The Way to Trade. John Piper
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you need help to learn this business, which is what this book is all about. You need a mentor, but you do not need gurus who tell you how to trade. You will only win by trading your way. Indeed Frank Sinatra’s big hit “My Way” is an excellent anthem for any trader. Taking that step to do it by yourself is one many traders find the most difficult, but it is essential.
If you don’t want to do it your way then you are better off giving your money to another trader, like John Piper, so that he can trade it for you. But make sure you check out the track record and risk profile first.
Foreword by Dr Alexander Elder, Financial Trading Inc.
Successful trading is based on 3 Ms – Mind, Method, Money.
Mind refers to your trading psychology. You must follow certain psychological rules that lead to winning when faithfully applied and avoid pitfalls that become death traps for most losers.
Method refers to how you find your trades – how you decide what to buy or sell. Each trader needs a method for choosing specific stocks, options, or futures as well as rules for “pulling the trigger” – deciding exactly when to buy and sell.
Money refers to how you manage your trading capital. You may have a brilliant trading system, but if your Money Management is poor, you are guaranteed to lose money. A single unlucky trade can destroy your account if Money Management is not in place.
Trading psychology, trading method, and Money Management – people sometimes ask me which of the three is most important. I answer – imagine sitting on a three-legged stool. It is pretty stable, but try getting comfortable sitting on that stool after taking away any one of its three legs. Now please tell me which of the three legs is most important?
Traders go through three stages of development. When people first approach the markets, they usually focus on the method. Most of them do not survive this stage. They are too inexperienced and do not have anyone who can tell them how to stay out of trouble. No amount of optimized moving averages or fine-tuned trendlines will keep them alive in the markets.
Those who survive that stage acquire a greater sense of confidence. They acquire a method of selecting what to trade and the tools for analyzing markets and deciding when to buy or sell. Some become quite proficient in technical analysis, market indicators and systems, using computers to search on-line databases. Then the smarter survivors start asking themselves: if I am so good, how come I am making so little money? How come my account is up 20 per cent one month, and down 20 per cent or worse the next month? I clearly know something about the markets – why can’t I hold on to what I make?
Traders at the second stage tend to grab profits and buy something before their money evaporates in a series of bad trades. Then one day they look in a mirror and realize that the biggest obstacle to winning is the person they see in it. Impulsive and undisciplined trades with no protective stops lead to losses. A trader who survives the second stage comes to recognize that his or her personality, with all its complexes, quirks, and faults is just as much a trading tool as the computer.
Traders who survived that stage become more relaxed, quieter, not jumpy in the markets. They are now in the third stage – focusing on managing money in their trading accounts. Their trading system is in place, they are at peace with themselves, and they spend more and more time thinking how to allocate their trading capital in order to reduce overall risks.
The concept of the 3 M’s comes from my book Trading for a Living which has become an international bestseller. I met John Piper six years ago and enjoyed watching him grow and mature as a trader and a teacher of traders. It gives me pleasure to see that we share a number of ideas about markets, such as the 2% Rule, the concept of the market as a manifestation of human psychology, buying below value and selling above value, the market as a minus-sum game.
In the book you are about to read John Piper takes you beyond theory in a very useful Chart Tutorial. He invites you to follow him through a series of trades, commenting on his actions along the way. He provides an essential lesson that most beginners never get.
In The Way to Trade John Piper mentions that he has been managing money profitably for the past year and I know that he has been trading for many years before that. To get really serious money under management in the US requires a five year audited track record. I wish John success in continuing to make consistent profits and his readers a captivating and profitable journey into the financial markets.
Dr Alexander Elder
New York – Moscow, November 1998
Introduction
I have been trading futures and options markets for over a decade. I now manage money and make good consistent profits. So what I have to say about markets has been forged in the fire of market action itself. I have suffered the highs and the lows which all traders experience on the road to success.
This book is unique in that it takes the reader right through the trading process and it also uses a model, the trading pyramid, which explains the process and the inter-relation between the component parts.
The key component for successful trading is the underlying philosophy of trading and this is what so many books and seminars ignore. There is so much written and spoken about analysis but that is such a small part of the game. Good trading is not a question of doing, it is a question of being. This book is dedicated to those who want to become good traders. Analysis and trading technique are useless to those who have not gone through this process.
Having dealt with the underlying philosophy, we then move onto specific trading techniques and the underlying analysis which builds those techniques. I do not believe that analysis is used correctly by the vast majority of those who risk capital in worldwide markets. Analysis is not for use on markets, it is solely to devise your methodology/ approach to the market. You must devise this methodology and then use it. Thus you become an expert in its application and then the money flows your way.
But you must have your own methodology; it is no good being spoon fed something by the currently “hot” guru. This is very unlikely to suit your trading personality. This book tells you how to develop your own methodology and explains the feedback process within the pyramid that will make it work for you.
Most people lose in the markets for one simple reason – they trade emotionally. When traders understand the problem they improve by becoming mechanical. This is a big improvement but it is still not enough. To be truly successful you have to become intuitive, and this simply means you become an expert in what you do – something you achieve through experience. It is this path I chart in this book. I think you will enjoy it.
Don’t accept anything in this book at face value. It is an essential part of a trader’s development to carefully consider all aspects of the market and his individual approach to it. Some of the statements made in this book are deliberately provocative and designed to ferment that process. So don’t accept anything, think about it, draw your own conclusions, and thus create your own useful beliefs about markets and your methodology. The key word is ‘useful’; your beliefs and techniques must prove their usefulness in producing lots of lovely profits.
Finally I must say that there are various lessons in trading which become particularly relevant at particular times during our progress towards success. For this reason you may find that parts of this book do not seem relevant to you the first time you read it. But they may well do so on a subsequent reading. This is a book which may repay frequent readings!
John Piper, December 1998
Acknowledgements
Many, many people have gone into the making of this book. Frequently I speak to a consultancy client or discuss a point with an attendee at one of my seminars and gain insight which I have tried to distill into these pages.
I am also grateful to the authors of the many works on markets and trading which I have read. The key works are listed in Appendix 3, but I must single out Tony Plummer whose article “The Troubled Trader” appears in Appendix