The Art and Craft of Trading

The following is a portion of the first chapter of "The Art and Craft of Trading". The entire series is a 12 chapter course that introduces and describes the concepts and requirements of trading. It is a wealth of information applicable to any trader and any market. The series provides the neccessary steps to not only enter the craft of trading but to successfully continue in the craft. Upon incorporating these concepts the trader is then prepared and indeed strongly urged to further their studies and skill development through the many available sources that currently exist.



The Art and Craft of Trading
by
Rich Leonardi

Table of Contents
Chapter 1 Introduction
Chapter 2 The History of Trading
Chapter 3 The Concepts of Trading
Chapter 4 The Financial Wheel
Chapter 5 Gambling and Speculation
Chapter 6 Bankroll and Knowledge
Chapter 7 Money Management
Chapter 8 Discipline
Chapter 9 The Trade Plan
Chapter 10 Technicals
Chapter 11 Finale
Chapter 12 Additional Material

© Copyright 2006, 2009 All Rights Reserved
Registration Number - SRu640-889
No part of this course, seminar or booklet may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Richard R. Leonardi.
This booklet is intended and provided as educational and informational material only and is not an offer to buy or sell financial futures, stocks, options or commodities. Richard R. Leonardi is not a financial advisor or a registered analyst. While there is great potential for reward as a trader of financial instruments, there is also substantial risk of loss in all types of trading. You must decide your own suitability to trade, and your trading results can never be guaranteed. Your purchase of this educational series and your use of any of the written content is an acceptance of this disclaimer. As such, you are also acknowledging the risks involved in trading and are also acknowledging that you, the reader and user, and not Richard R. Leonardi, is solely responsible for any loss, financial or otherwise, as a result of using this information.

The Art and Craft of Trading
Chapter 1 - Introduction

The approach behind The Art and Craft of Trading is to build a trading business. This requires a basic understanding of your current financial condition, assets available for speculation and a foundation built upon the four principles of trading – Bankroll, Knowledge, Risk Management and Discipline.
This series was created for a number of reasons.
1 - The process of presenting to you the trader what has taken me years to codify and apply. To pass on the skills I have developed and to help you shorten your learning curve. It is an opportunity for me to set you on a true path. If I had someone taking me through this in the beginning of my trading, it would have saved much time and wasted effort.
2 - To provide factual information in a logical, sensible format. Information that will stand the test of time and that every professional trader depends on to remain a professional. Information that can and should be referenced again and again over time until the concepts have become a bedrock foundation for your approach to market speculation.
3 - To share with you my efforts and my experiences in order that you will not have to reinvent the wheel or to do as little reinventing as possible because trading is not a course in the scientific method. If it were, only one course or book or seminar would be needed to explain the concepts of it and everyone would be profitable.
4 - Educating is a great way to improve one's own skills. Not only does it remind me of what it took to get where I am, it reinforces those concepts and practices that keep me in the game. It also increases my knowledge base through research, allowing me to explore new areas of interest.
5 – Finally, to present to you what is really required to enter this arena without spending hundreds and in many cases thousands of dollars to find out. In a real sense consider me a mentor. In this way you can honestly decide for yourself if trading is something you would be interested in, and if you do decide to proceed you will be prepared for what challenges lie ahead.

What This Course Is
Through this seminar series I will attempt to impart to you the depth of the traders world. Trading is far more than buying and selling financial instruments. Trading has taught me much, about the world, myself and how I fit into the grand scheme of market events. Have no illusions about this. Trading is a teacher as well as a vocation. A teacher of who you are. The market is a mirror and will reflect back to you your most inner self. And if you ignore this reflection, if you choose not to accept its meaning, if you decide you do not need to learn by what it is telling you, you will become a trading statistic.
The assumption that all one needs, to watch the profits roll in, is to obtain and learn a system or model or strategy to buy low and sell high and what drives us to them is simply greed and simplicity. BUY when the light turns green. SELL when it turns red (or some such variation on this theme). Nothing to it. Remember, if it were easy everyone would do it and clearly everyone is not doing it.
The market is not an entity that exists independent of its participants, but is driven by the human condition. It is subject to human emotions and elements such as fear, greed, hope, confusion, love, hate, and belief systems. And when people trade they bring these to the market and are influenced by them.
Consider. An indicator says it's time to buy. First, whatever indicator you care to use does not and will not make the same call every time so right off the bat there is inconsistency. Indicators are not magic wands.
Next, you decide to enter the position. Maybe.
“Oh look, it seems the price is dropping. Maybe I should wait.” (No discipline)
“No, it's moving up again. But now it's higher than where I was going to originally enter. I'll just get in.” (No plan)
“Good, it's still moving up.”
“Wow, it's up 50 cents. Maybe I should sell.” (No money management)
“I'll wait and see. It's going up some more. Smart of me to wait.” (Greed)
“But now it's pulling back to 50 cents profit. Now its 45 cents. I should have gotten out at 50. Now its 30. Now 20.” (Fear)
“Sell it, at least I made something.” (No discipline)
Or try this scenario. Everything is the same but the stock drops as soon as you get in.
“Down 20 cents.”
“Down 35 cents.”
“Should I get out.” (No plan)
“I'll wait a little longer.” (No discipline)
“ It seems to be basing. Yes, it's moving back up.”
“Smart of me to wait.” (Greed)
“Oh, its dropping again. I'm in the red.” (Fear)
“Down 65 cents, 85, 1.00” (No money management)
“Oh its moving back up 85, 75, 50. Good, its turning around.”
“I'll wait for the profit.” (Greed) or (“I'll get out when I'm even.”) (No plan, no MM, no discipline)
“Oh its moving down again. 85, 1.00, 1.20.” (Fear)
Finally, when the pain becomes greater than you can handle, you sell at a $1.35 loss. And feel relief that you are out.
Why did this happen?
No Plan.
No Money management
No Discipline.
Just gut feeling based on some technical indicator that won't work all the time.
A wild emotional ride in the market. Maybe with money that one can't afford to lose, like the rent money. Or maybe trying to make back what was lost in previous trades. This is not trading. This is insanity. Professionals do not go through these machinations when they trade. They just trade. With a plan, money management and most important, discipline.
A fundamental reason is that the way we are taught, the values we come to accept, the beliefs that are instilled in us, all of which may have some value in society, all of which that is in part what makes society function and all of which that cause us to behave the way we do and be the way we are, are absolutely useless in trading. Basically, there is very little that we learn that can assist us when we trade. What the market teaches us, in a nutshell, is who we are, what human baggage we bring to our trading and why.
When you come to realize this you either eliminate this form of gray reality from your being when you trade and replace it with black and white reality or you lose. This is not a philosophy or opinion. It is fact. It is the way things are and if you enter this arena you will find out it is true.
In addition, the best and most honest thing I can do for you is point out the path. I am a guide here, nothing more. That is all I can be and that is all anyone who trades and shares their trade experience can be. Also I am not here to judge or say this or that method is the only way or the best way to trade but I will provide for you information that will allow you to better judge for yourself whether a trade method or trade plan or money management system is the best fit for you.
Understand, that teaching someone to trade is like teaching someone to paint. I can show you the craft. What tools are needed, the standard use of those tools, the elements of color, brush stroke, composition, perspective, the styles of the great painters. What I can not teach you, indeed what I can not give you nor can anyone give you, is the art. Because art is limitless and art belongs to the individual. If 6 would be painters go into a field and paint the oak tree standing there, there will be 6 completely different views of that tree. Always. There will never be 2 paintings that are exactly alike. And there will never be two traders who, using the exact same method and system of trading, that will get the exact same results over time, and this includes two identical 100% mechanical systems requiring no discretionary decisions whatsoever. Over time there would be discrepancies.
Why? We at any moment in time see a slightly different structure of reality in the markets than others due to, among other things, did we sleep well last night, did we have an argument with someone, have we been losing more trades than we have won recently, is some belief system we have making trade judgments for ourselves, or are we more risk averse in general.
In any trade situation two traders would see the market differently, even if they both feel the market should go up or down at some point. They would not execute at exactly the same time to get in and then out of the trade. Yes, it may happen once in a while but over thousands of trades it will not. Hence, their results will be different.
In the case of two identical mechanical systems there will be elements not under the control of the systems such as market liquidity or regulatory based liquidity (for example, the limit up or limit down prices set by regulation in commodity markets), so over time both systems may not be able to enter and exit exactly as required for all shares or contracts traded. This has a basis in chaos theory. A butterfly flaps its wings in South America and it rains in New York. Over time even two identical deterministic systems will exhibit an exponential growth of error.
Understand this concept immediately and fully. This is why you can not purchase a trading course no matter how effective it is and expect the same results, positive or negative, as the trader who created it or uses it. You would never enter and exit all setups in the same way at the same price, you would never manage your share size or contracts in the same manner indefinitely, you would never analyze each situation with exactly the same process.
If you did or could then everyone would have exactly the same results. This is an impossibility by definition because then the markets would cease to function, they would cease to exist, because the markets must have two counter parties to complete a trade at a price. Therefore, two different opinions at that moment.
Finally, and this is very important. People want to see results. Like seeing how good a car wax is before they buy. And they think that when it comes to the markets and trading the same concept applies. So they want to see the profits that a trader has gotten with their system or method. Know this, that the published trade results of someone using a particular system is meaningless and of no use to you at all. What good would it be? What could it give you? Will it make you a consistently profitable trader?
You are not going to get the same results as that trader no matter what you do. You may do better. You may do worse. You may each show a healthy profit (or loss) over time under different trade management circumstances. Remember, it's not the method that provides results. It's the trader. You are your results.
It is also my intention to provide under one roof the basics of the craft and the business of the craft so you will be able to construct for yourself an absolutely rock solid foundation to build on. A foundation and environment which will ultimately provide the freedom you need to explore your art.
In other words,

YOU MUST UNDERSTAND WHAT YOU ARE DOING BEFORE YOU DO IT.

I will also present to you my trading method and my approach to the markets. This is my interpretation and opinion because it is for me what I am comfortable with in terms of how I trade. In other words, It is my artistic view. I don’t know how to present such information in another way that makes sense to me. However, I will also present others who share different viewpoints so that you may continue your research in those areas to help you decide for yourself the most appropriate meaning or method.
Also know that some of the material presented in this seminar is not an opinion but is indeed fact, the most fundamental requirements to a path of success. To present to you what is not up for discussion. Inherent ideas and concepts that must be followed to the letter. Such as “trading is a business”, “the proper use of money management techniques to minimize your losses”, “having a plan and following it”. This is imperative, not only for your pocketbook but for your growth as a professional trader and your piece of mind.

TRADING PROFITABLY IS NOT ABOUT MONEY!
MONEY IS A BY-PRODUCT OF CORRECT TRADING!

Trading well or correctly is about trading for skill. If you trade for skill the money will take care of itself. If you trade for money you will always find yourself closing a trade too early and taking the small profit and conversely letting your losing trades stay open too long and taking the large loss.
And how do we trade for skill?
Trading for skill means to trade objectively, with a plan, good money management and discipline, without letting emotions dictate our actions. Remember, If we trade for skill and the market moves against us on a trade, we have still traded profitably because we traded correctly and for skill.
To paraphrase Chris Ferguson, poker professional, “If you are not increasing your skill each time you play, then you are wasting your time.”
When we trade for skill we develop our art. But trading for skill requires a foundation and the ability to trade without the interference of non objective analysis caused by the influence of emotion and perceived reality we create for ourselves based on the way we interpret price action.

What This Course is Not
It is not a “get rich quick” scheme. It is not a “how to course” more than it's a “what to” course. There are no secret weapons, no holy grail, no means of trading the market that will give you a 100% guarantee. Because there are none. Success with the market does not comes from a black box. It comes from you, it comes from within. However, what you WILL find in this course is reality. What is really needed to succeed.
If you are looking for me to teach you how I make money you are looking at it from the wrong point of view. Essentially, you are asking the painter to teach you to paint the same way. Yes, you may appreciate my approach to trading, it may fit your personality and you may decide to incorporate it in your trading. But really all I can do is guide you towards the development of your own art. In other words, not how “I” make money but how “you” can make money. However, I can not guide you to anything without at least showing you where the path lies and the options available to traverse it. So to that end I will provide the money management methods and skill sets required to get you started and also a detailed look at how I approach the market. This will help you to begin your journey to the development of your art.
How you see and interact with the markets is entirely your own vision. This is again why you can be shown the craft but the art must come from you. If you speak to enough traders you will find that almost all who are not consistently profitable always seem to be looking for someone to teach them how to make money without ever considering that the path to profits lies within themselves. My hope for you is that in the final analysis you will come to understand the following:

YOU ARE YOUR RESULTS, NOT A BLACK BOX SYSTEM OR TECHNICAL INDICATOR.
THIS IS THE ART OF TRADING.

That is not to say and I want to be extremely clear about this, that learning another trader's style or money management system or reading books on trade indicators, and taking seminars are worthless. They are not. They are actually part of what is required to become a professional. But you must understand that this knowledge is just the beginning of what is required. Obviously, if you don’t know what a moving average is or how to construct one, or you don’t clearly understand the concepts of money management and how to apply it to your trading or are not shown clear examples of different time frame techniques such as scalping or position trading you could not advance yourself in the basic approaches to this business. But you can not do any of this unless you have a broad and fundamental view of the field of trading. An unbiased view. The design here is to provide that view.
Another aspect I would like you to consider is that traders new to the craft generally have an unrealistic view of the knowledge and time required to achieve profitability. Indeed, the time it takes to become an artist. Consider this analogy:
Place yourself at a professional poker table surrounded by the best players in the world. Your knowledge and skill is based on a couple of books you read, a live seminar or two given by top players and about a month playing poker online. How well do you think you will do? Those books, seminars and practice periods will give you the basics, in other words the science of poker but they can in no way prepare you or teach you the art of poker. That is something you must develop for yourself.
In addition, to further your knowledge and skill you will practice in live game situations at tables requiring the smallest “buy in” you can find. Right? I mean would you walk into a high stakes game as a novice? Would you just pony up thousands of dollars and enter the World Series of Poker? Of course not. And it is exactly the same in trading. So why is it novice traders are so eager to jump into the markets using as much capital as they have, leveraged with all the margin they are allowed to carry while at the same time knowing almost nothing about what it is they are doing and yet expect to make consistent and large profits? You are not going to make $1,000 a day opening an account with a $1,000 or even $5,000 or $10,000. The testimonials you see on TV infomercials are vastly incomplete because you don't know the bankroll, strategy or skill level of the person speaking. Some may have just been lucky. And if you talk to these same people a month down the line, would many still be profitable?
What you must also understand is the time required. It takes years to become proficient at this craft. Think of it as going to college for trading. Would you expect to become a doctor, engineer or master electrician in a few months. Then don’t expect to be a pro trader in the same time period.
Finally, many traders think they can find a way to eliminate losses and discover the holy grail, the secret method. Learn this now. It does not exist. And if it ever did exist it would have been discovered a long time ago and it would have immediately ceased to work because everyone would have been using it. The market is not an entity that exists independent of its participants. The very act of entering the market affects its movement. There is a quantum element to the markets.
In summary:
I want to open up your eyes, to give you a philosophy that will expand your vision. Ways of looking at and interpreting the markets that you most likely have not considered. So you can get a fresh perspective, a new perspective. I want to challenge your belief system and ask you to look at things from all sides. All this so you may gain a deeper understanding of the market psychology in play and more importantly, your own psychology.
You are about to embark on a journey. A journey that will teach you about yourself. The markets will tell you who you are, whether you like it or not, whether you want to hear it or not. The markets do not lie, and if you do not know who you are, the markets are the wrong place to find out, because it will cost you. Remember, the markets are a mirror. And when you look at the markets what you see reflected back is the reason you are either consistently profitable or you are not. Everyone who has ever traded has a problem with this in the beginning. And it can take a long time to understand the concept fully, much less to accept it and incorporate it. So, don't be discouraged. Persevere.

If you are new to trading this seminar will outline in a logical manner the fundamental concepts that you can build upon to gain an understanding of the world of trading. What is required not only to enter the business but much more importantly, what you need to STAY in the business, which is a much more difficult task. If you are trading already but have found that consistent profitability has up to this point eluded you, I ask you to keep an open mind and consider all of what I am saying. It could well be to your advantage to hear my thoughts. Indeed, it may cause you to rethink and reconsider your current approach and restructure or abandon your approach for a more efficient means of trading. A means that could allow you greater freedom in your trading and allow you to become profitable on a consistent basis.
All I have said to this point may not make sense or be entirely accepted by you. I ask you to withhold your opinion or conclusion at this point and open yourself up to a non prejudicial state of being. In time, I believe you will see the light of what I am saying.
Finally, I have not asked for nor have I received compensation in any form from those I mentioned or listed in this series to present them in a favorable light. I have also given appropriate credit to them when acknowledging their concepts and ideas. They are presented to you because they have been an integral part of what I needed to find my art.
The price of the course is $125. Available as a PDF file. Please contact me at rich_leonardi@yahoo.com or Michael Kuta at mkuta@squawktrader.com.