The Stuff They Don’t Put in the Trading Books


You could say I am a technical analyst. That means when I come to analysing the share market, I bring up the relevant company price chart.

That’s because everything that is known about a company is in the chart.

But if that’s all there was to the charts, I wouldn’t bother to study them. I could just as well look at the fundamentals to guide my analysis.

What makes the charts so interesting to watch, is that they often contain information that is not commonly known.

That’s if you know how to read one.

The trading books are a good start in this regard, and for learning all about technical analysis.

They usually explain the various charting patterns to watch for. Or they go through the many technical tools you can use to guide your analysis.

But while the books are of great benefit and you need to know all the technical aspects of the chart, that’s not all there is to it.

You know trading markets really is technically easy.

Note the qualification, I said ‘technically.’

Psychologically, trading markets may be the hardest, most challenging thing you will ever do in your entire life.

Why is it so hard for most in the market to consistently make profits over the long journey?

Because to win against the market you must overcome the biggest obstacle there is.

And that obstacle is always yourself. It always has been.

Your own self-limiting beliefs, issues about self-worth and feeling worthy enough to receive. Whatever hang-ups you have, the market will bring those often hidden beliefs to your attention.

Your psychology is everything.

No matter how good you are technically, if you are not in the right head space you will find a way to give it all back to the market, or crash and burn somehow.

That’s why I reinforce that, as well as doing work on the charts, you must be doing the work on yourself. That’s where the real work begins for all us.

This is a subject the trading manuals and books rarely cover. Few trading books take a more holistic approach to trading.

The market is more than just charts and trend lines. The most important thing is what you bring to the market.

There’s probably no better example of that than Jesse Livermore.

At the peak of his powers in 1929, when he went short the market, he was worth US$100 million. That’s around US$1.4 billion in today’s money.

But he found a way — in fact, he found someone (his wife) to spend it all for him.

By the mid-1930s almost every last cent of that vast fortune was gone.

And on 28 November, 1940, Livermore fatally shot himself in the cloakroom of a Manhattan hotel.

Police found a suicide note in his personal leather bound notebook. In the note he describes himself as ‘unworthy’ and ‘a failure’.

You sometimes see this experience with lotto winners. Often after winning the big one, five or 10 years down the track the money’s gone and they’re in the same position they were in before. Or far worse.

There’s more to trading markets than you think

Trading markets is more than just the technical aspects. It’s really how you manage it all. How you manage yourself and your positions in the market. But again, that flows from your psychology.

The market shouldn’t be a cause of stress or sleepless nights. If it is, you’re getting useful feedback that you’re doing something wrong.

The reality of investing in the share market is that not every trade is going to work out. That’s what a stop loss is for.

When you enter a trade, you put your stop loss in place and you let the market just do its thing.

Now if you’re stressed, or worried about your stop being taken, then you’ve bought too much stock and put yourself under unnecessary pressure. So here we’re talking about position sizing, which is so important. And, again, something many of the technical books leave out.

If you can’t sleep at night because of your stock market position, then you have gone too far. Sell your position down to a point where you can sleep at night.

The use of a stop loss brings me to another point you rarely see in the technical books.

You want to know what type of stock you are trading, and that you can actually get out at your stop loss level.

Because if you don’t have that awareness, your stop loss can really blow out.

For example, you might see a really good pattern and all the technical indicators are flashing ‘buy’. But if the stock is thinly traded (which means not many shares are traded in any one day) you just have to trade accordingly or stand aside.

This is because thin stocks can have large gaps in price and can get sold down very quickly. You may not be able to get out at your desired stop loss level.

So you trade accordingly, you don’t load up, you buy less stock, because you realise you may not get out where you want. Don’t put yourself in a position of unnecessary worry and stress about taking a loss.

And that’s the important point to never lose sight of. It’s not the market; we put ourselves in that position.

Or you may choose to just stand aside and pass if you think the stock is too thinly traded. Remember, sometimes the best trade is the one you don’t take.

Which leads me to another point. Knowing when not to trade is just so important.

One of the greatest pitfalls in trading markets is overtrading. Never let your trading become a blur.

If you’ve put a series of losing trades together, then you might have fallen victim to this greatest of all evils.

When you build up a good run of profits, don’t give it all back to the market.

This is a very common experience for traders, but subscribers to Money Morning Trader have a rule to deal with this affliction.

I haven’t mentioned half the things I wanted to cover. But you might see already that, while we focus on the technicals of the chart at Money Morning Trader, we also from time to time cover the types of subjects you won’t find in the trading books.

If that appeals to you, then go here to find out more.


Terence Duffy,
Editor, Money Morning Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia