0001 IBG 1019
`CBM of U.S. Pat. No. 7,533,056
`
`

`
` I©
`
`
`
`§..I.25<.»4..5§é§,%/1&5§2...,}§:.
`
`0002
`
`

`
`$29.95USA
`$41.9~ CAN
`
`tl<./\01N&
`tot
`
`II I vowed to. one day write a book so
`that other novices would not have to
`go through the same grueling process
`to learn about trading."
`-sunny Harris
`
`With a surge in the number of people try(cid:173)
`ing their hand at trading today-baby
`boomers, retirees, individual investors(cid:173)
`ies more important than ever to develop
`a solid working knowledge of the rudi(cid:173)
`ments of this potentially profitable prac(cid:173)
`tice. Trading 101 is a clearly written,
`concise, and thorough introduction to
`the basics.
`
`The author, renowned for her successful
`Trading 101 seminars, creates an indis(cid:173)
`pensable reference covering everything
`from charting techniques and trading
`vehicles to technical analysis and current
`market buzzwords. With easy-to-read
`charts and graphs supplementing the text,
`this is an invaluable resource for com(cid:173)
`plete information on:
`
`• The whats and the how-tos: What is
`a put? What is a call? How do I place
`a trade? How do I select a broker?
`
`• Fundamental analysis and its eco(cid:173)
`nomic indicators-leading indicators,
`real GDP, interest rates, productivity
`
`(continued on back flap)
`
`0003
`
`

`
`~ llllllllmlii~lil ~mm ~m1 mill~l/111111
`
`3 1431 00160 8686
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`
`HENDERSON DIST PUB LIBRARIES
`JAHES I. GIBSON BRANCH
`280 WATER ST.
`HENDERSON, NV 89015
`01/07/1997
`
`BAKER & TAYLOR
`
`0004
`
`

`
`TRADING 101
`TRADING 101
`
`0005
`
`

`
`I
`
`HOW TO TRADE LIKE A PRO
`
`SUNNY J. HARRIS
`
`John Wiley & Sons, Inc.
`NEW YORK • CHICHESTER • BRISBANE • TORONTO • SINGAPORE
`
`0006
`
`

`
`This text is printed on acid-free paper.
`
`Copyright© 1996 by Sunny J. Harris
`Published by John Wiley & Sons, Inc.
`
`All rights reserved. Published simultaneously in Canada.
`
`Reproduction or translation of any part of this work beyond that permitted
`by Section 107 or 108 of the 197 6 United States Copyright Act without the
`pem1ission of the copyright owner is unlawful. Requests for pennission or
`further infonnation should be addressed to the Permissions Department,
`John Wiley & Sons, Inc.
`
`This publication is designed to provide accurate and authoritative infonna(cid:173)
`tion in regard to the subject matter covered. It is sold with the understand(cid:173)
`ing that the publisher is not engaged in rendering legal, accounting, or
`other professional services. Iflegal advice.or other expert assistance is
`required, the services of a competent professional person should be sought.
`
`Library of Congress Cataloging-in-Publication Data:
`Harris, Sunny J.
`Trading 101 : how to trade like a pro I Sunny J. Harris.
`p.
`em.
`Includes bibliographical references and index.
`ISBN 0-471-14445-2 (cloth: alk.paper)
`1. Futures-Handbooks, manuals, etc. 2. Options (Finance)(cid:173)
`Handbooks, manuals, etc.
`3. Futures-Data processing-Handbooks,
`manuals, etc. 4. Options (Finance)-Data processing-Handbooks,
`I. Title.
`manuals, etc.
`HG6024.A3H37 1996
`332.64'5-dc20
`
`96-10258
`
`Printed in the United States of America
`10 9 8 7 6 5 4 3 2 1
`
`0007
`
`

`
`This book is dedicated to my partner Gina L. Maraio who has stood by
`me and maintained the faith through thick and thin, to my daughter, Colby
`E. Littlejohn, who is my pride and joy, as well as my understudy and
`right-hand woman, and to my mother, Mae B. Evans, whose strength I
`emulate. Above all, I thank Howard* , Who is the inspiration and guidance
`in all that I do.
`
`*From the children's prayer "Our Father Who art in Heaven, Howard be Thy name "
`
`0008
`
`

`
`ell done is better than well said.
`
`-Benjamin Franklin, Poor Richard's Almanack, 1737
`
`Wnners look for solutions-losers look for excuses.
`
`-Adrienne Laris Toghraie
`
`0009
`
`

`
`CONTENTS
`CONTENT5
`
`FOREWORD ..................................................................................... XV
`FOREWORD ................................................................................... .. xv
`PREFACE ........................................................................................................... xix
`......................................................................................................... .. xix
`
`1 GETTING STARTED ................................................................ 1
`GETTING STARTED .............................................................. ..1
`Introduction ................................................................................... 1
`Introduction ................................................................................. .. 1
`The Market .................................................................................... 2
`The Market .................................................................................. .. 2
`What Is Trading? ........................................................................... 2
`What Is Trading? ......................................................................... .. 2
`Why Do You Want To Trade? ........................................................ 5
`Why Do You Want To Trade? ...................................................... .. 5
`Excuses ............................................................................................... 5
`Excuses ............................................................................................. .. 5
`Reasons ........................................................................................................ 7
`Reasons ...................................................................................................... .. 7
`Learning the Jargon ....................................................................... 7
`Learning the Jargon ..................................................................... .. 7
`Adages ........................................................................................... 8
`Adages ......................................................................................... .. 8
`The Exchanges .............................................................................. 9
`The Exchanges ............................................................................ .. 9
`Reading the Ticker Tape .............................................................. 11
`Reading the Ticker Tape ............................................................ .. 11
`Margin ......................................................................................... 12
`Margin ....................................................................................... .. 12
`Further Reading ........................................................................... 13
`Further Reading ......................................................................... .. 13
`
`2 APPROACHES ....................................................................... 14
`APPROACH E5 ..................................................................... .. 14
`Fundamental Analysis ................................................................. 14
`Fundamental Analysis ............................................................... .. 14
`Economic Indicators ................................................................................. .. 15
`Economic Indicators ................................................................................... 15
`Analysis of Economic Data ............................................................ 16
`Analysis of Economic Data .......................................................... .. 16
`Sources of Fundamental Data ................................................................... .. 18
`Sources of Fundamental Data ..................................................................... 18
`What Should You Read? ........................................................................... .. 18
`What Should You Read? ............................................................................. 18
`Technical Analysis ....................................................................... 19
`Technical Analysis ..................................................................... .. 19
`Time Frames ................................................................................ 20
`Time Frames .............................................................................. .. 20
`Long-Term vs. Short-Term .......................................................... 20
`Long—Term VS. Short—Term ........................................................ .. 20
`Real-Time vs. End-of-Day Data .................................................. 21
`Real—Time VS. End—of—Day Data ................................................ .. 21
`
`IX
`
`0010
`
`

`
`Contents
`
`SOURCES OF INFORMATION AND DATA ..................... 23
`Introduction ................................................................................. 23
`Bulletin Boards ............................................................................ 24
`Chart Services ............................................................................. 24
`Commercial Data Vendors ........................................................... 25
`Magazines .................................................................................... 27
`Newspapers ................................................................................. 28
`On-Line Services ......................................................................... 29
`The Internet ................................................................................. 29
`
`4 ANALYZINGYOURDATA .................................................... 32
`Charting Techniques .................................................................... 32
`Types of Charts ............................................................................ 32
`Technical Indicators .................................................................... 39
`Average Directional Movement Index (ADX) ........................................... 39
`Candlesticks ................................................................................................ 40
`Cycles .......................................................................................................... 41
`Elliott ........................................................................................................... 42
`Gann ............................................................................................................ 44
`MACD ......................................................................................................... 47
`McClellan Oscillator ................................................................................... 49
`Momentu1n .................................................................................................. 50
`Moving Averages ........................................................................................ 50
`Pattern Recognition .................................................................................... 53
`Computer Software ..................................................................... 54
`The Analysis Process ................................................................... 55
`Digital vs. Analog Analysis ......................................................... 58
`Numerical Analysis ..................................................................... 59
`Pattern Analysis ........................................................................... 61
`
`5 EXPLORING THE LITERATURE ......................................... 62
`Upward and Onward ................................................................... 66
`
`X
`
`0011
`
`

`
`Contents
`
`6 CLUBS & PROFESSIONAL ORGANIZATIONS ............. 68
`Networking .................................................................................. 68
`Don't Get Stuck ........................................................................... 69
`Guide to Meetings ...................................................................... 69
`Users' Groups .............................................................................. 72
`
`7 EVALUATING SEMINARS & CONFERENCES .............. 75
`
`8 CHARLATANS AND THEIR TECHNIQUES ..................... 78
`Don't Let the Goblins Get You .................................................... 79
`Further Reading ........................................................................... 81
`
`9 WHAT DO YOU TRADE? ...................................................... 82
`Introduction ................................................................................. 82
`Trading Vehicles .......................................................................... 82
`Bonds .......................................................................................................... 82
`Cash ............................................................................................................. 83
`Futures (Commodities and Financials) ....................................................... 83
`Mutual Funds .............................................................................................. 84
`Options ........................................................................................................ 85
`Stocks .......................................................................................................... 89
`Investment Timing ....................................................................... 90
`Contrary Investing ....................................................................... 90
`
`10 SELECTING A COMPUTER ................................................. 92
`PC or Macintosh? ........................................................................ 92
`
`11 SELECTING SOFTWARE .................................................... 95
`Introduction ................................................................................. 95
`Fitness for Purpose .................................................................................... 97
`
`Xl
`
`0012
`
`

`
`Contents
`
`Throwaways ................................................................................ 99
`Still Confused? ......................................................................................... 106
`
`12 SELECTING A DATA SOURCE ......................................... 101
`Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
`What is accurate data? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
`
`13 PURCHASING A CANNED TRADING SYSTEM ......... 110
`Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
`Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
`Evaluating Canned Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
`The Watchdogs .......................................................................... 111
`Ifthe system's so good, why are you selling it? ........................ 112
`Commercially Available Systems .............................................. 112
`Breaking the Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
`Following the System ................................................................ 114
`
`14 THE NEVER-ENDING SEARCH FOR THE
`HOLY GRAIL .......................................................................... 11s
`Phase One-Think .................................................................... 116
`Phase Two-Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
`Phase Three-Follow Your System ........................................... 122
`
`15 DEVELOPING YOUR OWN TRADING SYSTEM ......... 124
`Introduction ............................................................................... 124
`System Design ........................................................................... 124
`Testing Your System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
`Factoring in Costs ...................................................................... 129
`Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
`Money Management Techniques ............................................... 132
`
`Xll
`
`0013
`
`

`
`Cont-ent-s
`
`16 SETTING UP YOUR TRADING AS A BUSINESS ....... 136
`Developing Your Business Plan ................................................ 136
`Selecting a Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7
`Full Service vs Discount ........................................................................... 138
`Brokerage Commissions and Fees ............................................................ 138
`Time Delay & Slippage ............................................................................ 139
`Electronic Trading .................................................................................... 139
`Setting Up Your Account ........................................................... 140
`Margin Requirements ................................................................ 140
`Entering Your First Trade .......................................................... 141
`Order Types ............................................................................... 141
`Legal and Tax Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
`Lawyers ..................................................................................... 142
`Books ........................................................................................................... 143
`Regulators . . . . . .. . . . . . . . . . . . . . . .. . . . . . . . . . . . .. . . . . . . .. .. . . .. . . . . . . . . . .. . .. . .. . .. . . . . . . . . . . .. 143
`
`17 DISCIPLINE ............................................................................ 144
`Introduction ............................................................................... 144
`Following Your System ............................................................. 144
`Motivation ................................................................................................. 145
`Commitment ............................................................................................. 145
`Persistence ................................................................................................ 146
`Keeping a Diary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
`What's Between You and Following Your Rules? ..................... 147
`Emotions ................................................................................................... 14 7
`Conflicts .................................................................................................... 14 7
`Attitudes .................................................................................................... 148
`Beliefs ....................................................................................................... 148
`Coaches and Psychologists ........................................................ 148
`Who You Gonna Call? ............................................................... 149
`
`18 EVALUATING YOUR PERFORMANCE .......................... 150
`Introduction ............................................................................... 150
`Useful Statistics ......................................................................... 152
`
`Xlll
`
`0014
`
`

`
`Contents
`
`19 BACK OFFICE DETAILS ..................................................... 156
`Introduction ............................................................................... 156
`Accounting ................................................................................ 156
`Do It Yourself? .......................................................................................... 156
`Accountants .............................................................................................. 157
`Back Office Services ................................................................................ 15 8
`Legal and Tax Questions ........................................................................... 15 8
`Lawyers ..................................................................................................... 158
`Regulators .................................................................................. 159
`CFTC-Commodity Futures Trading Commission ................................. 159
`NFA-National Futures Association ........................................................ 159
`NASDAQ-National Association of Securities Dealers ......................... 159
`SEC-Securities and Exchange Commission .......................................... 159
`
`20 CONCLUSION
`Step by Step ............................................................................... 161
`Phase !-Acquiring Information .............................................................. 161
`Phase II-Developing Your System ......................................................... 161
`Phase III-Following Your System .......................................................... 162
`
`I
`I.
`
`APPENDIX A-INTERNET SITES ........................................... 163
`APPENDIX B- MAGAZINES .................................................. 165
`APPENDIX C-NEWSPAPERS ............................................... 166
`APPENDIX D-ON-LINE SERVICES ...................................... 167
`APPENDIX E-SOFTWARE VENDORS ................................ 168
`APPENDIX F-FUTURES CONTRACT INFORMATION .... 169
`BIBLIOGRAPHY ........................................................................... 111
`GLOSSARY ................................................................................... 173
`INDEX ............................................................................................... 195
`
`XlV
`
`0015
`
`

`
`FOREW RD
`
`The beginning stages of a trader's education sets the foundation for each
`new level of success. The level of success you achieve is determined by
`your application of a good education. Trading 101 gives a new trader the
`guidelines for developing the education necessary to begin trading.
`Working as a traders' coach for the last six years, I have found that
`most excessive trading losses result from the bad habits traders develop
`at the beginning of their trading career. Some of these bad habits are
`created because a tra4er does not have:
`j\ "'"'-~;··yc?-0"'-'
`~~-~:.d.-.;7#.
`1.
`the basic fundamental knowledge of the trading industry and
`--- how all of its components interrelate
`2. a trading plan
`rules they believe will give them good results
`~"- 3-~--
`~- a tested system
`,.2.:_. money management rules
`
`Lack of discipline is the main reason traders fail. In_o_rder to be
`disciplined you must trust your methodology and money management
`rules. If you have not developed the basic education necessary to be a
`----·~
`good trader, you will not have the discipline necessary to follow your
`rules. If you do not follow your rules you will not get profitable results.
`Tradzng 101 will give you the education you need so you can trust your
`ability as a trader.
`The five main reasons beginning traders do not start out with the
`basics needed for good trading are:
`
`XV
`
`0016
`
`

`
`Foreword
`
`1. Their enthusiasm to trade immediately takes over without
`giving thought to the possible consequences.
`2. They do not know where to get the right information to start.
`3. They find the method taught too difficult to understand.
`4. They have information from too many sources which causes
`them to go in too many directions at the same time.
`5. They feel that to succeed they must establish complicated rules
`which results in too many possible things that can go wrong.
`
`Trading 101 is easy to understand, easy to apply quickly and will
`leave you with the confidence that you have the ability and knowledge
`to be a successful trader.
`Sunny Harris is an extraordinary trader who was ranked the number
`one tnoney manager in 1994 by Stark Research in the under $10,000,000
`category. She won that honor trading a system she developed which could
`only be for the kind of trader who can look death in the face and laugh.
`This system brought in 365 percent last year on investment dollars, and
`fits the dynamo side of her personality. The second system she trades,
`which was also developed by her, is for traders with a pulse. This system
`brings in a very respectable, predictable and safe 18 percent with 8.5
`percent drawdown. This system satisfies the conservative side of her.
`Recently, Sunny decided to make these two systems available to a limited
`number of traders who want to jumpstart their careers, but in order to be
`eligible for consideration, the trader must have the right personality type
`to bring out each system's best potential.
`In addition to trading, Sunny publishes the Traders' Catalog &
`Resource Guide. She began this publicaton when it became general
`knowledge in the industry that she had been keeping a "black book" of
`sorts on everyone and everything in the business - fron1 brokerages to
`software and weather. The word spread so far and wide about her "black
`book" that she was getting calls from all over the country. By April1993,
`Sunny was putting together her first catalog. And that is how a great
`business idea was born.
`While TC&RG is the phone book directory combined with editorial
`magazine, Trading 101 is the cookbook. TC&R G is an alphabetical listing
`
`XVI
`
`! '
`
`0017
`
`

`
`Foreword
`
`of who's who. Trading 101 is the step-by-step guide you need to get
`started.
`There is a lot to be learned from the brilliant investing and trading
`successes of Sunny Harris. Her determination, her thoroughness and her
`dedication to the techniques of trading and investing are an inspiration
`to all of us. And, there is also a lot to be learned from her willingness to
`organize and catalog the entire world of trading and to share it with the
`rest ofus.
`Trading 101 will give you the basic understanding of the trading
`business. It will save you time, money and research providing you with
`what is necessary to get started. Trading 101 will be a continuous resource
`as you develop into a successful trader.
`Sunny Harris' generosity to the investment world is a model of
`prosperity consciousness in action. Every?~ne seeking affluence in every
`part of their lives should follow her prosperity principle: "You only
`ha~ygu give."
`,~
`
`-Adrienne Laris Toghraie
`April, 1996
`
`XVll
`
`0018
`
`

`
`PREFAC
`
`I am now a professional trader. I was not always a trader, nor did I
`plan to become a trader. I was not an economist or a broker, or a banker
`or any other professional involved in the markets. I, like most other
`individual traders, came from a background unrelated to investing and
`trading.
`In my Trading 1 OJ seminars, I always ask about Iny students'
`backgrounds and have found that Inany aspiring traders come from
`engineering, physics and mathematics backgrounds, as do I. It seems to
`me a natural extension of logical abilities, but does not mean that one
`has to have a degree in math to be a trader. Yet a solid foundation of
`logical abilities does seem to me an absolute necessity for developing a
`theory, thoroughly testing the theory, and following the trading system
`once developed.
`My formal education has been in Inathematics. As a new
`mathematician straight out of graduate school, I abhorred the thought of
`using my training for any practical application like prograinming. But,
`earning a living became a necessity, and I began programining in the
`aerospace industry. I quickly caine to love the challenge and the
`opportunity to apply symbolic logic to "the real world".
`After an immensely successful entrepreneurial venture into computer
`graphics, I began the process of learning how to invest my own money.
`Early on I bought stocks and bonds, I hired money managers, I ventured
`into mutual funds and money market funds, I purchased real estate, and
`a variety of limited partnerships. Most of these ventures were profitable,
`some very much so. At one point I lost $75,000 with a "sure thing"
`commodites trader and swore I'd never have anything to do with futures
`trading again.
`
`XIX
`
`0019
`
`

`
`Preface
`
`While my advisors invested my money, I monitored the efficacy of
`their advice by keeping data and charts on a weekly basis. The mechanics
`of this process taught n'le the basics of technical analysis, and I wanted to
`learn more.
`At first I kept my charts by hand on a piece of 10x10 graph paper,
`and I got my data from Investors Business Daily and the Wall Street
`Journal each morning. Later! began watching FNN, the Financial News
`Network, frotn 6:00am each morning until the market closed at 1:15pm
`California time.
`The 1nore I learned, the more I wanted to learn. I bought my first
`book on technical analysis, John Murphy's Technical Analysis of the
`Futures Markets, and dug in. After weeks of study, the pages of the book
`were nearly covered with flourescent yellow frotn highlighting, so I
`purchased a second copy and studied some more.
`The more I studied, the more I feared that there was so tnuch to learn
`that I had better leave 1noney managetnent to the professionals. But I
`was still curious.
`As I kept my investment charts, I began keeping track of additional
`background charts: the Dow Jones Industrial Average, the dividends of
`the Dow, interest rates, and the price of gold. It was in this process that I
`began to see patterns, and to understand some of the concepts in John
`Murphy's work.
`Initially, I observed that a parabolic curve usually collapses and that
`the dividend of the Dow tends to range between 3.0 and 6.0 and that the
`trend turns when the dividend stays too long at one extreme. In September
`of 1987 I saw these two conditions in the DJIA and decided to act. With
`over a million dollars in equities and equity funds, I told rny broker to
`liquidate. He disagreed. "This is the biggest bull-run in history," he said.
`After a long lunch, at which I showed him my new-found technical
`analysis techniques, he still disagreed. Nevertheless, it was tny money,
`so I liquidated and went to Europe on vacation.
`When the market closed down 105 points on Friday, October 16,
`1987, I stated finnly, "It'll drop 500 points on Monday. I can see it in the
`charts." From my hotel room in London I watched with excitement as
`
`XX
`
`0020
`
`

`
`Preface
`
`the US market collapsed on that fateful Black Monday. I decided then
`and there to pursue advanced education in technical analysis-vigilantly.
`Over the next 2 years I consumed books, audio and video tapes on
`technical analysis. I attended every seminar I could find which even
`remotely touched on technical analysis. I voraciously read newsletters
`and watched FNN religiously. As I studied, I kept notes, and vowed to
`one day write a book so that other novices would not have to go through
`the same gruelling process to learn about trading.
`
`-Sunny J. Harris
`April, 1996
`
`XXl
`
`0021
`
`

`
`1 GETTING STARTED
`
`Introduction
`
`This book, Trading 101, is the collection of years of study and
`experitnentation, condensed to an easy-to-use guide for the newcomer.
`Trading 101 is like an overview class: you will learn about the existence
`of concepts, but will not learn the concepts in depth. You will, however,
`learn where to look for information on each of these concepts, so that
`you may explore in-depth and develop your knowledge base further if a
`particular topic appeals to you. I've drawn liberally from the work of
`others, using quotes and telling you where you can find more information
`on each subject.
`Trading 101 could hav