Winning the Trading Game

PART I More Life at the End of Your Money 1

CHAPTER 1 The Need to Build Wealth 3

Retiring Early 4

Negative Savings Rate 5

Social Security 6

Conclusion 8

CHAPTER 2 Money-Making Megatrends 11

Industrialization 12

Emerging Markets 13

China 13

India 14

Brazil 14

Russia 15

Mexico 15

Other Emerging-Market Countries 16

Resources under Fire 16

Food 17

Water 17

Energy 18

Ethanol—The Gasoline Alternative 19

Futures, Forex, or Stocks?

CHAPTER 3 What Type of Investor Are You? 23

Yale Study 24

What Are the Returns to Investing in Commodity Futures, and How Do

These Returns Compare to Investing in Stocks and Bonds? 24

Are Commodity Futures Riskier Than Stocks? 25

Can Commodity Futures Provide Diversification to Other Asset Classes? 25

Pros and Cons 25

Types of Investors 26

Type A Investor 26

Type B Investor 30

Fatal Market Conditions 32

Gold and Silver Cornering 32

Interest Rate Backfire 33

Asian Flu 34

Where You Fit in 35

PART II Why 95% of Investors Fail at Futures and Forex 37

CHAPTER 4 The World of Futures and Forex 39

Futures and Options 40

Hedgers and Speculators 41

Futures Exchanges 42

What Markets Are Traded? 44

Foreign Exchange (Forex) 44

What Is the Spot Market? 45

Importers and Exporters 45

OTC Forex Contracts 47

How Is the Spot Price Calculated? 47

OTC Participants 48

Components of OTC Contracts 49

Types of Positions and Orders 49

Positions 49

Types of Orders 50

Options 50

Option Rights vs. Obligations 50

Premiums 51

Time 51

Types of Options 52

Conclusion

CHAPTER 5 The Fallacy of Traditional Stock

Investment Beliefs 55

Futures and Forex Investing Is Not New 56

What You Don’t Know Can Hurt You 57

Explaining the Strategies 58

Buy and Hold 58

Dollar Cost Averaging 60

Value Investing 61

Portfolio Diversification 63

Margin 65

Don’t Short the Market! 66

Fear Leverage! 68

Good Use of Leverage 68

Neutral Use of Leverage 69

Bad Use of Leverage 69

Myth Busting 69

CHAPTER 6 How to Be Among the 5% Who Win at

Trading 71

The Reality 71

Trading with Emotions 72

In the Beginning: Happiness 72

Next Comes: Greed 72

Followed Up by: Fear 73

Which Leads to: Sorrow 73

Next You Have: Frustration 74

Finally: Defeat 74

What the Other 5% Are Doing 75

Selecting Trades Properly 75

Entering Trades Properly 76

Monitoring the Trade 76

Exiting the Trade 77

Battling the Demons of Fear and Greed 77

Holding Losing Trades 78

Chasing Markets 78

Overleveraging Your Account 79

So What Does It Take to Be a 5% Trader? 80

CHAPTER 7 Becoming a Speculator 81

Speculation vs. Gambling 82

Let’s Define Gambling Addiction 83

Could Trading Represent a Form of “Gambling Addiction” for You? 83

10 Symptoms of Gambling Addiction 85

Seeking Assistance 87

The Role of a Speculator 87

Are You a Sucker or a Speculator? 88

The Three Keys to Success 90

Money Management 91

Technical Analysis 91

Risk Management 92

Using the Keys to Map Out Your Journey 92

Trading Plan 93

Trade Worksheet 101

Trade Journal 101

Pulling It All Together 103

PART III Seven Lessons for Trading Success 105

CHAPTER 8 Lesson 1: Developing a Trading Plan 107

Myths of Trading 110

What Markets Should You Trade? 112

1. Get a Margin Sheet of All of the Tradable Markets 113

2. Understand Initial Margin and Maintenance Margin 119

3. Figure Out Which Markets Have Margins Less Than Your Account 120

4. Learn Minimum Tick or Point Values of Those Markets 120

5. Determine Average True Range to Choose Acceptable Volatility 121

6. Organize “Short-Listed” Markets from Least to Most Volatile 122

7. Check the “Open Interest” for Each Market to Find the Most Liquid 123

What You Have Accomplished 129

CHAPTER 9 Lesson 2: Preparing to Speculate 131

Your Money, Your Emotions 133

Defining Fear 133

Overcoming Fear 136

Defining Greed 136

Overcoming Greed 140

Setting Trading Goals for Yourself 140

Why Am I Investing in Futures/Forex? 141

What Percentage Return Am I Looking For? 142

When Will I Know If I Have Succeeded? 143

Money Management Rules 144

Your Capital 145

Your Account 146

Your Trades 147

Conclusion 148

CHAPTER 10 Lesson 3: Choosing Your Technical

Indicators 151

Fundamental versus Technical Analysis 152

Why Technical Analysis Works 153

Technical Analysis Strengths and Weaknesses 155

Strengths 155

Weaknesses 156

Questions for Technical Indicators 158

Where Is the Market Going? 158

How Quickly Is It Getting There? 163

When Has It Arrived? 168

Liverpool Trader Checklist 172

Black Box and Systems Trading 173

CHAPTER 11 Lesson 4: Developing Tactics for Entering

and Exiting the Market 175

Five Tools for Entry/Exit 177

Resistance and Support 177

Fibonacci Retracements 181

Average True Range 183

Moving Average 184

Candlestick Patterns 187

Trading Is a Team Sport 195

CHAPTER 12 Lesson 5: Analyzing Your Opponents and

the Market 197

Market Players 201

Hedging Examples 202

Contango and Backwardation 203

Speculators 206

Sophisticated Speculators 207

Ground Rules for Speculators Using Hedging Techniques as

a Risk Management Strategy 207

Examples of Why Hedging Can Be Important 208

What Can We Learn? 211

Analyzing the Markets: Volume, Open Interest, and Liquidity 212

Mastering Fundamental Reports 214

Tip for Active Traders 215

Tip for Swing Traders 215

Position Traders 215

Conclusion 216

CHAPTER 13 Lesson 6: Managing Risk 217

Stock Investment Truisms 218

What You Should Believe 219

Belief 1: Being Both Long and Short the Market Is Not the Same as Being

Neutral the Trade 219

Belief 2: These Markets Were First Designed as Insurance Vehicles, Not to

Be Speculated On 220

Belief 3: It Is Too Difficult to Understand/Learn 220

Belief 4: There Are Only Three Ways the Market Can Move: Up, Down, and

Sideways 220

Success and Failure in Trading 221

What Makes It Different from Money Management 223

Don’t Expect a Miracle 224

Stops—A Bad Habit 225

Power of the Limit Order 227

Determine What Type of Trader You Are 227

Day Trader 228

Swing Trader 228

Position Trader 228

What Risk Management tools Can Do for You 229

Nine Risk Management Tactics 229

1. Synthetics 231

2. Spread Trading 235

3. Hard Stops 237

4. Covered Option 239

5. Hedges 241

6. Collars 243

7. Straddles

8. Strangles 247

9. Ratio Spreads 248

Risk Management Tools Best Suited for Your Trading Style 250

Proper Risk Management 251

CHAPTER 14 Lesson 7: Building Confidence 253

10 Mistakes All Traders Make 254

1. Misuse Leverage 254

2. Confuse Speculation with Gambling 255

3. Improperly Funding Account 255

4. Choosing Costs over Quality 256

5. Misunderstanding the Differences of Trading 256

6. Trading without a Plan 257

7. Not Keeping Records of Your Trading 257

8. Looking for Trading Confirmations 257

9. Options Are Not the Only Leveraged Investment 258

10. Lack of Understanding Regarding Money Management 258

Demo Accounts and Paper Trading 258

Test Account 260

Trading Plan, Trade Worksheet, and Trading Journal 261

Trading Plan 261

Trade Worksheet 263

Trading Journal 263

Building Confidence Isn’t Easy 264

CHAPTER 15 Getting Started (The Three-Month Plan) 265

Four Steps to Seven Lessons 266

Money Management 267

Technical Analysis 268

Risk Management 269

Pulling It All Together 270

Three Months of Work 271

Month 1: Structure 272

Month 2: Trial and Error 272

Month 3: Perfecting Your Trading 273

What I Want for You as a Trader 274