billion by 2010.

Spitalfields was founded by Mark Faulkner and Bill Cuthbert in 2004 after careers in securities lending and investment banking at firms including New York-based Goldman Sachs Group Inc. and Frankfurt-based Deutsche Bank AG, respectively.

Short selling on the New York Stock Exchange rose to 4.6 percent of total shares last month, the highest since at least 1931, according to data compiled by Bespoke Investment Group LLC, the Harrison, New York-based firm that manages money for wealthy investors and provides financial research to institutions.

Wipe Out Shareholders

Short selling of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee about half of the $12 trillion of U.S. mortgages, surged before the shares plunged this month on concern they will require a bailout that would wipe out shareholders.

Fannie Mae tumbled 64 percent from the end of June, when so- called short interest stood at 138.7 million shares, through July 15, according to data compiled by Bloomberg and the NYSE. Freddie Mac sank 68 percent from the end of June through July 15 after short interest reached almost 83 million on June 30, the highest since at least 1991.

Even after a 90 percent rebound by Fannie Mae and a 75 percent surge by Freddie Mac in the final three days of trading last week, that would have left the shorts with a combined profit, excluding costs, of at least $1.4 billion from June 30 through July 15, the data show.

Survival of the Fittest

Ackman, 42, who oversees $6 billion at Pershing Square Capital Management LP in New York, said on July 15 he had short positions in both Fannie Mae and Freddie Mac. Rogers, 65, said on July 14 that he hadn't covered his short positions in Fannie Mae and would increase his bet if the shares were to rally.

``Short sellers are a very important part of the ecosystem of our financial markets,'' said Angel, a professor at Georgetown's McDonough School of Business in Washington. ``The same way that lions go after a herd, they go after the weaker animals. The shorts will pick on a company where there's a legitimate controversy over its valuation.''

European short sellers have also profited during the sell- off. The Euro Stoxx 50 Short Index rose 29 percent in the first half of 2008, the best performance since at least 1992. The Euro Stoxx 50 tumbled 24 percent in the period, its worst ever start to a year.

`Market for Speculators'

A slump in British banks helped spur the U.K. Financial Services Authority to impose rules on June 20 requiring firms to disclose short positions in companies that sell shares in rights offerings, when those positions exceed 0.25 percent of the company's stock. The FSA cited short bets on June 13 for ``severe volatility in the shares of companies conducting rights issues.''

Harbinger Capital, the New York-based hedge fund run by Philip Falcone, the former head of high-yield trading at Barclays Capital, disclosed a short position of 3.29 percent in HBOS as of June 20. Edinburgh-based HBOS has slumped 62 percent this year.

``The market is becoming a market for speculators rather than a market for investors,'' said Roger Lawson, London-based director at the U.K. Shareholders' Association. ``These guys are making fat profits out of these market maneuvers. It should be restricted to a very limited level of market cap, otherwise it becomes market manipulation.''

The U.S. Securities and Exchange Commission last week limited so-called naked short sales of Fannie Mae, Freddie Mac and brokerages. In such a strategy, speculators sell shares they haven't secured first. The decision comes amid an investigation of whether trading abuses contributed to the collapse of Bear Stearns Cos. in March.

`Send a Message'

James Chanos, president of Kynikos Associates Ltd., says the new rules won't deter most short sellers from making legitimate bets against companies.

``The SEC is trying to send a message -- I am again not quite sure what the message is,'' Chanos, a short seller and one of the first investors to raise questions about Enron Corp.'s accounting, said on Bloomberg Television from London. ``I am just not sure that this was an issue at all for the equity prices of these companies.''

The SEC's move ``squeezed'' some short sellers, forcing them to close positions they shorted earlier by buying the shares, Bespoke data show. Among Standard & Poor's 1500 companies, those with the highest short interest gained the most, rising 15.1 percent on July 16 and July 17, according to the firm's data.

So-called short covering also helped financial stocks in the S&P 500 surge 12 percent on July 16, the biggest-ever gain.

While regulators in the U.K. and U.S. move to limit some types of shorting, the practice is increasing elsewhere. India's capital markets watchdog said in December it would lift a six- year ban on short selling. Indonesia followed last month, allowing the practice for the first time.

Shorting Brazil

In Brazil, equities on loan in June jumped 22 percent from a month earlier to a record $23.3 billion, according to the Brazilian Clearing and Depository Corp. Shorting increased after the Bovespa Index climbed to an all-time high on May 20.

Francisco Meirelles de Andrade, a hedge-fund manager at Nest Investimentos Ltda., is shorting Rio de Janeiro-based Vale, the world's biggest iron-ore producer, which tumbled 6.5 percent last week after its share sale raised less than some analysts expected. His Nest Fund Ltd. Class Long Short Equities fund returned 30 percent in the 12 months through April.

``Short selling helps markets become more efficient,'' said Dallas-based David Tice, 53, founder and manager of the Prudent Bear Fund. ``Short selling is here to stay.''

[winston]

Pitfalls Encountered with Emotional Trades by Bill Kraft

At one time or another, most traders, including myself, have traded by emotion. In coaching sessions and in conversation with many traders over the years, I have seen countless examples of emotional trades and emotional trading.

There has been one constant in those observations and it is that those who continue to trade with emotion without some discipline fail. Some of the emails I receive and some of the traders I meet seem to think about buying a stock as they might think about buying a lottery ticket. They go in with a euphoria, or at least excitement that they are going to hit the jackpot. More often than not, they have no exit strategy whatsoever, nor have they considered the risk or the potential reward to risk ratio.

Successful trading involves some self-examination and planning. In my book, I talk about elements to include in the plan and the necessity of having an exit strategy before ever entering a position. Adherence to a simple plan designed for you can really give you a chance to become a better, more successful trader.

In the following material, see if you see yourself in any of the examples and then ask yourself how did it work out? A coaching client told me that his failures came from "the little man behind the curtain." He pointed to the back of his head indicating that the "little man" was that voice we have in our heads.

A while ago, I was talking to a guy who told me he bought a stock because he "knew it would go up." Another fellow told me he was buying a stock because he thought it would go up. Neither went up. Each of those traders suffered real losses. What did they do wrong? They approached the trades in "Pollyanna" fashion, "knowing" or believing that the stock would move in a specific direction and ignoring a decision on where they would get out if they happened to be wrong on the direction.

Why would they ignore the possibility that their stock would go down? My guess is there were two reasons: first, a case of mild euphoria about the big gain they would get (greed) and second, refusal to recognize, or at least sublimating, an unpleasant emotion -- loss. If we look at things rationally, wouldn't we agree that there is literally no stock that couldn't go down? (If there is, please let me know as soon as possible).

Recognizing that any stock can fall in price not matter what we think it will do might lead us to agree that an exit strategy in the event we may be wrong on the direction makes sense. At a rational moment, we can decide exactly where we will cut our loss. If we fail to make that decision ahead of time, aren't we leaving things to our emotions and aren't we more likely to listen to that little voice in our head that says: "it'll come back" even as we go deeper and deeper into the red?

Another example of emotional trading I have seen is the person who grabs a profit as soon as there is one to grab. I've heard a trader say, I took the profit right away because I was afraid I'd lose it. After his exit, the stock moved another $30. The fear caused him to cut his profits and miss another $30 a share.

His exit strategy was "the little voice" probably saying something like "Get out of this position, remember the last time you had a profit and you let it turn into a big loss. Don't do that again." Yank, the plug gets pulled. Would a more disciplined approach yield a better result? My guess is in more cases than not, it would.

The idea is to cut losses, not profits and to let profits, not losses, run. A predetermined exit strategy such as a trailing stop as I discuss in the book, can keep you in the game through little retracements and market chatter while limiting losses in the event of a reversal. You can create your plan and then execute it so that you simply follow a pre-determined exit strategy.

Does that mean you still won't have losses? No. Does it mean that you will always let profits run throughout their whole move? No. It means you are likely to improve your trading by limiting losses and giving yourself a better chance to avoid cutting profits early.

Trading is not about hitting the lottery. It is about having the gains add up to more than the losses. Successful trading involves giving yourself a little edge. The "hot reactors" of trading do not give themselves that edge. They tend to bet it all on black and though they might hit every so often, they are not giving themselves any edge. They are truly the gamblers while the pro traders make themselves the house.

Bottom line is it is your money and your risk so you are entitled to do it however you want. I prefer trying to get an edge, but I really appreciate the hot reactors; they make life a little easier for me.

[winston]

Psychology of trading is the key

Though methodology is important, discipline and control are the two main characteristics of a successful trader, reports GENEVIEVE CUA

TURN the pages of the daily newspaper and you're bound to find advertisements touting various training programmes that can supposedly turn you into a trading whiz.

But can individuals achieve consistent success trading currencies, futures, stocks or whatever asset?

Entrepreneur Gary Tilkin, who built US-based online trading group Global Futures & Forex, says that of his 'many thousands' of individual clients, more probably lose money than make money.

'With most short-term trading, that's the case because people never invest the time to learn good discipline and methodology. Most people approach the market as fun; they're there for entertainment. And the market usually gives you what you really want,' says Mr Tilkin.

'Everyone says they're there to make money, but they're there for entertainment and that's what they get. The ones who are there to make money and do study hard will eventually get it.'

'It's like any business. People don't usually start at the top. They build a level of experience and proficiency, and then money starts to come.'

He himself says he was a 'slow learner', taking some five to 10 years to master the skills and mindset for trading. 'My first trade was when I was 18 trading pork bellies, soy bean and other commodities. When you're that age, learning discipline was the last thing you're interested in.'

After school, Mr Tilkin worked for some years as a commodities broker and professional trader before he decided in 1997 that he needed to develop an alternative for clients who lacked market access and support. Global GFT was born in 1997, and is said to be one of the first firms to offer online forex trading.

'We decided to develop our own software so we can own it and have control. Probably the most unique thing was that I had been a trader for a few years, doing futures and taking orders from customers who were active speculators. It was really helpful to have gone through that experience from the point of view of software development because we knew what our customers wanted and what we needed to do,' he says.

The group has since set up four offices outside the US; three-quarters of all clients are outside the US. The Singapore office, GFT Global Markets Asia, was set up earlier this year, and has put in an application for a capital markets licence. The platform will offer trading in currencies and derivatives like contracts for difference (CFDs). The group hopes to market its software to brokerage firms in the region, as it has done successfully in Japan.

Mr Tilkin was named a regional winner in the Ernst & Young Entrepreneur of the Year programme in the financial services category in the US. He also co-wrote a book in 2006, The Complete Idiot's Guide to Foreign Currency Trading.

Mr Tilkin says there are two elements that are a must for anyone aspiring to trade successfully. One is methodology; the other is psychology. Methodology boils down to technical analyses, and that is relatively easy to teach and pick up. GFT and numerous other trainers offer courses.

The psychological part is not so straightforward, however. 'We don't teach that but it's extremely important . . . If you can't manage your money and your emotions successfully, all the methodology is not going to help. You really need to be able to control your emotions which goes with discipline. And discipline keeps you using your methodology correctly.'

Mr Tilkin recommends a book, Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas, which focuses on the psychology of successful traders. Within a year, he expects to offer a course on the psychological aspects of trading, in partnership with Mr Douglas.

Keeping emotions out of one's trades is something that 'comes very unnaturally', says Mr Tilkin. 'Virtually, everyone has to go through that battle. Until you do, I don't think you can be consistently and reliably successful. Most people focus on methodology, but that's just half of it.

'If you can't get the psychological aspect down, there is always that potential of something blowing up and you don't know when that's going to happen. It can cascade especially when you've been successful, because it makes it even harder to take losses. The psychological training will teach you that losses are a big part of trading; there is nothing wrong with that.'

Mr Tilkin names discipline and control as the two most important characteristics of successful traders. These qualities are honed over time. 'Almost no one starts with them. Most people start thinking this is something they can make a lot of money with. They then learn that's not the case until you learn the fundamentals. It's like any business. People don't usually start at the top. They build a level of experience and proficiency, and then money starts to come.'

Discipline includes money management, which covers how much money to put at risk; and having an investment plan. A stop-loss may not always be necessary, he says. 'I recommend people to have a plan of not only when you take your profit, but also where you take your loss, and do it. If that requires putting a stop-loss, that's fine . . .

'If you have a short-term trading plan, but the trade is morphing into a long-term trade, you've made a mistake. Technical analysis is quite objective. If your analysis is based on certain things, and the market breaches those supports, it's telling you that you're wrong. You may want to stop there . . . but you know because you've planned ahead.'

GFT's courses in the US usually assume an individual has knowledge and experience in trading. Its software provides drawing tools and various indicators; and allows clients to develop their own indicators, custom write their own systems and even back test them.

Mr Tilkin says a client can typically learn advanced techniques over a month or two, after which he could simulate trading using a demo account. 'It's usually important to start with real money early once you're comfortable. You don't ever realise the emotional aspect until you have real money on the line.

'You can demo trade forever and never experience the emotional highs and lows, and those are the things you have to get under control. If you don't get them under control, you'll never be successful consistently, and you never learn that unless you have real money at risk.'

[kennynah]

need to use both the Left and Right Hemispheres...

L-Hem = logics
R-Hem = visualises...

[winston]

Play the Market at Hand -- by Bill Kraft

In recent weeks, I have received a number of emails from traders who have been suffering a high percentage of losses in their accounts and who wonder what they are doing wrong. In many cases the answer is that they are playing a market that does not exist right now. They have been buying stock only to see it fall in price. While some stocks will inevitably move up in bearish markets, most are going to fall.

If we think about it, the markets would not be falling if most of the stocks in the market weren't also falling; that is why the indexes drop -- most of their components are dropping. When we buy stocks in a falling market, we are making a bet on an upturn rather than taking what the markets are willing to give.

I am writing this article on Monday, July 28th and, at the moment, 68% of the S&P 500 stocks are showing losses. If that is the case, why would I want to buy an S&P 500 stock? Isn't that the way to give the other guy the edge? In trading, as in life, there is no foolproof way to predict what will happen tomorrow. We can try to predict the future, and sometimes we will be right, but, truth be told, we have no control over the future. A rising market can turn on a dime as the result of some unexpected, unpredictable event or geo-political event. If we can't predict the future, how can we possibly succeed at trading?

The answer, I believe is to play the hand we are dealt rather than trying to play the hand we hope we may be dealt. In playing the hand we are dealt, we can try to get an edge by observing what the market is actually doing rather than what we think it might do. If, as has been the case, the markets are falling, why not make bearish plays instead of trying to force a play in the opposite direction?

I once knew a successful trader who said: "Play it until it breaks." Pretty good advice in my opinion. If the markets are generally bearish, emphasize bearish plays until it turns. If 70% of stocks are going down, consider playing the downside by selling short, buying puts, entering bear call credit spreads, or any other bearish strategy to give yourself the edge by favoring the current direction. Will the market turn? Of course it will, but no one and no system can tell us when. Meanwhile, let's try to take what it is willing to give.

If I am looking for a directional play, I look to see the market direction and then I look at sectors that are moving the same way as the markets and then I look at individual stocks moving in the same direction as the sector.

Once some candidates are identified, the next step, for me, is to see where my exit will be in the event I am wrong on the direction so that I can try to exit with as small a loss as possible. If I enter a directional play and it moves my way -- great. I'll just follow my exit strategy for the play and let it run. If it goes the wrong way, my initial exit should get me out with a relatively small loss so I can try again.

[winston]

Soros Successors Thiel, Howard Prove Global Bears Rule Markets
By Katherine Burton

Aug. 1 (Bloomberg) -- Hedge-fund managers following the path of George Soros, who made a fortune by exploiting financial turmoil, are beating their peers for the first time since 2003 on wagers the global economy won't improve anytime soon.

Clarium LP, the San Francisco-based hedge fund run by Peter Thiel, gained 47 percent this year as of July 25 on trades that paid off when stocks and the U.S. dollar fell, according to two of his investors. Alan Howard's Brevan Howard Fund Ltd. rose almost 18 percent, helped by holdings that profited as the Federal Reserve cut interest rates seven times since September to keep the U.S. out of a recession, according to monthly shareholder reports.

``Macro investors are torn between two views: We're in something like the 1970s or we're in something like the 1930s,'' said Christopher Watling, head of London-based research firm Longview Economics, referring to the two worst periods of economic pain in the last century.

Macro funds, which can trade everything from Apple Computer Inc. shares to zinc futures, returned 18.8 percent in the 12 months ended in June, five times the industry average and the most of any strategy, according to indexes compiled by New York- based Credit Suisse Tremont Index LLC. While two of their favorite trades -- betting financial stocks will fall and oil will rise -- turned unprofitable last month, the best-performing funds expect the bad news to continue.

Oil to Yen

Thiel, who founded Clarium in 2002 after helping sell online-payments service PayPal to EBay Inc. for $1.5 billion, has said oil prices could hit $200 a barrel by the end of the year. Yet the 40-year-old has unwound his position because of concerns that policy makers will do whatever is necessary to drive down the price to combat inflation, said the investors, who declined to be identified because the fund is private.

The Federal Reserve has taken the unprecedented steps this year of committing to pump $350 billion of cash and securities into the banking system and extending its emergency-lending programs to Wall Street firms.

Clarium, which oversees $7.4 billion, is positioned to profit from declines in U.S. stock prices and the dollar, particularly against the yen, the investors said. Thiel, who declined to comment, also expects 30-year Treasuries to rise as the U.S. moves closer to deflation, or an extended period of falling prices.

Howard, who founded his London-based firm in 2002 after leaving his job as head of proprietary interest-rate trading at Credit Suisse Group AG, correctly predicted that the difference between short-term and long-term interest rates in the U.S. would increase, as the Federal Reserve was forced to lower its benchmark rate by 2.25 percentage points to 2 percent to battle a slowing economy. He also made money on commodities and in emerging markets.

Macro Pioneer

Unlike Thiel, Howard, 44, is expecting stagflation, or economic stagnation coupled with an increase in prices, in the U.S., Europe and Japan, according to Brevan Howard's latest monthly shareholder report.

``The world continues to go through a period of adjustment from excess and the mispricing of risk,'' said Ian Plenderleith, chairman of London-based BH Macro Ltd., the publicly traded fund that invests in Brevan Howard's macro portfolio. ``I don't think that it would be remotely possible to say that this is coming to an end.''

Soros, who turns 78 this month, is the grandfather of macro investing, which seeks to profit from macroeconomic trends by trading currencies, bonds, stocks and commodities. The New York- based billionaire earned worldwide renown in 1992 for making $1 billion breaking the Bank of England's defense of the pound. He also profited from German reunification in 1990 and last year made 31 percent investing in India and China.

Tudor Jones

``Global macro is a good place to allocate assets if you are concerned about the health of the equity market,'' said Scott Baker, principal at Greenwich, Connecticut-based Cook Pine Capital LLC, which constructs hedge-fund portfolios for wealthy clients. ``They afford investors a good strategy in which to weather today's economic storms.''

Managers in the Soros mold who have developed into so- called multistrategy investors are also making money this year, though they aren't matching the returns of Brevan Howard and Clarium. These managers have a macro component to their firms, but also employ other strategies such as fundamental stock- picking.

The $11.1 billion Tudor BVI Global Fund Ltd., run by Paul Tudor Jones from Greenwich, Connecticut, climbed 4.2 percent this year through July 16. New York-based Louis Bacon's Moore Global Investment Fund rose about 2 percent in the same period.

Cost of Optimism

Bruce Kovner, who runs Caxton Associates LLC in New York, was up 3.44 percent as of July 22. Soros's Quantum Endowment Fund, which since 2000 has taken a more conservative investment approach, returned 5.5 percent in the first half of the year.

Officials for the funds declined to comment.

Managers who are the most optimistic about stocks have done the worst. London-based Lansdowne Macro Fund Ltd., overseen by Richard Davidson, has fallen almost 7 percent this year.

Barton Biggs's Traxis Fund LP tumbled 10 percent in the first half of the year, hurt by bets that U.S. shares would appreciate. As recently as May, Biggs, 75, said the U.S. economy will grow in the second half of 2008, the Standard & Poor's 500 Index may climb to a record and commodity prices will retreat as much as 30 percent.

Companies aren't expressing ``gloom and doom,'' and the economy is ``not as bad as you would believe from listening to the press and some of the Wall Street commentators,'' the New York-based Biggs said in a May 5 interview on Bloomberg Television.

Since then, Biggs has modified his view, saying the economy will neither grow nor tumble into recession, according to investors. He predicts the S&P 500 may rise to 1340 or 1350, though the market may retreat again after that.

The benchmark index closed yesterday at 1267.38, down 1 percent in July and 14 percent for the year.

[HengHeng]

As markets starts parroting gloom and doom i'm slowly opening my eye and researching on stocks to buy ... after taking a break of 8months since last dec.. lol ..

[winston]

What Really Matters in Trading
Jason Alan Jankovsky

As a veteran trader with more than 20 years of experience, young traders often ask me, "What makes a successful trader?" I often reply, tongue in cheek, "If I knew that, would I be teaching?"

No matter how you want to slice it, there is no easy answer to a question like that. Asking a seasoned trader, "How do I learn to trade?" is like asking a doctor, "How do you make a sick person well?" or asking an attorney, "How do you win a lawsuit?"

There is no 2-cent answer to a million-dollar question. In fact, it is this desire by many novice traders to find a pat answer to the process of becoming a net-winning trader that prevents them from succeeding.

I believe that successful trading is a learned skill just like any other -- except that what you have to learn is not what you first think it is.

Because I have had serious losses during my career I have had to re-evaluate my approach several times over the years. In the process of learning the business of trading from the inside out, I discovered that successful trading has very little to do with the markets themselves. I believe that 95% to 99% of successful daily winning in this game is a factor of personal trader psychology. I really don't think the markets have anything material to do with your ultimate success or failure. As a friend of mine is fond of saying, "The markets don't beat a player; they merely give the player a chance to beat himself." Most seasoned traders will likely agree with that statement and that is why I wrote Trading Rules that Work to help all traders -- old and new alike -- to stay focused on what really matters.

I've broken the material down into four distinct parts: "Getting in the Game," "Cutting Losses," "Letting the Profits Run" and "Trader Maxims." Each part is designed to give you a solid foundation within the overall context of personal responsibility.

If we assume the markets have little to do with our success and that our psychology of participation makes all the difference, then we must accept the responsibility for our results -- completely. We are the architects of our own fortunes, and the markets are merely the place we go to get it. Still, we must know what we are doing and more importantly, how to stop bad behavior. In my view, that is the most significant part of your daily trading: learning to stop losing behavior before it starts. This becomes your personal rule-set to begin your journey towards successful trading.

Each part of Trading Rules that Work builds on the others, and it is wise to start at the beginning and read the whole book through front-to-back before going into any one part more deeply.

Part 1. Getting in the Game: Let's face it: You can't win a game unless you know the rules to the game before you start playing it. The first section of the book shows you clearly the true nature of the market environment so you can begin from a solid understanding of how the game is played.

Part 2. Cutting Losses: Regardless of your sophistication or experience in the markets you can't really succeed until you master the skill of getting out when you are on the wrong side. No trader will master this game if he can't look himself square in the eye and say, "I am wrong. This won't work. I am getting out and finding another opportunity."

Part 3. Letting Profits Run: The opposite and equally needed skill of holding winners is critical to lasting trade success. Most traders cut winners and hold losers. In this section I show you how to change this basic error to the proper function of holding winners, in addition to cutting losers.

Part 4. Trader Maxims: In this section I show you the underlying psychology and common sense of such maxims as "don't trade the news" or "don't take tips." In truth, the only two skills you need to make your fortune are the ability to cut losses and hold winners. "Trader Maxims" gives you more detail on how to do exactly that.

I've made the language of the book very basic and to-the-point. Most readers have told me that they like the straight-shooting, no-punches-pulled style of the material. In my experience, the ability to communicate the basics well and add additional detail when needed is important, and with Trading Rules that Work I've done that.

[winston]

Standing Aside is a Strategy -- by Bill Kraft

Over the past several months, I have received a number of emails and heard from many traders how hard they consider the markets have been to trade. In talking to others, I have heard many sad tales about significant losses. In a sense, these complaints echo those I heard when the markets turned south in 2000. I always try to ask these folks what they are doing in the markets and the answer most often is that they are buying stock or taking bullish positions. The problem, of course, is that the markets have been decidedly bearish in general and unless a trader was focusing on oil and energy, the chances for success weren't very good. Markets are going down because most of the stocks in that market are going down so why be surprised that we lose if we are playing against the market?

I am convinced that most people are bullish by nature or training. The consensus, wrong though it may be, seems to be that we need to buy stock or directional options to make money in the markets. I once knew a man who literally made millions in a few short years trading the markets only to lose it all when the tech bubble burst. Of course, there were many reasons why he went broke including failure to manage money and failure to discipline his trading, but most importantly, he refused to do anything but continue to make bullish plays as the market turned more and more bearish.

It is fine to be bullish, but my suggestion is that if you are bullish by nature and only like to make bullish plays, then stand aside when the market turns bearish. Going to cash and just watching when a market is bearish is a lot better than watching our assets melt away as we try to pick the bottom.

There are many ways to make money in bearish and sideways markets. I discuss several of those ways in my book, "Trade Your Way to Wealth". In Appendix D to that book, for example, I specifically set out bearish and neutral strategies along with the bullish and describe things like their relative risk, capital required, time likely to be in the position, potential rewards, etc. However, just because those strategies are available doesn't mean everyone knows them or knows how to use them. If you are among those whose bent is bullish and who neither knows nor cares to use bearish strategies, the best strategy is probably to stand aside until the bull returns.

Awaiting the return of the bull requires patience and many would-be traders are very impatient to say the least. Patience, though, is a great asset for a trader. Rather than rushing in to catch the falling knife as so many do, how about waiting until a bullish move is confirmed and then invest. That certainly seems better to me than watching the portfolio race toward zero.

As the paid subscribers are aware, I have been addressing the bearishness for months now, and, in the bullish services have sent out many fewer alerts than when the markets were moving up. My efforts for the bullish services have been to try to find the occasional position that looks like it has reversed up and get in with a reasonably tight stop in case I am wrong on the direction. In general, though, I have spent much more time "standing aside" than I normally would in a bullish market. During the same period, the Option Trader service has had more trades simply because of the ability to make bearish and neutral trades.

The markets or a stock can only go one of three ways -- up, down, or sideways -- and there are strategies for each, but we have one other option available when we are unconvinced about direction or just uncomfortable with a market; we can stand aside and wait until we find the conditions we like. It may take time and require patience, but it is better than the alternative.

[millionairemind]

Just recently learned of a beginner currency trader who had $30K as starting capital.

Traded all the way to $80K (50k gain) this year by betting against USD.

Never learnt to protect his profit and never learnt to cut his losses. Within these 2 weeks, he lost $65K...

Not only did he lose that $50K of profit that the market gave him... he lost another 50% of his intial capital...

Same old mistakes, repeated in every market...

Never learn to keep the profits that market has given him, and never learnt to protect his capital.. it is his ego and his need to be right that kept him in the market even though the market has gone against him.

2 weeks was all it took to almost wipe him out.