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Is Your Trading

Biased?

Your Trading

Starter-Pistol

KKK...III...SSS...SSS TTTrrraaadddiiinnnggg PPPrrriiinnnccciiipppllleee

Seven Steps for

Developing a Low-

Risk Idea - Part 2

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Get an Edge in Your Trading! How to ’become’ a trader that wins in any

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Amazing Trading Formula! Remarkable new stock trading techniques

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MARKET UPDATE

Matthew Sharratt

Page 5

TRADING ARTICLES

Graeme Pearson

Is Your Trading Biased?

Page 11

Louise Bedford

Your Trading Starter-Pistol

Page 15

Gary Stone

K.I.S.S Trading Principle

Page 19

Van K. Tharp, Ph.D.

Seven Steps for Developing a Low-Risk Idea - Part 2

Page 23

REGULARS

News & Events Page10

Did You Know? Page 22

Quotes to Inspire Page 29

Trader’s Library – Book Review Page 27

YOUR TRADING SOLUTIONS

T +61 3 8682 8774 | F +61 3 8678 3034 |Graeme@yourtradingsolutions.com |

www.yourtradingsolutions.com

Welcome to Issue 30 of the Your Trading Solutions eMagazine.

In this issue I have written an article titled “Is Your Trading Biased?”

where I look cognitive biases and how they can influence your

trading. Gary Stone simplifying your system and focussing on the

process in “K.I.S.S Trading Principle”. Louise Bedford’s article “Your

Trading Starter-Pistol” looks at some things you need to consider to

start your trading off strong. In Van K. Tharp's article " Seven Steps

for Developing a Low-Risk Idea - Part 2" he completes his coverage

of the process for developing a trading system.

We have our regular Market Update with Matthew Sharratt from

SCM Equities. Matt is offering all YTS eMagazine readers a full

review of your portfolio and he will put a comprehensive

investment plan together for you free of charge.

We hope you enjoy the current issue of the Your Trading Solutions

eMagazine. If you have any comments or feedback, please direct

them to: support@yourtradingsolutions.com

Your Trading Solutions is committed to assisting Traders to gain the

right knowledge and to educate themselves to make informed

decisions about financial matters.

All or love and best wishes to you for a continued happy and

profitable 2012!

Graeme and Natalie Pearson

Note: Articles have been reprinted in the English language supplied

eMagazine Producers

Natalie & Graeme Pearson

Editors

Natalie & Graeme Pearson

Natalie@OrganisedForYou.com.au

support@YourTradingSolutions.com

Design

Natalie Pearson

Contributors

Louise Bedford, Graeme Pearson, Matthew

Sharratt, Gary Stone, Van K. Tharp, Ken

Long,

Contribution & Advertising Enquiries

Natalie Pearson

Natalie@OrganisedForYou.com.au

Important Message

All of the information contained in the Your

Trading Solutions eMagazine should not be

taken as financial, legal or accounting advice.

The producers, editors, contributors and any

other associated parties expressly disclaim

any and all liability and responsibility to

every person or party, whether a reader or

consumer of this eMagazine.

We do not endorse the views, statements,

claims, strategies or ideas that are put forth

in this eMagazine. We are merely relaying

the information.

Any business or financial strategy or

investment should only be applied after

taking into consideration your own financial

situation and you should seek professional

advice before making any decisions.

We are not liable for any losses you may

incur directly or indirectly as a result of

reading the Your Trading Solutions

eMagazine.

5 | P a g e

31st January 2013

January Markets

S&P 500 +5.31% XJO +4.9%

The Rally Continues

Stock markets posted strong returns in January; the

S&P500 had its largest increase since 1997.

As reported on CNBC this week;

“With the markets on a roll, will the 'January Effect' last

through the end of the year? Since 1950, the January

barometer predicted the year's course with 81 percent

accuracy.

In fact, the correlation is even stronger when the market

finishes January in the black, proceeding with full-year gains

90 percent of the time.

Consider the last five decades, for example, when there were

11 other instances, when the S&P 500 rose at least 5 percent.

In all of those years, with the exception of 1987, the index recorded double-digit gains of at least 16

percent.

Even in 1987, which is the year when stock markets around the world crashed in an event also

known as 'Black Monday', the S&P 500 managed to finish the year positive, up 2 percent.”

The XJO put on 4.9% in January maintaining its impressive run, from the 2012 low the Aussie

market has put on +23%. The divergence between the ASX 200 and other global index’s remains

however this is slowing closing as the Australian market plays catch up to global markets. We

have been talking about this opportunity to be long Aussie equities since early 2012 and we still

believe this “catch-up” trade remains strong going into 2013.

Markets Report for January 2013

SCM Equities International

Contact: Dealing Desk

global@scmequities.com.au

Matthew Sharratt Senior Advisor

matthew.sharratt@scmequities.com.au +61 2 8226 8280

Alain Liao

Portfolio Manager alain.liao@scmequities.com.au

+61 2 8226 8284

www.scmequities.com.au

AFSL 313 495

6 | P a g e

Source SCM

What is causing the rally?

I get daily calls from investors questioning why the market is rallying when the current

economic situation paints a different story.

A lot of it is to do with interest rates; historically stock markets are strong in low interest rate

periods. Today the cash rate is as low as the 2009 (GFC) low of 3% and may even move lower.

Leaving money in term deposits is very unattractive especially when yields on quality stocks are

in the 6 to 10% level. The chart below is from Bloomberg, it shows the RBA cash rate (blue) over

the ASX 200 (orange). You can see the historical RBA rate today and if history is to repeat then

we should see a strong equity market in the near term.

Source: Bloomberg

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Aussie Dollar v USD

As we noted in December, Aussie Dollar (AUD) momentum against the USD has stalled. We

would have expected to have seen a much stronger AUD given the recent rally in equities (which

indicates the attractiveness of the carry trade has diminished as investors seek growth and yield

from direct equities. Our long term investors and readers will know we have predominately

been hedged against Aussie dollar upside up to 1.08/1.09. We have now lowered the upside

band to 1.05/1.06 and are recommending buying USD at these levels.

AUD v USD

Q4 2012 Earnings Season

US Q4 2012 earning is the main focus for equities right now. Of the 136 S&P500 companies

reported, 62.5% have beaten expectations, with revenue up 5.5%. Whilst this result is

encouraging it should be noted expectations were low following very weak Q3 earnings which

were the weakest since 2009. Another encouraging indictor is on the whole company guidance

has been positive.

Stock in Focus: Apple (AAPL)

Reaction to Apple’s earnings has been negative (to say the least). Apple shares fell 12%

following their earnings release.

Revenue came in @ 54.5B, up 18% however EPS was flat @ 13.81 (year on year). Whilst this

result was higher than consensus estimates it was lower than expected iPhone shipments that

surprised the market. Gross margins also fell to 38.6% from 44.7%.

For second quarter 2013, Apple forecasts revenues to be in the range of $41.0 billion to $43.0

billion (approximately 5.0% to 10.0% year-over-year growth). Gross margin is expected to be in

the range of 37.5% to 38.5%, while operating expenses are projected to be within $3.8 to $3.9

8 | P a g e

billion range. Other income/ (expense) are forecasted to be $350.0 million while the tax rate is

likely to be 26%.

This sell off shows the high expectations investors place on Apple’s earnings and the high level

of ownership the stock already has. Was the selloff justified? From a valuation perspective

absolutely not, will it continue? From a technical/sentiment level it probably will.

What does concern us is the slowdown in year on year EPS from 13.87 to 13.81. To remain a

growth/market leader stock we want to see earnings growing & sales above +10% per quarter.

Quarter EPS ($) % Chg Sales ($mil) % Chg

Mar-11 6.4 +92 24667 +83

Jun-11 7.79 +122 28571 +82

Sep-11 7.05 +52 28270 +39

Dec-11 13.87 +116 46333 +73

Mar-12 12.30 +92 39186 +59

Jun-12 9.32 +20 35023 +23

Sep-12 8.67 +23 35966 +27

Dec-12 13.81 0 54512 +18

Source Zacks

Apple current weighting our US model portfolio is around 4%, we trimmed our position at 662

in December and at this stage we expect to maintain this weighting. We accept that Apple

cannot maintain its “super” growth run due to increased competition and a perceived lack of

innovation however Apple is well positioned to expand internationally and may yet play a

trump card and start to buy back shares and or pay a regular dividend.

9 | P a g e

About SCM Equities

SCM Equities are specialist in Australian and International equity markets; they run Individual

Managed Portfolio’s for their clients and provide comprehensive economic and company

specific research and recommendations. As a special offer for Your Trading Solutions

subscriber, if you mention you are from YTS, you will get 3 months free access to their model

investment portfolios in Australia and US.

Contact Matthew Sharratt for further information.

Regards

Matthew Sharratt Head of Global Markets

SCM Equities Pty Limited AFSL 313 495 Level 11, 1 Chifley Square, Sydney NSW 2000 PO Box R995, Royal Exchange NSW 1225 T 02 8226 8280 F 02 8226 8255 E matthew.sharratt@scmequities.com.au W www.scmequities.com.au

Warning: This report provides general advice only and document has been prepared without taking into account your

objectives, financial situation or needs. Before acting on any advice in this report, you should consider whether the advice

is appropriate for your individual financial circumstances and needs.

The report and any advice is subject to change without notice, but SCM Equities shall not be under any duty to update or

correct it. All statements as to future matters are not guaranteed to be accurate and any statements as to past

performance do not represent future performance.

General Disclosure

This research has been issued by SCM Equities Pty Limited (ABN 46 124 553 224, AFSL 313 495) (“SCM Equities”). It is

intended for clients of SCM Equities only and may not be reproduced or distributed without the consent of SCM Equities.

So far as laws and regulatory requirements permit, SCM Equities, does not warrant or represent that the information in the

report including any advice is accurate, reliable, complete or current (Information). The Information is indicative and

prepared for information purposes only and does not purport to contain all matters relevant to any particular company or

issuer. SCM Equities believes the information or advice in the report has been obtained from sources that are accurate at

the time of issue, but it has not independently checked or verified that information and does not warrant its accuracy or

reliability.

Important disclosure information regarding the subject companies covered in this report is available at

www.scmlequities.com.au/disclosures.

10| P a g e

Perth Trading & Investing

Seminars & Expo

23rd-24th March 2013

Venue: Perth Convention & Exhibition

Centre

21 Mounts Bay Road, Perth 6000

Times: 10am – 5pm Daily

Discounted Tickets available online at

http://www.tradingandinvestingexpo.com.au/

Brisbane Trading and Investment

Seminar & Expo

1st-2nd June 2013

Venue: Brisbane Convention and Exhibition Centre

Cnr Merivale and Glenelg Streets, Southbank, Brisbane, 4101

Times: Saturday 1st June: 10am – 5pm

Sunday 2nd June: 10am – 4pm

Discounted Tickets available online at

http://www.tradingandinvestingexpo.com.au/

11 | P a g e

Is Your Trading Biased?

By Graeme Pearson This is more of a rhetorical question than anything as I believe all traders would have some

level of bias in their trading and as human beings this is only natural. The biases I am talking

about are cognitive biases. I don't think anyone is immune from them and it is more about

how well they are managed as to how much they influence your trading.

The act of trading itself is a very simple process. You get a set up from your trading system

and get prepared for the trade and watch for a trigger to get you into a trade. Once in the

trade you then set your stop loss points and any profit target and then usually manage the

trade through a trailing stop of some sort. While in an open trade only one of two things

should happen either you get stopped out of your trade for a loss or you close out the trade

for a profit.

Sure I have probably oversimplified some steps but in essence that is the act of trading in a

nut shell. The mechanics of trading are not hard. So what is the difficult part of trading? I

often break trading down into two basic components.

One part being a profitable trading system with a

proven edge. The other part is that of following the

rules of that proven trading system. Or to put it

another way there is you and your trading system.

The first component of having a profitable trading

system is also not hard but it can take some effort.

We are not talking about a magic pill here. I think to

be successful at anything there is some effort required on your behalf and to think otherwise

would be slightly deluded. You can purchase a trading system but ultimately you will trade

the best when you have a system which suits your personality. This can be achieved by

modifying an existing system or developing a system from scratch.

There are some key elements which need to be in place for a well constructed trading

system. These are Setup, entry, exit (both for a profit and a loss) and risk management. I

have included money management under the umbrella of risk management for the case of

this explanation. If your system has each of these elements then you are off to a good start.

The next part is then to prove that it is actually profitable. This can be done through back

testing, paper trading or trading using a demo account or a

combination of all to be thorough.

Once you have that completed only then should you even

consider placing a trade. Having a profitable system only

makes up a small portion of the outcome of a trade.

Depending on who's opinion you are listening to the trading

system itself only makes up about 0-30% of trading results.

The other influence as touched on earlier is the ability to follow

a system or put another way the psychology of the trader.

12 | P a g e

A big part of the psychology of a trader are cognitive biases. The word cognitive can be

defined as pertaining to the mental processes of perception, memory, judgment, and

reasoning. Another description of cognitive biases are systematic errors in the way

information is processed. There are many cognitive biases which have been identified. I

have come across at least 85 biases. The cognitive biases can be grouped into 4 main

categories of decision making and behaviour biases, probability and belief biases, social

biases and memory biases.

I have chosen a few from each of these main categories and will detail below how they can

influence your trading.

Decision Making and Behaviour Biases

Bandwagon Effect

This is the tendency to do or believe things

because many other people are either doing or

believing something. In trading this is obviously a

major influence to markets being oversold and

overbought or booms and busts.

Confirmation Bias

The confirmation bias is the filtering or interpretation of information to confirm one's

preconceptions. This comes up in trading when a stock doesn't meet your rules but you don't

want to miss out on a trade as you have heard good things about the company. You begin to

look for or interpret any information to support taking the trade.

Representation Bias

This is the assumption that a representation is the real thing. For example a chart produced

by a software application can be seen to be the market whereas it only a representation of

the market.

Hyperbolic Discounting

This is the tendency to have a stronger preference for a more immediate reward rather then

a later reward. In trading this can result in closing out a trade because it is in profit rather

than following your system and letting your profit run for a potentially larger profit in the

future.

Illusion of Control

This is where the illusion of control or influence over

an outcome is created where there is clearly no

control possible. An example of this is that through

placing a trade you automatically think that the

market will now move in your favour just to give you

a winning trade.

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Outcome bias

This is the tendency to judge a decision by its eventual outcome instead of based on the

quality if the decision at the time. This shows up in trading where you place a trade

according to your rules and thus being a correct decision which then turns out to be a losing

trade and is therefore deemed to be a bad or incorrect decision.

Loss Aversion

"Numerous studies have found that people feel losses more deeply

then gains of the same value" - Kahneman and Tversky 1979. Some

studies even indicate that losses are twice as powerful,

psychologically, as gains. This can result in losing trades being held

for longer than they should just to "avoid' locking in the loss. Another

effect can be not taking a trade altogether in an attempt to avoid loss

but also making it certain that there is no possibility of a profit.

Neglect of Probability

This is where probabilities are totally disregarded when making a decision with an uncertain

outcome. An example in trading is not trading with the probabilities in your favour. If you are

long and the set up conditions of your system indicate that you should be short you are

neglecting the probabilities.

Biases in Probability and Belief

Overconfidence Effect

This is the tendency to overestimate one's abilities. The overconfidence effect becomes

evident in trading after a strong winning streak when the trader starts to believe they can do

no wrong and as a result begins to get sloppy with their trading. This leads to taking trades

which don't fit the rules of their system.

Gambler's Fallacy

This is the tendency to assume that individual

random events are influenced by previous

random events. An example in trading is when it

is assumed that a winning trade is more likely

after a long string of losses.

Recency Effect

The recency effect puts greater emphasis or weight on more recent events over earlier

events. In trading this will show up in a tendency not to take the next trade due to your last

trading or two being a loser even though the five trades prior to that were all winners.

Social Biases

14 | P a g e

Egocentric Bias

Where a person claims more responsibility for themselves for an outcome. In trading this

comes into play when the trader begins to think that any good results are directly attributed

to themselves rather than the system and or good market conditions.

Self-fulfilling prophecy

This is the tendency to carry out actions that create

results which will confirm existing beliefs. The

negative side of this is probably more common and

often labelled self-sabotage. You may have a belief

that you will never succeed at trading which then

results in you taking any necessary action in order

to fulfil that either consciously or subconsciously.

Memory Errors

Selective memory

This is the case where rare events are widely reported or emphasised, thereby altering the

perception of how common they actually are. This is evident in the trader who only talks

about their big wins to the neglect of the many losses that they have incurred.

This information on cognitive biases may all be well and good but what can be done to

overcome them. The first step is to be aware of them which I hope this article has gone

some way towards achieving that. In addition to this article start looking for evidence of them

in your decision making. You will begin to see how your decision making is heavily

influenced by your perception.

Once you have become more aware and conscious of these cognitive biases the next step is

to become data driven. Get to know the performance metrics of your system inside and out.

Understand the probabilities of your system and the reward and risk characteristics. By

understanding not just your system rules but your system performance and base your

trading decisions on that then you will always be trading in your best interests.

If you would like more information on cognitive biases and understanding your trading

system or would like support on your trading journey then free to contact me at

graeme@yourtradingsolutions.com to help you become the best trader you can be.

About the Author: Graeme Pearson is a Professional Trader and Trading

Coach for Your Trading Solutions. Since resigning from his Full-time job as a

Mechanical Engineer back in 2006, Graeme realised that although he had

reached his goal of financial independence something was still missing.

Graeme found that he gained great pleasure in helping others and

particularly when that help involved trading. Graeme now utilises his

trading experience, Neuro Linguistic Programming and coaching training to

combine mindset and methodology to help other traders become the best they can be. For more

information about coaching contact Graeme at: graeme@yourtradingsolutions.com

15 | P a g e

Your Trading Starter-Pistol By Louise Bedford

Suppose you were planning to purchase a business that

had the potential to create an unsurpassed lifestyle for you and your family. Would you spend some time discovering the critical components necessary for success? Of course you would. You’d also work your tail off to develop a business plan that would set you up for the future. One of the key similarities with successful people from all professions is that they start with the end result in mind. If they want to make a million bucks out of their business, they set up a business that is capable of generating that amount of profit. This sounds like such a simple concept, doesn’t it? However, many traders, when they first begin trading, seem to short-change their new venture and strangle their own potential results. Let’s have a look at some aspects you will need to consider to trade the sharemarket successfully.

Support Don’t make the mistake of thinking you can do all of this yourself without help. Trading can be lonely, even when everything is going your way. Find someone who cares about your success, and a group of traders who have already stepped through the minefield. Educate yourself, or you’ll suffer the consequences.

To really learn the ropes about trading, invest in some quality books and perhaps attend some share trading seminars. This will shortcut the process and speed up your progression from beginner to experienced trader. Trading mistakes are expensive, so it makes good sense to learn how to avoid them. For a basic set of books, CDs and DVDs, you must be prepared to invest around $2,000 - $3,000. Courses range from $200 for a day, up to around $90,000 for personal

tuition, depending on who you go to, their track record, and their reputation. Just because you pay more, doesn’t mean you get better value. Do your homework.

Brokers

There are two basic levels of brokers in the trading community – full service and discount brokers.

A full service broker tends to provide all of the bells and whistles that you would expect, especially given the amount of brokerage that they will extract from your account with every transaction (up to 2% of the value of the transaction)!

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Discount brokers fall into two categories – the human variety, or online brokers. ‘Human’ discount brokers will talk to you over the phone and offer very cheap rates. However, they won’t provide advice or send you any flashy newsletters, and often you won’t be able to deal with the same person every time you make a transaction. Fees of around $50 or more per small transaction are common.

The other type of discount brokerage firm is an online broker. Online brokers often charge a flat fee per transaction (e.g. $19.99) up to a certain value of shares traded (e.g. $50,000). If you know how to trade, and you’re not afraid of technology, online trading is a great way to minimise your brokerage costs.

Software

Sharemarket software uses shares-related data to produce charts and other forms of analysis. Expect a fee of $600 - $2,000 for decent software. You should consider:

Can you search the market easily for opportunities?

What technical support is available if you run into difficulties?

Are there training courses that you can attend to help you learn about the software?

How user friendly is the manual and help files?

Can the software handle a variety of data formats from different data providers, or will you be required to buy your data through only one source?

The software needs data to be able to produce the charts or figures that you will use to make trading decisions. Technical analysts rely on data such as volume traded and share price action. Fundamental analysts require company profit, loss, and balance sheet figures. It is your choice as to which type of analysis you prefer.

You’ll also need to invest in a relatively up-to-date computer if you don’t already have one. This will set you back around $1,500 or so.

Trading Plan

The best traders approach the market with a trading plan, which is their blueprint for success.

Your plan must cover some basic issues such as your trading goals and objectives, an accounting structure from which to trade, and how you will handle your positions when you go on holidays. A trading plan must also cover 3 essential areas:

* Entry

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* Exit

* Position Sizing

Entry

Develop a scientific process for analysing signals, and do not let your emotions dictate your trading habits. You need to define your signals in words in a clear fashion so that another trader unfamiliar with your technique could duplicate your strategy.

Exit

The golden rule of trading is: "Keep your losses small and let your profits run". Stop-losses provide a sign that it is time to exit your position, as it is no longer co-operating with your initial view. Every successful trader has pre-meditated the conditions of exit, before entering

the trade.

Many people set a stop-loss, but when it is hit they convince themselves that the trend will reverse and that they just need to give the share more time to prove itself. This is detrimental to your psyche as well as your bank balance. Don’t bury your head in the sand by holding onto a losing trade as a ‘long-term investment’ when you should have sold it months ago. Set your stops and follow them. When the share moves in the anticipated direction, you can trail your stop behind the share

price to lock in your profit.

Before you place your order, decide on how or where you will exit. Use a stop loss to capture your profits and avoid large losses.

Some traders day trade, and spend around 3 – 8 hours per day in front of their screens. Others trade weekly and devote only around 1 hour a week to trading. There is no ideal amount of time to devote. It depends on you, your lifestyle, and how much time you need to create the results you crave. Short-term traders don’t necessarily earn more than longer-term traders – however, they definitely spend longer screen watching.

Position Sizing

The key to managing risk is to size your positions correctly. Buy fewer shares and give the price action room to move if conditions have become lumpy. Seek risk by buying more shares when in profit, or if conditions are more stable. There are many ways to gauge your position size according to sound risk and money management principles. Whichever method you follow, make it explicit by writing it in your trading plan.

Consider position sizing and capital allocation based on risk. Here are some basic guidelines to ensure that you don’t get blown up while frolicking in the financial jungle:

• Commit a maximum of 15% of your total equity to higher risk sectors of the market. As an example, with a trading float of $100,000, $15,000 can be devoted to speculative shares. This will allow you to buy a maximum of 4 - 5 lower risk stocks, and up to 3 - 4 speculative stocks. This will still provide exposure to possible high returns, without the potential to devastate you financially if the market drops from the sky.

18 | P a g e

• Before you enter a trade, determine where or how you will exit if the market turns against you. By only allowing yourself to incur a loss of a maximum of 2% of your total equity per position, even a string of losses won’t destroy your capital. Your number one goal in the market must be the preservation of capital. When traders have learned how to consistently make more money than they lose, they enter the realm of the professional trader.

If you would like to download a trading plan template, there is one available for free from my website www.tradinggame.com.au. It will help you work through all of the vital issues that need to be included in a sophisticated trading plan to give you an edge in the sharemarket.

Successful traders are among the most highly paid professionals in the world, yet many beginners in the market expect to earn exceptional income immediately, without undue planning and effort. Profitable trading does not rely on luck. It demands the highest levels of skill and discipline, and lucratively rewards the people who develop these qualities. This is a marathon, not a sprint – so make sure you get set properly before you leap from the starting blocks. To help you pursue your trading goals, if you would like to download a trading plan template called a ‘Trading Plan Review’, there is one available for free from my website www.tradinggame.com.au. Simply enter the competition to potentially win a free Home Study Course, and you will also receive 1 month free forum access, as well as a copy of my Trading Plan Review. It will help you work through all of the vital issues that need to be included in a sophisticated trading plan to can give you an edge in the sharemarket.

Want to get Louise’s free 5-part e-course so you can excel in the markets? Register your details right now at www.tradinggame.com.au and you’ll never look back. Louise Bedford (www.tradingsecrets.com.au) is a full-time private trader and author of The Secret of Writing Options, The Secret of Candlestick Charting and Trading Secrets.

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K.I.S.S Trading Principle

by Gary Stone “Everything should be made as simple as possible, but not

simpler.” Albert Einstein.

If you haven’t heard of it the acronym K.I.S.S. stands for Keep It Simple Stupid. This acronym is as applicable to the field of trading the markets as it is to any. The Keep It Simple Principle works best when activities are kept simple rather than made complex, therefore simplicity is the key goal and complexity should be avoided.

So why do people over complicate the approach to trading?

All too often traders and investors set out on the path of good intentions but sooner or later the market’s short term random behaviour challenges any strategy’s strengths and weaknesses. Whilst this market behaviour is accepted as inevitable, traders tend to over complicate the trading approach as they seek to problem, usually on the run in the heat of the moment.

Understandably nobody enjoys giving money back to the market, but rather than accept that it is part and parcel of trading a stress-tested edge, traders mostly decide to try and modify the strategy to filter out the losing trades. They begin to tinker, try

new found indicators and use ever more complicated combinations as they feverishly look to analyse away the ‘bad’ signals from the strategy, resulting in a quagmire of indecision and chaos. The problem is that the price patterns for a ‘bad’ trade can look exactly the same as the price patterns for a ‘good’ trade so ‘good’ trades will also being analysed away.

I’m not saying that modifying and testing new concepts isn’t valid but when it’s done in the heat of the moment at the expense of an already profitable stress-tested system then the trader ends up greatly reducing the existing edge. Remember that every strategy will have a series of winning and losing trades. This combination is built into the edge. If this is accepted, stick with it.

When is enough, enough?

At some stage you just have to say enough is enough. Forget about listening to economists, media outlets’ stock picks, advertising by large fund managers that time

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in the market is the only way, brokers’ picks, story writers about a secret stock, and scrupulous marketers. Find yourself a system that has an edge and work towards building personalised processes that deliver the consistency and objectivity that will keep the activity of trading simple, focused, methodical and repeatable.

Think about the simplicity of McDonald’s restaurants for a minute and how they have adopted a true K.I.S.S approach. Their business systems allow their 1 million plus employees in over 31,000 franchised restaurants to efficiently deliver a consistent consumer product – wherever you are in the world your experience is very similar at a McDonalds restaurant.. McDonald’s are said to serve 68 million customers a day and in many instances the McDonald’s system is delivered by a team of low skilled youthful employees.

There is absolutely no discretion used by any employees and managers are tasked with ensuring that the team implement the proven processes of the McDonald’s system without any discretion. It took massive effort to create the McDonalds processes but once in place they pay for themselves over and over again. The McDonald’s processes are an excellent example solving complex logistical problems with simple processes whilst also keeping the customer experience simple and consistent.

You need to McDonaldise your trading

The definition of ‘process’ is “a series of actions or steps taken to achieve an end.” By definition this implies methodical and repeatable.

Quite simply, ever investor needs to McDonaldisee their trading. I’ve spent years training people on the markets and I am convinced that traders and investors need two pillars to simplify trading in order to achieve the success of protecting capital and outperforming the market benchmarks on an ongoing basis.

• You need a strategy that has a positive statistical edge. It determines what to buy, when to buy, how much to invest in each position and when to sell.

• You need simple processes to execute and manage the edge – could a low skilled teenager execute your investing processes? I have written much in this Blog about a Trading Plan. The ultimate test of yours is if a McDonald’s employee at the coalface could execute yours with a day or two’s training.

If you are going to trade the edge yourself, which is what the majority of investors do, then you need a third pillar, the necessary mindset to trade the edge.

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I have written much on the psychology of trading. As soon as you have attachment to the outcome of the process the necessary psychology required to follow the processes to achieve the edge skyrocket.

This is because we are so frail and full of fear of losing, being wrong or missing out. We put huge importance on our personal value based on the individual outcomes. The low skilled teenager would have no attachment to outcomes, he/she would just trust the process they were trained to follow. They put no importance on the outcome of the process, they put huge importance on how well they follow the process because they trust that the outcome will be satisfactory if they just follow the process. You might want to manage this teenager which, like the McDonalds manager, would simply involve you ensuring he/she followed the trading processes.

“The problem is that most overestimate the importance of events (outcomes) and underestimate the power of processes. We want quick fixes. ….. Don’t get me wrong. I appreciate events. They can be effective catalysts. But if you want lasting improvement, if you want power, then rely on processes.” John Maxwell

Markets are complicated, but trading them need not be. How simple are your investing

processes? Can they be executed in 10 - 15 minutes a day?

If they rely on hours of reading stories from newsletters or annual reports or fund managers reports or brokers’ recommendations or pouring over charts or watching TV programs or reading the daily financial press or magazines then I would suggest they are not simple nor consistent nor objective and that they require an enormous amount of knowledge, discretion and skill to execute. Is this how you want to spend the rest of your investing career?

Gary Stone is the founding Director of Share Wealth Systems and leads the Research and Development Team. Trading and researching the markets since 1990, Gary is motivated by a conviction to help people do better. He has a strong belief that gaining knowledge in the market is not enough. “Investors need to be able to step into a set of repeatable and measurable processes that emanate from the market. Without a set of rigorous processes the probability of success is low”. A contributor to media outlets such as Sky Business News, ABC Radio, Your Trading Edge Magazine and the Australian Technical Analysis Association, Gary is regarded as a well-researched and credible market commentator.

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Woodside was incorporated on 26 July

1954. It was originally named Woodside

(Lakes Entrance) Oil Co NL and it was

named after the small town of Woodside,

Victoria.[3] Woodside's early years were

focussed on Victoria's Gippsland Basin.

Switching to northern Western Australia in

the early 1960s, Woodside joined up with

Shell and Burmah Oil to form the original

North West Shelf consortium. BHP later

replaced Burmah, and with Shell, each

became a 40% shareholder in Woodside.

In the early 1990s both BHP and Shell

agreed to sell down to 34% stakes each,

before BHP sold out completely.

Woodside Petroleum

Woodside Petroleum Limited an is Australian petroleum exploration and production company. Woodside is the largest operator of oil and gas production in Australia and also Australia’s largest independent dedicated oil and gas company.

Woodside Petroleum first started trading on the ASX on 6th January 1984 at a price of $1.16.

Woodside hit an all time low of $0.74 on the 11th March 1985 and reached an all time high of

$69.92 on the 22nd May 2008.

http://en.wikipedia.org/wiki/Woodside_Petroleum

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Seven Steps for Developing

a Low-Risk Idea - Part 2

by Van Tharp, Ph.D. Last month we discussed the first three steps of a seven-step approach to developing low-

risk trading ideas:

1. Knowing the big picture and trading a strategy that will work given that big picture

2. Developing a fictional short-term model for what the market is doing

3. Finding a low-risk trade within the model for which your risk is minimal

This month, we'll talk about steps 4-7, which address the need to manage risk and adapt your system when necessary.

4. Make Sure Your Trade Has At Least a 3R Potential Gain.

Now that you know what a 1R loss will be, it’s important to determine your profit potential. If your model is correct, the prices should go to the other end of the channel. Ask yourself, “what kind of move is likely, and how big is that move with respect to my initial risk?” If it is at least three times your initial risk, it’s probably a good trade for you to take. If it’s less than three times your initial risk, skip it. You can find a better trade later.

Notice what this step means:

• The smaller the initial risk set up by your model, the more likely you are to get an acceptable trade.

• The model is useful as long as you’re not married to it. As soon as you decide that it might be real, you run the risk of developing a psychological need to be right about the model, and that will influence your decisions.

• It doesn’t matter whether or not the model is accurate or real—just that it gives you low-risk trades.

Consider this chart (Figure 1) from last month's article, which shows daily bars of the USD/JPY prices for 2012 (through mid-June). If we entered a short trade at 79.30 and placed our initial stop at the upper trend line, 79.50, our risk per unit would be 0.2. Our first exit target might be the swing-low close at 78.00 on June 1, so we'd have the potential for an 8R profit—well above our minimum of 3R.

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Figure 1: USD/JPY Daily Bars Jan. 1, 2012 through June 14, 2012

5. Take the Trade With a Position Size That Allows You To Continue to Play the Game.

Essentially, we’ve already talked about this step in our definition of a low-risk idea. You are basically trading beliefs that you made up, but as long as you remember that you made them up and keep from getting attached to them, it doesn’t matter.

Think about it. Let’s say you make money on 50% of your trades and that your average profit is about 2R, while your average loss is 1R. This gives you a pretty good system - even though you invented everything.

Keeping this illusory nature of your system in mind, you must trade it at a low-risk level that will allow you to survive any unexpected occurrence. Although I recommend that generally you risk no more than 1% on each trade, you are probably much safer risking ½% per trade when you start trading, especially if this is a new model with which you don’t have much experience.

By the way, let’s make sure everyone understands what risking 1% means. Suppose you found a stock and decided that your initial risk was $2.50 per share—the difference between your entry price and the initial stop. You would get out of the position if the price dropped by $2.50 after you entered. If you have a $50,000 portfolio, and you want to risk 1% of that, then you’d risk $500 on the trade. Now, if you divide that $500 by the $2.50 unit risk you get 200 shares. If the stock cost $40 per share then you purchase $8,000 worth of stock. You would get out of the trade if the price moved against you by $2.50, so your risk is only $500—not the entire $8,000 position. This is what we mean by risking 1% of your portfolio.

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6. Continue to Trade the Model if the Trade Works Out

If the trade works out, you might find that the model you made up will work for four or five more trades. If so, that’s great; continue trading the model.

Even if a trade doesn’t work out, it might not destroy the model. For example, the trade might retrace and go back above the line you drew, stopping you out. However, it if just stays there or then reverses again, it doesn’t invalidate the model. You might still get some more trades out of it. Continue to do that. You might have made up the model, but as long as it works, just continue to use it.

7. Adjust the Model if the Trade Doesn’t Work

Let’s say that the position does reverse and goes way back above the line. In fact, it goes so far above the line that your model no longer makes sense. At this point, you must realize that your model is just made up. Abandon the old one and find a new one.

From our previous example, you may find that you simply need to redraw your channel lines. In Figure 1, the USD/JPY bars were rolling over at the upper trend channel line. They did go lower but then later reversed to go through the upper trend line (see Figure 2 below). You might make up that there’s a new upward channel in which prices are now moving—or at least until they don’t anymore.

Figure 2: USD/JPY Daily Bars Jan. 1, 2012 through June 27, 2012

You might find that nothing you invent makes sense. However, later, after studying the charts some more, you find that another pattern seems to jump out at you. Okay, that seems to be what now fits. Go ahead and use the new model to help you generate new low-risk trades using the same principles we’ve just described.

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If you trade complex models (made-up models in my opinion) such as Gann or Elliot Wave, always remember that those are just invented models and you’ll be fine. You are simply following the steps I’ve just outlined. Once traders start believing the model, however, they have become convinced that their model is real and they stop seeing what the market is truly doing. Problems always occur at this point and the net result is usually a disaster.

Just remember that you are simply inventing models that give you the basis for low-risk trades. If those models are based upon commonly accepted trading practices (e.g., trend lines, support and resistance, Fibonacci numbers, etc) then enough traders may believe them to give them some validity. If not, then you still have a low-risk idea and you must act on it and get out. The net result, even though your idea is based on a fictitious model, is still a good trade.

Remember, the key is that you cannot trade the market; you can only trade your beliefs about the market. So why not make up some useful beliefs?

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his

best-selling books and his outstanding Peak Performance Home Study program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com.

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The Psychology of Trading

By Brett N. Steenbarger

Product Description

Behavior is patterned. Beginning with this premise, noted clinical psychologist and active

trader Dr. Brett Steenbarger opens the therapist’s door, demonstrating how traders can

identify, interrupt, and change the problem patterns that interfere with successful trading. In

The Psychology of Trading, Dr. Steenbarger draws upon real-life case studies and offers

hands-on techniques for emotional change to assist traders in becoming their own

therapists. Themes that set The Psychology of Trading apart include:

•"Trading from the couch" by utilizing emotions as valuable market data

•Identifying and building solution patterns that capture hidden trading expertise

•Techniques for assessing and trading against the emotions of market participants

Click directly on the image to

purchase this book

Each issue we will feature a Review from Amazon.com about a book that we would

recommend for your Trading Library. If you would like to purchase the book each month

simply click on the image and you will be taken directly to our Amazon A-Store to securely

take your order.

28 | P a g e

•Methods for building focus and concentration for more automatic and trustworthy trading

decisions

•Creating shifts in states of consciousness to rapidly exit anxious, impulsive, depressed, and

guilty frames of mind

In an engaging manner that provides practical solutions to real trading problems, Dr.

Steenbarger walks you through the most common cognitive and emotional tendencies that

distort efforts at identifying and trading market patterns. He then describes specific skills

derived from years of brief therapy practice to help you become an effective observer of

these tendencies and gain control over them. By blending state-of-the-art research from

psychology and cognitive neuroscience with detailed case studies, The Psychology of

Trading provides you with the intellectual and emotional ammunition to face yourself and

transform your approach to risk and reward..

Customer Review By Peter Jensen

Words cannot put to justice the astonishingly accurate, profoundly well-researched and

lucidly written work of Dr. Brett. Using his real life clients as models The Good Dr. takes us

on a journey through previously unchartered regions of the human psyche with painstaking

detail. This book and the references contained in it set me on a path to self-discovery that I

shall never backtrack on. I now see things with an awareness beyond which I ever thought I

could attain.

It is really amazing as to how many people are sitting behind trading stations without the

slightest clue as to the fiendish psychological challenges that trading presents to a human

mind which is hard-wired to protect its ego at any and all costs. For those that are not

brought up in an idyllic homestead with angels nursing their every psychopathological

ailments trading is simply not somewhere to search for affluence and prosperity. As this

applies to virtually everyone, those that intend to make money consistently must devote

themselves to cultivating a superior level of self-understanding. Aspiring students of the

markets must also increase their thresholds of pain exponentially since frustration & damper

are the order of the day in this industry, at least initially.

The profitable trader must wield acute awareness, understanding of the underlying

mechanism of the human brain and develop levels of self-discipline akin to the mythical

Odysseus because the sirens of the market can be just as deadly. Dr Brett shows you step

by step how the markets are relentless at exposing every one of our own individual

emotional weaknesses, ferreting out every chink in our armor.Plentiful "screentime" and an

objective mindset are the factors that go into the creation of a successful market player.

Persistence without a doubt is the penultimate for it is their own painful battle scars that bring

priceless wisdom to accomplished speculators.

This book should be on the shelf of anyone trying finish in the black on a consistent basis

regardless of their level of sophistication. Thank you Dr. Brett for changing my life.

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" I think it was a long step forward in my trading

education when I realized at last that when old

Mr Partridge kept on telling other customers,

"Well, you know this is a bull market!" he really

meant to tell them that the big money was not

in the individual fluctuations but in the main

movements — that is, not in reading the tape

but in sizing up the entire market and its trend."

~ Jesse Livermore

"Humility leads to strength and not to weakness. It is the highest form of self-respect to admit mistakes and to make amends for them."

~ John (Jay) McCloy.

“Happiness is when what you think, what you say and what you do are in harmony."

~ Mahatma Gandhi

" The starting point of all achievement is desire. Keep this constantly in mind. Weak desires bring weak results, just as a small amount of

fire makes a small amount of heat.

~ Napoleon Hill

" No problem can be solved from the same level of consciousness that created it."

~ Albert Einstein

Trading skills can be one of the most difficult skills to acquire, yet how many traders take on a coach to

help them with their trading? If we were to talk about any sporting endeavour which you wanted to

achieve your best in then you would hardly think twice about taking on someone to help make it work for

us, but trading, no, that seems to be different. Of course trading coaches may not be cheap, but in most

cases they are a lot cheaper than the losses which many make in the markets.

A quote by Derek Bok sums it up nicely “If you think education is expensive, try ignorance”.

It is not difficult to make money in the markets, but there are many things you need to learn and you also

may need to “unlearn”. It is learning to do what you learn intellectually, that ultimately proves so difficult.

Knowing what you should do is not enough. That is where the coach comes in to help you not only to know

what you should do, but actually do it.

A large number of losses exist through not following a profitable trading system and this is where the

coach comes in to find out what is stopping you working in your own best interest.

Your coach will give you methods to follow to help strengthen your internal discipline and continues to

work with you until it works for you. That is when the fees charged will be dwarfed in comparison with the

money you can make from the markets.

Winners go for what they need. If you think there is scope for improvement in your trading then you

should do something about it. The first step is to decide that you are going to be a winner, and then just

do it.

Become the Best Trader You Can Be!

When would now be a good time become a successful trader and make massive profits from the market?

Pick up the phone and CALL NOW on +61 400 482 653 or email me on graeme@yourtradingsolutions.com

for more information on our transformational coaching. Graeme Pearson.

As Anthony Robbins says “Never leave the scene of a decision without taking the first step”