FROM FAILURE TO SUCCESS IN TRADING

by David M. Knight
TradeCraze
http://123DayTrade.com

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DISCLAIMERS

U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures and Options
trading has large potential rewards, but also large potential risk. You must be aware of the risks and be
willing to accept them in order to invest in the futures and options markets. Don’t trade with money you
can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the
same. No representation is being made that any account will or is likely to achieve profits or losses similar to
those discussed on this web site. The past performance of any trading system or methodology is not
necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL
ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE
PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

All trades, patterns, charts, systems, etc., discussed in this advertisement and the product materials are for
illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and
material presented are entirely those of the author and do not necessarily reflect those of the publisher or
KnightCapitalManagement.com and DBA 123DayTrade.com. No system or methodology has ever been
developed that can guarantee profits or ensure freedom from losses. No representation or implication is
being made that using the Knight Capital Management, LLC. methodology or system will generate profits or
ensure freedom from losses. The testimonials and examples used herein are exceptional results, which do
not apply to the average member, and are not intended to represent or guarantee that anyone will achieve
the same or similar results. Each individual’s success depends on his or her background, dedication, desire,
and motivation.

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Manuscript on Trading

INTRODUCTION:

What are my thoughts concerning trading over the years?

As I sit at my favorite place to think, my local Barnes & Noble Bookstore here in
Greensburg, PA. I am reminded about how lucky I am to be alive and to be able to do
the one thing I am most passionate about trading ... outside of God, and my family.

Being an independent trader is the most enjoyable experience, I believe a person can
obtain. More importantly, here is one arena where a person can start with next to
nothing, and make themselves into something. You have the ability to truly reach for
the stars; if you fall short you can still reach the moon.

My first immediate thought on becoming a successful trader has to be the learning

process is a hand’s on job. There is no experience quite like your own experience as it
relates to trading.

What do I believe is true is it relates to trading?

The next conclusion concerning trading over a lifetime; you have to be able to survive
and thrive through turmoil.

The best teacher for a trader is experience. Many years ago, I use to wonder how a
person gains experience, if no one is willing to take the time to train a person. In my
pursuit of becoming a successful trader, my trading experience has been filled with
many twists and turns throughout my career.

There have been way too many books written on the subject of trading. My library is
filled with many of these so called trading ‘masters’. Whether they are a true master or
not, is not for me to say.

What do I know about trading?

To become a successful trader, think of it as a building process. Much like any

profession that requires training, you have to start at the foundational level to make any
progress on the journey.

I believe the toughest concept concerning trading is the overwhelming desire to make
money quickly, in this cut-throat environment. There has never been a week and now
with the lightning speed of email, a day, where I don’t see a 'get rich quick in trading
scheme' come across my trading desk.

In my early trading career, I fell for the same hyped-up mumbo jumbo sales letters. The
millions in a year stories. The latest greatest bread slicer trading method/system ... just
send $XXXX to this address or website.

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Why am I writing a book on trading?

My purpose in writing this book is to talk to the small account trader working hard to
make a living trading. The grinders out here, that have the never say die attitude. The, I
will survive, mentality it takes to become a success as a trader.

Being a trader is not for the faint of heart, after all, you may find yourself at the mercy of
the market, if you allow it to take control. Let’s talk a little bit about control … there is
no such thing as a single person having control of the market.

You may be able to influence the market as a big account trader for a short period of
time, but the market is much bigger than any one person or company.

Enjoy the Journey!

I believe, the journey a person goes on, can be the greatest gift I may be able to give you.
So enjoy the ride ... YOU ... the aspiring trader looking to take this journey with me.

The chart above is the eMini Dow Daily OHLC Bar Chart. My first trading course I put
online was called the eMini Bull Bear Trading Method.

In 2009 on YouTube, I recorded 9 videos documenting this trading strategy:

eMini Bull Bear Trading Strategy.

We will start our next discussion, in areas, I believe are important to understand as a
trader. They are: TRENDS, WAVES, and SUPPORT and RESISTANCE.

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TRENDS: HOW TO DETERMINE OVERALL TREND OF THE MARKET

The TREND (overall) as a DAY TRADER is determined from the DAILY Chart. This is
the big picture of the market you are trading, as a day trader. In addition, I like to utilize
the 50 Bar Simple Moving Average (SMA) relationship against the 200 Bar Simple
Moving Average (SMA) to help me determine the overall trend.

I believe, simply trying to trade a moving average crossover, without a momentum

indicator, is my definition of insanity. I have used all kinds of momentum indicators in
the past. Other traders use indicators like: CCI, MACD, RSI, Stochastic, Williams
PercentR and many other numerous indicators to help them trade in the markets.

What I honestly believe about trading, now after years of experience, is the most
important component to consider ...

What is the Mass Trader Psychology (MTP) of the Overall Market?

If you can determine MTP as a trader, then you will make more money than you lose.
Understanding MTP of the market you are trading determines the ultimate success or
failure of an individual trader.

In my opinion, the most efficient way to quickly determine MTP is to determine the
overall trend of the market you are trading. The chart directly below shows the first two
components of the eMini Bull Bear Trading Method.

They are Price Action represented by the Open, High, Low and Close (OHLC) Bars and
the 50 Bar Simple Moving Average (SMA) Line, represented by the rising black line
cutting through prices.

The SMA allows us to smooth out the Price Action. Additionally, it will show a snapshot
picture of the market trend. The Daily Chart below is from the eMini Dow, (Dow
Industrial 30 Stocks), which gives us our first glance of the overall trend, in the market
we are trading.

When the simple moving average (SMA) is going up then the overall trend of the market
is LONG a (Buy), meaning there are more buyers than sellers; the exact opposite is true
for the SHORT a (Sell) of the market.

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Now, the 50 BAR SMA by itself, can be a little deceiving. This is why I like to use another
simple moving average, the 200 BAR SMA, in addition, to the 50 BAR SMA. The
combination of these two simple moving averages (SMA), really helps paint a picture, of
the overall trend on the daily price action chart (OHLC).

For instance, if the 50 BAR SMA is above the 200 Bar SMA, then you would say the
market is in an uptrend, and the reverse is true for a downtrend of the market.

So, if we correctly determine the TREND of the overall market utilizing the 50/200 BAR
SMA relationship, then you will have a accurate picture of the market.

In the picture below, we would say the eMini Dow is in an UPTREND, because the 50
Bar SMA (black line) is above the 200 Bar SMA (purple line) on the Daily Chart.

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Wasn't that easy peasy lemon squeezy?

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WAVES: WAVES IN THE MARKET

One of my core beliefs concerning trading is this; a market trades in wave like patterns.

It will move up in a progression of waves, very much like when you watch a gentle tide
roll in, at the beach. At times the ocean and waves are rough, and at other times the
ocean and waves are very smooth; like glass. I would also agree, easier trading is
completed when the waves are in a smoother; more predictable environment.

Another core belief concerning trading; how volatile and aggressive is a market. This can
best be demonstrated in wave patterns; like a normal storm, a tropical storm or even a
hurricane. There is a time to trade and not to trade. Perhaps, the smooth, predictable
environment is like the consolidating trading ranges, when a market hasn’t shown
anything tradable. I find the easiness of the market in calmer waves is a more enjoyable
trading experience than extreme volatility.

Yes, it is a true statement, you need volatility in a market to trade it but ...

The market can become too VOLATILE to trade. The waves can become very violent
and the up and down extreme swings of a market will leave many traders terrified and
decimated, if they trade it. Extremely volatile markets should be a time when the small
account trader must stand aside, or you will risk too much of your trading account per
trade you take on.

So understanding the type of wave patterns, the ocean, will assist you as a trader.

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How is the water (WAVES) today?

Is it the cold, January, water of winter, the hot, July, water of summer or somewhere in
between?

Waves can be counted. This is the KEY to a trend with wave patterns.

Waves can be seen in Price Action, and in Moving Averages plotted on the chart. Price
Action by itself can only tell you so much. I know of traders who have the ability to
simply trade on the Price Action of the charts and nothing else. These traders are the
true surfers and artists of trading. They find it completely natural to be in a market and
understand Mass Trader Psychology (MTP) of a market.

For most of us; we need an indicator to help us in trading, but if you place too much
information on a chart, then you will not be able to place a trade at the appropriate time.
It is a fine line, between not having enough information to make a trading decision and
having too much information on the chart.

When you have too much information on your trading chart, then you will find yourself
paralyzed in your decision making process. If this happens to you in your trading, then
you need to reconsider the indicators you are using. Determine which indicators are
beneficial in your trading decisions or not.

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SUPPORT AND RESISTANCE: S & R in the Market

When you start talking about Support and Resistance, then you need to begin with the
highest time frame you are looking at to make decisions from that chart on correct
trading levels.

On the chart above, this is the Daily Crude Oil Candlestick Chart with all of the data that
is important as a trader.

Points of Interest on the Daily Chart:

• 50 Bar SMA
• 200 Bar SMA
• Pivot Points: PP, R1, R2, S1 and S2
• Major Support and Resistance Levels
• Minor Support and Resistance Levels

All of this information is extremely helpful to traders, but what exactly should you be
looking at on a daily basis.

We can determine the daily trend of the Crude Oil Market ... Down ... because the 50 Bar
SMA (Gold line) is below the 200 Bar SMA (Purple line). Therefore; until proven
otherwise, the crude oil market will make a better short (sell) opportunity than a long
(buy) opportunity.

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It is important to note, we are in a Price Action Pattern of what is commonly referred to
as a Trading Range or a Congestion on the Daily Crude Oil Chart. We are able to
subdivide the Support and Resistance areas into our daily target trading levels.

The most significant point on any Daily Trading Chart will be the Pivot Point. Notice, on
the Crude Oil Trading Chart above, this is located at 4558. This number will normally
change on a day by day basis. This is the most significant point of value where traders
are more apt to be short below the Pivot Point line, and long above the Pivot Point line.

Also looking at the Daily Crude Oil Chart, we are much closer to the Major Support level,
than to the Major Resistance level. To get these Price levels you look for the Highest
Point for Resistance on your chart data, normally going back a couple of months worth
of data from the charts. Likewise; we are looking for the Lowest Point for Support.

On the Daily Crude Oil Chart Shown Above These Levels are Currently:

• Major Support: 3850

• Major Resistance: 6400
• Minor Support: S1 Line 4407 and S2 Line 4311
• Minor Resistance: R1 Line 4654 and R2 Line 4805

Additionally, what is seen on the Daily Crude Oil Candlestick Chart is our 50 Bar SMA
and our 200 Bar SMA levels are above Price Action. Once again, this confirms that
traders would much rather be a seller, than a buyer given the current Price Action of the
Crude Oil Market.

In summary, the best chart to start formulating Support and Resistance Levels is the
Daily Crude Oil Price Action Chart, then working your way on down to the chart that is
utilized for your trading decisions. By accomplishing this task, you will have a top-down
approach to your trading decisions and you will take advantage of the best possible
trading opportunities as they develop.

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3 V's OF TRADING: Volume, Volatility and Velocity

What did Nikola Tesla and William Delbert Gann have in common?

This got me to think about the significance of these two individuals and the time they
lived in. Once again, I am a firm believer that there is nothing new under the Sun.

At some point, they got it ... and now I am starting to become clear about the
significance of their discovery ... or should I say ... their rediscovery of ancient
knowledge used in their own time.

It is quite simple in scope, but extremely deep when you really contemplate and logically
summon and harness your power in understanding the simple with the complex.

The rest of this discussion will center around the numbers 3, 6 and 9 ... and for my
purpose how this information can be interpreted to help us as traders as I have come to
understand Gann and Tesla in their time brought to our time.

What are the 3 V's of Trading: YouTube Video

1. Volume
2. Volatility
3. Velocity

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Pretty easy concepts to start seeing when you know what you are looking to achieve on
any given trading day. I believe, we make trading harder than it should be, because of
two key factors; fear and greed.

Have you ever given any thought about how small we are in relation to the universe? Do
you remember when your dad was your Superman? I do.

I also remember the beatings I received as a child right or wrong is not for me to decide,
but the luster of the Superman wears off as time moves on doesn't it.

But I do believe in a Creator God of this Universe from the

tiniest molecule to the vastness of space, if you seriously
take the time to look and ponder ... you will see intelligent
design of everything.

As traders, we are taught different concepts called Chaos

Theory and Occam's Razor. Are they one in the same or
completely different trading models?

We are taught about the Madness of Crowds like the Tulip Crisis of Holland. This
coincides with the loser is the last one holding the bag when the air is let out, right? In
other words, the market will go up as long as there is a 'greater fool' than you that will
buy it.

Back to design ... intelligent design. Have you ever watched ants at work? They are what
I will call driven insects with a purpose, just like the ordinary honey bee.

Honey Bees work in concert with the flowers of Spring. This

allows the beauty and wonder of Spring, while giving and
receiving nourishment from each other. But there is design
in the simple honeycomb.

So this is all great and good, but what does this have to do
with Gann and Tesla? Here it is in a nutshell ... reference to Austin Powers. I believe, if
you limit yourself then you are simply allowing yourself to see the small picture instead
of the big picture. You need to be aware of both when you are trading.

Yes, there is design and there is intelligent design. You see the world over and over ...
you can see the six sides of the honeycomb, or the entire beehive plus the honey bee(s)
that created the honey.

To have a market, it has been said, you need a buyer and a seller. This is true to the
extent that there is an event, much like when the bee arrives at the flower. There is an
exchange and there is a consideration given to each side. The market continues to march

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on with or without us, but regardless, there is design in everything you see, feel and
touch.

When you start seeing the market through the lenses of 3,6, and 9, then I believe that is
what Gann and Tesla were trying to communicate. There is design and a purpose for the
design.

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VOLUME VS RISK: Volume versus Risk In Trading

In my humble opinion, I have struggled as a trader in placing the 'R' (RISK) over the
years working on the CL Power Trading Method. In other words, should I be at 1/2R,
2/3R or at 1R on my stop loss after I enter the trade.

Most of the time, 1/2R is enough to make the trading decision on the CLPORT Method,
but at select times it is not the optimum level for the stop loss.

Trading days like today happen where I take on more trades than what I would like
trying to position myself on the trade. Before I can get positioned for the profitable
trading day, I run into my Max Daily Loss inside the trading day.

Looking at the chart below, and the video I placed up on YouTube: Volume Versus Risk,
I hope this helps you in your trading as it will help in my trading decisions going
forward.

By implementing the R-Risk versus the V-Volume in Trading ... I will be in effect
allowing the market volume spike bar to determine how many ticks I should be risking
given the trade.

In a nutshell, I have determined a level of ticks for a stop loss from 400 in Volume to
above and beyond 2,000 in Volume on one Volume Bar.

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In today's trading example, we had a Volume Spike Bar of 1725 at 7:39AM CST. This
means it is above 1000 in Volume ... so this should tell me for my CLPORT Method
trade I should use 1R in RISK for the trade.

Today, this would have meant a 23 tick stop loss on the trade entry of 4425. This would
have placed the Stop Loss on the Long Signal at 4402 in the Crude Oil Market.

Bottom line, you need to determine how far and how much you should be willing to
RISK on any given trading opportunity.

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VOLATILITY VS RISK: Volatility versus Risk in Trading

What can I say ... I had to eat a piece of humble pie on Wednesday, as I hit my Max Daily
Loss and lost my Funded Trader Account. I will talk more on it as I feel like talking
about it.

CLPORT Method: Trade #1 Short 2 at 5000 at 8:11AM CST.

I think one of the toughest things about trading is getting back up on the horse after it
has kicked you off. I am working on the $50K TST Trading Combine now; instead of, the
$30K TST Trading Combine.

I am starting my sequence at 2 trades now. I would like to move to breakeven on the

move to 1P, but you have to respect the $50 a barrel level on this trade. I am looking for
a 3P profit target on 2 contracts this Friday.

What I really want you to get in this section is the following; trading setbacks will
happen. It is how you handle the trading adversities, which will determine your eventual
failure or success in trading.

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Crude Oil Market reaches down to 1P and then marches back to $50 a barrel. I took
what I could from the trade ... trading 2 contracts. 1 Contract Trade Exit at 1P at 4972
and the 2nd Contract Trade Exit was removed at 4997 a little bit later as the market
went back to $50 a barrel.

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Profit Factor on trade was 31 ticks versus 26 ticks overall. I was risking 2 trades at 13
ticks each. I was able to get 28 ticks on the first contract and 3 ticks on the second
contract. The Crude Oil Market moved back to breakeven and back to 5000 level.

Over the years, I have debated about how many ticks I should take on the 1st contract ...
should it be 1P ... 2P ... or 3P? This has and will be a continual debate for me. Today, I
wanted to give the market room to run down quickly, and then I took one contract off as
the market was getting stronger on the way up as the trading chart shows above.

Trading is definitely a balancing act. But the most important component as it relates to
TST (TopStepTrader) is to NOT ruin your chance at trading real money. I did this on
Wednesday. As you know, I don't like to track my dollars versus my ticks, and I ran into
the max daily loss as I had my 1R at 23 ticks on Wednesday. I took two quick losses and
it brought me over the mark with slippage and I lost my funded trader account at TST.

I am not eligible for the Trading Redevelopment Opportunity, because I broke rule
number one, which is very disappointing. I have been moved to the $30K TST Trading
Combine.

Yep ... I am back in the TST Combine ... sucks to be me man! I had only 5 days in the
TST Funded Trader Account before I screwed it up. It isn't the loss I am disappointed in,
as I have had much greater losses and recovered from them.

My disappointment comes in the fact that I was in ... and now I am not. I was looking
forward to a cash Christmas, now this will not happen. I got the cart before the horse.

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Volatility versus Risk is a very key component to your trading plan. But, as you are
trading at TST, you also have to consider risk of ruin against the Max Daily Loss every
trading day. I have been very good at stopping before I got to it. This did not happen on
Wednesday and I am paying the price for it.

As first, I thought I would be eligible for redevelopment, because the program doesn't
mention anything other than a negative trading account balance to go into
redevelopment. I still honestly believe this is a true statement, but those with the gold ...
they make the rules don't they!

We will continue this discussion on Volatility versus Risk on another training blog post.

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VELOCITY VS RISK: Velocity versus Risk in Trading

Velocity and Volatility are very similar in nature, but there is a difference. Hopefully,
during this trading discussion concerning Velocity Vs Risk, it will make a lot more sense.

Volatility is defined by how much the average movement of the market you are trading
is moving on a day to day basis. For instance, a 1R or 10 tick movement in Crude Oil is
less volatile, than a 3R or 30 tick movement for a stop loss. In dollar cost, this is $100
versus $300 as it relates to the Crude Oil Market.

When I first started the concept of "R" I used a concept of what I called Average Daily
Range (ADR). I still use this concept to determine the Volatility. Velocity is closely tied
to Volatility, because you can't have one without the other.

Crude Oil Futures Market: 5 Minute Candlestick Chart

How FAST is the Futures Market Moving?

Velocity is more specifically how "fast" the current market is moving. When you are
trading the Crude Oil Futures Market, then this can be best seen right at the open of the
trading session in the USA. Velocity is also closely tied in with Volu me.

When you are looking at your futures trading charts, then you may notice that a high
spike volume bar will show up. This High Volume Spike (HVS) comes into the market,

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then the market seems to pick up steam and the trading bars (candlesticks) print much
quicker.

When the market is moving slow or fast, then it is best seen on a tick chart versus
another chart like a 5 minute chart.

Crude Oil Futures Market: 5 Minutes of Tick Data

In the Crude Oil Futures Market, you can count on one report each week, which will
influence a quicken the pace of the trading day. Normally, on Wednesday's at 9:30AM,
the Crude Oil Market Releases the Crude Oil Inventory Report.

The next trading chart below shows the open of the Crude Oil Futures Market on
October 22nd, 2015, specifically the time period of 8:00AM to 8:05AM CST is bracketed
off. This will allow you to see velocity of the market a lot better. Let's compare this tick
chart against the tick chart right after the report release.

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Crude Oil Futures Market Tick Chart at the Open 8:00AM CST:

Crude Oil Inventory Report Releases at 9:30AM CST:

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How About Velocity and How Do You Trade It Profitably?

At other times, one minute of data can bring a lot of trading candlestick bars. Look at
what happened on October 28th, 2015 at 9:00AM CST. Yes, this is just one minute
worth of data being represented.

By now, you should be able to see, if you were able to know in advance which way the
market is going, then you would be a very wealthy person. Now, becoming a successful
trader is all about having an edge and trading your edge.

Crude Oil Futures Tick Chart 1 Minute Worth of Data:

Just comparing these three charts, then you can see the that one is three times greater
than the other chart on the same 5 minutes worth of data component.

Here is where you can say, the Velocity of the market is triple what it is normally. Once
again, both charts are tick charts and both are 5 minutes worth of data compressed into
this manual to show you what each time period can look like at different periods of the
trading day.

And on the other or third chart, then you can see how truly fast a market can move when
it is either driven on an event or somebody or group of people positioning ahead of
something they believe. You would call this people in the know.

I hope this helps in your understanding over Futures Trading in the Crude Oil Futures
Market.

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THE MORAL OF THE STORY: From Failure to Success in Trading

Honestly, there have been so many countless number of trading books written about of
all things ... trading. What makes me different, you ask? Well, I can say without a doubt.
I am a day trader.

When you are NEW to trading it can be an overwhelming experience. There is so much
information that will make your head spin and your body doing cartwheels. There is no
short supply of opinions on the "HOW TO TRADE."

What I know has been gleaned from the master teacher ... experience. By my failures, I
have written this trading book. From my successes and persistence, the pages of this
book come alive.

So what can I possibly say that hasn't already been said before? The honest answer to
this question is nothing. There is nothing new under the sun. It is only repackaged and
sold again from another person that has learned his lessons as a trader.

What works for me, may not work for you in your personal trading ...

But, with that being said, I definitely know the principles I have taught in this short book
are valid.

The 3 V's Of Trading:

• Volume
• Velocity
• Volatility

These concepts will stand the test of time as they have already stood on the backs of other
traders much better than myself in explaining these trading concepts.

What I know is this ...

The Market Has All Of These Characteristics:

• Trends
• Waves
• Support and Resistance

These are the main points of this short trading book. To learn these concepts and more
importantly start seeing them correctly is my overall goal to you ... the day trader. In the
end, if I have taught these concepts effectively and efficiently, then I have accomplished
my goal of teaching you about day trading correctly.

Ready to get started: 123DayTrade.com/dts

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