List of Tables and Figures xv

Foreword xvii

Preface xix

Acknowledgments xxi

CHAPTER 1 A Philosophy of Trading 1

Analogies 1

Pragmatism 3

Goal-Oriented Behavior 5

Timing 6

Stocks versus Commodities, Options, Mutual Funds, and Bonds 7

Short Trading 9

Use of Margin 10

Trading and Gambling 11

Bold Passion 12

Summary 13

CHAPTER 2 Tools of the Trade 15

Online Access 15

A Reliable Brokerage Account 16

Information 17

Formal Study 18

Analysis Software 20

Protected Workspace 21

Mathematical Trading Systems 21

Market Timing Indicators 22

Summary 22

CHAPTER 3 Constructing Mathematical Models for Stock Selection 25

Technical Approaches to Stock Selection 25

Fundamental Approaches to Stock Selection 26

Hybrid Approaches to Stock Selection 27

The Nature of the Stock Selection Challenge 27

Common Mistakes in System Design for Decision Making 28

Early Beginning Approaches 30

Advantages and Disadvantages of Mathematization 32

Summary 33

CHAPTER 4 Stock Selection: A Technical-Momentum System 35

Qualifying Variables 35

Sample Recommendation Summary Table 39

Questions and Answers 40

Summary 44

CHAPTER 5 Stock Selection: A Fundamental-Value System 45

Qualifying Variables 45

Fundamental Variables 47

Questions and Answers 55

Summary 57

CHAPTER 6 Stock Selection: A Technical-Fundamental Hybrid Approach 59

Qualifying Variables 59

Point-and-Figure Analysis 64

Technical Ratings 64

Other Technical Indicators 65

Price-to-Earnings (PE) Ratio 66

Book Value 67

Earnings Growth 67

EPS/PE Divergence 68

Cash Flow and Free Cash Flow 69

Other Fundamental Indicators 70

Questions and Answers 71

Summary 74

CHAPTER 7 Buying Stocks 75

Preparing the Slate of Candidates 75

Gathering Intel 76

Demanding Supply 77

Cost Averaging 77

Limit and Market Orders 78

Avoiding Purchases with Unsettled Funds 82

Summary 82

CHAPTER 8 Selling Stocks 85

Setting Targets 86

Setting Partial Targets 86

Using Stop-Loss Orders 87

Culling Out Losers 88

Rank Indicators 88

Holding Limits 89

Breaking the 50-Day Moving Average 90

Identifying Market Downturns 90

Summary 91

CHAPTER 9 Portfolio Management 93

Diversifying Over Stocks 93

Diversifying Over Sectors 95

Record Keeping 95

Proportionality over Portfolios 96

Proportionality over Individual Stocks 97

Turnover Ratio 97

Timing the Market 98

Summary 98

CHAPTER 10 Market Timing 99

Mythological Indicators 100

Quasi-Mythological Indicators 101

Reliable Indicators 102

Summary 108

CHAPTER 11 A Performance Record 109

Performance Caveats 109

Hindsight is 20/20 112

Summary 113

CHAPTER 12 A Typical Trading Day 115

Before the Bell 115

The First Half Hour 117

Midday Monitoring 118

After the Closing 119

Weekends 120

Summary 121

CHAPTER 13 Threats to Success 123

Actions of the Federal Reserve Board Open Markets Committee 123

Analyst Downgrades 129

"Pump-and-Dump" Ploys 130

Message Board Panning 131

Market Maker Meddling 131

Negative News Events 132

Large Position Dumping 133

Overhead: Taxes, Commissions, Margin Interest, Spreads 134

Summary 135

CHAPTER 14 A Summary of Trading Principles 137

Never Follow a Tip without Due Diligence 137

Don't Get Grounded on Low Volume 138

Never Buy at the High for the Day 138

Never Sell at the Low for the Day 138

Remember Why You Bought 139

Don't Get Too Attached to Any Stock 139

Maintain Diversification 140

Don't Overtrade 140

Don't Hesitate to Reacquire a Winner 141

Don't Get Your Guidance from Message Boards 141

Maintain Your Own Trading Identity 142

Read Widely 142

Back Off Periodically 143

Seldom if Ever Buy with Unsettled Funds 143

Look to Sell with the Same Level of Zeal That You Look to Buy 143

Maintain a Trading Journal or Diary 144

Gather Information on Your Holdings Daily 144

Learn from Your Mistakes 145

Don't Damage the Environment for Others 145

Don't Let Yourself Become Discouraged 146

Learn to Time General Market Trends 146

Don't Begrudge the Paying of Dues 147

Set Realistic, Measurable Goals for Trading Gains 147

Don't Take Advice from Investment Professionals 147

Avoid Buying a Stock Immediately After It Has Made a Huge Price Run Up 148

Avoid Selling a Stock Immediately After It Has Had a Huge Loss 148

Maintain Your Discipline 149

Don't Hesitate to Sell Good Stocks When Macro Market Indicators Signal a Downturn 149

Focus More on Avoiding Great Losses than on Making Great Gains 149

Continually Be Watching for Success Predictors 150

Summary 150

CHAPTER 15 Morality in the Marketplace 151

Integrity Defined 152

The Gravity of the Effects of Declining Integrity 153

Conditions that Can Promote the Erosion of Integrity 155

Possible Solutions to the Problems that Promote the Erosion of Integrity 161

Summary 168

CHAPTER 16 Random Walk or Rational Wager 171

Predictability and Probability 173

The Limits of Predictability 174

Following the Numbers or Following the Gurus 176

The Accuracy and Use of Mathematical Models 180

Predictable Market Phenomena 181

Summary 185

CHAPTER 17 On the Nature of Risk 187

The Risks of Risk Management Applied to Market Phenomena 190

Risk and Variance 191

Risk and Compassion 191

Risk and Trust 193

Risk and Wealth 195

Summary 195

CHAPTER 18 Trading in the Information Age 197

The Economy of Abundance 197

A Perspective on Abundance 199

Taking Advantage of Information-Access Opportunities 201

Summary 202

CHAPTER 19 Using a Trading System with an Excel Spreadsheet 203

Step 1: Loading the Excel Spreadsheet into Your Computer 203

Step 2: Recognizing Information on the Spreadsheet 205

Step 3: Updating Your Spreadsheet 210

Step 4: Running the Analysis 212

Step 5: Interpreting the Results 214

Step 6: Maintaining the Spreadsheet 214

Cautionary Reminders 215

Summary 215

CHAPTER 20 Afterthoughts 217

Timing 217

Opportunities 218

Market Trends 219

Lessons from History 220

Conclusion 224

Bibliography 225

About the Author 229

Index 235