It’s your money, take control!
By Robert Deel
Taking control in the management of your money in today’s world is
perhaps one of the most important financial imperatives facing us all. This
checklist should serve you well, and possibly keep you from becoming a
victim of the market and false media information.
In my twenty-five plus years of trading experience I have found these rules to be an
invaluable way of keeping me focused on the trade.
Deel’s 16 Rules of Investology
1. Trad e With A Plan
Set objectives before you ever buy. Define all outcomes — not only what you
will do when it goes right, but what you will do if you are wrong. Determine the
amount of capital you are willing to lose and conversely, define when you will take
profits. Letting the market take away your profits by holding on to a losing trade
is not a good strategy. Write out a trading plan on paper and follow it. Do not
become a causality of emotionally involved buying or selling. Trade with a plan.
2. Scr een Your Trad es
To select trading vehicles you must have a predefined method. Select a method
based on price momentum and trend. Don’t guess what the future is going to be,
trade the current trend direction. Your method must consider your individual time
frame and risk tolerance. Always address liquidity, sector rotation, and technical
factors when screening stocks.
3. Always Look at a Chart
Never buy a stock without looking at a chart of the stock first. Look at the oneyear
trading range. Ascertain where you currently are in the trend and what that
trend is. Also determine if the chart reflects a stock split. Never trade against the
trend. Buying and selling decisions are technical in nature. Fundamentals will
never tell when to buy or sell a stock. Always look at a chart for entry and exit
timing decisions.
4. Stay With a Trend
Your probabilities of success are far greater if you stay with a definable market
trend. Statistically, these trends provide better profit potential with a lower amount
of risk. A good rule of thumb is to watch a 50-day exponential moving average
of the close. This moving average represents the intermediate trend of a stock. A
12-day exponential moving average represents short-term trend. The use of these
two moving averages should yield excellent results in keeping you in the trend. If
you perceive the trend beginning to change, act accordingly by taking profits or
placing stops to protect your capital and locking in a profit.
5. Use Money Manag ement Techni ques
Determine the probable dollar losses of your trading plan or investment style based
on your trading record for the current year. Then devise a way to generate income
through passive sources:
• Cutting a loss quickly is the best money management you can have. Too
many times traders fall in love with stock, holding on as the stock begins
to decline. Never use a hedging strategy, such as options, to justify holding
on to a losing position.
• The use of money market, bond, and stock dividend income to offset
losses in your trading portfolio is an excellent technique.
• Covered call options may be an appropriate way to generate income for
your portfolio to offset losses. Be careful here because you can write
covered calls into oblivion. If the stock is going against you, sell it.
• If you are going to hold a trade overnight, never risk more than 3% of your
available capital. If you are going to day trade, an excellent rule of thumb
is to only risk 1% of your capital in any one trade.
6. Buy and Sell on Confid enc e
Many times you won’t feel quite right about a buy or sell decision.
If this feeling persists after you have done all your research and you have
followed the rules to this point, don’t take the trade. Too many times individuals
try to rationalize a decision. Don’t try to find a good reason for making a bad
decision. Your decision must be a confident one.
7. Buy only Liquid Stocks and Liquid Mar kets
Stay with major markets and stocks with millions of shares in the float. Make
sure the average trading volume is enough for you to sell all of your position
on any given day. By following this rule you should be assured of a reasonably
good execution of your trade. Don’t buy stocks trading at the lower end of the
price range. Generally speaking, do not buy stocks that don’t have good trend
characteristics or predictability. True professional traders avoid them and so should
you.
6
Robert Deel
8. Don’t buy or sell on Hot Tips
More money has been lost on hot tips than is in the U.S. Treasury. While this is an
exaggeration, it does make the point clear. If someone tells you about an investment
or trade, research the recommendation before you put your money into it. Most
novice investors and traders fall victim to tips every day. Please don’t fall for the
story no matter how good it sounds. Always use technical analysis to make your
buy and sell decisions, and buy or sell based on facts.
9. Do not Dollar Cost Averag e
If your timing decision was wrong on an aggressive stock, don’t make the problem
worse by trying to buy a stock that is going lower. The probability is that you will
only compound the loss. I call this technique disaster cost averaging. Don’t buy a
stock until the trend is evident. Dollar cost averaging is good for your broker, but if
you continue this technique, the ‘broker’ you will become.
10. No one wins 100 % of th e Tim e
Many people enter the stock market focused only on the profits and do not
consider the losses. If you think for one minute you are going to win one hundred
percent of the time, you are wrong. Losing is just part of the cost of doing
business. Your goal is to make sure you control the risk and not blindly put your
money at risk, like a buy and hold investor. You must come to the realization that
you will never learn how to win until you first learn how to lose. How you handle
loss psychologically is truly the difference between an amateur and a professional.
Professional traders don’t react the same way as an amateur to loss. When a
professional trader loses, he or she simply says next. They don’t take the loss
personally.
11. Always us e Stops
The proper use of stops will protect profits and limit your losses. Look at stops as
profit and loss insurance. When you enter a trade, you place a stop to limit the loss
in case the trade goes against you. When the trade becomes profitable, you use
them to lock in a profit.
Anyone who would argue against risk control by discouraging the use of stops
is a fool indeed. In effect they are saying you should put your capital at unlimited
risk. Does this make any sense to you? Of course not, but that is exactly what a buy
and hold investor does all the time. Most investors do not use stops because they
are afraid of being stopped out. This is a psychological problem of not wanting to
be wrong, or having to admit to yourself you lost on a trade. It certainly isn’t based
on logic or strategy. Remember, always use stops if you are carrying a trade over
night.
7
It’s your money, take control!
12. I don’t ha ve Tim e
Make the time or suffer the consequences. If you are too busy to manage your
money, maybe you’re too busy. Take a look at your portfolio and if you lost half of
your money without knowing it, you can congratulate yourself on being too busy.
Was it worth it? Probably not. It doesn’t make much sense to work yourself to death
and have nothing to show for it. You must take time to educate yourself and take
control of your future.
13. Be pati ent and let tim e be your Fri end
Making money safely takes time. The only time to hurry is when you’re in trouble.
Remember, “Everyday is not a trading day.” Only trade when the sector, market,
and the correlating stocks are in trend. Just because you want to trade doesn’t mean
you should. Only trade when the probabilities are in your favor, and let the market
come to you.
The market is going to do what it is going to do and what you want is
irrelevant. Don’t become addicted to the action. You are not an action junky. You
are a high probability trader. Profits are made the old fashioned way, one trade at a
time. Be patient and make time your friend instead of your enemy.
14. Learn fr om your Mista kes
The most successful traders and aggressive investors learn from their
mistakes. Many even go as far as writing down what went wrong and analyzing
the problem. Mistakes can be costly, so use them as learning experiences and don’t
make the same mistake twice.
Unfortunately a large number of people are doomed to make the same
mistakes over and over again. This behavior is usually a sign of emotional
reactions to price momentum and the absence of any well thought out strategy.
My father once told me that the best education was to learn from the mistakes
of others. Most people fail in the market not because of technology or a lack of
information, but because of emotional reactions, and never learning from their
mistakes and the mistakes of others.
15. Kn ow how to sh ort Stock
Markets do not go up all the time, a painful lesson some have learned over the last
three years. From the year 2000 to the present time, we have experienced one of the
most agonizing bear markets in the last 70 years. Does this bear market mean that
you can’t make money? No. What has the trend been for most of the last three years?
The obvious answer is down.
Common sense says you are to follow the trend. So if the trend has been down,
why haven’t you been shorting stocks? The reason is sadly fear and ignorance. Only
2 % of the American public ever shorts a stock in their lifetime. This is shocking
when you understand that markets and stocks fall 67% to 80% faster than they rise.
8
Robert Deel
In other words shorting stocks tends to compound money faster
than buying a stock to go long. Plus, if you can make money when the market
is going down and when it goes up, what is it that you have to be afraid of?
Professional traders have made millions the last three years. You must learn to
short stocks if you are to have any chance of being successful in today’s markets.
Fear and ignorance must be overcome because you must know how to short.
16. Foll ow th e Rul es
Some people are doomed to make the same mistakes over and over again. Using
this set of 16 trading rules, which has been compiled from over 20 years of
experience, should keep you from making many common mistakes.
If you follow Deel’s Rules of Investology, you have a much better chance of
success than someone who doesn’t. Always remember, there is never any guarantee
of success. But if you are properly educated and develop the correct mind set, you
have a major advantage. Don’t become one of the sheep led to the slaughter by
media nonsense.
You must make your own fortune and control your financial destiny.
Always remember, it’s your money. Take control… and follow the rules.
Robert Deel is an internationally recognized trading expert, and has trained groups of traders
throughout the U.S., Europe, Asia, and Canada. He is the author of Trading the Plan and The Strategic
Electronic Day Trader. He is also the President and CEO of Tradingschool.com, a school that trains
individual and professional traders from all over the world.
Here’s a game plan for getting yourself back on track:
1. Define Your Trading Plan – If you already have a plan, reexamine it. Are you
following your rules for entry, exit and money management? Does your plan
still have an edge in the current market conditions?
2. “If In Doubt, Get Out” – Who says you have to trade every day? If you are not
pulling the trigger on your trades, it is because you lack confidence in yourself
or your plan. Try taking a step back for a short while. Consciously decide not
to trade real dollars, but work on paper trading your buy and sell signals. Sure,
it’s not the same as trading real dollars, but this step allows you to work on
executing your trading plan. I have found systematic trading to be much easier
than discretionary trading, because it helps take my ego out of the equation.
I focus instead on the execution of buy and sell signals, as opposed to my ego
wanting to be proved right. Paper trading will allow you to get refocused on
execution of your ideas.
3. Measure Your Results – Too often traders may have a good plan,
but then lose sight of measuring their results on a regular basis. What happens
is that 90% of your trades may be done properly, but it is those 5-10% of your
trades that eat you up with big losses. If you monitor your results closely, you
should start to develop a “Success Profile” which defines what your best trades
look like. Once a trade doesn’t fit this Success Profile anymore, you should
look to exit –whether at a profit or a loss – as your edge no longer exists.
Understanding the Crowd
By Daryl Guppy
In trading, there are three key questions:
• Is this a short-lived rally or a trend?
• Is this really a trend change?
• Is this price pullback in a rising trend an opportunity to join the trend,
or a signal that the trend is ending?
Technical analysis indicators are generally designed to answer one or more of
these questions. The answers help us to select better trading opportunities,
and to trade them in the correct way. It is no good trading a rally as a
major trend change. It calls for different techniques, and we need a method to
decide when the rally has ended and the downtrend resumed.
I use a Guppy Multiple Moving Average to help make these initial decisions.
Once the best opportunity has been found, and the nature of the opportunity
identified, I then turn to other tools to fine-tune the entry, define and manage
the risk, and to manage the trade. The Guppy MMA relies on understanding
the fractal repetition of relationships across multiple time frames. It helps us to
understand the behavior of the two most important groups in the market — traders
and investors.
When traders use two or more moving averages, their attention is usually
focused on the point of the crossover. This is a distraction from the more important
messages contained in moving average relationships. The Guppy MMA uses the
moving averages to track the activity of traders and investors, and to understand
the difference between price and value.
Value is what we believe a stock is worth. We make this decision based on our
future expectations. Price is what we pay to buy the stock today. When everybody
agrees on price and value there is no market. You can walk to the nearest Wal-Mart
and see agreement on price and value in action. It is not very exciting and not very
profitable if we want to buy an item and later sell it at a profit.
The financial market is driven by the difference between price and value.
When some traders see a stock selling at $50 they believe it is under valued. They
buy because they believe they can make a profit on the difference between the
current price and the future value. When we expand this concept to the broader
market we observe periods where there is relative agreement on value and price.
The market moves sideways. At other times there is a wide disagreement on price
and value so the market moves quickly.
36
Daryl Guppy
Traders make these decisions more rapidly than investors. Traders are always
probing to see if current price is good value. Traders lead the market. Investors
follow. Traders cannot maintain their momentum unless investors follow, and the
Guppy MMA highlights these relationships.
Applying the Guppy MMA
Before we apply the Guppy MMA, we start with an observation of the
behavior of the group of short-term averages. These are 3, 5, 10, 12 and 15-day
exponential moving averages. When these averages compress, they tell us that
short-term traders are in agreement on price and value. Inevitably a few traders
see an opportunity to make a dollar because they believe the market is incorrectly
valued. They start buying. To get stock they have to outbid their competitors. This
causes a separation, or spreading in the short-term group of averages. Other traders
pick up on the price moves, and before long we see a wide separation of the shortterm
group.
At its widest, this separation tells us that value has moved well away from
price. You probably know the feeling. Desperate to buy a stock that is moving
exactly as you anticipated, you end up chasing it to the top price of the day. Next
morning you realize you have paid much more than you should have. When you,
and other traders reach this conclusion, the selling starts, and the wide spread in
the short-term group rapidly collapses. Compression is followed by expansion and
followed again by compression. Agreement on value is followed by disagreement
about value, and then followed by agreement about value.
Investors show the same relationships, and these are captured with the long
term group of averages. These are 30, 35, 40, 45, 50 and 60 day exponential
moving averages. The compression and expansion does not develop as quickly as
with the short term group but the same behaviors are repeated on a longer time
frame. When the long term group of averages spreads out it tells us that the trend
is well supported.
Combine these two groups into a single display and we create a Guppy MMA.
This is available as a standard MetaStock template in the template menu list.
There are four areas of importance in applying this indicator.
1. The compression and expansion relationships in the short-term group
of averages.
2. The compression and expansion relationship in the long-term group
of averages.
3. The relationship and degree of separation between the short-term group and
the long-term group.
4. The crossover area and the nature of this crossover.
The accompanying chart shows how we use the Guppy MMA to identify the
most appropriate trading opportunity. We start with the first trading question: Is
37
Understanding the Crowd
this a short-lived rally or a trend?
Prices break above the
downtrend line in area A on
the bar chart. We confirm the
probability of a rally by using the
Guppy MMA.
The short-term group has
compressed, but when the rally
starts the long-term group is
more widely spread. For this
rally to succeed the traders have
to convince the investors that
this stock has a good future. We
know this is more likely when
the long- term group compresses
and turns upwards. It would be
unusual for traders to rapidly turn
around investor sentiment when
the long-term group is well spread
apart. This is most likely a rally
opportunity and has the potential
to deliver an 11% profit. We
might not be comfortable trading
the rally, but we are interested
in the developing potential for a
trend change.
The Guppy MMA helps answer the second trading question: Is this really a
trend change?
Prices rebound from the trend line and by the time they get to 77, we are
interested. The relationship between the two groups of moving averages, shown in
area B1, is now quite different. There is no holding the traders back. This group
of averages is moving sharply upwards with no sign of faltering. There is a smooth
expansion in this group suggesting steady buying support.
The investors are also taking notice of the latest price moves. The long-term
group has remained compressed — agreeing on value — since the first rally. Now
they compress further before also moving sharply upwards and expanding. This
group contains a 30-day and a 60-day moving average, and we would expect these
to lag behind price action if we were looking just at moving average crossovers. By
understanding the developing relationship in this long-term group, traders quickly
identify the developing investor support.
The crossover of the two groups on moving averages is on the upside and
confirms this bullish trend change. However the relationship in area B1 is different
from that in area A1, and this difference confirms a trend change. Relying on
moving average crossovers alone does not give the trader sufficient information to
make good decisions.
38
Daryl Guppy
These relationships suggest there is a high probability that this is the start
of a new and strong up trend, led by traders and supported by investors. This
opportunity offers a 49% return.
Plucking up the courage to enter on a price pullback in a rising trend is made
easy with the Guppy MMA. In area C, the initial trend momentum fails and
prices collapse. The reaction of the long-term group of averages tells us this is a
buying opportunity. The group is well separated and when prices fall as traders
take profits, the investors step in to buy stock at cheaper than expected prices. The
long-term group does not compress and continues to move upwards.
Traders who took early profits can buy back into the trend around 88,
confident that the underlying trend is intact. Traders and investors who missed out
on the initial trend break now have an opportunity to join the trend and collect
a 30% return. It is the relationship between the long-term group of averages that
confirms the trend strength. This relationship is not revealed if we use just a
10-day and 30-day moving average combination.
Analysis on historical charts always looks good because we already know
what has happened in the future. These notes are drawn from my analysis of this
stock in real time. I opened a personal trade in area B and rode the trend using the
Guppy MMA to deliver the exit signal. This is my primary tool for understanding
the trend, the probability of a trend change, and the nature of trading opportunity.
Guppytraders.com is an international financial market education and training organization with
offices in Darwin, Singapore, Beijing and Malaysia. We provide independent education, training,
analysis and resources for retail and professional financial market traders involved in stocks,
CFD’s, warrants, derivatives, futures and commodities. Our objective is to provide you with quality
independent education and professional assistance because the financial market does not recognise
learner traders.
Daryl Guppy appears regularly on CNBCAsia and is known as “The Chart Man”. He is an equity and
derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies
of The Chinese For Financial Traders. He has developed several leading technical indicators used by
traders in many markets.
Mr. Guppy is a regular contributor for financial magazines and media in Singapore, Malaysia, China,
Australia and the US. He oversees the production of weekly analysis and trading newsletters for the
Singapore/ Malaysia market, and Australian markets. He recognized as a leading expert on China
markets. He is in demand as a speaker in Asia, China, Europe and Australia. Guppytraders has offices
in Singapore, Beijing and Darwin .
39
Bollinger Band Basics
By John Bolling er
Bollinger Bands are available on MetaStock and most charting software. They
have become popular primarily because they answer a question every investor
needs to know: Are prices high or low?
What are Bollinger Bands?
Bollinger Bands are curves drawn in and around the price structure on a chart
that provide a relative definition of high and low. Prices near the upper band are
high prices, while prices near the lower band are low.
The base of the bands is a moving average that is descriptive of the
intermediate-term trend. This average is known as the middle band, and its
default length is 20 periods. The width of the bands is determined by a measure
of volatility, called standard deviation. The data for the volatility calculation is the
same data that was used for the moving average. The upper and lower bands are
drawn at a default distance of two standard deviations from the average.
These ar e th e standard Bolling er Band
formulas :
Upper band = Middle band + 2 standard deviations
Middle band = 20-period moving average
Lower band = Middle band – 2 standard deviations
Learning how to use Bollinger Bands effectively cannot be fully explained in this
article. However, the following rules serve as a good starting point.
15 Basic Rules for Using Bollinger Bands
1. Bollinger Bands provide a relative definition of high and low.
2. That relative definition can be used to compare price action and indicator
action to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment,
open interest, inter-market data, etc.
4. Volatility and trend already have been deployed in the construction of
Bollinger Bands, so their use for confirmation of price action is not
recommended.
5. The indicators used for confirmation should not be directly related to one
another. Two indicators from the same category do not increase confirmation.
Avoid colinearity.
40
John Bollinger
6. Bollinger Bands can be used to clarify pure price patterns, such as M-type tops
and W-type bottoms, momentum shifts, etc.
7. Price can — and does — walk up the upper Bollinger Band and down the
lower Bollinger Band.
8. Closes outside the Bollinger Bands can be continuation signals, not reversal
signals—as is demonstrated by the use of Bollinger Bands in some very
successful volatility-breakout systems.
9. The default parameters of 20 periods for the moving average and standard
deviation calculations, and the two standard deviations for the bandwidth are
just that, defaults. The actual parameters needed for any given market/task
may be different.
10. The average deployed should not be the best one for crossover signals. Rather, it
should be descriptive of the intermediate-term trend.
11. If the average is lengthened, the number of standard deviations needs to be
increased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise,
if the average is shortened, the number of standard deviations should be
reduced; from 2 at 20 periods, to 1.9 at 10 periods.
12. Bollinger Bands are based upon a simple moving average. This is because a
simple moving average is used in the standard deviation calculation and we
wish to be logically consistent.
13. Be careful about making statistical assumptions based on the use of the
standard deviation calculation in the construction of the bands. The sample
size in most deployments of Bollinger Bands is too small for statistical
significance, and the distributions involved are rarely normal.
14. Indicators can be normalized with %b, eliminating fixed thresholds in the
process.
15. Finally, tags of the bands are just that, tags, not signals. A tag of the upper
Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower
Bollinger Band is NOT in-and-of-itself a buy signal.
These rules outline the basic guidelines for using Bollinger Bands. For a more
comprehensive understanding of the bands, I suggest that you read “Bollinger On
Bollinger Bands.” This book starts with the basics, builds to the complex and
teaches the technical analysis process, including which indicators to use and how to
read charts.
John Bollinger, CFA, CMT is probably best known for his Bollinger Bands, which have been widely
accepted and integrated into most of the analytical software currently in use. He is the president
of Bollinger Capital Management, a money management firm, and has published The Capital
GrowthLettersince 1988. He has eight websites: www.BollingerBands.com, www.EquityTrader.com,
www.PatternPower.com, www.BollingerOnBollingerBands.com, www.GroupPower.com, www.
FundsTrader.com, www.MarketTechnician.comand a new forex website, www.BBForex.com
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