Book Summary/Notes/Highlights: Trading Habits - 39 of The World's Most Powerful Stock Market Rules {By Steve Burns & Holly Burns}

            "As a billionaire...most people are interested in what type of cares I drive instead of asking me what types of books gave me the drive to be successful."  - Warren Buffet.

      I have divided this book in three parts:

           Part 1 : Rule 1-15

                             The Foundation

           Part 2 : Rule 16-27

                            Mind Over Emotions

           Part 3 : Rule 28-39

                            The Keys to Profitability

       The Power of Habits

•  In athletes, business, and entertainment, the top performance are those that carefully consider every action they take.
• Do A, then B, and you will likely arrive at C. Speed in action comes from knowing what to do on a deeper, subconscious level.
• In trading, the first step is to learn what you need to do in order to be profitable.
• Find good source of trading information and learn as much as you can.
• Continued learning through chart studies, back testing price patterns, interacting with experienced traders, and reading great trading  material is are best habits a new trader can develop.
• Always focus on being better today than you were yesterday.
• Another way to gain an advantage over your opponents is to trade with discipline.
• Replace your opinions with trade signal, your ego with position sizing, and your emotions with a trading plan.
• Developing and practicing powerful trading habits has made me successful in the stock market for more than 20 years, and they can help you, too. 

PART-1 : Rule 1-15

          The foundation

     1. A winning trading system must either be designed to have large winning percentage, big wins or small losses.    

1. There are two paths to profitable trading, accuracy of winning trade and size of winning trade.
2. High win rate system can quickly become unprofitable when losses are allowed to get out of hand.
3. It is crucial to cut losers short, even in high win rate trading system, because a large loss doesn't give back previously earned profits.
4. If you take only small profits it only takes a few big losses to break you.
5. Cut your losers short but let your winners run. A stop loss is your insurance against  having any big losers.
6. To be profitable in a low win rate system, you just have to right big and wrong small.
7. Cutting winners short at the beginning of a trend and letting a loser ran on the wrong side of a trend, are the two biggest causes of unprofitability. 
8. 1: 1 risk/ reward ratio requires greater than 50% win rate for profitability.
9. 1:2 = 33%
10. 1:3 = 25%
11. 1:5 = 17%
12. You can be profitable with fewer wins as long as losses are kept small.

   2. Your trading system must be built on quantifiable facts and not opinions. 

1. New traders may take trades based on feelings but professionals base their trades on fact.
2. A signal is a quantifiable reason to take a trade on price action, a technical indicator, a trend line, or a price pattern.
3. "Buying a dip, " is not a signal, but buying a pullback in 8 and  P 500 Index to the 50 day SMA, or the price reaching the 30 RSI on a daily chart inside an uptrend over the 200 day SMA is based on quantifiable facts.
4. I personally prefer using more quantifiable signals, like price support and resistance levels, moving averages, MACD, and RSI.
5. Replace your discretionary trading with quantifiable signals that give you a specific reason for entering a trade.
6. Quantified entries and exits in a tested trading system is the path to profitability. 

       3. Look for low risk, high reward, and high probability setups.    -Richard Weissman.

1. If you buy apple stock when the price is 1% over the 200 day SMA, and apple has not closed below the 200 day SMA in 18 months, then there is a good chance that your stop loss will not be triggered if you set it as a close under the Apple 200 day SMA.
2. Your reward should be two or three times larger than your capital at risk to make the trade worth the risk. This may give you a smaller win but you should have that potential.
3. Look for trades with potential of being big winners. 
4. Enter when the odds are low that your stop loss will be hit before you're profitable enough to exit.
5. Use trailing  stops when possible to maximize winning trades, exit a winner when you have a reason to, and not because open profits make you nervous.

    4. The answer to the question, " What's the trend?" is the question,"What's your time frame?      - Richard Weissman.

1. The best way to profit in the stock market, or any financial market, is to capture a trend in your time frame.
2. I have found that the longer the time frame, the simpler it is to capture the trend.
3. Different systems will work based on the velocity and volatility of the trend in a particular time frame.
4. Any trading system on any time frame is just a set of rules that give the trader a high probability to capture a trend.
5. When building a trading system and developing a trading plan, your goal is to discover ways to capture trends in a way that makes you comfortable psychologically and financially profitable.

    5. Start with the weekly price chart to establish the long term trend, and the work down through the daily and hourly charts to trade in the direction of that trend. The odds are better if you're trading in the direction of the long term trend.

1. Trends are created on the long term charts by the accumulation or distribution of a stock, commodity or even a whole asset class.
2. Large money managers can't buy millions of share of a stock at one time. Instead, they buy in stages so they don't push the price up too fast and make too expensive to accumulate.
3. Much of the support for stocks at key moving averages is caused by money managers adding their long term positions by buying at 50 day SMA pullbacks.
4. It is difficult to short markets under accumulation because the pullbacks are very short and buyers are waiting to get in at any pullback. 
5. This differs from a market that is being traded, creating resistance where the market runs out of buyers at a specific price range, and then has support at a level where it runs out of sellers at low price.
6. As key support levels are broken, stop losses are triggered causing more selling and even lower prices.
7. Market need accumulation for long term uptrend and distribution for long term downtrends.
8. Long term the stock market has bullish slant because it has demand from buyers of mutual funds, retirement accounts, company buybacks and investors.
9. Make a habit of trading on the side of the flow of the capital into or out of your market of choice, instead of resisting the reality of price action.

     6. The more times a support or resistance level is tested, the greater the odds that it will be broken. Old resistance can become the new support, and the old support may become the new resistance.

1. What causes price resistance and support on chart? Price has memory.
2. If price makes a new high, then reverses and goes lower. Many people left holding a stock at lower price  will decide that if the stock returns to that price level, they will sell it immediately.  These holders group of sellers waiting for the old price high to be their target. When price returns to the old, higher price level, these holders sell and fell relieved. They are happy that they didn't miss their second opportunity to get out at the higher price. This selling sends the price back down again.
3. Support and resistance levels can play out over and over again, until a breakout happens to a new trading range for price, or the market begins to be accumulated or distributed.
4. When a breakout of a trading range occurs and big distributors or accumulators take over a market they cause it to trend, but it doesn't go straight up or down. There is still a pattern of a market moving in one direction, then meeting supply and demand and retracing.
5. Make a habit identifying old support and resistance levels and trading off them as long as they holding in a range bound market, then look at trading a breakout.

     7. Moving averages can quantify trends and create signals for entries, exits and trailing stops.

1. Moving averages on charts is the quickest way to identify the direction of a trend in any time frame.
2. The slope and direction of the moving average shows the direction and power of price action.
3. A quick way to identify a trend is to look at the price action versus the moving average in your trading time frame. Price above the key moving average shows an uptrend and price below it shows a downtrend.
4. I like to use moving averages for trend identification over trend lines and price patterns because they are 100% quantifiable.
5. Moving averages can also be used in pairs to create entry and exit signals when short term moving averages crosses a long term one.

      8. Bull markets have no long term resistance and bear markets have no long term support.

1. During 20% drop in prices into a bear market, key support levels are lost repeatedly, stop losses are triggered, rallies are sold into, and fear slowly takes hold as people see money disappearing from their accounts.
2. The odds are on your side to sell strength short in bear markets so you stay on the right side of the trend and flow of capital out of the market.
3. The end of bear market arrives when selling is finally exhausted. With many long term position holders left onboard, and with the deep buyer become the majority of the new holders that get in at much lower prices.
4. The primary characteristic of the bull market is the ability to repeatedly breakout to new highs. First with a 52 week highs, and then all time highs.
5. In bull markets, buying is eventually rewarded. Buying dips gives traders and investors the chance to catch the next trip to all time highs.
6. Having trading rules that identify price patterns for range bound markets, uptrend, and downtrends so you can trade according to the environment will improve your profitability.

      9. The larger the market gaps, the greater the odds of continuation and a trend. 

                                                                                                     - Linda Raschke

1. Price gaps on a chart are generally trend indicators in the direction of the gap. This is especially true for growth stocks and commodities.
2. You can catch a nice trend in the meantime if the gap turns out to be a " gap and go" that leads to a trend over days, weeks, or months.
3. When gaps in price fail and move back to fill the gap in price on the day of the gap, they can be called "gap and crap".
4. If the gaps don't fill in the first hour of trading, the odds are that they aren't going to fill, and price will continue in the direction of the gap for the remainder of the day.
5. You can buy into the gap in the morning, but there is more risk because you don't know if the gap will hold.
6. You can also buy the gap at the end of the day with your stop as a close below the low of the gap up day.
7. Traders should have solid rules about trading gaps in the markets on their watch list. Finding a successful way to trade gaps can be very profitable.

     10. The last hour often tells the truth about how strong a trend truly  is."Smart" money shows their  hand in the last hour, continuing to mark positions in their favor. As long as market is having consecutive strong closes, look for an uptrend to continue.The uptrend is most likely to end when there is a morning rally first, followed by a week close.               -Lnda Raschke

1.  In the stock market, the first hour of trading is often times amateur hour, while the closing hour is like a lie detector.
2.  New traders are lured into taking the wrong side of trades at the open, but most of the smart money waits to see how the market closes before making a decision.
3. In my experience, traders would be better served by getting into the habit of taking profits in the morning, and making entry decisions based on the last 30 minutes of the trading day.
4. Get in habit of  trading your time frame in a disciplined manner, whatever strategy you choose.

     11. Above the 200 day where bulls create uptrends. Bad things happen below the 200 day; downtrends, distribution, bear markets, crashes, and bankruptcies.

1. The ultimate line in the sand that separates  a long term uptrend from a long term downtrend, and bull market  from a bear market, is the 200 day SMA on the daily chart.
2. For market to drop 20% into a bear market, or 'meltdown' or 'crash' it typically first fall through it's 200 day moving average.
3. The 200 day is a trend trader's first warning sign that the trend has changed.
4. In a young bull market, this is generally the early support line. Later in a bull market when the 200 day is lost, price will tend to rally back over this line.
5. The 200 day is a way to quantify a long term uptrend from a long term downtrend.
6. The odds are better for long positions in markets above this line and selling short below this line.
7. Traders should get in the habits of thinking about going long above the 200 day and selling short below it in most cases.  

     12.  It is much easier to watch a few than many.    - Jesse Livermore.

1. The best way to develop a strong edge in trading is it to study, test, trade and master a specific thing.
2. It is hard to beat an expert in a specific market, setup, chart pattern, trading system, or stock.
3. You will have much better chance if you have small watch list of specific stocks or setups.
4. Get in the habit of trading a specific winning price action based system so that your trading becomes a simple search for the right signal.

    13. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and first sharp rise always finds sellers.    - Alan Farley

1. It is important for traders to understand that trends don't go straight up or straight down. Instead, they tend to zigzag back and forth from a new high, back to a lower high, to a higher high, and back down.
2. You have to find good key price levels to enter where you can position your stops to not be hit before you're able to capture a piece of the larger market trend. 
3. Traders should  get in habit of finding ways to capture trends as the price zigzag and then continues in the primary market direction.
4. Ability to filter out noise and capture a trend is trader's primary responsibility during system development. 

     14. Successful trading is about consistently doing the difficult things so often that it becomes second nature.      - Richard Weissman

1. When the trader feels the most comfortable entering a trade to get onboard a trend, it is usually close to the end.
2. The potential dip buyers get so consumed by fear that they can't take their desired entry signal because their emotions take over.
3. Another difficult entry to take is to buy a breakout to new highs out of a price range. The initial breakout over resistance will feel like you are buying too high, chasing, or buying late.
4. A trend up to new all time highs  can only happen after a breakout to a new price level.
5. Momentum traders and trend followers best traders are usually those that are entered at an initial breakout into a new price zone, and the trend over weeks and months to higher highs or lower lows for days, weeks, or months.
6. All the things that make a trader profitable are difficult to do. Buy initial strength, short initial weakness, buy breakouts, sell breakouts short, and let a winner run with a trailing stop loss, cut a losers short and accept when you are wrong.
7. Opportunity exits in a state of uncertainty, when the majority is waiting to see what will happen, and where price will go next. Price will generally go in the direction that causes the most financial and emotional pain to the majority,  because the majority is usually wrong over the long term.

   15.   The best trades work almost right away.   - ArtOfTrading.net

1. The best trades are the ones that fit your entry signal parameters, and have a stop loss at a price level that is unlikely to be hit before the trade is successful.
2. When your position size is setup so that the stop loss placement limits the size of your potential loss, it is a good trade out of the gate. 
3. The best trade are those that you fully understand and accept the risk/return potential.
4. The odds of having a winning trade from the beginning increases if you wait for an initial move in the direction you want to enter, instead of stepping in to catch a falling knife, or sell a rocket that is blasting upwards.

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Hint: Part-2 will coming soon......🙂