Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups / Edition 1

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The essential guide to launching a successful career in trading—updated for today’s turbulent markets

Mastering the Trade is an excellent source for a basic understanding of market action, be it day and/or longer-term trend trading. A programmer will have a field day with the many ideas that are in this book. It is highly recommended.”
—John Hill, president of Futures Truth magazine

“John Carter’s new book focuses quickly on the critical area of trader psychology, a realm that will often separate the trader from his wallet if it is not mastered first. The in-depth trading strategies clearly show how to respond to market moves based on real-world examples.”
—Price Headley, founder of and author of Big Trends in Trading

“Well written and packed with the kind of insight about the nature of trading and the markets that can surely benefit every level of trader.”
—Mark Douglas, author of Trading in the Zone and The Disciplined Trader

“This is a must read for all new traders, specifically for the psychological aspect of trading. I am recommending it to all of my clients.”
—Carolyn Boroden,

About the Book:

When it was first published in 2005, Mastering the Trade became an instant classic in the world of day trading. Now, veteran day trader and educator John F. Carter has updated his time-proven swing trading technique to help you succeed in an environment vastly transformed by volatility and technology.

Universally acclaimed for its sophisticated yet easy-to-execute methods, this practical, results-driven guide provides everything you need to make a lucrative career as a day trader—from preparing yourself psychologically for the unique demands of day trading to timing the market, managing risk, and planning future trades.

Mastering the Trade sets aside timeworn basics and rehashed ideas to examine in detail the underlying factors that cause prices to move. Providing the tools you need to make the right decisions at the right times, it helps you enter market shifts early and either pull out before losses accrue or hang on for a long and refreshingly predictable ride. Mastering the Trade covers:

  • The five psychological truths that will transform you from a mistake-prone novice into a savvy trading professional
  • Exact entry, exit, and stop-loss levels for the intraday trading of stocks, options, ETFs, e-mini futures, 30-year bonds, currencies, and more
  • Seven key internals, from $TICKS to five-minute volume—critical for gauging pending market direction from the opening bell
  • Premarket checklists for analyzing recent market behavior and calculating on each trading day what you plan to do, how you plan to do it, and why
  • Airtight risk control techniques for protecting trading capital—the most important component of a professional trading career

After spending many years on various trading desks, Carter has developed an intuitive understanding of how the markets work. In Mastering the Trade, he gives you unlimited access to everything the markets have taught him—so you can make an exceptional living on the frontlines of professional trading.

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Product Details

  • ISBN-13: 9780071459587
  • Publisher: McGraw-Hill Companies, The
  • Publication date: 12/7/2005
  • Series: McGraw-Hill Trader's Edge Series
  • Edition number: 1
  • Pages: 432
  • Product dimensions: 7.80 (w) x 9.50 (h) x 1.22 (d)

Meet the Author

John F. Carter, CTA, is president of Trade the Markets, Inc., and principal of the money management firm Razor Trading. Carter speaks often at Trader's Expo and other trading industry events, and is a regular contributor to SFO magazine, award-winning website, and Chicago Board of Trade publications.

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Read an Excerpt

Mastering the Trade



Copyright © 2012 The McGraw-Hill Companies, Inc.
All right reserved.

ISBN: 978-0-07-177514-4

Chapter One

What Really Causes the Markets to Move?

Did You Know That Most People Who Lose Money in the Markets Do So Because of These Four Things?

Individual traders live in a state of constant flux, stuck between two worlds that combine both the best and the worst that trading has to offer. On the one hand, they can move into and out of markets with an ease and efficiency that large funds can only dream of. Have you ever wondered what it would be like to have to dump 200 million shares of AAPL (Apple) stock—without drawing attention to what you are doing? Well, like trying to hide a pregnancy, it ain't easy. It's a process, not a mouse click. On the other hand, you can get into and out of 1,000 shares of AAPL or 10 E-mini S&P 500 futures contracts instantaneously, and it won't even register as a minor blip on the day's trading activity. In other words, a smaller trader can move about undetected—a huge advantage. Funds need days, and sometimes weeks or months, to move into and out of sizable positions without showing their hand. If they do show their hand, then other funds will front-run them (jump in front of their orders) and bury them if possible. That is how money is made in the markets—by taking it from other traders. If you think this sounds ruthless, you are right. It is. This isn't a holistic coming together of like-minded souls to celebrate the meaning of life. This is trading.

Then why are so many people attracted to this profession? It's exciting, yes. It's engaging, definitely. It's a chance to make a lot of money. In a word, though, it's freedom. In every area of our lives, we are told what to do. Some people don't like that. Traders have the freedom to carve out specific niches for themselves that other people on the planet can never achieve or duplicate. Most centimillionaires and billionaires don't have freedom. They have obligations, although they can fulfill those obligations in style. Retirees have a sort of freedom, but at what price? And many that I talk to are bored out of their minds. Stay-at-home moms? That's the hardest job on the planet (as is marrying rich). The only professions I've seen that have a large amount of freedom are prostitution, homelessness, and trading. Since I knew I didn't have much of a future as a prostitute (I got nothin'), and since I'm a wimp when it comes to sleeping (I need a clean mattress), trading won out. Traders, at least traders who learn the art of being consistent, have the opportunity to create an independent life, free from the hassles of the average Joe. These perks are extremely appealing and impossible to duplicate in many other professions.

Reasons for trading full or part time are many, and can include wanting a career change, a wish to be more independent, the desire to escape the responsibilities of running a large corporate division or individual business, or choosing to be a stay-at-home parent. A lot of would-be traders I meet are already successful in other areas of their lives—they are just bored with those other areas of their lives. I call these folks "doctors who hate their jobs," although they can include anyone who is in a high-paying career. They like the income and the prestige ... they just don't like the bubble in which they are now trapped. Others have been burned by the financial markets and are now interested in taking control of their financial future. And many have put together a small stake and want to give it a go and pursue their dreams of becoming a trader. I see this firsthand in my office, watching guys like Henry go through the painful cycle from "the excitement of discovering trading" to "wow, I can't believe that option expired worthless." This is a "job" that provides the chance to make a very nice living, and it's a lot more interesting and fun than any other profession—except being a rock star, of course. But if sharing the stage alongside U2 seems slightly out of reach, then trading is a good alternative.

It can be done from anywhere that has reliable Internet access—and as I'm writing this update in 2011, that means just about anywhere. There are no bosses spewing forth inane, ever-changing contradictory orders as they struggle within a system that has promoted them right up to—and through—their level of competence. For some people, working for a corporation is a way to gain power, which is more important to them than financial independence. Working for one of these clowns is enough to drive anyone to drink. In addition, in trading, employees are not necessary, although at some point they can be very helpful if you decide to trade many markets and watch many different time frames (I'd love to trade the European session, but I have to sleep sometime—however, I can hire someone to do that for me). Those of us who have survived the corporate world can find nothing on this earth that's equal to the freedom and beauty that come from no longer having to manage a large group of dispassionate human beings: "I'll pretend to praise you, and you'll pretend to love your job." The good news is that if you hire someone to help you out with your trading, he will generally be as passionate and excited as you are about the adventure.

Start-up costs are minimal thanks to leasing programs from companies like Dell. Trading in your robe or nothing at all is perfectly fine. Best of all, a trader can choose her own working hours. Some examples of schedules from successful traders I work with include trading actively from October through April and then taking the remaining five months off; trading only the first two hours of the market open and taking the rest of the day off; and trading until they make 50 percent on their capital and then taking the rest of the year off. The list goes on and on. By the way, one of the common fallacies of trading is the idea that "to make more money, I need to trade more." Nothing could be further from the truth. Trading smarter and less frequently is one of the hidden secrets of doing this for a living. There is no need to catch every move.

Since trading has so much to offer, it is no wonder that tens of thousands of people toss their hats into the ring, trying to make a go at this most appealing of professions. It truly represents the proverbial American dream, and traders from all over the world are giving it a shot. Since this book first hit the shelves, I've had the opportunity to speak to traders in China, Taiwan, India, Sweden, Australia, England, France, Singapore and many other countries. The bottom line is that traders sweep aside political and philosophical differences when speaking to other traders. Traders around the world are linked together by a single idea—to generate cash with their mind and to reap the benefit that this cash creates: freedom. It's a beautiful thing. I love traders and all the craziness they represent.

And I'm not kidding when I say "craziness." The University of St. Gallen, Switzerland, has come out with a study that compares traders with psychopaths. The study reviewed the results from an existing study comparing 24 psychopaths in German high-security hospitals with a control group of 27 "normal" people. The funny thing is, this control group of "normal" people turned out to be traders. Stock guys, currency and commodity traders, and derivative types happened to be the normal control group that was stacked up against the high-security, barbed-wire-enclosed psychopaths. In the end, the performance of the trading group was actually worse than that of the psychopaths. The study indicated that traders, "Have a penchant for immense destruction," and that their mindset would lead them to the logical conclusion of "beating one of the neighbor's expensive cars with a baseball bat with the sole objective of owning the most beautiful car in the neighborhood." In other words, traders are nuts. Indeed if you look up the textbook definition of a psychopath, here are some of the tidbits you'll uncover: antisocial behavior, poor judgment and failure to learn from experience, inability to see oneself as others do, inexplicable impulsiveness ... sounds like a typical trader who is struggling against the market and can't figure out why.

So it's the freedom that attracts traders. And it's the freedom that is the undoing of many, because with so much freedom comes a cruel price. Simply put, the markets cannot protect a trader from herself. Individual traders, unlike fund managers (most of them, anyway), are unsupervised and have the freedom to act unchecked in any way that they choose. And for many traders, this means they live a life where they are one mouse click away from disaster. The markets lull them, encouraging and even reinforcing bad habits. Have you ever removed your stop and had the trade then go on to hit your target? Well, the market just taught you that it is perfectly okay to do that, at least once in a while. That can work 999 times in a row. It's the one time where it doesn't work that wipes out the profits from all your previous trades, and can potentially wipe out your entire account. It's the day you buy gold on a dip, remove your stop, and it falls $80 an ounce. "Wow," you think, "I can't believe it fell that far!" Exactly. It's what we don't see coming at us like a runaway freight train that destroys us. It's the classic bad habits—chasing a market higher or lower, trading too large for your account size, not having a firm idea of your loss limits, and so on—that creates a market that moves and thrives in such a way as to prevent as many people as possible from consistently making money. Remember the psychopath trait, "Failure to learn from experience"? Why is this? Why are traders so good at sabotaging themselves? After all, nobody, and I mean nobody, enters a trade with the idea of losing money. In a nutshell, it has to do with traders being the best salespeople in the world. Introverted, yes, but salespeople nonetheless.

Although used-car salespeople are saddled with the reputation of being pushy and dishonest, they don't hold a candle to the average trader. A trader, once in a position, can deceive himself into believing anything that helps to reinforce the notion that he is right—or at least "not wrong"—on this particular trading idea. Nobody likes to be wrong. In a job, a person who is wrong can typically blame it on someone else. "It was those stupid delivery people," he says. "They screwed it up." In trading, there is nobody to blame but yourself. And human beings have a very difficult time accepting that they might, in fact, be wrong. "If a husband expresses a thought alone in the middle of the woods," so the joke goes, "is he still wrong?" Probably so.

When faced with a loss, Joe Trader will look at a chart and tell whoever is nearby, "See that spike? That's the hedge funds running stops." He then says with a knowing grin, "As soon as they're done, just watch; this market is going to rip higher." Net result: he does not exit the position, and his losses mount. When faced with a profit, Joanne Trader hesitates to pull the trigger, telling her cat, "The market is acting fantastic here. There is a ton of good news on CNBC. I bet it goes a lot higher." Net result: she does not exit the trade, and it turns into a loser. The mistake these traders are making is a common, yet fatal affliction that most traders suffer from: they are unaware that the market naturally programs their reactions into a losing trader's mindset. And they are unaware of the key factors that really move the markets. The net result is a trader who "eats like a sparrow and defecates like an elephant." This is a situation, of course, that no account can withstand. Worse, this cycle of emotional slavery will not end until it's met head on, until a trader can "pull his head out" and realize that trading is unlike any other activity on earth. Trading has a lot more to do with repeatedly admitting that you are wrong than with trying to make a lot of money. Unfortunately, professional traders understand this all too well, and they set up their trade parameters to take advantage of these situations, specifically preying on the traders who haven't figured out why they lose. One trader's disaster is another trader's bread and butter.

And there you have it, the four things that cause traders to lose money. First, anyone who is attracted to trading shares the same characteristics as a psychopath. Second, the inherent freedom is destructive—after all, we spent our first 18 years of life learning that it's better to follow the rules and do what we are told. Third, the markets actually encourage and reinforce bad habits. And fourth, traders are seduced into taking every opportunity to sell themselves on the idea that they are right.

There is always someone on the other side of your trade. Start being that trader. Not the one who chases, but the one who knows that other people are chasing. Not the one who removes stops, but the one who knows that traders tend to remove stops. Not the one who trades too big for her account size, but the one who trades just the right size, or smaller, for her account size (two points a day is fine, even though deep down we all want ten). Not the one who frantically feels that he has to be in every move, but the one who is content to wait patiently for the one setup that falls within his trading plan, even if it means not having a trade that day.

Be the trader that wants to make money over time, not the one that needs to be right, right now.

How Do Our Odds for Success Increase Once We Understand the Pain and Suffering of Individual Market Participants?

The problem is simple and twofold. First, although traders certainly know that not all their trades are going to work out, they do get a distinct feeling right after placing every trade that this trade is going to work out. A study done by a pair of Canadian psychologists documented this fascinating aspect of human behavior. Just after placing a bet at the racetrack, people are much more confident about their horse's chance of winning than they were immediately before laying down the bet. Obviously, there is nothing about the horse that has changed, but in the minds of those bettors, its prospects improved significantly once they placed their bet and got their ticket. Without getting into a large psychological treatise on why humans behave like this, it has to do with a strong, underlying social influence to appear consistent with our choices. Once we make a choice, we respond to external and internal pressures in such a way as to justify our earlier decisions. If we made a good choice, then this process works out very well for us, and we will continue to build upon our good choice. However, if we made a bad choice, whether it is regarding a trade, a job, a significant other, or a business deal, then this process will take this bad choice and make it emphatically worse. We will simply refuse to let go and move on, as we are more concerned about trying to act consistent with our earlier decision. People can waste an entire lifetime living within the justifications of a bad choice: trying to make it work, trying to be nice and look good and not hurt anyone's feelings, and trying to make it look as if they were right.

Doing and saying things just to prove to others that your choice was right leads down a slippery slope of not being true to yourself. And if you aren't true to yourself, it just leads to frustrations, some of them popping up for no apparent reason. Did you ever get ticked off at your mom when she simply told you to eat more veggies? Bingo. There is some stuff going on there, and, believe it or not, it will affect your performance as a trader.

By the way, your personal life is a good place to test this out, and it's a lot cheaper than working it all out in your trading account. Just start paying attention to what annoys you.

I worked with Rosa, my awesome sister-in-law, for a while on our website back in 2005. We are very close, like brother and sister. I've known her since she was seven years old. While we were working together, we would get into arguments, and essentially I would calmly try to show her why I was right and she was wrong. I didn't think much about it (because, hell, I was right!), but eventually our working relationship became very frustrating for both of us, to the point where she moved on to "explore other opportunities."


Excerpted from Mastering the Trade by JOHN F. CARTER Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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  • Anonymous

    Posted December 18, 2005

    Advice From an Experienced Trader and Investor

    It's obvious from the first chapter that John has extensive experience with the markets, and he doesn't shy away from telling it like it is. I found his talks on how human psychology moves markets refreshing (why most people lose money and how to have that money go into your own account), and his trade setups intriguing. Although many of the books I've read on the financial markets have been tedious, John somehow made reading about the markets interesting and entertaining, with straight forward language. His case studies on specific winning and losing trades from his own accounts are especially interesting, and I found his nearly 15 page detailed trading plan to be very helpful. He also discusses about 10 trading setups. Although not all of them appealed to me, three of them did and I've been using them with success. He talks about finding 'the right market and the right setup for your personality' which I'm assuming is why not all of the setups appealed to me. I've read many books on investing and trading and this one tops my list of favorites.

    4 out of 4 people found this review helpful.

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  • Anonymous

    Posted December 29, 2005

    A New Classic!

    This is a well-written, well-organized book on trading. If you want to learn how to trade for a living, this is the book to read. Everything you need is covered from psychology to computer requirements to money management to business plans to specific setups to trade with. It is especially helpful, if you are interested in futures and forex. This book explains how markets really work, and how to profitably take advantage. It covers ideas that aren¿t written about elsewhere. I¿ve read dozens of trading books, and this one might be the best I¿ve ever read.

    2 out of 2 people found this review helpful.

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  • Posted October 2, 2010


    Very dissapointed I bought this book, which led me to make trades that are very outdated. John carter has now teamed up with a fella Hubert and together are a sales team on steroids. Book led me to webinar (way overpriced) in which we were told we would get the days on cd. Hmmmm, what we got was John Carter's aftrican safari pictures he took right after the high priced rip-off webinar. CD came in like 3 months later and such bad quality I have yet to sit through it again. I believe he was once a great trader but has since just focused on ripping folks off through a marketing powerhouse. Save your money.

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