Trading As A Business by Dick Diamond

Trading As A Business: The Methods and Rules I′ve Used To Beat the Markets for 40 Years

Trading As A Business: The Methods and Rules I’ve Used to Beat the Markets By Dick Diamond 一 BOOK SUMMARY   

About The Author

After leaving the American Stock Exchange in 1965, where Dick Diamond worked as a floor broker, he has been trading for a leaving for over 50 years now. He is an absolute legend with expertise in trading OEX options, S&P/Nasdaq futures, and Dow/Amex/Nasdaq equities. He’s been around the trading game for over 40 years. He’s convinced that while it’s tough and unforgiving, it is possible to make a great living out of trading. The keys are emotional discipline and risk control.

Key Lessons Learned

With the proper trading principles and technical analysis tools, you can learn how to consistently make money in up and down markets. You can make trading your business. Whatever you trade, make sure there is sufficient liquidity to get in and out of the market efficiently. Avoid losing money.

Here’s how the author describes his approach:

“I trade on two-minute charts. I usually set my initial stop order two ticks away from the entry price. As the price moves in my favor, I’ll push the stop order higher or lower to protect my position. If the market doesn’t move fast enough, I may liquidate the trade before it hits my protective stop order. It’s better to break even than take a two-tick loss. My initial goal is not to lose money.”   

You always want to use stops — even in paper trading. Put a stop order in with your initial order and move the stop in the direction of the trade as the trade becomes profitable. Never take for granted risk control, and don’t let a profit turn into a loss. Markets can change in an instant, and you should always protect your position. The setups will enable you to identify situations where the percentages are in our favor and execute trades in a disciplined and consistent manner.

Another important thing is to capitalize on the market’s short-term swings to eke out consistent profits. Wait for high-probability situations — what the author calls 80/20 trades. Defines your 80/20 setups, patiently wait for them to develop, and then act decisively. Anticipates trades. And once the setup materializes, pull the trigger. When the author enters his 80/20 trade on a two-minute chart, he expects the market will move quickly in the direction of the trade. He’s looking for a free ride. If the ride doesn’t come quickly, he’ll get out.

Dick looks for all his trading indicators on any particular trade setup to be pointing in the same direction before putting on a trade. It means developing the ability to patiently wait for a tradable situation to emerge, and then, when it’s in front of you, executing the trade. You have to do the right thing consistently, even if it feels uncomfortable.

Emotional Discipline

Everything in trading is connected: trade setups, money management, and emotional discipline. To be profitable, you need both high-percentage trade setups and good money management tactics. And to execute 80/20 trades and adhere to sound money management principles, you need to be emotionally disciplined.

You want to cultivate feelings of quiet confidence and self-control. When you begin trading, you need to base your confidence on the knowledge that you can identify high-probability trades and can follow the trading rules. Focus on the market, your signals, and your rules. The money will take care of itself. Remember, you can only trade what the market gives you.

Principles of Successful Trading

Trade within Your Capital

Determining and adhering to your core position is an absolute necessity to succeed over the long haul. A core position is the trading size that you can execute in the market without becoming too emotional. When a trade doesn’t work out, you should be able to exit with a small loss and without any emotional pain. Similarly, when a trade works in your favor, you should be able to grab your profits at the right time. You need to find a position size where you’re not overwhelmed with feelings of hope, fear, and greed and stick with it.

Quiet confidence

Quiet confidence comes from following your trading rules and faithfully executing high-probability trades. The quickest way to lose your confidence is to violate one of your trading rules. If you are making more money than usual, it’s probably because the market conditions are creating more trading opportunities, not because you’re a better trader. Don’t let quiet confidence develop into overconfidence.

Sell Too Soon, Not Too Late

It’s a rare event for a market to make a move early in the morning and then continue in that direction the entire day. Typically, there are pullbacks or small consolidation points along the way. Sometimes the market reverses, sometimes the trend continues, and sometimes the market transitions into a trading range. The patterns are endless.

Good traders don’t worry about missing a chunk of a big move. They take their profits without regrets. The best time to sell is when the momentum is in your favor. You see the 80/20 trade. You get in. The market moves in your direction, and you have a nice profit on the trade. Take it. Get out and get ready for the next trade. Do this three or four times a day and you’ll end up winning most days and nearly every week.

Conclusion —
Trade small, use tight stops, and cultivate emotional discipline

1. Do not rely on a single indicator or even two indicators. The markets are too complex to be reducible to a single indicator at all times. Instead, consider using three to five indicators in a setup and waiting until all the indicators align before putting on a trade.

2. Make sure that your setup is effective in identifying 80/20 trades. It is tough to maintain emotional discipline when your trade setup is wrong almost as much as it is right.

3. Repeat trading principles described in the book and make them part of your trading DNA.