Trading In A Nutshell 10th Anniversary Fourth Edition

Table of Contents

Chapter 1: An introduction to trading

Trading

Develop a trading plan

Commit to it

My story

Put in the required effort

Chapter 2: Financial markets

What are stock exchanges?

Stock exchanges around the world

NYSE/Euronext

NASDAQ

Toronto Stock Exchange (TSX)

Australian Securities Exchange (ASX)

Singapore Stock Exchange (SGX)

Bursa Malaysia

NZX

Tokyo Stock Exchange (TSE)

London Stock Exchange

Shanghai Stock Exchange (SSE)

Hong Kong Stock Exchange

Companies

Other markets and products

Foreign exchange

Indices

Global Industry Classification Standard (GICS)

Futures

Contracts for difference (CFDs)

Options

Stockbrokers

Chapter 3: Technical analysis and charts

Fundamental analysis

Technical analysis

Open, high, low, close and volume

Charting

Volume

Trends

Peaks and troughs

Moving averages

Always consider the trend

Chapter 4: Chart patterns and indicators

Support and resistance

Triangles

Symmetrical triangles

Ascending triangles

Descending triangles

Double tops and bottoms

Indicators

Relative Strength Index

Moving average convergence divergence (MACD)

On balance volume

Directional movement

Stochastic Oscillator

Need more indicators?

Chapter 5: Developing a trading strategy

The importance of entry

Aim for consistency

Trading style and time frame

Trade with the trend

Using moving averages

Trend alignment

Trading strategy structure

Using indicators

Confirmation

Confidence

Liquidity

Weight of evidence

Sector analysis

Diversity

Keep it simple!

Checklist

Chapter 6: The exit decision

Stop losses

How to set a stop loss

Inactivity stop

Trailing exits

Stop losses and trailing exits together

Profit targets

Chapter 7: Trade execution

At market/at limit orders

Which one should I choose?

Know your orders

Chapter 8: Money management and risk

Importance of money management

Your primary aim

Risk

Capital preservation

Risk amount

Position sizing

Probability

Half the risk

Volatility

Averaging down

Averaging up

Adopt a defensive posture

A final thought

Chapter 9: Developing your trading plan

‘Buy and hold’ approach

Aim for something

Discover yourself

How confident are you?

Give yourself an edge

Monitoring your trades and performance

Paper trading/testing

Chapter 10: Developing your mindset

Attitude

Confidence

Patience

Control

Emotions

Perspective

Decisiveness

Humility

Discipline

Get healthy

Trading as a game

Give yourself a break

Ultra-comfort

Focus

Chapter 11: Rules of trading

Rule one — cut your losses

Rule two — let your profits run

Rule three — follow the trend

Rule four — don’t overtrade

Rule five — never blindly react to a tip

Rule six — always trade liquid stocks

Rule seven — keep positions small

Rule eight — don’t buy something because it looks cheap

Rule nine — keep it simple

Chapter 12: The experts

Chapter 13: Getting started

Guidance for new traders

Discover yourself

Money management

Entry and exit

Your routine

Taxation structure

Information

Computers and software

The internet

Recordkeeping

Conclusion

This fourth edition first published in 2012 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd 42 McDougall St, Milton Qld 4064

Ofﬁce also in Melbourne

Typeset in Chaparral Pro 11.5/13.5

First edition published by Wrightbooks 2001

Second edition published by Wrightbooks 2005 and reprinted in December 2007

Third edition published by Wrightbooks 2008 and reprinted in September 2009

© Stuart McPhee 2012

The moral rights of the author have been asserted

National Library of Australia Cataloguing-in-Publication data:

Author: McPhee, Stuart.

Title: Trading in a Nutshell: Planning for Consistently Profitable Trading/Stuart McPhee.

Edition: 4th ed.

ISBN: 9780730378150 (pbk.)

Subjects: Stocks.

Investments.

Stock exchanges.

Dewey Number: 332.6322

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover design by punch bowl design

Cover images © Dalibor Sevaljevic/Shutterstock.com

Charts by MetaStock

Printed in China by Printplus Limited

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Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

Acknowledgements

I dedicate this book to my late mother, whose devotion and guidance has inspired me throughout my life.

I would like to thank my wife Lindy and my beautiful children, Sarah, Jenna and Jessica. The four of them make every day worth living and my children regularly provide great perspective on what is and is not important in life. Also, thank you to my father and brother for all their support and love.

I am also thankful to the tens of thousands of people who have purchased the first, second or third (or all) editions of this book. I am humbled by the support it has received and by the many encouraging comments I have received from readers. Thank you — it means a lot to me.

Finally, a further thanks to fellow Australian authors Christopher Tate and Louise Bedford. They gave me the encouragement to begin the task of writing the first edition of this book back in 2001.

Preface

Let me take you back to what now seems a long time ago. I first became interested in the Australian sharemarket in 1996 and set about making some trading decisions of my own with reasonable success. Living in the US throughout 1997 and 1998 brought me closer to a major part of the financial world, New York. Here, I observed the extensive financial commentaries available on various cable TV channels, and this only served to increase my interest in our own sharemarket and the possibilities awaiting me in Australia. On my return to Australia in 1999, I set about learning more about the Australian Securities Exchange and those who were successful at trading on it. More importantly, I set about discovering what made them successful.

Through my study of successful traders and their methods, I discovered many similarities in the way they approached their craft, despite differences in their backgrounds, education and age. I found that they all placed great emphasis on certain principles and all tended to follow similar rules that have stood the test of time. A fascinating aspect of the rules is that there is no secret to them; you can read almost any trading book that has been written and discover some of them. Yet most people fail to follow them. Why?

When studying the trading careers of many successful traders, I found that most acknowledge discipline as a cornerstone of their success. More importantly, I discovered that every one of them had an individual approach to the market and a specific trading plan that was right for them.

I also found some amazing parallels between trading and my former career as an officer in the Australian Army. Obviously, discipline is instilled in all members of the Australian Defence Force through rigorous and focused training. But, somewhat remarkably, I have found that my own military background, starting at the Royal Military College, Duntroon, has given me a great grounding for trading.

When I started trading, I didn’t fully appreciate how much my background would assist me. Only now do I look back and realise that learning to be disciplined, planning almost everything I did and learning to easily cope when unexpected things happen have all provided me with a great advantage in trading.

Another significant crossover between my military and trading experiences is that both demand the ability to recognise that, in most situations, there is no right or wrong answer. What you think is a good trading opportunity may not be in the opinion of other traders you know. But, at the end of the day, it doesn’t matter what other people think, only what you think. This is incredibly similar to military tactics.

When faced with tactical problems on field exercises or during courses, I was always aware that there were no right or wrong answers in tackling these problems in order to develop a plan to achieve the mission. All you could be assessed on was how well you put into practice the principles applicable to that type of operation. The same could be said about making trading decisions. Follow the time-tested principles, make a decision and don’t worry about what other people think.

I have been very fortunate to have travelled extensively over the last few years and to speak to traders from many countries. One thing I have realised is that traders from other countries are no different from traders anywhere else. They all face the same challenges and it seems that, generally speaking, the only difference between markets around the world is the names of the companies listed on the various exchanges.

This reinforces the belief that your education, background, language, cultural beliefs and many other factors are almost irrelevant when it comes to trading. Trading ability comes from within, with a desire to learn and develop the skills and attributes necessary for consistent, successful trading. I am confident my book will point you in the right direction and provide guidance on developing a solid trading plan that you will execute with confidence.

Since the first edition of Trading in a Nutshell was published in 2001, I have coached many traders and learnt more about the problems they face. Speaking to traders from all around the world has also given me a greater appreciation of the extent to which our mindset affects our overall success as traders.

When starting out, I believe that many people view trading as easy money; however, it may be the hardest easy money there is! Trading has relatively straightforward concepts, yet it is amazing how many people make a mess of it. Once they realise that it isn’t as easy as they initially thought, they try to overcomplicate their approach, believing that a complex solution is required. Unfortunately, this is often not the case and they end up travelling down the wrong path.

Over the last 10 years or so, since I wrote the first edition of this book, I have learnt so much about myself, trading and the financial markets. I am proud to say that the bulk of the content from the first edition is to be found within these pages — the new editions have simply expanded on that material with additional material I have learnt along my own journey.

During this same time, the general public has become more savvy and better educated when it comes to trading; however, the principles still remain the same. The most important part of your trading is you. One of the main reasons that people fail in the market is because they don’t have a plan, or even if they do, it doesn’t suit them and they don’t follow it. As a simple example, they buy stocks and don’t know at what point they are going to sell them. In the end, your trading success is up to you, because there is little preventing you from developing a robust trading plan that follows the rules.

Before I start, I would like to suggest an idea for you. One thing I have learnt about highly successful people in all professions is how quickly they implement new ideas. They hear something, consider it and then implement it without hesitation. The problem with most people, however, is they don’t have in place a way of making this easy for themselves. Let me give you an example. You may read through this book and, as you go along, think to yourself on numerous occasions what great ideas it contains and how you can’t wait to implement them. Then as you finish the book, you forget them, drift away and focus on other things. We fail to put steps in place to implement all those ideas we just read about and were nodding our head at in agreement as we read them.

What I suggest is having a separate piece of paper to take notes relating to only those things you wish to implement in your trading straightaway. Once you have finished reading, you will have a concise task-list that will make it far easier to make changes. I am reminded of the saying, ‘If you keep doing what you have always done … you will keep getting what you have always got’.

I have included something new in this 10th anniversary edition of Trading in a Nutshell. I have asked several of the great people in the trading fraternity whom I have been fortunate enough to meet over the years to make a contribution to my new edition, by responding to a range of questions that I know can help you in your quest. I have included all of these responses in chapter 12 and I hope you find them valuable.

I also hope this new edition will enable you to discover yourself and then put together all the pieces of a robust plan necessary for long-term profitable trading. It is worth the effort, I can assure you.

I wish you well.

Stuart McPhee

Melbourne, Australia

February 2012

www.mcpheesecurities.com.au

Chapter 1: An introduction to trading

How to succeed? Try hard enough.

Malcolm Forbes (1919 – 1990)

In a nutshell

• All consistently profitable traders have a trading plan that they follow.

• There is nothing stopping you achieving trading success, except yourself.

• Develop a passion for trading and commit yourself to it.

• Put in the required effort and don’t look back.

Trading

In simple terms, trading is the process whereby we regularly buy financial products, primarily in a market (more officially referred to as an exchange), and then sell them later for a higher price. This simple concept makes a lot of sense and is probably the main reason why people generally think that trading is easy money.

The financial product that we buy and sell may be stock in a company, a commodity like gold or silver, a futures contract or even a foreign currency, for example. Many people don’t know that many markets offer the opportunity to take advantage of and financially benefit from a falling price as well. This is often referred to as trading ‘short’, as opposed to the aforementioned and more commonly known ‘long’trading.

If you were to ask most people to describe their ideal or perfect job, many would suggest the following:

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!