The Hindu Business Line : How to beat Aladdin in gathering wealth

YOU want to become rich overnight. Or, say, over two or three nights. No, sorry, this book is not for you, says the foreword to Better Stock Trading by Daryl Guppy, founder of Guppytraders.com. It can, however, help you achieve above-average returns, with `no hype, no tripe, but just cold facts from someone who has been there and done it'.

Trading skill counts, says Guppy, but money management gives you an important edge. He takes you through a selection of proven strategies — from the 2 per cent rule to pyramiding methods — to help you study your own trading history. "These methods make the difference between trading survival and consistent success," announces the blurb. "The objective," says chapter one, "is to take a small amount of cash and, by trading the market, consistently turn it into a larger pile." If that sounds interesting enough, read on:

The 2 per cent rule simply states that no single position, or trade, should put at risk more than 2 per cent of our total trading capital. If we have $100,000, this does not mean each trade is limited to a total of $2,000. It means the actual risk of the trade — the amount we are prepared to lose before we admit we are wrong — is not larger than 2 per cent of our total trading capital.

Aladdin found wealth hidden in a cave. We find it in the financial markets lurking on our computer screens. The potential wealth available turns Aladdin into a pauper. If there is a secret to gathering this wealth, it is this: do not allow yourself to be blinded by the glitter of profits slipping across your computer screen. Instead, concentrate closely on protecting your capital and profits will follow. Central to trading survival is the stop loss rule. Central to trading success is a correct evaluation of the risk/reward ratio.

Hamlet is advised by his father, Polonius, "Neither a borrower, nor a lender be." Excellent advice had Hamlet been about to venture into the financial markets.

In a rapidly falling market, traders who fully own their stocks are able to consider all the alternatives because there is no pressure to come up with extra cash. These alternatives include refusing to sell into market panic and waiting for the inevitable rally to sell at higher prices.

September and October tend to be bearish months in the world markets. This is typically followed by three months of bullish trend in November, December and January. In the very near future, 24-hour trading will be a global reality. Traders from all over the world will have access to all markets. NYSE estimates that trading volume will be in the range of four to eight billion shares a day in a 24-hour trading environment. Right now you can trade most major stock markets worldwide from your home or office.

Matching the market return is like breaching the jogger's pain barrier. The first five kilometres are agony, but the last five seem very easy.

Once the investor consistently matches market returns, it is much easier to move beyond these and into hedge fund territory.

And remember: "The trader who is fastest on the mouse is not necessarily the smartest."

(Book courtesy: Wiley www.wiley.com)

BookValue@TheHindu.co.in

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