The Three Skills of Top Trading: Behavioral Systems Building, Pattern Recognition, and Mental State Management (Wiley Trading)

303 Pages·2007·6.56 MB·English

by  Hank Pruden

ffirs.qxd 2/28/07 4:08 PM Page i
The Three
Skills of
Top Trading
ffirs.qxd 2/28/07 4:08 PM Page ii
Founded in 1807, John Wiley & Sons is the oldest independent publishing
company in the United States. With offices in North America, Europe, Aus-
tralia, and Asia, Wiley is globally committed to developing and marketing
print and electronic products and services for our customers’ professional
and personal knowledge and understanding.
The Wiley Trading series features books by traders who have survived
the market’s ever changing temperament and have prospered—some by
reinventing systems, others by getting back to basics. Whether a novice
trader, professional, or somewhere in-between, these books will provide
the advice and strategies needed to prosper today and well into the future.
For a list of available titles, visit our web site at www.WileyFinance.com.
ffirs.qxd 2/28/07 4:09 PM Page iii
The Three
Skills of
Top Trading
Behavioral Systems Building,
Pattern Recognition, and
Mental State Management
HANK PRUDEN
John Wiley &Sons, Inc.
ffirs.qxd 2/28/07 4:09 PM Page iv
Copyright © 2007 by Hank Pruden. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
Wiley Bicentennial Logo: Richard J. Pacifico
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning,
or otherwise, except as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without either the prior written permission of the Publisher, or authorization
through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,
222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web
at www.copyright.com. Requests to the Publisher for permission should be addressed to the
Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,
[phone], fax [phone].
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 our Customer Care Department within the United States at [phone],
outside the United States at [phone] or fax [phone].
Wiley also publishes its books in a variety of electronic formats. Some content that appears
in print may not be available in electronic books. For more information about Wiley
products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Pruden, Hank, 1936–
The three skills of top trading : behavioral systems building, pattern
recognition, and mental state management / Hank Pruden.
p. cm.—(Wiley trading series)
Includes bibliographical references and index.
ISBN 978-0-470-05063-7 (cloth)
1. Stock price forecasting. 2. Stocks. 3. Futures. 4. Speculation. I.
Title.
HG4529.P78 2007
332.63'2042—dc22
2006036653
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
ffirs.qxd 2/28/07 4:09 PM Page v
To Sarah—my precious wife,
lifelong love, and best friend
ffirs.qxd 2/28/07 4:09 PM Page vi
ftoc.qxd 2/28/07 4:09 PM Page vii
Contents
Preface ix
Acknowledgments xv
About the Author xvii
PART ONE Systems Building and Behavioral Finance 1
CHAPTER 1 Systems Building for the Three Skills
of Top Trading 3
CHAPTER 2 Behavioral Finance 33
CHAPTER 3 The Life Cycle Model of Crowd Behavior 55
PART TWO Pattern Recognition
and Discretionary Trading 87
CHAPTER 4 Wyckoff: The Man, the Method,
the Mystique 89
CHAPTER 5 The Basic Elements of Charting
for the Wyckoff Method 99
CHAPTER 6 The Wyckoff Method of Technical Analysis
and Speculation 131
CHAPTER 7 Anatomy of a Trade 161
vii
ftoc.qxd 2/28/07 4:09 PM Page viii
viii CONTENTS
PART THREE Mental State Management 173
CHAPTER 8 Trader Psychology and Mental Discipline 175
CHAPTER 9 The Composite Man 201
CHAPTER 10 Putting It All Together: Ten Principles
for a Trader to Live By 235
Notes 265
Recommended Reading 269
Bibliography 273
Index 277
fpref.qxd 2/28/07 4:10 PM Page ix
Preface
This book gives the trader, the investor, and the analyst a true compet-
itive advantage in the challenging markets of the twenty-first century.
Today, there are powerful agitations in the United States and globally
to shift responsibility for investing onto the shoulders of the individual.
But, just as responsibility moves away from corporations and the govern-
ment, the individual faces conflicting advice as to how to manage financial
investments. The efficient market hypothesis is riddled with false assump-
tions that lead to wrong results. Equally mistaken are brokers who advise
their clients to buy and hold. The real behavior of markets, what the data
show in numerous markets over many time frames, is that “Market ‘timing’
matters greatly. Big gains and losses concentrate into small packages of
time.” (Benoit B. Mandelbrot)
Some of the most successful traders are the ones who got their market
timing right. Take, for example, George Soros, who during two months in
1992 profited about $2 billion by betting against the British pound sterling.
Although few traders are in the same league as George Soros, most can
profit from market moves concentrated in time.
This book aims to equip the trader with a balanced set of skills for cap-
turing the “packages of time” that make for big gain opportunities in the mar-
ket. It will also help the trader sidestep the timing pitfalls stemming from
superficial data analysis and erroneous interpretations of market indicators.
To compete successfully the trader must become a Complete Trader.
As you can see in the Three-in-One Trader Model (Figure P.1), three mutu-
ally reinforcing elements form the Complete Trader. This book will help
you develop skill within each of the elements of systems building, pattern
recognition, and mental state discipline, giving you solid footing well along
the path to becoming a Complete Trader.
This book brings together the three skills of top trading: behavioral mod-
els for systems building, pattern recognition, and mental state discipline.
ix