Table of Contents
For my children, Heather Frances and Brady Bennett, with love and affection.
Foreword
This is not your ordinary get rich quick book about trading the stock market. Rather, it is a guide to a multimedia approach to learning and trading, using the Applied Reality Trading (ART) method of trading. This book and the accompanying DVD explain the concepts and methodology. In addition, the purchase of this book includes a one-month time frame in which to actually learn to trade the system and apply it in real time. This is done by including the ART software for one month, including access to live streaming data and access to a few, designated brokerage firms that can trade directly through the software. In essence, everything that the reader needsfor learning and for seeing how the system works in actual marketsis included with this book.
The ART trading methodology is built on software recognition of several time-tested patterns that can be easily identified for the user. While they are called specific names in the software, these are essentially breakouts and reversalsthe meat and potatoes of technical trading. The chart patterns identified can be applied to any type of bar chartdaily, five-minute, weekly, and so on. Moreover, they can be applied to stocks, futures, indices, and forexor any other market that can be charted.
What separates this methodology from many other computer-generated trading systems is that this is not a 100 percent mechanical black box system. Rather, this book (and the multimedia associated with it) teach the individual how to apply the various trading signals to the style of trading with which he feels most comfortable. Position traders can trade the trend signals from the software, while short-term swing traders may prefer to take minor signals generated along the wayeven trading within a trend, if desired. If you are uncertain which trading style might best suit you, the ART Profile exercise in this book will aid you in determining the style best suited to your personality.
Risk control is stressed throughoutdetermining effective position size, setting stop-loss exits, and more. Exact entry and exit points are given with the signals, so that you can judge your risk beforehand, and therefore determine position size as well. One of the many unique features is that stops are based on market conditions (chart patterns and volatility) as opposed to an arbitrary dollar amount. Therefore, the stops are more logical in terms of market mechanics, which prevents one from being stopped out prematurely, as might happen with percentage risk stops.
Finally, the techniques can be applied to option trading as well. I have long espoused the idea that any successful stock trading technique can be translated into a profitable option trading strategy, as long as one acts rationally in choosing the expiration month and striking price of the options to be purchased.
This multimedia approach to learning may be new to many readers, but the concepts and techniques associated with the ART software are well-suited to such an approach, and the benefits should be great for those who are willing to embrace the ART methodology and fit it into their trading personality.
LAWRENCE G. Mc MILLAN
Author, McMillan on Options,
2nd Edition
Preface
This book,
The ARTof Trading, is a unique opportunity for you, the trader or investor, to benefit from four fabulous things:
1. A sound trading system and software (Applied Reality Trading or ART) that gives you high probability entries, exits, and risk controlyou get a free 30-day trial of the ART software with this book
2. Live streaming data direct from the markets to provide you with the truth and the reality of the financial marketsyou get a free 30-day trial of live data with this book
3. The education on how to use the first fabulous two to generate profits
4. Superb brokerage services to execute your trades and investments once you have mastered the ART system
Best of all, you get this right here in just one book. This means that for the price of one book, you will be able to experience the reality of technical analysis software and data to generate greater profits. Youll see firsthand how technical analysis can enhance your fundamental analysis. Or, if you do not use fundamentals, you will see how ART can be used as a stand-alone decision maker for your trading and investing.
Maybe you are currently making entry and exit decisions by looking at fundamental information that you can gather from news, corporate earnings, Fed statistics, or any other multitude of reports that are available to you on CNBC and in the Wall Street Journal.
The reality is that those reports can be subject to distortion (a corporation carefully manages how the numbers are revealed so as to look their best); exaggeration (its a slow news day and a commentator may need to enhance a story to make it newsworthy); and, of course, interpretation (a trader interprets a poor earnings report and panics out of a position to find out that the stock goes up, and up and up).
How do we determine what is reality? How do we know when something is exaggerated or distorted? How do we make sense of the information and the world around us to determine how to make profitable financial decisions? That is where reality-based trading and investing come in. ART, Applied Reality Trading, can help you decipher the information that you receive from the market so that you can clearly understand it and act on it intelligently.
This does not mean that you will be following someone elses reality. Instead, you will be creating your own reality and personal financial approach that works for you and makes you profits. Think about Columbus setting off to sail into the distance in 1492, when everyone else thought that the world was flat. That didnt stop Christopher; he had his own reality, and he followed it and succeeded. Despite the naysayers, he was courageous enough to try a new approachwhich is what you will be doing. You will be an explorer and you will discover your reality, and you will use that as your edge in the financial markets.
The gift that ART and technical analysis can also give to you is clarity. You can include the ART trading software in your approach to confirm, or deny, an entry or exit. ART gives you the reality because it is based on the truths of the marketprice and volumeand these cannot be distorted.
My personal approach happens to be purely technical analysis using the ART software, but many of my students do combine fundamentals with ART. You will decide what is right for you, and this book is designed to bring you up to speed in trading with ART and technical analysis. If you have never used technical analysis and charts to make better entry and exit choices, there is no time like the present! This book, The ART of Trading, gives you everything you need to get started.
Enjoy the benefits of reality-based trading and technical analysis. I wish you all the best in everything that you do!
BENNETT MC DOWELL
San Diego, California
January 2008
Acknowledgments
Thank you to David Pugh at John Wiley & Sons for discovering us in New York City in February 2007. David, you are a master of the art of publishing, and without you this book would not be possible. Your gift of knowing how to bring the pages together to make them the best they could be is greatly appreciated. And, thanks to Stacey Small (Davids right-hand assistant) for her patience, kindness, and many hours of expert templating. Also thank you to Larry McMillan, a friend and brilliant trader, for writing the Foreword.
