The full title of this book is The Trading Book: Complete Solution to Mastering Technical Systems and Trading Psychology by Anne-Marie Baiynd.
This book has two main sections: one of using technical indicators / tools for the trading methodology, and another section focuses on softer aspects: trading psychology, discipline, etc.
Baiynd walks through a long trade as well as a short trade to illustrate how to use the technical tools (moving averages, bollinger bands, fibs, volume) to enter, set stops, move stops, exit, etc. While the text is supplemented by charts, I still found it hard to follow the trading decisions precisely. I would have preferred if the “rules” are written down in succinct sentences in bullet point rather than being written somewhat in a more conversational style.
One point Baiynd wrote which I disagree with is that the entry point is more important than the exit. While I agree the entry point is very important in fixing the risk, many times, I find that the exit strategy affects the overall profitability more than the entry strategy.
I find the trading psychology chapters to be a good honest reflection of the trials and tribulations that comes with successful trading. Baiynd shows honesty and courage in showing excerpts from her trading journal from the time she was still a struggling trader.
Overall, I think the book is good in that it shows the reader that simple strategies, executed well, is all that one needs. Trading psychology, discipline, and endurance are more important factors that contribute to successful trading than a magic methodology.
Technical Indicators Used
- Moving averages
- 8 EMA, 20 SMA, 50 SMA, 200 SMA.
- Bollinger bands
- Day trading: 25 SMA, 2.5 standard deviation
- Swing trading: 30 SMA, 2.5 standard deviation
- Fibonacci retracements and extensions
Slope of the Moving Average is Everything
- Slope is everything. We are going to be studying a momentum-based trading system, and without momentum, our trades will fail.
- If there is no directional slope, a good trade is not available.
Entries Are More Important Than Exits
- The entry of a position is vastly more important than the exit, because the entry manages the risk threshold. Moreover, very often we will enter a position that will go against us.
Enter at Pullbacks / Band Squeezes / Re-Test of Breached Levels
- Moving average
- It is more conservative to enter at the pullback to the 20 SMA. However, the sharper the acceleration, the less likely the pullback to the slower moving average. Hence if the move is sharp, enter on the pullback to the 8 EMA.
- Bollinger bands
- Entry on a squeeze of the bands with a candle above the midpoint line of the band.
- Note that if the stock has new highs or new lows that are away from the upper/lower band, acceleration is slowing in the direction of the trend.
- To be conservative, enter at the re-test of breached levels, unless you have a great deal of volume or a breakaway formation.
- There should be a confirmation candle that has a long wick that tests a level, but does not close below the level (for long) / above the level (for short).
Make Sure Higher Timeframes Have the Same Trend or About to Resume
- Trading daily charts, make sure the weekly and 4-hour charts have the same trend.
- Trading 4-hour charts, make sure daily and hourly charts are following the same trend.
- Trading 15-min charts, make sure hourly and 5-min charts are following the same trend.
- Trading 5-min charts, make sure 15-min and 2-min charts are following the same trend.
Scale In and Scale Out
- Enter a half position initially. Add when there are more entry opportunities later.
- Exit half position at tests of overcoming new levels in the direction of the trend (i.e. at the point where you expect it to retrace).
Set Different Stop Levels for Portions of the Position
- The rule of thumb here is — the longer the time frame of the trade, the wider the stop necessary.
- When I stalk an entry, my initial stop is usually quite tight, and when I have assumed a full size, I will frequently set a very tight stop for a quarter of the position, a midrange stop determined by recent wave retracement in my time frame for one-half, and finally a longer wave retracement in my time frame for the last stop.
Pay Attention to 15-Minute Opening Range Breakouts
- If a stock breaches the high / breaks the low of the first 15-minute candle at any time after that during the trading day and the stock shows momentum, i.e., slope in the moving averages, the price will continue in the direction of the break.
Checklist Prior to Entry
- Basic requirements
- High liquidity, > 500K shares traded daily.
- Stable patterns – few gaps, no unfilled gaps, good clear linear trend
- No earnings releases nearby
- Identify entry
- Draw weekly, daily, four-hourly Fibs.
- Identify probable entry, either at the breach of a nearby Fib or moving-average formation. Premium long entries are usually found when the stock price is bouncing off support levels, not breaking over resistance. Vice versa for short entries.
- Identify the stop, set alerts to be aware when the event is about to occur.
- Calculate the number of shares to trade based on distance between entry and stop.
- Wait for confirmation candle to complete if using the moving averages to trade.
- If Fibs are used, isolate a breakout formation around the level if there is congestion or go to the time frame just beneath the one chosen to trade to see the break above or below just a little earlier.
- Don’t open a trade in the first 15 minutes.
- Raise your stops as new areas of support or resistance form.
- At the probable target, remove some of the position.
Daily Preparation Routine
- Material Events
- Check economic calendar, watch out for conference calls, earnings, etc.
- Look at slope of moving averages, and whether candles are above/below moving averages, slope of Bollinger bands, position of candles in relation to the Bollinger bands.
- Is your trade with trend or countertrend?
- Support / resistance
- Near a Fib level? Any nearby overhead support or resistance?
- Warning signs
- Look for unusual volume changes.
- Are you in a low volatility area that might whip you around?
- Is it a low or high probability trade?
- How would you know if the trade is broken?
- Risk management
- Set a reasonable stop? Have an entry / exit price?
Be a Dedicated Trader
- Dedication will show itself as a consistent commitment to understanding the markets and awareness of just how we are affected by it every day.
- The dedicated trader uses a journal to chronicle the market and her actions through the day.
- The trader examines the market in different ways and makes the decision to learn something new every day that makes her a better person and a better trader.
- The dedicated trader studies after hours. She will review trades, scrutinize charts, and work to discover what she had missed during the work day.
Keep Being Better Every Day
- The strongest mindset comes from those who are willing to work at being better than they were yesterday.
- The golden rule is this: the market is a living, breathing, and moving thing, and if you think you have arrived, it won’t be long before you are watching it pass you by.
Why You Repeat Mistakes
- One reason is that you have trained yourself to respond to the wrong cues, this being the rational element; and the second is that, at the end of the day, you have not anchored a truly distasteful memory to your actions. I believe the psychological term is aversion behavior therapy, and it is most effective.
Have a Day Stop
- Have a maximum loss threshold for the day. Whether this happens on one trade or four, the number is fixed and should not fluctuate.
- Unless we rapidly assess where we have gone wrong in a series of trades, we must stop trading after we breach the maximum we are willing to lose in a day.
- If we are trading without a maximum daily loss threshold, we are being exceedingly poor money managers as day traders.
- Losing trade after trade is a sign of something being very wrong. Stop trading until the problem is isolated, analyzed, and properly corrected, or more losses will mount.