Winning the Trading Game

NOBLE DRAKOLN is President of Liverpool Group Inc., a futures and Forex brokerage firm, where he focuses on the development, management, and promotion of the company’s core philosophy of “focusing on the trader not the trading.” Prior to this role, DraKoln served as a broker in the retail division of Royal Financial Inc. and as a professional sugar trader. He speaks regularly at industry conferences in the United States and Europe, and has written articles for numerous financial publications. DraKoln is also an NFA Arbitrator and commodities Series 3 licensed.

• Preface xvAcknowledgments xixPart I More Life at the End of Your Money 1Chapter 1 The Need to Build Wealth 3Retiring Early 4Negative Savings Rate 5Social Security 6Conclusion 8Chapter 2 Money-Making Megatrends 11Industrialization 12Emerging Markets 13China 13India 14Brazil 14Russia 15Mexico 15Other Emerging-Market Countries 16Resources under Fire 16Food 17Water 17Energy 18Ethanol—The Gasoline Alternative 19Futures, Forex, or Stocks? 20Chapter 3 What Type of Investor Are You? 23Yale Study 24What Are the Returns to Investing in Commodity Futures, and How Do These Returns Compare to Investing in Stocks and Bonds? 24Are Commodity Futures Riskier Than Stocks? 25Can Commodity Futures Provide Diversification to Other Asset Classes? 25Pros and Cons 25Types of Investors 26Type A Investor 26Type B Investor 30Fatal Market Conditions 32Gold and Silver Cornering 32Interest Rate Backfire 33Asian Flu 34Where You Fit in 35Part II Why 95% of Investors Fail at Futures and Forex 37Chapter 4 The World of Futures and Forex 39Futures and Options 40Hedgers and Speculators 41Futures Exchanges 42What Markets Are Traded? 44Foreign Exchange (Forex) 44What Is the Spot Market? 45Importers and Exporters 45OTC Forex Contracts 47How Is the Spot Price Calculated? 47OTC Participants 48Components of OTC Contracts 49Types of Positions and Orders 49Positions 49Types of Orders 50Options 50Option Rights vs. Obligations 50Premiums 51Time 51Types of Options 52Conclusion 53Chapter 5 The Fallacy of Traditional Stock Investment Beliefs 55Futures and Forex Investing Is Not New 56What You Don’t Know Can Hurt You 57Explaining the Strategies 58Buy and Hold 58Dollar Cost Averaging 60Value Investing 61Portfolio Diversification 63Margin 65Don’t Short the Market! 66Fear Leverage! 68Good Use of Leverage 68Neutral Use of Leverage 69Bad Use of Leverage 69Myth Busting 69Chapter 6 How to Be Among the 5% Who Win at Trading 71The Reality 71Trading with Emotions 72In the Beginning: Happiness 72Next Comes: Greed 72Followed Up by: Fear 73Which Leads to: Sorrow 73Next You Have: Frustration 74Finally: Defeat 74What the Other 5% Are Doing 75Selecting Trades Properly 75Entering Trades Properly 76Monitoring the Trade 76Exiting the Trade 77Battling the Demons of Fear and Greed 77Holding Losing Trades 78Chasing Markets 78Overleveraging Your Account 79So What Does It Take to Be a 5% Trader? 80Chapter 7 Becoming a Speculator 81Speculation vs. Gambling 82Let’s Define Gambling Addiction 83Could Trading Represent a Form of “Gambling Addiction” for You? 8310 Symptoms of Gambling Addiction 85Seeking Assistance 87TheRoleofaSpeculator 87Are You a Sucker or a Speculator? 88The Three Keys to Success 90Money Management 91Technical Analysis 91Risk Management 92Using the Keys to Map Out Your Journey 92Trading Plan 93Trade Worksheet 101Trade Journal 101Pulling It All Together 103Part III Seven Lessons for Trading Success 105Chapter 8 Lesson 1: Developing a Trading Plan 107Myths of Trading 110What Markets Should You Trade? 1121. Get a Margin Sheet of All of the Tradable Markets 1132. Understand Initial Margin and Maintenance Margin 1193. Figure Out Which Markets Have Margins Less Than Your Account 1204. Learn Minimum Tick or Point Values of Those Markets 1205. Determine Average True Range to Choose Acceptable Volatility 1216. Organize “Short-Listed” Markets from Least to Most Volatile 1227. Check the “Open Interest” for Each Market to Find the Most Liquid 123What You Have Accomplished 129Chapter 9 Lesson 2: Preparing to Speculate 131Your Money, Your Emotions 133Defining Fear 133Overcoming Fear 136Defining Greed 136Overcoming Greed 140Setting Trading Goals for Yourself 140Why Am I Investing in Futures/Forex? 141What Percentage Return Am I Looking For? 142When Will I Know If I Have Succeeded? 143Money Management Rules 144Your Capital 145Your Account 146Your Trades 147Conclusion 148Chapter 10 Lesson 3: Choosing Your Technical Indicators 151Fundamental versus Technical Analysis 152Why Technical Analysis Works 153Technical Analysis Strengths and Weaknesses 155Strengths 155Weaknesses 156Questions for Technical Indicators 158Where Is the Market Going? 158How Quickly Is It Getting There? 163When Has It Arrived? 168Liverpool Trader Checklist 172Black Box and Systems Trading 173Chapter 11 Lesson 4: Developing Tactics for Entering and Exiting the Market 175Five Tools for Entry/Exit 177Resistance and Support 177Fibonacci Retracements 181Average True Range 183Moving Average 184Candlestick Patterns 187Trading Is a Team Sport 195Chapter 12 Lesson 5: Analyzing Your Opponents and the Market 197Market Players 201Hedging Examples 202Contango and Backwardation 203Speculators 206Sophisticated Speculators 207Ground Rules for Speculators Using Hedging Techniques as a Risk Management Strategy 207Examples of Why Hedging Can Be Important 208What Can We Learn? 211Analyzing the Markets: Volume, Open Interest, and Liquidity 212Mastering Fundamental Reports 214Tip for Active Traders 215Tip for Swing Traders 215Position Traders 215Conclusion 216Chapter 13 Lesson 6: Managing Risk 217Stock Investment Truisms 218What You Should Believe 219Belief 1: Being Both Long and Short the Market Is Not the Same as Being Neutral the Trade 219Belief 2: These Markets Were First Designed as Insurance Vehicles, Not to Be Speculated On 220Belief 3: It Is Too Difficult to Understand/Learn 220Belief 4: There Are Only Three Ways the Market Can Move: Up, Down, and Sideways 220Success and Failure in Trading 221What Makes It Different from Money Management 223Don’t Expect a Miracle 224Stops—A Bad Habit 225Power of the Limit Order 227Determine What Type of Trader You Are 227Day Trader 228Swing Trader 228Position Trader 228What Risk Management tools Can Do for You 229Nine Risk Management Tactics 2291. Synthetics 2312. Spread Trading 2353. Hard Stops 2374. Covered Option 2395. Hedges 2416. Collars 2437. Straddles 2458. Strangles 2479. Ratio Spreads 248Risk Management Tools Best Suited for Your Trading Style 250Proper Risk Management 251Chapter 14 Lesson 7: Building Confidence 25310 Mistakes All Traders Make 2541. Misuse Leverage 2542. Confuse Speculation with Gambling 2553. Improperly Funding Account 2554. Choosing Costs over Quality 2565. Misunderstanding the Differences of Trading 2566. Trading without a Plan 2577. Not Keeping Records of Your Trading 2578. Looking for Trading Confirmations 2579. Options Are Not the Only Leveraged Investment 25810. Lack of Understanding Regarding Money Management 258Demo Accounts and Paper Trading 258Test Account 260Trading Plan, Trade Worksheet, and Trading Journal 261Trading Plan 261Trade Worksheet 263Trading Journal 263Building Confidence Isn’t Easy 264Chapter 15 Getting Started (The Three-Month Plan) 265Four Steps to Seven Lessons 266Money Management 267Technical Analysis 268Risk Management 269Pulling It All Together 270Three Months of Work 271Month 1: Structure 272Month 2: Trial and Error 272Month 3: Perfecting Your Trading 273What I Want for You as a Trader 274About the Author 277Index 279