New Trader, Rich Trader

The purpose of this book is to share with readers the principles of successful trading: methodology, risk
management, and psychology. New traders usually learn these the hard way, by losing money.

I also have read and studied over 150 books on investing and trading.

Burns found his investment method of choice in the trendy trading strategy known as “The Darvas
System.”

The keys to successful trend trading are removing your emotions from the trade, avoiding the Wall
Street “noise” and stock guru “predictions, ” and keeping your buy-and-sell rules as simple, clear, and
easy to implement as possible.

Part I Psychology

1. New Traders are greedy and have unrealistic expectations; Rich Traders
are realistic about their returns. Recommended Book: The Universal
Principles of Successful Trading: Essential Knowledge for All Traders in All
Markets, by Brent Penfold
2. New Traders make the wrong decisions because of stress; Rich Traders
are able to manage stress. Recommended Book: Trader Performance:
Proven Strategies from the Cutting Edge of Trading Psychology, by Brett
Steenbarger
“You can limit your stress level by removing as many unknowns as possible from your trading. You
should know your trading plan before you start trading. You should already have a watch list of what
you’ll buy. You have to decide how many shares of what specific stock to trade even before you execute
the trade.”

“Before you place the trade, you need to have in place an exit strategy of how, when, and why you will
take profits and what your stop loss will be. You have to plan to sell your stock at a specific percentage
loss, price support breach, or trend change.”

“If you experience high levels of stress during trading, either you are trading too big of a position or you
do not have enough confidence in your system. Reduce your position or do further testing on your
system to cure your stress.” – Steve Burns

Traders need a trading style that’s compatible with their personality.

“I would suggest that you trade only to make money, not for entertainment or to prove anything about
yourself.”
3. New Traders are impatient and look for constant action; Rich Traders are
patient. Recommended Book: Trading for a Living, by Alexander Elder
Traders need a trading style that’s compatible with their personality.

“I would suggest that you trade only to make money, not for entertainment or to prove anything about
yourself.”

4. New Traders trade because they are influenced by their own greed and
fear; Good Traders use a trading plan. Recommended Book: The
Psychology of Trading: Tools and Techniques for Minding the Markets, by
Brett Steenbarger
New Trader felt more prepared than ever before. It was time to get serious; it was time to start creating
a trading plan. But first he had to answer some questions. Taking one of his favorite trading books off
the shelf, he opened it to the chapter on how to write a trading plan. What will be your signal for
entering a trade? When will you sell? How much will you risk on each trade? What will be your trade
size? What equities will you trade? How long will you hold your trades? How will you test your system
for profitability? What is your ratio of risk to expected reward? And so he started making decisions. I’ll
trade trends, he thought, so my signal needs to buy into price and volume strength.

5. New Traders are unsuccessful when they stop learning; Rich Traders never
stop learning about the market. Recommended Book: How Legendary
Traders made Millions, by John Boik
“This is like your first freshman paper you’re turning in for your first class. If you’re like other successful
traders you will have to test this system first and then make adjustments.”

“It may work well for a while, then suddenly stop working and give your capital a large draw down due
to a change in market conditions. The system may not even work; you don’t know yet. Or it might make
you a nice profit in a bull market then take the profits back in a bear market. If you want to be profitable
in a bear market, you may have to reverse your system and sell the same stocks short when they break
down through support. Testing your system both in simulations and real money will teach you a lot. You
first need to get an idea of your winning percentage and the average sizes of your wins and losses.”

“A trading journal is like having a teacher who teaches traders about themselves.”

“Always stay humble. Always know the market is too big for anyone to master. You must never stop
learning about yourself, about the market, and about risk, ”

“Most of the best traders have read hundreds, ”

“In my whole life, I have known no wise people over a broad subject matter area who didn't read all the
time – none, zero.” – Charlie Munger
 Part II RISK
6. New Traders act like gamblers; Rich Traders operate like businesspeople.
Recommended Book: Trading without Gambling, by Marcel Link
He looked at his journal – glad that he had taken Rich Trader’s advice – to refresh what he had learned.
1) Cutting losses was crucial; many of the stocks I sold with a $250 loss continued to fall and I could have
lost over $1,000 on one. I must know the amount of money I am willing to risk before I trade.

2) Buy stops are good because it helped me make extra money on the move by getting into a trade
automatically. If I would have attempted to buy some of these stocks in an uptrend, I would have lost
hundreds of dollars in profits while trying to manually buy it as it shot upward.

3) I take a profit when it begins to fall. If I didn't have a trailing stop I would have given back all my
profits on two of the trades. It’s good to have a profit-taking strategy.

“Like all businesses and disciplines, the psychological aspect is usually the part that causes people to
become unsuccessful, ” Rich Trader said. “Being a professional means doing your job no manner how
you feel.”

7. New Traders bet the farm; Rich Traders carefully control trading size. A
Trader's Money Management System: How to Ensure Profit and Avoid the
Risk of Ruin, by Bennett McDowell
“If you make a mistake and lose a few percentage points of your account, that’s not as big a deal; you
can trade and get that back. You can lose 5% of your account four times in a row and be down 20%, so
you need five wins in a row to get back 25% to be even again.”

8. For New Traders huge profits are the #1 priority; for Rich Traders
managing risk is the #1 priority. Recommended Book: Super Trader, by
Van Tharp
“I thought risk was just the chance that you could lose money...” “It is, but there are many ways you can
lose money:

1. You have the basic risk that your trade will be a loser, that it will move in the opposite direction of
your long or short position. This is trade risk; however most times you can control the maximum amount
you lose through position size and a stop loss.

2. You also have the general market risk factor. You can pick a stock of a wonderful company but if the
trend of the stock market itself is down for some reason, the likelihood is that your stock will also fall
regardless of the fundamental merits of the company or the past strength of your stock’s price
movement. The market is like a tide that comes in, lifts up all ships, and then goes out and lowers them
back down.

3. You have the risk of your stock either being or becoming highly volatile. Volatility risk can scare you
into selling your stock too soon or simply cause your system to stop working because the stock you
bought hit your predetermined stop loss and forced you to sell – even though it might reverse and be
right back where it started later that same day. It is the broadening of a stock’s price range from its past
history.

4. Overnight risk is when something unexpected happens while the market is closed and the next
morning your stock gaps down in the pre-market and you never even had a chance to sell and stop your
loss. This risk applies to everyone except day traders or traders who trade markets that are open 24
hours.

5. Liquidity risk is when there are just not many buyers or sellers for your stock, so you lose money in the
bid/ask spread. The "bid" is what a market maker is willing to buy your stock for, and the "ask" is what
they are offering to sell it for. There are stocks and options which have such low volume that you can
lose 5%-10% just simply buying and selling, even if the stock price does not move. If your stock has a BID
$9.50 and ASK $10.00 and you buy it at the ask price then sell it at the bid price, you lose 5% when you
enter and exit the trade. It is important to trade in stocks that have a small spread in the bid/ask quotes.
Less than 10 cents is good but a penny or two is excellent.

6. Margin risk is when you use your stocks as collateral and borrow money from your broker to buy
additional stocks. Most brokers, after you have set up a margin account, will allow you to buy additional
stocks and double the size of your account. With margin you can use a $10,000 account to buy $20,000
worth of stock as long as the stocks are marginable securities. Some more risky penny stocks and small
cap stocks are not marginable. The good thing about margin is you make twice as much profit when you
are right, but the risk is that you can lose twice as much if you are wrong. Doubling your risk with margin
greatly increases your risk of ruin by making your losses compound twice as fast!

7. Earnings Risk: If you are holding a stock through earnings, you are exposed to the risk of a sharp move
in one direction after the announcement. It can hurt your account if the move is too fast after hours and
blows through your stop loss.

8. Political Risk is a possibility if you are invested in a company located in a different country or your
stock’s company does a majority of its business in a country that suddenly has a change in power.
Investors and property owners of all kinds were wiped out when the Communists took over all private
property for the state in Cuba in 1960.

9. Time decay risk: If you trade options, the clock is always ticking against you. A major component of a
stock options value is its time value: each day it loses a small amount of this value until it is only worth
its intrinsic worth – how much it is ‘in the money’ based on its strike price. So if you decide to trade
options, you must be right about the price movement and the timeframe. You are also paying for the
right to control the shares, so you have to be right by more than the cost of the option for it to be a
winning trade.

10. There is also the risk of error where you can actually put one too many zeroes on the amount of
shares you want to buy for a trade, or buy the wrong symbol, or sell a stock short instead of buying it
long. Double checking your trades before you place them is very important.

11. One of the most frustrating kinds of risk of all is technology risk. If trading is not hard enough
already, you can also have your Internet connection crash or your broker's trading platform go down
while you are in a trade. These are good reasons to have a backup plan like the phone number for your
broker ready at the push of a button to get out of a trade entered. Anything can happen while you are
trading, so be prepared.”

“Here are some simple suggestions to help lower your risks when you trade. Some of this you have
probably heard before:

1. Determine your stop loss before any trade is placed.

2. Honor your stop; CUT YOUR LOSS.

3. Only take trades that meet the criteria of your predetermined trading plan.

4. Trade mostly long in up trending bullish markets and mostly short in down trending bearish markets.
(A 10-day moving average over the 20-day moving average is a good sign of an uptrend, and the reverse
is a sign of bearishness).

6. Only use margin to trade more trades of equal size. On margin you do not typically have to wait three
days for your trade to clear and you can keep trading after trades are closed. Do not use margin to make
one huge trade.

7. Only trade in stocks with over a million or more shares traded a day and options with open interest of
over a thousand contracts.

8. If you decide to be a day trader you can avoid overnight risk, however the most profitable traders
carry trades for weeks and months. The only ways to manage this risk is to either become a day trader
wherein there is a huge amount of uncertainty in the markets, or you can simply go to cash when a huge
announcement is set after hours, whether it be political in nature or simply earnings for your company.

9. To manage the risk of volatility you can simply trade slow, dependable stocks which have consistent
daily ranges. A stock with a beta of 1.0 simply moves the same as the S&P 500; a stock with a 2.0 moves
twice a fast as the index. You want to trade lower beta stocks to manage volatility. You do not need a
volatile stock to make money; you just need a stock that is either in a trend or in a price range with
support and resistance levels.

10. You can control political risk by simply trading stocks that do the majority of their business in
countries with historically stable governments, such as the United States, Great Britain, Canada, Japan,
etc. When you trade in emerging markets you take on the element of political risk.

11. If you do trade options you can limit the risk of time decay by trading deep in the money calls and
puts. Most of these are pure intrinsic value and do not even have much time value, if any. Some of these
options move close to 100% with the stock price. So even though they cost more, you eliminate the risk
of time running out before they go in the money.

12. Remember to always double check trade information before you hit that last trade button. I have
accidentally traded 10,000 shares instead of 1,000. I have also accidentally traded a stock long when I
meant to short it. This is a real risk like any other.

13. Have a Plan B for your broker and Internet connection. I always keep my broker in my 'contacts' on
my cell phone, and I also have the Internet on my phone to check stock prices.”
9. New Traders try to prove they are right; Rich Traders admit when they are
wrong. Recommended Book: The Disciplined Trader: Developing Winning
Attitudes, by Mark Douglas
He learned that if a stock met his exit price, trailing stop, or stop loss, the odds were that he was wrong
about the trade.

10. New Traders give back profits by not having an exit strategy; Rich
Traders lock in profits while they are there. Recommended Book: Sell and
Sell Short, by Alexander Elder
You can’t predict the markets; you can only react to the signs it gives you.

“So what would you suggest is the best way to take profits in a trading plan?”

“That depends on your trading plan, methodology, and system. Trend traders like me tend to take
profits when trailing stops are hit, but sometimes we also have sell signals as a stock falls through a
moving average support or hits a new low for a certain number of days. We always let profits run as far
as possible. We want to give the stock an opportunity to catch the big trends. A trend trader must
capture large wins to pay for all the small losses.”

“What do you mean by ‘historical price action’?” “I mean that if you’re swing trading a stock and buying
it a month before the underlying company announces its earnings, you would want to know how much
the stock moved leading up into earnings announcements over the past year.”

“If the last four times the stock increased 8%, 7%, 10%, and 12% the four weeks before the company
announced earnings, it would be prudent to take profits when the stock was up 7%, or set a stop if it
retraces to 7% when it is up 8% or more. If you are up 10% in this particular trade, the odds are that you
have all the profits you are going to have and you need to look at taking them.”

When you trade you should:

1. Really understand the stock you are trading, its volatility, daily price range, and historical movements
leading into earnings. You should also understand how the earnings reports of similar companies affect
your stock. Economic reports may also cause movement in your stock. Know it inside-out before you
trade it.

2. Control your risk. When a stock moves against you and hits your stop or gaps down below your stop,
get out. This is your insurance against ruin. Do not hope, do not try to predict, just sell. The majority of
times this will save you further losses. When you sell you can plan to get back in at a predetermined rally
if it fits your trading plan.

3. Keep your Ego out of the trade. Your goal is not to be right every time; your goal is to make money
over the long term. This is accomplished by your winners being bigger than your losers. Focus on being
right big and wrong small, not on being right every time.”

“I have collected ten principles that have helped my trading over the past twenty years. Every last one of
these lessons was learned the hard way.”

1. Read your trading rules and trading plan before trading every day.
2. Never hope for a bounce back; cut losses at predetermined price.

3. Exercise discipline at all times. Follow your predetermined trading plan.

4. Do not overtrade.

5. A successful trade is a trade that follows your trading plan and your system.

6. Do not divide your time; when you are trading, focus only on trading.

7. Your opinion does not matter – only price action.

8. Never try to predict; follow trends and trend reversals.

9. Never fall into the trap of hindsight – only real- time trading counts.

10. Respect the market at all times and do not become arrogant.

Part III Methodology

11. New Traders quit; Rich Traders persevere in the market until they
are successful. Recommended Book: Trading for a Living, by
Alexander Elder
He looked at a cup with handles, ascending triangles, head and shoulders, flags and pennants,
descending triangles, and wedge formations. He read up on trader psychology theories which were
supposed to cause these patterns to form, and he wondered how often they really worked.

Price was reality; personal opinions had little value.

As he went, he jotted down key lessons on growth investing from the trading books which he thought
may be important.

• Trade stocks with double-digit-earning increases year over year.

• The general market direction determines the direction of your stock more than anything else.

• Only trade the leaders in the hottest industries.

• Trade stocks which trade at least a million shares a day so they are liquid.

• Stocks that are close to all-time highs and have great support on the charts are the ones to trade.

• Stocks that have new products with heavy consumer demand should have the highest earnings
expectations.

• Stay away from illiquid penny stocks; trade stocks on the major exchanges.

• Cut losses at predetermined amounts, 2%-8% maximum.

• Never try to bottom fish or buy a falling stock.

• Never bet against a government taking corrective action in the economy.

He also had gotten more than halfway through some great books on trader psychology. By now he knew
that having the right mindset would be very important in his trading. He jotted down these lessons:

• You must make up your mind to trade until you are successful, or you may never make it long enough
to be successful.

• To win at trading you must think and act like a winner. Whiners are not successful traders.

• The biggest determinant of a trading system's success is the ability of the trader to follow it 100%.

• Listen and learn but also verify the source and whether what is being taught really works.

• Do not start trading real money until you have done due diligence on your system.

• Never trade without a written trading plan.

• Control your trading risk by reducing your risk of ruin to as close to zero as possible while still making
an acceptable profit.

• Your system should show your equity curve growing over several months in historical back tests or
paper trading.

• Have an accountability partner whom you can talk to about your trading.

• Keep a trading journal with as much detail as possible – how you felt during each trade and what you
were thinking. Include charts with buy and sell points if possible.

12. New Traders hop from system to system the moment they suffer a
loss; Rich Traders stick with a winning system even when it's losing.
Recommended Book: How to Make Money in Stocks, by William
O’Neal

“Could you sum up success in trading?”

“Hmm…” Rich Trader mumbled, starting to slowly call out what he thought made him successful in the
markets. “Well, let’s see…

1. Find a style of trading you are very interested in and which feels right to you.

2. Learn everything you can about this style.

3. Develop a system that is historically profitable.

4. Develop a watch list of stocks and/or exchange traded funds that have the characteristics which will
make them good candidates for your system.

5. Test it out on paper over a few months through different market cycles to see how it currently
performs.
6. If you are convinced it is a winning system, begin trading it in very small positions, just enough to be
profitable and cover commission costs.

7. Slowly increase your position size as you understand all the moving parts involved in your specific
system.

8. Journal your thoughts and feelings as you trade to learn what causes you to over-trade/under-trade
or not follow your system.

9. Continue to learn and grow by reading books written by successful traders.

10. Continue to network with seasoned traders to grow as a trader.

11. Discuss your trading with another trader to keep yourself on track.

“You can measure the success of your system with these.” He pulled out a blank work sheet and
explained each line to New Trader.

1. The winning percentage: wins divided by total trades

2. Pay off ratio: Profits versus losses

3. Your largest winning trade

4. Your largest losing trade

5. Average winning trade

6. Average losing trade

7. Largest percentage drawdown: The most money you have lost in a row divided by your starting capital
before the draw down

8. Average percentage drawdown: What is the average money lost during your losing streaks divided by
your account before each loss, then divided by number of total losses?

9. Largest numbers of straight losses

10. Largest numbers of straight wins

11. Total percentage profit for different time periods

13. New Traders place trades based on opinions; Rich Traders place trades
based on probabilities. Recommended Book: High Probability Trading, by
Marcel Link
“How do I increase my chances for success in my system?” “Let me think… I’ll give you a top five list:
How to improve the probabilities of your system becoming a winning system.

1. Trade in the direction of the overall market trend only.

2. Let my system make all the trading decisions, not my opinions and feelings.

3. Buy only at the sweet spot on a chart.

4. Become an expert in the method I trade and on the stocks I trade on my watch list.

5. Trade where the volume is not in illiquid stocks or markets.”

14. New Traders try to predict; Rich Traders follow what the market is telling
them. Recommended Book: You Can Still Make It in the Market, by Nicolas
Darvas
The market is going to go where the votes carry it; your job is to vote with the majority.

15. New Traders trade against the trend; Rich Traders follow the market
trend. Recommended Book: Trend Following, by Michael Covel

16. New Traders follow their emotions, putting them at a disadvantage; Rich
Traders follow systems which give them an advantage. Recommended
Book: The Complete Turtle Trader, by Michael Covel

17. New Traders do not know when to cut losses or lock in gains; Rich
Traders have an exit plan. Recommended Book: Wall Street: the Other Las
Vegas, by Nicolas Darvas

18. New Traders cut profits short and let losses run; Rich Traders let profits
run and cut losses short. Recommended Book: How I made $2,000,000 in
the Stock Market, by Nicolas Darvas

According to this book, I am going to make a trading plan.

I should have buying strategy, selling strategy and profit taking strategy.

Buying strategy:

1. RSI above 50.

2. Give signal by moving average i.e, 10 day moving average crossing 20 days moving average.
3. Price should be above 200 day moving average.
4. Watch the chart across different timeframe.
5. Should have formed reversal candle in daily chart.
6. Watch key retracement level, support and resistance.
7. Use ADX
8. Use Accumulation Distribution chart.

Selling strategy:
1. RSI divergence and RSI level on around 60(may be changed after proper research).
2. Have to be in key resistance level.
3. Have to break 20 days moving average in 1 hourly time frame.