Trading to win: the psychology of mastering the markets

134 Pages·1998·2.47 MB·English

by  Ari Kiev

WILEY TRADING ADVANTAGE
Trading without Fear / Richard W. Arms, Jr.
Neural Network: Time Series Forecasting of financial Markets / E. Michael Azoff
Option Market Making / Alan J. Baird
Money Management Strategies for Futures Traders / Nauzer J. Balsara
Genetic Algorithms and Investment Strategies / Richard J. Bauer
Technical Market Indicators: Analysis and Performance /
Trading to Win
Richard J. Bauer and Julie R. Dahlquist
Seasonality: Systems, Strategies & Signals / Jake Bernstein
The Hedge fund Edge/ Mark Boucher
Beyond Technical Analysis / Tushar Chande
The New Technical Trader / Tushar Chande and Stanley S. Kroll
Managed futures: An Investor's Guide / Beverly Chandler THE PSYCHOLOGY OF
Trading on the Edge / Guido J. Deboeck
Trading the Plan / Robert Decl MASTERING THE MARKETS
The New Science of Technical Analysis / Thomas R DeMark
Point and figure Charting / Thomas J. Dorsey
Trading for a Living / Dr. Alexander Elder
Study Guide for Trading for a Living / Dr. Alexander Elder
The Day Trader's Manual / William F. Eng
The Options Course: High Profit &Low Stress Trading Methods / George A. Fontanills
retsaM uoT pleH ot sesicrexE petS-yb-petS :koobkroW esruoC snoitpO ehT
The Options Course / George A. Fontanills
Trading 101 /Sunny J. Harris
sirraH .J ynnuS/ 201 gnidarT
Analyzing and Forecasting futures Prices / Anthony F. Herbst
Technical Analysis of the Options Markets / Richard Hexton
Pattern, Price & Time: Using Gann Theory in Trading Systems / James A. Hyerczyk
Ari Kiev
Profits from Natural Resources: How to Make Big Money Investing in Energy, Food
& Metals / Roland A. Jansen
Trading Systems & Methods, 3rd Edition /Perry Kaufman
Trading to Win / Ari Kiev
Understanding Options / Robert Kolb
The Intuitive Trader / Robert Koppel
McMittan on Options / Lawrence G. McMillan
Trading on Expectations / Brendan Moynihan
Intermarket Technical Analysis / John J. Murphy
Forecasting financial Markets, 3rd Edition / Mark J. Powers and Mark G. Castelino
Neural Networks in the Capital Markets / Paul Refenes
Cybernetic Trading Strategies / Murray A. Ruggiero, Jr.
The Option Advisor: Wealth-Building Techniques Using Equity and Index
Options / Bernie G. Schaeffer
Gaming the Market / Ronald B. Shelton
Option Strategies, 2nd Edition / Courtney Smith
Trader Vie IT. Principles of Professional Speculation / Victor Sperandeo
Campaign Trading / John Sweeney
The Trader's Tax Survival Guide, Revised / Ted Tesser
The Mathematics of Money Management / Ralph Vince
The New Money Management: A framework for Asset Allocation / Ralph Vince
Portfolio Management Formulas / Ralph Vince
Trading Applications of Japanese Candlestick Charting /
Gary Wagner and Brad Matheny
New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds,
and Commodities / Bill Williams .cnI ,snoS & yeliW nhoJ
Trading Chaos: Applying Expert Techniques to Maximize Tour Profits /
,sillyhP efiw ym roF
with love and admiration
This book is printed on acid-free paper. ©
.devreser sthgir llA .veiK irA yb 8991 © thgirypoC
Published by John Wiley & Sons, Inc.
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No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
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E-Mail: [email protected].
This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is sold with the understanding that the publisher is not engaged in
eht ,deriuqer si ecnatsissa trepxe rehto ro ecivda lanoisseforp fI .secivres lanoisseforp gniredner
.thguos eb dluohs nosrep lanoisseforp tnetepmoc a fo secivres
Library of Congress Cataloging-in-Publication Data:
Kiev, Ari.
Trading to win : the psychology of mastering the markets / Ari
Kiev.
p. cm.—(Wiley trading advantage)
Includes index.
ISBN 0-471-24842-8 (cloth : alk. paper)
.sisylana tnemtsevnI .3 .segnahcxe kcotS .2 .stnemtsevnI .1
I. Title. II. Series.
HG4521.K455 1998
332. 024'01—dc21 98-20497
Printed in the United States of America.
Foreword
If you want to learn how to be a super-trader, then closely examine the
taht margorp gnidart evitcaorp a no desab si tI .koob siht ni stpecnoc
-02$ a morf worg ,CLL ,tnemeganaM latipaC CAS ,mrif ym depleh sah
retfa yllaunna noillim 005$ revo gnildnah eno ot dnuf egdeh noillim
.sraey evif ylno
I have been trading the stock market for twenty years. Originally, I
rekcit eht fo swolf dna sbbe eht gnihctaw yb snoisiced gnidart ym edam
tape. I knew very little of the fundamentals of the companies I was trad-
ing and based my decisions on the tape action. Later, as I refined my
-adnuf eht fo gnidnatsrednu repeed a htiw ti enibmoc ot nageb I ,tra
mentals of the underlying companies, the industries, and the general
.sdnert tekram
I have worked with and met many traders in my life. Most combine
some forf mcoh art reading, tape analysis, and/or fundamental analysis
to make their decisions. The super-traders, though, share certain com-
yehT .eusrup thgim yeht enilpicsid revetahw edesrepus taht stiart nom
etartsnomed dna elyts ralucitrap nwo rieht ot dettimmoc yllatot era
complete conviction when trading. Because of this conviction they are
able to take large financial risks and have the confidence and belief that
probability is on their side. They also have the ability to admit their mis-
era yeht nehw—sessol ,si taht—secneuqesnoc rieht eziminim dna sekat
ton era yeht ;sevlesmeht rof kniht dna tnednepedni era yehT .gnorw
:taht ekil ton era ,ylgnisirprus ,sredart tsoM .srehto yb decneulfni ylisae
dna sksir gnikat fo diarfa era dna ,noitcivnoc kcal ,evisicedni era yehT
era taht snomed lanosrep eht fo erawanu era yehT .sekatsim gnikam
.sseccus eurt morf kcab meht gnidloh
viii Foreword
That is why I brought Ari Kiev in to help my group. He has had ex-
perience with Olympic athletes, helping them maximize performance
by setting goals and then improving on those goals. I felt the same con-
tsoM .ynapmoc ym ni sredart eht htiw llew yllauqe krow dluoc stpec
traders have only a vague idea of why they are underperforming and at-
tribute this underperformance to the market or other trivialities that Acknowledgments
nwo rieht taht ezilaer t'nod yehT .revo lortnoc on evah yeht leef yeht
deveihca t'nevah yeht yhw nosaer yramirp eht eb yam swalf ytilanosrep
.sseccus mumixam
Ari and I hold weekly meetings where we attempt to help our
traders identify and modify those limiting thoughts and bad habits.
-rocni dna roivaheb gnidart rieht yfidom ot nrael sredart eht ylevitcaorP
porate successful changes into their strategies. Additionally, we monitor Numerous people have helped in the preparation of this book. Most of
eseht ot dettimmoc sniamer redart hcae taht erusne ot stluser eht all I am indebted to the various traders I have worked with in the past
rof gnikrow sredart evah I .sevlesmeht rof kaeps stluser e-nhaTM .s elagtnipaahCc CAS ta ffats eht dna nehoC evetS ralucitrap ni ,sraey xis
me whose profits have gone up 100 percent since implementing this agement, LLC. I am also appreciative of the support given me by Peter
program. Kellogg, Gary Goldring, and Chip Weinberg at Spear, Leeds and Kel-
snoziroh ruo dnapxe ot su depleh sah hcaore phTpTar anidWin ogt -xe ot tnaw I ,noitidda nI .CLL ,namdloG .J ta namdloG yaJ dna ,ggol
and branch out from equity trading into various strategies such as for- press my thanks for editorial assistance given me by Tricia Brown in the
eign exchange, convertibles, options, junk bonds, risk arbitrage, and early stages and Grace Lichtenstein in the later stages of the manuscript,
-hguosryhstte mesc tnraaddinigu.g reh rof ,nesseiG nav alemaP ,rotide ym knaht ot dna
The ideas and concepts that Ari presents in this b.okooko wb islli hht eflop naoniytaraperp eht tuo
trader increase profits. Combining good commosanh sysaewnlas sea owhwi t,shill yhePs teafiwb -ym ot detbedni ma I ,lla fo tsoM
klaw ot redaer eht elbane lliw koob eht ,selpicnirp lacigolohcysp dehsil ta tnemegaruocne dna troppus fo ecruos tnatsnoc a eb ot deunitnoc
away with a greater understanding of the complexities of being a suc- every stage of this process.
lliw pam daor a sa stpecnoc dna selpicnirp eseht gnisU .redart lufssec
benefit anybody who has chosen trading as a profession and livelihood. A. K
Happy trading.
STEVE COHEN
Contents
Xll
emaG gnidarT eht gniretsaM EERHT TRAP
ssertS htiw gnilaeD 01 retpahC 187
sekatsiM nommoC gnimocrevO 11 retpahC 197
egnahC ot rewoP ehT 21 retpahC 223
Trading to Win
Index 249
Trading to Win
Introduction
pleh ot dengised hcaorppa detneiro-laog a senifed "ni• ;wt'^ ra dointg
JL traders maximize their performance in a unique way—by tapping
-ar a gnipoleved yb ,dah yeht wonk reven thgim yeht secruoser lanosrep
tional strategy for trading, by learning new psychological skills, and by
letting go of unproductive, even maladaptive, behavior patterns.
This approach puts a special emphasis on learning to get rid of past
memories and erroneous notions around which people have organized
their lives. This book shows you how to commit to a future goal by sur-
rendering to it, and simultaneously relinquishing all thoughts of gain,
s'tahT .si tI ?yas uoy ,lacixodarap sdnuoS .tnemhcatta ro ,tnemeveihca
the point.
This system encourages you to trust a higher power that assists you
sucofer uoy spleh ti yllacidoireP .flesruoy nihtiw rewop eht gnizilaer ni
esu uoy ,nehT .sevitcejbo ruoy htiw flesruoy gningilaer ,laog ruoy no
eht ni snoitcnitsid ekam ot hcihw hguorht retlif a sa sevitcejbo ruoy
present moment.
.ytivitca ksir-hgih dna sekats hgih fo eno si gnidart fo dlrow ehT
The goal is, ostensibly, financial gain. Give up that goal, and you gain
ot dna ecalptekram eht fo sdnuos eht ot netsil yleniuneg ot modeerf eht
be able to read the movement of stock prices in a way that enables you
to increase your probability of success.
TRADING TO WIN Introduction
For master traders, the monetary result is secondary to the gratifica- and caught holding declining stock in hope that it will turn around.
naht rehtaR .sessol triouno thyat ceomzeism froimn bieming aoblte t oe mlbakae t hge rnigihet mba rkreot cfal l.s Tehoeyg ge temas ehT
their primary satisfaction frgonmic nhivanvoicn gy ba nn oiidtaetais aehbo ruuto ya gsntoizcikla annoidt airm dpnlae -gniyarp dna gnipoh
-rofni rieht tsurt sredart retsaM .edart elbatiforp a ni aedi siht gnitnem ruoy tuc uoy ,dnuora nrut yllautneve lliw kcots eht taht flesruoy
rehto ynam ssessa dna ,ecalptekram eht fo noitcerid eht esnes ,noitam .daetsni sessol
.edart evitarcul a gnitucexe yllanif erofeb selbairav e hT Trdana lacihposdolihp fo tes ia sthgniltops margogrp niW ot
This requ-diraerst a env eitncoaromropu tsn aebmileitlyp tmo ia boatn udooyn pprliedhe annadc ttoa hmta sinetlapiincnirp laroivaheb
equanimity in the face of loss or excessive profit. The master trader ing strategies. This approach involves commitment, concentration,
dluohs airohpue ron riapsed rehtien taht—nrael nac uoy dna—swonk tsurt ot uoy selbane tI .yad txen eht rof noitaraperp dna ,yrevocer
erom neve semoceb tekram eht ,evorpmi uoy sA .tnemgduj s'eno duolc .fles eurt ruoy
challenging, requiring you to commit to bigger numbers or more com- This approach is not for the fainthearted. It puts much emphasis on
ot uoy dael nac siht ,gnilliw era uoy fI .emag eht fo snoisnemid xelp proactive trading strategies designed to produce exponential results. It
give up more of your old habits and to become more at one with the encourages you to do counterintuitive things—such as admitting uncer-
universe. -amrofni gnirahs ;pleh rof gniksa dna egdelwonk fo kcal dna ,raef ,ytniat
I sraey xis tsap eht roF .sredart efil-laer ni rucco siht dehctaw evah I dna oge fo og gnittel snaem siht fo llA .ytilibarenluv gnicaf dna ;noit
have met weekly with a group of professional traders to explore theuoy splepmsocy tI- .ecalptekram eht no sucof ruoy srulb hcihw ,ecnagorra
syaw dnif ot dna gnidart rieht fo snoisnemid lanoitome dna lacigolohc to learn to communicate directly and clearly with others, whether they
of maximizing their performance. The Trading to Win principles dis- be staff, associates, or floor brokers.
neeb ecnis evah dna sranimes eseht morf devlove koob siht ni dessuc nac uoy os ,sedart s'yad hcae weiver ot uoy segilbo niw ot gnidarT
tested and developed in several other trading settings. I am deeply in- see how you may have veered from your commitment, what dropped
rof dna elbissop ytinutroppo siht gnikam rof nehoC evetS ot detbed out of your trading, and what commitment you must add to get the de-
eht ot seussi redaorb eseht fo noitaicerppa retaerg a ot yaw eht gnivap yeht os dedart serahs fo rebmun eht esiar ot deen thgim uoY .tluser deris
.smrif rehto dna sih ni sredart -naba ot evah thgim uoY .tnemtimmoc fo level ruoy htiw tnetsisnoc era
deredisnoc seussi eht fo ynam fo erutan yrateirporp eht fo esuaceB( don energy-draining behavior—impulsiveness, chest beating, whining,
-rep llA .eman yb sredart cificeps yna deifitnedi ton evah I ,koob siht ni and scalping (selling too soon to book a quick profit and missing the
sonality profiles represent composites of the various traders and, al- larger upward movement of a stock). You'll need to understand how to
desu neeb sah anosrep enilucsam eht ,sredart elamef era ereht hguoht get out fast when stocks are dropping. You'll have to shed counterpro-
).dleif detanimod-elam yltnerruc siht ni msilaer rof tuohguorht -car ro semit gnidart gnirud sllac lanosrep gnikat sa hcus ,stibah evitcud
Reading the market's direction and the directions of specific ing home after the bell instead of reviewing the day with other traders
fo emag doohdlihc eht ekil si tI .sseccus gnidart ot laitnesse si skcots and coaches.
musical chairs. In that game, you have to time your move nsI o.ye ntohma fot eyloro eutairporppa eht nrael tsum uoy ,noitidda nI
t'nod osla uoy ;deppots sah cisum eht erofeb riahc a rof pmuj ton odgnipeek fo yaw a si tI .eruces ro hcir eb ot hcum os ton s'ti ,gnidart
want to linger too long after the music stopsn acs uoo y ttahhta ots sttnhevee rfoe k roawreem arnf eoht gninifed fo yaw a si tI .erocs
uoy delliks erom ehT .llew sa ammelid s'redart eht si sihT .tfel staes determine what actions are needed in the present. Paradoxically, the
eht sa ni yats nac uoy regnol eht ,evah uoy ecneitap erom eht ,era greater the amount of money, the more you must renounce your fo-
erofereht dna ,regnol ni yats uoY .tca uoy erofeb sllaf ro sesir kcots .ti no suc
maximize your profits. However, you do not stay in so long that,s tib ,sreydart lanoisseforp rof depoleved neeb sah margorp siht elihW
-pa gnidart dnunrutotn-wnodS neht nno ikd c. nrrue.ttus iu elon-voie rl"b.s anenrr" lehwrt sa redart yranidro eht rof eulav evah selpicnirp
Introduction 5
4 TRADING TO WIN
this book raises your level of awareness of certain critical processes so
plies to everyone, including the advanced trader who must regularly re-
that you can begin to use them in your work.
turn to basics. Since it concentrates on a goal, yet makes you detach
sa efil ot tub ,gnitsevni ot ylno ton ecnaveler sah ti ,ti morf oge ruoy
well. I define "winning" as maximizing your own potential, as seeing
What Do I Mean by a Strategy?
the world realistically, and as living life like the miracle it is. After all,
gnivil fo erutan gnitaralihxe tey suolirep eht rof rohpatem a si gnidart
-og era uoy woh ksa tsum uoy ,raey eht rof laog cificeps a tes uoy ecnO
on the edge.
ekam ot evah uoy dluow ezis tahw ta sedart ynam woH .ti teem ot gni
tahW ?ekil kool maet ruoy dluohs tahW ?rebmun ruoy ekam ot redro ni
general rules must you establish in terms of holding on, doubling up, or
What's the Concept, Doc?
?snoitisop fo tuo gnitteg
If you reply with a shrug, "Well, I want to do as well as I can," you
The objective of this book is to try to get at the underlying thought
etavele ot evah ll'uoy ,tegrat ruoy hcaer oT .ereht teg ot ylekil ssel era
-itom s'tahW ?gnikniht yllaer era uoy era tahW .sedart dniheb ssecorp
gniog m'I tahw si siht ,yakO" ,yas uoy erehw level a ot emag ruoy
vating you? Is it consistent With your style? Does it make sense for you?
yb ro ,cinap yb ,noitome yb tnemom nevig a ta denrevog uoy era rO o do." t
ruoy ni dnif nac uoy hcihw ,sevom emos esuaceB ?selur evah yhW
whatever is going on in the Street? The ultimate objective is to be much
own database, consistently work. Forget the standard litany of rational-
more capable of reading the tape and reading the changes in the market
izations. You can always blame Alan Greenspan, or the market, or the
in terms of what is occurring based on what you understand about it.
fact that it's February. But regardless of different styles, certain princi-
You'll hear colleagues discuss in these pages things that they don't nor-
ples remain immutable. If a stock goes down and you own it, you're
mally like to talk about, such as weakness or getting away from one's
losing money. "I'm going to make it a long-term trade," you say? You
.nalp emag
htnom-eerht a" ro "edart htnom-xis a s'tI" .yadot yenom tsol llits
'Trading, like sports, involves a high degree of uncertainty and un-
daer uoy ;gnihsiw dna gnipoh erew uoy yadot tuB .ebyaM ?"edart
skoob ynaM .yrotirret railimafnu ni gniyalp snaem sihT jytilibatciderp
something in Barron's, but it doesn't happen. You may keep thinking
-xaler sa hcus stpecnoc lacigolohcysp cisab dna gnidart cisab erolpxe
that you can make up for the loss, but, in fact, you would make much
ation, but don't link psychology and trading behavior. My aim is to de-
more if your losses were less.
fo mlaer eht ni gnidart rof laitnesse sessecorp thguoht eht polev
,ssol fo level hgih a rof ecnarelot a taerg oot gnivah pots uoy ecnO
uncertainty. Whether you are hammered by fear or animated by eupho-
you can start raising your monthly profit and loss (P&L) significantly.
ria, both can throw you off your game.
er'yeht fi neve snoitisop ni yats ,seno laitnatsbus neve ,sredart emoS
,gib niw uoy retfa esol yam uoy yhw dnatsrednu ot tnatropmi si tI
dropping, because they are "macho" and can "tolerate pain." The stock
leef ro ,niw ot evresed t'nod uoy taht leef semitemos yam uoy yhw ro
pmiw a ton era uoy tuB .sevlesmeht llet yeht ,kcab emoc yllautneve lliw
guilty about it, or have an attitude about money that colors your trad-
if you get out of a losing position.
enilpicsid ruoy tegrof ot ton nrael tsum uoy ,redart-repus a eb oT .gni
One trader I know had to learn to get out at three points. Next he
and not to forget to respect the market. How do you surrender and
learned to get out at one and a half, and he made more money. Now he
yet keep your consciousness and your alertness so you can move in
a morf yawa nur ot yako s'ti taht gninrael :pets gib txen eht ekat ot sah
and out?
losing stock. So if he's making four thousand dollars and he starts cut-
-evisnefed fo tol a sreggirt tI .emag erusserp-hgih yrev a si gnidarT
.dnasuoht xis ro evif ekam nac eh ,sessol sih gnit
ness that on the surface looks very rational and reasonable. I hope that