HIGH PROBABILITY TRADING Take the Steps to Become a Successful Trader
Total Page:16
File Type:pdf, Size:1020Kb
HIGH PROBABILITY TRADING www.rasabourse.com This page intentionally left blank. www.rasabourse.com HIGH PROBABILITY TRADING Take the Steps to Become a Successful Trader MARCEL LINK McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto www.rasabourse.com Copyright © 2003 by Marcel Link. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-142901-8 The material in this eBook also appears in the print version of this title: 0-07-138156-2 All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fash- ion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at [email protected] or (212) 904- 4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, mod- ify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strict- ly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS”. McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICU- LAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the func- tions contained in the work will meet your requirements or that its operation will be unin- terrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or any- one else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. DOI: 10.1036/0071429018 www.rasabourse.com Want to learn more? We hope you enjoy this McGraw-Hill eBook! , If you d like more information about this book, its author, or related books and websites, please click here. www.rasabourse.com Dedicated to both the readers (and by saying both I do hope there will be more than two of you) who are doing whatever they can to become better traders and to those traders who do nothing to improve, because the latter make making money a little bit easier for you and me. Thanks for choosing the book. I hope that it helps and that you enjoy it. www.rasabourse.com This page intentionally left blank. www.rasabourse.com For more information about this title, click here. CONTENTS PREFACE xi PART I THE BUILDING BLOCKS Chapter 1 The Tuition of Trading 2 Chapter 2 Setting Realistic Goals 24 Chapter 3 Leveling the Playing Field 46 PART II USING THE NEWS Chapter 4 Trading the News 60 PART III TECHNICAL ANALYSIS Chapter 5 Increasing Your Chances with Multiple Time Frames 78 Chapter 6 Trading with the Trend 96 vii Copyright 2003 by Marcel Link. Click Here for Term of Use. www.rasabourse.com viii CONTENTS Chapter 7 Using Oscillators 122 Chapter 8 Breakouts and Reversals 149 Chapter 9 Exits and Stops 178 Chapter 10 Making the High Probability Trades 211 PART IV TRADING WITH A PLAN Chapter 11 The Trading Plan and Game Plan 230 Chapter 12 System Trading 243 Chapter 13 A Little about Backtesting 267 Chapter 14 Employing a Money Management Plan 286 Chapter 15 Setting Risk Parameters and Making a Money Management Plan 299 PART V SELF-CONTROL Chapter 16 Discipline: The Key to Success 322 www.rasabourse.com Contents ix Chapter 17 The Dangers of Overtrading 336 Chapter 18 The Inner Side of Trading: Keeping a Clear Mind 363 INDEX 385 www.rasabourse.com This page intentionally left blank. www.rasabourse.com PREFACE Trading is easy; anyone with a few bucks can do it. Making money, however, is a whole different ball game. A simple fact of trading is that almost 90 percent of all commodity traders and those who day trade equities lose money. Investing in stocks, by contrast, was always looked at as a safe long-term play, but as I write this, I have to say that may not be the case anymore. So why is there such a high percentage of losing traders? Do they all have something in common that makes them lose continuously? Why do a select few traders repeatedly make money while the masses lose? What are the common traits that winning traders possess that losers don’t, and vice versa? Can losing traders become winning traders? What do bad traders do that good traders avoid? More important, what do winning traders do that is different? With such a high percentage of traders losing, there have to be some things they all do that cause those results. Throughout this book I will try to answer these questions as I detail how successful traders behave differently and can consistently make money by making high probability trades and avoiding common pitfalls. As important as learning how to trade successfully is learning how to avoid losing. People who are not clear on this will have trouble turning the corner and becoming winning traders. I won’t just point out what traders’ weaknesses are; I will help readers overcome and avoid those common mistakes while showing how a successful trader would react in the same situation. The goal is to teach all traders to have the mindset of a successful trader. There is no easy recipe for becoming a winning trader, but hard work, experience, capital, and discipline are some of the basic ingredients. Although most people will lose money, by learning to trade with the percentages, I believe the average person can become a successful trader. Most of the best traders started out on a frustrating note but were able to turn it around. Sure, some traders may get lucky at first, but trading is a learning process that xi Copyright 2003 by Marcel Link. Click Here for Term of Use. www.rasabourse.com xii PREFACE takes years to master. Much of that learning consists of being able to tell the difference between high and low probability situations. By doing this one can begin to filter out trades that have a low probability of working while being more aggressive on others. Many trading books I’ve read make it seem that trading is a piece of cake and that anyone can do it after reading the book. That’s not the case. Reading will help, but experience is a much bet- ter teacher. One of the best ways of improving, in my opinion, is by correcting past mistakes. It’s easy enough to tell a trader how to trade and to teach him that the trades offering the highest potential reward for the lowest risk offer the highest probability of success. Yet there is nothing a book can teach that a $1000 loss can’t amplify. No book can teach you how to handle losses mentally or how emo- tions affect one’s trading. Only having real money on the line will make you feel the pain and exuberance that can cause traders to behave erratically. Paper trading can help with some things, but one needs to risk actual money to learn how to handle emotions and risk. People follow their rules to a T in paper trading, but as soon as real money is on the line, they begin to ignore those rules. As a trader trades, the first few years will be filled with count- less mistakes. These mistakes are important because only when traders realize what they are doing wrong can they start to concen- trate on not making those mistakes over and over again. By weed- ing out the bad trades, a trader becomes an overall better trader. It is important to show why some trades are bad even if they turn out to be winners, simply because they have a high risk/reward ratio.