The ART of Trading
Description
A comprehensive, all-in-one resource for building a successful trading system
In the newly revised second edition of The ART of Trading: A Complete Approach for Traders and Investors in the Financial Markets, veteran trader and bestselling author Bennett McDowell delivers an intuitive and comprehensive system for trading success. In the book, you'll learn the trading rules, risk management techniques, mindsets, and trade debriefing strategies you need to master the markets and enjoy market-beating returns.
The author explains how to identify intelligent entry and exit opportunities, as well as trade management strategies, trading psychology insights, and more. He also outlines:
- How to design, test, and apply your own custom system of trading rules
- How to avoid the twin traps of fear and greed that poison the returns of so many unwary traders
- How to create a sound and effective risk control system that protects you against catastrophic losses without limiting your ability to find profitable opportunities
An outstanding, all-in-one resource for day traders, retail investors, and fund managers, The ART of Trading walks you through every relevant aspect of building a winning trading strategy.
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BENNETT A. MCDOWELL is the founder of TradersCoach.com® and the developer of the proprietary Applied Reality Trading® (ART) system. Today, the ART system is used by investors in over 85 countries around the world by retail investors, active traders, and hedge fund managers. He is an expert in technical analysis, trading psychology, and money management.
Content
Introduction ix
Acknowledgments xxv
Disclaimer xxvii
Epigraph xxix
Step I: Focus on Reality 1
Chapter 1: Reality Check 3
Chapter 2: Perception Versus Reality 9
Chapter 3: Too Good to Be True? 25
Chapter 4: Price, Volume, and Momentum 31
Chapter 5: Get Down to Business 39
Step II: Develop the Trader's Mindset 49
Chapter 6: Your Mindset 51
Chapter 7: Brain Power 61
Chapter 8: Stress Reduction 73
Chapter 9: Fitness 85
Chapter 10: Nothing to Fear 103
Step III: Implement Risk Management 119
Chapter 11: Risk Management Essentials 121
Chapter 12: Win Ratio and Payoff Ratio 129
Chapter 13: Trade Size Matters 139
Chapter 14: Stop-loss Exit Strategies 149
Chapter 15: Trader's Recordkeeping Forms 157
Step IV: Design Your Trading Rules 169
Chapter 16 The Hardest Rule to Follow 171
Chapter 17 Understanding Financial Markets 181
Chapter 18 Customize Your Rules to You 237
Chapter 19 Your 10 Rules Trading Template 253
Chapter 20 Testing and Proving Your Edge 297
Step V: Scan for Opportunities 305
Chapter 21 Needle in the Haystack 307
Chapter 22 Scanning Strategies 313
Chapter 23 Building Your Watch List 331
Step VI: Manage the Trade 339
Chapter 24: It Ain't Over Till It's Over 341
Chapter 25: Trade Management Strategies 349
Step VII: Debrief the Trade 363
Chapter 26: Learn from History 365
Chapter 27: Debriefing Strategies 375
Epilogue: Trading Is the Perfect Business 389
Appendix A: Advanced Techniques 413
Technique 1: Elliott Wave and Fibonacci 415
Technique 2: Multiple Time Frame Analysis 457
Technique 3: Scaling Out of and Into Trades 475
Appendix B: Resources 483
Resources 1: Brokers, Data Feeds, and More 485
Resources 2: Technology Tips 505
Resources 3: Books, Movies, and Websites 513
About The Website: Online Information Portal 535
Glossary 539
About the Author 565
Index 567
Introduction
It's been 15 years since the first edition of The ART® of Trading was released, and all I can say is ".time flies when you are having fun!" My philosophy has always been to make work (and trading) fun. When you love what you do, you never work a day in your life.
With that said, of course, the goal in trading and investing is to be successful. At www.TradersCoach.com, we've got a darn good track record in helping traders do just that since 1998. This second edition contains so much brand-new content that we've developed since the first edition, and it is designed to help you be more successful.
My use of multiple time frame analysis, for one, has developed significantly since the first edition and is included in this second edition. And thanks to my terrific coaching students that have helped me discover what works best for them in learning new trading and investing concepts. This new edition includes material they've inspired me to create for you.
My students have made me a better teacher, and I'm grateful.
So, whether you are just discovering us now for the first time, or you are already one of the family, welcome to this adventure we like to call The ART® of Trading!
Revolutionary Learning Experience
You are about to embark on a revolutionary learning experience that will simplify the financial markets for you and very well may simplify how you live your life. This experience will help you focus on reality and is built around these major concepts:
- To be a successful trader and investor, you must look at the current market reality as it is happening and not get married to opinions, theories, or fantasies about what will happen.
- Successful trading and investing is based on probabilities-not on absolutes. Success comes to those that master how to find and then assess which are the highest probability trades.
- The market will tell you exactly how to trade and invest, if you know how to listen to what it is saying.
- Money management is essential; without it you will fail. You must know your risk before taking any trade.
- It is essential that you test your rules to ensure that you have a proven edge in the market prior to risking real money. Skipping this step leads to lack of confidence and eventual failure.
- Staying honest with consistent recordkeeping and tracking of your losses and wins is difficult for new traders. You will find the only way to be profitable for the long term is to maintain honest records on every trade every day.
- Obtaining the trader's mindset is a prerequisite for trading and investing with any approach or system to be successful.
- Developing the confidence to think like a winner and behave accordingly is an important part of developing the trader's mindset.
- Successful trading and investing requires that you align your unique personality with your chosen system.
- Finally, you must have the perseverance to become consistently successful.
The ART of Trading will show you how to use these concepts to help improve your performance. Have an open mind as you process the material. Some concepts may challenge the inner core of your belief system. While you read this book, try to be receptive so you can fully explore the infinite possibilities available to you.
You may discover that you've developed bad habits that are holding you back. Recognizing these bad habits is the first step. Unlearning these bad habits is the more difficult next step.
You must unlearn what you have learned.
-Master Yoda, Star Wars
Most important of all is that you embrace the process, and if you stumble and fall on occasion, be sure to get back up. Perseverance is probably the most important trait of any successful person because successful people never quit. See Figure I.1.
It's All About Reality
In 2003, I released trading software called Applied Reality Trading®, also known as ART®, to the public.
Notice that smack in the middle of the name of this software is the word reality, right? That's because to be consistently profitable as traders and investors, we must focus on reality . and not get distracted by emotions, illusions, or other people's opinions.
Part of doing that requires that you consciously separate fact from fiction. Which at times, if we have not trained our brains to do so, can be difficult. It is so tempting to give in to a fictional fantasy of getting rich quick with no effort and no risk. Who wouldn't love for that to be reality!
Figure I.1 MINI POSTER-NEVER QUIT-Being successful at anything, trading and investing included, requires perseverance. This quote is one of my favorites. Quote from Edwin Louis Cole.
Of course, given any deep thought, we all know that succeeding in anything requires taking on some level of risk plus putting in the effort and persistence and pure grit to get there.
Lucky for you, the book in your hands will help you discover how to be successful by focusing on reality using a few simple steps that put you right on track toward reaching your goals.
The Art Pie
You'll need to develop trading and investing skills in four major areas. Think of an apple pie cut into four slices and call this your ART pie. To be successful, you will need to master every piece of the pie; Figure I.2 illustrates the four major slices.
The ART pie consists of four major slices:
- Trading rules
- Risk management
- Trader's mindset
- Debrief your trade
This is where so many fail, by not understanding and mastering all slices of the entire pie. It is a process, one that requires patience and focus. A novice must first become aware and understand that these different skills are all needed to create a consistently successful approach.
No single one piece of the pie will ensure lasting success. Sure, an occasional big win might be attained, but consistency over time is the primary goal. As more experience is gained, the seasoned trader and investor will hone their skills. When consistent positive cash flow over time is acquired, that is the true test of having mastered all pieces of the ART Pie.
Figure I.2 The ART pie illustrates that the four major areas of trading and investing are all equally important.
You might be surprised at how many traders in the markets don't have any trading rules to follow. And many of the traders that do have a set of rules, choose to ignore them on a regular basis. But the one area that I find my coaching students resist the most is debriefing the trade and recordkeeping.
Your goal is to become proficient in every slice of the trading pie, and I'm here to help you do just that.
Layout of this Book
You will find that there are seven sections, or seven steps to success, in this book so that you can quickly find the right information as you travel along the path of The ART of Trading.
Step 1: Focus on Reality
Start off by going back to square one. Forget just about everything you may have learned about trading and investing and build a new foundation from the ground up that is based on reality.
Begin by discarding any illusions or bad habits you may have picked up along the way and focus on reality going forward. Use your critical thinking to ask, "Does this make sense to me now?" and then move on from there. If it doesn't make sense to you now, then set it aside.
Essential Reality Tips
- You will have losing trades. This reality can be particularly difficult for traders who are perfectionist prone.
- A trade is not a success or a failure until it is closed.
- The only thing that is true is price, volume, and momentum.
Keep an open mind as we move forward, and again use your critical thinking to ask, "Does this make sense to me now?" You may find that your thoughts and beliefs about trading may change as you rebuild and reevaluate your foundation.
Step 2: Develop the Trader's Mindset
When I first began trading, the term trading psychology was thrown around, and my first reaction was "What on earth is that?" Being from New York City, where everyone has a psychotherapist on speed dial, it's not that the idea is foreign to me; it just didn't seem relevant to trading.
Until . it hit me, and the lightbulb went off.
After some personal losses and stress and sleepless nights, the idea of thinking about my psychology and how it related to my trading performance made perfect sense. The self-introspection is incredibly useful in determining what causes trading errors and lapses in judgment. I realized that I needed to turn the tables on fear and greed. Instead of letting them rule me, I learned how to rule them.
On the surface you'd think that finance and trading the markets is only about math and numbers and strategies, right? Yes, it is, but there's much more beneath the surface. Many traders would say that 90% of your success is due to your mindset.
In fact, you can give a tested, proven...
