Trading Basics: Evolution of a Trader

CHAPTER 5

45 Tips Every Trader Should Know

After 30 years of taking money out of the hands of professionals on Wall Street and newbies on Main Street, I have learned tips that every trader and investor should know. These I describe below. I refer to them in other chapters, so here is a brief tutorial.

1. Timing the Exit: The 2B Rule

In Victor Sperandeo's book, Trader Vic—Methods of a Wall Street Master (Wiley, 1991), he discusses three principles to determine when the primary trend changes. On principle two, he introduces a rule that has come to be known as 2B.

In the 2B pattern, when price tests (rises near to) a prior minor high and fails to continue rising, look for price to drop. That may sound as if I am saying, if price does not rise, it drops, but this is valuable information. I will discuss an example in a moment.

The same applies to valleys. If price drops to a minor low and fails to continue moving lower and then rises above the prior low, there is a decent chance of a trend change.

Figure 5.1 shows an example in Boeing on the daily scale. Price peaks at A, in June 2009. When price attempts to push above this peak three months later at B, it fails in a 2B pattern. Price tumbles to D and then recovers to C where it stalls again—another 2B—but this time forms a peak that looks laced with indecision about moving higher. Price tanks for three days to E before the uptrend resumes.

Figure 5.1 Examples of the 2B rule where price reverses on the test of a prior high and low. ...