Gary's Greatest Hits on Trading

Ever walk into a party, meet someone new and get an immediate sense that you like or dislike that person? Sure you have, because your brain matched up certain characteristics it has seen before. Pattern recognition. That's all it is.

6. But, assuming you buy the notion that charts are nothing but patterns, why should they repeat? Because buy and sell decisions are made by fallible humans. Humans who are alternatively greedy and fearful. Why is the Nasdaq straight up this year? Did things improve dramatically starting on Jan. 1? No, but psychology has changed. Now people are greedy. (Soon, they'll be fearful again.)

7. If charts are nothing more than patterns that repeat, how do you become a good chart reader? You look at a lot of charts. For example, who are generally the best drivers? Professional truck drivers. Why? Are they smarter than the average person? Or stronger? No, they just drive a ton more than most of us.

In the same vein, want to read charts like I do? Then look at 500 charts every day. I guarantee many of you will be better than I am.

8. Back to No. 4: There is a golden equation of trading. This is it: (The win rate multiplied by profit percentage per win) -- (the loss rate multiplied by loss percentage per loss) = expectancy. Learn this equation. Learn that there is an infinite set of numbers that could yield a positive result. And an infinite set of numbers that could yield a negative result.

9. People are far too caught up in having the correct entry and far too unconcerned in having the correct exit. In fact, you could come up with almost any half-baked scheme to buy a stock and still be profitable if you focused on making the "golden equation" positive. Instead, too many people focus on the win rate and stop at that point.

10. Trading is a brutal profession because you have to control your emotions. As humans, we generally stink at that. Therefore, most people make lousy traders.

11. As my wife told me a long time ago: I am nothing but a gambler. I countered that she may be right, but at least give me the benefit of being the "house." That is, if my "golden rule" equation is positive, then all I ask is that people keep coming through the front door and betting at my tables.

In trading terms, all I want to do is get a fair number of at-bats each day. If I have enough at-bats, I should make a decent buck over time. In other words, think like a casino, not like the rube who throws down a $100 bill and expects to walk away a big winner.

And there you have it. Stuff I'd talk about in a two- or three-hour seminar. Or maybe a book.

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I'll be appearing at TheStreet.com's Technical Analysis Seminar on Saturday, Nov. 6. Come hear me discuss the pitfalls of using anything other than technical analysis to do your trading; the tools every successful trader should have; and the 10 errors all traders make -- and how to avoid them. Please click here for more information.

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