Survival Guide for Traders

BENNETT A. MCDOWELL, founder of TradersCoach.com®, began his financial career on Wall Street in 1984 with J.J. Kenny, and later became a Registered Securities Broker and Financial Advisor for Prudential Securities and Morgan Stanley. He developed his own proprietary trading system, later known as the Applied Reality Trading® (ART®) system, which was released to the public in 2003 and today is used by traders in over fifty countries around the world. Considered an expert in technical analysis and complex trading platforms, McDowell lectures nationally and writes for many leading trading publications, including Technical Analysis of Stocks & Commodities magazine. He has also written two other bestselling books published by Wiley, The ART® of Trading and A Trader's Money Management System, both released in 2008. Internationally recognized as a leader in trading education, Bennett teaches trading to students around the world through his company TradersCoach.com®.

• Foreword xiiby Toni TurnerPreface xviiAcknowledgments xixDisclaimer xxiIntroduction: Survival of the Fittest xxiiiPART I Survival Basics 1CHAPTER 1 It’s a Jungle Out There! 3Brawn, Brains, and Technology 4Technological and Innovation Time Line 5Don’t Bring a Knife to a Gunfight 7Right in My Own Backyard 7CHAPTER 2 Managing Your Money Is Serious Business 9Trust and Financial Advisers 10Tips on Selecting a Qualified Financial Adviser 11So, Who Are You Going to Trust? 12Creating Your Own Business Plan Will Strengthen Your Ability to Prosper 13Trade, Invest, and Live within Your Means 14CHAPTER 3 Accountability, Setting Stops, and the Rogue Factor 15Traders Are the Ultimate Entrepreneurs and Must Be Held Accountable 16Setting Stop-Loss Exits Is Essential 17The Infamous Rogue Trader Named Nick Leeson 17Watch the Rogue Trader Movie 18Insurmountable, Large Losses Usually Start As Small Losses 19CHAPTER 4 What’s Your Net Worth? 21Net Worth Statement 21Creating Your Financial Profile 22Are You Moving Forward, Falling Backward, or Standing in Place? 28CHAPTER 5 The Life of an Entrepreneur 31New Start-Up Businesses Have High Failure Rates 31What Does It Take for a New Business to Succeed? 32Small Businesses Are the Backbone of the Economy 34Reduce Your Expenses and Increase Your Revenue 35How to Reduce Expenses 36A Penny Saved Is Really One and a Half Pennies Earned 38It’s All About the Revenue 39CHAPTER 6 Understanding Financial Markets 41Buyer and Seller Agree on Price, but They Disagree on Value 42Buyers and Sellers and the Financial Order Flow Process 42Types of Orders 49Using Margin and Leverage 52The Importance of Liquidity and Volume 53Zero Liquidity 56Volatility and Market Gaps 58How Can the Bid and Ask, Spreads, Fills, and Slippage Affect Your Profits? 61You Can Parallel Test Your Broker and Data Feeds 62“I Feel the Need for Speed” 63So Many Markets to Choose From 64Ticker Symbols at a Glance 65How to Choose the Best Data Feed for Your Needs 66How to Choose the Best Broker for Your Needs 70How to Choose the Best Front-End Platform for Your Needs 72Manias, Panics, and Crashes 73CHAPTER 7 Adapting to Changing Market Cycles 75Four Major Market Cycles 75It’s All in a Name 78Using Trend Lines to Identify Market Cycles 79Using Elliott Wave Analysis to Identify Market Cycles 80Pitfalls of Not Identifying Market Cycles Correctly 81CHAPTER 8 Education and Support 83A Few Classic Trading Books 83Learning Styles 84Repetition, Repetition, Repetition 85Paper Trading Is an Essential Learning Tool 85Do it Your Way 86You Can Learn from Your Mistakes and Failures 87Life Mentors, Professional Mentors, and Trading Coaches 88CHAPTER 9 Writing a Business Plan 91Business Plan: Blank Template 91Front Matter: Title Page, Table of Contents, and Mission Statement 931. Summary 942. Strategy 1083. Operations 1184. Financials 124Business Plan Tips 128Part II The Financial Pie 129CHAPTER 10 The First Slice: Trading and Investing Rules 131Develop and Test Your System 132Perseverance Is the Holy Grail 132Failure Is Not an Option 133Creating Your Trading Rules Profile 134A Note about Day Trading versus Position Trading 138Holding Trades Overnight and Assuming Overnight Risk 140My Definition of Scalping 141Sample Trading Rules to Start With 141Combining Fundamental and Technical Signals in Your Trading Rules 142Technical Analysis Signals 143Fundamental Analysis Signals 146Value Investing in a Bear Market 148The Importance of Paper Trading 148Set Up Multiple Brokerage Accounts to Monitor Your Trading Results 152CHAPTER 11 The Second Slice: Scanning for Opportunities 155Technical Scanning Techniques 156Fundamental Scanning Techniques 157Opportunity Is Always Abundant in the Markets 165Stocks 165Options 169Futures 170Forex 174Exchange-Traded Funds 177CHAPTER 12 The Third Slice: Money Management 179What Can Money Management Do for You? 179Three Ways to Control Risk 180Risk Factors to Develop Your Plan Around 180Stop-Loss Exits Can Save the Day 182Your Survival Depends on Having a Healthy Respect for the Risk of Ruin 184Optimal f Formula: Information Similar to the Risk of Ruin Tables 186Comparing Optimal ƒ Equation Results to the Risk of Ruin Tables 187The 2 Percent Risk Amount Formula 188Using the Trade Size Formula 188Trade Size Formula Using Leverage 189Using the Trade Size Calculator 190Good Record Keeping and Performance Analysis Are Essential 191Without Risk, There Is No Opportunity 192CHAPTER 13 The Fourth Slice: Financial Psychology 193The Trader’s Mind-Set 194Even Good Change Can Be Stressful and Emotionally Challenging 195Looking at 15 Destructive Psychological Trading Issues and Their Causes 196Optical Illusions Show How Our Minds Can Mislead Us 198EPILOGUE 201APPENDIX A Online Bonus—Survival Guide Central 203APPENDIX B ART Basics 209APPENDIX C Resources: Front-End Platforms, Brokers, Data Providers, and More 243APPENDIX D Suggested Reading and Education 255APPENDIX E Market Exchanges 273Glossary 283About the Author 307Index 309