The Three Skills of Top Trading: Behavioral Systems Building, Pattern Recognition, and Mental State Management by Hank Pruden shows how traders must learn to combine three crucial skills in the markets to become a top trader.
Pattern Recognition and Discretionary Trading
The author uses the Wyckoff method to show chart representations of how hot stocks are accumulated in bases for long periods of time, eventually have pull backs, and then break out to new highs. You will learn to recognize the patterns of how they eventually have exhaustion tops that fail to rally and they begin to break down as sellers rush in to distribute their holdings.
The patterns in this book will be nothing new for traders who have studied William O’Neil and the Investor’s Business Daily methodology of trading winning stocks, but reinforcement is always a good thing. The author encourages traders to use discretionary trading to profit from the markets repeating patterns of accumulation and distribution, however chart reading experience is required to be able to identify market action through the past models.
Behavioral Finance and Systems Building.
You must be flexible in your trading – you must bend so you do not break your account. When you are wrong you must sell and not allow your mistakes to hurt your trading capital. You are merely a tiny ship on the ocean of market opinion. The book suggests that top traders have learned to follow the trend by trading with the prevailing sentiment during the middle of the the trend, they then go contrary to it at the extreme tops and bottoms.
Hope, fear, and greed are the most influential movers of the market and are capable of moving the markets in many ways. The price action of the stock market is nothing more than a manifestation of crowd psychology in action. Like bullets, prices never lie. The Pruden model shows a chart of how accumulation, mark-up, distribution, works in the market tied to price, volume, sentiment, and time. It attempts to explain how the market for growth stocks work.
The Ten Tasks of Top Traders:
- Daily self analysis: Successful trading is 40% risk control and 60% self-control.
- Daily mental rehearsal: Practice being disciplined in your mind before you trade daily.
- Developing a low risk idea: Trade with the odds on your side with a defined risk.
- Stalking: Wait for the entry. Utilize patience and don’t pull the trigger to soon.
- Action: Take the entry when the signal is hit. Do not freeze up. Be definitive.
- Monitoring: Keep an eye on what is happening with your position.
- Abort: Be ready to cut your losses, when you are wrong and hit your stop loss.
- Take profits: Use trailing stop or profit target when one is hit. Allow the market to take you out.
- Daily briefing: Think through your trading & what you did right/wrong based on your trading plan.
- Periodic review: Is your trading working? Do adjustments need to be made?
Pruden’s book also explains the principle of the “Composite Man”, it is much like Benjamin Graham’s “Mr. Market”. It explains that you must think of the market as one big trader you are trading against. Your job is to understand how he is trading to adjust your trading accordingly to be profitable trading off his greed and fear.
Top Trading is a key book for all traders who truly want to be successful in the markets, dig into the psychology of trading, and is a great guide to taking someone from a trader to a Top Trader.