Table of Contents WILEY TRADING SERIES BOOKS BY DR. ALEXANDER ELDER Title Page Copyright Page Dedication Introduction WHY SELL? ABOUT THE Q&A PART ONE - PSYCHOLOGY, RISK MANAGEMENT, & RECORD- KEEPING CHAPTER 1 - ON BUYING THE THREE GREAT DIVIDES ONE TRADER’S TOOLBOX CHAPTER 2 - TRADING PSYCHOLOGY AND RISK MANAGEMENT YOUR MIND AS A TRADING TOOL RISK CONTROL CHAPTER 3 - ON KEEPING RECORDS GOOD RECORDS LEAD TO GOOD TRADING TRADER’S SPREADSHEET—BASIC ACCOUNTABILITY TRADING DIARY—YOUR KEY TO LASTING SUCCESS HOW TO DOCUMENT YOUR TRADING PLAN MARGRET’S METHOD—PUT IT ON THE WALL HOW TO GRADE YOUR PERFORMANCE TWO TYPES OF TRADING PART ONE QUESTIONS - PSYCHOLOGY, RISK MANAGEMENT, & RECORD-KEEPING Question 1—The Stress of Holding a Position Question 2—Your Trading Edge Question 3—The Three Great Divides Question 4—Price and Value Question 5—Fundamental and Technical Analysis Question 6—Trend vs. Counter-Trend Trading Question 7—Systematic vs. Discretionary Trading Question 8—Technical Toolbox Question 9—Trading Psychology Question 10—Trading Discipline Question 11—Dealing with Losses Question 12—Overtrading Question 13—The 2% Rule Question 14—Modifying the 2% Rule Question 15—The 6% Rule Question 16—The Top Two Goals for Every Trade Question 17—Learning from Experience Question 18—A Record-Keeping Spreadsheet Question 19—Trading Mistakes Question 20—Trader’s Diary Question 21—Diary Entry Question 22—Trading Plan vs. Diary Question 23—The Monitoring Screen Question 24—Comments on the Screen Question 25—Pinning a Chart to a Wall Question 26—Sources of Trading Ideas Question 27—Grading Buys and Sells Question 28—Grading Completed Trades Question 29—Buying Question 30—Value Question 31—A Trade Diary Question 32—Grading a Trade Question 33—Value Buying vs. Momentum Buying ANSWERS TO QUESTIONS - PART ONE: PSYCHOLOGY, RISK MANAGEMENT, & RECORD-KEEPING Question 1—The Stress of Holding a Position Question 2—Your Trading Edge Question 3—The Three Great Divides Question 4—Price and Value Question 5—Fundamental and Technical Analysis Question 6—Trend vs. Counter-Trend Trading Question 7—System vs. Discretionary Trading Question 8—Technical Toolbox Question 9—Trading Psychology Question 10—Trading Discipline Question 11—Dealing with Losses Question 12—Overtrading Question 13—The 2% Rule Question 14—Modifying the 2% Rule Question 15—The 6% Rule Question 16—The Top Two Goals for Every Trade Question 17—Learning from Experience Question 18—A Record-Keeping Spreadsheet Question 19—Trading Mistakes Question 20—Trader’s Diary Question 21—Diary Entry Question 22—Trading Plan vs. Diary Question 23—The Monitoring Screen Question 24—Comments on the Screen Question 25—Pinning a Chart to a Wall Question 26—Sources of Trading Ideas Question 27—Grading Buys and Sells Question 28—Grading Completed Trades Question 29—Buying Question 30—Value Question 31—A Trade Diary Question 32—Grading a Trade Question 33—Value Buying vs. Momentum Buying GRADING YOUR ANSWERS PART TWO - HOW TO SELL THE THREE TYPES OF SELLING CHAPTER 4 - SELLING AT A TARGET SELLING AT A MOVING AVERAGE SELLING AT ENVELOPES OR CHANNELS SELLING AT RESISTANCE LEVELS CHAPTER 5 - SELLING ON A STOP THE IRON TRIANGLE MARKET OR LIMIT ORDERS HARD AND SOFT STOPS A BAD PLACE REDUCING SLIPPAGE—TIGHTER BY A PENNY NIC’S STOP—TIGHTER BY A DAY WHEN TO USE WIDER STOPS MOVING STOPS A SAFEZONE STOP VOLATILITY-DROP TRAILING STOPS CHAPTER 6 - SELLING “ENGINE NOISE” WEAKENING MOMENTUM AN “ENGINE NOISE” EXIT FROM A SHORT-TERM TRADE A DISCRETIONARY EXIT FROM A LONG-TERM TRADE SELLING BEFORE EARNINGS REPORTS THE MARKET RINGS A BELL TRADING WITH THE NEW HIGH—NEW LOW INDEX THE DECISION TREE FOR SELLING PART TWO QUESTIONS - HOW TO SELL Question 34—A Plan for Selling Question 35—The Three Types of Selling Question 36—Planning to Sell Question 37—Targets for Selling Question 38—A Stock Below Its Moving Average Question 39—Moving Averages as Selling Targets Question 40—Regrets About Selling Question 41—EMA as a Profit Target Question 42—Channels as Price Targets Question 43—Measuring Performance Using Channels Question 44—Selling Targets Question 45—Reaching for More Question 46—The Top of a Rally Question 47—Prices above the Upper Channel Line Question 48—Profit Targets Question 49—Support and Resistance Zones Question 50—A Protective Stop Question 51—Breaking through Resistance Question 52—A Trade without a Stop Question 53—Changing Stops Question 54—Reentering a Trade Question 55—Deciding Where to Set a Stop Question 56—The Impact of the Last Trade Question 57—“The Iron Triangle” Question 58—A Limit Order Question 59—Soft Stops Question 60—A Stop One Tick below the Latest Low Question 61—A Stop at the Level of the Previous Low Question 62—A Stop That Is “Tighter by a Day” Question 63—Trade Duration Question 64—Wider Stops Question 65—Moving Stops Question 66—The SafeZone Stop Question 67—Trading with the SafeZone Question 68—The Volatility-Drop Method Question 69—“Engine Noise” in the Markets Question 70—Selling “Engine Noise” Question 71—New High-New Low Index Question 72—Not Liking Market’s Action Question 73—Earnings Reports Question 74—The Market “Rings a Bell” Question 75—Trading with the New High-New Low Index Question 76—A Decision-Making Tree vs. a Trading System Question 77—A Decision-Making Tree Question 78—Value Buying and Selling Targets Question 79—Support, Resistance, and Targets Question 80—Multiple Targets Question 81—Holding, Adding, or Profit-Taking Question 82—Handling a Profitable Trade Question 83—Placing a Stop Question 84—The Impulse System Question 85—The Signals of NH-NL Question 86—The Decision at the Right Edge of the Chart ANSWERS TO QUESTIONS - PART TWO: HOW TO SELL Question 34—A Plan for Selling Question 35—The Three Types of Selling Question 36—Planning to Sell Question 37—Targets for Selling Question 38—A Stock Below Its Moving Average Question 39—Moving Averages as Selling Targets Question 40—Regrets About Selling Question 41—EMA as a Profit Target Question 42—Channels as Price Targets Question 43—Measuring Performance Using Channels Question 44—Selling Targets Question 45—Reaching for More Question 46—The Top of a Rally Question 47—Prices above the Upper Channel Line Question 48—Profit Targets Question 49—Support and Resistance Zones Question 50—A Protective Stop Question 51—Breaking through Resistance Question 52—A Trade without a Stop Question 53—Changing Stops Question 54—Reentering a Trade Question 55—Deciding Where to Set a Stop Question 56—The Impact of the Last Trade Question 57—“The Iron Triangle” Question 58—A Limit Order Question 59—Soft Stops Question 60—A Stop One Tick below the Latest Low Question 61—A Stop at the Level of the Previous Low Question 62—A Stop That Is “Tighter by a Day” Question 63—Trade Duration Question 64—Wider Stops Question 65—Moving Stops Question 66—The SafeZone Stop Question 67—Trading with the SafeZone Question 68—The Volatility-Drop Method Question 69—“Engine Noise” in the Markets Question 70—Selling “Engine Noise” Question 71—New High-New Low Index Question 72—Not Liking Market’s Action Question 73—Earnings Reports Question 74—The Market “Rings a Bell” Question 75—Trading with the New High-New Low Index Question 76—A Decision-Making Tree vs. a Trading System Question 77—A Decision-Making Tree Question 78—Value Buying and Selling Targets Question 79—Support, Resistance, and Targets Question 80—Multiple Targets Question 81—Holding, Adding, or Profit-Taking Question 82—Handling a Profitable Trade Question 83—Placing a Stop Question 84—The Impulse System Question 85—The Signals of NH-NL Question 86—The Decision at the Right Edge of the Chart GRADING YOUR ANSWERS PART THREE - HOW TO SELL SHORT CHAPTER 7 - SHORTING STOCKS YOUR FIRST SHORTS THE ASYMMETRY OF TOPS AND BOTTOMS SHORTING TOPS SHORTING DOWNTRENDS SHORTING FUNDAMENTALS FINDING STOCKS TO SHORT SHORT INTEREST CHAPTER 8 - SHORTING NON-EQUITY INSTRUMENTS SHORTING FUTURES WRITING OPTIONS FOREX PART THREE QUESTIONS - HOW TO SELL SHORT Question 87—Shorting a Stock Question 88—Risk Factors in Shorting Question 89—The Impact of Shorting Question 90—Short vs. Long Question 91—Disadvantages of Shorting Question 92—Learning to Sell Short Question 93—Shorting vs. Buying Question 94—Shorting Stock Market Tops Question 95—Shorting in Downtrends Question 96—The Tactics of Shorting Downtrends Question 97—Shorting the Fundamentals Question 98—Looking for Shorting Candidates Question 99—The Short Interest Ratio Question 100—Trading the Short Interest Ratio Question 101—Markets Need Shorting Question 102—Who Shorts Futures Question 103—Shorting Futures Question 104—Long Rallies and Sharp Breaks Question 105—Writing Options Question 106—Writing Covered Options Question 107—Naked vs. Covered Writing Question 108—The Demands of Naked Writing Question 109—Brokers Against Traders Question 110—Forex Market Question 111—Learning to Become a Better Trader Question 112—Trading Signals of the Force Index Question 113—False Breakouts and Divergences Question 114—Shorting and Covering Signals Question 115—Shorting Tactics ANSWERS TO QUESTIONS - PART THREE: HOW TO SELL SHORT Question 87—Shorting a Stock Question 88—Risk Factors in Shorting Question 89—The Impact of Shorting Question 90—Short vs. Long Question 91—Disadvantages of Shorting Question 92—Learning to Sell Short Question 93—Shorting vs. Buying Question 94—Shorting Stock Market Tops Question 95—Shorting in Downtrends Question 96—The Tactics of Shorting Downtrends Question 97—Shorting the Fundamentals Question 98—Looking for Shorting Candidates Question 99—The Short Interest Ratio Question 100—Trading the Short Interest Ratio Question 101—Markets Need Shorting Question 102—Who Shorts Futures Question 103—Shorting Futures Question 104—Long Rallies and Sharp Breaks Question 105—Writing Options Question 106—Writing Covered Options Question 107—Naked vs. Covered Writing Question 108—The Demands of Naked Writing Question 109—Brokers Against Traders Question 110—Forex Market Question 111—Learning to Become a Better Trader Question 112—Trading Signals of the Force Index Question 113—False Breakouts and Divergences Question 114—Shorting and Covering Signals Question 115—Shorting Tactics GRADING YOUR ANSWERS PART FOUR - LESSONS OF THE BEAR MARKET CHAPTER 9 - BEARS MAKE MONEY THE BEAR WAS BEGINNING TO STIR IN ITS CAVE