The Principles of Successful Trading

Over many years of trading, I’ve found certain principles to be true. Understanding and using basic principles provides an anchor of sanity when trading in a crazy world. Whenever I find myself under stress, questioning my judgment or my ability to trade successfully, I pull out these basic trading principles and review them.

Don’t Try to Predict the Future
I used to think that there were experts and geniuses out there who knew what was going to happen in the markets. I thought that these traders and market gurus were successful because they had figured out how to predict the markets. Of course, the obvious question is that if they were such good traders, and if they knew where the market was going, why were they teaching trading techniques, selling strategies and indicators, and writing newsletters? Why weren’t they rich? Why weren’t they flying to the seminars on their Lear Jets?

No one knows where the market is going
It took me a long time to figure out that no one really understands why the market does what it does or where it’s going. It’s a delusion to think that you or any one else can know where the market is going.

I have sat through hundreds of hours of seminars in which the presenter made it seem as if he or she had some secret method of divining where the markets were going. Either they were deluded or they were putting us on. I have seen many complex Fibonacci measuring methods for determining how high or low the market would move, how much a market would retrace its latest big move, and when to buy or sell based on this analysis. None has ever made consistent money for me.

No one knows when the market will move
It also has taken me a long time to understand that no one knows when the market will move. There are many individuals who write newsletters and/or books, or teach seminars, who will tell you that they know when the market will move.

Most Elliott Wave practitioners, cycle experts, or Fibonacci time traders will try to predict when the market will move, presumably in the direction they have also predicted. I personally have not been able to figure out how to know when the market is going to move. And you know what? When I tried to predict, I was usually wrong, and I invariably missed the big move I was anticipating, because it wasn’t time.

It was when I finally concluded that I would never be able to predict when the market will move that I started to be more successful in my trading. My frustration level declined dramatically, and I was at peace knowing that it was OK not to be able to predict or understand the markets.

Know that Market Experts aren’t Magicians
Some of the experts that try to predict the markets actually make money trading the markets; however, they don’t make money because they have predicted the market correctly, they make money because they have traded the market correctly.

They don’t profit from their predictions

There is a huge difference between trading correctly and making an accurate market prediction. In the final analysis, predicting the market is not what’s important. What is important is using sound trading practices. And if sound trading habits are all that is important, there is no reason to try to predict the markets in the first place. This is the reason strategy trading makes so much sense.

They have learned trading discipline
I have watched many market gurus continually make incorrect market predictions and still break even or make a little money because they have followed a disciplined approach to trading. More importantly, they used the exact same principles that I will show you how to use in creating your strategy. It is these principles that make the money, not the prediction.

To be a disciplined trader, you have to know how and why to enter the market, when to exit the market, and where to place your money management stops. You need to manage your risk and maximize your cash flow. A sound trading strategy includes entries, exits, and stops as well as sound cash management strategies.

Even the market gurus and famous traders don’t make money from their predictions, they make it from proper trading discipline. Over the years, they have learned the discipline to control their risk through money management. They have learned to take the trades as they come, and not forgo a trade because they are second-guessing their strategy or the market. These are the same practices that you will learn to include in your trading strategy.

They profit from sound cash management & risk control
Sound money management and risk control are the keys to being a profitable trader. I will say over and over again, it is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure.

I often tell the story of the great fish restaurant that opened up just down the street from my office. It opened with great fanfare and was ranked in the top five restaurants in the city. The food was outstanding. But it only took a little more than a year and this great restaurant was out of business. Why? Because the key to running a good restaurant is not the food…it is cash management and risk control. It is making sure your business is run efficiently, keeping your costs (risk) in control, and managing your staff effectively. If you believe that the taste of the food is what makes a great restaurant, think of how great the food is at your favorite fast food restaurant. But, someday, watch how well that restaurant is run.

Just as in the restaurant business, the key to profits in trading is not in the prediction or the indicator, but how well the trading strategy is designed and executed. The ability to achieve risk control and cash management will make the difference between a successful trader and an unsuccessful trader. If you ever have the opportunity to watch a successful trader, you will see that they don’t worry about where the market is going or about predicting when the next big move will take place. They aren’t looking to tweak their indicator. They are worried about their risk on each trade. Is the trade being executed correctly? How much of their total account is at risk? Are the stops in the right place? And so on.

They don’t have superior performance numbers

If you want to have some fun, look at the performance of a successful market expert, one who is known for his or her market predictions and trading expertise. You will find that their performance numbers really aren’t any better than an average trading strategy. The percentage of profitable trades, the return on the account, average profit to average loss, number of losing trades in a row…all of these trading parameters are within the average trading strategy performance parameters.

Why is this? Because you can’t predict where the market will go and when it will move. But if you use correct strategic trading disciplines, you will make money whether you try to predict the market or just trade a good strategy. You might as well save yourself a lot of time, energy, and mental anguish and trade a good strategy.

Be In Harmony with the Market
We make money trading when we are in harmony with the market. We are long when the market is going up, and short (or out of) the market when it is going down. If we bring an opinion with us while trading, we will end up fighting the market. We keep trying to go long as the market is declining, or we keep shorting a market that it is in a bull phase.

Don’t fight the Market
Fighting the market is not good for two reasons. First, we lose money. How much we lose depends on how well we are managing our money and controlling our risk. Second, fighting the market affects our judgment, and causes us to try to confirm that our judgment is correct, or persist in fighting a trend so that we will eventually prove to be correct. We figure that if we persist long enough, no matter how long it takes, we will eventually be right.

The same can be said for being in a canoe in a river. There is a reason for leaving your car downstream, launching your canoe upstream, and paddling downstream. It is much easier and eminently more fun to go with flow and paddle downstream. We could do the opposite and paddle upstream. Eventually we may even get to our destination, but the cost would be substantial. It would take much more time, more physical and emotional stamina, and we would be constantly fighting the current. Reaching the goal would not be worth the cost.

Even if you ultimately make money fighting the market, it is not worth the price you have to pay, both financially and with peace of mind.

Let the market tell you what to do and when
The correct attitude for successful trading is to let the market tell you what to do. If the market says to go long, buy, and if it starts to go down, sell. This sounds easy but it is much more difficult than you think. We always like to believe that we can be in control. We want to be in control of our trading and of the market. If you accept the notion right now that you cannot control the market, that all you can control is your execution of trades, you will take a great step toward being a successful trader.

Instead of trying to control the market, let the market tell you what to do. Let the market and your strategy take you long rather than you personally trying to predict or decide when to go long. Let your strategy take you out or get you short. Once you realize that you can’t understand the market, and that you can’t predict when the market will move, you will move into that detached state of mind where you let the market take you where it will when it wants to.

The market gives and the market takes away
To remove your personal biases and let the market tell you what to do is to give up control, to give up the notion that you are actually in charge of how much money you make. For profitable trading, you need to move into the mental state of letting the market determine the profits, not you. It won’t be whether you predict the market correctly that determines the profits, but whether your strategy is in a profitable mode or drawdown mode as determined by the market.

So, let the markets tell you what to do based on your strategy. Let it get you long and put you short. Let the market determine how much money you are going to make. Trade your strategy and let the market do the rest. And know that the market gives money and the market takes away money. Your goal should be to develop a strategy that gives you more money than it takes away.

Have a Healthy Time Horizon
One of the biggest problems new traders have is that they think they will make a large amount of money right away. They think they will get rich quick. This type of reasoning is very similar to the short-term thinking in American business in general, usually managing for the current quarter’s profits, focusing on short-term earnings at the expense of long-term investment and profit growth.

Trade for profits over time
Traders tend to get wrapped up in current market conditions, the news of the day and the current trade, usually at the expense of the big picture and profits over time. My grandfather used to have a saying, “You can’t go broke taking profits.” He was very wrong. You can go broke taking profits. If you take profits before the market tells you to, or you succumb to fear and close out the trade before its time, you are focusing on the short-term and forgetting how to make money over the long haul. Close out no trade before its time.

Give your trading strategy enough time to work
We tend to be impatient, and we sometimes think that we should get instant gratification. This will not work in trading. The only way you will really know whether you are a successful trader is to be successful over time. A week or a month will not be enough time to tell you how you are doing. You should be trading with the objective of making money in the long run, consistently, and with the confidence that your strategy will make money given enough time.

One of the benefits of trading with a strategy is that having done the requisite historical testing, you should know how long it should take you to start making money. You should have an idea as to the length of time that the strategy has lost money in the past, how much money it has lost, and how long it will take the strategy to become profitable. If the strategy has proven profitable historically, it should be profitable in the future. You just need to give it the necessary time to do its work.

Understand the Psychological Keys of Trading

There are many people who teach the psychology of trading. There have been many books written and effort spent on seminars trying to teach the discipline needed for trading. I don’t think trading is that complex. I have developed a few simple psychological rules for myself, and once you accept them, they should greatly enhance your ability to trade effectively.

Accept losses as a cost of doing business
Most successful traders will tell you that the most difficult thing about trading is accepting the losing trade. We all have the desire to be to be right, to be correct all of the time. For novice traders, the losing trade means that something is not working and that you have somehow made a mistake. For experienced traders, losses are just a cost of doing business.

Some of the best traders in the world lose money on more than half of their trades. If you look at the performance results of the best traders and money managers, you will see that they all have a large percentage of losing trades. If you trade, I guarantee you that you will have losing trades. Learn to love losing trades. They should be your friend because you will be spending a lot of time with them.

Use historical statistics
I don’t think anyone has ever traded without first looking at historical statistics. Even some traders who deny they are strategy traders have used historical data. And before EasyLanguage and TradeStation were available, most good traders developed a strategy’s history by hand. I can remember countless hours pouring over charts spread out on the kitchen table, writing down trades by hand. Before I would trade it, I absolutely insisted on knowing what the strategy’s personality was and how much money it would have made.

Using historical statistics gives you great peace mind, particularly in learning to love losing trades. Knowing the history of a trading strategy can give you tremendous psychological comfort during those tough periods of losing trades and drawdown. Historical statistics tell you how much money the strategy has lost in the past, how many losing trades it has had in a row, and the largest losing trade the strategy has experienced. This is very important information if you are learning to accept losing trades. Comparing historical data with the current string of losses and drawdown can give you much comfort that what you are experiencing now is not unusual and has happened before. Maybe not in exactly the same manner, but it has happened before.

Let the market and STRATEGY determine the profits
Don’t have an opinion, don’t try to predict the market, and don’t try to second-guess your strategy. It’s human nature to have an opinion about things, but this opinion can become a stumbling block if we let it affect our trading. One of the alluring aspects to having an opinion on the market is the exhilaration of being right. Even though we know that the chances of being right are slim, we nonetheless want to prove our intellectual prowess by being right.

Your trading strategy is ultimately a little business. You have developed and tested the product and are now operating the business in the real world. Let the strategy be the strategy. Let it make the money you know that it can. And know that if the market doesn’t move in the manner that will allow the strategy to make money, it won’t make money. Ultimately, the market determines the profit through its movement. If it doesn’t make that move, there will not be profits.

Put the responsibility of making money on the strategy and the market. When they work together, you will have a profitable business.

Don’t Trade for the Money
I have met many successful people, and the one thing that they have in common is that they love what they do. Many have told me they can’t believe that they actually get paid for doing what they do. They have so much fun they feel guilty taking money for doing it. Many successful people will tell you that they would do what they do even if they weren’t paid at all.

Successful people don’t work for the money
Work hard and love what you are doing and the money will follow. Successful people work first and count the money later. Sometimes they don’t ever count it, and some don’t even know (or care) how much they have. They just know that they have enough to allow them to continue what they are doing; working hard and having fun.

Love trading for its own sake
I know that many individuals want to trade because they think that they can make a lot of money easily and quickly. Because of the low start-up costs for trading as compared to other businesses, they think that trading should be the easy road to riches. Their goal is to make a lot of money fast. These are the people who come to seminars and want an indicator that will guarantee profits. They don’t want to learn the ins and outs of the business; they want the magic indicator that will get them the money they desire. They are doomed to failure.

I remember a guy named John walking into a seminar I was about to teach. He threw up his hands and said, “Ah, Traders! I am glad to be home.” This individual was a successful trader. John loved going to seminars, not so much for the techniques and indicators, but for the camaraderie. He loved being around traders, talking with traders, analyzing trading strategies and techniques, and learning about the latest and greatest trading technology. He loved learning the latest features added to TradeStation and finding out a new way to use EasyLanguage.

He loved designing new indicators, and spent countless hours working on new and different ways to exit the market. He was excited about getting up early in the morning to monitor the overnight market information and checking what the S&P was doing in London. He looked forward to calling his broker and putting in his orders. He loved watching his strategy run on TradeStation. He was exhilarated when he had to call his broker and give him a lot of grief for the latest bad fill. He even loved losing trades. Even when he had to take a losing trade, he was still doing what he loved to do—trade.

John is a successful trader. He loves what he is doing. And as long as he can keep on trading, he will be happy. The money he makes is secondary, but he makes a lot of it. He can’t believe that he can have all of this fun and make money as well.

Concentrate on Execution

All of your market and strategic analysis should be done before the markets open. The strategy design should be clear in your mind. You should have the historical Performance Summary of your strategy at your fingertips to remind you of the personality of the strategy, how much money it has made over time, and what its largest string of losses in a row has been. You should know what kind of orders you are going to place, and how you are going to communicate this to your broker.

The last thing you should have to worry about during market hours is where the market is going, and whether to be long or short. Your strategy will tell you all of this. You should not be concerned about the news, or even if you are making or losing money. You should not be concerned with analyzing the market, always reserve this for when the market is closed.

The only thing you should be doing during market hours is concentrating on effectively executing your strategy. If you can’t execute your strategy effectively, there really is no point in trading. There are two sides to trading, strategy development and trading execution. During market hours is when you should concentrate on execution and nothing else.

Always Be In the Market
I have always characterized trading the trend as keeping your costs down while waiting for the big move. We know that to trade profitably, especially for trend traders, you need to be in the market for the big move. Many traders stay out of the market when it’s quiet and try to predict when the big move will occur. These people invariably miss the big move.

Instead of trying to predict when the big move will occur, your task becomes to minimize your losses and drawdown while you are waiting for the big move to occur. This is a different way of looking at trading that focuses on managing cash flow and risk rather than finding magic indicators and making good predictions. Trading thus moves from a hobby to a business.

The only way to ensure that you won’t miss the big move is to always be in the market.

Buy High - Sell Low
Probably the most interesting rule for successful trading is to Buy High and Exit Higher, and Sell Low and Exit Lower. This is counter-intuitive to what we all have a natural inclination to do, which is buy low, sell high. Most great trading strategies are counter-intuitive. They are not based on our normal human nature and the normal human reaction to the markets. They consistently make money because they are designed with market sense not human common sense.

In the final analysis, any market is just a collection of individuals making decisions and placing money in the market based on these decisions. Most of these individuals are doing what comes naturally to humans, buying low and selling high. Statistics show that 95% of these people lose money.

To be a successful trader, you have to do the opposite of what this 95% is doing. It isn’t easy, because it goes against your human nature. But any strategy that is successful over time will most likely follow the rule of Buy High, Exit Long Higher and Sell Low, Exit Short Lower.

Thought I would start things off by sharing some of the things I have learned through my own experiences, and how it might apply to daytrading the NYSE. This is intended to give a little insight to some of the newer traders who are having a hard time finding information on reading the tape/specialist. I would welcome any of the more experienced traders to correct my mistakes or fill in things that I have missed. In a previous thread I spoke a little about how generally an institutional order works on the floor (http://www.elitetrader.com/vb/showt...=&threadid=2267 - hope I did that right). I think it's important to understand the big picture in order to profit from scalping, so let's start from the beginning…

What moves a stock price up and down? Easy - supply and demand. We all know that, and if we could just figure out when one was higher than the other, we would be successful traders. So where does this supply and demand come from? It comes from many different sources, but by far the most significant are the institutions. If you are a new trader do not be discouraged by some poster who quotes something like 'Yeah, I love taking some newbie's money'. That person clearly does not understand the mechanisms of the overall market. Whenever you buy or sell any stock, chances are there was an institution on the other side of that trade, not another daytrader. But don't worry about that - institutions come in all shapes and sizes, and are as wrong as often as we are. So in order to make money, we need to figure out when a good size institutional order is out there buying or selling. We have two tools to figure this out: The tape (which shows us the past - what has traded) and the specialist (who shows us the present - what the changing current market is). Which is more important? In my opinion it's the tape. The tape doesn't lie. Specialists can. But don't discount the specialist; he's going to determine your entry and exit points

I. Think Like an Institution


Like everything else in life, we tend to see things in our own image, and we try to explain things by using our own motivations. Trading as if everyone out there was a daytrader can be a costly mistake. If the market is an ocean, being tiny little fish, we are better off feeding off the scraps of larger fish than going head to head with other tiny fish. So what is the motivation of the institution? Obviously to make money, but not like us. An institution is not buying 1,000,000 shares of ANN to sell it back .25 cents higher. Most of their buy/sell decisions are based on fundamental analysis. Nowadays there are quite a few hedge funds that I know of that base everything on technical analysis, but even they are looking for a few points gain at least. The point is this: How many times have you bought a stock after spotting a significant buyer, saw a little resistance and subsequently sold for a 25 cent profit, and then watched the stock go up another dollar or more throughout the day? It can be very frustrating. What you need to understand is that what is important to you may not be important to the institutional trader. Yes, you care about that 10 cents. On 1,000 shares that's $100. But to the institutional trader who needs to buy those 1,000,000 shares it does not matter. What? That's $100,000! Well not really - could I really buy 1,000,000 shares at one price? No, not unless I negotiated upstairs (read the other thread). But what if I could buy 10,000 ANN at $31.50, 25,000 at $31.70, or 50,000 at $32? What would I choose? If I had 1,000,000 shares to buy I would easily choose 50,000 at $32. Why? Because of the most important aspect of institutional trading: opportunity costs. By saving a few pennies but having less shares I have just cost the firm money (and thus the clients), if the anticipated result occurs. It is more important for the institutional trader to complete the order than to get the best price. Sounds incredible but it's true. Remember, with the exception of some hedge funds, money managers make their money from management fees and commissions, not performance. True, if your performance is really bad, you may lose some clients, but from what I've seen, just plain bad performance interestingly enough doesn't seem to have any harsh consequences.

-cont-


There is a poster here whose signature reads "Trade what you see, not what you think." That is my favorite quote. Did you ever see a perfect setup - the market is up, the sector is up, the tick is positive and even a ray of sunlight is shining on your enter key to transmit your buy order, only to watch the stock continuously drop from unrelenting pressure? Somebody must know something, right? Let me tell you a little story. One morning I went into the morning meeting as usual, where the futures were up strong and one important stock had beat the street with good numbers. One of our holdings was a much smaller company but in the same sector as the larger stock was. One of my bosses had called the CEO to discuss the ramifications of the day's news, only to be treated "rudely" by the secretary. One hour later I had instructions to sell all of our 1.2 million shares. By the end of the day the sector index was up 4%, the stock was down $2 (about 7%). Only now can I feel the pain of the poor daytrader who just couldn't understand why. Why is not important. I have many stories similar to the one above. If you only knew some of the reasons of why I have bought/sold tons of stock you would be in shock. If any of you watch Seinfeld, then just picture the character of George Steinbrenner running an investment firm. (Big Stein wants his calzone!) It was certainly an interesting period of my life…

What's my point? When there is heavy buying pressure you should be buying, and when there's heavy selling you should be selling. In my last firm, we managed about $2.2 billion in equity. On average, I would trade about 1.5 ~ 2 million shares of stock per day. There are tens of thousands of other institutions out there that are much bigger than that buying and selling all day long for a number of reasons that may never have occurred to you. I never once looked at a chart and said 'Hey, ANN is at its 50 day moving average, I think I'll stop buying it'. My head would be on display on the trading desk as a warning for all those who dare to go against Big Stein. I can honestly say that most days I went home not knowing whether the market closed up or down. It was never a factor. It only mattered on extreme days - i.e. if the Dow is down 200+ there's no need to step up on any buy orders. Actually it's very common. As a test we used to call the other traders on the street through the direct lines and say 'Quick - what's the market doing?' Almost always there was a long pause with the occasional ummmmm, and after they looked at their monitor we would get an answer. The most important numbers for an institutional trader are the high and low of the stock, and round dollar prices ($32, $33, etc) which act as "mental" barriers of support/resistance. As much as I love and believe in technical analysis it is important to see it for what it is; a tool to measure investor/trader sentiment. Over the long haul it probably works pretty well, but it can never know the urgency of today's institutional buyer/seller. For that information we only have the specialist and the tape.


II. The Specialist

What is the Specialist's motivation? Most of us see the Specialist as some evil guy who's sitting on a 10,000 share sell order, just waiting for us to buy a few hundred shares so he can fill us and immediately knock the stock down half a point. While it can feel like that at times, his primary goal is not to screw us. His primary goal is to maintain a fair and orderly market. That's his job. In doing so, if he happens to make money, all the better for him. In order to keep the market as fair as possible, the Specialist will work harder for the large institutional orders, for a few reasons. First, because the large orders dictate in which direction the stock will move. Next, because of the relationships on the floor. If I'm going to sell 1,000,000 shares of ANN, it's going to take me a few days, and I'm going to be on the phone with my floor broker who in turn will be dealing with the specialist during that time. Is the Specialist going to screw me on 5,000 shares just to make a few pennies, risking a bad relationship with the guys on the floor who have to tell their client the bad news? (Actually, some have done that before, but it's not the norm) As discussed in that older thread, the Specialist will always want to know from the floor broker if there's more stock behind it. The more he knows, the more he can act accordingly, and the more he can profit from it. He realizes that the institution does have power in the form of size. If he has 5,000 shares left of a 25,000 share sell order from me, and he prints the 5,000 down an inexcusable amount and buys the stock from me just to try to make a buck, I can stuff a few hundred thousand shares in the form of a market order (where he cannot get out of his position) down his throat and he will lose money. In the long run that type of behavior won't benefit the Specialist.

The Specialist makes money in two ways: when traders buy and sell the spread that he has created for the stock, and by buying and selling out of his own inventory when certain situations occur where he is almost certain that he will make money. Playing the spread is easy. The Specialist can trade in front of a limit order, so he can basically adjust his spread all day. He'll normally do this when there is little activity in the stock (like the Dead Zone) and an absence of institutional buyers/sellers.

The other way the Specialist makes money is by buying or selling the stock at specific times in order to profit from moves; much like us, but with a lot more certainty. This is an example of when a little knowledge can be dangerous. Once people learn this they start to assume that the Specialist was part of every decent size print that trades. Next they assume that the Specialist is a participant of every opening trade. This is simply not true. The Specialist is not a risk taker. He doesn't have to be. If the opening of the stock is uneventful, there is no need to participate. He does not know in which direction the market is going to go, so why take the risk? It is only on those special circumstances, where some form of news will affect the stock, when there will be a gap up or gap down, that the Specialist might be involved. And even then, there is no guarantee that the Specialist bought stock on that gap down. Remember, a Specialist sees all the order flow on that stock that morning, which includes cancelled sell orders because the price is getting too low, and cancelled buy orders when the opening price looks to be too high. We only see the opening price after the delayed opening on a large print. We don't know how many institutions "checked" him. Floor brokers will be constantly checking the Specialist and changing their orders and reporting back to their clients with the opening indications, which eventually are displayed on a news server (unfortunately delayed and usually inaccurate). The Specialist gets a good sense of where buyers might come in and where sellers will start to unload and is pretty sure of whether he will be able to profit from it or not.

-cont-

One final note on openings - when an institution is buying or selling a stock the trader does not give the whole order to the Specialist on the opening. If I had to sell 300,000 shares of ANN, I would only give 25,000 - 50,000 shares depending on how big the opening print was going to be, just to test the water. Then I would see which way the stock was trending, and act accordingly. Nobody is going to show his hand, and it is very rare for an institution to buy/sell their whole order on the opening print. The Specialist is very much aware of this fact, and that is why he is not always a part of the larger prints that go up later in the day. If I continuously feed 25,000 shares of ANN to the Specialist without telling him my size, do you think he will take a chance and buy any significant amount of stock at any time during the day just because the stock is lower? No, he'll keep asking the floor broker who keeps giving him the order if there's more behind it. It could take days. But when the order is finished, most traders won't care about letting the specialist know, and now he'll participate on the clean up print.

So how does this apply to "reading" the Specialist? It keeps the focus on what we really want to know: how the Specialist handles larger orders, not how the Specialist makes money for himself. The Specialist will always make money and unfortunately we can't use the same methods for ourselves. For those of you excited about the possibility of 'Open Book' on the NYSE forget it. Do you really think that an institution would give the Specialist a 200,000 share sell order if the whole world could see it? Or even 50,000 shares? No, the orders will just get smaller that's all.

So actually we're not looking for much, just a typical pattern that the Specialist continues to exhibit when working a large order. Lets say the Specialist in ANN receives an order to buy 50,000 shares at the market, and he doesn't have a natural seller. What is his normal process? Well, if you knew beforehand that he had this order, and then watched what happened it would be easier to see, but unfortunately you'll have to work backwards and try to figure things out which will certainly take much more time. How does he start? Usually he'll start by flashing a decent bid of about 5,000 shares. It's a strong bid, but not enough to scare anyone away. If he gets some nibbles, he might up the ante and show 10,000 shares. As a daytrader, we get excited when we see this, but we need to think like an institution. If I was an institutional seller of ANN, I'd be more likely to react to a real bid than a tiny bid. That's what the Specialist is looking for. But if he can't lure one in, he'll have to just pick away, which means buying at the offers (Not many small orders will feel the need to sell 500 shares into such a strong bid). So the stock moves up slightly as different offers are taken, but how does the Specialist handle this? If he's accumulated 5,000 shares already does he sit tight with a 5,000 share bid at the original level? Does he replace with bid with a higher 2,000 share bid? Does he remove the bid altogether to make it seem like there's no support? You may have been watching the stock for the last hour, but will every trader catch that? Making the stock look weak is a common strategy. Instead of dropping the bid, it's actually more effective sometimes to show a weak bid, of say one or two hundred shares, as well as a strong offer one cent above it making it look like the stock is ready to fall. Not a bad way to attract sellers. Does the Specialist in your stock do this? How many times? What happened when sellers took out the weak bid? Where was the next bid? Where was stock being printed? Was it 5 cents below the weak bid? 10 cents? Some specialists will use the same amount every time. And unless the stock has just run up a lot already, he won't let the stock fall too much - remember his primary goal is to fill the order, not to get too cute about it's execution. He's still got more stock to buy, so he'll take all those panic sell orders and execute them at the same price. Eventually if there's no supply, the stock will move up. Does the Specialist use another 5,000 share bid, but up higher? Kind of obvious, huh? How about 3,400 shares - looks more like a stray order. Another 10,000 shares accumulated, time for the old 'weak bid' trick again. You get the point. The key is watching, and I mean really paying attention to what is going on so that you can get a good idea of the behavior of the Specialist when he has a large buyer and no sellers (or vice-versa). This could take an extremely long time, but could be well worth the effort.

One last thing - some Specialists trade more than one stock (not the really big ones), and at times, their attention may be drawn to another situation. Sometimes they are out sick or on vacation (or out to lunch). Sometimes an institutional trader will tell them exactly what they want them to do as far as showing bids/offers that may make no sense to us watching the stock. It happens, and there's nothing we can do to change that. Just try to stick with what usually happens, not what happened last.





II. Tape Reading


Interpreting the tape can seem very difficult and overwhelming at times, but it gets a little easier with practice. The key is not trying to interpret every trade that is printed, but rather to look for and identify situations that indicate a large or aggressive buyer/seller. We don't need to know about the small orders that are being traded back and forth all day - they can occur for a variety of reasons (retail orders, etc.), none of which concern us. So, what are we looking for?

Momentum. Is the stock moving up or down? If it's moving up I'll bet you that prints are going off at the offer. If it's going down then prints are going off at the bid price. That's the most basic and important rule of tape reading. How many times have you seen a bid get hit and then saw the bid step up to a higher level, only to get hit again, and then move to a higher level? Doesn't make much sense. When bids get tapped they go lower. In order to gauge momentum we need to look at the prints on the tape and the stock price, not the Specialist. What if the market in ANN is being shown as 10,000 bid at $31.60 and 1,000 offered at $31.70. Which way is the momentum? If nothing has traded then there is no momentum. However, if three trades of 1,000 shares each go off at $31.60, then the short-term momentum is down, even if the bid amount is greater than the offer amount. Is that enough information for us to make an informed decision of shorting the stock? Of course not, but it's a start. It's telling us that the sellers have a greater sense of urgency than the buyers at this time. I know this is really basic but it really is the key to profiting off stock momentum (NYSE or NASDAQ).

Once you've got that down you're ready to look for some institutional buyers/sellers. The first and easiest thing to spot is big size on a bid, taking out offers and stepping up on the bid. That clearly represents an aggressive buyer, as well as a market order. You'll have to be quick though, because everyone else is seeing what you're seeing, and when the momentum starts to die down, and the bid is down to a few thousand shares, there will be a quick pull back. How much and how quick depends on how fast and severe the stock just moved up. Obviously this works on the downside as well, but to capitalize from it you'll need bullets because you probably won't get any upticks to enable you to get your short off.

The next is when a large offer that has been sitting at one price for a while gets taken out (the larger the better). That shows that the buyers were willing to step up and pay the offer for size. It also breaks a mental "barrier" and buyers tend to feel there may not be any more supply left and scramble to buy whatever they can, and thus the stock moves up. Eventually it will get to another level where supply comes out and the process starts all over again. Since this technique is pretty much known buy everyone you may have to take more of a risk and wait until there are only a few thousand shares left on the offer and buy your stock. By jumping the gun, you risk the occurrence of the offer being refreshed by another large offer, but it guarantees that you won't miss any moves if the stock takes off. Again, this also works the same on the downside.

Another thing to look for are the double prints (my favorite). I went into detail about this in that older post, so please see that thread I referred to on the first page. This can be a very useful tool. Two buyers of 10,000 shares each are stronger than one seller of 20,000 shares. The fear that another buyer is out there whose size and intent you don't know will definitely motivate you to buy your stock faster and with less care as to execution.

The next thing to focus on are the larger prints. When a stock on the NYSE makes a move in a specific direction and is subsequently followed by a large print at the end of the move, it tends to signal a reversal (at least for the short term). Why? If I'm selling 100,000 shares of ANN and I knock the stock down 50 cents, while selling 35,000 shares, I'll be willing to sell the rest at a lower price if I can do it. Eventually the stock will find a level that will generate some buying interest. If I'm the buyer, then I'm in the driver's seat because I can produce a discount bid. If I'm the seller, I'm more likely to capitulate and sell the rest of my stock at one price. So if I can sell 65,000 down another 30 cents, I'll do it. But now my order is finished (for the moment at least - institutional traders tend to take a break after a significant piece trades to "let the dust settle") and the stock is at a level that has generated buying interest. The print goes up, the spread widens, and before you know it, the bids start stepping up for fear of missing a golden opportunity. If you're quick enough, you can profit from the short-term panic move. But what comes next is the most important. After the stock retraces a bit, if another large offer appears and does not get hit, this is where you cover your long and go short. The seller is back, and from the tape you know that he has sold at a lower price. He will have no problem doing it again. If this sounds new to you don't be impressed: you've seen it before. Where? On any intraday chart. The stock makes a decent move in one direction, retraces a bit, (you were taught to buy/sell at this point) and then continues in the original direction. It's the same thing, but now your info comes in the form of the tape instead of a chart.

-cont-








One thing I want to add is to be careful on playing the first move when a large print occurs at the high of the stock. Yes it often works well enough, but not as well as on the downside. The reason is this: Buyers are stronger than sellers. A buyer can always walk away, whereas a seller cannot. That is why stocks go down faster and harder than they go up. That is why most negotiated large prints are executed at a discount and not a premium. Most buyers will not pay a premium on a large print if it is the end of their order. They will however pay up to get some stock under their belt (remember to think like an institution), in case the stock moves even higher. Once that "high" print goes off, the specialist will usually not let the price fall too much too soon to avoid embarrassing the buyer, and believe me, the buyer will be pissed if he tells his PM that he just bought 50,000 shares at $31.90 and a minute later the stock is at $31.50.

One thing that can be read from the tape but is easier to see on an intraday chart is consolidation. On the tape there may be a battle between a buyer and a seller or there may be just inactivity. If you watch the tape during this time you will start to take notice of the key support and resistance levels. Eventually either the buyer or seller will finish the order, and there will be a lack of supply or demand. Key levels will be broken and that is your cue to go along for the ride. It may be boring to watch, but by watching the tape you may have a better chance of spotting real breakouts/breakdowns by looking at the size traded as opposed to the price where it traded (chart method).

Another thing I have not mentioned yet is spotting market orders. Market orders are very important in getting a stock to move in a specific direction. A large limit order can give you support in case the stock doesn't move, but isn't going to help you in making money. So how can you tell? Well aside from the obvious large bid stepping up pattern, you can't know for sure. But when I used limits as an institutional trader, they were always significant price levels - $32, $31.75, $31.50, etc.. I wouldn't give an order to buy 25,000 ANN using a $31.46 top. So when you see larger bids/offers at an odd price, they probably have room.

What else can you look for? What happens when you see a spread like this: 3,000 bid at $31.50 and 1,000 offered at $31.60, and a few prints of 1,000 shares go off at $31.59. Shouldn't they go off at $31.60? What just happened? It could be a couple of things. The first is that the Specialist jumped in front of a limit order to sell from his own inventory, because he knows that there is a large supply right above. Or, the Specialist could be working a large sell order with a lower limit (or a market order) but does not want the offer to be taken out. Or it could even be that a sell order of 3,000 shares came in with a limit of $31.59 at that exact moment (yeah, I know, but it could happen). Either way it doesn't matter why, because all of the reasons are bearish, not bullish. You've got buying momentum but too much supply, so if I was long stock, now is when I would pay very close attention to when the buying stops and the momentum reverses.

When you start to trade larger sizes you will also be able to "test" the specialist. When supply runs out the Specialist will often try to keep a lid on the stock by offering a few hundred shares a few cents away from the bid. If you want to know if it's a real seller, you can buy just a hundred shares. If the ask changes from say 400 shares to 300 shares it's probably a real seller. But if it was the Specialist, you'll get your 100 shares at that price, but the rest of the offer will often just disappear. You can also try a different approach; you can join him at the offer with a hundred shares. If you see 400 shares offered at $31.80 and you enter an order to sell 100 shares at that price and the amount then shows 500, chances are it's a real seller. But if it's the Specialist, chances are it will show 500 shares for a split second, and then you'll be all alone with 100 shares offered at $31.80. Cancel it quickly and you might get a glimpse of the real market.

-cont-

I really think the best way to practice reading the tape is to pick a small/mid cap stock that trades about 200,000 - 400,000 shares a day and watch it for a week. Yes, it will get boring, but keep a piece of paper in front of you and take notes. Not only should you paper trade, but also write down your concerns, ideas, and questions about the stock and the overall market and it's effect on the stock. Your questions will be answered later by watching how the stock trades. On the first day you'll probably want to buy every time the bid is bigger than the ask (and vice-versa) and by paying the spread you'll find that at the end of the day you would have lost money. When you start to get the hang of momentum, your shooting percentage will increase because you'll be able to better filter out the noise. Next start trading 100 shares because honestly, execution is everything when trading. Great ideas that would have worked don't pay the bills. The more size you trade, the harder it will be (% wise) to make money from scalping so I think it's important to prove yourself on 100 shares first.

What I have just written is by no means some "secret" formula to instant wealth. It's just a simple guide of perhaps how to get started in the right direction, in case you're having trouble finding anyone willing to share any ideas on this topic. I am continuously learning everyday and am always eager to learn from anyone else who has any tips/techniques to offer me. Happy trading!

IMO Open Book is just another way for the exchange to make an extra buck. In theory, it sounds like a useful tool, but to whom does it really benefit? The institutions don't need it: they already know where the real size is by talking to the floor brokers and Specialist directly. Besides, their goal is not to make a quick 25 cents off order flow. It seems like it might be useful to a daytrader, until you realize that no institution is going to give a size order to the Specialist and have him put it on the book. So if anything, I believe that Open Book will more often than not lead a daytrader to make a wrong decision if he bases it on the info he gets from it (Not to mention that it's delayed info). And it won't do anything for the Specialist, unless he uses it to fake out other traders. Remember, if he's working a huge market order, he can put any part of that order on the book and then remove it, which makes Open Book a rather useless tool for a daytrader. Just my opinion though…

CHAPTER NINE
THE POWER OF IMAGINATION

Willpower needs an enemy to overcome before it
reaches its goal. It tries to be tough and, like most
toughies, it becomes a cream puff when the going gets
rocky. There is a gentler, easier way to shuck bad
habits-imagination. Imagination seizes directly on the
goal; it gets what it wants.
This is why in earlier chapters I placed so much
emphasis on your learning true-to-life visualization at
deep levels of mind. If you spur your imagination with
belief, desire, and expectancy, and train it to visualize
your goals so that you see, feel, hear, taste, and touch
them, you will get what you want.
"When the will and the imagination are in conflict,
it is always the imagination that wins," wrote Emile
Coug.
If you think you want to give up a bad habit, chances
are you are deceiving yourself. If you really wanted to
give it up, it would fade away on its own. What you
should want more than the habit itself is the benefit of
giving it up. Once you learn to want that benefit strong-
ly enough, you will become free of the "unwanted"
habit.
Thinking about your habit and firmly resolving to
give it up may bind you more tightly to it. It is a little
65

66 / THE SILVA MIND CONTROL METHOD
like firmly resolving to go to sleep; the very firmness
of your resolve can keep you awake.
Now let's see how all this can be made to work for
you. As examples, I will use two habits which Mind
Control graduates overcome most successfully: over-
eating and smoking.
If you want to lose weight, your first step is to reason
out the problem at the outer level.
Is your problem overeating, underexercising, or both?
It may very well not be overeating, but eating the
wrong foods. A diet of foods more suitable to your
particular needs may be the answer. Your physician
would know.
Why do you want to lose weight? Are you so fat that
your health is impaired, or do you simply feel that a
slimmer you would be more attractive? Either provides
a good reason for losing weight, but you must know
beforehand how you expect to profit from the weight
loss.
If you already eat the right foods in modest amounts,
if you get as much exercise as you reasonably can, and
you are only slightly overweight, my advice would be
-unless your physician says otherwise--to live with it.
I do. The alternative is an unnecessary disruption for
you. Besides, there are probably bigger problems and
more important opportunities in your life to put your
Mind Control to work on.
If you are sure that you really want to lose weight
and you know why, your next step is to analyze all the
benefits you will derive-not general benefits like "I'll
look better" but concrete ones involving, if possible, all
the five senses. Example:
Sight: Find a photograph of yourself when you were
as thin as you would like to be now.
The Power of Imagination 1 67

Touch: Imagine, when yon are thin again, how
smooth your arms and thighs and stomach will feel to
your touch.
Taste: Imagine the flavors of the foods yoU will em-
phasize in your new diet.
Smell: Imagine the odor of the foods yon will be
eating.
Hearing: Imagine what those who are important to
you will say about your success at losing weight.
Even the five senses are not enough for thorough
visualization. Emotions are important, too.
Imagine how elated and confident you will feel when
you are as thin as you want to be.
With all this firmly in mind, go to your level. Create
your mental screen and project onto it a visualization
as you are now. Now let it disappear and from the left
(the future) slide on an image (the old photograph
perhaps) of yourself as you ultimately want to be and
will be when the diet succeeds.
While you mentally gaze at the new you, imagine in
as much detail as you can what it will feel like to be this
thin. How will it feel when yon bend over to tie your
shoelaces? Walk upstairs? Fit into clothing 'that is now
too small? Walk on a beach in a bathing suit? Take
your time and feel all this. Go through the five senses,
one at a time, as described above. How will your at-
titude toward yourself feel as a result of achieving this
goal?
Now mentally review your new diet-not just what
you will eat, but how much-and select a few between-
meal snacks, raw carrot or whatever. Tell yourself that
this is all the food your body will need and that it will
not send you hunger pangs as a way of asking for more.
This is the end of your meditation. Repeat it twice a
day.

68 / THE SILVA MIND CONTROL METHOD
Notice that not once during your meditation was
there any image or thought of the foods you should not
eat. You eat too much of them because you like them;
the mere thought of them will make your imagination
lurch in unwanted directions.
Hollywood actress Alexis Smith was quoted by the
San Jose Mercury News (October 13, 1974) as saying,
"Positive thinking works beautifully on a reducing diet.
Never think once about what you are giving up but
concentrate on what yon are getting." She is often told
that she is more attractive now than when she made
some of the Wamer Brothers movies now showing on
TV. She attributes much of this to Mind Control. "The
big difference," she is quoted as saying, "is that now
I'm in better balance and more in control of myself."
In your weight-loss program, be sure to select a rea-
sonable target for weight reduction; otherwise you will
destroy the believabilily of your project. If you 'are 50
pounds overweight, you cannot reasonably believe you
will look like Audrey Hepburn or Mark Spitz next
week. To visualize this will do little good.
Old body messages may come through the first few
days to remind you of the delights of a candy bar.
During your busy day, when you may be unable to
meditate, take a deep breath, put your three fingers to-
gether, and remind yourself in the same words you used
during meditation that your diet is all your body needs
and that you will not have hunger pangs. A quick
glance at an old photograph of yourself as you would
like to be again will be helpful.
As you progress with your Mind Control in this and
other areas, your total mental state will improve and
this in turn will contribute in important ways to better
functioning of your body. With a little mental nudging
it will more gladly seek its proper weight.
There are a number of variations on this technique

The Power of Imagination ! 69

that yon can use. They may occur to you during medita-
tion. One man, a factory worker in Omaha, said to him-
self during his meditations, "I will desire and eat only
those foods good for my body." Suddenly he found a
new interest in salads and vegetable slices and a fading
interest in high-calorie foods. Result; He lost 40 pounds

in four months.
A woman in Ames, Iowa, used the same technique.
A few days later she bought some doughnuts-three for
her children and three for their friends. "I completely
forgot to buy any for myself. I almost cried. Mind Con-
trol was working!"
A farmer in Mason City, Iowa, bought a $150 soil
which, to say the least, was a poor fit. He could neither
draw up the trousers nor button the jacket. 'The sales-
man thought I was crazy," he said. But with the mental-
screen technique, he lost 45 pounds in four months and
"now the suit looks tailor-made for me."
Not all the results are this spectacular-in fact, not
an of them should be. However, Caroline de Sandre of
Denver and Jim Williams, who is in charge of Mind
Control activities in the Colorado area, launched an ex-
perimental program which shows the reliability of Mind
Control techniques for those who genuinely want to lose
weight
She organized a workshop for 25 Mind Control grad-
uates to meet once a week for a month. Among the 15
who attended all the meetings, the average weight loss
was a little more than 4% pounds. All lost weight!
A month later, she checked with -these 15 and learned
that 7 had continued to lose weight, and 8 were 'holding
steady. None had gained weight
This was not only a painless experience for these
graduates, it was a joyous one, Caroline reports. Not
only did they lose weight with no hunger pangs or any

The Power of Imagination ! 69

that yon can use. They may occur to you during medita-
tion. One man, a factory worker in Omaha, said to him-
self during his meditations, "I will desire and eat only
those foods good for my body." Suddenly he found a
new interest in salads and vegetable slices and a fading
interest in high-calorie foods. Result; He lost 40 pounds

in four months.
A woman in Ames, Iowa, used the same technique.
A few days later she bought some doughnuts-three for
her children and three for their friends. "I completely
forgot to buy any for myself. I almost cried. Mind Con-
trol was working!"
A farmer in Mason City, Iowa, bought a $150 soil
which, to say the least, was a poor fit. He could neither
draw up the trousers nor button the jacket. 'The sales-
man thought I was crazy," he said. But with the mental-
screen technique, he lost 45 pounds in four months and
"now the suit looks tailor-made for me."
Not all the results are this spectacular-in fact, not
an of them should be. However, Caroline de Sandre of
Denver and Jim Williams, who is in charge of Mind
Control activities in the Colorado area, launched an ex-
perimental program which shows the reliability of Mind
Control techniques for those who genuinely want to lose
weight
She organized a workshop for 25 Mind Control grad-
uates to meet once a week for a month. Among the 15
who attended all the meetings, the average weight loss
was a little more than 4% pounds. All lost weight!
A month later, she checked with -these 15 and learned
that 7 had continued to lose weight, and 8 were 'holding
steady. None had gained weight
This was not only a painless experience for these
graduates, it was a joyous one, Caroline reports. Not
only did they lose weight with no hunger pangs or any

70 / THE SILVA MIND CONTROL METHOD
other discomfort, but they reinforced many Mind Con-
trol-acquired skills.
The average weight loss was about what it would
have been had they taken one of the more successful
weight-reduction courses. Caroline 'herself had been a
lecturer for one of these courses for a year and a half,
and was Assistant Food Director of the Swedish Medi-
cal Center in Denver-she knows about proper nutri-
tion and weight control.
She plans to contmue this workshop and to develop
another one for smokers.
Smoking is so serious a habit that if you are a
smoker, the time to start becoming a former smoker is
now. As with weight reduction, we will take this in easy
stages, giving your body plenty of time to learn to obey
a totally new kind of instruction from your mind.
There is no need for reviewing at the outer level why
you should stop; the melancholy reasons are familiar
enough. What you need is a list of benefits which you
later make so vivid that you will want to stop.
You will have more vitality; your physical senses will
be sharper; and you will savor life more fully. You
know better than I, a nonsmoker, what you will gain.
Go to your level and see yourself on your mental
screen in the situation where you normally smoke your
first cigarette of the day. Visualize yourself, fully at
ease, from that moment until the end of an hour, doing
everything you would normally do except smoking. If,
for example, the hour is 7:30 to 8:30 A.M., say to your-
self, "I am now and will remain a former smoker from
7:30--8:30 A.M. I enjoy being a former smoker during
this hour. It is easy and I am used to it."
Contmue this exercise until you are really fully at
ease, at the outer level, with your first hour of freedom
from cigarettes. Now for the next hour, and soon the

The Power of Imagination f 71
third, and so on. Take this slowly-pushing too fast
may lead to punishing your own body, which is hardly
fair, since yonr mind, not your body, introduced the
habit in the first place. Let your mind do the work
through imagination.
Here are a few hints to speed up the day of complete
liberation:
Change brands frequently.
Daring the hours when yon are not yet a former
smoker, ask yourself each time you reach for a cig-
arette, "Do I really want this one now?" With surprising
frequency the answer is no. Wait until you really
want it.
If, during one of your liberated hours, your body in-
trudes with an apparent "need" for a smoke, take a
deep breath, put your three fingers together, and-using
the same words yon use in meditation-remind your-
self that yon are and will remain a nonsmoker during
this hour.
In controlling the smoking habit, yon can add other
techniques to this basic method. A pack-and-a-half-a-
day smoker for eight years, an Omaha man visualized
in Alpha all 'the cigarettes he'd ever smoked-a great
heap of them. Then he put them in an incinerator and
burned them.
Next he imagined all the cigarettes he would smoke
in the future unless he stopped-another great mound
of them-and he gleefully burned these too in the
incinerator. After 'having quit smoking many times in
the past, this time he gave up cigarettes for good after
only one meditation. No craving, no overeating, no side
effects.
I cannot, I regret to say, report as much success with
smoking as with weight reduction. However, I know of

72 / THE SILVA MIND CONTROL METHOD
enough graduates who have given up smoking, and
enough others who have reduced the amount they
smoke, to urge anyone who now smokes to put Mind
Control to work on the habit.

Scanner's Notes: Putting the three fingers together when in the
Relaxed Alpha state in meditation creates an association: When one
Is in alpha and places the thumb and two fingers together, then when
One is out of Alpha and places the thumb and two fingers together, one
Feels oneself back in Alpha. One can see that this is a useful technique
When one is "stuck" in Beta, ordinary wakefulness, and needs a rapid method for
Getting into the relaxed, creative Alpha state.