The Business of Trading: 101 steps to trading success
By John Piper
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About this ebook
Over 101 short and easily digestible chapters, this eBook takes readers behind the scenes of the life of a professional trader: from how to get started all the way through to staying in the game for the long term. Find out what a profitable strategy looks like. Discover the cardinal rules of effective risk management. Get a true handle on the kind of mindset you need to succeed. And watch some of Piper's own trades in action with exclusive links to online videos.
Collecting his acclaimed 'Trading Intelligence 101' emails together for the first time, this is one of the most candid guides to making a living in the markets that you will ever read.
John Piper
John Piper is founder and lead teacher of desiringGod.org and chancellor of Bethlehem College & Seminary. He served for thirty-three years as a pastor at Bethlehem Baptist Church in Minneapolis, Minnesota, and is the author of more than fifty books, including Desiring God; Don’t Waste Your Life; and Providence.
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Reviews for The Business of Trading
2 ratings1 review
- Rating: 1 out of 5 stars1/5I have been trading for around 5 years now, and this book did not bring any value to me. It is highly possibly that could be useful for beginners.
Book preview
The Business of Trading - John Piper
Piper
Contents
About the Author
A Note on the Text
1. Welcome
2. The Very Basics of Trading
3. An Edge
4. Profits and Cutting Losses
5. Risk Control
6. Manic Depression – The Market Mirror
7. From Extreme to Extreme
8. A Simple Trading Approach
9. Trade What You See
10. A recap of modules 1 – 9
11. Trading and Psychology Questionnaire
12. Winners and Losers
13. The Internet
14. The Evolution of a Trader
15. The Risk-Orientated Trader
16. An Understanding of the Market
17. An Understanding of How You Work
18. An Understanding of How Your System Works
19. Risk Control and Stops
20. A recap of modules 1 – 19
21. A Look at Spread Betting (aka Futures Trading)
22. A Look at Binary Betting
23. A Look at Option Trading
24. A Look at Share Trading
25. You
26. Commitment
27. A Day in the Life of a Trader
28. Discipline
29. Money Management (1)
30. A recap of modules 1 – 29
31. Fundamental vs. Technical Analysis
32. Analysts and Traders
33. Risk Control (2)
34. Futures and Fair Value
35. The Three Simple Rules
36. Control Your Losses
37. Run Your Profits
38. Trade Selectively
39. System Parameters
40. A recap of modules 1 – 39
41. Entry vs. Exit
42. Your System/Approach
43. Operation
44. Let There be No Illusions
45. Profit/Loss
46. How Many Brains Do You Think You Have?
47. Who is Going to Bail You Out?
48. Winning Trades
49. Trapping Your Prey with Moving Averages
50. A recap of modules 1 – 49
51. Testing Out Your System
52. Trapping Your Prey More Quickly
53. Milestones
54. Five Characteristics of Successful Traders
55. The Elliott Wave Theory
56. Price Spikes
57. The Evolution of a Trader (I)
58. Failed Breaks and Failed Re-tests
59. Focus
60. A recap of modules 1 – 59
61. Trendlines and Moving Averages
62. The Mind of the Markets
63. Acceptance and Rejection
64. What Do We Really Have Control Over?
65. Selling the Dow at the Top (I)
66. Selling the Dow at the Top II
67. Selling the Dow at the Top (III)
68. Putting it all Together
69. The Next Step
70. A recap of modules 1 – 69
71. Using Your System (I)
72. Using Your System (II)
73. Trading FTSE on 26th November 2007 (I)
74. Trading FTSE on 26th November 2007 (II)
75. Trading FTSE on 26th November 2007 (III)
76. Trading the News
77. Trading the £ with Options
78. Trading FTSE Triangles
79. Trading Dow Binaries
80. A recap of modules 1 – 79
81. Q and As (I)
82. Q and As (II)
83. Why Your Stop Policy May be a Big Mistake
84. Where to Trade
85. Making a System Your Own (I)
86. What Next?
87. 24 Hour Markets
88. Making a System Your Own (II)
89. Trading and Life
90. Your Q and As
91. More Q and As
92. One Use of a Track Record
93. Wealth Creation
94. Webinar One
95. Trading Vehicles and ETFs
96. Work
97. Webinar Two
98. Even More Q and AS
99. ETFs
100. Clarity of Vision
101. You’ve Made It!
Extra Modules
102. Trading is a Business
103. Panic to Complacency
104. Fibonacci Targets and Freebies
Publishing details
About the Author
John has been trading markets since the mid 80s, mainly writing options but also trading futures, spread and binary betting. The highlights have been trading right through the ’87 Crash (mainly selling put options – hence the lack of hair!), annual turnover exceeding £2m of option premiums on his personal account, winning a TV trading contest, and generally spending far too much time glued to screens.
Whilst abusing himself in this way he also decided to help other traders and started The Technical Trader in 1989 and which has become the leading trading newsletter in the UK. The newsletter filled a void and the business has helped many traders over the years.
John has also developed a number of trading techniques; he summarizes his approach as Psycho-Trading – meaning getting into the mind of the market.
John is based in the Spanish hills around Marbella but is also a frequent traveller to more exotic climes often with the Hash House Harriers – a club for those who like a drink but who have a running problem!
John runs a trading service looking for the big calls.
Other books by John Piper:
The Way to Trade
The Fortune Strategy
Profit Before Work
Binary Betting
Binary Trading
Tunnel Trading
Trading is a business (reached No. 1 on Amazon in its category)
The KrautGap/ ZeitGap Modules/The A-B Trading System (Awarded Best Financial Product 2014
by More Money Review)
Trading Triangles
The Little Book of Trading Secrets (with Mark Austin and Cameron Malik)
Wealth is a Choice***
If you would like to receive John’s free news sheet send a blank email to jptt@aweber.com (***you also get a free copy of Wealth is a Choice)
The author welcomes feedback and can be contacted at jpmobile@john-piper.com; his web site is www.johnpiper.info
A Note on the Text
This book was originally written and published as a series of subscription-only weekly emails called ‘Trading Intelligence 101’. Rather than take out all reference to this, including exchanges with readers, the decision was made to keep all of the original character in place in order to preserve every insight in its original context.
At the time of going to press, all links were active. Should any prove problematic, please contact tt101@aweber.com for assistance.
1. Welcome
Welcome to Trading Intelligence 101!
My name is John Piper. I have been trading successfully since the 1980s and I now work with people like you who want to:
•learn to trade successfully
•make the leap to living off their own trading/business earnings (trading is a business)
•live a life of financial abundance
•run their business from anywhere in the world they want.
Sound good?
Well I am here to tell you it is better than good, it’s great!
I have been running my business from all over the world for some years now and I would not swap the lifestyle for anything.
Over 101 short and easily digestible chapters/modules, I hope to help you get to the same place.
Each module is to the point – with no unnecessary fluff. Every tenth module I will summarise the key points so far.
Some of the modules are extracts and/or summaries of material in my various books. Others include video clips of trading tips or actual trades I have taken. Some devices, such as the iPad, will be able to open these up in browsers if you tap on the links. On Kindle and other eReaders, you’ll either need to copy out the link to a browser on your computer, or just use the desktop app for that brand of eReader and click through from there.
In this first module I am now, very briefly, going to introduce a concept which we will explore in more detail later in the course – trade what you see, not what you think.
Joe Ross, a well known trader from the US, said this and I have expanded it slightly to …
Trade what you see, not what you think or feel.
Many people get fixed ideas about a trade and then carry it our regardless of what they see.
Many others simply want to trade emotionally and do so for that reason.
Often it is the very impulse that gets us involved in trading in the first place that causes this and for this reason it pays to closely examine our motivation.
Exercises
Occasionally in this book an exercise will be suggested. You have three choices: you can ignore them, do them as they come up, or wait until every tenth module and do all of the exercises for that group in one go.
Book recommendations and websites
As we go along, I will include book recommendations, and direct you to useful websites if I think these will be helpful.
I really hope you enjoy this project and should you find anything confusing, badly written (!), non-working links or have any suggestions, resources or stories, please email me directly on john@john-piper.com.
What you can do to get ready for the next module – The Very Basics of Trading
Complete this statement ‘I want to trade because ............... ’, writing down as many things as you can and then consider what these motivations will mean in terms of when you trade.
Will they help you make money?
2. The Very Basics of Trading
In this module I want to look at the very simple mechanics of trading – the essential trade-off you make when you enter any trade.
However you trade you are taking on the risk of loss in return for the prospect of reward.
Let’s categorise the risk you might take. It might be …
•fixed, or
•variable.
Think about this for few minutes – which would you prefer?
Would you prefer to know exactly what you might lose or would you rather be unsure?
But there is another part to this equation: your reward . Guess what? That also can be either …
•fixed, or
•variable.
The most popular form of trading in the UK is probably spread betting
(roughly equivalent to futures trading in the US) and here both your risk and your reward is variable.
You can change this and limit your risk, but this makes everything far more complicated – we will be looking at this later in this course.
An alternative is a fixed-odds
bet – with this bet (aka trade) your risk is fixed and so is your reward.
In this module my aim is to tell you about the various ways you can use risk and reward.
Having told you that both risk and reward can be fixed and/or variable the next stage is to consider how risk relates to reward and vice versa. So two more questions …
•would you prefer the reward to be greater than your risk? or
•would you prefer the risk to be greater than your reward?
The inventiveness of man knows no limit and there are trading vehicles which will offer you all of the possible parameters. But let me tell you here and now: there are no free lunches, and it is simply a matter of choosing parameters that suit you personally.
My best-selling book The Way to Trade was subtitled discover your trading personality
for this very reason – a key part of the trading process is simply finding an approach that suits you.
As this course continues we will be looking at all of the available trading vehicles but here are a few just to be getting on with …
•if you buy an option your risk is limited and your reward theoretically unlimited – but most options expire valueless
•if you sell (aka write) an option your reward is limited and your risk theoretically unlimited – remember most options expire valueless
•any spread bet (aka futures trading) carries unlimited risk and unlimited reward
•stops change that but you will get stopped out of otherwise winning trades
•fixed-odds bets, and these include binary bets (aka binary options), offer fixed risk and fixed rewards but rewards can be in the thousands of per cent!
This brings us to a key point – you need an edge and we will discuss this in the next module.
What you can do to get ready for the next module – An Edge
Consider risk and reward – what relationship would you like them to have in your trading?
3. An Edge
In the last module we took a basic look at risk and reward and we concluded we need an edge.
An edge is essential if you are going to win. However you trade you want your profits to exceed your losses – I don’t think I need to elaborate on that point.
In fact there are two metrics
which govern whether you win or lose. These are …
•the frequency of your winners, and
•the ratio of the average amount you win against the average amount you lose.
As an example, many trading systems or trading approaches may win 50% of the time – so the frequency of winners would be 50%.
If the amount lost and the amount won each time was the same – in this case the ratio of the average win against the average loss would be 1 – the trader would not make any money because his winners and his losers would be equal.
Plus you must bear in mind the costs involved with trading. These can be minimal but you will have a computer, maybe a PDA, software, and you may subscribe to newsletters or attend seminars.
These can add up.
Your edge also has to overcome disadvantages such as the spread you may be charged and any commissions you may pay.
So to make money with an approach approximating to 50% winners and 50% losers you really want to aim for an average winner twice your average loss.
Of course if you win more often, say two winners for every loser, then the average profit ratio can be lower.
We will be looking at your edge throughout this course but here are some examples …
•a trading technician will have an edge if he finds an indicator or combination of indicators that give an expectation of profit
•a chartist will have an edge if he finds a chart pattern that does this – personally I find triangles very reliable and a recent trade in Gold is an example, as is a trade in 2008 on FTSE – this trade is set out in Binary Trading
•a value investor will have an edge when he finds a stock offering good asset cover, including cash, for his investment
•an arbitrageur will have an edge when he finds two or more positions which either eliminate his risk or bring it down to very low levels
If you want to read more on this important subject, go to: www.johnpiper.info/Profitsmax2008.pdf
In the next module we will be looking at the first stage of trading – where we fixate on profits and need to learn to cut losses.
What you can do to get ready for the next module – Profits and Cutting Losses
Consider what markets you would like to trade.
4. Profits and Cutting Losses
In this module we are going to start out on your journey to trading success.
In fact I am going to tell you where you are going to go – now that may seem a little far fetched but the truth is we all travel a very similar path when it comes to trading markets.
We come to the market brimming with confidence and full of hope.
If any of you have started businesses you will know what I mean. We have all these plans and we only have to put them into practice and the cash will roll in, life will be good, we will have made it.
It is a great pick-me-up for sure!
I have started a number of businesses in my life and some of them have done brilliantly including my trading business – but it never quite goes how we plan.
There are always obstacles and thank goodness for that – because that is how we learn – that is how we become experts …
In fact it is the knowledge and experience that we build by doing these things that makes life interesting, that makes us the people we are!
The trading business is no different and when we enter the arena we often do not know what we are getting involved with – certainly I did not back in the 1980s.
When we start trading we are focused, almost entirely, on profits. But we tend to ignore risk and we simply cannot do that in a high risk environment.
The trick is to stay focused on profits but to learn how to handle risk at the same time.
In trading terms this may mean cutting losses
which refers to the practice of bailing out of losing trades when they reach a previously defined point – set by yourself.
If you don’t do this yourself then you will find that your emotions and instincts do it for you – usually at the worst possible time and that will be the subject of a future module.
But there is an easier way than cutting losses – you can trade with vehicles which do all that for you in the price.
Finally the skill you want to learn is running profits
which simply means getting the most out of every trade.
•There is a book you ought to read if you have not already. It is the bible of all those who wish to attain financial abundance – it is of course Think and Grow Rich by Napoleon Hill.
In the next module we will be looking at controlling risk in more detail.
What you can do to get ready for the next module – Risk Control
Think about what you would consider an acceptable amount to lose in the markets and the amount you would expect to win.
5. Risk Control
This is the basic skill.
Rather like learning how not to fall off your bicycle – if you do not learn how to stay on you will never go onto greater things – like the Tour de France!
Risk control allows you to stay in the market so that you can learn all the stuff you need to learn to excel!
If you allow yourself to be wiped out that is the end of the lesson.
In module #3 I mentioned the two metrics of trading and one of these was the frequency of winners.
A good benchmark is that you will win 50% of the time but many traders do not know how to apply that simple statistic.
In fact statistics is one subject that should be compulsory for traders as a lot of what we do involves probability – especially if we find that we prefer to use price charts and technical indicators to decide on what trades to take.
A little known fact is that if you toss a coin 1000 times you are likely to see strings of 10 or 11 heads and tails in a row.
The significance to trading is that if you have a hit rate of 50% every 1000 trades you are likely to see 10 or 11 winners in a row and 10 or 11 losses in a row.
Now, nobody ever complains about the winners!
But the losses are something else.
Especially if you risk 10% or more of your pot on each trade – because then you will be wiped out of the game.
There is an excellent book on this subject called The Jungles of Randomness and it is a book every trader should read.
In the next module we will be taking a first look at the manic depressive nature of markets.
What you can do to get ready for the next module – Manic Depression – the Market Mirror
One well-known market indicator is the PE ratio which is simply a share price divided by earnings. If we turn this round we get …
PRICE = Value x Sentiment
But why does this explain the manic depressive nature of market action?
6. Manic Depression – The Market Mirror
In recent years we have become all too familiar with the boom and bust of markets.
But what many people fail to understand is that the market simply reflects our views and then does what it has to do to correct when this has moved too far from reality.
Let me explain a simple boom/bust and then look at the mathematics.
The boom/bust cycle applies equally well to property as to stocks and I want to talk about property in this example as it is a market more people have direct experience of.
Back in the 1950s and 1960s property was considered a utility, rather like a car – nice to own but you did not expect an investment return.
Certainly some people bought property to rent out and as a general rule they would pay a capital sum equivalent to around 100 months of rental income – and we might call that the benchmark of a property’s value.
But over the last 50 or so years the public enthusiasm for property has grown and grown and grown.
As we like property more and more that has had a direct effect on price – obviously so as the more we like something the more we will pay.
Sure we were encouraged with this by the banks making it easy to borrow money and by governments giving us