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9 Secrets Professional Stock Traders DO NOT Want You To Know

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9 Secrets Professional Stock Traders DO NOT Want You To Know

NOTICE: You May Give Away or Share This eBook As


Long As It Is Not Altered In Any Way.
© Copyright 2009 DerickTan.com

ALL RIGHTS RESERVED. No part of this eBook may be reproduced or transmitted in


any form whatsoever, electronic, or mechanical, including photocopying, recording, or
by any informational storage or retrieval system without express written, dated and
signed permission from the author.

DISCLAIMER AND/OR LEGAL NOTICES: This information presented herein


represents the view of the author as of the date of publication. Because of the rate with
which conditions change, the author reserves the right to alter and update his opinion
based on the new conditions. The report is for informational purposes only. While every
attempt has been made to verify the information provided in this ebook, neither the
author nor his affiliates/partners assume any responsibility for errors, inaccuracies or
omissions. Any slights of people or organizations are unintentional. If advice concerning
legal or related matters is needed, the services of a fully qualified professional should
be sought. This report is not intended for use as a source of legal or accounting advice.
You should be aware of any laws which govern business transactions or other business
practices in your country and state. Any reference to any person or business whether
living or dead is purely coincidental.

Please be informed that the below mentioned stocks/ indexes/ investment


instruments are solely for the purpose of education; it is NOT a recommendation
or an invitation to trade/invest. For trading/investment advice, please speak to
your remisier, dealer representative or financial adviser. Please understand that
there is risk in every trade/investment venture, know your risk first before you
venture into any of them.

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Table of Contents
Greeting Message From Derick Tan............................................................................ 1

Secret #1: The Pros Cut Loss Quickly And Take Profit Slowly.................................... 3

Secret #2: The Pros Read Stock Charts To Time Their Entry And Exit....................... 5

Secret #3: The Pros Always Have An Exit Plan. They Will Never Buy-and-Hold!...... 7

Secret #4: The Pros Eliminate Their Emotions When Trading. They Do Not Look At
Stock Prices During Trading Hours And Use Stop-Limit Orders To Automate Their
Trades.......................................................................................................................... 10

Secret #5: The Pros Know How To Profit In Both Up And Down Market.................... 12

Secret #6: The Pros DO NOT Average Down! They Only Buy Stocks On The Way
Up!................................................................................................................................ 14

Secret #7: The Pros DO NOT Buy Stocks Based On Tips, Rumours, Hearsay,
Insider News Or Opinions They Hear From the So-Called Experts ............................ 18

Secret #8: The Pros Understand Their Risk-Reward Ratio......................................... 20

Secret #9: The Pros Disregard Their Pride And Ego................................................... 22

Special Thanks............................................................................................................. 23

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Greeting Message From Derick Tan


Hi everyone, if you’re reading this ebook, most likely you
would have already visited my stock trading blog at
http://dericktan.com

Before I unlock and share with you the secrets behind


how the professional traders can consistently make
steady income from the stock market, ask yourself these
important questions:

 Do you recall feeling upset to see friends,


colleagues or even strangers profiting from the
stock market while you are sloughing away at work
and earning a miserable income despite putting in all those hard work?

 Do you sometimes buy stocks that are based on unqualified rumours or tips, only
to see them plummet to new lows after you bought?

 Do you ALWAYS buy at high prices, get impatient or start to panic, and sell at
lower prices during one of those inevitable times when stocks are taking a
tumble?

 Do you want to know how to void yourself of emotions during trading, which
cause a lot of people to lose their hard-earned money in the stock market?

 Do you sometimes wish you could trade like a pro but is at a lost as to how best
to do it?

In all likelihood, your answer will be YES! But you're not alone because according to
statistics, as high as 95% of the people lose money in the stock market and most of
them are facing more or less the same old problems. To sum it up, you can say that the
psychology and methodology that they used were totally wrong to begin with.

I have been a professional trader for more than 10 years and have successfully
achieved consistent profits in the stock market. If anyone were to ask me what is the
difference between a professional trader and an amateur trader, I would say it lies in
their psychology of trading. If you want to achieve great success in the stock market,
then you have to master trading psychology. You should pay as much attention to
managing your emotion, patience, fear, hope and greed as the trading technique itself.

A truly successful trader is one who is rational and controls his/her emotions to the point
of being void of feelings. He/she has a set of trading plan, knowing exactly what to buy,
when to buy, how much to buy, when to stop loss, when to add positions and when to
exit for profits to enable him/her to make rational and emotionless decisions.

1
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To me, stock market is the perfect place for us to accumulate our wealth and it is my
wish that nobody be left out in the cold and miss out this heaven of opportunities.
Throughout this eBook, I will share the insights on what the professional traders think
and do differently from those amateur traders who are struggling in the stock market.
Read it carefully, and take it to heart. I promise you will be glad you did. Enjoy.

For your Dreams,


Derick Tan

7th December 2009

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9 Secrets Professional Stock Traders DO NOT Want You To Know

1. The Pros Cut Loss Quickly And Take Profit


Slowly.
Protection of our hard-earned capital is one of the most important things to do in the
stock market, and yet so many of us choose to stubbornly hold onto our losses when
they are very small. Typical excuses we say to ourselves include ‘It has already
dropped so much, how can it possibly go down any lower?” or “I'm sure it will rebound
later, I shouldn't sell it off now”.

How many times have you avoided selling stocks that have gone down so that you can
avoid the pain and regret of having made a poor trading decision? According to Gerald
Butrimovitz, a behavioral finance expert: the pain of loss is two and a half times stronger
than the joy of making a profit. As a result, many of us will try all ways and means to
avoid losses, or rather, to avoid admitting the fact that we have made a loss.

BIG MISTAKE!! And this is probably the biggest mistake most amateur traders ever
make!

Most of us could have just suffered a minor pinch if we cut loss at the early stage, but
many times we just let our emotions take over rational thinking. People hate to make
mistakes and they consider cutting losses as admitting that they have made a wrong
move. As a form of self denial, most of us end up waiting and hoping that the stock price
will rebound back to our entry level or even sky rocket into a new high ground. Well, not
that this hope will never come true, but are you prepared to let your money stuck inside
the stock market for 3 years, 5 years or even 10 years when the pros are taking in huge
chunks of profits?

You have to understand the fact that most stocks are highly speculative and cutting loss
does not necessarily mean that you were wrong in your judgment. It simply means that
your TIMING was not ideal. Instead of being afraid of admitting you were wrong, what
you should fear more is that the small loss may turn into a devastating and expensive
mistake as the stock price continues to drop.

Here's an illustration that you guys will probably be able to comprehend better. Stopping
loss is like having a goalkeeper to prevent opponents from scoring in a defending. On
the other hand, riding the trend to take profit is like placing strikers in a match, they help
you hit your financial goals and score flying colors in the stock market.

Talking about profits, please consider cashing in only when they run up to a significant
amount. By significant amount, we're typically looking at around 20-30% profit. In fact,
the real pros will think about protecting 70%-80% of their profits when it has run up to
that level. This means that if a stock runs up from $1 to $1.20, you should protect 70%-
80% of the $0.20 profit.

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Have you heard of a saying “You will never get broke taking small profits”, but
remember, you will certainly NEVER be rich this way too. So stop pulling out the flowers
and watering the weeds, shift away from the typical retail investor mindset and learn to
cut your losses quickly and take your profits slowly.

To be a successful trader, 2 things are vital: a winning trading system and strategy. And
of course, the ability, discipline and patient to follow the system and strategy.

Remember that I mentioned earlier the most important thing to do in the stock market is
to always minimize our losses early and give our profits more time to run. Now
let's add on an exit strategy to this - always remember to stop loss at 8% below your
buying price! By following this simple rule faithfully, it will ensure that your portfolio will
always be positive and full of winners. You will never end up having stocks down 20%,
30% or even 50% in your portfolio ever again.

Let's go through in detail how this is possible. Assuming that you have a 50% winning
rate, which means you will have 1 correct trade out of every 2 trades. If you are
disciplined enough to stop losses at 8% for every one of your losing trades and then
ride your profits to say an average of 20% for each of your winning trades, can you see
that your net return will be a positive 12% for every 2 trades?

By repeating this feat over and over again, your portfolio will never be in the red, as your
profits will be more than sufficient to cover your losses. Overtime, you will be moving
forward financially because you are always taking massive 20 steps forwards and only 8
steps backwards.

Great fortunes are made in the stock market by holding on to winners and selling off
losers fast to maintain a healthy and profitable portfolio. It is the responsibility of a trader
to limit his/her downside loss while it is Mr. Market’s job to decide how much profits
he/she will make. Always remember to “seal your downside and the upside will take
care of itself”.

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2. The Pros Read Stock Charts To Time Their Entry


And Exit.
We all know that drivers and pilots need Global Positioning System (GPS) to guide
them to arrive at their desired destinations from their current locations. Doctors need to
take X-rays , MRI scans…etc. of their patients before they perform any surgery or
treatment. In almost every industry, professionals use tools to help them assess the
current situations and assist them in making correct evaluation and decisions. If they do
not use such tools, they are plain irresponsible and not acting professionally towards
their customers or employers.

Likewise in trading, professional traders make full use of the price and volume
information on stock charts to determine the overall market condition as well as the
performance of individual stocks. Let me emphasize this again, it is EXTREMELY
IMPORTANT that we learn to read charts correctly to recognize profitable price
patterns, exact buy and sell points to improve our stock selection and timing. If
you ever go shopping for a trading book and come across one that doesn't have a
single chart printed on it, please throw it back onto the shelf, you can declare that book
worthless immediately.

A trader who has the knowledge to read charts will recognize when exactly a trend is
about to run its course or the point of time it is near its period of exhaustion.
Recognizing the early signs of exhaustion will allow a trader to be cautious of his open
positions and be mentally prepared to take immediate action when the trend changes.

There are many stock charting systems out there in the market and I personally trade
using T3B's proprietary stock charting system. In the T3B System™’s charts, signs of
exhaustion are often denoted by the trough1 being penetrated. Looking at the Bumi
Resources chart (Chart 1) below, this Indonesian stock’s price collapsed a whopping
95% after the trough has been broken! This meltdown probably caught a lot of retail
investors by surprise as the stock was previously enjoying a good run up. However,
professional traders will only need to take one glance at the chart and will see that the
trough has been broken – time to exit. Instead of suffering a nightmare of the 95%
plunge, those who possess the knowledge of chart reading will be happily cashing in
profits and reading other stock charts to plan their next move.

1
Trough is the red horizontal support line found on T3B System™’s charts, one will exit a trade
when the trough is penetrated.

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Bumi Resources Exit when trough was penetrated

95% meltdown!!!

Chart 1 – Bumi Resources (Indonesia)

Some of you may not have heard of the stock Bumi Resources which I used as an
example above. This brings out another beauty of chart reading - stock markets from all
over the world behave in more or less the same way. Why? Because stock chart is a
daily display of emotions such as greed, fear, hope…etc. that affects the trading
sentiment in the stock market and human beings around the whole world have been
reacting to these emotions more or less the same way for the past thousands of years.
So even if I'm a Singaporean, I can still read Singapore charts the same way as I read
Hong Kong charts, Malaysia charts, India charts, U.S. charts….etc, thus allowing me to
trade and profit in any international market. In this eBook, I'll be illustrating with charts
from various countries and you probably won't even notice the difference!

Now, can you understand and see the power of chart reading? It is like a crystal ball for
you to peek into the past, present and future of a stock from any part of this world.

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3. The Pros Always Have An Exit Plan. They Will


Never Buy-and-Hold!
A lot of us focus most of our time deciding on what stocks to buy and once we enter into
our desired stocks, we have no idea when we should sell. In other words, we only did
half of the homework necessary to succeed in the stock market.

Some people sell their winners too soon perhaps because they are too eager to take a
small profit. After all, some profit is better than no profit at all, right? WRONG! If you are
still hanging onto this kind of mentality, please start reading this eBook from page 1 all
over again to understand why this is a deadly mistake.

On the other hand, some people sell off their stocks too late, and let their huge chunk of
profits shrink into a tiny speck that cannot even cover their commission charges, or
worse still, witness their profits turn into losses.

That is why having a specific set of selling rules will ensure your big success in
the stock market. Approach the stock market like a business, you must always have
an exit strategy with either a profit objective or loss potential. Treat losses as the cost of
doing business. When your position begins to go against you, honor your loss target
and do not look back.

The below chart of a Hong Kong stock, 21 Holdings Ltd (Chart 2) shows the importance
of having an exit plan for our trades:

21 Holdings Ltd

Exit signal appeared when the


trough was first penetrated

87% Collapse!!!

Chart 2 – 21 Holdings Ltd (Hong Kong)

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I have shown this chart over and over again during my seminars and it never failed to
shock people with the dramatic 87% collapse that occurred shortly after its trough was
first broken in the middle of August 2009.

I can assure you that there are definitely people out there who didn't exit in time and I
sure hope you are not one of them. You just need one stock like 21 Holdings Ltd in your
portfolio and it will be badly damaged beyond repair! Take note how the trough line
took care of the downside as 21 Holdings Ltd continued to trend upwards from May to
August 2009. One will continue to hold on to 21 Holdings Ltd patiently as long as its
trough was not penetrated to prevent one from exiting too early and missing out much
of the upside.

It is also important to learn NEVER TO FALL IN LOVE WITH A STOCK! Just because
you had made money from a stock before or you are working in that company does not
mean that you should buy or hold on the stock through thick and thin.

Take a look at Cosco Corp (Chart 3), a very popular stock among the Singaporean retail
investors. Whoever bought Cosco at around point A would have seen their investment
went up several folds and imagined themselves laughing all the way to the bank.
However, it may be too early for them to celebrate because there is a reason why 95%
of the people lose money in the stock market and they will soon end up joining the this
crowd.

COSCO
B
A

Chart 3 - Cosco (Singapore)

The greedy side of human nature will pray hard that the price of Cosco will continue to
shoot through the roof, but most of them will have no idea what will be the highest price.

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In other words they did not know when to sell and simply hold onto it and proclaimed
themselves as “long term investor”. In the end, they saw Cosco dropped all the way
back to where it first started at point B. Now, they will have to wait for another few more
years before Cosco go up again... if it ever does go up. Some people would have
thrown more money into Cosco when its price was plunging, thinking that this 'lucky
stock' will shine again someday and they can make more money from it like how they
did previously.

More than often, they are just wasting long period of time waiting, hoping and missing
out lots of opportunity costs because their attention is so focused on Cosco that they
turned a blind eye towards other stocks which could have actually made them money.

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4. The Pros Eliminate Their Emotions When Trading.


They Do Not Look At Stock Prices During Trading
Hours And Use Stop-Limit Orders To Automate
Their Trades.
As a human being, our emotions will undoubtedly affect the trading decisions that we
are going to make. Many researches have shown that traders are a group of irrational
beings. In other words, we are swayed by our emotions, alternating between the 2
extremes of GREED and FEAR.

Because of the emotional tension that is attached to the speculative nature of stocks,
very often our emotions will cause us to take actions totally opposite to what we should
be doing. Furthermore, a lot of amateur traders do not have a set of strict principles or
buy /sell rules to correctly guide them and this will add on to their emotional uncertainty.

Watching the trading screen and looking at stock prices during trading hours is the most
dangerous and unproductive practice of a trader. Please understand, the stock prices
won't go up just because you are looking at them the whole day long. It will probably just
increase your pressure (plus blood pressure as well) and mislead your judgments.
Sometimes when a stock keeps on increasing in its price, there will come a point when
everyone is convinced that it’s going to shoot through the ceiling. People will buy
because of their greed for fast profits and fear of losing out.

This is the precise moment when discipline is most required because the stock may be
topping soon. When a stock becomes so obvious to everyone, you can be certain that
almost everyone who has the money to buy it will already have entered. Remember:
majority opinion seldom works in the stock market. Moments after when there is a drop
in the stock price, your heart will start to sink and start to experience difficulty in
breathing. Should you sell or should you wait for the price to rebound? Should you just
average down or should you wait for the price to drop more? Should you call your
broker now or should you just hope tomorrow everything will resume to normal? You will
get more anxious and worried till you work yourself into a frenzy, and this may cause
you to make mistakes that would probably never have occurred if you had remained
cool and rational.

Those who continually sit in front of trading screen will make emotional and irrational
decisions very easily. So please do not look at the stock prices during trading
hours but instead have the discipline and perseverance to follow a specific set of
buy and sell rules, and never ever let your emotions influence your trading
decisions.

Being in the Technological Age right now, we have a wonderful tool that can help us
eliminate our emotions when trading, and this is what most professional traders will

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exercise. Some broking houses allow you to set your target buy prices and stop loss
prices before the trading hours and the trades will be executed mechanically. This is
known as a stop-limit feature, having it in place will take the agonizing decisions out of
our hands and mind. Either you are stopped out or you are not, it is as clear-cut as
black and white.

Chances are that a properly placed stop will give us a smaller loss than if we were to
manage the trade without a stop. Don’t let those small losses grow into big ones and
don’t ever allow a profit to turn into a loss. The willingness to use a stop-limit order
gives professional traders a huge advantage over the average amateur, so start
adopting this practice now!

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5. The Pros Know How To Profit In Both Up And


Down Market.
A good trader must know:

1) When to exit way before the downturn to take profit;


2) How to perform short-selling while waiting for the right timing to buy when
stocks hit the low floors.

By carrying out all these actions at the critical turning points of the market, he/she will
be able to profit in any kinds of conditions, be it bull, bear or even sideway markets.

Sad to say, many of us only know how to profit in the bull market. Making money in the
bull market is as simple as ABC, especially during the first 2 years of a new bull run. If
one were to close his/her eyes, throw a dart and buy whatever stock that the dart hits,
there is a very high chance that he/she will make money from that stock because most
stocks appreciate in the bull market.

But the real test of a trader’s knowledge and skill will come during the bear market. The
trading time frame will probably be much shorter if you are buying stocks during the
bear period and more importantly, one needs to know how to do short-selling 2 to ride
the downtrend in the bear market.

Of course, the bear market is not always in an ever-dropping situation, a good trader
needs to know when is the right timing to cover his/her short positions when the
downtrend has reversed and enter again when the stocks are just starting to rebound.

Let’s refer to the chart of Sino-Environment (Chart 4) below. If one were to short-sell it
during the 2008 financial meltdown, it would have been a very profitable trade because
Sino-Environment tumbled more than 90% due to the severe credit crunch and
extremely bearish market sentiment. But if one were to buy Sino-Environment when it
appeared cheaper on the way down, he/she would have experienced tremendous
heartache instead. Never Average Down! This will be covered in our Secret #6 of the
professional traders later on.

2
Short-selling or shorting is to sell off a stock which you don't own with an intent to buy back
later at a lower price, a technique used by traders to profit from a declining stock price.

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Sino-Environment

More than 90% collapse!!!

Chart 4 – Sino-Environment (Singapore)

Asian Paints
Broke downtrend line, hit 3 month
high and peak was penetrated

87% rally

Chart 5 – Asian Paints (India)

Having the ability and skill to pick up good stocks when the market has hit the bottom
can be very rewarding, as shown in Chart 5 above of a well known stock, Asian Paints,
in India. If a person were to buy Asian Paints when it rebounded and broke the
downtrend line, achieved a 3-month high and penetrated its peak3, it was followed by a
wonderful 6 month uptrend as it appreciated 87%!
3
Peak is the blue horizontal resistance line found on T3B System™’s charts, one will enter a trade
when the peak is penetrated.

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6. The Pros DO NOT Average Down! They Only Buy


Stocks On The Way Up!
A lot of findings have shown that 95% of the masses lose money in the stock market.
They simply do not understand that the real market winners start their big moves by
selling near or at new price highs, and NOT near new lows or after they have dropped a
good amount from their highs which most of the retail investors think.

Most of us like to buy stocks that look cheap because they seem to be at a discount
from where they were few months or years ago, making it a good bargain. But why try
to catch a falling knife? Professional traders DO NOT average down in price when
they are buying stocks. If you buy a stock at $1 and then buy more at $0.80 and
average out your cost at $0.90, you are following up your losers and putting good
money after bad. This strategy may result in serious losses and weigh your portfolio
down with a few big losers.

Let’s take a look at the chart of Creative (Chart 6), which used to be a darling in the
Singapore stock market. Note that I said 'used to', meaning that its glorious days are
already history.

I’d bet the shareholders of Creative were thinking that “if it has gone down this much
already, it can’t go much lower” just after the stock had fallen a third of the way along its
long drop from a high of S$69.50. Creative has been a solid company with a blue-chip
reputation in Singapore, so when its sales and earnings declined, a lot of people did not
pay attention to how overpriced it really was. Instead they continued to reassure
themselves that “good companies will always rebound” and “you just have to be patient
in the stock market”.

These self denial phases were running through the minds of Creative's shareholders
over and over again as Creative sank to $50, and then to $40, and then to $30…etc.
and now to less than $10. Shareholders who were buying Creative all the way down on
the theory that it couldn’t go much lower totally regretted that decision because in fact
Creative did go much lower than they have expected! This stock fell from its high of
$69.50 to less than $10 and the “it can’t go much lower” theory was proven to be wrong
many times, over and over again!

There is simply no rule that tells us how low a stock can go in principle, similarly there is
also no rule to tell us how high a stock can go. Your better bet will be to ride a trend of a
running stock, so average up and NOT down while buying stocks!

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High of S$69.50 CREATIVE

Low of S$2.38

Chart 6 - Creative (Singapore)

I can give you numerous names of so called “good” companies that never managed to
regain their former glory and their prices are still far below their all-time highs. Stop
indulging in the “they will always come back” theory, there is simply no absolute in the
stock market.

Have you heard of the saying: “it is always the darkest before the dawn”? But in stock
market, sometimes it is always the darkest before pitch black. How many times have
you heard people saying things like “It is only $0.20 a share. How much can I lose?”
You come across some stock that sells for $0.20 a share and you may think “It’s a lot
safer than buying a $10 stock because it has lesser room to drop”.

My 10 years of trading experience in the stock market tells me that whether a stock
costs $0.20 a share or $10 a share, you will still lose everything if it goes down to zero!
The point is that lousy cheap stock is just as risky as a mediocre expensive stock if it
goes down. Let's say you invest $10,000 in a $0.20 stock and another $10,000 into a
$10 stock, one fine day the market crashed and both stocks fell to zero. Can you see
that you would have lost exactly the same amount for your two stocks? No matter what
price you entered, the ultimate downside of picking the wrong stock is always the same
100%. I have seen stocks which drop from $1 to $0.05 and finally was delisted, and yet
there are people who can’t resist a “bargain” at $0.20 and say to themselves “What can
I lose?” My answer to them is “You can lose EVERYTHING”.

On the other hand, many amateur traders generally think that a stock making new price
high seems too expensive to buy, but personal opinions and feelings are far less
accurate than the market itself. In fact, the best time to buy a stock during a bull market
is when the stock initially emerges from a price consolidation base, which indicates

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accumulation by the “Big Boys”. A successful professional trader will always buy stocks
on the way up, where the price has reached a new high or have broken peak. You may
ask:” If it has already gone this high, how can it possibly go any higher?” But wait, let's
take a look at this stock named Wilmar (Chart 7), a perfect example of nothing is
impossible in the stock market.

Wilmar

Peak was penetrated


Historical High of S$5.71
Very High Risk

Chart 7 - Wilmar (Singapore)

If you had bought Wilmar in early 2009 at S$2.83 when its peak was penetrated, you
might have tempted to sell it for S$4 per share 6 months later, if you believe in the this-
stock-can-never-go-higher theory. However, 9 months later when the stock was selling
at the historical high price of S$5.71, once again you might DECIDE that this is the
highest price that Wilmar can reach. If you sold it at then, you would have missed it
going up to another historical high of S$7 one month later. Whoever managed to ride
Wilmar all the way up would have seen their S$2.83 per share blossom into a S$7
share, and a S$20,000 investment end up as S$49,000! And that doesn’t include the
dividends that you would have picked up along the way.

The point is there is no arbitrary limit to how high a stock can go. Stocks such as Wilmar
and many others have broken the “cannot go much higher” barriers year after year. In
another words, you should be buying stocks that are on their way up, just making
new price highs and raise your bet through averaging up as your positions
strengthen.

And guess what, not only Singapore stocks behave like that, Chart 8 shows the price
action of PPB in Malaysia, another example that proves the theory of “high cannot
become much higher” wrong. It broke its historical high price of RM11.6 and went
almost 40% higher after that!!

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PPB Went up 40% after breaking historical high

Historical high of RM11.6


Very high risk

Chart 8 - PPB (Malaysia)

But please be clear that it DOES NOT mean that you will buy whatever uptrending
stocks that you can get your hands on. You still need to know how to assess the risk
level of a stock before you buy into it. Look at the chart of Wilmar (Chart 7) again, it was
very risky to buy in the middle of August 2009 as indicated by a very high KRA (Keane
Risk Assessment) Line4. Similarly for PPB (Chart 8), the KRA Line is at an extreme
high after its 40% run up, indicating that it was not the best time to enter at that point.

Another common misconception is that high price is equivalent to high risk, this is totally
NOT TRUE! Vice versa, low price DOES NOT equal to low risk. To determine risk level,
you should have an effective trading system to accurately map it out, otherwise you will
never know whether your entry point is ideal or not.

4
KRA Line is T3B System™’s patented risk assessment tool.

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7. The Pros DO NOT Buy Stocks Based On Tips,


Rumors, Hearsay, Insider News Or Opinions They
Hear From the So-Called Experts.
Grab someone on the streets and ask how he/she decides on which stocks to buy, and
you'll likely hear things like tips, inside information or rumors. These are the most
common and yet the most unwise answers.

Good tips are given to only a few while bad tips are given to everyone. Most rumors and
tips that you hear simply are not true. Even if they are, by the time they travel to your
ears they may already become old news, and most of the times they are already
factored into the stock prices.

Have you heard of people who will go around comparing prices for certain items that
they want to buy, for example a hi-fi system which may only cost a few hundred dollars?
Interestingly when it comes to trading in stocks, they don't even bother to verify the so
called tips and just dump in a large sum of their hard-earned money based on what
someone else says.

They do this because they cannot stand to miss out on all the profits they will “lose”
should they ignore the tip IF the stock doubles or triples. They may think that they have
an unfair advantage over the other ignorant retail investors, but unknowingly they have
just fallen into this category themselves! Always remember: risk comes from not
knowing what you are doing.

I still remember a lady who came to speak to me after I had concluded a preview. She
told me she has bought this stock named Koh Brothers (Chart 9), a well known
construction company in Singapore. When the stock price dropped, she averaged down
around S$0.60 and S$0.55 respectively and pumped in about S$150,000 in total.

Now the stock is only worth around S$0.25 and her S$150,000 has shrunk about 57%
into S$65,200. She said her friends told her that Koh Brothers has secured 2 Integrated
Resort (IR) projects in Singapore, so she bought the stock without doing any homework
or analysis on her part. Is this logical or plain foolishness??

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Averaged down at Koh Brothers


S$0.60 and S$0.55
Capital of S$150,000
shrunk into S$65,200

Chart 9 – Koh Brothers (Singapore)

Friends and relatives might all be sources of bad advice, only a small minority are
successful enough themselves to worth your consideration. Stop listening to the tips
and rumors that are flying all over the place unless they come directly from the
mouths of the big boys who rule the market.

If you think that listening to the experts like stockbrokers and analysts will be a safer
option, have you noticed how often so-called experts feel most positively that stocks are
going to go up or the economy is going to improve just when the opposite happens?
Popular magazines and investment-advisory papers tend to be bullish and bearish at
the wrong times. The problem is not that the experts or analysts are wrong. It is just that
by the time the message is received by the public, the information may already have
been changed.

When lots of bad news has overwhelmed everyone with negative and bearish
sentiments, it maybe about time for the economy and stock markets to bottom.
Likewise, when enough positive general financial news filters down so that the general
public is feeling confident in the short-term prospects, the economy may soon get
hammered. Please do not over-estimate the skills and wisdom of so-called
experts/professionals. Certain advisory columns in some business newspaper are fed
by street gossips, rumors or personal feelings. In my opinion, they are unprofessional
and unsophisticated.

There are sounder and safer ways to gather information and trade rather than following
them blindly. At the very least, please do some research on the things that you read or
hear before pumping your hard-earned money into the market.

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8. The Pros Understand Their Risk-Reward Ratio.


I always tell people who attend my previews and workshops that there is no such thing
as a risk-free trade. Don’t believe anyone who tells you that their trading systems have
zero risk or their methods can yield incredibly high returns with close to zero risk. “Low
Risk and High Reward” is a hope for dreamers, risk and reward simply do not go hand
in hand in the trading world.

Gamblers or speculators unknowingly indulge themselves in “High Risk Low Return”,


whereas professional traders will take calculated risk, such that we will only enter a
trade when the risk-reward ratio is stacked in our favor. Risk is also a function of
predictability. The higher the predictability, the higher will be our probability of winning
and the lower will be the risk.

You have to understand your risk tolerance level and stay within it. If you stay within
your comfort zone, you are highly likely to succeed in that trade. I always advise traders
to trade only when the risk-reward ratio is 1:2 or 1:3 when our upside potential is
double or triple of our downside risk.

Let’s do a case study based on CNPC (China National Petroleum Corporation), an oil
and natural gas play in Hong Kong, as illustrated in Chart 10 below. CNPC experienced
a pullback in price and its KRA line has dropped to a relatively low level, thus limiting
our risk and reducing the impact of any downside volatility at the end of September
2009.

CNPC Potential upside is HK$1.84

Potential downside
is HK$0.51
Very Low Risk

Chart 10 – CNPC (Hong Kong)

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At that point, we have a potential downside of HK$0.51 which we are prepared to cut
loss, as determined by the peak and trough lines; and a potential upside of HK$1.84,
indicated by the gap between our entry price and a possible resistance level. This gives
us a fairly good risk-reward ratio of 1:3.6 (HK$0.51: HK$1.84). As it turned out, the price
of CNPC went beyond the resistance level of HK$8.1, thus making this a nice profitable
trade with a good risk-reward ratio stacked in our favor.

Once you know how to calculate your risk-reward ratio, you will realize that many
seemingly good trades may not be so attractive after all.

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9. The Pros Disregard Their Pride And Ego.


The last secret that I'm going to share with you is more psychological rather than
technical.

No matter how confident a professional trader is, he/she understands that personal
opinion is seldom right in the stock market and Mr. Market is always right. The market
does not care who you are and what you think; “he” is ALWAYS smarter than you are.
Do not be over-confident or over-estimate your own ability.

A PHD, master degree or high IQ does not guarantee that one will be successful in the
stock market. Everyone hates to admit that he/she is wrong but Do NOT let your pride
and ego get in your way, they can prove to be the most expensive mistake that
you will ever make!

Never argue with Mr. Market and do not ever try to prove that you are right and “he” is
wrong. A successful professional trader always let Mr. Market tell him/her whether
he/she is right or wrong.

If you have a profit, ride on the trend until the market turns around and tell you that you
are no longer correct, this will be the time for you to exit. Do not be eager to sell off your
stocks before the market signals you to do so.

In the unfortunate event that you do commit a mistake, acknowledge it and learn from it.
In the world of trading, right and wrong is easily determined by whether you make or
lose money. If you do not know where your mistake lies, be humble and seek help from
a qualified mentor who has proved himself to Mr. Market, or else you will never know
where you went wrong and continue to go round in circles. Always remember: Mr.
Market is the final judge!

All being said, I sincerely hope that what I have shared in this eBook will benefit you in
your trading journey. May the trend be with you all!

~End~

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Special Thanks To:

http://trackthetrend.com

This E-Book Is Designed By:

http://www.eiinix.com

DISCLAIMER: Please be informed that the above mentioned stocks/ indexes/ investment
instruments are solely for the purpose of education; it is NOT a recommendation or an
invitation to trade/invest. For trading/investment advice, please speak to your remisier,
dealer representative or financial adviser. Please understand that there is risk in every
trade/investment venture, know your risk first before you venture into any of them.

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