| Peter is a professional trader, Paul is not. Peter has a | | | | to 1994. Paul looked at it in disbelief. He was looking |
| tested, proven, written trading plan that he follows | | | | at probably the greatest wealth creation trend in |
| each time he enters a trade, Paul does not. Peter has | | | | history and he had missed most of it because of his |
| agreed to meet with Paul to help Paul become a | | | | short term focus. Chart available at Stock Trading |
| more successful trader. | | | | "Remember this Paul," Peter said as they studied the |
| Paul was early for his first appointment to see Peter | | | | long term chart, "Wealth comes from looking at the |
| a few days later - he was feeling both excited and | | | | big picture. Many people believe that holding for the |
| apprehensive. Peter had told him he would show him | | | | long term means forever. I prefer to hold things that |
| how to use technical analysis and swing trading | | | | are rising in value. If the trend turns down, I take my |
| strategies to trade Stock market trends with | | | | money and wait until the trend turns up again. |
| confidence - but could he really do it? | | | | "This strategy of timing the market with a simple |
| Did he have the ability to become a successful trader | | | | moving average crossover has made me a fortune |
| after losing so much money in the market these last | | | | while millions of people in this country have lost their |
| two years? Was he just wasting Peter's time? | | | | life savings. |
| As he waited, he thought about the look Beth had | | | | "Smart investors always invest the majority of their |
| given him when he had told her about his trading | | | | capital for the long term, but have clear guidelines for |
| losses...the sense of failure he had experienced as she | | | | preserving it if the trend changes. They only trade |
| just walked away. The feeling of utter helplessness | | | | with a small amount of money that they are |
| he had felt as the enormity of his losses had finally | | | | prepared to lose. |
| dawned on him. He had been so close to financial | | | | "Your trading will be more profitable if you know that |
| freedom, but now that had been taken away from | | | | you have a substantial portfolio invested long term |
| him. | | | | and it is increasing your wealth. By trading your entire |
| He was just starting to feel sorry for himself again | | | | account, and not managing it properly, you risked, |
| when Peter strode into the foyer of the office | | | | and finally lost, most of it. |
| building and wished everyone good morning - feeling | | | | "And even though I bought a small position in Index |
| sorry for himself would have to wait until later. | | | | futures a few days ago, my long term portfolio is still |
| Peter motioned him to follow him to the elevator. | | | | fully invested in Mutual Funds that trade inversely to |
| Paul did so and they chatted as the lift took them to | | | | the Index - in other words, the unit price of those |
| Peters 30th floor office. It was smaller than he had | | | | Funds increases if the Index goes down. |
| imagined, just a receptionists desk in the waiting | | | | "The trend is still down on the monthly chart as you |
| room and one office with a view of the city. | | | | can see, so that's the way I want to be positioned |
| He expected something grander, but the office was | | | | with the majority of my portfolio. I think we have |
| functional, and besides, Peter didn't have a need for | | | | seen the low, but I am not prepared to risk my |
| any more space as he had only 1 staff member, Kim, | | | | wealth on it. If the trend changes, then I will change |
| his Secretary and receptionist, host, coffee maker | | | | with it. As you can see, I don't have to make |
| and confidant. | | | | decisions very often. |
| The focal point of Peter's office was his trading | | | | "The market took nearly a year to form a top and |
| screen - a triple screen plasma display monitor over 4 | | | | start down. It might take a year to form a base if I |
| foot wide. "Not that's a screen," Paul thought to | | | | am right and we are near the low. Patience and |
| himself. | | | | emotional control will make you a fortune -fear and |
| Kim brought in coffee and then left them alone. Paul | | | | greed will destroy your wealth." |
| poured them both a cup and took a seat. | | | | Peter let the enormity of the previous rally and |
| Peter gazed out the window towards the city for | | | | subsequent bear market sink in, and then said, OK, |
| more than a minute before speaking. "So you want | | | | "Now we've had a look at the big picture, let's have a |
| to be a trader?" he finally asked. "Yes, but more than | | | | look at the weekly trend." Chart available at Stock |
| that, I want to be a great trader," Paul answered, | | | | Trading |
| "Like you." | | | | As they looked at the weekly chart, Peter continued, |
| "How do you know I am a great trader? And | | | | "We know that the monthly trend is down - this |
| anyway, what is your definition of a great trader?" | | | | weekly chart shows the most recent leg down that |
| Peter asked. | | | | may have brought in the low for this bear market. |
| "I heard you talking at the diner the other day - you | | | | The remaining 30% of my Stock market allocation is |
| certainly know what you are doing, and the market is | | | | used to trade shorter term trends using both this |
| up 5 days straight and more than 130 points since | | | | timeframe and the daily chart. |
| you bought the S&P 500 Index, that's 20% in a | | | | "Bearing in mind that we are looking for trades with |
| week!" Paul explained. "I think anyone who can take | | | | the major trend, we are looking to enter this market |
| their profits on the day of a major low like that and | | | | as soon as it confirms that the fast move down is |
| then have the ability to turn around and buy...and be | | | | indeed under way again after each of the bear |
| dead right, is a great trader." | | | | market rallies that typically come along every few |
| "That is true, the Index is up a long way. And yes, I | | | | months. I have drawn a swing chart over the bar |
| did get in at the low, didn't I? So I guess, by your | | | | chart to highlight the swings of the market as it |
| definition, I am a great trader," Peter chuckled to | | | | moved lower. |
| himself. | | | | "Tell me what you see here," Peter asked. "Again I |
| "How far do you think the market will go up before it | | | | see a down trend - the moving averages are more |
| has a breather?" Peter asked. "I have no idea," Paul | | | | often than not heading down and the swing chart |
| replied. "Neither do I, that's why I have placed my sell | | | | you have drawn over the bars is making lower tops |
| orders below the daily lows each day in case it turns | | | | and bottoms - the trend is definitely down," Paul |
| around again and I'm ready to go short again," Peter | | | | replied. |
| explained. | | | | "And still you held on, while billions of dollars was |
| "It's not so much picking the low that is important or | | | | wiped off the value of the Stock market all around |
| even necessary, it's managing the trade as it | | | | you!" Peter said. "You knew the market was going |
| progresses that makes the money," Peter added. | | | | down as you are somewhat familiar with charts, why |
| "But we'll get to that later, let's have a look at a | | | | did you not do anything to protect yourself?" |
| chart and tell me what you see," Peter said. He | | | | "I was always told that I should hang in for the long |
| opened his charting software and soon they were | | | | term - that the market always came back, and that |
| looking at a monthly chart of the S&P 500 | | | | it had never failed to make a new price high after |
| Index. Chart available at Stock Trading "This is the | | | | every bear market. I guess I was too scared to do |
| last 3 years price history of the S&P 500 - what | | | | anything in case I got out right at the bottom. As it |
| can you tell me about the direction of the trend?" | | | | turned out, I did that anyway," Paul said. |
| Peter asked. | | | | Peter continued, "Notice on this chart that the rallies |
| "It's been going down," Paul replied. "Correct, and | | | | were also no more than one or two bars. This |
| which way have you been trading this market that | | | | indicates a very strong trend - not something anyone |
| has been in a clear down trend?" Peter continued. "I | | | | should be buying into or holding if they want to |
| haven't been trading it at all, I've just been fully | | | | protect their wealth. |
| invested, losing money," Paul replied. | | | | "There were many people buying the dips as the |
| "Then you have indeed been trading it, my friend." | | | | down trend unfolded. This strategy had worked well |
| Peter continued. "By sitting on your hands for the last | | | | in the bull market, but it failed miserably when the |
| 2 and a half years while prices continued to fall, you | | | | bear market came along. Every rally failed, forcing |
| have been fighting the trend. People who fight the | | | | buyers to become sellers as the trend continued |
| trend always lose money. | | | | down. |
| "Then, you finally sold in a panic, like all the other | | | | "Trading the market requires us to adapt - the |
| small traders who finally gave up hope last week. | | | | market has seasons - if we are out of season with |
| You sold to people like me. The same thing happens | | | | the market, we get crushed. |
| every time there is a correction or bear market - the | | | | "The rallies were just traps. Every bear market has |
| small traders hang on until they can't stand to be in | | | | them, and every time, traders think they have picked |
| the market any longer, they all sell together in a panic | | | | the bottom, only to find that they have not." |
| and then the market goes up." | | | | Paul looked at the chart and for the first time, with |
| "Tell me, looking at this chart, when did the | | | | the help of the swing chart overlaid on top of the |
| downtrend start?" Peter asked. | | | | bars and the moving averages set as they were, he |
| "Well I guess around December, 2000 is where it | | | | could see how simple it was to determine the trend. |
| looked like it started to fall away," Paul replied. | | | | Especially the last few weeks - it was certainly a |
| "Correct," replied Peter. | | | | panic. |
| "That means that from December 2000, there was | | | | "Now, let's have a look at the last few weeks to see |
| no reason to be buying this Index, or buying Stocks | | | | what we can determine." Chart available at Stock |
| that were showing the same chart pattern, and | | | | Trading |
| there was every reason to have your Stock portfolio | | | | "Again, I have drawn a swing chart over the price |
| hedged if you didn't sell or have your money in cash." | | | | bars on this daily chart. Once you understand swing |
| Paul looked at the chart and of course it was easy | | | | charts, you will be able to draw these lines in your |
| to see the trend was down with hindsight. | | | | mind and you will not need to draw them on your |
| Before he could say anything, Peter continued. "Of | | | | charts any more," Peter said. |
| course, hindsight trading is perfect, so how would | | | | "As you can see, the moving averages are again |
| you have known the best time to get out of the | | | | moving down at a fair clip and the reactions to the |
| market or hedge your portfolio?" Paul looked at the | | | | down trend are no more than 3 bars. With the |
| chart and said, "I guess when the moving averages | | | | Monthly and Weekly trends strongly down, and a |
| crossed over." | | | | daily trend that is showing very weak rallies in this |
| "Correct," said Peter. "So, for the last 2 and a half | | | | fashion, what else is a trader to do but short sell this |
| years, the trend on the monthly chart was down. | | | | market?" Peter asked. |
| "What else does this chart tell you about the | | | | Paul could see it clearly now, the trend was blindingly |
| market?" | | | | obvious -why had he not taken any notice before? |
| Paul looked at the chart, but he wasn't really sure | | | | There had been a fortune for the taking and he had |
| what Peter wanted to know. "I'm not sure," he finally | | | | not seen it. |
| confessed. | | | | "But how did you know for sure the market would |
| "Take a close look at the reactions within the | | | | turn on that day?" he asked Peter. "Ah, that is a |
| downtrend. Notice that the largest one only managed | | | | lesson for another day my young friend. For now, |
| to go against the trend for 3 months. In any | | | | lets make sure you understand trend trading first. |
| timeframe, a market or Stock that can only go | | | | Once you know what a trend looks like, you will be in |
| against the major trend for a few bars like this is in a | | | | a position to make consistent profits from the |
| very strong trend. | | | | market, not before." |
| "Also, the Index was consistently closing below the | | | | With that, their first meeting was over. Peter had |
| short term moving average, and always closed below | | | | some important visitors waiting in the reception area |
| the longer term moving average - this is not | | | | to discuss a Joint Venture in a property development. |
| something you want to sit through fully invested, | | | | It was time for Paul to go. |
| holding on and hoping," Peter continued. | | | | He thanked Peter for his time and left the office. As |
| Paul could see now the reason for his huge losses. He | | | | walked out through the reception area, Peter called |
| had looked at charts before but he had never looked | | | | out behind him, "When you get home, set up all the |
| at the big picture. The monthly chart showed the | | | | Stocks you owned in a watchlist on |
| trend clearly - and it had been down. A simple moving | | | | Incrediblecharts.com, set it to monthly, put some |
| average crossover sell signal would have saved his | | | | moving averages on them and work out where you |
| fortune... | | | | should have exited - that is your homework for this |
| "This simple timing system is what I use for my long | | | | week. I will see you next Wednesday at 8.00am. |
| term portfolio," Peter continued. "I have 70% of the | | | | Don't be late..." |
| funds I have allocated to the Stock market invested | | | | Paul arrived home with a renewed sense of purpose. |
| for the long term in leveraged S&P 500 Index | | | | He did as Peter ordered and as he went through his |
| Funds. My investment in these funds forms the core | | | | previous portfolio, he saw that he should have sold |
| of my Stock portfolio. | | | | every Stock he had owned by January 2001 at the |
| "I initially entered when I got a buy signal in 1994 and | | | | latest. He felt disgusted with himself at having not |
| added more funds each month - 50-70% of my net | | | | been able to see this sooner, but he consoled himself |
| short term trading profits and other income. I kept | | | | that at least now he was on the right track. |
| an eye on the monthly chart and didn't get a sell | | | | He was still apprehensive, but he had a chance to put |
| signal until the end of 2000. I was fully invested in | | | | things right for his family. He was determined to |
| those funds from around 500 points to 1450 points." | | | | make it as a trader, and with Peter's help, he felt he |
| Peter then showed Paul a monthly chart going back | | | | could indeed succeed... |