Trend Trading: A Seven-step Approach to Success

439 Pages·2004·12.55 MB·English

by  Daryl Guppy

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I DISCOUNT COUPON - TRADING WORKSHOPS '
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I 10% off the regular seminar fee - single and group rates. (These workshops are held in
Australia. Asia, China, the USA, the UK and Europe.)
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I Trading looks easy, but it takes skill. How best to approach your market and survive is
I a skill that can be learned, and improved. Trading success means knowing how to
I GET IN by identifying a trade. It means knowing how to manage the trade so you
I GET OUT with an overall profit.
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You can become a better trader by attending a half-day or full-day workshop because
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Daryl Guppy will teach you how to understand the marker from a private trader's
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perspective, how to use your advantages, and how to manage a trade to Jock in capital
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profits.
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I All traders - those considering entering the market and those who want to improve
I their trading - benefit from these workshops.
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Nobody can give you the ultimate trading secret, but Daryl Guppy will show you, using
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local examples selected by the audience on the day, how a private trader identifies and
I manages a trade. You will enter the market better informed than your competitors.
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I Daryl Guppy holds regular trading workshops, Dates and details are posted on
www,guppytraders,com eight weeks before each workshop,
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I How to claim your workshop discount
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I When YOll hook your seminar mention that YOll own TrendTl'Luiinf.[ and ger 1 (n{~ off the
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"The workshop, like your book, was practical and informative. I enjoyed it, and
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more importantly, I learned from it. For me it brought a lot of the theory into
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I "The workshop covered all the essential building blocks of the trade hetter and more
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- Remisier, Singapore
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I "On the subject of the seminar, J must say that it was an inspiring night. Daryl was
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I examples used during the evening were drawn from the audiel1Ct! (not pre*plal111ed). "
I - Private equity and derivatives trader
TREND
TRADING
Daryl Guppy
Ctj
3 8888 109049407
bJrlghtboolss
DARYL GUPPY is also the author {)f:
Share Trading~, Trading Tactics \ Trading Asian Shares. Bear Trading*.
Chart Trading", Better Trading"", Snapshot Trading"
and the Australian editor/contributor to:
fhe Basics O(Speculating* by Gerald Krefetz, The Day Trader's AdvantagtJ* by Howard Abell,
Options· Trading Strategies That Work"" by William F. Eng
"'Published by and available from Wrightbooks
irst published 2004 by Wrightbooks
n imprint of John Wiley & Sons Australia, Ltd
•
;3 Park Road, Milton, Qld 4064
)ffices also in Sydney and Melbourne
[ypeset in 11.5/14.2 pt Sa bon
© Daryl Guppy 2004
internet; 100035 [email protected] www.guppytraders.com
Charts crented by MewStock, Guppy Trader" Essentials and Ezy Charts,
uSing data supplied by Just Data.
National Library of Australia Cataloguing-in-Publication uatD.:
Guppy, Daryl.
Trend trading.
Includes index.
ISBN 0 7314 0085 2.
1. Stocks - Australia. 2. Investments - Australia. L Titie.
332.63220994
AU rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior
permission of the publisher.
Cover design by Rob Cowpe
Printed in Australia by McPherson's Printing Group
10987654321
Disclaimer
The material in this publication is of the nature of general comment only,
and neither purports nor intends to be advice. Readers should not act on the
basis of any matter in this publication without considering (and if appropriate
taking) professional advice with due regard to their own particular
circumstances. The decision to trade and the method of trading are for the
reader alone. The author and publisher expressly disclaim all and any liability
to any person, whether a purchaser of this publication or not, in respect of
anything and of the consequences of anything done or omitted to be done
by any such person in reliance, whether in whole or partial, upon the whole
r .1 . _ .... l,l;,-..,t;nn
CONTENTS
7::)8 it,
Preface: A flea on an elephant 1
Part I Gone fishing
1 How do I start making money? 17
2 Fish finding 36
3 A hitchhiker's guide to the sharemarket 48
4 No secrets 56
Part II Hey good looking
5 Heads up 67
6 Overcom ing bias 79
7 No secrets 93
Part III Line of lode
8 Classic trend lines 101
9 Line managers 11 0
10 Curve balls 119
11 No secrets 127
Part IV Testing character
12 Building character 137
13 Tracking traders and investors 155
14 Trend travellers 163
15 Using price weakness 175
16 Rally breaks 184
17 Breakout trading 194
18 Better exits 204
19 Bubble baths 212
20 No secrets 225
(Cont'd ... )
III
TReND TRADING
CONTENTS (CONT'O)
Part V Price check
21 Breakout confirmation 235 1'
22 Entry management 245 (
23 Keeping the most 253
24 IPQ profits 268
25 No secrets 275
Part VI Calculating size
26 Three figures 285
27 Stop 293
•
28 A danger to ourselves 306
29 No secrets 317
Part VII Modern Darvas
30 Boxing the trend 329
31 Building a box 341
32 Classic Darvas 352
33 Modern Darvas 362
34 Playing with the edge 376
35 Technical Darvas 382
36 No secrets 388
Part VIII Performance plus
37 Personality blues 399
38 Lucky you 407
39 Nosecrets 417
40 Found in translation 426
Index 429
IV
PREFACE
T
rend 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 abo~e 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.
1
TREND TRADINc;
I have given up t\¥ing to understand why people behave as they do in the
J1b!,
market. Intelligent, 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 stoc~ to continue rising after it has
been mentioned in Sharll<A"agazine. We look at this in Chapter 2. Other
relationships altow uS to hftcn 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 olthem 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 disaste~ 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 rhinking
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.
A FLEA ON AN ELEPHANT
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 50150 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:
o A trade can only move up or down, so the chance of a trade moving up is
always 50%.
o Therefore it is very difficult to get the direction of a trade right more than
50% of the time.
D Consistent successful trade selection of better than 60% is suspicious
because we know there is only a 50% probability of a stock moving
upwards.
o Trading is really about prediction and we use charting and technical
analysis to predict what will happen.
o All successful trades must be very large winners to overcome the 50/50
balance of winners and losers.
o Common indicators are reliable. They must be because they are so widely
used and referred to.
o 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.
3
TREND TRADING
Let's take the first cluster of misconceptions - a trade can only move up or
lown, 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
,tock that has been moving sideways for an extended period, The price action is I
confined to the thick box. Nothing has changed at the point shown by the end
t
)f the box. The stock price has three choices - not two. It may continue to
,nove 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 f
important news event which has enough force to deflect or change the direction
,i
of the trend.
"::<."
Price activity I-----l. .. 70%
.. 15%
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.
4