Trading in a Nutshell

Planning for Consistently Profitable Trading
10th Anniversary Edition
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Excerpt from Trading in a Nutshell - 4th Edition

Let me take you back to what now seems a long time ago. I first became interested in the Australian sharemarket in 1996 and set about making some trading decisions of my own with reasonable success. Living in the US throughout 1997 and 1998 brought me closer to a major part of the financial world, New York. Here, I observed the extensive financial commentaries available on various cable TV channels, and this only served to increase my interest in our own sharemarket and the possibilities awaiting me in Australia. On my return to Australia in 1999, I set about learning more about the Australian Securities Exchange and those who were successful at trading on it. More importantly, I set about discovering what made them successful.

Through my study of successful traders and their methods, I discovered many similarities in the way they approached their craft, despite differences in their backgrounds, education and age. I found that they all placed great emphasis on certain principles and all tended to follow similar rules that have stood the test of time. A fascinating aspect of the rules is that there is no secret to them; you can read almost any trading book that has been written and discover some of them. Yet most people fail to follow them. Why?

When studying the trading careers of many successful traders, I found that most acknowledge discipline as a cornerstone of their success. More importantly, I discovered that all of them had an individual approach to the market and a specific trading plan that was right for them.

I also found some amazing parallels between trading and my former career as an officer in the Australian Army. Obviously, discipline is instilled in all members of the Australian Defence Force through rigorous and focused training. But, somewhat remarkably, I have found that my own military background, starting at the Royal Military College, Duntroon, has given me a great grounding for trading.

When I started trading, I didn’t fully appreciate how much my background would assist me. Only now do I look back and realise that learning to be disciplined, planning almost everything I did and learning to easily cope when unexpected things happen have all provided me with a great advantage in trading.

Another significant crossover between my military and trading experiences is that both demand the ability to recognise that, in most situations, there is no right or wrong answer. What you think is a good trading opportunity may not be in the opinion of other traders you know. But, at the end of the day, it doesn’t matter what other people think, only what you think. This is incredibly similar to military tactics.

When faced with tactical problems on field exercises or during courses, I was always aware that there were no right or wrong answers in tackling these problems in order to develop a plan to achieve the mission. All you could be assessed on was how well you put into practice the principles applicable to that type of operation. The same could be said when making trading decisions. Follow the time-tested principles, make a decision and don’t worry about what other people think.

I have been very fortunate to have travelled extensively over the last few years and to speak to traders from many countries. One thing I have realised is that traders from other countries are no different from traders anywhere else. They all face the same challenges and it seems that, generally speaking, the only difference between markets around the world is the names of the companies listed on the various exchanges.

This reinforces the belief that your education, background, language, cultural beliefs and many other factors are almost irrelevant when it comes to trading. Trading ability comes from within, with a desire to learn and develop the skills and attributes necessary for consistent successful trading. I am confident my book will point you in the right direction and provide guidance to developing a solid trading plan that you will execute with confidence.

Since the first edition of Trading in a Nutshell was published in 2001, I have coached many traders and learned more about the problems they face. Speaking to traders from all around the world has also given me a greater appreciation of the extent to which our mindset affects our overall success as traders.

When starting out, I believe that many people view trading as easy money; however, it may be the hardest easy money there is! Trading has relatively straightforward concepts, yet it is amazing how many people make a mess of it. Once they realise that it isn’t as easy as they initially thought, they try to overcomplicate their approach, believing that a complex solution is required. Unfortunately, this is often not the case and they end up travelling down the wrong path.

Over the last ten years or so, since I wrote the first edition of this book, I have learned so much about myself, trading and the financial markets. I am proud to say that the bulk of the content from the first edition is to be found within these pages – the new editions have simply expanded on that material with additional material I have learned along my own journey.

During this same time, the general public has become more savvy and better educated when it comes to trading; however, the principles still remain the same. The most important part of your trading is you. One of the main reasons that people fail in the market is because they don’t have a plan, or even if they do, it doesn’t suit them and they don’t follow it. As a simple example, they buy stocks and don’t know at what point they are going to sell them. In the end, your trading success is up to you, because there is little preventing you from developing a robust trading plan that follows the rules.

Before I start, I would like to suggest an idea for you. One thing I have learnt about highly successful people in all professions is how quickly they implement new ideas. They hear something, consider it and then implement it without hesitation. The problem with most people, however, is they don’t have in place a way of making this easy for themselves. Let me give you an example. You may read through this book and, as you go along, think to yourself on numerous occasions what great ideas it contains and how you can’t wait to implement them. Then as you finish the book, you forget them, drift away and focus on other things. We fail to put steps in place to implement all those ideas we just read about and were nodding our head at in agreement as we read them.

What I suggest is having a separate piece of paper to take notes relating to only those items you wish to implement in your trading straightaway. Once you have finished reading, you will have a concise task-list that will make it far easier to make changes. I am reminded of the saying, ‘If you keep doing what you have always done … you will keep getting what you have always got’.

I have included something new in this fourth edition of Trading in a Nutshell. I have asked several of the great people in the trading fraternity whom I have been fortunate enough to meet over the years to make a contribution to my new edition, by responding to a range of questions that I know can help you in your quest. I have included all of these responses in chapter 12 and I hope you find them valuable.

I also hope this new edition will enable you to discover yourself and then put together all the pieces of a robust plan necessary for long-term profitable trading. It is worth the effort, I can assure you.

I wish you well.

Stuart McPhee
Melbourne, Australia
February 2012

Praise For

Trading in a Nutshell

  • It is easy to understand and everything you need to know about trading is logically set out. It is a book for everyone, from the newbie through to the more experienced trader who wants a revision and an annual ‘tune up’. Read full review
    Jo Martin
    Australian Investors Association
  • The book is an excellent resource, especially if you are a newbie trader. What I like most about this book is the easy to understand manner in which it is written. It covers all the essential material for a newbie to understand what he needs to succeed at trading.
    Ray Barros
    Fund Manager and Interviewee in Trading in a Nutshell
  • No matter which stage of the learning curve a trader’s at, Trading in a Nutshell resonated some very meaningful principles that any trader should adhere to.
    Rahul Mohindar
    Trader and interviewee in Trading in a Nutshell
  • A concise, well-written read with smart tips. This is an essential book for every trader’s bookshelf. I recommend Trading in a Nutshell to all of my trader clients — from Wall Street and beyond
    Julie Melillo
    Trading Coach and interviewee in Trading in a Nutshell

Trading in a Nutshell

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