Part II – Advanced secrets of successful traders

Author: Sanjoy Mullesserril

 

This book is the second part in series to learn trading. Part-I introduced you to the general concepts and showed how to enter a trade. Part 2 contains advanced trading techniques taught in a step by step way.

You can buy Part-I of this book from http://www.dreamtai.com

Yes, TRADING IS EASY, VERY EASY, INSANELY EASY!!  You have lost money in stocks till now. You have listened to the so called gurus and crazy financial analysts on the TV and burned your fingers. You purchased so many trading systems, spending thousands of dollars, but still you were not successful. You have read many self help and psychology books which say that your main problem is not having the correct mindset. You still lost money. In the end, you really began to question yourself and lose your self confidence. Why can’t I trade? What is wrong with me? Am I stupid or just plain dumb?

Well, my friend, this is where I think that this book will help you. This book does not have any complicated indicators.

Even though, I have used examples with DreamTai Trading Software, you do not need to buy it. You can use any charting software like TradeStation, Esignal or go to Yahoo Finance charts, BigCharts.com or any other stock charting website. In fact, you will not need any indicators at all, except moving averages. This book gives you plenty of charts to practice. Study these charts and practice. You will need to develop your trading skills and hone them. Yes, these skills have to be developed by constant practice.

 Set aside some time every day and go through each and every one of these charts. Study them carefully and try to think what you would do if you are investing. Would you buy the stock, short the stock or do nothing for each of the stocks shown in the charts. After you have made the decision, turn to the next page and see the chart with possible entry zones highlighted.

For best results, print out some 10 to 20 pages of this book and read them, highlighting important points, making notes on the margin and marking the charts. The most important thing is practice, practice and practice till you get so familiar with the charts that just by looking at them you can make an instant decision on what actions to take.

Some legal disclaimer! All the characters and incidents in this book are a work of fiction and do not resemble any persons, living or dead. I am NOT a registered financial advisor, so do not try to sue me if you lose money. This book is for fun, education and entertainment only and does not give any investment advice. In other words, my friend, you are on your own. If you make money on stocks, you enjoy it. If you lose money, just don’t blame me and start crying like a baby or go to the courts. You are the only person legally responsible for handling your own money. Trading is risky and you could lose money. Wow!! Did you know that? Yes, you could lose lots of money trading stocks, futures or forex. Consult with a professional where appropriate.

DreamTai owns the legal copyright to the contents of this book.

OK, enough of the legal stuff. Let us get started. We have plenty of grounds to cover.

Enjoy this book!

It was a pleasant afternoon. I was at La Circus, a trendy upscale restaurant in New York City along with Bob. We were waiting for Master Wong.

Wait a minute!! Did I tell you something about myself? I am a software developer by profession. I work as a programmer in a large financial institution in Wall Street. I am not a trader, though trading is my passion. I have traded stocks, options and futures. I had programmed DreamTai Trading Software for myself and found it very useful. So, I began to sell it online at http://www.dreamtai.com

Bob was one of the customers who had purchased this software. He emailed me with many questions about trading and investing. In the end, he requested to meet me. He wanted to learn how to trade. I referred him to Master Wong, an old, wealthy eccentric trader, who had made millions trading stocks and commodities. Master Wong agreed to mentor him.

In the past few months, Master Wong had taught Bob how to determine the trend of a stock and how to enter into a trade with minimum risk using the NECK OF THE DRAGON method.

Then, he asked Bob to paper-trade for a month using the techniques he had learnt and then Master Wong left for Hong Kong for some business.

When Master Wong returned from Hong Kong, he invited me and Bob to La Circus restaurant for lunch.

[To read more about the NECK OF THE DRAGON entry method and how to determine the trend, please refer to Part –I of this book. If you did not buy Part-I of this book, you can buy it at http://www.dreamtai.com ]

It was a really beautiful restaurant, with a stately environment which showed signs of luxury and privilege.

Master Wong was waiting for us. The waiter took us to the table where Master Wong was seated.

Master Wong: Welcome!! It is great to see you both again. Bob, before leaving for Hong Kong, I had asked you to paper trade using the entry method I had taught you. Tell me how did you do so far?

Bob: Great!! I started trading with $100,000 and in four weeks, turned it to $111,505.77.

This was not with real money. As you had advised, I paper traded. I used TradeStation Simulation account. It shows real time price data and allows you to buy or sell stocks. Only, these trades are not with real money, but with fictitious money.

Master Wong: Not bad! Not bad! Making $11,500 profits in one month is good progress.

Bob: If I continue to do like this, I can leave my job and become a full time trader.

Master Wong: Stop!! Stop thinking in terms of money! Money clouds your judgment. It is easy to make money when paper trading, but when real money is involved, people make foolish mistakes. You should think more in terms of whether you have mastered trading or not.

Here, the waiter is coming towards us. Allow me to place order for you. Believe me, the food here is excellent. Worldwide food experts have ranked it among the best restaurants in the world.

(Smiling at the waiter) Hello Williams!! How nice to see you again!!

Waiter: Hello Sir! It is really wonderful to meet you again. What would you and your guests like to have?

Master Wong (Intently studying the menu):For soup, get us this soup [Chicken Consommé Soup infused with ginger, mushroom ravioli, chicken quenelle curry, hijiki, shaved vegetables]

For appetizers, we would like to have this delicacy [Salmon Tartare with mango, cucumber, ginger, and cilantro]

For salad, we would like to have this [Chicken Curry Salad with golden raisins, créme fraîche, mango chutney]

For main course, we would like to have this item [Paupiette of Black Cod wrapped in crispy potatoes on a bed of braised leeks and Rocca di Frassinellowine sauce].

Also, we would like to order this item [Chicken stuffed with morels, caramelized pommes cocotte, pearl onion, asparagus fricassée, morel jus  and Roasted Lamb Chops with garlic, thyme, and pommes purée or mixed vegetables]

Waiter: Excellent choice Sir!! I would also recommend that you try this excellent dish [Foie Gras Raviolo with green cabbage marmalade, black truffle emulsion]. It is just heavenly!!

Master Wong: That will be great, William!! Bring that delicacy also. That’s all for now!!

Master Wong (To Bob): OK Bob, show me the charts of all your trades. What time period did you use?

Bob: I used weekly charts.

Master Wong: Weekly? Why not daily charts? What made you feel like using weekly charts?

Bob: If I had used the daily charts, I would be looking at the charts every 5 minutes. I wanted peace of mind and wanted to sleep well at night.

Master Wong: Good answer!! You should always use the time period you are comfortable with. If you are a long term investor, you can use monthly charts. These patterns work for any time period.

Let us study the trades you have made. Show me the printouts you had prepared for each trade.

Bob: First of all, I looked at the market trend. For determining the market trend, I looked at the weekly charts of Dow Jones Industrial average. The market trend was down. So, I decided that I will only short shares. I will not buy any shares.

Master Wong: Excellent!! You should always look at the market trend first. For that, you should look at the trend of the major market index of that country. If in UK, you should use the FTSE index.

Bob: Next, I spent hours looking at hundreds of stock charts for the right set up. I was looking at the weekly stock charts of those stocks that were about to break the neck of the dragon. I selected the best candidates from them. I really spent time here searching for the best candidates and rejecting hundreds of stocks before selecting the final list of stocks to trade.

Master Wong: Show me! Let us study those trades.

Bob: OK, let me get the printout of the charts.

[AUTHOR’S NOTE:

The screen shots you see are screenshots of real trades done by me on the TradeStation simulation account for a period of around 4 weeks. Of course, they were not done with real money , but with simulated money.]

By this time, William our waiter had arrived with food for our table. Master Wong ordered chop sticks for himself. He liked eating with chopsticks.

Bob: Here is the first chart, DTE. First, it was in a downtrend as the 20 day moving average was below the 50 day moving average.  I shorted it around $44, right when it broke the neck of the Dragon trend line. It just went down after that. I did not know when to buy back the stock. I purchased part of the stock as it continued its slide downwards. I covered remaining as it tried to go up, as seen by the green candle.

Master Wong: Perfect trade!! I liked it. Next!!

 

Bob: Next, I shorted MHP. The stock had been in a downtrend and it formed the Neck of the Dragon pattern. I shorted this stock at around 39. Unfortunately, the stock, instead of moving down, just went up to around 45. I was feeling nervous about this stock. For the next two weeks, it stayed around 43 to 45. I bought back some of the stock at a loss. Later, the stock moved to 40. But I was really nervous at this point. The stock did not look like it was behaving nicely. So, I bought back the remaining stocks at around 41 for a loss. I did not make any profits in this stock. Rather, I lost money in this stock.

Master Wong: Uh Oh!! You lost money in this stock. What mistake did you think you had made in this trade? Did you select the wrong pattern? Was it the wrong stock? Or was it the wrong timing? Or did you not follow my instructions exactly?

Bob(Thinking hard for a few seconds): No, I do not think that I made any mistake in my trading. I followed the chart pattern exactly. However, not all trades will be successful. Some trades are going to fail. The best thing is to recognize that the chart pattern was not successful and to cut your losses and close the trade.

Master Wong: Excellent!! I was testing you. You are correct. Not all trades will be successful. You have to close the unsuccessful trades and concentrate on those trades which make profits. Also, never let a small loss turn into a big loss. Later, I will teach you how to filter out such bad trades and select only the best trades.  Next trade please!!

Bob: Here is another stock (STU) I shorted. I shorted this stock at around 120. It went down to around $100. I made a good profit from this stock. Notice that it made a perfect Neck of the Dragon breakout.

Master Wong: Perfect trade, I must say!!

Bob: However, I just don’t know when and where to take profits.

Master Wong: Patience! I will teach you that also. Show me the next chart you traded.

Bob: My next trade was a stock called TeleFlex (TFX). I shorted 400 shares at around 58. As the stock reached near 55, I got nervous and bought back 200 shares. Later, at the end of the week, I closed out by trade by buying back the remaining 200 shares because the stock was trying to go up and I was getting nervous. I made profits in that trade.

Master Wong: Very good. I will teach you about profit targets and when to close the trades. Show me the next trade.

Bob: Next, I shorted a stock URS. URS formed the perfect Neck of the Dragon pattern. I shorted it at around 46.17. I bought back 380 shares at 42.16. I then purchased back the remaining 380 shares also at around 42. I made profit in this trade.

Master Wong: Good trade!! Show me the next trade.

Bob: My next trade was WCG. It had already made a Neck of the Dragon breakout previously. (See the orange line). I had missed that move. When it made the Neck of the Dragon pattern again (See the blue line), I shorted it at 51. It went down to 39. I covered it there and made profits on this trade.

Bob: Here is another trade. I shorted COF at around 48 and covered it at 40.

Master Wong:  Very good!! I want to see your account statement. Did you really make profits or was it just by luck.

Bob: I knew that you would want to see it. Here is the account balance. When you left for HongKong, I set up the TradeStation Simulation account with $100,000 initial balance. Now, it is $111,505.17.

Master Wong: This is wonderful. Great job!!  I am happy that you have done a great job learning the Neck of the Dragon pattern. Now, I can teach you other advanced trading techniques like placing stops and placing profit targets.

Bob: Master Wong, I must thank you. I had listened to hundred of stock experts and read thousands of trading books, but none of them taught such a simple profitable techniques. Most of the books would talk about complex technical indicators.

Master Wong: Sometimes, the simple techniques are the best techniques. Let me pay the bill now and you can meet me for the next session tomorrow. (To the waiter:) William, can I have the check please?

William: Of course, Master Wong! Here is the check. Also, here are three plates of carrot cake dessert, compliments of the restaurant.

Sanjoy(looking at the check): Oh my!! The bill comes to $520. Master Wong, allow me to pay part of this bill. I should have known that this is an upscale expensive restaurant.

 

Master Wong: Heeh Heeh Heeh!! Do not worry about the bill. I am not paying it with my own money. I am putting it down as business expense, which is true, because we were discussing trading techniques here. It will be paid by my business accounts and I will save taxes. Heeh Heeh Heeh!!

Master Wong paid $520 along with $100 tip for Williams.

Master Wong: Thank you Williams for your excellent service. The food here was really wonderful!

Waiter: It is always a pleasure having you here, Master Wong! You know that you are always welcome here.

We went outside the restaurant for a stroll. The street was filled with tourists.

Sanjoy: I feel so sleepy after this great lunch.

Master Wong: I always take a nap after lunch. It refreshes you. Bob, you can come to my house tomorrow at 9:00 sharp. We will learn about placing stops. You have done a great job learning the Neck of the Dragon pattern and now we have to make sure that you learn the other aspects of it like placing stops and profit targets.

Bob: Sure!!  I will come there tomorrow.