The Hindu Business Line : Seven steps to trading success

IF you are unaware of your blind spots as a trader, you can be run over by a nasty eighteen-wheeler before you know what hit you, warns Price Headley of BigTrends.com in his foreword to a new book by Toni Turner, "Short-term Trading in the New Stock Market," from St. Martin's Press (www. stmartins. com).

So, you pull at the kerb and ask, "What's the `new' stock market?" It formed from the `Big Bang' of the 1990s market mania, when Wall Street shot up, ballooned, exploded, and then imploded on itself, chronicles Toni. To her, the three-year cooling period (2000-2002) was a black hole, and now as the market spins into the future, "it remains a churning mass of energy that feeds from its own fiery core of human emotions and the non-stop whirlwind of global events".

Check first if you belong to `the new breed of traders' eager to `learn' instead of `burn'. It was the `buy-t-and-it'll-go-up' mentality that ruined novice traders during the go-go years of the late 90s, Toni recounts. "Newcomers feel content to paper-trade for a month or two before they ante up real dollars. They are willing to study market psychology and apply personal discipline."

Toni then lays out `seven steps to trading success', each with a set of `action items' for you to work through at your pace and build `a foundation of trading knowledge'. Thus, step one is `find your place'; and the suggested action items are five, starting from `explore, discover, analyse, decide', and ending in `opening your account'. Toni lists the four different trading styles, viz. scalping, momentum, swing, and position trading, each with varying time frames, mindset, lot sizes, and risks vs rewards.

Step two, `stretch and warm up', but first be assured that we don't have to `know everything' to make money. "Avoid thrashing in the sea of information overload," cautions Toni, and suggests that in a bull market you should better concentrate on a limited number of leading industry groups. That clutter makes stress is another clue; "if the clutter relates to unfinished projects, efficiency experts call this `subliminal screaming' because the projects call for your attention."

Read first `The Art of War', to know the importance of `pre-market analysis'. Toni alerts: "Know that the brightest minds in the world are waiting to take your money. If you rush to your desk each morning and jump into trades without forethought, you are placing your account in deadly jeopardy."

Next step, if you're raring to go, is `ready, set, trade'. Don't drape dozens of indicators on your charts; just study the key chart components, viz. candlestick reversal patterns, volume signals, and moving averages. "I enjoy using candle charts because they give me early reversal signals, broadcast market psychology, and act as great money management tools," is a tip from Toni. She'd advise you against.

`Focus on basic setups' is action item two in this step. Just as there are only three central ideas in all novels (man against man, man against nature, and man against himself), so too there are only four basic setups or `price formation', Toni would propound. "They are: 1) breakout from consolidation in a base or uptrend; 2) breakout from a pullback in a base or uptrend; 3) breakdown from a consolidation in a reversal pattern or downtrend; and 4) breakdown from a rally in a downtrend."

The bottom line with setups, according to the author, is: "You'll be a wealthier trader if you understand how and why setups progress into either good entry opportunities, or failed non-events." There are further actions to note, such as `if one buy signal is good, three are better' and `sharpen your money management skills'. The second is about predetermining share size, performing risk-reward analysis, and executing protective stop-loss strategies. Step four, `fine-tune your approach', beginning with `a trade sheet with a conscience'. Toni provides a format you can paste onto Excel, and it has 15 columns from entry date to profit/loss, through symbol, number of shares, long/short, entry price, total amount, initial stop, profit target, risk/reward ratio, adjusted stop, and more.

Also, `study momentum indicators' and `target gap strategies' before answering the question, `Are you a top-down or bottom-up trader?' Toni points out that the bottom-up method may involve less analysis because "you simply choose a stock based on the quality of its tend direction and setup", but there's a caveat: "The majority of stocks eventually follow the direction taken by major indices, especially in bear markets. Exceptions to this rule show up in commodities stocks, such as oil, oil services, and metals."

Each chapter ends with a valuable `center point' from Toni. "You are in control - you are proactive," reads one such input. "Those who are proactive take responsibility for their lives, their relationships, and their environments. They take the initiative and they act, instead of `being acted upon'," she explains. Events need not steal your core identity, she urges.

Lock step with Toni!

BookValue@TheHindu.co.in

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