The market guys' five points for trading success. Identify, pinpoint, strike, protect and act!

337 Pages·2008·4.93 MB·English

by  A. J. Monte

The Market Guys’
Five Points for
Trading Success
IDENTIFY, PINPOINT, STRIKE,
PROTECT, AND ACT!
A. J. Monte
Rick Swope
John Wiley & Sons, Inc.
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Copyright © 2008 by A. J. Monte and Rick Swope. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Monte, A. J., 1958-
The market guys’ five points for trading success : identify, pinpoint, strike,
protect, and act! / A. J. Monte And Rick Swope.
p. cm.
Includes index.
ISBN 978-0-470-13897-7 (cloth)
1. Stocks. 2. Investments. 3. Speculation. I. Swope, Rick, 1964- II. Title.
HG6041.M653 2008
332.63'22--dc22
2007028034

Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Contents
Preface ix
Acknowledgments xiii
About the Authors xv
Introduction xvii
Chapter 1 Blueprint for Success: Creating Your
Trading Plan 1
Trading Is No Longer a Team Sport 2
Beware the Siren Song of Gurus 8
Know When to Fold ’Em 11
Shucking Right Down to the Cob 15
Grow with Your Plan 25
Chapter 2 Are You Out of Your Mind?: How to
Work with Your Emotions 27
Avoiding Pain, Seeking Pleasure 27
Piloting Your Trades 29
Technical Analysis or Tea Leaves? 31
Fundamental Seduction 32
Using Best Practices 33
The Business of Trading 34
Overcoming Fear and Greed 36
Filtering Your Emotion 39
Case Studies 40
Mind Your Emotions 45
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iv Contents
Point I: Follow the Money Trail: Identify the Trend
Chapter 3 I t Pays to Be Trendy: Putting Your
Money with the Money 49
The Crowd May Be Wrong, but They’re Still
the Crowd 50
Dow Theory 51
Uptrends 55
Downtrends 61
Sideways Trend 63
Support and Resistance 63
Moving Averages 65
Back on Track 66
Chapter 4 T he Trader’s Toolbox: How to Pick
a Hammer when the Market Gives
You a Nail 67
Trend Lines 70
Channel Lines 74
Moving Averages 78
Fibonacci Retracement Lines 84
Stochastic Oscillator 86
Moving Average Convergence Divergence
(MACD) 91
Bollinger Bands 95
Don’t Plow a Field with Your Mercedes 98
Chapter 5 T en Common Mistakes Made by
Traders (And How to Avoid Them!) 99
Mistake 1: Marrying Your Stock and Finding Trades
that Aren’t There 100
Mistake 2: Failing to Accept a Loss 103
Mistake 3: Doubling Down on a Losing Position 106
Mistake 4: Lack of Training and Preparation 108
Mistake 5: Trading with Scared Money 110
Mistake 6: Buying Cheap Options 112
Mistake 7: Overcomplicating the Analysis 114
Mistake 8: Unrealistic Expectations 116
Mistake 9: Using Software Crutches 117
Mistake 10: Trading without a Plan 118
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Contents v
Point II: Establish a Clear Support Level: Pinpoint Support
Chapter 6 T he Role Reversal: Working the
Buyer/Seller Battle Line 121
Market Mechanics 122
Your Opinion Won’t Move a Market 126
Defining Role Reversal 126
Dollar Cost Averaging versus Cost Averaging Down 127
A Good Plan Gone Bad 128
Pursuit of the Breakeven Point 129
The Building Blocks of a Role Reversal Pattern 130
The Psychology behind the Move 132
The Role Reversal from the Short Side 133
More Traders Drawing the Lines 135
Chapter 7 S eventh-Inning Stretch: Managing
Market Stress 137
Analyzing Alex 139
Sweet Nothings—Literally! 142
Trading Fingers of Steel 144
Small Steps, Big Changes 146
Chapter 8 E Pluribus Unum: Out of Many
Stocks, One 149
It May Be a Small World but It’s a Big Market 152
Viva Simplicity! 153
Back to the Basics 154
Getting Technical 162
Putting the Fun in Fundamentals 170
Buy the Rumor, Sell the News? 172
“When You Come to a Fork in the Road, Take It” 175
Point III: Wait for the Pivot Point: Strike with the Buyers
Chapter 9 G oing with the Flow: Don’t Jump
in Too Early 179
Jiu-Jitsu Trading—Knowing When to Tap 180
Identifying the Pivot Point 181
The Pineapple Principle 184
Pivot Point Patterns 185
Bullish Pivot Point Patterns 186
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vi Contents
Bearish Pivot Point Patterns 192
Use the Market without Guilt 198
Chapter 10 E ssential Options, Part 1: Knowing
Your Options 201
What Is an Option? 203
Call Options or Pizza Coupons 204
Put Options 217
Chapter 11 E ssential Options, Part 2: Knowing
Your Strategies 221
On Expiration Day, the Option Must Be
Worth at Least Intrinsic Value 223
Closing Your Option Position at Expiration 224
Closing Your Option Prior to Expiration Friday 225
Let’s Talk Volatility 226
Long Calls 227
Long Puts 229
Cash-Secured Put Selling 231
The Covered Call 233
Now You Have Options 236
Point IV: The 1% Rule: Protect Your Position
Chapter 12 M anaging Risk: Learning to Lose
Money the Right Way 239
Is There Really Such Thing as a Safe Investment? 240
I’d Like to Buy a Vowel 243
Everyone Should Be Above Average 244
Five Principles of Risk Management 246
Risk Management Action Steps 252
Managing Risk in a Probabilistic World 259
Chapter 13 T rading Hall of Shame: Traders You
Don’t Want to Imitate 261
Barry the Bottom Fisher: Always Buys the Low
(Until It Makes a New Low) 262
Breakeven Betty: Forget Profits, Breaking Even Is
Her Goal 264
Seminar Sal: He’s Everywhere, But Is He
Making Money? 265
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Contents vii
The Frozen Chosen: Holding Back Because of Fear 267
Larry the Lemming: Follows the Crowd, Not the Money 269
Norman Is an Island: Trades in Seclusion, to His Theme
Song, “All by Myself ” 271
Urgent Carl: He’s Trading, but He’s Not Weaned 272
Oz and Trish: The Couple that Vows to Ignore Any
Losing Position 274
It’s Funny Until It Hurts 276
Chapter 14 G oing to the Dance: Finding
Your Broker 277
1. Accounts 277
2. Advice and Support 280
3. Trading and Investing Products 281
4. Costs and Fees 283
5. Software 284
6. Order Types 287
7. Research 289
8. Banking 291
9. Reports and Records 292
10. Security 294
You Are in Control 296
Point V: Take Action: Act for Results
Chapter 15 T he Trade and Beyond:
Wealth Has a Purpose 299
What Is Your Purpose? 300
Changing the World One Person at a Time 302
What’s Your Story? 303
Take Action 305
Glossary 307
Index 313
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Preface
W
hen we stand before a new audience for the fi rst time, we
often get some variation of the following question: “Why should I
listen to anything you have to tell me?” It’s a fair question and one
that we would expect you to ask of anyone who offers their advice.
Over the years, we have had the privilege of working with hundreds
of thousands of investors and traders all around the world. Long
before this book was ever considered, The Market Guys were talk-
ing to traders in London, teaching beginner options to students in
Taipei, and helping investors protect their portfolios in Stockholm.
Through all of these experiences, we have observed certain strate-
gies and characteristics that are common to successful traders. We
have also observed certain other strategies and characteristics that
are common to unsuccessful traders.
We have joined you on the front lines of trading and investing. We
did not just read about stocks and options and use that information
to build a supposedly better mousetrap. Rather, we have bought and
paid for our education through real trades. We know what it feels like
to go home with a trade that could ruin your family fi nances. We have
watched helplessly as the market shut down for want of buyers when
we desperately needed to sell. We counseled traders who were placing
their last dollar on a high-risk speculative trade in the hope that they
could possibly escape their failings in the market.
Along the way, we realized that we were uniquely positioned
to actually help people protect their assets while building wealth.
You see, we didn’t create The Market Guys’ Five Points for Trad-
ing Success as a marketing gimmick to entice you to purchase our
version of beating the market. In a sense, this was a book that had
to be written. It was born of our passion to teach and truly make
a difference in peoples’ lives. If we can help one person preserve a
retirement account through a simple risk management strategy,
our work has been worthwhile. It has been said that teaching is
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