Dick Diamond

45 Years of Advice From a Trading Legend Close the gap between analyst and trader with time-tested lessons from legendary trader Dick Diamond

45 Years of Advice From a Trading Legend I.

6 Key Trading Principles from the Trader Who Lost 70% of His Account — and Made a Comeback

II.

Which Technical Indicators Can Help You Trade the E-Mini?

III.

The Two Times of Day the Market has a High Degree of Predictability

IV.

Preview “Trading Insights” from 45 Years of Trading Success

V.

Diamond’s Methodology and Advice on Discipline and Trade Execution

VI.

Closing the Gap Between Analyst and Trader

Dear EWI Community Member, Dick Diamond has been trading for a living for over 45 years. His expertise is in trading OEX options, S&P/Nasdaq futures and Dow/Amex/Nasdaq equities. Diamond has an MBA from the University of Michigan with a Bachelor of Science degree in economics from the Wharton School of Business. After active duty in the Marine Corps, he worked as a floor broker on the American Stock Exchange. He left the floor in 1965 and has been trading his own account since then. Elliott Wave International’s President Bob Prechter, who set a new record for options trading in the U.S. Trading Championship in 1984, was an early fan of Mr. Diamond. Through partnership with Elliott Wave International, Dick has taught his trading discipline to over 1,000 students in a live, 4-day comprehensive trading course. Diamond’s hands-on approach provides the student with a custom-tailored methodology that accommodates his or her individual skill level. Mr. Diamond often says, “If I had known these teachings at the beginning of my career, I could have accelerated my trading progress by more than 20 years!” Diamond’s protégé, Roberto Hernandez, first heard about Dick’s course through EWI in 2002. During the session he attended, Roberto quickly caught Dick’s eye when he used Elliott wave analysis to make amazingly accurate forecasts of the DJIA’s intraday moves. He has worked with Diamond ever since and now assists him in teaching his trading course. Dick’s approach is highly technical though it does not include Elliott wave analysis. Roberto, however, rarely makes a trade without checking his Elliott wave indicators. We hope you enjoy these tips from trading mentor Dick Diamond.

Sincerely, The EWI Education Team

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I. 6 Key Trading Principles From The Trader Who Lost 70% Of His Account — And Made A Comeback

Learn 6 Key Trading Principles from the Trader Who Lost 70% of His Account — and Made a Comeback Dick Diamond traded on the floor of the Amex between 1960 and 1965. And he started trading his personal account in 1965. He could do no wrong — or so Diamond believed, as he rode the wave from 1965 through 1968. He had positive returns in all four of those years. Alas, he fell into a trap that is too common among traders: he believed his personal investing “genius” was behind his profits. The more basic truth was that he simply remained on one side of a favorably trending market. But as 1969 unfolded, the trend was no longer his friend. That’s the year he lost 70 percent. How did he recover? He established trading principles and vowed to stick by them. As Diamond applied them, he did indeed make a comeback — which has lasted until this very day. He has not had a losing year since the 70 percent loss. He even says a losing month is unacceptable. Here are six of his trading principles: 1.

Trade only a small percentage of your overall capital at any one time (once you get over your “core position” you’ll get emotional and bad things will happen).

2.

Be open to change. A good trader lets market conditions dictate short-term feelings. Market conditions can change many times during an active day.

3.

Never get aggressive after short-term success or failure in your trading life (and don’t dwell on the past, good or bad. Focus on the NOW).

4.

Intraday trading winners come into a trade for a quick profit and if it does not work out, they sell. Losers hold on to hope. Diamond says this is a dirty word for traders. If you find yourself wishing or hoping — get out!

5.

Don’t buy because prices seem too low, or sell because prices seem too high. A trader should have the ability to buy higher than he bought on the last completed trade even though only a short period of time has lapsed. Conversely, a trader should be able to short at a lower level than the last completed short trade.

6.

Don’t fault yourself for a losing trade — you’ll be right 70-80% of the time if you are trading properly. However, you must fault yourself if you break the trading rules.

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II. Which Technical Indicators Can Help You Trade the E-Mini?

Which Technical Indicators Can Help You Trade the E-Mini? If you’re familiar with the risks and rewards of futures trading, you probably know of the E-mini. The “E” is for electronic, “mini” means this trading vehicle is a “miniature” version of a full-size S&P 500, Dow, or Nasdaq Index futures contract. [Always remember: futures trading is not for the risk-averse.] For example: 1 point in the full S&P 500 contract equals $250. But the S&P E-Mini’s value is equal to 20 percent of the full contract, so 1 point is $50. This can make index futures trading more affordable. E-minis are one of Dick Diamond’s favorite trading vehicles. He calls them the “best day-trading or swingtrading vehicle to come around Wall Street ever!” Diamond has undertaken what he calls “primary studies” of ten technical indicators, and his approach to E-minis trading is based on what these indicators show him:

1. Moving Averages reflect the direction of a trend by smoothing the price and volume fluctuations (or “noise”) that can confuse interpretation. 2. Moving Ribbons identify changing trends by placing a large number of moving averages onto the same chart. 3. Commodity Channel Index (CCI) is an oscillator that mostly fluctuates between -200 and +200. Specific CCI readings help determine overbought/oversold territory, and serve as buy/sell signals. 4. TRIX displays the rate-of-change percentage, of a triple exponentially smoothed moving average of a closing price. 5. Keltner Channels are “envelope” indicators based on volatility, which help determine overbought and oversold market conditions. 6. MACD Oscillator is a trend-following momentum indicator that shows the relationship between two moving averages of prices. 7. Williams %R is a momentum indicator which measures overbought and oversold levels. 8. Stochastics is an oscillator that measures the market’s relative momentum in the current time frame. 9. Walter Bressert Oscillators are based on the cycle analysis and trading methodology developed by Walter Bressert. 10. RMO or Rahul Mohindar Oscillator, the associated tools and indicators developed by Mr. Rahul Mohindar of VIRATECH.

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III. The Two Times of Day the Market has a High Degree of Predictability

Learn the Two Times of Day the Market has a High Degree of Predictability According to Diamond, there are two times of day when the market has a high degree of predictability: 1. Morning (time of day) is from approximately 9:50am to 10:10am (Eastern Time). 2. Afternoon (time of day) is from approximately 1:50pm to 2:30pm (Eastern Time).

Implications in the Morning 1. If the Market Opens Down and the contra move is weak, the market will likely go down for the rest of the morning. 2. If the Market Opens Down and the contra move is strong, the market will likely rally into prelunch. 3. If the Market Opens Up and has a weak contra move, the market will likely rally into pre-lunch. 4. If the Market Opens Up and the contra move is strong, the market will likely have a sell-off into prelunch.

Implications in the Afternoon Afternoon contra moves follow the same general principles as the morning contra moves. This move has the potential to be much more important than the morning, which could mean an exaggerated move into the last part of the day.

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IV. Preview “Trading Insights” from 45 Years of Trading Success

Preview “Trading Insights” from 45 Years of Trading Success No matter how skilled a trader may be, and regardless of his track record, demonstrating a real-time trade before a live audience is very risky. Yet Dick Diamond routinely does exactly this with his trading students. He doesn’t just talk — he shows them how he “practices what he preaches.” One of Diamond’s principles is the 80/20 trade — he teaches students to shun trades which offer less than an 80/20 chance of success. This takes discipline, because marginally attractive trades come along more frequently than the high-confidence trading set-ups. Trading in all kinds of markets taught Diamond a lot. What began as “trial and error” became “trial and success.” Diamond absorbed what worked and what didn’t. Here are some of the lessons he learned: • Stocks that are positive early and can’t hold their gains are frequently good short candidates. • Don’t buy because prices seem too low or sell because prices seem too high. • Strictly adhere to technical data. Do not consider economic or corporate fundamentals. • Trade the chart and the indicator — not the money in your account. • Nothing is harder than to try to pick a top or bottom. Instead, go for a buy or sell zone. • Trade into the “white heat.” If they want them, sell them. Better to get out when you can instead of when you have to. • Never have a position in anticipation of a major report. • If you are trading a 5-minute chart, use the 30-minute chart to gain additional perspective. • After the market has been in an extended trading range for 3-4 days, expect a big move up or down when it comes out of that range. • In gambling — when you let go of the dice you don’t have control. In trading — you should always have control. Good traders are not gamblers — good traders stay in control. • Don’t be inflexible (be open to change). A good trader lets market conditions dictate his/her short-term feelings. Market conditions can change many times during an active day. • Learn how to handle short-term success & failure in your trading life. Never get aggressive after either situation. • Don’t dwell on the past, good or bad. Focus on the NOW.

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IV. Preview “Trading Insights” from 45 Years of Trading Success

• Don’t worry about leaving something ‘on the table.’ • Sell when you can — not when you have to. • A sign of a bad trader is one who focuses blame away from himself. You are the cause of your success or failure! • Taking losses and handling losses well is part of everyday trading. • It’s ok to have a bad day, it’s questionable to have a bad week, it’s unacceptable to have a bad month!!! • Wait for the 80-20 trades. This is the trade that you want to buy or sell immediately — leave the 60/40 trades alone. • Never force a trade. • A good trader plays excellent defense. Don’t allow small losses to turn into bigger ones by riding them down. • If the market is giving mixed signals, stand on the sidelines. • Think in terms of getting on base as opposed to hitting a homerun. • Trade small to win small — Trade small to win big. • Everybody has good days in this business — what matters is how you can control the bad days. • Buy and sell to take advantage of the emotion of the moment. • Short-term traders are not overly analytical. They are able to pull the trigger. Generally speaking, the better the opportunity the shorter the time it will be available. • Focus on executing the trade as opposed to making money. • You may be right on direction but wrong on short-term timing. This could be disastrous if stops are not used. • Never have a position in anticipation of a major report. There is plenty of time to buy or sell after the announcement. • Close shop when you are not 100% mentally and emotionally ready to trade. • Think for yourself. The indicators on your computer — combined with the background work — are all you need.

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V. Diamond’s Methodology and Advice on Discipline and Trade Execution

Diamond’s Methodology and Advice on Discipline and Trade Execution An interview with Dick Diamond conducted by EWI’s Bob Stokes

Q: Trading is such a tough business that it usually does people in long before 45 years pass. If you had to point to one thing that has kept you in the game all these years, what would it be? Diamond: Discipline. It’s as important to trading as location is to real estate. Q: You talk about your trading principles. What are a few that every trader should be aware of? Diamond: One thing is to trade within your capital. This is essential to being effective on a long-term basis. It’s better to trade small to win small and possibly even trade small to win big. That’s how you keep your pulse rate and heart rate low. You can think well because you haven’t stuck your neck out there. Unfortunately, a lot of people trade big to win big or even trade big to win small. That just ends badly. Be conservative, be disciplined, and if you trade just a small amount of your capital, you’ll be successful. Q: Could you tell me about the 80/20 trade? Diamond: The 80/20 trade is based on indicators that create a specific trading set-up. A trader must act on this set-up immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five-minute chart, the 80/20 set up may come along a few times a day. If you’re trading a longer time frame, like off of a 120-minute or 240-minute chart, the 80/20 will come along less frequently, but when it does, the opportunity will be bigger. The 80/20 trade can be especially rewarding for position traders. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades. Q: What emotional factors do traders need to work on the most? Diamond: Traders must be calm and confident. You can’t be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques. Q: What’s different about trading today vs. when you started out in the 1960s? Diamond: When I started trading, execution took up to five minutes -- now it takes less than a second. Time is money, so computers provide a great advantage to today’s trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.

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V. Diamond’s Methodology and Advice on Discipline and Trade Execution

Q: Students spend the last half of your course applying your principles and methodology in real-time trading. This must be a tremendous value to the students. Diamond: This is a four-day course. The first two days are academically oriented. But it’s stuff you’re not going to get in an ordinary trading course. At the end of day 2, I explain my indicators and how to use them. On day 3, I trade live in front of them. For the most part, it’s worked out well. My trades are successful about 70-80% of the time. But, I am a human and have to take losses every once in awhile. But bad trades give me the opportunity to show students how to close a position out quickly. I teach students to look for an 80/20 trade. That means that you should feel in your gut that you have a 4 in 5 chance of winning as the trade sets up. People fail as traders because they take these 50/50 or 60/40 trades that look “okay.” You can’t really make any money on a long-term basis making trades like that. Q: A skeptic might say that your trading can’t be that great, or you’d keep it to yourself. Your trading is not just great; it’s legendary. Why do you feel so strongly about teaching others? Diamond: I just enjoy training people. Each course is only a four-day period. I did it for a while in 1987 and part of ‘88 and Bob Prechter recommended a lot of people to me. It was very fruitful on a personal level: I met so many people through those courses. I was doing it every week and finally realized I really wanted to get back to trading because I had gotten away from trading completely. Now I get to have my cake and eat it too. I’m still a full-time trader. Trading is what I love to do and what I want to do. I trade, but now I can still take time out for three or four days every six weeks or so and teach other people. It’s very fulfilling.

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VI. Closing the Gap Between Analyst and Trader

Closing the Gap Between Analyst and Trader Roberto Hernandez went from working in the finance department of an oil company to becoming a full-time trader and teacher. He also assists Dick Diamond in his trading seminars. He says the transition was rocky: “I lost more money trading than what an Ivy League School M.B.A. would have cost me. I paid a high tuition for my ‘trading education.’” A turning point in Hernandez’s trading career was when a friend recommended a book on technical analysis. He devoured the text, including a chapter devoted to Elliott wave analysis. Eventually Hernandez became a frequent visitor to elliottwave.com, and a subscriber to EWI publications. That’s also where he discovered the Dick Diamond Trading Seminar. He attended and “followed the rules” he learned from Diamond. As a result, his trading skills improved dramatically. He transformed himself into a successful trader. (He even shows his trading account statement during the seminar.) Here’s a Q&A that EWI’s Bob Stokes conducted with Roberto: Q: When you first started trading, why did your approach cause you to lose so much money? Hernandez: I based my trading purely on fundamentals. I studied balance sheets and listened to conference calls. It didn’t work. And it didn’t help that I started trading in 1999 at the peak of the bubble. I was familiar only with trading on the long side, not going short. Overall, I just didn’t know enough about trading markets. I had one of those nice Bloomberg terminals on my desk, but that didn’t make up for my lack of knowledge about the best trading techniques. Q: Since you’ve raised the subject, what are the best trading techniques? Hernandez: It takes Dick Diamond and me four days to explain all of the techniques and rules. Generally, I believe a technical approach is the way to go -- like using oscillators. That’s what turned things around for me. And it started with reading a technical analysis book by John Murphy. Plus, I had to get rid of all of the garbage I had stored up about trading. Q: What if the short-term trend moves in one direction, while the longer-term trend moves in another? How do you trade in that kind of environment? Hernandez: As you know, stocks can rally powerfully in a downtrend, and have corrections in an uptrend. A trader simply has to get in and out of trades in shorter time frames. But one thing I’ve learned: A trader who is flexible can do well in any market environment. The key is to follow all of the rules to the letter, no matter how the market is trending. Trading opportunities come faster during a bear market because the emotion driving market prices is fear. A trader just has to be ready.

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VI. Closing the Gap Between Analyst and Trader

Q: Can your trading approach apply to financial markets beyond stocks? Hernandez: Definitely. In fact, I’ve personally been trading highly liquid futures and forex lately. The euro has been a beautiful trade. Q: Why should a trader attend the Dick Diamond Trading Seminar? Hernandez: What we teach “closes the gap” between being an analyst and a successful trader. Dick Diamond and I provide students with the correct tools, and everything necessary to start trading. Trading is not for everybody. But for those who really want to trade, they can be successful. As we hear back from former students, we learn that those who are the most successful are those who apply the techniques and rules exactly as we teach them.

To learn more about Dick Diamond’s Market Mentor Trading Course, visit www.elliottwave.com/wave/DickDiamondTradingCourse © 2014 Elliott Wave International — www.elliottwave.com 11