Trading Basics: Evolution of a Trader

The series Evolution of a Trader explores four trading styles that people use when learning to invest in the stock market. Often, beginners enter the stock market by

Buying and holding on to a stock. That works well until a bear market begins. Then they try Position trading. This seeks to exit positions before a significant trend change occurs. Swing trading follows when traders try to catch short–term swings. Finally, people try Day trading by completing their trades in a single day.

This series takes a detailed look at each of the four styles by offering numerous tips, sharing discoveries, and discussing specific trading techniques to help the reader be successful as they journey through each style.

The first book, Trading Basics, takes an in–depth look at money management, stops, support, and resistance, and offers dozens of tips every trader should know.

The second book, Fundamental Analysis and Position trading, explains value investing and tests fundamental factors, such as book value, price–to–earnings, and price–to–sales ratios, to see how important they are to stock selection and performance. Chapters such as How to Double Your Money, finding 10–Baggers, and Trading 10–Baggers put the fundamentals to work. Position trading introduces market timing to help remove the risk of buying and holding a stock for years.

The third book in the series, Swing and Day Trading, explains how to use chart patterns to swing and day trade. It reviews the basics, including the home office setup and the cost of day trading, and drills down into specific trading strategies such as the opening range breakout and the opening gap setup. It introduces new research on major reversal times and the time most likely to set the day s high and low. That is valuable information to a day trader.

Whether you are a novice who has never purchased a stock but wants to, or a professional money manager, these books are a necessary addition to any market enthusiast s bookshelf.

preface ix

acknowledgments xv

Chapter 1 how to retire at 36 1

Chapter Checklist 4

Chapter 2 Money Management 7

Trading: How Much Money, Honey? 8

Order Types: Read the Fine Print! 10

Position Sizing: My Story 12

Position Sizing by Market Condition: Bull or Bear? 13

How Many Stocks to Hold? 15

A Better Way? Portfolio Composition 16

Hold Time: How Long Is Long Enough? 18

Hold Time: My Trades 19

The Money Management Matrix 19

Should You Scale into Positions? 21

Averaging Down: Throwing Away

Money or Smart Choice? 28

Scaling Out of Positions: A Profitable Mistake? 31

Dollar?]Cost?]Averaging: Good or Bad? 34

Using Leverage: An Expensive Lesson! 35

Leverage Guidelines Checklist 36

Chapter Checklist 37

Chapter 3 Do Stops Work? 41

What Is Hold Time Loss? 42

Mental Stop: For Professionals Only! 44

Minor High or Low Stop: A Good Choice 45

Squaring Off Round Numbers 46

Chart Pattern Stop: Too Costly? 47

Stopped by a Moving Average 47

The Truth about Trendlines 48

Trendline Stop 49

Fibonacci Retrace Stop: Deal or Dud? 50

Fixed Percentage Trailing Stop 53

Volatility Stop 53

Chandelier Stop Leaves You Hanging 55

Testing Six Stop Types 55

What I Use 59

Chapter Checklist 61

Chapter 4 Support and Resistance 63

Types of Support and Resistance 64

Measured Move Support and Resistance 65

Minor High Resistance 66

Volume at Minor High Resistance 67

Minor Low Support 67

Volume at Minor Low Support 68

Minor High Support 68

Minor Low Resistance 69

Gaps Showing Support and Resistance 70

Myth: Tall Candle Support and Resistance 70

Horizontal Consolidation Regions 71

Another Look at Round Numbers 72

Support in Straight?]Line Runs 72

Resistance in Straight?]Line Runs 74

SAR Summary 75

Chapter Checklist 76

Chapter 5 45 Tips Every Trader Should Know 79

Determining Stock or Market Direction 97

Finding the Market Bottom 102

Visual Tips 122

Chapter Checklist 130

Chapter 6 Finding and Fixing What Is Wrong 135

What Was the Market Behavior? 136

Was the Industry Trending? 137

How Is the Timing? 139

Are All Entry Conditions Met? 142

Was the Position Size Proper? 144

Was an Initial Stop Used? 144

Did You Exit Before the Stop? 145

What Was the Risk/Reward Ratio? 146

Did You Average Up? 147

Did You Average Down? 147

Are You Buying Out of Season? 148

Trading Checklist 149

Chapter Checklist 151

Chapter 7 What We Learned 153

Chapter 1: How to Retire at 36 153

Chapter 2: Money Management 153

Chapter 3: Do Stops Work? 155

Chapter 4: Support and Resistance 156

Chapter 5: 45 Tips Every Trader Should Know 157

Chapter 6: Finding and Fixing| What Is Wrong 161

Visual Appendix of Chart Patterns 163

Bibliography 169

Other Sites of Interest 171

About the Author 173

Index 175

Thomas N. Bulkowski is a successful investor with thirty years of experience in the stock market. He is also the author of the Wiley titles Encyclopedia of Candlestick Charts, Encyclopedia of Chart Pattern, Getting Started in Chart Pattern, Trading Classic Chart Patterns, and Visual Guide to Chart Patterns. Bulkowski is also a contributor to Active Trader, Technical Analysis of Stocks & Commodities, and other publications worldwide. Before earning enough from his investments to retire from his day job at age 36, Bulkowski was a hardware design engineer with Raytheon and a senior software engineer for Tandy Corporation.

The three books in this series were written for people unfamiliar with the inner workings of the stock market, but will still curl the toes of professionals, too. Research is used to prove the ideas discussed, but is presented in an easy to understand and light–hearted manner. You will find the books to be as entertaining as they are informative and packed with moneymaking tips and ideas. Use the ideas presented here to hone your trading style and improve your success. Whether you are a novice who has never purchased a stock but wants to, or a professional money manager who trades daily, these books are a necessary addition to any market enthusiast s bookshelf.
Alan Battista, Stockineer.com Book Review