Today's Quote: “I have never in my life learned anything from any man who agreed with me” - Dudley Field Malone.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

SECRET #4: HOME RUNS ARE FOR LOSERS

The master trader knows that Mark McGwire and Sammy Sosa, the two baseball superstars who battled for Major League baseball's home-run record in 1998, would not make good day traders. Why? Because it is in their nature and their blood to go for the big one, the long ball, the almighty home run. And while that approach may work in baseball, it does not work in day trading. Professional traders, I mean the ones who have mastered the game, are consistent "singles" hitters. They only occasionally experience doubles. And when they get very lucky, which does happen every now and then, they may score a triple. But the master trader never goes for the gusto, or what some call the "big one." They are never looking to make a huge score. The push to score big, to hit the jackpot, is usually the occupation of a loser who, lacking skill, tries to stay or get back in the game via one big giant win. Going for home runs in day trading is typically an act of desperation, and just in case you did not know, it is characteristic of wisdom not to do desperate things. We see it all too often. A struggling day trader is down 3 days in a row, or 3 weeks in a row, maybe even 3 months in a row, and the pain is so unbearable that he or she starts to get desperate. The stocks hit their stops, and they're ignored because the trader is convinced that he or she can't take another loss. Or, the trader gets handed a $1 or $2 gain, but can't seem to make the decision to sell because it's not nearly enough to get back to breakeven. So the trader holds on (as if the stock knows he or she needs more) until the stock finally moves down to deliver another devastating loss. We've seen some traders so imprisoned by this viscous cycle that they don't realize they are speeding on a self-destructive kamikaze course that can only end in psychological and financial bankruptcy. We, as master traders, need the heart of a McGwire, accentuated by the smarts of a Pete Rose. We need the power of a Sosa, directed by the mind of a Rod Carew. In short, we need to become masters of the single, the base hit, the small but consistent gain. And if we do that right, every now and then that approach will reward us with an unexpected gift. A gift called the home run.

MASTER TRADING TIP

A big win is usually the hallmark sign of a novice. This is not to say that a large point gain in a stock is something that should be pooh-poohed. But every master trader knows that successful trading is all about consistency, and consistency is more attainable as a singles hitter than it is as a home run hitter. This is why they leave the homeruns to novices, as enticing lures to stay in the game, while they take the smaller but more consistent gains right from under them. Think about it. The ultimate masters of the game are specialists and market makers. Firms like Spear, Leads & Kellogg (SLKC), Goldman Sachs (GSCO), and Merrill Lynch (MLCO) represent the blue bloods of Wall Street, the titans of the game, and they are by far the most profitable groups in existence. Do you think for one moment that they are looking for a $27 gain in Amazon.com or a $14 score in AOL? The answer is no. Only novice traders seek such things. These masters' sole mission on each trade is to simply gain the spread, the difference between the bid price and ask price. These masters of Wall Street and their representatives preach the buy-and-hold approach, but any NASDAQ level II quote system will reveal that they do not practice the buy-and-hold approach. They are perpetually vying for 1/4s and 1/8s, and they have more money than the gods. In fact, they are the gods, the gods of Wall Street. If you believe the recent hype that short-term trading does not pay, perhaps you should take a few notes from the real masters.

MASTER TRADING TIP

Hope is a state of mind that the professional traders do not often partake of. Whenever they feel themselves hoping for something that does not exist, they know they are in trouble and immediately take the necessary steps to get out of the trade. Hope is something reserved for novices, those individuals devoid of knowledge and a concise trading plan. The master trader fully knows that selling hope is far more profitable than buying it. The options game, for instance, is largely a game of hope, so much so that we refer to it as the poor man's racetrack. It is not a coincidence that the biggest winners in the options game are those who sell options (hope), not those who buy the options (hope). When given the choice, the master trader will always be a seller of hope, rather than a buyer of it. It's more profitable.