hi BLUEPRINT Limited Risk HEC 4 ee ro oem iC i i. RNIE ata Lie mae KensencThe Blueprint Limited Risk Investing & Unlimited Profit Potential Kurt Frankenberg & Ernie Zerenner Published By: Power Financial Group, Inc. ZIPOWEROptions° = RadioActiveTrading Lith EditionCopyright © 2008-2012 by Power Financial Group, Ine. d.b.a. PowerOptions & RadioActive Trading httprivww.poweropt.com Printing 11.0 All Rights Reserved Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to’ Power Financial Group, Inc. 404 First State Blvd., Wilmington, DE 19804. 302-992-7971 Limit of Liability/disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. ‘You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact support@poweropt.com or call 877-992-7971 (toll free) or outside the United States at 302-992-7971 or fax 302-992-9859, ISBN: 0-9759093-1-2 Printed in the United States of America 11th EditionForeword The RadioActive Trading Methodology described in this text, The BluePrint (BP) has been under development for several years. Kurt Frankenberg created the first version of the BP in 2002 to address the problem of capital loss in his covered call portfolio, In 2007, Ernie Zerenner at PowerOptions embraced the RadioActive Trading Methodology to insure his portfolio as Kurt suggested. Since 2007 the BP has been packaged in this binder format and accepted contributions from the staff at PowerOptions. Both Michael Chupka and Ernie Zerenner of PowerOptions have made inputs to the BP since the end of 2007 with the inclusion of finding RPM opportunities and management tools from the PowerOpt.com web site and added additional income methods. Each version of the BP has created an opportunity for us to include corrections on small typos, new thoughts and observations, new income methods and the development of new tools to help investors implement the RadioActive Trading strategy. We also try to address questions that arise in the use of the BP to make it easer to use and understand based on customer feedback. Therefore, give us feedback. Your ideas and suggestions will be taken seriously and will probably be incorporated in the next version. Below are summarized some of the changes included in the last few revisions of the BP: Printing #7 * By customer request added a tab on "Exiting a RPM” * Added this “Foreword” to clarify the differences in the versions of the BP * Revised the “Trade Simulator Tool” chapter Printing #8 » Added buying hints into the Married Put Setup section * Added a buy stock or long call alternative to IM#9 and IM#4 * Updated links to the Trade Simulator Tool and updated tab with new application * Updated management grid in Appendix 2 Updated IM# 7,8 to include 8a and 8b Printing #9 « Added a Q8A section to the Appendix = Added a table of contents to the Appendix ‘+ Added to exiting tab content on Post Exit Analysis Printing #10 IM#9, page 3, change $46.88 to $46.84 and $39.89 to $38.85 * HPQ Example, page 11, change “more” to “move”, Married Put Setup, page 8, change “on” to “one”. * IM#4, page 14, change $128.60 to $127.90 and $10.17 to $9.47 * Added numbers to the Appendix table of contents Printing #11 (this printing) * IM#5, page 7, 4" line changed’ The long $60 calls...” to “The short $60 calls...” * Appendices, Page 15, line 3 changed STO1 Nov 07 from $42.50 to $47.50 * Added IM#11 to the IM#10 tab i.e. Income Method #10811 1th EditionAnnouncing FUSION—The Brand New Service from RadioActive Trading Greetings Trader! Thank you for your purchase of The Blueprint. We already have QUICK update for you... Many times through this book and all over the RadioActive Trading site, you may read about Fission’ as well as a separate, search and management service called PowerOptions. Both Fission’ and PowerOptions were available by subscription to support RT. Fission’ is... or rather WAS...the subscription service for you to follow other RadioActive Traders (including Kurt) in the market. Subscribers see how we respond to what the market offers REAL TIME by looking over our shoulder at dozens of real as well as simulated trades. Fission’ documents the open, development, and close RadioActive Profit Machines, so Subscribers get an ongoing education on how to apply the concepts in The Blueprint. The Blueprint stands alone, but Fission’ was introduced for those readers that wanted to see the principles applied in real time. | have GREAT news for those that are already Subscribers... and convincing reasons for those who aren't yet... to stay or become subscribed to the new service: FUSION. FUSION is more than a repackaging and re-launching of the “old” Fission’ service; it is an entirely NEW service. FUSION contains everything that Fission’ did, but with so much more! We are replacing the name Fission’ with FUSION for a number of reasons: 4. IN nuclear physics, it's known that FUSION releases more energy than Fission 2. The benefits of FUSION are felt all over the planet; it's what powers the sun! 3. As averb, “FUSION” means, “joining together’. Take a look at what it will fuse... The new FUSION subscription will still have real-time tracking of trades, the “Income Method’ trade adjustments, as well as ongoing education from the whole RT staff. But we are adding SO MUCH more, you may hardly recognize it! Improvements include: > Aforum for RadioActive Traders to network with one another and share ideas » Frequent “Boot Camps” to discuss breaking techniques... and fine tune old ones > Asuite of search and management tools, powered by PowerOptions We are joining... FUSING..., together all these great ideas to better serve YOU! FUSION will join together’ two companies... RadioActive Trading and PowerOptions so that separate subscriptions will be unnecessary. FUSION will “join together" you and the RadioActive Trading staff for better trading. FUSION will ‘join together" the whole RadioActive Trading community by giving you a place to post questions and answers and share learned lessons. Now that RadioActive Trading is practiced all over the planet, everyone ‘under the sun’ can share and grow in the light of FUSION! Please “join together” with us as we endeavor to help people all over to trade better. Your purchase of this Blueprint entitles you to coupon try FUSION for $10 for the first month, 11th EditionChapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Table of Contents Introduction Option & RPM Basics Trade Simulator Tool Married Put Setup Income Method #1 — Selling a Covered Call or Creating a Collar Income Method #2 — “Rolling” The Call from Income Method #1 Income Method #3 — Roll Put Strike In Income Method #4 — Roll the Put Up Income Method #5 — Increase Your Payout Income Method #6 — Give Me My Money Now! Income Methods #7 & #8 - The Future of RadioActive Trading Income Method #9 — Rolling the Put Down Income Method #10 & 11 - Dividend Paying Stocks & Broken Wing Butterfly 11th EditionChapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Appendix Bulletproofing Combining Income Methods Exiting RPMS Trading Support HPQ Example Finding Trades 1th EditionIntroduction Options’ trading is not as shrouded in arcane, esoteric thought as many investors think. It just appears that way at the beginning. As with any endeavor, once ground is broken it comes together very quickly. If you are an options trader already, welcome to a whole new way of thinking about options. If you're brand new, this Blueprint will start you off right. In each chapter you may find: Exercises In several places there are exercises or assignments, activities designed to help broaden your understanding. Actually performing these exercises is one of the best ways to assimilate the ideas they are meant to convey. The old saying is, "Tell me and | will forget. Show me, and | may remember. involve me, and | will understand.” As you go over them, be sure and do the first exercise. The first exercise is the most important, and the foundation of the rest of this work. Mustrations The illustrations, especially graphic data, are meant to be simple and convey the ideas visually. Study them! Beiter yet, try and produce your own graphs for your private use There is something about writing it down or making a sketch that hammers an idea into place. Quizzes There are no tests to pass or fail here. The quizzes are meant to get you thinking about what you have already learned. If a question stumps you, it’s a clue to go back over the chapter, or to email us a question for clarification Reflection Sections Jot down your thoughts here. A very helpful part of learning is to “brain dump” by rewriting what you have learned. Better yet, share what you have learned and what you are exploring with your friends! Also, interact with your past and what you have learned from ‘experience. Writing it down will give you added perspective. As a martial arts instructor, !'ve met many “masters” that boasted twenty years’ experience. What they actually had was one year's experience, worn into a rut and repeated twenty times! I've found that all fields of endeavor have “experts” like this. All that their twenty years’ experience has done for them is to make them unteachable. To be in the upper twenty, or better yet, the upper two percent of any field takes continual learning. Masters of any field do not neglect this important activity of reflection. Suggestions Once you've gotten everything you can out of this Blueprint, | challenge you to give back. That is, help us to give @ better product to you and to future subscribers. At the end of each section there is space for you to jot down your ideas and suggestions for improvement. Please share them with us by letter, phone or email. . 1 POWEROptions* one: Pant roe, Faience ingIntroduction The Blueprint Welcome to a whole new way of thinking, to trade the stock and options markets. My name is Kurt Frankenberg, and I'm a reformed gambler. That is, | used to bet on something other than a sure thing. Not anymore. There is a sure thing in the markets, contrary to common knowledge and popular belief. Betting on this sure thing is my secret. | make lots of money using this secret, and yes, | profit by sharing (read: selling) the secret. Before you set down this book and dismiss it as another hooky-pook, black magic theory, hear me out. My method has nothing to do with trying to predict the future or using inside information. It does not involve fantasy. It never applies any illegal, or immoral activity of any kind. What it does deal with are mathematical certainties, principles that cannot be altered. Read the chapters through. Then make up your own mind whether or not the following statement is true: | have discovered how to truly put the odds on the side of the individual investor. It uses a principle that has been in front of our eyes all along, but is rarely used or understood. Other systems advocate treating the stock market like a business. My system really does. After reading The Blueprint, you'll understand what | mean by that. After making and losing what seemed to me like a fortune many times over, | finally decided to step back and see what it was that made some people fail and others succeed, | found that there are certain skills that successful people have in common, even though their personality and approach to the market may be different. | also found that the approaches that emphasized longer terms of holding, trading with the long-term trend, and having money management rules did the best. One thing was lacking, however, and that was a true understanding of how to reduce one’s risk by managing time. It is this principle that all RadioActive Trades are founded upon. RPMs, or RadioActive Profit Machines, are built using components that are available to any investor with $2,500 or more to trade. In the case of working with real radioactive materials, one configuration can make a destructive device. Another arrangement of the same materials produces the cleanest burning, most efficient power source known to man. The Blueprint is your guide to arranging the financial components available in the stock and options markets into the proper manner for making reliable profits with minimal risk. Some of these trades make it impossible to lose any money at all. In 1999, | suffered a huge loss doing a trading strategy according to the guidelines set by a Wall Street guru. This man’s workshop cost over $3,000 to attend. As it tums out, the education | got cost me more than that! | had made a “covered call” trade that appeared to be profitable, but turned around quickly. This one trade almost totally cleaned me out. For you experienced traders out there, listen to what my stock guru had to say: The following is paraphrased from a workshop that costs thousands, though it cost me less to attend than | lost. “In order to get the full return on a covered call trade, the guidelines are the following: buy a stock that’s priced $5-$18, make sure it's very volatile, and buy it on margin. Then sell covered calls against it, slightly out-of-the-money.” Now, in case I've lost some of you newcomers to the market, just hang on. The Blueprint will walk you through all these terms and ideas. But for a seasoned trader that's familiar with these terms, I have Just described financial Russian roulette. That is, the worst thing that could happen to a trader with this approach would be that the strategy worked out! Covered calls, especially covered calls with the parameters that | just described, can be very risky. They have a good retum in rapidly rising markets, as long as nothing goes wrong. The problem with this a 2 POWEROptions® owes Hen Sep tn RadioActive TradingIntroduetion strategy working at first for a neophyte is that he (she) becomes so overconfident until eventually he bets the whole farm! When | tried this strategy, | was just following directions. The man that was teaching this strategy was taking flak from all the pundits and “traditional” approach investment types, so in my book he had to be okay. | figured if he was going against the grain, he must have been exposing some great secrets that only the privileged few knew about. At first it appeared as though my conclusions were right or By selling someone the option to buy my stock at $20 at some point in the future, | collected $3 for every share of that stock that | owned. Since the stock was trading at about $17.50 a share, and bought on margin, it looked as though | had made a killing, as they say. It seemed that every institutional investor that dabbled in pharmaceuticals was accumulating my company. Analysts were coming out with glowing reports of its past earings, future expectations, and the new and revolutionary products they were producing. Then my entire account was wiped out within 15 minutes of the market open. In case you are unfamiliar with this term, a “covered call’ is a situation in which the owner of a stock doesn’t immediately sell his stock, but instead sells the right for an interested party to buy the stock within the time frame specified in an “option contract’. This method adds both income and risk to the trade. The Blueprint will teach these and other terms in full detail for beginners, while giving a new perspective to seasoned traders. Before the market open, my company announced that the FDA pending more research had rejected their new cancer-fighting drug delivery system. All of the institutional investors seemed to want to bail out at one time. My stock opened at $9 and went down from there! The strategy of “selling covered calls” is very popular, and touted as one of the safest ways of pulling money out of the markets. The truth of the matter is that call selling (or "writing" as it's sometimes known) covered calls limits the upside potential of an investment while offering a small income in exchange for all the risk of a stock price slide. That slide happened and | got caught in it. My stock gapped down so much that | panicked and sold what | had for a paltry sum to pay off the margin loan. It later turned out that | sold very near the bottom. Even that same week, the stock began to come back just a little. To add insult to injury, it climbed back to the $17-$18 range in about seven months. The new drug delivery system eventually was approved and my company got a fat offer from one of the giants. LIPO was ultimately absorbed by a merger, but not before its stock climbed back to full strength. If | had the money, and had made the margin call, | would've still been in this stock at full value! Shattered, | withdrew the rest of my savings from the market, and vowed never to let this happen to me again Hindsight revealed the foolishness of almost ALL of my actions in this scenario. | had been margined to the gills, but if | really had set my mind to it, | probably could have borrowed enough money to cover the margin call. However, it was a wise choice to withdraw because there was no way | could have known that the stock would come back. Two things combined to totally clean me out: an incomplete strategy (no contingency plan) and FEAR. Greed for gain got me into this trade and fear of loss took me out of ita loser. ALIFE CHANGING EXPERIENCE A seemingly unrelated experience changed the way | look at trading forever. | bought a trampoline for my daughter's birthday. She's a talented gymnast, and | wanted to give her a gift that she'd appreciate. | made a big mistake while jumping on it myself. Now, I'm a PAPOWEROptions® oe FatonenectingIntroduction martial arts instructor with over twenty years of experience. This gives me strength in my legs but no sense in my head. After | did a front flip, my daughter said, "Daddy, do a BACKFLIP!" and | tried to without thinking first. | jumped real hard, looked back, tucked my knees into my chest, and then began to think about the consequences of failure. About hallway through | realized that this probably wasn't as easy as gymnasts make it look! | came undone. My feet landed a bit earlier than | expected and way out on the edge of the tramp. They collapsed under me because | wasn't expecting to land. | then proceeded to flop on my back and head on the ground. Daddy was done. Or so | thought! | don't like pain, but I didn't like the thought of giving up either. Then one day Jayde and | were in the mall. The Daisy Twist entertainment company was setting up a wonderful device: two huge steel columns rose over twenty feet on each side of a trampoline, and hanging from each column were strong, flexible cables. The cables attached to a body harness. They explained that | should step into the thing, strap it on, and jump on the tramp! The cables are pulled tight enough to suspend the user above the tramp in case of a fall. Additionally, a network of gimbals and straps makes it possible for the user to tum somersaults, but impossible to fall off. After | paid the owners $5 for a turn, | found that the only thing preventing me from doing back flips, and even double- and triple-back flips, was between my ears. | found that my body had the ability to jump and do a triple back flip, land, tuck, and immediately do a double front flip. Even if | blew it big on a move, | could not fall off. Why could | not do a simple back flip at home? FEAR. But the cable device kept me safe from harm, releasing the high performer within. With fear out of the picture, my timing clicked. Risks were less severe. My mind was free to concentrate on the nuances of motion, instead of being dominated by the fear of injury. As a martial arts instructor, | had seen first hand how just a littie conditioning could take a shy, unassuming person with limited confidence to a great level of strength and assertiveness. Learning how to properly take a hit, for example, could catapult a woman consumed by fear into a realm of self-respect normally reserved for fierce tigers. Some of my students had taken on challenges they never dreamed possible after learning how tough they really could be. | thought, "This is great. Now | wonder how | could do the same thing with trading?" After all, the market will “hit” the little guy time and time again. What could be done in advance to prepare for such a hit, such a fall, so that the consequences wouldn't be so fearsome? Over the next three years | experimented with several different approaches to the highly mental game of trading the stock market. | experimented with approaches as varied as Elliott Waves, Gann Angles, and Darvas Boxes, “magic” solutions all. | never found the safety net | was looking for until | looked again at the old dust and mothball-covered idea of "married puts” Married puts are the exact opposite approach of the covered call strategy. A put contract puts control in the hands of its holder. A put contract is a legal, binding agreement that guarantees the sell price of a given stock. No matter how low a stock dips, the holder of a put contract can sell his stock at or even above the price at which he bought it. There is a time limit on the use of this contract, which actually is a plus: No losing stock play will be permitted to go on longer than it should. A put contract actually forces discipline, the kind of discipline that it takes to be a winner in the market. After looking at the potential of the married put, | hit on the idea of using other options strategies for income. The result of my study is a system that I'll outline with all the detail you need as you read on. IPOWEROptions® ee Tainan eotingIntroduetion The system allows the potential upward growth that goes with owning an explosive, winning stock, At the same time, it limits a loss, even in the case of an overnight loss like the one | experienced in 1999. The beauty of the system is that if the bottom falls out of any investment, the most you can possibly lose is five percent. Even if the company comes out with news of "accounting discrepancies", you can't possibly lose more. But you can gain! It's a matter of math | call my method "The RadioActive Profit Machine” or RPM for short. “RadioActive” refers to the behavior of the time value of options contracts. When we compare the graph of a radioactive element's decay over time with the graph of the time value component of an option contract, they are virtually identical. This is not a ‘forecasting’, ‘predicting’, o any other prognostication tool. This behavior is an absolute, and both you and | can make money on this one sure thing. | recently invited a friend to coffee to tell him about The Blueprint. He's not really “into” the stock market, so it was a tough sell, But | wanted him to know | had @ way to seriously do well, would he like to check it out? As we sat down to coffee (this is a true story), I told him that | had a new system; it’s a sure thing. Now, Emil knows | got hurt bad playing the market in 1999. So he was naturally concerned when | told him about this “amazing new strategy.” | looked at Emil and said, “I'll bet you a dollar. Let's flip a coin, and in the air, | can tell you exactly what it'll do. This is how | make money with the system.” | waited until after his dollar was on the table. Then | flipped the coin, saying, ‘It's going to hit the floor.” | took the dollar off the table and put in my pocket. Leaving Emil with his mouth open, | went to the counter and bought him a mocha. Needless to say, this was a one-time deal for Emil. That is, | was never going to sucker him again by saying, ‘I know exactly what itll do” when the implication was that | absolutely knew heads or tails. | explained, though, that there are people in the options marketplace that are willing, month after month, to give you money in a bet just like this: They may be betting heads or tails, but you're just betting that the coin will fall. In my system, the forward movement of time guarantees your gain, almost independent of the stock chosen. gAPowEROptions* oe TaaionaeingIntroduction Reflections Let's pause for a moment and go over ideas from this chapter. Writing your thoughts here will help you interact more meaningfully with the material. Use extra paper if you need it. We'd be very pleased if you'd share your reflections with us as welll Send copies of this sheet with your suggestions for improvement in the supplied envelope to RadioActive Trading. Thank you! 1 Have you ever had a life-changing experience that made you decide to alter the way you trade? Perhaps it might have changed your perspective on other things, 00, ike your relationships or professional life. Did you learn from the experience? Has your new approach helped you? Are you new either to stock or options trading? Whether new or not, are you willing to diligently invest in your own learning by studying this and other materials? Are you familiar with, or have you done the stock and option strategy known as selling covered calls? How has it worked for you so far? What has been your biggest, one play gain? Your worst loss? Have you heard of the stock and option strategy known as the married put? If so, have you employed it? What were the results? Are you willing to invest your time to learn the RadioActive Profit Machine System, and to practice It for at least 90 days by paper trading? What else have you gained from this chapter? a 6 APOWEROptions* Poec Fae rot ne. RadioActiveTiadingIntroduction The Single Most Important Thing! A Mindset that Makes Money More important than any other one thing in your career as a trader is your decision to succeed. The word “decision” is made up of two parts: a. The root cis, which means, “to cut’. Think about these common words... incision, incisor, and scissors. b. The root prefix de, which means, “away from". Like: defect, derail, deter. To truly decide something is to cut away from previously held ideas. Think about it. Every decision you make Is based either on new information or a new way of looking at old information. Nothing else brings us to a point of decision. Once we do make a decision, it is @ cutting away...things will be different from now on. Even accepting or not accepting this point of view will be a decision for you, won't it? The reason that I'm focusing on this very simple, seemingly unrelated point is this: Great traders are made, not born. It is a matter of learning and wanting to understand, You made a decision to buy this course and invest your time, your effort, and your money. I'm here to tell you that there is no magic pill, no secret formula, and no holy grail. 'm going to be very honest and tell you that my system will not make you an excellent trader. Nothing will make you an excellent trader except for your decision to diligently invest in yourself. The mindset that makes money is the mindset that accepts responsibility. Nothing, repeat, nothing can guarantee tomorrow's prices. That which sets the legendary traders apart from the masses that lose money is this: They accept that the marketplace is nothing but chaos. The only order that trading has is the order that we bring to it. Discipline is a decision. Having a set of rules to trade by, and get this....following those rules is what the Twenty Percenters do. A Twenty Percenter is any person that rises to the level of the upper twenty percent of their particular profession. Shouldn't that be your goal? | hope it is, because the fate of 80 percent of all traders is losing money. This is fact: Both theoretical (see Pareto's Principle) economics and statistical history show that the market swallows whole those who do not know how to or decide not to arm themselves against loss. RadioActive Trading will help you to not lose money, because it's based on using the orderly and predictable phenomena of mathematics and the only legal medium to guarantee a future price: the option contract. What RadioActive Trading will not do is turn you into a financial genius. My job is to teach you how to awaken the high performer within. But it is you that awakens the giant that stirs the deep recesses of your potential into active, moneymaking motion! Ready to get started? I's just a decision away. Cut away from your past ideas and learn. The silliest thing that ever made me money... Was to adopt a habit of repeating to myself phrases of affirmation. You know, those silly things that are supposed to give you confidence! All the self-help books have this stuff in one fashion or another. Gee, if you just harness the power of positive thinking, your mate will adore you and your children will respect you. You'll golf in the low sixties. You'll lose fifty pounds in ten minutes without exercise, and feel great! Sigh... a 7 EROptions® ne ETE ta RadioActive Trading (APOWEROptionsIntroduction Well, the truth is that the things we say, both aloud and to ourselves, program automatic responses deep within. Every decision we make is based on what we believe. And what we believe is no more and no less than what we have heard and accepted as truth. Take everything away from a self-made millionaire and two years later, he'll have it all back or be well on the way. Why? Because he has more time in the day than you or I? Because he's necessarily smarter or better? No, we know better than that. We know that the self-made millionaire got that way because of his decisions, and that his decisions were based on what he believes. About himself, his ability, what is available and about his reasons for succeeding. The wealthy man is wealthy even without one physical thing to his name: he is wealthy because of what he believes. What he believes he believes because he wanted to accept something that was told him; he also made a decision to reject other things that he was told. can tell you all day long: You can be a successful trader! And it’s true. You can. But will you? Depends on what you believe. This is why | put this at the very beginning of this edition of The Blueprint. The Most Important Thing is that you decide to be a success. Then, act on that decision daily by repeating to yourself things that empower you. Things that you want to believe, things that you can believe, things that you should believe. Things like: “1 know what goes into a good trade.” “| make decisions quickly but not hastily.” “I know when I should get out.” “I don't feel like | have to trade every day” “invest in my own learning daily.” “4 easily recognize buy and sell signals.” Silly, silly, silly! | know. I know! But just do me this indulgence. Come up with three things that you know you do well already. Then come up with three skills you'd like to acquire or improve. Add to this your goal, which we'll look at making in the next section. Then repeat the whole list of seven things seven times, every day for a week. Goals: Measurable, Believable, Time Limit I should also mention WRITTEN. If a goal is not written, it's not @ goal at all, There's something about committing your goal to paper that makes it more real. More palpable. More acceptable. Believable, even. A measurable goal is like a command, an instruction you give to yourself. If you write, | want to make more money, well...Itll be hard to know when you've reached it. Chances are that if you aim at nothing, that's exactly what you hit. Chance will allow you some success but nothing that really lasts. Good fortune is neither guaranteed nor a credit to you. On the other hand, a specific measurable goal has some chutzpah to it. Write the exact dollar amount, the exact percent return, and the exact reward that you might purchase for yourself with the next well-executed trade. Be precise. Know what makes the “cut” between what you want and what you don't. Then write it down. at 8 APOWEROhptions’ ones Pa rape RadioActiveTradingIntroduction Your goal should be a reasonable, believable one for you. | can't give you a definite rule for this, because everyone's resources are different. For example, if you have $5,000 to trade and no experience, it may be a bit optimistic to write a goal of $100,000 income from trading this year. Here's a solid guideline: Your goal needs to be out of reach, but not out of sight. Your goal should be something that you have not yet attained, but could definitely see yourself doing with some focused effort. Now write it down and let's be about the business of attaining it, One last thing: there must be a definite time limit to your goal. Your subconscious mind responds well to simple but specific commands. Vague believing will yield vague results. Precise believing yields precise results. Commit your goal to paper, in a positive tone, using a format like this: My definite goal for the next six months is to earn one thousand dollars from trading in the stock and options markets. Today, December 1st, 2008, | have five thousand dollars to trade. | have developed the skills necessary to yield a twenty percent return on this amount within the next six months. This will put one thousand dollars in my pocket. | will write a check for one tenth of this amount, or one hundred dollars, to my church. | will put five hundred dollars back into the market with another positive goal. The remaining four hundred dollars will go into the Disneyland account for my kids’ and my vacation next June. Notice the deliberate and specific wording in the above affirmation. Is it measurable? Is it believable? Yes. It is specific, with a time limit and even includes my plans of what I'll do with the money once I get it out of the market. Repeating positive phrases every day to you with enthusiasm actually creates a greater desire to see them accomplished. This, then, is the silliest thing that ever made me money. | chose tooth-brushing time as the time | would say these affirmations, because it was easy to remember then. Here's my formula, but you should develop your own: “1 know what goes into a good trade.” “| make decisions quickly but not hastily.” “ know when | should get out.” “4 don''t feel like I have to trade every single day” “invest in my own learning daily.” “4 easily recognize buy and sell signals.” “My definite goal for the next six months is...” How long does this take? About five minutes. Probably less. Now, this is very important: Nothing that you repeat to yourself every day will make the market do what you want. Don't for a second believe that you can mutter some incantation and make the price of your stock shoot through the roof. These exercises are meant to help YOU develop the skills, confidence, and assurance to make quality decisions. The decisions that we make help us minimize losses and maximize opportunity. (APOWEROptions* Power et I es RadioActiveTradingIntroduction The Power of PT: Positive Tone, Present Tense, Paper Trading Affirmations can't actually affect prices. They certainly can't help you predict the future. What they can do is program you to become more effective in your decision-making. An affirmation should always be PT: Positive Tone and Present Tense. For example, “I don't hesitate or make stupid mistakes’ should be replaced with the same statement in the positive: “I consider carefully the wisdom of my choices, then move ahead without doubt’. Present tense means saying what you want, as though it were already yours. “I'm going to become more aware of opportunities” should be replaced with, “I can easily see when an opportunity is in front of me!” Paper Trading Paper Trading is the other PT | want to tell you about. One of the best ways to insure success is to rehearse it under simulated conditions. Most everyone understands this, from the U.S. Military to a teenage boy going over exactly how he's going to ask a girl out. “Paper trading’, as it’s called, is one way to test out our skills and our ideas in the marketplace before ever risking any real money. Later, we'll discuss what | call the Ten Commandments of Paper Trading. There are Ten Commandments, but they are all founded on just two precepts: Thou shalt train thy mind to see opportunity, and the all- important Thou shalt not kid thyself! Almost every trading course advocates paper trading to test and prove their theories. It's an interesting phenomenon that people rely so heavily on paper trading to become comfortable with the market, and then chuck the whole idea when they have real money on the line! That's what | did, and found that all my time trading on paper did not prepare me for some of the realities of trading real money. The Ten Commandments are meant to help you avoid the same difficulties that | had. Perhaps the most important lesson to learn now is that you must NEVER consider your paper trading training to be complete. There are ALWAYS more trades than money, so it's important to constantly train our minds to recognize the pattems that lead to victory — even when we don't have the money to participate. One of the dumb things | did was to gain confidence by trading on paper, then put real money in the market and treat the real trades differently. If | had kept six or seven paper trades on at the same time as my real ones, | would have: 1. Kept up my “feel” for broader market conditions 2. Maintained a healthy detachment 3. Gotten three or more times the experience in the same timeframe. The RadioActiveTrading newsletter, FUSION, and the patented tools at PowerOptions® are dedicated to helping you learn paper trading skills. If you are more comfortable continuing your education by example, | post my own real and paper trades on the RadioActiveTrading website (http:/Ammw.radioactivetrading.com) in real time. If you are a more self-directed individual, the patented SmartSearchXL@ and My Portfolio tools from PowerOptions (http://vww.poweropt.com), offer a complete way for you to find RadioActive trades that meet your risk/reward criteria, paper trade and track them on your own. There’s even some paper trading analysis tools that offer trade management ideas for the RadioActive Trading INCOME METHODS. ., Zz 10 APOWEROptions® Powe Fal op ne RadioActiveTradingIntroduction The Ten Commandments of Paper Trading 4, Thou shalt write it down in real time 2, Thou shalt consider the volume and the open interest 3. Thou shalt paper trade such an amount as thou truly havest 4, Thou shalt not cease to paper trade when thou havest real money in the market 5. Thou shalt paper trade at least 2X as many issues as thou havest in thy portfolio 6. Thou shalt treat bid and ask fairly 7. Thou shalt remember the expiration day, to keep it wholly 8. Thou shalt write thy reasons, not just amounts and times 9. Thou shalt learn from thy past successes as well as thy failures 10.Thou shalt properly use market, limit, and stop orders What is the greatest of these? All these laws are briefly summed up in one statement: Learn the patterns of success, and do not kid thyself. The reasons for the Ten Commandments: I's very easy to fool yourself into thinking you're a great trader while reinforcing mistakes. The Ten Commandments keep our paper trades honest. Let's look at a few of the reasons for them: Thou shalt write it down in real time. At the end of the trading day, it's easy to look at the chart and say, “Oh, | would have bought here, and sold there”. But the truth is that while we're in the heat of the moment, either greed or fear can cause us to hesitate or to be hasty. In order to treat our paper trading honestly, we must record the price at the moment we “pull the trigger’. For those of us with real jobs, | recommend that you record a limit or stop price before the trading day begins, then see if the stock or option traded through that price. For example, if you wanted to buy XYZ when it got down to $11.25, make sure that the ‘ask’ price went down lower than $11.25 with enough volume to support your trade price. Otherwise, don't record the purchase as having happened. Thou shalt consider the volume and the open interest. These have to do with the liquidity of the stock or option. When | was just beginning trading, | remember looking at an online trading contest. | signed up, got a virtual account of $100,000, and “bought” and “sold” in real time according to what the stocks were really doing. Some high performers were getting returns like 1,000% in five weeks! | decided that it might be worth looking over the shoulder of these phenomenal traders, to see what kind of strategy they were employing. | was disappointed. What the contest failed to take into consideration was that some of these issues traded very thinly, like 10,000 shares a day or less. What these legendary traders were gambling their virtual money on were penny stocks, issues less than $5. If a stock's price went from $1.10 to $1.15, these fellows would sink $50,000 of virtual money into the thing. Then as it continued to $1.25, they “sold” it all and banked a 10% return, sometimes three or four times a day on the same stock! Hmmm...we know it doesn't really work that way, don’t we? Any order to buy drives the price up. The market maker is only obligated to fill the first 100 shares at the “ask’ price- then he has the ability to change it. And change it he will, usually against your best aul (APOWEROptions° Poet nal Gat ne RadioActiveTradingIntroduction interests. It's unlikely that an order equaling five times the daily volume would get filled at the “ask” price! It's even less likely that a real “bid” order would be filled exiting the issue at such a windfall profit, since selling a stock drives the price down. When I record a paper trade, | make sure that the stock is trading at least 300,000 shares daily, so my order of 100-500 shares would not seriously impact the price. Also, | usually make it a point to see that the “open interest’ on my particular option contract is 100 or more ~ that is, at least 100 contracts controlling that stock have been opened. We'll learn all about options later. Thou shalt paper trade such an amount as thou truly havest. The one thing that paper trading is good for is training our minds to see and seize opportunity. For this reason, we need to make our trades as “real” as possible. Say you have $15,000 in your account. You can open ten different paper trades, and one real one, each using $15,000 or so as the invested capital. Your mind can deal with $15,000 in each trade because it knows that you really have that much. On the other hand, trading $150,000 virtual dollars in one issue will disengage your brain from the trade because it’s an amount that seems unreal to you. Thou shalt properly use market, limit, and stop orders. This means being honest about whether or not an order would be filled. It goes along with the “real-time” commandment and the “volume and open interest’ one. I'll give you an example of what misunderstanding orders can do to you, but first I'll make what may be seem like a shocking statement: There is no order at all in the market but a market order. A “limit” order is supposed to get you in or out at your price. But in order for a limit order to be filled, the market has to move to meet it. If the market doesn't move in the direction that you expect, you will not be filled. Most people use limit orders to be filled at an ideal price, and then find out that they missed the boat! A limit order is properly used in RadioActive Trading under very specific conditions. A “stop” order is supposed to stop and trigger a buy or sell order at a certain price. What it does, in fact, is cause you to get filled at the present market price, which may not be near the last price. Often, your order is filled in the most disadvantageous way. Now the example: As a fledgling system trader, | was looking for the foolproof way to catch a rising stock on its way up, and bail out in time to lock in a profit as it fell. | came across a system on the Intemet that claimed to have the answer: Stop orders! What you were supposed to do is look at 2 prospective stock and place a “stop” order at slightly more than the ask price. That way, you'd only be filled if the stock was indeed rising! Conversely, once you were filled, you would then place a “stop” order that would safely take you out of the stock if it began to fall. You'd keep moving the “stop” order's price up as it climbed, “locking in profits.” | found out that this approach worked beautifully on paper. Issues that didn't rise, didn’t get filled on the stop-buy order. Issues that did rise got filled, and | was often able to place a stop-sell order that rode them up to great profits, on paper. Then came the real world! | found out that my “stop” order slightly above the ask price was an invitation for the market maker to move the price up, take a sucker's money, then go back down. The stop sell order wasn't any help, either: If | happened to be in a stock that was going up, my “protective” stop-sell order acted as a magnet! Somehow, the price would fall to exactly the biggest loss | could tolerate, | would be out of the stock, and then it would climb again. | will tell you that there is one way to predict with accuracy the exact bottom or top of a market: Place a stop order. You'll find yourself on the wrong side of it.,.ouch. PAPOWEROptions* von se TatonaeetingIntroduetion QUIZ + What does the word, “decision” really mean? To" __ away * Aside from the tongue-in-cheek example with “stop” orders, is it possible to predict future price action with accuracy and certainty (circle one)? YES NO * The market is rampant The only order that it can have is the order that we * Proper goals are measurable, believable, have a , and are written down * Phrases of affirmation develop your . They cannot magically affect ! Reflections Let's pause for a moment and go over ideas from this chapter. Writing your thoughts here will help you interact more meaningfully with the material, Use extra paper if you need it. We'd be very pleased if you'd share your reflections with us as well! Send copies of this sheet with your suggestions for improvement in the supplied envelope to RadioActive Trading. Thank you! 1. Did you do the first exercise? If not, go back now and do it. Set some specific, measurable, believable goals. Give yourself a time limit and write them down. Write affirmations to go with the goals and a commitment to go over them seven times, at least once per day. Sign your commitment to yourself and get started today. 2. Think of some of the great accomplishments you've had. Include the whole span of your life, including great victories you had as a child, Did you knowingly, or even subconsciously, prepare yourself in advance to accept success? What did that look like? Did you repeat commands and encouragement to yourself in any way? Did you draw pictures of yourself and your goal, symbolizing it as already accomplished? 3. Looking back, how big of a role do you think mental rehearsal played in preparing you for success? Do you think it's worth doing it on purpose? 4, Read again and think about each of the Ten Commandments of paper trading. Have you violated any of them? What do you think the consequences of overconfidence or under preparation might be in any competitive arena? 5. What else, if anything, have you gained from this chapter? . 13 APOWEROptions® ones inal roy, FadonaheotingIntroduction Who Really Makes Money? The Real Skills Since our topic of interest is how to profit from the stock and options markets, it would seem to make sense to examine the lives and practices of those that have already done it As | researched the lives of great stock ‘wizards’, | found that they were often poles apart both in personality and in their methods, Nicolas Darvas, for example, was an entertainer, As a world-famous dancer, his schedule demanded late nights and quite a bit of travel, Darvas never actually traded during trading hours! Keeping his stock market activity under strict secrecy, he employed as many as six brokers at a time. His orders were sent, in code, by telegram, from all over the globe. The most famous characteristic of Darvas’ method of trading, which he revealed in a book entitled, How | made $2,000,000 in the Stock Market, was the trailing stop-loss order. A stop-loss is an order to sell a stock if it falls to or below a certain price. Darvas would pick a stock that was making new advances according to a “box” charting system that he developed. He would trade a stock based on its recent movement within an imaginary "box", and stay in the stock so long as its price continued in a range that was defined by the box. Darvas’ brokers were given the order to sell @ stock if it violated the price low that he set. As the stock continued to perform and rise, he would reset the stop-loss price at a higher level. If the stock failed and its price hit the stop-loss, his stock would be sold while he was sleeping. There would be telegrams for Darvas in the lobby of whatever hotel he happened to be staying, and he would then scan the news for other companies that fit his criteria Darvas’ approach to the market was to ride a stock that was already moving, but to cut it quickly if it took a big enough dip. His trailing stop-loss order approach is used by many in an attempt to ‘ratchet’ gains. That is, as long as the price continues moving up, a successful user of the trailing stop-loss will bring up the price at which his broker should stop and sell. Theoretically, the stop-loss order will keep a trader out of trouble, but there are ways it can backfire. We'll explore them later. Let's look at another living legend: William O'Neill, the founder of Investor's Business Daily, a newspaper dedicated to helping investors time and evaluate their stock picks. The managers of over 500 financial institutions read IBD, and the average net worth of its subscribers is $1.4 million. | highly recommend Mr. O'Neill's book, How to Make Money in Stocks. O'Neill stunned many in the investing world as he multiplied his account by about twenty times in as many months. He based his stock picks on a study of the biggest winners in the market going back to 1953. Plowing through enormous amounts of historical data, he looked for common characteristics shared by the big winners before they made their gains. This fundamental analysis was only part of the equation, however. As a young broker in the ‘60's, O'Neill observed that one of the best performing mutual funds made their purchases after a stock made a new high. This goes against the “sage” advice of buy low, sell high! O'Neill saw the logic in this: for a stock to make astronomical highs, it first has to make new highs. If a given stock has never traded above $20, but it has the strong fundamental characteristics common to the big winners, O'Neill advises to go against buy low, sell high. A stock that may eventually trade at $100 a share first has to. " aw (APOWEROptions* one: Fatal rope RadioActiveTradingIntroduetion go to $21, then $22, and so on. Therefore the safest time, he contends, to buy a new stock is after it makes a new high while having strong fundamentals. O'Neill's approach also deals with interpreting specific chart patterns for confirmation and timing, but his cardinal rule is most perhaps the greatest key to his and countless of his followers’ success. The rule is to always, always sell a stock if its price falls eight percent below the price at which it was purchased. This rule has more to do with money management than with anything else and is the point, which he emphasizes most clearly. This simple rule, if followed, keeps losses from becoming unbearable. A corollary to O'Neill's cardinal rule is to never average down in price. Again, the conventional wisdom is that if a stock is a good buy at $50, it's even better after it goes to $46! If the investor buys more, then the average price is only $48. The thinking here is that when the stock comes back, then the profit will be that much larger. The problem with this thinking, O'Neill observed, is that often a stock's price does not come back and the novice ends up throwing good money after bad. William O'Neill and other successful bull investors profit by averaging up. That is, they buy first, and upon finding that they were initially correct, they buy more of the same stock. As a stock moves from $50 to $52, then they are found to effectively have twice as much at an average price of $51 if they bought the same amount of shares at both prices. Mr. O'Neill was not the first, however, to hit on the idea of adding to an already winning position. Jesse Livermore, man about town, catnip to women, was blamed by many for the 1929 stock market crash. Because he sold short at the very top of an out-of contro! bull market, he profited over $100 million in that day's panic selling (back in 1929, you know, $100 million was a lot of money). Mr. Livermore was blamed for the same reason that short-sellers are blamed today for driving prices down: ignorance. We'll explore this idea later as well. The fact is that selling short actually provides support to prices, but this didn't stop the death threats to Livermore and his family. Livermore said that there is no bull side to the market, neither a bear side; there is only the right side, He always did his best to be on the “right” side of the market. In contrast to Darvas, whose orders were carried out while he slept, Livermore stayed glued to the market during trading hours. He had a staff of men whose only job was to continually post current prices on an enormous chalkboard in his palatial New York office. Absolute silence was demanded during market hours, and he was never as far as a stone's throw away from a stock ticker. Like O'Neill, who advocates averaging up when a stock's price is rising, Livermore would take a position in the market and add to it as long as he was right. That is, while prices were rising, he kept buying more and more. If he had sold short and prices fell, he would sell and sell some more. He looked at a stock's movement in the direction that he originally predicted as a confirmation that he had been correct. He would then add to the position whether it was long or short. As soon as he smelied a genuine reversal, he'd be back out of the trade again, looking for new opportunities. 15 APOWEROptions* one: Pal oes. FaintingIntroduction Livermore was referred to as a “great bear’, one that profited by somehow driving the market down. He scoffed at the idea that one man could alone influence an entire market to do his bidding. The fact is that he did make money on both sides of the market, and knew that he could make it twice as fast when a stock was headed down. Livermore therefore determined to be equally comfortable as either a “bear” or a “bull”, as long as he was right. Here's another man that insists on being right about a stock's worth: Warren Buffet, the king of “Value Investing” has traded places many times with Bill Gates as the world’s richest man. Mr. Buffet is actually a distant cousin to the rock musician Jimmy Buffet of "Margaritaville fame. Buffet’s interest in “picking up money” began when as a boy at the horse races; he would search under the stands for the carelessly discarded tickets of winning bets. Value Investing, as it's called, is based on the premise that a stock's real value may be known by looking at its fundamentals: earings, retum on equity, et cetera. Using a proprietary system of financial analysis, Buffet will determine what price he believes a stock should be trading for compared against what its real price is. If the parameters are right and he feels that a stock is undervalued, he'll buy it. This method of investing, though it may sound wise, is very difficult for the individual investor to do effectively. There are armies of analysts working for the institutions that drive the market's prices. These institutions have already effectively determined the value of companies they trade and it is reflected in their pricing long before the rest of the investing world knows about it. Buffet is himself such an institution, having billions of dollars invested in the market, His ‘value investing” approach works best for him and the people that invest with him. The copycats don’t do nearly as well. One thing that can be learned from Buffet's approach is that he makes a good income from mixed positions; that is, he can be both long and short in the same market. Selling covered calls is one way that he accomplishes this. A covered call is the situation of being long (owning) a particular stock, while short (selling) the right to someone else to buy that stock at some point in the future at an agreed upon price. The buyer of these rights effectively “rents” the stock for a period of time, with the hope that its price will gain by more than he spent for the option, He could then exercise his option and buy the stock at a discounted price. Buffet, an expert in stock pricing, has nothing to lose by offering a stock he owns for sale in this way. If the stock rises in value, the worst thing that could happen to him is that the stock will be bought from him at a price he's already happy with! An even better situation for Buffet (or any seller of covered calls) is that the stock stays the same or goes down a little, so he can rent it out again and again. Warren Buffet is a widely respected market pundit, and he has almost a cult following. One of his famous saying is, “If you've been sitting at a game of poker more than fifteen minutes and don’t know who the patsy is... YOU'RE the patsy!” Buffet has long believed in picking up money, or taking money that no one seems particularly concerned about holding. His covered call strategy is one such method of accepting “free” money from those willing to pay it. Selling options is a part of RadioActive Trading, and we'll be exploring the ideas surrounding it and other option plays later. 16 APOWEROptions® Powe Fauna re FadonatetotingIntroduction For now, let's recap what we've learned from some of the experts: There are many different, successful approaches to trading stocks and options. There are perhaps as many different ways to be successful in trading, as there are successful traders. Nicolas Darvas, for example, preferred not to be in touch with the markets while they were moving, but rather to make his plays in the quiet of his hotel room and have others execute them. Jesse Livermore, in contrast, was “working” during 8 - 2 weekdays and 12-4 Saturdays (these were the market hours in his time). Jesse Livermore would just as easily sell short as go long, while William O'Neill prefers only to buy growth companies. O'Neill would rather trade “the New America’ - companies less than eight years old with lots of growth potential. On the other hand, men like Warren Buffet will go with the tried and true old-guard companies like Hewlett Packard, Proctor and Gamble, IBM and the like comprise the main traffic of value investors, especially when they are perceived as under priced. Even with such a range and diversity of approaches, there are a few things that all these great traders have in common, Besides a burning desire to understand and utilize the forces that move a market, every one of these men: Avoided “falling in love" with a particular stock Emphasized longer term of holding Traded with the trend Had exit strategies and used them responsibly Cut losses early, while letting the winners run Decided to be on ‘the right side” of the market vYVvVY Each of these great traders brought something unique to the market. The stock market, as we'll see, is ruled by absolute chaos. There is really no way to predict where the moment- to-moment, largely invisible forces of supply and demand will take a stock, option, or commodity's price. These men knew that the only reliable order that there can be in the marketplace is the order that we bring to it. The discipline to follow one’s own rules is the hallmark of every successful trader. Next, we'll learn about some of the strategies that bring this order that we're talking about into manifestation 17 PoweROptions’ sn a donde tingIntroduction Reflections Let's pause for a moment and go over ideas from this chapter. Writing your thoughts here will help you interact more meaningfully with the material. Use extra paper if you need it. We'd be very pleased if you'd share your reflections with us as well! Send copies of this sheet with your suggestions for improvement in the supplied envelope to RadioActive Trading. Thank you! 1 2. What seem to be some of the shared characteristics of successful traders? Of the featured traders, with whom do you identify the most? Are there others that you admire and wish that we had included? Why? Have you applied some form of value investing? That is, have you looked for stocks, which the market doesn't value as much as you think they will? Have you used trend following techniques? That is, have you bought or sold a stock in response to what the masses appear to be doing? Have you day-traded? If so, what has your experience been? What do you think of selling short? Have stop-loss orders helped you, like they did Nicolas Darvas? Have you also been disappointed when using them? Jot down your experiences. Has this chapter caused you to reconsider some of the things you've been doing up to now? If so, in what areas might you change or try something new? What else, if anything, have you gained from this chapter? ZB @POWEROptions* Powe tt or a RadioActiveTradingIntroduction What Really Makes Money? The Strategies of Pareto’s Principle Vilfrido Pareto was an economist living in the late nineteenth and early twentieth centuries. He studied the socioeconomic structure of many countries, including his own native Italy. Pareto concluded from his observations that approximately 60% of the wealth of any country is concentrated in 20% of its citizens. This is what he called a “predictable outcome”. Though Pareto took no small amount of criticism for his ideas, they are still in use today. The “80/20” rule is familiar to anyone that has attended a modern management workshop. The principle is used for more than just to project the distribution of wealth. Management consultants have begun to apply the 80/20 rule to evaluating performance on the job or to solving problems in production. Eighty percent of results, they say, come from twenty percent of the people. Eighty percent of problems in production come from twenty percent of the possible causes. Twenty percent of the people at a potluck are responsible for consuming eighty percent of the food. ..how else do you explain taking home an empty dish? Seriously, the Pareto Principle is so widely accepted that there are even options in data graphing programs to display data as a “Pareto”. This format option shows a graph of X versus Y with a curve that visually displays the Pareto distribution. I've seen a police department's Pareto Chart that graphed the number and kinds of offenses resulting in traffic tickets! By concentrating more attention on the bigger problems revealed by the Pareto [graph], any system can become more effective. At least, that's what the management guru's claim. Mr. Pareto himself claimed no insight as to why this phenomenon worked, only that it did and that it was a predictable outcome. There are, of course, exceptions in the short term and in isolation. But the larger an economic system is, and the longer its duration, the 80/20 rule can be expected to be observed. Research into nearly any arena of human interaction will show Pareto’s principle at work. The stock market is no exception; it's no secret that statistically, eighty percent of all ‘players” lose money. Remember Jesse Livermore's famous assertion? “There is no bull side to a market,” he sald, “nor is there a bear side. There is only the right side.” When someone loses money on a trade, there is a player on the other side of that trade that gets some of it. The rest is collected by the market makers and by the brokers. Which side of the market do you want to be on? The eighty percent from whom the assets flow, or the twenty percent to whom they come? |'ll admit that | struggled with this precept for a long time; like many (most of which are eighty percenters), | viewed the stock market as a place where money just was, and if you were smart, you could just go pick it up. | resisted the idea that my winning meant someone else losing Then | remembered that | am a capitalist. | believe that many of the wealthy of our nation deserve to be wealthy. It's the wealthy that are the captains of industry. The wealthy make jobs and opportunities. They finance research into medicine and science. They build parks and libraries and colleges. They give to churches and charities. Even a charity understands that eighty percent of its support will come from twenty percent of those sympathetic with its goals. Without those that are wise and powerful in finance, the less wise and powerful would have even less material prosperity available to them. After | discovered the logic and math of RadioActive Trading, | had a serious moral dilemma: Should | do if? Should | employ a method that virtually guarantees that I'll win? In the short term, I'll win big or I'll win little. But over the long haul, the seemingly unfair advantage that RadioActive Trading affords will put me in the twenty percent bracket for keeps. | was powerOptions® pen RationingIntroduction sincerely distressed over the whole idea of sure wins and that's why | was in “Pareto denial” for what seemed to be ages. | believe that the stock market is necessary for the US and world economy's to run, properly. Without Wall Street, there would be no level playing ground for finance. Only the already wealthy (and we know that wisdom and “old money’ don't always go together) could finance and, therefore, control the companies that provide most of the opportunities of this nation. Certainly it functions as a most efficient Pareto sorting machine, changing money from the hands of the foolish to the wise at lightning speed every day. But at the same time Wall Street finances the companies that form the economic backbone of the country. | said before that the stock market is a somewhat level playing field for both the litle fellow and for the great behemoths of finance. While the big players certainly have the advantages of extensive research and even “insider information”, most everything they do is a matter of public record. A gorilla can't jump in a bathtub without making a splash, and neither can an institution purchase or sell a stock without making far-reaching ripples in its price. While the institutions enjoy wielding vast sums of money, they must disguise their moves by accumulating or distributing a stock in small chunks so as not to cause a widespread panic. Or a feeding frenzy! The individual investor, on the other hand, can make his moves with anonymity and usually quite nimbly. When | execute a trade it's a matter of a few keystrokes from my high-speed Internet connected computer, and over with In about ten seconds. The would-be wise investor must first accept that there is an 80/20 rule at work. He must then study the market movers to understand market moves. I'll shadow the big movers instead of coming up with my own ideas. For example, | don’t even consider a stock unless there's a healthy degree of institutional sponsorship. The temptation of the fool is to think that he knows something no one else does. He'll buy shares of a particular issue and think that then the guys with all the research and the big finances will find out about XYZ corp., come in and inflate the price. What he really should be concerned about is this: “what do all the big boys know about XYZ that | don't?” The Forces that Move Markets Market moving forces are for the most part unseen. The “tip of the iceberg”, as it were, is shown moment by moment during market hours. The bid (what the market maker says he is willing to spend, right now, to take a stock or option) and the ask (what the market maker will sell the same stock or option to you for) represent only the bargain of the moment. The “spread” or difference between the bid and the ask, are the market maker's bread and butter. He makes money by one activity alone: passing stocks from the sellers to the buyers and shaving the spread off the top. Though this seems very straightforward, the vast forces that underlie a stock or option price's movement lay hidden It's generally assumed that a price goes up in response to buying pressure from the market, and likewise falls in response to selling pressure. While in the long view this is correct, it has very little to do with the moment-to-moment pricing of a stock. This is a big assertion, but I'll back it up. 2 a ZAPOWEROptions® so OE TadioaaneaingIntroduction There are two lines at the market-maker's window, so to speak. One is for buyers and one is for sellers. The front of each line is where only one gets served at a time. There are two things that ‘weight’ the priority of bringing someone to the front of the line: The volume of his order and the price at which he's willing to buy or sell. A particularly good price will bring him to the front of the line, and a large order will put him in front of the others willing to sell or buy at that same price. While we say that the price is determined by supply and demand, the only evidence that we can clearly see of that supply and demand are the fellows at the front of the line. Moment by moment, the numbers of shares or contracts that trade hands, and the prices at which they are traded, are posted. No one knows who else is in line, they can only speculate. No one, that is, except the market maker. We'll look at his role in this grand drama last. There is more to consider that determines a stock's price than just the two at the teller's window. Beside buyers and sellers at the front, there are also those that are in line, and those that refuse (for now) to get in line. These are the holders and those that for one reason or another are standing aside. The holders won't sell if the price goes up or down, they're vested. Perhaps these are loyal stockholders that have owned the stock for generations. Perhaps they are pension funds or index funds whose mandate requires them to own x amount of XYZ. Perhaps they are the company insiders that know about an upcoming breakthrough. At any rate, these holders buoy the price of XYZ. They are the unseen, real force behind the support of XYZ's price. Beside sellers at the front of the line driving down the price, there is also the unseen standers-aside. These people have the money to invest in XYZ, but for one reason or another, they don't see that it's an attractive company to own. At least they don't right now. For these people to jump into the market, there has to be a compelling reason, Because that reason has not yet come along, neither has their money. They are part of the unseen resistance to a stock's advance. Of the people standing in line, some will sell, but only at their price. They don’t get to be in the front of the line, and therefore we also can't see them. Others would like to buy, but only at their price. These sellers and buyers represented are the limit orders. Alongside the same people in line, there are those that already have a position. Perhaps they have bought and want to protect their interests in case of a sudden drop. Or they are short in the market and want to cover their shorts in case of a sudden spike in price. In either case, these are those with stop orders. The order to the broker is to stop at a certain price and bail out there, Theoretically, a stop order should limit losses. What it often does instead is lock losses in at the most unfavorable price. I have found one reliable way to predict the high or the low of a stock on a particular day: set a stop order. A number of times I've had @ stop order designed to protect me from a bigger loss. Somehow, the market maker came down, bought the stock from me at the lowest price of the day, and then up it went again. And | was feeling a little like Warren Buffet might describe me: the patsy at the poker game. Have you ever spent soul-searching hours in research, charting, and bought a stock that immediately went down? Or have you ever sold, just to find that afterwards the price —_7 221 APOWEROptions® Pome il rou, RadioActiveTradingIntroduction spiked? Frustrating, isn't it? Often the most solid indicators only serve to get us in or out at the exact wrong time. This is because the other players in the game are every bit as sophisticated as we are and make no apologies for wanting to be winners. There are multiple players with multiple agendas, and there is no way to be absolutely certain what any of them will do. Let's look again at the role of the market maker. He exists for the simple purpose of keeping an issue liquid. There are two lines at his window, so to speak: buyers and sellers, Buyers he serves at his price, and sellers he takes an also at his price. His way of really making the big money is traffic; he'd love to buy stock at $19 and sell at $20 all day long. And he'll do so until either the sellers or the buyer dry up. At that point, he begins to adjust his prices either to attract more buyers or more seliers, or both, into the marketplace, No one gets to see all the orders until affer they are executed. Even level II quotes give only a small representation of the total picture of the interest in any particular issue. So no one gets to plan for the movements of the day. No one, that is, except for the market maker. The Strategies: How to be in the Twenty Percent that Profits Once we've accepted the fact that the market is one grand Pareto scenario, and have gotten over the moral turpitude that stops us from going full bore for the win, next comes the how-to. How to stay in the upper twenty percent. Because the Pareto Principle is a measure of socio-economic, human behavior, we have to assume that it's human behavior that produces its effects. In other words, the distribution of wealth is a function of the decisions and behavior of people. The flow of money from point A to point B is influenced by chance to some degree, but the fact that it happens so predictably shows that human decisions are the key to how it occurs. The key to playing with the Twenty Percenters is to know what they do. Here are some of the keys: Playing With the Odds A6'5", 260 pound, martial artist friend of mine put himself through college as a bouncer in a bar. His degrees are in Computer Science and Mathematics. One of his favorite sayings is flavored not only with statistics but with first-hand observation of human behavior: “Might does not always make right, but it is the way to bet!” Not fair, but it’s true. We'd all like to see the underdog win, but when it comes to real dollars, decide to bet on the odds-on favorite if there is one. Although the payoff for a lower-risk wager is smaller than the long shot, it is almost always the way to go. One very good decision that Twenty Percenters make is to stay as conservative as possible, as often as possible. A very good investment at one time was America Online. Why? Because everyone else with their little sister thought so too! Now AOL would be more of a long shot. We want to place our bets with the majority, and then to get out faster than they do and profit. When you bet on the outcome of a beauty contest, don't favor the one you think is prettiest. Bet on the one that the judges think is the prettiest. The marketplace is the purest form of democracy: Every day, an election is held in the marketplace, and the votes are cast with real dollars. Instead of putting money where we think it should go, the safe thing is decide to put more where it's already flowing. Momentum Years ago, master traders William Eckhardt and Richard Dennis had a friendly wager. They wanted to settle once and for all whether trading could be taught as a learned skill, or —2 » APOWEROptions* ona Fal ope RadioActiveTradingIntroduction whether it was simply an inbom trait. Sounds a lot like Eddie Murphy and Dan Akroyd’s Trading Places, doesn't it? The outcome of the wager was that not only was trading a learnable and teachable skill, but that it was more easily taught than anyone expected. Their fourteen students all came from different walks of life and education levels but they had stellar success in both rising and falling markets, Many of them ended up managing multi-million dollar accounts as professional traders. They nicknamed their test group the “Turtles” after a turtle farm in Singapore. The Turtle Trading system is shrouded in secrecy; each member of the first group had a strict embargo against sharing the Turtle Method for nine years. Now it's possible to buy videotapes, seminars, and from all manner of people that claim to have been in the original group. Not all of this information includes the original Turtle Method. For those interested, | recommend Turtletrader.com for the authentic system. Though | don't know enough about the Turtle Trading system to discuss all its strengths and limitations, | will say that the premise is very simple. Turlle traders are trend followers; that is, they wait for an established move to manifest, then jump in and begin riding the crest of a stock or commodity’s upward or downward movement. Turtle Trading is the opposite of day trading. Practitioners of the Turtle system and other trend following methods take positions and leave them for days without action. Most of the decisions are made the night before the trading day, based on price movements over the last few days. It’s not unusual for a Turtle Trader to buy into a stock, wait a few days, and then buy more if it's showing a profit. This pyramiding, or “averaging up," is contrary to most amateur investor's thinking. Turtle Traders won't even consider buying unless they see a sustained upward pattem and the stock reaches a new 20-day high. After this, if the position makes a profit, they might continue to add to the position until it no longer meets the criteria for holding, then they sell (or buy to close if it's a short trade) the whole deal. Turtle Traders do very well with this approach. Trend following is indeed part of the answer to making money in the market. The most money is gained in any market by capturing part of the big moves. Day traders try to shave little slivers of profit off the daily volatility. Of the great traders of history, none were as good at “reading the tape” as Jesse Livermore. He achieved great fame even as a young man, and was banned from every bucket house he had “plunged.” Livermore had an uncanny ability to trade intraday on a ridiculous amount of margin and get in and out of markets quickly with a profit. But even J.L., as he liked to be called, knew that the big moves were in the longer held positions of trend following and he wisely changed his style to include them. | recently made a purchase of software that purported to be able to “wizely" predict the direction of prices. | returned it. All this $3,995 disk really did was look at short, medium, and long-term trends and project the possible, continued direction. Now, trend following is far superior to any crystal-gazing idea out there, but it doesn't take a genius to see if a stock is trending up or down. It certainly doesn’t take four thousand dollars! — 3B APOWEROptions* ones Fal ope. RadioActiveTradingIntroduction Leverage Anyone that has spent time browsing the aisles of the bookstore, looking at the get-rich real estate literature is familiar with the acronym, OPM. Other People’s Money, these books say, is the key to wealth. Take investing in single-family residences, for example. As an investor, you may put up $10,000 as a down payment, and borrow $90,000 of the bank's money to buy a house. After securing tenants that pretty much pay the mortgage for you with their rent payments, you wait three years. The house appreciates by 20% in value and you sell it for $120,000. Let's look at the end result in this scenario. You put in only $10,000, The home increased in value by 20%. When you sell the home, you receive $120,000 from the sale. After paying off the $90,000 mortgage, you get back the $10,000 that you put in, plus another $20,000! You have tripled your money rather than gaining a mere 20% when the asset only grew by 20%, the whole $20,000 profit was channeled back to you. This is what Mr. Pareto was looking for...the why and how of the distribution of wealth Now for a shocker. The real estate books will tell you that in this example, you have applied financial leverage by using Other People's Money. While this is true, its important to distinguish whose money the Other People's Money was. Most every real estate book says that it's the bank's money that provides the leverage. While the bank is an important, necessary player in this arrangement, their money is never, ever yours. Surprised? Think about it. The bank has secured not only their money with a title to the property, but also your $10,000. Stop making mortgage payments and you'll quickly see who really owns both the house and your down payment. As for the tenants’ payments, well, that is OPM to be sure, but most or all of their rent goes to the mortgage, doesn't it? Who is really applying leverage, you or the bank? While you do profit in this arrangement, itis of utmost importance to keep in perspective whose OPM you really use for leverage. The only Other People's Money that you get to keep in this arrangement is the end consumer's. The person that actually buys the property is the one that puts the money in your pocket to stay. Without the buyer's money, this whole arrangement would go kaput. ‘And here is the most important consideration: what about the property's value? It's never guaranteed that the prices of homes will go up. What does make it more likely is the flow of Other People moving into the same neighborhood with their Money. This is the Other People’s Money that really gives you leverage. Grand Junction, Colorado, became a ghost town less than two decades ago when the oil shale refinery closed down. People abandoned their homes because it was cheaper to allow foreclosure than to try and fight it. Renters left even quicker, leaving their landlords holding the bag. Real estate was not a safe investment in this town. Of course, now Grand Junction is one of the hottest places in the nation to buy real estate because it's become one big retirement community. Why is a single-family home worth over ten times what it was worth ten years ago? Everyone wants to live there now. What are the most important three words in real estate? Location, location, location. The reason location is important is Other People's Money. For any real estate investing . 24 APOWEROptions* ne donee tingIntroduction opportunity to work, it has to be applied in a community that's in demand. The Other People's Money that is applied for your gain is the money that’s going into a given community, not what the bank offers you. As a Black Belt in Jiu-jitsu, | never mind fighting an individual that's larger because | understand and can apply principles of leverage. What | would mind is fighting a larger opponent that also understands the same principles! Leverage, while useful as a tool, can be a dual-edged sword. It can be used just as effectively against you if you're not instructed and careful. In the stock market, there are also tools for leverage. The most dangerous tool is margin. If you don't believe me now, keep trading your whole account on margin and sooner or later you'll receive a much more costly education than this Blueprint. Margin money can and should be used as a tool, but should never be regarded as Other People’s Money. Any loan that your broker makes you is a liability and should be treated as such. | personally use margin, but i's always with a combination of arrangements that minimizes my risk to nearly zero. Twenty Percenters remember which Other People’s Money they really get to keep: the other investors that are interested in buying their stocks end options. Hedging Another thing the Twenty Percenters (page 23) do is to hedge their bets. That is, rather than placing fifty-fifly odds bets, Twenty Percenters skew the odds in their favor. This is done in one or a combination of three ways. We can hedge any kind of bet by: 1. Increasing the odds of being correct - for example, 70/30 instead of 50/50 2. Increasing the payoff in case of a win 3. Decreasing the payout in case of a loss Most of the energy expended by Eighty Percenters is in the first category. They get the most up-to-date news, read all the analysts’ reports and projections, watch the Bloomberg Report and CNN, read charts and use the newestfangled software available. In the end, they have to make a decision and their choices are rarely better than if they'd just tossed a coin Hedging a bet by trying to spot a sure win is difficult. Well-funded professionals with eyes better than yours and mine dor't reliably spot them either. Once an opportunity is obvious, the secret is out and a stock's pricing reflects that public knowledge. Believe me, there is, no way to accurately predict a stock’s price tomorrow. What keeps most Eighty Percenters in the Eighty Percent category is the misguided notion that they must somehow just get better at predicting prices. Now, | do look at charts to see how a stock has performed in the past, as well as to determine whether it appears to be under accumulation or distribution. Remember, the elephantine institutions can disguise their moves to some degree, but not entirely. To this degree only will | forecast; paying attention to analysts is, sheer folly, as most of them don't even own the stocks they tout. | mainly forecast this way not to guarantee buying a stock that will rise, but rather to pass on stocks that appear to be vulnerable or under distribution. When you think about it, true hedging by insuring you are right would involve illegal, insider trading or stock manipulation. This is an activity that | condemn; in many cases it involves preying on the uninformed rather than accepting the freely spent money of other buyers in a free market. Deliberately manipulating prices with the intent to prey on the ignorance of others is a crime. A crime punishable by law, | might add. Itis also almost impossible for most of us to obtain inside information, —~2. 35 APOWEROptions* ones Pal ro, RadioActiveTradingIntroduction As difficult as it is to honestly hedge bets by increasing one’s chance of being correct, it is easy to hedge losses and wins. We'll get into more detail as this work progresses, but the main thing hedging does is to skew the chances by skewing the possible outcomes. For example, if it were possible to make an arrangement in which we lose one dollar when we're wrong, but we gain two dollars when we're right. Well, we'd like to flip a coin on that all day, wouldn't we? It's not only possible (and legal) to hedge a stock or option - it’s commonplace. Most individual investors have been hearing about and only know of one hedge: the covered call. We'll be looking at this strategy later, as well as married puts, spread trades, and more. Right now I want you to become enamored with the idea of being in the top Twenty Percent. Individuals and institutional investors that know how to hedge belong there. Hedging is one important way to protect our account from losses. The following principle is perhaps the most important, and least understood. Money Management As strange as it may seem, it is possible to be right more than half the time in the stock market and still lose money. It's even possible to hedge and lose money. The culprit in these cases is not hard luck; it's bad decisions in the management of assets. Again, the assets of the Eighty Percenters eventually flow into the hands of the Twenty Percenters not because of chance, but because of the decisions that they and we make. The tragic flaw of a gambler is that he tries to overcome a loss by wagering larger and larger amounts until he is broke. This tendency of gamblers to lose everything by the decisions they make is called the Martingale Effect. Martingale is a mathematical term also commonly called the Gambler's Ruin. Look up Gambler's Ruin or Martingale on any website or in any book dedicated to math and probability and you'll ind the mathematical proof of why bankruptcy is inevitable for the poor manager of money. This is the math behind the Martingale: If a gambler loses twenty percent of his stake on ‘one wager, he must make a twenty-five percent gain just to break even. If he makes a twenty-five percent loss, he must gain 33% on his next wager to break even. If he bets and loses 50% of his stake, it would take a 100% gain on his next wager just to end up where he started! The fact is thal these kinds of gains are possible in the marketplace, and the gambler may have experienced them once, twice or more...so it seems reasonable to him ‘eventually to bet his whole stack. The gambler in search of the one big return is doomed from the start. Though winning a jackpot is in the realm of the possible, it is highly improbable. The insidious, gaping maw of the Martingale is responsible not only for the financing of the huge electric monuments of Las Vegas, it is also responsible for financing Walll Street. Many a trader comes into the marketplace with a fat wad of cash and hopes of scoring big, and yet statistically, very few ever make a living from their trading. Some do okay. Some are fantastically successful. Most lose. How can this be, if they all have access to the same software, the same workshops, the same crystal balls? Part of the answer is money management. Money Management Exercise The following exercise is a variation on an idea taken from The Trading Game by Ryan Jones (New York: John Wiley & Sons). Zz 6 (APOWEROptions* Powe anal rep, RadioActiveTradingIntroduction Think about the section on hedging investments, skewing the odds in our favor. Just having this hedge is not enough, it's also important to properly manage our money. Let's say that we did find a hedge that allowed us to win $2 for every winning dollar that we bet...would that hedge in itself guarantee success? Let's see: Sit down with a calculator, a quarter, a pen and a few blank sheets of paper. Toss your coin 25 times and record the results, heads or tails. You should have a long list of marks down the left side of your paper. Now, treat each “heads” as a win and each “tails” as a loss. Starting with an imaginary account of $100.00, “bet” 10% of your account on every flip and see what you come up with. Whatever you have left over after losses, and whatever you have beefing up your account after wins, take 10% of that number and “bet” it on the next flip. Round off the cents and be sure and record your results. Mine looked like this: 10% bet 25% bet 60% bet Start bet $10 $100 bet $25 $100 bet $60 $100 Bet Total Bet Total Bet Total 1. H win $10 $120 $25 $150 $60 $220 2 H win $12 $144 $38 $225 $132 $484 3. H win $14 $173 $56 $338 $290 $1,065 4. T lose $17 $156 $84 $253 $639 © $426 5. H win $16 $187 $63 $380 $256 $937 6. H win $19 $224 $95 $570 $562 $2,061 7. T lose $22 $202 $142 $427 $1,237 $825 8. T lose $20 $181 $107 $320 $495 $330 9 T lose $18 $163 $80 $240 $198 $132 10. iT lose $16 $147 $60 $180 $79 $53. Chances are that you've done well with 10%. After all, each bet is hedged in your favor. Now see what the same procedure will do with a bet size of 25%. Don't flip the coin again, just look at how well you would have done if you had bet more on each toss, as | did above. More is better, right? Well, not always. Try the same procedure again, this time betting 60% of your entire account on every toss. Just two wins in a row would more than double your account, right? Record your wins/osses honestly and see what the results are. Notice after only 10 tosses a pattem starts to emerge. After 10 tosses it is not at all clear that the higher bets will succeed in obtaining the largest returns, even with a 2 to 1 win to loss advantage. Also note the extreme volatility of the 60% bet account. Your results will of course differ randomly, but after enough tosses the pattem illustrated should emerge. We have created an application discussed in a latter tab called, “The Trade Simulator Too!", which will help automate this coin tossing process as it applies directly to trading. Optimum bet sizing is important to understand for both the blackjack player and the investor. Bets that are too conservative may not lose much money, but they don't gain a2 APOWEROptions® Ponerinae. RadioActiveTradingIntroduction enough to be worthwhile either. And as you experienced in the exercise, bets that are too large begin statistically to lose money. Even in a scenario that pays double for wins on every dollar wagered, the Martingale swallows accounts whole that aren't fiercely protected by a strong system for managing money. The bet sizes in Jones’ examples were 10%, 25%, 40%, and 51%, with 100 tosses of the coin. In the actual run of 100 tosses, the scenario that “bet’ 10% of the account on every toss did exactly as well as the one that “bet” 40%. Both the 10% and the 40% tries increased an imaginary $100 to $4,700, a respectable gain! On the other hand, the same coin tosses with a 51% bet lost over two-thirds of the account, even with two-to-one wins. Strangely enough, it was found that a 25% wager was optimum- it was not too small to make any progress and not to large to lose the farm. With the exact same coin tosses, an account that was rolled 100 times with a 25% bet came out with an increase in value from $100 to $36,100. This example is not real life, meaning that there’s no real investment that offers exactly a two-to-one return with exactly fifty-fifty percent chances. Nor should we conclude that putting 25% of one’s account at risk is ideal in every situation, The example still proves a point, however: all things being equal, the better money management rules will bring a better return. | read in a magazine article that a certain mutual fund company employed dozens of people to manage holdings of the fund. By hiring individual traders to focus on buying and selling two or three companies, the mutual fund had its holdings in as many as 83 companies. What | read about their internal policy was remarkable: These men and women were assigned a monthly amount that they were allowed to lose. If they lost that amount or more in a single month, they were demoted to ‘runners’, basically glorified gofers, and had to wait six months before applying to become traders again. If they lost their monthly allotment on any single trade, they were immediately fired for insubordination! This article started me thinking. Why would an employer assign a penalty for a circumstance totally out of the trader's control? The answer is simple: it is possible to manage one's losses. It just takes discipline to adhere to a decision. Summary — How to be in the Twenty Percent that Profits The story goes that a stellar football player was just having a bad day. He kept catching the ball and running into trouble — trouble that was wearing a helmet and a mouthpiece. After being tackled several times in one game, his coach pulls him aside and says, “Son— run where they ain't!” The key to being in the elite company of the Twenty Percenters has nothing to do with your intelligence, upbringing, or even capital. It has to do with making the kinds of decisions that other Twenty Percenters make. It has to do with “running where they ain't". We certainly haven't covered every skill or every principle here that belong to the players that finish in the winner's circle. What we have done up to this point is to put forth some of the most important factors that make or break a trader. Let's compare the traits of Twenty Percenters, the investors that consistently profit in a market bent on taking money, and the other Eighty Percent that finances the whole party: " ——— 8 APOWEROptions’ omer area re RadioActiveTradingIntroduction Pareto Principle Eighty Percenters aren't aware that there is an 80/20 rule, or if they are, they just assume they're in the category that'll win. Twenty Percenters make a decision to be on top. Playing with the Odds Eighty Percenters like to beat the odds; Twenty Percenters stay with the odds. Momentum Eighty Percenters like to wait for a low to buy or hold out for a high price to sell; Twenty Percenters buy issues that are rising and sell ones that are falling. They tend to cut losses very early but stay with the winners for an extended period. Leverage Eighty Percenters use leverage to buy every bit of stock they can afford and more. Twenty Percenters are aware when leverage can be used against them and borrow only small amounts for mobility in a stock. Hedging Eighty Percenters either don’t hedge their positions or concentrate all their energy trying to gain an advantage in timing or inside information. Twenty Percenters know how to create mixed positions to limit loss or turbocharge their gains. Money Management Eighty Percenters trade arbitrary amounts without considering the consequences of loss. Twenty Percenters look at risk/return and set an optimum amount for each trade. Conclusion The above principles are as sound as the law of gravity, and we court disaster when we fail to heed their wisdom. This Blueprint's purpose is to provide the individual investor with the ammunition to succeed by properly using them, Success in the market begins with the acknowledgement that the marketplace is rampant chaos. Panic selling and feeding frenzies abound, often in the same day and with the same issues! The only order present in this setting is the order that we bring to it. Some of the common, successful strategies include spotting good risks, using momentum, and applying leverage safely. Hedging our bets and using sound money management immediately put us in a category above most players. Look for these principles at work as we get into the entry, exit, and income methods in the chapters ahead. + a 2 APOWEROptions* Powe Posnl Srv, he RadioActiveTrading °