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Trading As A Business

The Methods and Rules I've Used to Beat the Markets for 40 Years

Dick Diamond

Title Page

Foreword

In 1979, I was sitting between two traders at a specialty brokerage firm. The one on my left was on the phone all day, working his contacts to get preopening shares in initial public offerings, which he would jettison at a profit shortly after the deals. He solicited opinions from friends to figure out hot stocks to ride. He was always long, never short. The guy on my right was a plunger who would identify markets that were extended and then bet huge wads on a reversal. I was there when a reversal didn't come, and he was gone.

Sitting across the room was a loner who quietly worked his system. The friend to my left suggested I meet him, so I did. I asked him what he was doing. He said he traded options, and I could sit and watch if I wanted. His name was Dick Diamond.

Most of the traders in the room were chatty, but Dick was quiet. Mostly, he just watched the screen and updated his indicators. Then every now and then he would sit up straight and become hyperalert. Then—bam—he would call in a trade. (There were no electronic trading platforms back then.) He would stay on edge for a period of time, maybe an hour, and then call to close the trade. Then he relaxed again.

When I pressed him about what he was doing, he would talk about waiting for the right “setups,” acting swiftly and getting out while momentum was still in his favor, an absolute must when trading options. He seemed more disciplined than other traders. He wasn't trying to win a war; he was in a bunker, taking the occasional shot when his odds of a hit were 80/20. He never changed his tactics, never asked other people their opinions, and never bet big. Incredibly, unlike almost everyone else, he was also making a very good living, every single month.

I liked Dick right away because he was a pure technician. He never acted on news; he didn't care about valuation; he didn't try to solicit inside information; he didn't factor in what the economy was doing, or the president, or the Fed. He just waited for the market to signal the start of a volatile move; then he grabbed a piece of it, time and again. We struck up a friendship that's still ongoing.

In the mid-1980s, Dick and I talked about teaching his method. Subscribers were always asking me about where they could learn trading, and he was ready to show a few people how he did it. So for several years, he taught would-be traders, usually about four at a time, in his Long Island home. They would sit with him for a week as he showed them exactly what he did all day. Despite being shown the ropes, most students, for psychological and other reasons, never became as successful as he is. But every now and then he would report on one who “got it” and was doing well.

In the 2000s, after Dick moved to Florida, he set up seminars that would accommodate 20 or more people. Dick was trading futures by then, but he never changed his entry and exit methods. He and his partners, Roberto Hernandez and Brad Marcus, kept to the format of allowing prospective traders to learn what he was doing, in real time, for a week. Often, he would get dumb questions such as, “When you get stopped out, why don't you just reverse your position?” Dick's usual answer was, “That's not what I do.” Secretly, he was thinking, “If you want to lose money on some random idea, go ahead.” But, occasionally, an attendee would adopt his method and start winning more than losing.

In the 1990s, I started bugging Dick about writing a book. I said, “Lots of trading books are about making killings and getting killed. Yours will be about chopping it out every day, not for a thrill but as a business. It will be a first.” His wife took up the cause.

Many years went by, and no book. Dick is not a writer; he's a trader. After a false start or two, my firm put Dick together with seasoned editor Kevin Commins, with whom we had worked on several projects. Soon the trading book began to take shape.

And here it is!

If you're looking for colorful “war stories,” you won't get any. But if you read this book, you will know—as closely as you can absent mathematical codification—just what Dick has been doing all these years.

Dick's approach is so conservative that he's still trading at an age when most people are retired. And he still doesn't have a boss or employees. For most people, trading produces sleepless nights. For him, it produces steady income at retirement age. What a difference! Incredibly, this is absolutely not what most traders want. Consciously or unconsciously, they want big scores. That's one reason they end up losing.

Anybody can adopt Dick's method. Whether you do is another question. But it's all here, and it's very clear.

ROBERT PRECHTER
September 2014

Preface

I've been around the trading game for over 40 years. I've seen a lot of traders come and go. But while it's a tough and unforgiving game, it is possible to make a great living from trading. The keys, as I discuss throughout this book, are emotional discipline and risk control.

I've organized this book, Trading as a Business, in much the same way that I teach attendees at my seminar. I recount a little bit about my own history as a trader. I discuss the principles that I use to guide my trading and explain the technical indicators that I use. Finally, I reveal my four trading templates and provide dozens of examples of how I use the templates to place trades.

I would suggest reading the entire book from beginning to end and then returning to Chapter 2, “Emotional Discipline”; Chapter 3, “Principles of Successful Trading”; and Chapters 5 through 8, which discuss trading with four different templates. After you've mastered the material, I suggest you set up the trading templates on your computer and begin analyzing the markets every day using the templates. Just as I do in Chapters 5 through 8, you should try to identify 80/20 trades (trades that will produce a profit four out of five times).

I have taught many traders, and I certainly understand that readers will come to this book with different levels of trading experience and expertise in technical analysis. Many of my most successful students adapted parts of my methods to their preexisting approach and evolved into better traders. Roberto Hernandez, a former student who now teaches with me, uses his own trading template, which incorporates some indicators that I do not use at all. If you're going to modify the templates or use your own template, I would suggest a few things. First, and most importantly, do not rely on a single indicator or even two indicators. The markets are too complex to be reducible to a single indicator at all times. I advocate using three to five indicators in a template and waiting until all the indicators align before putting on a trade. Second, make sure that your template is effective in identifying 80/20 trades. From my experience, it's tough to maintain emotional discipline when your template is wrong almost as much as it is right. Finally, read and reread the chapters on trading principles and make them part of your trading DNA. Trade small, use tight stops, and cultivate emotional discipline.

While it's fine to modify my templates or create your own templates, I believe the majority of traders will be better off using the templates in the book. They are the templates I use in my own trading; I know they work.

As I discuss in the chapter on emotional discipline, it's essential that you feel confident in your trading strategies and your trading rules. A trader without confidence will have a hard time pulling the trigger and will constantly second-guess his/her system and rules. A trader with confidence will consistently follow his/her trading signals, will adhere to his/her trading rules, and will accept with equanimity the occasional loss. Remember, as long as you followed your signals and followed your rules, you made a good trade—regardless of whether it produced a profit or loss.

My goal in this book is to give you all the tools you need to trade successfully and to trade with confidence. If you study the material here and work hard to implement the strategies and rules in the market, there's no reason you can't become a consistently profitable trader.

Acknowledgments

I would like to thank several people who helped me on my path as a teacher of trading and assisted me in the preparation of this book.

First and foremost, I want to thank my wife, Sharie, for giving me motivation, support, and encouragement. Without her, I don't know if I ever would have finished the book.

In many ways, this book is an outgrowth of my trading seminars. I would like to thank Brad Marcus, who got me into teaching in a classroom setting. After I moved to Florida many years ago, I began to take in one or two students for a week. Brad was one of those students. He loved his week with me and proposed that we start a business in which I would teach a group of students for a week three or four times a year. Brad was terrific at organization and he was instrumental in making the business successful.

Bob Prechter has been a close friend and business partner for many years. Bob appealed to me to begin teaching people to trade. For a long time I said no. Finally, we were on vacation together with our families and I told Bob I would try it and see how it worked out. Well, when Bob mentioned that I was providing trading sessions in one of his columns, the phone rang off the hook. Right off the bat, it was a huge success.

Steve Sweet, a partner in Zaner Group, has been very helpful in assisting students with setting up trading accounts and placing trades. I deeply appreciate his presence at our trading seminars in recent years.

Kelly Clement of MetaStock has also been very helpful at seminars, showing students how to create trading templates on their computers using MetaStock. I've used a number of trading software packages over the years, and I consider MetaStock to be the best.

After Brad could no longer participate in the seminars due to other commitments, I began working with Roberto Hernandez. I met Roberto when he attended one of my seminars in 2003. I could tell right away that he was a very bright and very committed trader. He adapted my approach and developed his own unique template. Unlike me, Roberto is a long-term trader. Attendees at our seminars appreciate the perspective and strategies that Roberto brings and how his approach differs from mine, while at the same time conforming to the trading principles I teach.

Finally, I would like to thank the many traders from around the world who have attended my seminars over the years. I enjoyed teaching each and every one of you. I hope this book reinforces what you've learned and helps you to trade more successfully.