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Survival Guide for Traders: How to Set Up and Organize Your Trading Business

ISBN: 978-0-470-43642-4
324 pages
November 2011
Survival Guide for Traders: How to Set Up and Organize Your Trading Business (0470436425) cover image

Description

The must-have guide for anyone considering entering the exciting world of trading from home

The biggest stumbling block for people looking to launch their own trading businesses from home is a failure to understand the complexities of the "back office" operations needed to be successful. Survival Guide for Traders is here to help. Packed with strategies for building a successful home trading business, and featuring answers to questions most up-and-coming traders would never think to ask, Survival Guide for Traders is required reading for anyone who wants to start and sustain a trading business from home.

  • Explains how to create a trading business plan, set up an office, implement a trading system, use margin, deal with legal and financial issues, and keep appropriate records
  • Examines the opportunities and challenges of handling a home-based trading business
  • Details the process of setting up and organizing your trading business
  • Includes a comprehensive "Trading Business Plan Template" that you can customize
  • Written by Bennett McDowell, a highly regarded trader and trainer of traders

The book for anyone even thinking about entering the exciting world of trading, the Survival Guide for Traders offers practical solutions that anyone can use in order to build a lasting, thriving home trading business.

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Table of Contents

Foreword xiii
by Toni Turner

Preface xvii

Acknowledgments xix

Disclaimer xxi

Introduction: Survival of the Fittest xxiii

PART I Survival Basics 1

CHAPTER 1 It’s a Jungle Out There! 3

Brawn, Brains, and Technology 4

Technological and Innovation Time Line 5

Don’t Bring a Knife to a Gunfight 7

Right in My Own Backyard 7

CHAPTER 2 Managing Your Money Is Serious Business 9

Trust and Financial Advisers 10

Tips on Selecting a Qualified Financial Adviser 11

So, Who Are You Going to Trust? 12

Creating Your Own Business Plan Will Strengthen Your Ability to Prosper 13

Trade, Invest, and Live within Your Means 14

CHAPTER 3 Accountability, Setting Stops, and the Rogue Factor 15

Traders Are the Ultimate Entrepreneurs and Must Be Held Accountable 16

Setting Stop-Loss Exits Is Essential 17

The Infamous Rogue Trader Named Nick Leeson 17

Watch the Rogue Trader Movie 18

Insurmountable, Large Losses Usually Start As Small Losses 19

CHAPTER 4 What’s Your Net Worth? 21

Net Worth Statement 21

Creating Your Financial Profile 22

Are You Moving Forward, Falling Backward, or Standing in Place? 28

CHAPTER 5 The Life of an Entrepreneur 31

New Start-Up Businesses Have High Failure Rates 31

What Does It Take for a New Business to Succeed? 32

Small Businesses Are the Backbone of the Economy 34

Reduce Your Expenses and Increase Your Revenue 35

How to Reduce Expenses 36

A Penny Saved Is Really One and a Half Pennies Earned 38

It’s All About the Revenue 39

CHAPTER 6 Understanding Financial Markets 41

Buyer and Seller Agree on Price, but They Disagree on Value 42

Buyers and Sellers and the Financial Order Flow Process 42

Types of Orders 49

Using Margin and Leverage 52

The Importance of Liquidity and Volume 53

Zero Liquidity 56

Volatility and Market Gaps 58

How Can the Bid and Ask, Spreads, Fills, and Slippage Affect Your Profits? 61

You Can Parallel Test Your Broker and Data Feeds 62

“I Feel the Need for Speed” 63

So Many Markets to Choose From 64

Ticker Symbols at a Glance 65

How to Choose the Best Data Feed for Your Needs 66

How to Choose the Best Broker for Your Needs 70

How to Choose the Best Front-End Platform for Your Needs 72

Manias, Panics, and Crashes 73

CHAPTER 7 Adapting to Changing Market Cycles 75

Four Major Market Cycles 75

It’s All in a Name 78

Using Trend Lines to Identify Market Cycles 79

Using Elliott Wave Analysis to Identify Market Cycles 80

Pitfalls of Not Identifying Market Cycles Correctly 81

CHAPTER 8 Education and Support 83

A Few Classic Trading Books 83

Learning Styles 84

Repetition, Repetition, Repetition 85

Paper Trading Is an Essential Learning Tool 85

Do it Your Way 86

You Can Learn from Your Mistakes and Failures 87

Life Mentors, Professional Mentors, and Trading Coaches 88

CHAPTER 9 Writing a Business Plan 91

Business Plan: Blank Template 91

Front Matter: Title Page, Table of Contents, and Mission Statement 93

1. Summary 94

2. Strategy 108

3. Operations 118

4. Financials 124

Business Plan Tips 128

Part II The Financial Pie 129

CHAPTER 10 The First Slice: Trading and Investing Rules 131

Develop and Test Your System 132

Perseverance Is the Holy Grail 132

Failure Is Not an Option 133

Creating Your Trading Rules Profile 134

A Note about Day Trading versus Position Trading 138

Holding Trades Overnight and Assuming Overnight Risk 140

My Definition of Scalping 141

Sample Trading Rules to Start With 141

Combining Fundamental and Technical Signals in Your Trading Rules 142

Technical Analysis Signals 143

Fundamental Analysis Signals 146

Value Investing in a Bear Market 148

The Importance of Paper Trading 148

Set Up Multiple Brokerage Accounts to Monitor Your Trading Results 152

CHAPTER 11 The Second Slice: Scanning for Opportunities 155

Technical Scanning Techniques 156

Fundamental Scanning Techniques 157

Opportunity Is Always Abundant in the Markets 165

Stocks 165

Options 169

Futures 170

Forex 174

Exchange-Traded Funds 177

CHAPTER 12 The Third Slice: Money Management 179

What Can Money Management Do for You? 179

Three Ways to Control Risk 180

Risk Factors to Develop Your Plan Around 180

Stop-Loss Exits Can Save the Day 182

Your Survival Depends on Having a Healthy Respect for the Risk of Ruin 184

Optimal f Formula: Information Similar to the Risk of Ruin Tables 186

Comparing Optimal ƒ Equation Results to the Risk of Ruin Tables 187

The 2 Percent Risk Amount Formula 188

Using the Trade Size Formula 188

Trade Size Formula Using Leverage 189

Using the Trade Size Calculator 190

Good Record Keeping and Performance Analysis Are Essential 191

Without Risk, There Is No Opportunity . . . 192

CHAPTER 13 The Fourth Slice: Financial Psychology 193

The Trader’s Mind-Set 194

Even Good Change Can Be Stressful and Emotionally Challenging 195

Looking at 15 Destructive Psychological Trading Issues and Their Causes 196

Optical Illusions Show How Our Minds Can Mislead Us 198

EPILOGUE 201

APPENDIX A Online Bonus—Survival Guide Central 203

APPENDIX B ART Basics 209

APPENDIX C Resources: Front-End Platforms, Brokers, Data Providers, and More 243

APPENDIX D Suggested Reading and Education 255

APPENDIX E Market Exchanges 273

Glossary 283

About the Author 307

Index 309

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Author Information

BENNETT A. McDOWELL, founder of TradersCoach.com®, began his financial career on Wall Street in 1984 with J.J. Kenny, and later became a Registered Securities Broker and Financial Advisor for Prudential Securities and Morgan Stanley. He developed his own proprietary trading system, later known as the Applied Reality Trading® (ART®) system, which was released to the public in 2003 and today is used by traders in over fifty countries around the world. Considered an expert in technical analysis and complex trading platforms, McDowell lectures nationally and writes for many leading trading publications, including Technical Analysis of Stocks & Commodities magazine. He has also written two other bestselling books published by Wiley, The ART® of Trading and A Trader's Money Management System, both released in 2008. Internationally recognized as a leader in trading education, Bennett teaches trading to students around the world through his company TradersCoach.com®.

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