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By : Moustafa Bel Khayate
It is the beginning of fall 2000. We are living in a revolutionary era. Astonishing progress is realized in almost every field of everyday life. Everything is going faster and faster. We all have the strong impression that our civilization has just considerably accelerated. To go where ? Nobody knows. Some are tetanized by this speed ; they hold their breath. Others, clinging to their references of yesteryear, look behind in search of any refuge whatsoever against what seems to be uncontrollable to them and therefore dangerous. And there are those who simply move with the times, come what may. Depending on how we interpret what happens to us in these modern times, we decide whether to continue or stop living. This book is aimed at those who accept to continue; those who still believe that something extraordinary might happen to them...They have confidence. They are happy to live, happy with what will happen to them. This book is about money; about principles for making money on the financial markets. This is a delicate subject because each one of us has a very personal relationship with what is known as the sinews of war. According to this relationship, you will be an excellent trader or a lamb. Some of these principles are personal. They are not thought in any university curriculum of international finance or financial markets. However, it is practically the implementation of these principles that allowed me to win the international competition for portfolio management on futures market, leaving behind internationally renowned traders. To date I am heading two competitions for portfolio management (Yahoo Finance and Etrade), which means that these principles are not only good but are VERY good. They have two main distinctive features:
1They are valid for stocks as well as for currencies, commodities, Stock Exchange indexes, interest rates and any other financial product, 2They do not require any knowledge of the laws of economy and finance. One needs not to be an expert in financial analysis nor micro-economy to earn money on the markets. This looks like a tall story but the reading of this book will prove it to you. At whom is this book aimed ? This book is aimed at investors in general and traders in particular. The former have a long-term vision on a position and can keep it for more than 6 months, whereas the latter have a short-term vision and their position does not exceed two to three weeks in general. It is aimed at those who are thoroughly convinced that, outside the pure laws of finance and economy, the Stock Exchange circle is governed by laws that are almost imperceptible and inexplicable. As to the others, those indomitable rationalists, who believe only what they can calculate, explain and understand, this book will make them smile. This book is aimed at those who already have the principles of what I intend to describe. The very fact of reading them and realizing that they can implement them in trading can help them to implement them in their souls and bodies. There are hundreds of (good !) books, video courses, seminars and conferences about stock exchange techniques, strategies and philosophies, etc. It is therefore not information that are missing. Yet a very small minority of traders manage to regularly achieve good results. It is estimated that, on the Stock Exchange planet, 5% of the traders rake in the money of the remaining 90%. This means that information and knowledge are not sufficient. These exceptional traders have something more...and this is exactly the main subject of this book : studying in details the principles that make the difference between the best and the ordinary. In trading, as is the case in life, the majority of people know what they have to do, but for reasons of which they are more
or less aware, simply manage not to take the decisions that correspond to what they know. Why? Here is one of the most important questions in order to understand the success or failure of a trader. The principles that we are going to study here will attempt to give an answer. This book is aimed at those who dare to look at themselves without judging nor criticizing themselves, just seeing thing as they are. This is not an easy task for everybody because nothing is more difficult than looking at oneself in a mirror with total objectivity. However this is a fundamental step in order to succeed in trading. We shall later see why. Finally this book is aimed at those who love trading, which is first a passion before being a means of living. It is aimed at those who feel by instinct that they can succeed in this field, but still fail to extricate themselves. They keep changing softwares, markets, and methods...but they are continuously losing...and they have good excuses. When one loses on the financial markets, no excuse is valid. This is the first fundamental principle in order to improve. No excuse is valid because the only one to blame for a trading operation is the trader himself/herself and never the broker, nor a financial newspaper, or a mediocre adviser, or a terrible ill luck or a bad connection to Internet. When you make a bad trade and deeply admit that you are the only one to blame, you do not only have the courage to close the position in question but your are also and, above all, able to make another choice with less guilty conscience than if you persist in burying your head in the sand. Once, I suggested in a forum on Internet to offer a free personalized analysis of the portfolios of the 20 first messages. I was surprised to find that 19 portfolios out of 20 were sharing a big point: more than 70% of the portfolio was invested on a negative position…for more than 2 months in average!! They did not leave on time and they were just waiting there, hoping that the stocks in question would rise again. When I advised them to close those positions, their answer was astonishingly identical: “But...I have lost a lot on these positions....I can not venture to leave now...I have no more to lose...what If I take the loss and then
they go up again...I wouldn’t bear it....I have been waiting for 3 months (which implies: I have been suffering for 3 months)...I can still wait....I’m not in a hurry…they will end up rising again… ». Only one of them listened to my advice and closed all his losing positions. Two weeks later, I received a message…from his wife : “Dear Sir, I would like to thank you for having convinced my husband to leave his positions on CMGI, AMDI and IBM. I don’t know what has come of them but one thing is sure: you have liberated my husband, he is nicer to the kids and to me...the atmosphere at home is more relaxed...”. Generally speaking, a position that makes you suffer is a bad one. It is imperative that you leave it without hesitation. This is a simple principal that you have to respect for two good reasons : - avoiding that your life as a trader encroaches up on your private life, - sparing you further losses. Since Georges Soros, the trader on the futures, brought down the Central Bank of England, and pocketed 1 billion dollars while passing, the realistic professionals have realized that we are from now on living in a revolutionary era where States and Central Banks no longer control financial markets. This reality is difficult to accept but the fact of the matter is that it is portfolios’ managers (especially traders) who are the masters of the international markets. The financial power of many of these managers is higher than that of a great many Central Banks and their objective is to speculate only not to invest. This means that their aim is to make a profit as quickly as possible by anticipating the emotional reaction of investors and other traders and not the potential value of a security or a financial product. As the main activity of operators on the financial markets is to foresee the psychology of the other operators (therefore to speculate not to invest) , all the good theories of economy and finance are wrong-footed. We shall see in this book why and how the markets make fun of the very principles that constitute their own foundations.
The aim of this book is to give you elements to reflect on so that you constitute your own method of trading, according to your personality, your objective and your psychology. You will « feel » that, from now onwards, you will not only speculate but you will be sufficiently equipped and motivated to be a winner on the financial markets. You may lose in the beginning but you will learn. You will see, it’s exciting. To be excellent in the field of trading, you do not need to be graduated from a big business or engieering school. 75% of the best managers on these markets in the world are self-educated. By breaking down the different stages (before, during, after) of a trading operation we can better understand the process of success or failure. Before: 1- the psychological and physical readiness of the trader. 2- rumors and financial, economic, political and social information. 3- the fundamental analysis of the stock or contract. 4- the chart analysis of the stock or contract. 5- the intuition of the trader. 6- technical know-how in order to put in orders in an optimal way. 7- the choice of a good broker for the execution of the orders. During: 8- the psychological and technical management of the position (stop orders). 9- the intuition of the trader. After : 10- the management of the success or failure of the operation. Look at these 10 stages carefully. Take time to think about them and classify them in order of importance. Apply yourself because this classification is not banal…It is the frame of how you see
things and how you approach the stock markets. It is the pillar of your trading method. Do not look at my classification before you have done yours at least mentally, if not on a piece of paper. I repeat again, to make the reading of this book fruitful, you have to make this classification. In front of each stage, you can put a percentage representing its importance in the success or failure of your trade (round turn). Be honest with yourself. Here is my classification. It reflects my own vision of trading and, of course, it involves only me : 1- the psychological and technical management (stop orders) of the position + the chart analysis of the stock or contract = 70% 2- the psychological and physical readiness of the trader = 15% 3- the management of the success or failure of the operation = 5% 4- technical know-how in order to put in orders in an optimal way = 4% 5- the choice of a good broker for the execution of orders = 3% 6- the intuition of the trader (before and during) = 1% 7- rumors and financial, economic, political...information = 1% 8- the fundamental analysis of the stock or contract = 1% ------------------100% Conclusion : a) As you can see, I pay practically no attention to rumors and financial, economic and political information nor to fundamental analysis. When available, these information have already been used by professional traders who are a hundred times better equipped than us in this field. When they are published, it is always too late for the average trader, especially that, nowadays, there is no economic or financial logic as we shall see later. I have put 1% because sometimes a piece of news may attract my attention to a particular stock or contract and then I study its chart. b) The percentage of intuition is negligible (1%) whereas some investors take positions that are based at the rate of
80% or even 100% on their instinct, or their good intuition. When I tell them that I fail to see why they have bought such or such a stock, they answer with a confident and halfamused smile, that it was “ a choice of the heart”, that they have felt it, dreamed of it, “that they are sure of it and that I will see...”, that their intuition rarely misleads them... Or they do not answer at all and simply point at their nose with their forefinger while trying to look mysterious. The conclusion : After 10 years of experience in this field, I know no investor nor trader who has made money at the long-term thanks to intuition. Why? First of all intuition is an abstract notion that misleads more often than we think; perhaps because 90% of what we mistake for intuition is only the more or less unconscious feeling of what we wish. Moreover intuition has a special characteristic which is that we only remember the good tips it has given us and never the bad ones. Finally since intuition leads to presumption, presumptuous investors lose all clear-mindedness and objectivity because they cling to their « belief » even when it makes them lose. We have yet to distinguish between intuition and instinct. Generally speaking, when a trader takes a position by instinct, the position will be profitable in 95 times out of a hundred times. The problem however, you have guessed it, is how to be sure that it is by instinct not by intuition. This is a very important subject to meditate on in trading, we shall study it with pleasure in Chapter 10. c) You have noticed the percentage of 70% for chart analysis and the psychological and technical management of the position. We shall see in details why and how.
A simple remark: the majority of traders, even the beginners, take positions that are positive at a given time; and yet they end up losing. Why ? The whole art of trading consists in knowing how to close a position be it a negative or a positive one. This is what makes the difference between the amateurs and the professionals. The decision of closing a position is the very essence of trading, and is therefore the most difficult stage to master. This is why it represents 70% of trading for me; which justifies why 70% of this book will be devoted to this stage. You will see a lot of percentages in this book. I love the science of probabilities and I must admit that this love has been rewarding for me. Practically all my trading method is based on probability laws that are very simple but surprisingly efficient. Are you ready to become an extraodinary trader ? Principle I : Fortifying the spirit of the trader in you: Trading is an activity that has the peculiarity of creating its laws as and when required. Traders must take them or leave them, they have no other choice. They must not go to the markets in order to challenge them or try an intuition or an idea and see what would come of it, because trading is not a game. Trading is rather an art, an art that respects itself like a martial art for example. If you have a weak point, you can not ignore it or pretend that it does not exist. You have to fight against the weak point rather than develop the strong ones. Some excellent traders have went to ruin and never managed to get over it although they used to be “genius” in their field. Some of have neglected their weak point which is their real professional motivation while the Achille’s heel of the others was their passion for gambling according to the strictest definition of the term. A complete and balanced training of the body, spirit and emotions is necessary in order to succeed in this profession. It is
certainly not just a matter of stock exchange techniques and tactics....It is far more serious than that! Look at the professionals: they use almost the same softwares of technical analysis, the same sources of information, they have had the same education and generally have the same level in the technical and strategic field. The difference lies only in the depth of their psychological analysis of the market and the ties they have with themselves. The sole and real opponent of traders is their own person. When they lose, it is they that have caused this loss, not the market. Here is a sentence that might seem obvious to you but of which very few traders are aware.The majority think that when they win, it is thanks to their genius and when they lose it is because of the market. The market is never wrong; because it simply relates what is happening. Are you really ready to get involved in this process? Are you ready to question some of your principles regarding money, gambling and pride, etc.? Do not tell me to give you techniques only and that you will manage to have the rest by yourself. You can find these techniques everywhere, in books, on sites, in schools, etc. Before you learn to be a trader, it is essential, indeed primordial, for you to be open enough to immerse into yourself in order to know the real reason that pushes you to become a trader. This reason is and will always be the “moteur” of your success...or failure. Do you understand how important this introspection is? What is the difference between the best traders of the world and the ordinary ? This is very simple: their psychological, physical, mental and emotional readiness and, above all, the relationship they have with themselves. At the high level (as is the case in all sports) it is this readiness that gets the better of technical and strategic mastery. Let’s see, for example, the relationship of traders with money. The first obvious thing about the profession of traders is to make money. However, they can not succeed in this job, if they do not have a sound relationship with money.
If they are afraid to lose money or if they do not love money, they have to choose between withdrawing from the financial markets or seriously looking into their relationship with money . However they can not start to speculate if they have not determined this relationship. I warn you immediately: it is not easy at all ! Some traders think that they love money but in fact they do not! This looks strange but is true. When they take a winning position, they do not like it and it is only when it becomes losing that they get interested in it. Loss excites them much more than gain. This is a phenomenon that is very known in the milieu of casinos and gambling in general. Others speculate uniquely out of passion for gambling and not to make profits. Others are so afraid to lose money that they stop breathing (and living) when they take a slightly aggressive position. This is not trading, but a fight against the self. What’s the use of perfectly mastering the techniques and « secrets » of financial markets if one would voluntarily sink one day? If you have been trading for more than 3 years and are almost at the starting point, then you have to stop looking for a better system, a better strategy, a good advisor or software. The problem lies in you! Try to face the beliefs that you have unconsciously accepted during your childhood : « Money can’t buy you happiness » « I am not educated enough to make money » « I was born in a poor family, I will always be poor » « On the financial markets we end up losing » These beliefs are present when you put in a buy or sell order. You are not aware of them but they do block your prosperity. Unfortunately it is not sufficient to long for being an excellent trader because what we believe in mentally is a thousand times stronger than what we desire. What do you have to do then ? very often
Change your idea of money! Traders in general consider money as a good. NO! Money is only a means for exchanging goods, obtaining goods and comfort... If you accept and deeply assimilate that money is just a means for exchange, you will be “centred” on earning it on the financial markets because you will no longer need to be afraid of loosing money or being short of anything whatsoever. Here is a very frequent case : You are trading, you take a strong position on the Yen against the dollar. You are aware of the volatility of the market. In 10 minutes you can earn a half of your capital or lose it. It is a risk that you have taken. However, immediately after putting in your order, your brain gets the upper hand: « I shouldn’t have, I should have waited a little more, I shouldn’t have involved myself too much, I will lose all my investment… ». Fear prevails and so does regret. What happens then? Your chances of being effectively loser are multiplied by ten solely because of the attitude you have just adopted. This seems irrational but I can only explain it to you by saying that I have experienced it. As you will see later, the universe of trading abounds in laws of this kind. We can not explain them, we have to recognize them, believe in them and implement them. That is all. What should you have done after you had put in your order? To get impregnated with the idea that money is an energy that circulates in the universe, that what you have earned does not belong to you; that everything that emanates from us comes back to us one day depending on the spirit in which we have sent it. When we operate on the financial markets, all our behaviors boomerang on us. Everything comes back to us. A law that is beyond our human understanding takes care of all this. By simply putting in an order while being fully aware that we are just a passageway of a part of the world financial flow, our subconscious stops to cling to the fear of being short of money and flings the door wide open to prosperity.
What do you think about this discourse? Do you feel concerned or do you feel aloof from this « spirituality» ? There are thousands of trading systems and methods. Mine is largely based on laws that I do not understand. But do I really need to understand them since I feel them and since they do work? Shall we go on?
We know many traders who think that their sole source of income is their performance on the markets. Either they are good and they make money or they are not good and they lose it. These traders will never be great ones, and even if they become great one day, they will never be happy... Because the image they have of themselves depend on their performance on the market, they spend their life questioning their being. They are continuously confusing their performance and behaviors in the markets and what they really are. No ! Performance is not the only source of income. There are so many others ! There are unexpected and inexplicable sources that we can not take the liberty of ignoring. Good traders are first of all people who are blessed and who are backed by providence. People often say that they are lucky but in fact it is the way they are and their behavior in everyday life that have created a channel of positive energy for them. Here is a story : Once I was at the airport to welcome a relative. I saw a Japanese lady in tears. I drew close to her and asked her about the reason why she was crying. She answered me with a sob that someone had robbed her of all the money she had provided herself with in order to spend her holidays in Paris. I gave her a phonecard and some money and went to welecome my uncle. The following day at the Office, Simo told me : “Mous, there is an interesting deal with the Yen, shall we make it ?” He did not have to specify whether we had to sell or to buy. I was not in need of this detail. I had already got the « message ». « Ok, Simo, I even suggest that we double the number of contracts ! »
I was still telling him my story with the Japanese lady when our broker called him : 4 contracts of the Yen were purchased ! We sold them out the same day, making a profit of 6,000 USD. Each one will interpret this story in a different way. My interpretation is simple : we always reap what we have sown. The most efficient means for making money is giving it. We do not give money in order to earn it but in order to be in harmony with the financial flow and to contribute to its circulation. This flow, in turn, never forgets us. (Georges Soros, one of the most impressive traders history has ever known donates about 100 million dollars each year). When we give money, no matter what the sum is, we lift the internal obstacles created by the fear of lack, and we let our abundance river flow freely. The same holds good when we accept to receive and therefore to take the profits offered by the market. The majority of traders do not understand that they have to collect the small profits that appear because they signal that more important profits are coming. One must have experienced this law many times to believe in it. Our « good manners », timidy, modesty or politeness often make us refuse a gift, an offering or simply a chance. This is a big mistake. To refuse something that is offered to you means blocking the Providence. We have to know how to welcome whatever is offered to us, be it a material good or a feeling someone has towards us, and always bear in mind that we are simply a bridge the mission of which is to convey in good conditions whatever is passing. When you are offered a cake, a free ticket for a show or a small profit on the CAC40, never say no! Take it and say thanks to the donator, the providence and the market... What you have just taken announces a coming (material or non-material) abundance that you will obviously have to redistribute in a good way later. As you start to see, trading is not only a matter of performance. It is a whole. One has to be attentive to the signs and believe in them in order to let oneself get connected with Nature, with the affective and emotional state of the other traders.
A good trader is a woman or a man who is humble enough to admit that she or he is a simple bridge, a passageway. The art of trading consists in knowing the opportune moment for harmoniously merging the rivers we are in charge of into the foaming rivers of the financial universe. How can you fortify the spirit of the trader in you? You are in front of the Nasdaq chart. The latter is gently but certainly going up. You wonder what to do : buy, sell or wait. Things could flare up but you want to enter into the spirit of the game. Before you take any decision, you have to ask yourself: how is my mood today? Why? Because the decision you are about to take is closely linked to the personal interpretation you think you have of the chart and this interpretation is not objective at all: we do not see things as they are but as we are. In other words, you will generally bull the market if you are in good spirits and you will bear it if your spirits are low. If you have had a quarrel with your spouse and are annoyed with yourself because of that, you will choose a losing position in order to punish yourself, and so will you if you are disturbed by a noise or if you need to be alone. On the other hand, if you have heard some good news, your position will be winning, etc. You have to be vigilant to all these things that look insignificant, as some of them can unconsciously disturb your intuition, your lucidity and therefore increase the risk of error. Therefore the first thing we must think of before we start trading is not to think too much. We must liberate our mind. I must admit that this is very difficult but it is a key-quality in order to be excellent in this field. I want to go deeply into this issue because it seems primordial to me. Here is an example. One day in the morning, as I was crossing the road to go to the office, a taxi narrowly missed knocking me down. I jumped to the sidewalk and continued on my way. I have
the choice between saying «you bastard !! » and «I still have good reflexes!!! ». If I choose the first reaction, it is obvious that I will have little chance of putting in a judicious order. Why ? Because I have emitted a negative energy by thinking « you bastard !!». This negative energy will come back to me, that is certain, believe it or not! If I choose the second reaction, I am practically sure to put in a pertinent order. Why? Because I have congratulated myself on my agility. The positive feeling that I have had towards myself will also come back to me. Therefore the performance of traders never depends on what happens in the market but on what they feel when they are putting in orders and on their personal interpretation of what they see on the market. The question becomes as simple as this: how to interpret rightly what we feel when we look at the chart of Stock Exchange indexes ? In other words, how to be the best trader of the world? The answer is also simple: by liberating our mind of all thoughts, forecasts and intuitions. The World’s Trading Champion never thinks that, never feels that, never foresees that....The World’s Trading Champion simply listens to what his body is telling him. His body has access to knowledge. I do not know exactly why. We become ready to face the other traders when we are connected with ourselves and if our mind is liberated. You are in front of your screen. Your posture is comfortable and peaceful. The charts of the dollar, oil and Stock Exchange indexes pass before your eyes. Different ideas cross your mind. Some of these thoughts are aggressive , others are happy, disturbing or pleasant thoughts; but you do not pay attention to them. You do not become stiff, you do not react, you do not care about them. You are simply seated and you watch. The most fundamental form of trading is pure attention: observing without clinging, without getting attached and without judging. Observing the forward and backward motion of the
quotations and listening to the emotions, to the worries and dialogues hidden behind these figures and charts. At this time you are in the depth of the present. With practice, you will manage to have access to a part of the universal knowledge and trading will no longer have any importance whatsoever because you will be in another dimension ... Then you will go back to the emotive/mental level; and in order to decide wether to buy or sell, you will try to remember all what you have received at the, let’s say, meditative state. Be humble and contend yourself with the role of a witness of what is taking place in the market. Do not be tempted like some great traders who are more concerned with being operators on the markets than making profits. This is my personal way of trading. I reveal it to you as one would betray a secret. By using it in a regular way, you will learn to think less and therefore to feel more, which is the very essence of communication with the self. Let’s us now see two reasons that may prevent you from taking the good decision. Taking a decision before it is necessary: The majority of traders want to decide what they will do after the announcement of statistics about unemployment in the USA, for example, a long time before these statistics are revealed. Hence they end up oscillating mentally, weighing up criteria, ordering their calculations, anxious to make sure that they will take the perfect decision. The sole and best way of taking a decision, at least in the field of trading, is to take it at the last moment. Why? In fact, our brain is at least one million times more powerful and more rapid than what we think. Remember that Kasparov, the World’s Chess Champion, beat a computer that calculates 1 billion possibilities per minute. So, in reality, we only need one billionth of a fraction of a second to take a decision.
The later we take it, the less influenced our brain will be by analyses, rumors and figures… The fear of taking a bad decision : Here is a trader who has short sold wheat. Suppose that the weather has turns wet and suddenly the price of wheat starts to go up. Does this mean that the decision of the trader was not good? Of course not. The market simply has not accepted it. That need be no obstacle. The trader has to take the loss as soon as possible and then take a position that is in the direction of the train. Not fearing to make mistakes is one of the qualities of a good trader, but this quality must be on a par with the quality of recognizing, as soon as possible, that one is in the opposite direction of the march. As a conclusion, we can say that the art of trading consists in sufficiently liberating our mind in order to reach the level where we know exactly what we have to do long before our brain understands what is happening. Principle 2 : Respecting your body : Very few traders conscientiously take care of their body. The majority of them think that it is the brain or the intellect that decides what orders to put in. They neglect their body, eat and drink anything at any time, without realizing that they have no physical activity. Seated in front of their screens of direct quotation, they forget their body...and end up going out of tune. We must consider our body as the most important thing for us. We can not be connected with the others if we are not in harmony with it. How could you get a good inspiration about any market whatsoever if your body is out of tune with you and with the rest of the orchestra? This is impossible. Our body is the musical instrument that allows us to receive, to emit and to be connected. We have to consider it as an extraordinary gift at every moment. It is this everyday awareness that will develop in us the conviction and the unshakable force of taking care of it.
Yes, there are great traders who do not have a healthy relationship with their body. They are all day long sprawled on their chair, in front of their screen, with bottles of bear and Mc Do packings scattered around their desk, badly shaven, half asleep and uncomfortable. They are excellent on the markets but very mediocre in their everyday family and affective life. What is the use of making money all day long if one would let the quality of one’s human relations deteriorate? To be an exceptional trader means in the first place to have an exceptional relationship with one’s instinct. It is precisely the relation we have with our body that allows us to improve this relationship. If you want to be a professional trader, you must start by facing your sole and real partner : your body ! What kind of relationshp do you have with your body? Do you like it? Do you have something against it? Are you proud of it? The antenna a trader is his/her body. It is therefore primordial to keep it in the best possible state. What do you have to do exactly? Start by realizing once and for all that your body is a loyal friend and that it will remain with you until the end!! This seems trivial but by simply thinking about it from time to time, we imperceptibly start to take particular care of our body. Have you ever heard or read the expression “entrering one’s body” ? Do you know what this means? And do you perceive the importance of this concept in the performance of a trader? «Entrering one’s body» means entering in one’s present. This means feeling all the messages that our body, our soul and our mind are transmitting to us; listening to what we are living at the very present instant; listening to what is happening to us at this very second. The mind is not away and the body is here! We are not in our body when we think about what we have to do or what we have done. We are in our body when we do not think, but feel!
However, in 24 hours, we are less than 5 minutes in our body because the mind quickly breaks loose. We think instead of listening to ourself, instead of feeling, instead of living. You will certainly find this philosophical, but take it from me ! This is an essential key if you want to create and develop in you this instinct that makes the great traders. When you take time to listen to your body, you are obliged to accept it. When you accept your body, you start to accept yourself. And obviously, when you accept yourself, your instinct starts to talk to you. We shall see later that this is simply primordial for succeeding. Average traders have lost touch with their physical dimension, of the matter-of-fact aspect of themselves, as well as with their intuitive dimension. A good trader touches the trees and the plants, looks at his/her body, to the sky and smells the perfume of life. He/she takes time over admiring the wrath of the sea and the smile of the sun. Sometimes, we need only to sit on the ground in a garden, to touch the grass and to stop thinking in order to speculate on coffee, gold or wheat. We let it come and it comes. As you can see, this is a very strange way of taking positions on the financial markets. With practice, you will understand why I say that trading is the most beautiful job in the world. It is a job where one does not think, nor calculate or analyze. It is a job where we do certainly not listen to our brain, but only to our body. This is an unusual behavior that we have to get used to. A new form of reflection, where precisely every reflection disappears. Here is an idea that I invite you to reflect on : Our body is submitted to the same laws as planets and stars. It has direct access to universal knowledge. It is our master if we accept to listen to it and to respect it. What does the punctual knowledge of the tendency of coffee or the CAC40 index at a given day mean to it ? A speck of dust in a desert of sand.
We only have to be properly connected, don’t we ? So, how can we take care of our body? In fact, this means getting reconciled with one’s body. And, this is an important remark, it is never too late to start this process. Here is what the body needs: a balanced diet and a regular physical activity. This is all and it’s quite something. There are good books about diet and about physical activities as well. So I will only give elements that seem important to me. As you improve your diet, your trader’s instinct becomes finer. Do not eat any sandwich that you come across under the pretext that you have to watch the screens. For the majority of traders, eating consists in gulping down food as quickly as possible, without taking time to enjoy what they are eating. Consider a meal as a sacred moment. Suppose that you only have 10 minutes for eating, so devote all this time to your body. Be present in what you eat. This is the opportunity for you to show respect towards your body. Do not eat if you feel tense or irritated. Keep in mind that the relationship you have with food reflects your relationship with your body, and therefore your relationship with the financial market. If you really make these efforts, you will quickly notice a clear improvement in your performance as a trader. Why ? As soon as we start to have the simple intention of respecting our body, an extraordinary phenomenon takes place: we become stronger in many fields. We start to feel the intimate tie that exists between us and the universe. Concerning physical activity, it is also essential for the body...and the mind. Here is the main principle: better a little from something than a lot from nothing. This principle is valid for trading as well as for physical exercise. We are almost sure to make progress when we decide to make one step at a time but in a regular way. Here is an idea of my daily physical exercises:
I have got myself organized in order to go on foot to and from the office. I start every morning by doing some exercises for the arms, the neck, the shoulder and the feet before I switch on the screens. This does not take more than two minutes. Every hour approximately, I stand up and stretch. Stretching is a fearsome arm for the trader! By stretching the muscles get numb and this prevents the forming of energy knots. When I look at the screens but fail to have any particular ideas, I stand up and do some exercises. Then I get seated and the idea comes by itself as if it was already there but something was preventing it from appearing. I have quickly understood that stretching reduces my tensions and fears at the moment of decision-taking, of which I am more or less conscious. Since I spend a lot of time seated on my chair, I apply myself to paying attention to my position every two hours. We have to avoid putting in orders when we are slumped in a chair. Our body requests that we keep in a dignified position as much as possible. That is important for it. I have got myself organized in order to have a sport activity at least once a week. I love my body and I congratulate myself on being able to communicate with it. What about you? What do you blame it for? Nothing ! There is nothing you can reproach it for. This is the fundamental basis of the respect of our body. I know that you have understood what I mean. Principle 3: The rule of 70% of the profits : If you have to learn only one principle from this book, it is certainly this very one. Have I implemented it since I have started my trading activity, I would have been the owner of an apartment building. I have read it nowhere although I have read a lot of works on this subject. This is a principle that I have discovered almost by chance. It did work and it still works. I am proud to present it to you because it is really the main key to success in trading. I am absolutely certain that you will entirely agree with me when you understand what it means.
Pierre goes into the casino and buys chips at 5,000 Euro. He starts playing roulette . He plays conscientiously. After an hour, he has a lucky break and wins 15,000 Euro. However, you know that as much as I do, at the end of the evening, he leaves after he has lost the initial 5,000 Euro, if not more. Paul opens an account with 50,000 Euro. After 2 months of attentive speculation, he makes a profit of 40,000 Euro. In full flow, he bets 30,000 Euro in the Stock Exchange and earns 20,000 Euro. You have understood it, in the next trade, he stakes 50,000 and loses 70,000. Pierre and Paul have two common points: 1No matter how much they win, they always end up losing the initial stake , 2By adding the money they have earned, they pay little attention to it than if it were their personal money, 3They do not know the principle of 70% of the profit. This principles is as follows: When you invest and make x profit in relation to your initial capital, it is imperative that you take out 70% of the profit from your portfolio before you continue and so on. There are hundreds of stories of glorious traders who had reached the sky and then crashed to the ground and were penniless again. They would never have experienced such a disillusion if they had implemented this principle. If you open an account with 50,000 Euro and make a benefit of 5,000 Euro, transfer 70% of this profit- meaning 3,500 Euro- to the account of your spouse, your child or to your life-insurance frozen account with the firm principle of never using it. Then, you continue with 51,500 Euro. You lose 4,000 and then earn 6,000. So how much are you going to transfer to the account of your beloved mother ? No less than 1,400 Euro !!! And so on and so forth... This principle has advantages only: 1- At each time you realize what your gains (and also losses) materially represent,
2- This prevents you from taking more or less hazardous positions with the money you have made. It’s just human nature: when you take a position using the money you have just earned, your chances of losing are bigger than those of winning, 3- The fact of seeing your results becoming concrete will be your best motivation for improving your position. Motivation is essential in this activity, especially for traders who are comfortably off. 4- You will create a sympathetic bridge between the Stock Exchange universe and your relatives. The latter will start to be interested in your passion and this will help you be more objective in such a way that your activity would not encroach up on your private life, 5- Whether you place 50,000 or 200,000 will not change anything in your winning probabilities. On the other hand, if you get into the habit of taking out 70% of the profit, you will become aware of the real value of the sums that you manipulate. This regular awareness is fundamental in order to prevent you from getting intoxicated by gambling according to the strictest definition of the term, 6- Every sum that you deduct will represent a kind of insurance for you. This will allow you to handle the market with less stress and doubt. 7- Finally and above all, this will oblige you to take only the best positions at each time. “Trying” a stock, under the pretext that, in any case, you have a margin of 5,000 is out of the question. You will certainly find other advantages too. There are only two conditions in order that this principle works: a) You must absolutely not use the money you have taken out even if it means warning your spouse that she has to remain uncompromising weather you fondle her or not. b) You must not try to win 8,000 Euro by hook or by crook because you have to change the roofing of the house. The profit is there because the opportunity to make it has come. Otherwise, do not absolutely rush things on the market.
Since I respect this principle, my performance has clearly improved. My children were able to buy a complete equipment for underwater fishing, my parents built the garage they were dreaming of, my sister changed her car, my cousin went into business on his own. Now they all know what Nasdaq and a future contract on oil mean. What is you objective when you invest on the stock markets? To shift from an account of 50,000 Euro to an account of millions of dollars? To profit from your results in order to improve your comfort and that of your children? To fight the market? To have fun? Each one of us has a personal objective. Mine is to make regular profits on the stock markets in order to live what I want to live and help my relatives. This is both my job and my passion. I think that the best way to preserve a capital in the Stock Exchange is by rigorously implementing this principle. I should be very interested to know your opinion about this particular subject : (firstname.lastname@example.org). Principle 4: Learning how to read the charts : The majority of operators on the financial markets use chart analysis to complement their technical, fundamental, financial and other analyses. Personally I use solely and exclusively chart analysis. I do not read newspapers, except the sport column or the chess problem. I am not subscriber to any financial publication or advisory letter. In fact, instead of trying to know what the market will do and why it will do it, I rather apply myself to watching and understanding what it is doing without being influenced by any rumor or even official information. Why? If you want to use information other than those that you can see on the chart, this means that you believe that the markets will react in a logical way, which they never do. The behavior of traders and therefore that of the human being is and will always be irrational or stamped by a kind of immorality as we shall see later. The only way to be sure of not making mistakes is by not attempting to forecast the evolution of a financial product but simply saying what it is taking place.
In the past, the financial markets used to be efficient. This means that they used to correspond to the economic reality of the financial tissue. Things have changed today. The markets are entirely controlled by traders. Now neither States nor Central Banks can pretend to have any control whatsoever on them. Even when the Federal Bank of America decides to increase its prime rate and officially shows that it still has an influence on the markets, in fact it is traders who have indirectly imposed such an intervention. In the past, traders used to have the same objectives: making rapid profits from round turn trades. Today, they have completely different objectives: Some are making strange transactions with the sole aim of exempting a portfolio from taxation. For example a trader will make a disadvantageous purchase in France (where taxes are high) in order to take an opposite position with an account in a tax haven. They sell themselves futures contracts not in order to make profits but in order to “move” a capital from a country to another in a legal way and mainly in a way that is difficult to detect. Others are busy laundering the money of drugs, bribes, and corruption through the potential of the international financial markets with arrangements that are easy to make but also difficult to counter. In this case too, the objective is absolutely not making profits. Finally there are manipulating traders who put in orders with the main objective of giving a false impression to the other traders. This category of traders is the most dangerous one because they have a huge financial power and very often cause the unexpected fluctuations of the markets. Therefore we can see that markets, today, are not regulated by the law of supply and demand only. The number of movements that aim to transfer funds from a country to another regardless of the profit is getting higher. How important are these « false » transactions in the international financial channel ? The FBI estimates their share at 10%. Yet I am convinced that their share can reach 80% during some markets pauses.
It is a relatively hidden aspect of the financial markets. One has to be aware of it and compromise with it. This is one of the reasons why I say that the only way for analyzing what happens in the markets or to a stock is by observing the chart in question in order to have a chart analysis. The laws of economy, international finance and all the other fundamental analyses will show you nothing but the wrong thing to do. I know some traders who lose a lot of their time trying to understand why the market has become bearish or bullish. By the time they have understood that, it takes a new direction for reasons that are yet more obscure. These traders always find themselves in an uncertain position in relation to the reality of the markets. I repeat again, in order to become a good trader, you must not divide your attention and reflection. You must just concentrate on what the market is doing instead of trying to understand why it is behaving in such or such a way. Economic experts are almost every time wrong when you ask them to foresee an interest rate, the probable evolution of a rate or the reaction of their peers. I have concluded from this that not only one does not need to be an expert in economy in order to succeed on the markets but also, and above all, that it is a handicap that is very difficult to overcome, because the instinct is always influenced by the rational theories of economic and financial laws. The only reliable data on the state of a market are available on a chart. It tells us what is happening and how it is happening. It never lies since it only depicts the feelings of all the intervening parties. Therefore, one only has to know how to read a chart in order to realize important trading transactions. There are many schools of chart analyses. I willingly and almost exclusively use the Japanese candlestick method in addition to the charts of some indicators of which I am especially fond. Two books will be sufficient to make of you a good chart analyst: Steve Nison’s “Japanese Candlestick Charting Techniques” and Stan Weistein’s « Secrets for Profiting in Bull & Bear Markets ». You do not need to know dozens and dozens of other indicators. A chart of Japanese candles, the tendency line, the moving
average and the relative force of a movement are necessary and also sufficient elements for taking a buying or selling decision. Do not burden yourself with anything else.
Principle 5: Scrupulously respecting the moving average: Here is a very simple principle that is yet fundamental to respect: never buy when the price is under the moving average and therefore never sell when it is above it ; no matter what the rumors, financial information and other results say. Out of context, when you buy or sell a stock, there is a chance in 2 that you are right. If you respect this principle, there are at least 3 chances in 4 that you are right instead of one chance in two. What is a moving average? A moving average is the average of the closing prices on a determined period. Investors use a 50 to 30-day moving average whereas traders use a 10 to 5-day moving average. In order to make a 30-day moving average, the technical analysis software sums the last 30 closing prices and divides the sum into 30. A new number (the last price) is added to the total each day and the most ancient closing price is deducted from the sum. This average evolves each day, hence the name “moving average”. That’s all for the definition. (chart) If you want to buy or sell a financial product, look at its chart (which is available on many Internet sites) and add the moving average. In a split second, you will know if the tip or advice you have received from your favorite expert is to be considered or forgotten. Buying whereas the moving average is above the price amounts exactly to making a double bet:
- that a train that advances at a certain speed will soon stop, - that it will reverse. When you buy in these conditions, you think that the price has come sufficiently down, that it is cheap, and that it is judicious to buy. This is a bet. A bet means that you have an even chance of winning or losing. But in this very particular case, the chances of losing are bigger. Why? Practice has shown that betting that there will be a reverse in the tendency causes about 75% of the bad stock-market transactions. What further confirms this idea, 80% of the stockmarket transactions that bet that the train will keep moving, therefore that the tendency will persist, are potential winners provided that they know how to close their position. In fact, investing in the stock exchange is not that complicated. One only has to adopt a rigorous method based on a logical law : never take a decision unless you have big winning probabilities . Therefore investing does not mean betting but going with the tide. This seems obvious but the majority of traders, for reasons which I leave it to you to analyze, bet that there will be a reverse in the tendency. They almost can’t help it ; as if the most important thing in the stock exchange is to buy at the lowest price and to sell at the highest one. They may be right three times and earn 10,000 Euro and be wrong one time and lose 15,000 Euro. The message we get from the moving average is visual and immediate: either the price is below or above it. We must not make things complicated with the weighed average, the smoothed average, the double and the triple average. The message is simple : the price is above it = buy, the price is bellow it = sell or at least stand aside. Apply this principle as it is, irrespective of any other element, and you will improve your results in a considerable way. Obviously, other elements of chart analysis are also important such as timing (the choice of the appropriate time) for example ; but the respect of this principle will save you a lot of torments.
Principle 6: Putting stop orders is IMPERATIVE: All the portfolios that were once sent to me for a personalized analysis used to have the same defect, an enormous defect in fact. The investors in question had completely neglected to put stop orders, be they stop-loss or stop-profit orders. Losses that exceed 40 to 50% on a position mean that no stop order has been put. I believe that a good manager should not lose more than 20% on a position. I know very well that some investors would not accept this rigor. They take some positions because they have reasons for doing that. Then they cling to them come hell or high water. Their logic is that they will end up being right one day because the security in question is potentially profitable. They keep calm during difficult times, suffer in silence and wait… This way of investing is certainly not the best one for me even if it proves to be judicious (sometimes). Why? Today, we are living in an extraordinary era that offers big investment possibilities. Through Internet we have access to all the financial markets of the world. The element that seems primordial to me in trading, or even in investment, is the time factor. This element is extremely important in modern trading. Either you have a passive attitude, are subjected to it and are unable to do anything apart from waiting; or you know from the beginning that you have to attack it, to surprise it, to fight it because you have decided to adopt an aggressive attitude against it. I have written this book because I really want to share my convictions with you and it gives me great pleasure to talk to you about this notion of time. It is one of the essential keys to success in the Stock Exchange. Let’s take a concrete example: If you have the possibility to choose between a trader who has an objective of earning 100% of the initiatl investment per year and another one who has an objective of 2% per week, which one would you prefer? Of course, the second. 12% per week, with the accrued rate, make much more than 100% per year. 2The second is less exposed to the hazards of the market.
3The second has, above all, relatively some control over the time factor. This trader can sell off the whole portfolio at any time. When you bear in mind, before taking a position, that you have to control the time factor, you will considerably change your way of trading. You buy a stock at 100 Euro, then it decreases by 20%. What would you do then? There are three cases: 1you take the loss, 2you have already decided to wait, because this security will end up rising again (otherwise you would not have bought it), 3you consider the new facts, you ask your friends who are expert, you look for the reasons of this change, you think in order to decide whether to buy or not. It you have already decided to control the time factor, none of these cases would concern you. In this case you would already have sold, thanks to your stop order . You have reasoned in this way: I buy at 100 Euro on the basis of the hypothesis that, after a very short time, the price would not drop by more than 15%. Therefore I put a stop order at 85 Euro. If the price exceeds this stop, I am executed and it makes no matter that the price soon goes up. I am no longer concerned with this since the market has proven me wrong during the time I have given myself. Your spirits must not be affected if the prices go up soon after you have taken the loss because you trade in a rigorous way that will make of you a winner on the market in the long run. This method will not only simplify your life as a trader but also, and above all, your everyday life. You will not have to rack your brains over whether to take the loss or not if you treat yourself to oneweek holidays with your family in total disconnection from the financial markets. Protection stop orders are the real tools of the successful trader. Beginners do not use them simply because they not know how to. In fact it is not easy to know where to put the protection stop; there is no percentage that works every time. What I can tell you now is to adopt the strategy of stop orders from now by using
percentages that range between 10 and 15%. With experience and with chart analysis in particular, you will improve these stops untill you learn how to follow the tendency by increasing your protection stops every time in order to collect the maximum of gains. Some traders also put stop-profit orders, which means that they limit their gains. For exapmple, they buy at 100 Euro, put a stoploss order at 85 Euro, and another one at 125 Euro. Their argument is that the price will probably reach 125 Euro, but that it might decrease again soon after. So they prefer to take the profits as soon as the price reaches an amount that they consider as the top of the security. I am not a follower of this strategy even if it proves to be profitable from time to time. If I buy at 100 and then the price rises to 125, I increase the stop-loss order to 120 and so on and so forth in order to follow the tendency which is in my favor. If it is reversed, I take the loss or collect the profit and move to another security, without caring about the evolution of the one I used to have. One must grow emotionally and psychologically away from a financial product, because it is and will always be a simple support not a physical or material good. I know many investors who have not been able to grow away from a security because they have almost started to love it, they are anxious to be faithful to it as if it were their spouse. The loss engendered is not important for them ; perhaps they do not even realize it. The financial entity to which they have become attached has turned them blind, incapable of realizing that they have taken that position in order to make a profit and only for that reason. Thanks to protection stops you will not fall into that trap, a trap that is not easy to avoid since the human nature is weak. It easily gets attached to a tree, a house, a car, a book, an idea...a stock. Traders must always bear in mind their aim: making profits. No support must be important for them. They must not keep a position on French stokcs, for example, out of patriotic concern. Financial supports have no nationality. When you buy at 100 and then the price goes down to 85, your brain loses at least 75% of its objectivity. It is difficult to accept to
take this loss. Your ego is always present, and it will unconsciously give you good excuses for keeping that position and waiting. When you put a sell stop order at 85, it is the maket that decides whether you have to buy or not, and no longer you. The difference lies here. By handing over to the market, you set up a structured strategy for trading with a minimum of emotionalism (and therefore of subjectivity) at the crucial time of the operation: the closing of the position. I hope that you have got this important message: never take a position without putting stop orders. It would not be sufficient to read this chapter and say that you agree with these ideas. You do not only have to be deeply conviced but you have to make of this an unshakable principle and implement it on each position, anyway if you want to consistently make money. Principle 7: Playing for big stakes ...at the appropriate time : Here is one of my favorite principles: take time to watch the markets, study the charts of many stocks and futures contracts in search of the best possible deal of the day or of the following days, and then play for big stakes. This principle is so important that you can double your benefits if you implement it alone. At first sight, this seems hazardous because as soon as our brain has seen «playing for big stakes » it has almost spontaneously understood « taking big losses » but at the end of this chapter this expression will mean « making big profits ». I have always been fascinated by the method of Garry Kasparov, the World’s Chess Champion. During the semi-rapid tournament held in Paris, I had the chance to have a talk with him when he was walking in the FNAC in the Champs Elysées. I asked him with a broad smile: « Could you tell me in one sentence how I can beat you in one ten-game match and become the World’s Chess Champion?”. I would never forget his attitude nor his answer. He was surprised by my question. He smiled and continued on his walk between the departments. I followed him without uttering a word. I felt that he was thinking, that he was going to tell me something interesting. He turned and said: “ You
have to learn to always look for the best move in a position, be it in a game you play or watch or analyze ». He was looking serious ; he was telling me something important…at least for him. It is only some years later that I have realized that it was important for me as well. That’s all the story. The implementation of this advice has allowed me to make rapid progress in chess. Then I have tried to implement it in trading. I am sure that my result in the International Competition is largely due to it. The portfolio that were once sent to me for analysis used to have another common point: they had a diversified and homogenous distribution. This is exactly what you have to avoid. Diversifying one’s portfolio is a good idea for institutional investors, big accounts, but not for us. Either we are convinced of the potential of a stock , we believe in it and we put it in our portfolio or we leave it out. We do not try it, under the pretext that it has good chances. In my opinion, the maximal number of stocks or futures to be kept in a dynamic portfolio is 5. Why 5? 1- This number is practical as it represents the fingers of the hand. I attribute a feature to each finger, then I associate it with a stock or a future contract that corresponds to it. For example, the small finger means instinct. I attribute to it a position that I have taken...by instinct. The forefinger is logic. The thumb is panache, etc. 2- Diversifying one’s portfolio on 10, 20 or 25 stocks certainly allows for the distribution of risks but also diminishes the potential of gain. 3- When we know that we do not have to exceed this number, we no longer choose the stocks that have strong winning probabilities, but the ones that have the best winning probabilities and this is the difference. This takes us back to the advice of Garry Kasparov: to develop our technique and strategy in order to locate not the good opportunities but the best ones. Among these best opportunities,
we make another selection in order to play for big stakes. If the candidate stock is not there, we wait wisely with the available liquidity. This is the reason why our portfolio must not be homogenous. If it contains 9 stocks with a percentage of 10% for each one of them, therefore it has a liquidity of 10%. So how can we seize an opportunity that appears and on which it would be judicious to invest 40% ? In this case, we will simply miss the opportunity. Moreover, when the portfolio is homogenous, the investor can not devote sufficient time to look for the best deal but keeps helplessly watching the positions. We can have 10 to 15% on three positions, then a position of 50% and the rest represented by liquidities. This way of managing might seem kamikaze at first sight, but this is the one to use if one wants to maximally dynamise one’s porfolio. Once I had the chance to be invited to Las Vegas, the kingdom of pure gambling. I was soon attracted by a young man , about twenty years old, seated in front of a black jack table. There was a big mass of chips in front of him and he looked very self-assured. He was beating the bank. I drew close to him and after some passes, I understood his system. It was a very simple and legal one that was yet largely in his favor on that day. When the first card was fairly in his favor, he would stake 1$, which is the minimum. On the contrary, when it was CLEARLY in his favor, he would stake 50$, which the maximum. He was intuitively using probability laws to his best advantage. I had to wait one full hour before he stood up. I streched out my hand to him : “ Good evening, I am Moustafa Bel Khayat, from Morocco. Bravo ! that was a very good demonstration. Why have you stopped ? ». “Good evening, Ali Mahfoud from the Republic of Iran. Pleased to meet you! I have stopped because I’ve started to get tired and lose confidence. I will go to eat something”. During dinner, he confirmed to me that his technique was really based on probability laws and that this science is a real passion for him. According to him, Black Jack is the sole game in Las Vegas
where the clients can win provided that they do not play for a long time. Trading means gambling against the market. If your winning probability is not largely in your favour, do not bet a single dollar. In case it is, you have to be able to go right ahead. Georges Soros played for big stakes to earn that famous billion dollars against the pound sterling. He largely exceeded 90% of the portfolio he was managing and went as far as to getting into debt ! This is a big trading lesson for us because it simply means that the art of trading consists in waiting that our winning probability becomes largely advantageous and then we stake the maximum. Meanwhile, we must not keep our portfolio « stuck » on stocks that are excellent but that can soon end up doing terribly badly. Our portfolio must always be ready to attack. Since two years already, I do not keep more than 3 positions in my portfolio. I have bought a house on the sea front in Morocco with an initial capital of 10,000 $. There is another reason that explains why this system is successful and it is an important one indeed. The longer we stay on the market the bigger the risk of loss is . I invite you to think deeply about the following idea. In the university, scientific and financial circles, as well as in some seminars on investment techniques, the opposite is thought : you have to take a position, believe in it and keep cool. In other words, you have to stay on the market a maximum of time. This was perhaps valid about ten years ago. Today the marekts have become dangerous...One must not be present in them for a long time. One has to behave like the hawk: stay the maximum of time in the sky, very high and sheltered from surprises, in order to dive as quickly as a flash, take the food and then come back up immediately. We have to adopt our trading technique to the reality of the modern financial markets in the same way that the hawk has adapted its hunting technique to the land jungle. When we take a position, anything can happen, especially the worse because modern markets, which are perpetually unbalanced and practically interrelated, may have brutal and totally unpredictable reactions.
Personally, I am absolutely not confident on a medium-term position. This used to be playable in the past but no more now. If you are stuck in a position since many weeks, this means that you have not entered at the appropriate time. No matter how the stock evolves later, one thing is sure: you were mistaken about timing. This is a fact which is very important and the way you manage it can make of you a champion, a good trader or a victim. The first thing to do is to recognize it. Develop in you this lucidity in order to be able to take the appropriate decision. The second thing to do is far more difficult : studying if at the present time a better opportunity is present on the market. In this case, take the loss and take a position on the stock which, before all, has a higher winning probability. The third thing to do is to grow emotionally and psychologically away from the stock you have put aside. The fact that it goes up or down no longer concerns you. I even recommend that you forget it because, from now on, your judgment will not be objective. All this chapter has been devoted to the principle of playing for big stakes at the appropriate time. Do you still understand this as “ taking big losses » ? I hope that you do not. The message I wanted to transmit in this regard is not easy to accept because each one of us has his/her own story and values to which he/she firmly believes and also a different investment objective. You have certainly understood the principle and some of you even agree with it. However there is a big difference between approving and implementing. I feel that you have started to be interested in this difference. Principle 8: Never averaging when your position is losing: In 1997 I used to work for an American company for portfolio management in Geneva. The main trader, Guy, was a 28-year-old French man who has already had a six-year experience in the field of futures. He was the star of the trading room. I have learnt a lot by seeing him working. An afternoon, I arrived late.The American market has just opened. Guy was vivacious and excited. He told me that he had started to trade the Nasdaq. He short sold 10 Nasdaq contracts.
His confidence astonished me and I had a quick glance at the chart and noticed that the 30-day moving average was still below the price, which means that the tendency was bulish. I remarked on it to him. He smiled to me and said “you will see Mous, it can no longer rise up ...that’s all over and done with the Nasdaq! The price will collapse before 5.00 pm ». At 5.00 pm, the price was already at 20 points above the sell price. The position was losing : 20x10x100 = 20,000 dollars. I started to get worried and asked Guy if he had put a protection stop order. “ Not for the time being..., you see, here the relative force is considerably slowing down....and look at the volume....nobody is buying... In fact, the price has not changed since a half an hour...that‘s a top, I tell you. Look now, at this price it is even more intersting to sell”. As if to prove to me (or to himself) that he was entirely confident in his losing position, he sold 10 other contracts, thus averaging while his position was losing. Selling 10 Nasdaq contracts at 1,200 and other 10 at 1,220 is equivalent to selling 20 contracts at 1,210. Many traders average in this way, especially when they are losing. That is the worst one can do when one is not in the good direction. This strategy is never valid on a losing position. Traders who use it no longer try to make profits but are offended, affected in one or other pride and it is only out of presemption that they defeat the position. This is not trading any more, it is rather a psycho – emotional settling of accounts between the trader and the market. An hour before the closure of the Nasdaq, the price went up again by 10 points. In your opinion, what our friend Guy was intending to do? Averaging again! Because in general, when we are seized by “frustration”, we lose every contact with lucidity and objectivity. We prefer to go to the bitter end than admit that we are wrong. I intervened “Listen Guy, this was an exceptional morning for us. We earned 21,000 dollars on the Yen, T -Bonds and the German Bunds. Now at 1,230 we will lose 40,000 dollars and the price is still above the moving average. It was you who have thought me to respect it no matter what the other indicators say. I suggest that we put in a buy-back limit order at 1,221 and a stop order at 1,232. There are chances that the stocks will be in demand at 1,221 and we will be quits for today ». He listened to
my advice and we were executed at 1,221. What a relief! The following week, the Nasdaq rised to 150 points on the right line!! We could have lost 300,000 dollars. The lesson we can learn from this story is that when we are in the wrong direction we must not try to “improve” our position by averaging. The risk of making a mistake and, thus, making the loss bigger is very high. Knowing from the beginning that we can not make recourse to this “remedy” allows us to always take enough time to study the best time for taking a decision. This is what we call timing. Improving the timing is fundamental in trading. To achieve this, one has to keep in mind that the selection of a stock is essential but the choice of its timing is still more important. 80% of the bad trades are due to the problem of timing. The stocks or futures in question were really potentially winning but they have been sold or bought at the wrong time. I know only one means for having a relative mastery of timing: chart analysis. It is this analysis, and nothing else, that gives you the signal of selling or buying. Principle 9: Initiating yourself into trading on futures contracts: In Europe, 95% of the private investors do not use futures markets, commonly known as futures contracts or derivative products ;whereas in the USA, more than a half of the investors trade on these markets that are continously expanding. The daily transactions realized on these markets are estimated at 6 billion dollars, which represents the annual amount of physical international trade. Today, traders who limit their area to stocks only, as is the case for 90% of French private investors, limit their profits’ potential in a considerable way. One has to move with the times and profit from the potentialities that are offered by the financial markets. These futures markets suffer from three evils : 1- They look complicated, reserved for the professionals. 2- They are reputedly very dangerous since the profit potential is enormous and so is the loss potential. 3- They are immoral, because the majority of the traders on these markets do not invest but make pure trading.
This is what I think about these markets: 1- They are far less complicated than stocks. Today, a private investor has more chances to make profitable transactions on a future contract than on a stock. 2- They are absolutely not more dangerous than stocks. One only has to respect a rigoros trading method. These marekts are very interesting and I would be very pleased to initiate you into them. 90% of my transactions are based on futures contracts. I am persuaded that when you understand their mechanism, you will trade almost exclusively on these markets. 3- Trading, be it on stocks or on futures markets, can not be denounced as “immoral” because it is the very essence of the financial markets’ regulation and therefore of the world’s economy. This is a philosophical and economic issue and also a subject that comes within social conscience; we shall not tackle it here. I do not have an ounce of guilty conscience when I make money on the financial markets thanks to trading. So what is a futures contract? A futures contract is a financial product that we can bull purchase or short sell and which can concern commodities (oil, gold, wheat, sugar), currencies, interest rates or stock exchange indexes such as the CAC40, Nasdaq, the S&P of the USA. Example : In october 2000, I short sell a CAC40 contract to be settled in December 2000 at the price of 6,300. Each variation point of this price costs 10 Euro, so the value of this contract is 6,300 x 10 = 63,000 Euro. But I only need to have 6,000 USD on my account to take position on this contract, either to sell or to buy. That is called a deposit. It is as if the broker gives us credit of 10 times the stake . On some contracts (especially currencies), and according to the broker, this can reach 100 times the stake. This is the famous lever effect that characterizes the futures markets. We can earn a
lot and lose a lot. However, as you will see later, by systematically and rigorosly implementing the principles that have already been stated and the ones that will be mentioned, it will be impossible- I say impossible- to lose a lot. Let’s come back to our example: Buy selling a CAC40 contract at 6,300 in October, I expect that the financial market will become bearish between now and December 2000. Suppose that I am right and that, in November already, the contract does not cost more than 5,700. I do not need to wait for the settlement in order to realize a profit therefore I buy my position back. I earn 6,300 – 5,700 = 600 points. The brokerage fees cost 10 Euro for a round turn, I make a net profit of : (600 points x 10 Euro) – 10 Euro = 5,990 Euro. This means a performance of 100% with a stake of 6,000 Euro in less than one month. Suppose that I am wrong and the contract has rised to 6,900 between the time when I short sold it and its settlement in December. Theoretically I will lose 600 points. I say theoritically because , in practice, a loss of 600 points on one CAC40 can never happen. Why? You have guessed it: when I put in the short selling order, I put in a protection stop order at less than 100 points. In other words, a buy stop order at 6,400. So in the worst case, the maximal possible loss on this position is 100 x 10 = 1,000 Euro + 10 Euro for the brokerage fees = 1,010 Euro again on a stake of 6,000 Euro. The conclusion: here is a trading transaction where in practice (and not only in theory), the profit potential is largely higher than the loss one. If, in addition to this, we take into consideration the principles that have been studied above, we understand the big success of futures contracts. This is not all, other criteria explain why hundreds of thousands of Americans trade on these markets.
a) The futures market enjoys a high fluidity contrary to stocks market. When we want to sign about ten buying or sale contracts, the markets absorbs them automatically, which is not the case in the stocks market. b) Viewing its financial power, the futures market considerably limits manipulation possibilities. For example in order to influence the CAC40 market, one has to put in orders for 400 to 500 contracts, which is not affordable to everybody. c) The possibility of bearing the market with a short sale is an important criterion, because investors hate to buy and to have nothing to do apart from waiting that the securities go up. The futures markets offers you the possibility to be actively trading in a continuous way since it allows you to follow the tendency, be it bearish or bullish. d) Brokerage fees are largely lower than those of the stock markets. In order to buy in stocks the equivalent of a CAC40 future contract (63,000_) , you have to spend 0.5%, which means 315_ in comparison to only 5_ for the future contract. The diffrence is huge. e) It has been proved that it is far easier to foresee the evolution of a Stock Exchange index than the evolution of a stock. Trading on furture is undeniably more interesting for private investors than trading on stocks. In this case they will no longer have to follow up the PER nor to make advanced financial analyses, let alone to watch the result of an enterprise. f) Let me ask you a question: in your opinion, which one is easier to follow in the ocean : the whale or a sardine ? It is exactly the same thing for a Stock Exchange index and a stock. To make a modern Stock Exchange portfolio dynamic, I think it is useful to open an account that is devoted to futures market. I would recommend that you trade only futures on Stock Exchange indexes in the beginning, until you perfectly master the mechanism.
Where can one open a futures account? In France, in spite of the rapid growth of online brokerage, there are few brokers who offer futures. In the USA, there are hundreds of them but one of them is really exceptional. http://www.interactivebrokers.com It is the best in the world for futures and even for stocks. This year, it obtained the equivalent of the gold medal for online brokerage (Deloit & Touch). However it is not very known in France. Do not worry! I am not a shareholder nor a sales representative of this site . I have been simply one of its users since two years and I must admit that I am astounded by the realtime system for putting in orders. This is , beyond all doubt, the better that can be done in the Stock Exchange field, be it for stocks, futures or options. I am very happy to give you this excellent tip. You owe me a kingly meal. The minimum that is necessary in order to open a futures account is 10,000_. Yet I recommend that you start with at least 20,000_. If you feel like to have a try, I would be pleased to assist you in you first moves. Trading on futures is as simple as this. It is absolutely not reserved to the experts of finance. Start step by step, with one contract at a time and don’t let the euphory of the first profits get the better of you. Futures too have their own principles that you will discover and learn to respect. The main thing is that you advance gradually. Unfortunately there are no books in French about futures. I had to seriously revise my poor English in order to study these markets on American sites. Perhaps some French-speaking sites have started that. If you find any, I should be grateful if you could kindly send me the address. Conclusion If you buy and study Stan Weinstein’s book “Secrets for profiting in Bull and Bear Markets » and Steve Nison’s book « Japanese Candlestick Charting Techniques » and if you use the principles we have just seen, I assure you that you have the necessary and sufficient tools for being a winner on the financial markets.
Of course, this will not work every time, but one thing is certain: from now on you will have all the chances to be a talented trader. - Do not care any more about economic or financial information. - Do not prick up your ears to rumors. - Do not read the advice of experts, and , above all, do not heed them. - Do not take positions on the basis of your « flair ». - Learn to withdraw in a strategic way in order to close a losing position. - Consier the chart as your SOLE and real source of reliable information. - Never take a position before you put protection stop orders. - Wait for the appropriate time, then enter the market with force . - Make a part of your portfolio dynamic by investing it on futures. I know very well that the majority of traders take their decision on the basis of fundamental analysis and some information that are more or less privileged or in order to follow the recommendations of experts. This is an efficient way of losing money without having a guilty conscious because it is the others who have been wrong. The first princilpe for an ambitious trader is to never follow an advice. I have always been staggered by the lack of perspicacity of some Stock Exchange experts, especially the journalists working for some specialized magazines. As you have certainly noticed, my method is categorical. It will not suit everybody. In fact this is not the aim of it. Don’t we need somebody in front of us in order to make profits? So, it is up to you to chose on which side you will be.
Translated by Zainab El Abdaoui
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