Robert Prechter's Trading Tips - Guru Reveals His Secrets

Trading is tough - really tough. When you're making money, it feels like the easiest thing in the world. It's a great feeling - almost intoxicating, really. Like you're printing money from nothing!

Then, inevitably, you get cocky. And you lever up. And sooner or later, a trade goes against you...or two, or three. And you lose a lot of money. And it sucks!

Take it from a guy who has gotten pounded during the end of last year and the first half of this year - I've taken some knocks the hard way.

Bob Prechter, who is featured below in this guest article, is someone I recently started tracking. I've been drawn to the zen-like nature in which he's able to look at the markets. I reached the conclusion that a lot of my mistakes could have been presented, had I kept a more level head about me.

See, many of the trades I got into were "less loved" when I found them. Sugar at 8-cents back in 2004. Gold below $700 in 2007. It's all obvious in hindsight, but those really were "easy money" trades - buying an asset that was still relatively unloved, and watching the market warm up to it.

I got burned when I stayed too long at the dance. Buying gold at $1,000 today, when everyone is talking about it, and loving it, is perhaps not the wisest move.

So back to Prechter - that's what I've learned - the importance of being grounded, and of carefully weighing popular sentiment. Because even if fundamentals are good - if EVERYONE knows they are good, then you're really screwed on the long side, because it's all factored into price.

So here are five trading tips and a brief interview with Prechter, along with a link for a free trading eBook at the end of the article.

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Robert Prechter's Five Tips for How To Trade Successfully
September 21, 2009

By Elliott Wave International

Take it from the person who won the United States Trading Championship with profits of more than 440% in 1984 – there are five things that every successful trader needs to know how to do:

1. Have a method to trade.
2. Have the discipline to follow your method.
3. Get real trading experience, instead of only trading on paper.
4. Have the mental fortitude to accept the fact that losses are part of the game.
5. Have the mental fortitude to accept huge gains.

Bonus tip: Find a mentor.

That trader who won the championship in a record-breaking fashion is Robert Prechter, the founder and president of Elliott Wave International. Once you think you've mastered his 5 tips for how to trade successfully, then the best thing to do is to find a mentor. In this excerpt from the book, Prechter's Perspective, Bob Prechter discusses how sitting at the elbow of a professional trader can make all the difference in learning the trade of trading.

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Free 47-page eBook: How to Spot Trading Opportunities

Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

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(The following Q&A is excerpted from Prechter's Perspective, revised 2004.)

Question: Has any specific trading experience decreased your trading success?

Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you're better off speculating with small amounts of real money. Using larger amounts of money will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

Q.: It sounds painful. Is there any way at least to reduce the hard knocks?

Bob Prechter: There is one shortcut to obtaining experience, and that is to find a mentor.

Q.: Did you have a mentor?

Bob Prechter: In 1979, I sat with a professional trader for about a year. The most important thing he taught me was to keep trades small relative to your capital. It reduces the emotional factor.

Q.: How would one select a mentor?

Bob Prechter: The best way to select one is to find a person who is doing exactly what you would like to do for a living, then get to know him well enough to ask if he will tutor you or at least let you watch while he works. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Listen to him. Sit down with him, if possible, for six months. Watch what he does. More important, watch what he doesn't do. Finding a guy who knows what he is doing is the best lesson you could ever have. You will undoubtedly find that he is very friendly as well, since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled, matured by the experience of trading. He will usually welcome the opportunity to tell you what he knows.

Free 47-page eBook: How to Spot Trading Opportunities
Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

How to Get Started Trading the Markets - The Right Way

How do you master the maddeningly difficult exercise of trading? As we mentioned this morning, paper (imaginary) trading just doesn't cut it. You don't have the stomach churning fear of losing money when the market goes against you.

No, the only way to do it is to get out there and do it yourself. I read a good piece of advice yesterday actually - start with a stake so small, you won't mind losing it...because you probably will the first time!

Then you can examine what went wrong, and improve your methods next time.

Trading is fascinating because it's a constant learning process. If it were easy, there would be a lot of millionaires running around who made their fortune in the market, and that's simply not the case.

It is possible to become "good" though, I truly believe that (and I say that not as someone who is good, just someone who tries to learn and improve everyday). To help you on your quest to master the markets, I hope this guess piece by expert trader Jeffrey Kennedy is a helpful one, as he tackles three basic tenets of trading...

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The Three Phases of a Trader's Education: Psychology, Money Management, Method
July 27, 2009

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

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Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.

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Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting service.

Why "Paper Trading" Is Worthless

What's the best way to get your feet wet trading/investing?

Many folks will tell you that trading on paper is the best way to get started. Our buddy Brian Hunt writes today that this advice is crap!

Becoming a good trader isn't just about learning about charts or buying cheap assets. It's about suppressing the desire to "make it all" on one big trade... learning how to take small losses... and learning when it's time to simply sit out the game for a while.

Paper trading doesn't get you any "live fire" training on overcoming your emotions. It's like trying to learn how to hit a baseball by swinging an imaginary bat. So what's the new trader to do?

Read the rest of Brian's article on paper trading...

I agree wholeheartedly with Brian. When I was a senior in college, my good friend Joe and I each opened up a Scottrade account with $500, the minimum amount allowed.

We loaded all of our eggs in one basket - he bought Bally's Total Fitness, and I was fortunate enough to buy Dick's Sporting Goods.

Every day, every hour, we'd watch the tickers on our respective stocks. If DKS ended Friday on a positive note, I'd be on a high through the weekend. When Bally's tumbled, I was razzing him on his lack of investment prowess.

It was great fun, and addicting, and most important of all, educational. My stomach would churn if DKS slumped a few bucks - at one point my paper losses almost totalled $80! Fortunately for me, DKS rallied and by the time graduation had come around, I had nearly doubled my initial stake.

So if you find yourself watching a market from the sidelines, please realize that the best way to learn it inside and out is to actually get in the game! You don't have to put a ton of capital on the line - just start with a small stake, and see what you can make out of it!