Trading Basics

Comprehensive coverage of the four major trading styles

Evolution of a Trader explores the four trading styles that people use when learning to trade or invest in the stock market. Often, beginners enter the stock market by:

• Buying and holding onto a stock (value investing). That works well until the trend ends or a bear market begins. Then they try
• Position trading. This is the same as buy-and-hold, except the technique sells positions before a significant trend change occurs.
• Swing trading follows when traders increase their frequency of trading, trying to catch the short-term up and down swings. Finally, people try
• Day trading by completing their trades in a single day.

This series provides comprehensive coverage of the four trading styles by offering numerous tips, sharing discoveries, and discussing specific trading setups to help you become a successful trader or investor as you journey through each style.

Trading Basics takes an in-depth look at money management, stops, support and resistance, and offers dozens of tips every trader should know.

Fundamental Analysis and Position Trading discusses when to sell a buy-and-hold position, uncovers which fundamentals work best, and uses them to find stocks that become 10-baggers—stocks that climb by 10 times their original value.

Swing and Day Trading reveals methods to time the market swings, including specific trading setups, but it covers the basics as well, such as setting up a home trading office and how much money you can make day trading.

Preface ix

Acknowledgments xv

Chapter 1 how to retire at 36 1

Chapter Checklist 4

Chapter 2 Money Management 7

Trading: How Much Money, Honey? 8

Order Types: Read the Fine Print! 10

Position Sizing: My Story 12

Position Sizing by Market Condition: Bull or Bear? 13

How Many Stocks to Hold? 15

A Better Way? Portfolio Composition 16

Hold Time: How Long is Long Enough? 18

Hold Time: My Trades 19

The Money Management Matrix 19

Should You Scale into Positions? 21

Averaging Down: Throwing Away Money or Smart Choice? 28

Scaling Out of Positions: A Profi table Mistake? 31

Dollar‐Cost‐Averaging: Good or Bad? 34

Using Leverage: An Expensive Lesson! 35

Leverage Guidelines Checklist 36

Chapter Checklist 37

Chapter 3 Do Stops Work? 41

What is Hold Time Loss? 42

Mental Stop: For Professionals Only! 44

Minor High or Low Stop: A Good Choice 45

Squaring Off Round Numbers 46

Chart Pattern Stop: Too Costly? 47

Stopped by a Moving Average 47

The Truth about Trendlines 48

Trendline Stop 49

Fibonacci Retrace Stop: Deal or Dud? 50

Fixed Percentage Trailing Stop 53

Volatility Stop 53

Chandelier Stop Leaves You Hanging 55

Testing Six Stop Types 55

What I Use 59

Chapter Checklist 61

Chapter 4 Support and Resistance 63

Types of Support and Resistance 64

Measured Move Support and Resistance 65

Minor High Resistance 66

Volume at Minor High Resistance 67

Minor Low Support 67

Volume at Minor Low Support 68

Minor High Support 68

Minor Low Resistance 69

Gaps Showing Support and Resistance 70

Myth: Tall Candle Support and Resistance 70

Horizontal Consolidation Regions 71

Another Look at Round Numbers 72

Support in Straight‐Line Runs 72

Resistance in Straight‐Line Runs 74

SAR Summary 75

Chapter Checklist 76

Chapter 5 45 Tips Every Trader Should Know 79

Determining Stock or Market Direction 97

Finding the Market Bottom 102

Visual Tips 122

Chapter Checklist 130

Chapter 6 Finding and Fixing What is Wrong 135

What Was the Market Behavior? 136

Was the Industry Trending? 137

How is the Timing? 139

Are All Entry Conditions Met? 142

Was the Position Size Proper? 144

Was an Initial Stop Used? 144

Did You Exit Before the Stop? 145

What Was the Risk/Reward Ratio? 146

Did You Average Up? 147

Did You Average Down? 147

Are You Buying Out of Season? 148

Trading Checklist 149

Chapter Checklist 151

Chapter 7 What We Learned 153

Chapter 1: How to Retire at 36 153

Chapter 2: Money Management 153

Chapter 3: Do Stops Work? 155

Chapter 4: Support and Resistance 156

Chapter 5: 45 Tips Every Trader Should Know 157

Chapter 6: Finding and Fixing| What is Wrong 161

Visual Appendix of Chart Patterns 163

Bibliography 169

Other Sites of Interest 171

About the Author 173

Index 175

“The three books in this series were written for people unfamiliar with the inner workings of the stock market, but will still curl the toes of professionals, too. Research is used to prove the ideas discussed, but is presented in an easy to understand and light-hearted manner. You will find the books to be as entertaining as they are informative and packed with moneymaking tips and ideas. Use the ideas presented here to hone your trading style and improve your success. Whether you are a novice who has never purchased a stock but wants to, or a professional money manager who trades daily, these books are a necessary addition to any market enthusiast’s bookshelf.”
—Alan Battista, Stockineer.com Book Review

THOMAS N. BULKOWSKI is a successful investor with thirty years of experience in the stock market. He is also the author of the Wiley titles Encyclopedia of Candlestick Charts, Encyclopedia of Chart Patterns, Getting Started in Chart Patterns, Trading Classic Chart Patterns, and Visual Guide to Chart Patterns. Bulkowski is also a contributor to Active Trader, Technical Analysis of Stocks & Commodities, and other publications worldwide. Before earning enough from his investments to retire from his day job at age 36, Bulkowski was a hardware design engineer with Raytheon and a senior software engineer for Tandy Corporation.

How you trade or invest in the stock markets depends on market conditions. Buying and holding on to a stock during a bear market can mean a substantial decline in net worth. Day trading when the markets are soaring can add to stress unnecessarily. Thomas Bulkowski discusses the evolution of a trader from buy-and-hold to position trading, swing trading, and day trading in his hotly anticipated series of how-to guides, Evolution of a Trader.

The first book in the series, Trading Basics, is a practical introduction to the art and science of stock trading. The book discusses money management, a topic so often overlooked in financial works. How do you size a position properly? How many stocks should a portfolio hold for proper diversification? Should you scale into or out of positions? Do dollar-cost-averaging and averaging down work? He answers these questions and more.

Choosing the correct type of stop can mean the difference between success and failure, profit and loss. Learn why stop-loss orders cut profit more than they reduce risk. Sometimes, stops are best left unused because they cash you out of potentially winning trades prematurely.

Bulkowski discusses a half-dozen types of support and resistance, then he measures and compares their effectiveness. If you can determine where a stock is going to reverse because of overhead resistance or underlying support, then the riches on Wall Street can be yours. His research is a gold mine of information waiting to be unearthed.

He discusses forty-five tips that every trader should know. Have you heard of the 2B rule? Or how about trading busted chart patterns? Does divergence in the RSI indicator really work or have today's markets made it obsolete? Bulkowski offers tips on finding the market direction, determining when the market has bottomed, and over a dozen tips on when to sell.

He wraps it all up by helping you diagnose trading problems. Are you entering or exiting your trades too early or too late? Did you average up? Are you buying out of season?

Bulkowski's work sets an example of how financial books should be written. He doesn't just repeat what others have said. Rather, he investigates and researches his facts before teaching the reader in an entertaining and informative style that is accessible to the beginner and the professional. Anyone investing or trading the markets can benefit from this series.