The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

PART ONE

PSYCHOLOGY, RISK MANAGEMENT, & RECORD-KEEPING

To be a successful trader you need an edge—a method of discovering opportunities and placing orders. An edge plus a lot of discipline will put you ahead of the pack.

A beginner has no plan and no edge. He hears different bells on different days and jumps in response to all of them. He may buy today after seeing a piece of news about earnings. He might sell tomorrow after seeing—more likely imagining—a head-and-shoulders top. This is the normal stage of initial ignorance. To move beyond it, to graduate to trading for a living, you need a clear concept for buying and selling. You need to define a trading plan that is fairly clear and bulletproof in order to enjoy a rising equity curve.

My own search for an edge led me to focus on the gap between price and value. Surprisingly few people are aware of it, although when I point it out on a chart they see it immediately.

The concept is quite simple: price and value are not the same. Price can be below value, above it, or equal to it. The distance between price and value may be large or small, increasing or decreasing.

Few technical traders ever think about the difference between price and value. Fundamental analysts are much more attuned to the idea, but they do not own it—technicians can use it as well.

Most buying decisions are based on the perception that price is below value. Traders buy when they think that some future event will increase the value of their trading vehicle. ...