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The Alchemist (05/25/2008)
By Al Thomas


I have been trading for more than 40 years and I am going to let you in on the secret of successful trading and show you a method that will beat the market over time.

Almost every day I see ads in the financial journals that claim 98% success. There are software programs and books on fabulously profitable methods.

Having been a broker, floor trader and exchange member I don't know one single person who has ever had that type of profit success. The statistics for professional traders is 40% winners, 40% losers and 20% scratch. Of the winners 20% will result in 80% of the profit.

As a floor trader for 17 years I will attest to those numbers. When the tally is made at the end of the year the pro ends up having made $3.00 for every $1.00 he lost he will have done an excellent job.

Before anyone starts trading (some of you like to call it investing, but it is still gambling any way you slice it) you must decide on how much you are willing to loseon any individual trade. Yes, each trade. If you have several positions at the same time it should never be allowed for the profitable trades to carry the losers.

When a position is taken after analysis a risk reward ratio should be determined. If the stop loss may result in the loss of $1.00 it should have determined that the potential profit is about $3.00 or more. This is a 3 to 1 risk reward ratio. 2/1 is not sufficient.

Some traders use a percentage loss factor, but most will look at a chart to determine support and resistance points. For the pros charts are absolutely necessary.

If you go to the floor of the exchange to question as many traders as you wish you will not find any two members who do the same thing. That is a good because if they all came to the same conclusion there would not be enough buyers or sellers at a particular moment.

There has to be a seller for every buyer.

Technical analysis seems to do much better than fundamental analysis. The fundamental analysts want to know all the basic facts about a company or the market and economy if he is trading the indexes. Technical analysts are only concerned with price action and its price relationships.

Here is an example of trading any major index where the trader does not have to know anything about the economy. Using the S&P500 Index the trader follows the actions with just 2 moving averages - a 10-day and a 200-day. When the 10-day goes above the 200-day MA he is long. When it penetrates to the downside the trader sells and goes to cash. There is no further analysis. Over a long period of time this is very profitable.

The truth is there is no "best" trading system.

You must find one that works for you and follow its rules exactly. It will make you rich.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at no charge on www.mutualfundmagic.com to discover why he's the man Wall Street does not want you to know.

Copyright 2008 All rights reserved.



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