TuffTrade- Day Trade Smart

Bailout for the Porn Industry?

2009-01-08T00:08:00Z

I don't generally post anything unrelated to Trading, but today there was market related news story so compelling that I just couldn't ignore it. Check out this story Porn kings Larry Flint and Joe Francis go begging for a bailout

Now I pose a challenge to my readers. Can anyone come up with a convincing argument why the porn industry is not every bit as deserving of bailout money as the financial institutions that have already received it? If you can, go ahead & post it in the comments section. Anyone who is able to convince me will not only be personally recognized on this blog, but will receive a personal letter of recommendation from me for a high ranking position in the Treasury Dept (and you know what that's worth).

Day Trading Mindset

2009-01-07T16:54:00Z

Here's a short post that could have Big impact on your Day Trading. A simple yet profound statement.

When you trade, you must be in a mindset of Calm, Alert, Focus

Spend time to consider this. Think about each of the 3 words and their implications: Calm, Alert, Focus

So how do you achieve the mindset of Calm, Alert, Focus? The first step is to simply think deeply about it, and come to really believe that if you could achieve it, that your trading would improve. And it almost goes without saying that you need a quiet place to trade, free of distractions.

While you are trading, periodically try to notice if you are in the proper mindset. Suppose you just took a big loss on a trade. You're angry about the trade. This is the second losing trade in a row! Now you're starting to think about jumping into a quick trade to "get even". So now you ask yourself: Am I in the mindset of Calm, Alert, Focus? Since the answer is certainly NO, the smart thing to do is get up and walk away from the computer for a while.

Every trader must discover for themselves just how to achieve this proper mindset over a period of time. Sorry, it's elusive & there's no simple trick to it.

Calm, Alert, Focus is similar to the concept of FLOW, originated by the psychologist Mihaly Csikszentmihalyi. He wrote an excellent book called "Flow". Although it is not specifically about trading, I highly recommend it to all Day Traders. Interesting, a few of the most valuable books for traders are not specifically about trading. And this is one of them.

BTW, the next installment of the post Take up Arms in your Day Trading with the TRIN will appear soon.

Take up Arms in your Day Trading with the TRIN

2009-01-05T00:15:00Z

The TRIN, also called the Arms Index, was first developed by Richard W. Arms, Jr. My apologies to Mr Arms & all my readers for the title of this post.

This is Part One in a series on the TRIN.

Ever see any of those trading contests where each trader who enters starts with the same amount of money in his account, then after a certain period of time the trader with the largest account wins? Imagine there's the Minimalist Traders Contest with big prizes, with only two strict rules:

Day Trade any stock or Future you like (no overnight positions)
Your charts are allowed to have price bars or candles of the item you're trading, but you can choose ONLY ONE other technical analysis tool.

So you could choose Stochastics as your technical analysis tool . Or you could choose RSI. Or Moving Averages. Or Bollinger Bands. Or CCI. Or Put/Call ratio. Which would you choose?

I wouldn't even have to think about it. I'd choose the TRIN.

So what exactly is the TRIN? It's a way of comparing the number of stocks that are advancing or declining in the market, to the volume of trading occurring in those advancers & decliners. So for example if there were more advancers than decliners, that would sound bullish. But if not only were there more advancers than decliners, but the advancers were getting more than their share of the Volume, that would REALLY be bullish. And that's the type of information the TRIN gives you.

The formula for the TRIN is:

Number of Advancing Stocks / Number of Declining Stocks
Advancing Volume / Declining Volume

The TRIN was originally applied to NYSE data, but later was applied to other markets as well. So now you have:

NYSE TRIN
NASDAQ TRIN
AMEX TRIN
RUSSELL 2000 TRIN

Part Two in this series on the TRIN will be posted soon...

Impulse Trades and the BEAST, Part 2

2009-01-04T01:31:00Z

This is the second part of a two part post. If you have not read the first part Impulse Trades and the BEAST I would advise you to read it now before proceeding.

Based on the thoughtful comment to by a member of the Trade 2 Win forum called 'nine", here are more ways to defeat the BEAST and thus reduce Impulse Trades.

For many traders the BEAST tends to show up right after a losing trade. If you recognize this pattern in your own trading, then after each losing trade physically do something to make it impossible to make the Impulse Trade. Like actually change your trading platform to a mode where it is impossible to enter a trade. Or get up & leave the room where your trading computer is. Or set a timer after the completion of each trade & add to your trading plan that no trades will be made until so many minutes have elapsed from end of the previous trade.

Get in the habit of noting each component piece of your setup as it occurs in real time. This could be done by saying it aloud, writing it down on a piece of paper, or typing it on the charts on your computer screen. The basic idea is that you do not enter a trade until all the correct parts of your setup have been noted. This helps keep the mind in planning mode which tends to crowd out the BEAST.

Concentrate on developing a mindset of calm alert focus at all times when you are trading. As you do this, try to notice when you are in this mindset, and when you are not. This is not a quick fix. It will take time develop. The goal is to be able to enter this mindset most of the time when you are trading, and to able to recognize when you are just not in the mindset of calm alert focus. When you are not in this mindset, you should not be trading. That's when it's likely the BEAST may be paying you a visit.

Impulse Trades and the BEAST

2008-12-29T22:24:00Z

As you exit that losing trade with a painful loss, you curse under your breath and say "Why the hell did I make that stupid trade!!!" You can't believe it happened again. He just made another Impulse Trade.

Being a serious trader, of course you have a Trade Plan with specific criteria for entering trades (more on Trade Plans here)

But when you enter a trade that has nothing to do with your Trade Plan, that's an Impulse Trade. For many traders making Impulse Trades is a big problem.

The strange thing is many traders know intellectually that making impulse trades is dumb, yet they continue to do it anyway. They seem unable to stop. What's going on here? Why do you do it? The short answer is that the BEAST makes you do it.

That's right, the BEAST makes you do it. What the heck is the BEAST? It's an appetite that originates in the biological, animal side of human nature. It is a very real place in the human brain based on how we evolved from more primitive creatures. The BEAST is that part of the brain that seeks pleasure but doesn't care about the consequences. And it doesn't want to wait. It's the very same thing that compels the alcoholic to take that next drink. In the alcoholic, the BEAST is easy to understand - it wants the pleasure of the next drink, but doesn't care about the consequences like liver damage.

Would psychologists or neuro-scientists ever use the term BEAST?. Of course not. It's just a descriptive way to describe the phenomenon.

The concept of the BEAST may sound a little far-fetched, but it sure does explain a lot of irrational self destructive human behavior. Think about the guy who engages in unprotected sex, knowing full well the consequences. Think about the severely obese person who sits down to eat a half gallon of ice cream. Think about the kid speeding along at 95 miles an hour, knowing full well if he gets one more speeding ticket he's going to lose his license.
So what on earth does any of this have to do with trading? In the trader, the BEAST wants the pleasure of big win, but doesn't care about the consequences of wiping out your account. Or it just wants the excitement of the trade.

Suppose like many traders you do have some problems with Impulse Trades that have baffled you in the past. And now maybe you're thinking: As strange as this BEAST idea sounds, maybe there's something to it. But how can this help me trade better? Simple. The next time you're about to pull the trigger on that big trade, just pause a few seconds and ask yourself if the trade really meets all your setup criteria, or maybe it's the BEAST telling you to act.

Useless Tip Lists

2008-12-28T18:44:00Z

Ever notice how many trading articles out there include useless lists of tips that will supposedly make you a better trader? The TuffTrader is looking for valuable information & insights, but ends up wasting time wading thru Bird Poop like this.

Two minutes of Google searching and a little copying & pasting, allowed me to find a couple of examples to show you what I mean. These were just the first two I happened to come across. The following are real articles from the Internet, from which I just copied out the tips lists and deleted the rest of the text for clarity.

The first is article is called "5 Ways To Improve Your Investing Skills"
1. Do Your Research
2. Evaluate Your Financial Goals
3. Don’t Be Hasty
4. Weight your risks
5. Continue Investing

The second article is called "Tips for Winning at Day Trading" (from Businessweek, believe it or not)
1. Have a system and stick to it like Crazy Glue [OK, this one tip I would admit has true merit]
2. Cut your losses
3.The only thing you have to fear is fear itself
4. Don't get greedy
5. Worry about what you can control. Ignore what you can't
6. The market is always right.
7. A little bit of technical analysis never hurts.
8. Don't try to catch a falling safe
9. Buy low, sell high
10 - 14. Blah, Blah, Blah, more of the same not even worth my effort to copy & past

Ok, so why are all these tips a useless waste of time? Here's the TuffTrade Tip List for Spotting Useless Tip Lists:
1. You've heard them all before a million times
2. They are so general as to be impossible to apply
3. The are so obvious that if you don't already know them you have no business trading anyway
4. They are not Falsifiable

That said, here's the TuffTrade Cynical Tip List, guaranteed to be Original, contain no Bird Poop and not be a useless waste of time:
1. If someone tells you to buy this or that stock because it just can't lose, punch him in the nose, then run like hell
2. Instead of listening to paid stock analysts, you are better off getting advice from cab drivers.
3. The more time you spend listening to the financial news, the worse your trading results will be
4. Every trader should read the book "Extraordinary Popular Delusions and the Madness of Crowds". Even though it was written in 1852, it's better than whatever the flavor of the month trading book happens to be.
5. If you can think of another way to earn a living aside from trading, do it.
6. You can learn a lot about the markets by watching a herd of Wildebeest. Think crowd behavior. As a trader, don't be a Wilderbeest.
7. Spend a minimum of 1000 hours learning about the markets before you even consider putting any real money at risk
8. Many of the celebrity traders made the huge money they did thru illegal means. Think Michael Milkin, Ivan Boesky & Bernard Madoff . Since you probably don't intent to break the law, you are at a distinct disadvantage

Day Trading Lesson: Roadmap Step 12

2008-12-26T18:14:00Z

In my post Day Trading Lessons: The Roadmap I present a list of steps to learn to Day Trade. Here are the details of Step 12:

Sim-Trade profitably

If you've been following the last 11 lessons in this series, you now have a Trading Plan.

How do you know if you have a good (profitable) Trading Plan? Follow it to the letter for a few months in SIM mode, and if you make a lot of money, then you probably have a good Plan. No matter how good you think your plan is, you're only going to know for sure by actually following it for a while. OK, suppose you did follow it for a few months and end up losing money (luckily, not real money)? Hopefully after this experience you've learned enough over the months to modify your trade plan to one that works.

Just in case you are not familiar with SIM trading, it's short for SIMulated Trading, and also called Paper Trading. It's a service available from many brokers where it looks and feels just like a real trading account, except you are only trading play money.

One reason to SIM trade prior to trading cash, which few people would argue with, is simply to get used to your trading platform. In other words, to avoid entry errors while you are learning the particular software you will be using enter & exit trades. You want to avoid the shock of opening your account one morning, noticing a huge unexpected loss, and thinking to yourself "I thought I had exited that position yesterday". Oops!!!

The use of SIM trading to test your Trading Plan, however, is more controversial. A lot a smart traders would argue that you are wasting your time, because when real money is on the line you will trade differently than when you know it's only play money. While I agree this arguement has some merit (you probably WILL trade differently when real money is on the line) I still stick to my advice above: To test your Trading Plan, follow it to the letter for a few months in SIM mode. Keep reading ...

You could break down the ingredients of trading profitability into 3 components:
Component 1. Having a good Trading plan
Component 2.   Successfully dealing with your emotions to allow you to faithfully execute your trading plan
Component 3.   Making good judgment calls within your trading plan.

It is Component 2 that critics would argue makes SIM trading a waste of time. Will you react the same way losing $5000 in hard cold cash than if it was just play money? Probably not. To minimize this drawback to SIM trading, you have to do everything possible when you SIM trade to treat it exactly like you were trading real cash. So pretend you are trading real money. Get excited when you have a nice SIM win and scold yourself when you make a dumb mistake that causes SIM loss.

Here's a method you can try, to help you care more about your wins and losses in SIM mode. And of course caring helps the experience be psychologically more like really trading cash. Make a vow to yourself that you will not trade cash in until you have met some specific goal in your Sim trading. For example, your goal could be to Sim trade with a minimum $250 per week profit, for 4 weeks in a row before you start trading cash. Since you are eager begin trading cash to really see that money start coming in, every winning Sim trade feels good because you know you're getting that much closer to trading cash, and every losing SIM trade feels bad because it puts it that much farther away.

Still on Component 2, let's say you SIM trade your Plan for a few months and you end of LOSING a sizable amount of play money. Then you know almost for sure that your Trade Plan is no good. Because if you were to use the same plan to trade cash, it's likely the added emotions of trading cash would cause you to trade worse, not better. Now suppose  you SIM trade your Plan for a few months and you end of EARNING a sizable amount of play money. Then you start trading cash, but you start LOSING money.  Now you can assume you have a good Trading Plan, but are not successfully dealing with your emotions to allow you to faithfully execute it. Ok, so it sucks that you spent all this time only to lose money, but at least you have a logical direction to go in to try to fix the problem.

What about Component 3? What do I mean by "Making good judgment calls within your trading plan "? It has to do with how you decide to enter and exit trades, whether it's more mechanical or more discretionary. Mechanical entry and exit methods are predefined in such a specific and rigorous manner that they  require little or no judgment on the part of the trader to make the trading decision.   Discretionary methods are predefined in a more general way and thus require much more judgment. The more discretionary your entry method is, the more often you will find yourself asking this question: "The charts show that the minimum criteria of my setup has been met, but is this a high enough probability trade to pull the trigger?" Answering this question wisely requires good judgment, and the best way to develop this judgment is through SIM trading. The idea is by making trade after trade, over time you begin to develop this judgment. Whether you SIM trade or not you'll still probably have to go through this learning period, but SIM trading is kinder to your account balance.

So quit reading blogs, you've got work to do.

Day Trading Lesson: Roadmap Step 11

2008-12-24T17:13:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 11:

Create a Trading Plan

A Trading Plan is a business plan for your trading business. It essentially defines everything that you will do in order to earn money trading. It puts into a formal statement a lot of the thinking that hopefully you've already done if you've your way through this roadmap to this point.

The problem that many traders have is they have not carefully thought out a method that is likely to be profitable over the long term, and they don't consistently practice of profitable method day after day. Your Trading Plan is a good tool to avoid this problem. So if you want to stand a chance of making any money in the markets, he damn well better have a good trading plan and the discipline to follow it.

There are 4 "Rules" to creating your Trading Plan. Other than these, a "good" Trade Plan can vary quite a bit depending on your personality and style.

1. It must be carefully thought out over a period of time

2. It must be in writing

3. It must include Risk Management

4. It must include your Edge

Here's an example of a Trade Plan to get your started:
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Miracletech’s Superior Trade Plan

Date ____________

Plan was modified on this date ________

Edge
The purpose of this plan is to define my “edge”, ie a system that has better than chance odds of creating profits. A good edge in general will either produce more winners than losers, bigger winners than losers, or both. A good edge is much more than just a setup. All parts of this plan should contribute to my edge.

Discipline
Without the discipline to follow this plan, it is useless

Markets
Example 1. I trade emini futures on an intraday time frame. I trade only YM & ES, to allow max concentration. Since I only trade these two, I have been able to watch them long enough to have a pretty good idea of their “personality”.

Example 2. I trade NASDAQ stocks on an intraday time frame. I trade these 8 stocks _______ only, because my research shows me that they have good volume, trend well & prices vary enough to make a profit

Example 3. I trade NYSE stocks on an intraday time frame. I trade any NYSE stock that meets my criteria that day. I use a scanning software called _________ to help me find stocks that meet my criteria that day.

Recording
• I will enter every trade I make (Sim or cash) in a spreadsheet
• I will make a diary entry every day I trade or work on trading

Daily Trade Routine
I follow a written “Daily Trade Routine” (a separate document), which includes the most important tasks I need to do every day. This facilitates good habits, discipline & consistency.

Need for consistency
I need to follow the same procedures day after day. This allows me to evaluate if my techniques give me a long term edge in the market. After a period of time I can make a specific changes to my Trading Plan, try it for a while, & see if it improves my profitability

Healthy Balanced Lifestyle
Living a balanced lifestyle is important because not only will it make me a happier person, but will make me a better trader.
The main reason I choose trading for a living, is to give me the lifestyle I want, including freedom from corporate BS & unlimited earnings potential. But trading itself tends to create an imbalanced lifestyle (since it involves sitting alone for hours in front of the computer), so I must work to create balance. Elements of healthy balanced lifestyle are:
• Good sleep habits
• Exercise
• Proper diet
• Limit alcohol & caffeine
• Spending time away from trading w/o thinking about trading
• Spending time outdoors
• Spending time with friends & family
• Having fun

Risk Management
If I want to do this full-time & be successful, I must be make my initial investment last as long as possible during the learning curve.
At this point in my development I will only trade 1 contract at a time. To be re-evaluated later as I become a more experienced trader.

Maximum risk per trade is $55. This is assured by having a 10 tick stop automatically entered each time I enter a trade. Allows for 1 tick slippage.

The max I will ever lose in any one day is 2.5% of my total acct. Since my starting acct is $____, that’s $____. If I ever lose this much in a day, I will stop trading for the day.

The max I will ever lose in any one week is 5% of my total account. Since my starting acct is $_____, that’s $_____. If I ever lose this much in a week, I will stop trading for the week.

More specifically, I will not enter a trade that could potentially cause me to lose more than my daily or weekly max. eg, if I were down $205 on the day, and my max daily loss was $250, I could not make any more trades because a Stop Out of $55 would cause me to go over the $250 /day max loss

As my acct size changes, I will re-calculate the dollar amounts of my max daily loss & my max weekly loss. I will always know what these amounts are before I begin trading for the day.

Setups
I play 2 & only 2 setups. These setups are specifically defines in a separate document. I never enter trades that do not match my setups. However there may be times that a proper setup forms, but I decide not to enter a trade

The Charting package I use, which is _________, has been configured to view these setups properly.

Trade Entry & Exit
I use a DOM (ladder) to enter & exit all trades, The name of the DOM is use is _______. I use a _______ order (fill in Market, Limit, etc) to enter trades. I use a _______ order (fill in Market, Limit, etc) to exit trades,

Trade Management
Once I have entered a trade, I use the following criteria to decide when to exit the trade.
1. ________
2. ________
3. ________

This criteria has been carefully thought out to produce the largest winners and the smallest losers in the long run.

Scheduled Announcements
Prior to making any trades, check to see what announcements are scheduled to be made during the trading day. Do not trade during & just prior to a “big” announcement. This is because prices often bounce wildly and unpredictably during Announcements

Note: Any numbers or dollar amounts in the above of course are examples only.

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OK, so hopefully you think my example Trade plan has some merit, and gives you some good ideas to help you create your own. Or maybe you think it sucks! Feel free to flame me. The point is not to use the Miracletech Trade Plan, but to create your own trade plan.

Still thinking about trading WITHOUT a Trade Plan? I have a better idea. Why not take the money you were going to put into your trading account, and donate it to MAKE A WISH . The money will be gone anyway, but you'll feel a lot better giving it to a worthy charity than to another trader who has a Trading Plan (and a clue).

Day Trading Lesson: Roadmap Step 10

2008-12-21T16:10:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 10:

Define your Trading Edge

The main principle behind Day Trading, is that for a particular stock or futures contract, at certain points in time there is a greater probability that price will increase than decrease, and at other points in time there is a greater probability that price will decrease than increase. So if at 10:32 a.m. you determine that EBAY stock has a greater probability that price will increase than decrease, you enter a Long trade. And if at 11:47 a.m. you determine that the DOW e-mini futures contract (YM) has a greater probability that price will decrease than increase, you enter a Short trade.

Now that you have entered a trade, you have to make the decision when to exit the trade, either to lock in profits if the trade moves in your favor, or to minimize losses should the trade move against you.

The specific criteria that you use to make these entry and exit decisions is what I call your Trading Edge.    As a Daytrader a large part of your Edge will be a specific chart "setup", meaning that you enter a trade when your charts match a specific criteria.   Suppose you want to trade the YM. You could configure a one minute YM chart with a 10 period Moving Average and a 20 period Moving Average. Your setup could be as simple as entering a Long trade when the 10 period MA crosses above the 20 period MA, or entering a Short trade when the 10 period MA crosses below the 20 period MA. Then you exit the trade once a profit target of 20 ticks has been reached, or a stop loss of 10 ticks has been reached, or the moving average crosses back.

OK, so here's one possible Trading Edge and setup to use. It meets the minimum criteria of the trading edge because it specifically defines your entries and exits. But the big question is: will this trading edge truly give you an edge? That is, will it give you a greater than even chance of making a profit? The only way to know is to look at historical data. So you look at old to charts see what happened every time your setup formed in the past. A good edge will provide either more winners than losers, or larger winners than losers, or even better both. How many past setups do you need to look at in order to be sure that you truly have an edge? The only answer I can come up with, is enough to convince yourself that actually have an edge (it's your money).

As you look at each past setup that would have met your edge criteria, record in a spreadsheet what the profit or loss would have been if you traded it. It's easiest to keep the trade size the same for each, say 100 shares (for stocks) or 2 contracts (for futures). Figuring commissions also to make it real more realistic. After you've recorded a couple of hundred setups, if it shows a nice big profit, and you have some confidence that your edge is a good one.

There are automatic backtesting programs will allow you to automatically test your edge over a given time period, without the necessity of actually viewing the charts themselves. Then they'll even produce a nice pretty report with all kinds of facts and figures. Should you use an automatic backtesting program, or just manually look for setups one by one on a chart that goes back a suitable length of time? I look at it this way. Manually combing through the charts will give you valuable screentime. Automatic backtesting programs won't.

So let's go off on a little tangent and talk about screentime. If you asked me to say in one sentence the most important thing a newbie can do to develop his skills as a Daytrader, I'd say "Get a lot of screentime".   In other words, watch the charts of whatever you plan on trading for hours and hours and hours. And then watch some more. Watch in real time, watch in replays, or view static charts. Just watch. Suppose you watched the YM in real time for 500 hours. You might start seeing patterns in its price movement, what you might call its personality. You might begin to anticipate its moves. Not seeing any patterns? Not anticipating any moves? Try watching another few hundred hours.

Obviously there are an infinite number of chart criteria you could use in defining your trading edge. Like different timeframes (one minute charts. 5 minute charts, 9 minute charts, etc). Like different technical indicators (stochastics, moving averages, MACD, RSI, Bollinger Bands, CCI, etc). Like the Tick and the TRIN. Like Indexes. So how begin decide which to use in defining your trading edge? One way is to look at what other traders have done, which I discuss below.    Play with some ideas by setting them up in your charting package, then hunker down and get that screentime with them. What seems like it might work?

It's my contention that you must develop your own edge. You can't simply take another trader's edge and start using it. I could write an entire post on why this is the case, but let's stay on topic and save that for another time. The good news is you don't have to develop your edge totally from scratch. You can take some basic setup ideas that other traders have developed, and then modify them, combine them, mix them and match them, to make them your own.   Here are 3 links with lots of setups to get you started:
Trading Naked setups (don't worry, no porn)
Forex Strategies Revealed (written for Forex but IMHO applicable to Futures too)
Floor Trader Method (at first glance looks kinda old, but definitely worth a look)

Wanna see an edge with an entire free educational website devoted to it? it has a manual with several specific illustrated setups. And it has a free chat room where they actually show you the trades in real time and you can ask questions. Then check out
Woodies CCI Club. This is an excellent place for any newbie to learn about trading, even if you have no intention of using their specific setups.

Expect that it will take a long time to develop your trading edge. So don't become discouraged when it does.

Day Trading Lesson: Roadmap Step 9

2008-11-23T18:08:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 9:

Decide if you want to Trade Stocks or Futures (you can trade Forex also, but this blog does not discuss Forex)

In this post I'll try to highlight the major features and differences between stocks and futures to help you decide.

Let's define Stocks and Futures. Stocks are really easy to understand. When you buy stock in a Corporation, you become a part owner of that Corp, and are therefore entitled to a share of their earnings (if any). Futures are a little more difficult to understand. If you buy futures, you are actually entering into a contract, agreeing to buy some Physical commodity (like wheat, corn or gold) or a Financial Instrument (like the S&P 500 Index) at a predetermined future date and price. If you sell futures, you are actually entering into a contract, agreeing to sell some Physical commodity or a Financial Instrument at a predetermined future date and price.

So although Stocks & Futures are completely different instruments, it practice how you trade either of them as Day Trader will be the same. Stock prices go up and down. Futures prices go up and down. Whichever you trade you bring the particular instrument up in a chart, and based on the chart's price action and technical indicators you make decisions to buy or sell. If a particular chart were not labeled, it would be difficult to tell it were a stock or a future.

So your trading decisions will be the same for either Stocks or Futures, but there are certain details about each that you need to know before you can trade them. If you're a newbie these may seem difficult at first, but I can assure this is easy stuff compared to actually making trade decisions based on technical analysis. Let's go over some of them:

There is a legal minimum account size of $25,000 set by Uncle Sam for stock traders living in the US. Let me explain. The SEC has specific rules regarding what they call a Pattern Day Trader. Anyone who Day Trades will be labeled as a "Pattern Day Trader" very quickly (I wear the label proudly). And the SEC requires "Pattern Day Traders" to have a minimum account size of $25,000. For whatever reason, there is no such minimum acct size for futures traders. So your minimum acct size can be much less.

With Stocks you trade shares, but with Futures you trade contracts. So while a small Stock trader might trade 100 shares at a time, a small Futures trader might trade 1 or 2 contracts at a time.

Unlike stocks, all Futures contract have an expiration date. So if you wanted to trade Corn futures, you would have to specify Dec 2008 Corn (which expires sometime in Dec) or Mar 2009 Corn (which expires sometime in Mar). Corn also has contracts that expire in May June and Sept. You will want to be aware ot the expiration of the contract you are trading and generally you will want to start trading the next available monthly contract some days prior to expiration. Two different months of the same contract are generally available to trade at the same time, and you get to choose to trade which one you wish to trade. Depending on the present date, one of the two contracts will have th majority of the volume, and that one is generally easier to trade.

Every Futures contract has a particular tick size and tick value that you need to be aware of. For example, the mini-sized Dow Futures has a tick size of 1 point and tick value of $5. So if you bought it, for every point that it went up (or down) you make ( or lose) $5. The Nasdaq 100 emini Futures has a tick size of 1/4 point and tick value also of $5. So if you bought it, for every 1/4 point that it went up (or down) you make (or lose) $5.

Suppose you want to buy 200 shares of Microsoft stock and it's currently priced at $20? It will cost you (200 X $20) $4000. Suppose you want to buy 1 contract of Nasdaq 100 emini Futures and it's currently priced at $1075. The amount you need in your acct is not determined by the current price but instead by the contract's margin. The margin is fixed and set by your broker. The margin will vary from broker to broker, but should be around a little under $4000.

This leads us to one of the most important differences between Stocks & Futures: LEVERAGE. Continuing with the example above, for approximately the same $4000, you could buy 200 shares of Microsoft stock or 1 contract of Nasdaq 100 emini Futures. Supposing they each went up 2%, how much would you make?
IBM would go from $20 to $20.40, or .40 profit per share. Since you have 200 shares, total profit is $80. Nasdaq 100 emini would go from $1075 to 1096.50, an increase of 21.5 points. Since for every 1/4 point that it goes up you make $5, you earn $430. That's what leverage can do for you. Just remember on if the price had gone down 2%, then you would have lost $430 on the Nasdaq 100 emini, as opposed to only $80 on IBM. Obviously have the greater leverage of Futures magnifies both your gains and your losses.

Next let's consider shorting. If you think the price of the instrument you're trading is gonna go down, you enter the trade short (sell). If you're trading Futures, shorting is no different than go entering a trade long (buying). When you short a stock, you are actually borrowing or renting the shares from you broker, so there may be some additional considerations. Also certain Stocks may not be shortable at certain times. In general shorting is just more straightforward with Futures than with Stocks.

Lastly, let's consider taxes. The simple fact is, Day Traders will pay less taxes on Futures profits than on Stock profits. That's because Futures profits are treated as 60% long term cap gains, 40% short term cap gains. Stock profits (assuming you hold less than 1 year) are treated as 100% short term cap gains. The short term capital gains rate is up to 35%, but the long term capital gains rate is only of 15%. Assuming you pay the maximum short term capital gains rate of 35% (ordinary rate), you will pay 35% tax on your stock profits, but only 23% tax on futures profits. I know many of you will feel bad paying less taxes, given how wisely Uncle Sam spends those tax dollars. But a nice beach vacation might help you get over it.

Ultimatelty, as a Day Trader it's most important to trade an instrument that "moves well" and has good liquidity. Whether it's a Stock or a Future. By "moves well" I mean it has a good amount of price fluctuation and prices that tend to trend. If prices hardly change or they just seem to be all over the place, it tuff to trade (I'm a TuffTrader, but I don't like it that tuff). Good liquidity means you can enter & exit the instrument quickly with a minimum of Slippage.

Still not sure what to trade? I just told you! Look for instruments that "moves well" and have good liquidity. Study their charts to get an idea of their "personality". On the Futures side, the eminis fit the bill. Check 'em out on www.cme.com and www.cbot.com. On the Stocks side, newbies should look for actively traded Nasdaq stocks.

Day Trading Lesson: Roadmap Step 8

2008-10-29T00:00:00Z

In my post Day Trading Lesson: The Roadmap I present a list of steps to learn to Day Trade. Here are the details of Step 8:

Get a good Broker, Charting Package, Data Feed and Trading Front End

In simplest terms what your broker does is execute trades for you. In the old days before the Internet you if you wanted to buy or sell a stock or future, you would telephone your broker and he would place the order for you. Not only would he place orders for, but he would also advise you on what stocks to buy. These were called full service brokers because the commission they charged was higher since you were paying for great advice like "buy Enron, this one just can't lose". Once the Internet became popular you started to see discount brokers whose commissions were much lower because you executed trade directly from your own computer, and the broker was not giving out (invaluable) advice. This is of course what you'll use as a day trader, but you also want to make sure that you were using a direct access broker. Direct Access means that your broker is connected directly to the exchange where the trades actually take place, as opposed to being connected through an intermediary. The advantage of direct access is that your trades will be filled more quickly. Be aware that most of the brokers that advertise on TV are not Direct Access, meaning they're really not designed for day traders.

An example of a Direct Access broker many day traders use is Interactive Brokers. I am not recommending them in particular but they are a good place to start as a basis of comparison. When choosing a broker there are essentially 3 things you need: speedy execution, reliability and low commissions. The other thing to keep in mind is that some brokers may specialize in futures or stocks.  Check out EliteTrader to see dozens of brokers with reviews.

As you will probably be making your trading decisions based on technical analysis, you will need a good charting package. The charting package may be offered by your broker or you may obtain it separately. Many brokers provide free charting if you open an account with them; the only thing you pay is commissions. Such free charting software tends to be extremely basic and may not have enough features for the serious TuffTrader. One very popular and good charting package you may want to consider is SierraChart. Again check out EliteTrader to see dozens of packages with reviews.

Many of the packages you'll see here do quite a bit more than just chart. You should choose a charting package that has the particular features you need to make good trading decisions based upon your particular style of trading, but paying for features you never use does not make sense.

One feature that I really do think makes sense is Replay. With this feature it's almost as if you had videotaped your charts over the entire day, and after the markets closed you have the ability to play them back including pause and fast-forward. This is a great learning device especially if you are unable to be sitting in front of the computer while the market is open.

Your charting package needs a data feed, which is essentially a real-time source of every transaction (buys and sells) that is taking place on the particular stock exchange or futures exchange. This may be available from your broker, but will more likely will be purchased separately. Data feed vendors charge for each group of instruments separately, so you would only order what you need. An example of a popular data feed to be used as a basis of comparason is iQFEED. One thing to keep in mind is that your data feed needs to be compatible with your charting package.

The last thing you need is a Trading Front End. This is a piece of software that you use to actually make a trade.
It may be provided by your broker or you can get it separately. A good front allows you to enter and exit trades with one or two mouse clicks, as opposed to having to type a lot of stuff in. This is not just a matter of convenience but can avoid very costly mistakes. Most good front ends give you what's called a ladder or DOM, which provides a very good visualization of the price movement of the instrument you're traded. To get an idea as to some of the typical features you should be aware of, check out ZeroLineTrader, a pretty good stand alone front end.   PFG Best, a pretty good broker for trading futures, provides a free basic front end to their customers called BestDirect8. Compare this to PFG Best's Navigator which has lots more features, but is not free.

There often are lots of bells and whistles included with most good front ends, but by far the most important is the ability to have your pre-determined stop automatically entered when you place your order. Again this is more than just a matter of convenience since in insures that you don't ever enter an order without a stop because you "forgot".

If you choose not to enter your stop automatically, and find yourself forgetting to enter it sometimes, you may wish to purchase my "Bash-O-Matic Traders Helper". This highly sophisticated, programable, electromechanical device is compatible with most PC's and mounts conveniently on your desk. Once installed, a large hammer automatically hits the trader over the head as soon as it senses an order has been placed without a stop. To order yours, simply send $9999.99 (Cash only) to:

Miracletech LLC
PO Box 123
Cayman Islands

IRS Realizes I'm not that good a Day Trader

2008-07-28T00:31:00Z

This is the followup to my previous post IRS Declares me one of the top Day Traders in History

In that post, I tell about my (futile) discussion with the IRS where they claim that I made a profit of over $2,500,000 on a $30,000 account. At the time I had no clue how the IRS got such an idea, but after doing some research I understand how it happened.

Evidently there are 2 tax forms that your stockbroker issues. The first form itemizes every trade that you made, the profit or loss on each trade, and at the very end the total profit or loss for the year on all the trades. You might assume this very long form would pretty much provide what you need to pay your taxes, but they produce a second form also. The second form is very short and contains basically one number, which is the sum of cost of the securities of every trade you made. For example suppose you bought 500 shares of a stock at 42.80 per share, that's $21,400. Then you sold all 500 shares at a small loss for 42.10 per share, that's $21,050. So for your first round trip that's over $42,000. Now suppose this is is an average size trade for you and make 200 trades for the year, then the number on the form would be over $8,400,000. Impressive for bragging rights, but having absolutely nothing to do with how much money you made (or lost).

Now here's the punchline. I surmisedthat in my case the IRS had gotten the second form from my broker, but NOT the first. So I sent them that form.

As the weeks went by I was fully expecting a personal letter from the IRS thanking me for my cooperation and complimenting me for being such fine American. To my surprise I received a form letter instructing me to send them $112 in back taxes, plus $9 interest.

IRS Declares me one of the top Day Traders in History

2008-05-07T18:00:00Z

Just in case you question the value of my advice, you should be aware that the IRS has declared my one of the top Day Traders in history. You might question my veracity, but how can you question the veracity of the IRS?

OK, so maybe the IRS didn't say it in those exact words...

It all started a few weeks back when I received an official letter from the IRS. There was a discrepancy in tax year 2006 between what I had reported to the IRS and what the IRS says my stockbroker reported (regarding my Day Trading account). I don't recall exactly what I reported, but it was a small loss. But the IRS claims that my broker reported that I made a profit of over $2,500,000. Yes, over 2.5 million dollars. Please realize that my trading account was less than $30,000. So I must be one of the top Day Traders in history. Do the math: that's an 8333% return!

OK, so I'm not one of the top Day Traders in history. Obviously the IRS has made a mistake.

I notice on the letter there's a telephone number to call the IRS if you have any questions. So I figure I'll call the number and see if I can get them to straighten this out. I dial the number and an extremely friendly person answers immediately. I can't believe the IRS picks up their phone so quickly! Unfortunately I soon realize I'm talking to a trucking company - evidently I've dialed the wrong number. I dial again, and after about an hour of pressing keys and holding, I'm actually speaking to a human being. I explain the situation to her, saying it's an obvious mistake, and can she please correct it. About five minutes into the conversation I realize I've entered a strange world of unreality. It makes absolutely no difference how absurd it sounds, their information states that I made $2,500,000 and they refuse to correct it. If my file said I made three times the Gross National Product of of the United States, they would still refuse to correct it. It is up to me to provide acceptable documentation proving that I did NOT make $2,500,000, or else pay the taxes on it.

I hang up. and then it occurs to me I would have gotten more satisfaction talking to the trucking company.

Gotta go now, need to call my accountant.

Wanna know how this turns out? Check back soon, I'll post as the story unfolds. Does anyone know if you can blog from prison?

Day Trading Lesson: Roadmap Step 7

2008-05-02T23:05:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 7:

Get a good trading computer and Internet connection

As a Day Trader you depend on your computer to execute trades and analyze charts. So you need a computer that can do these things quickly and reliably. And you need a high speed Internet connection that doesn't often go down.

Meet these requirements and you will be OK. A crappy computer or Internet connect will cause you aggravation and even cause you to lose money trading. On the other hand, past a certain point, spending more money on a computer will not make you a better trader.

This post will not give you all the info you need to choose a good trading PC, but here are few guidelines.

Get a decent processor. Look for at least dual core, at least 2 GHz.

Get enough RAM. Get at least 2 GB. Many decent PC's come with 1 GB standard, my advice is to shell out the extra bucks to upgrade to 2 GB.

Hard drive space is less essential than RAM, but given it's cheap look to get 500 GB or more.

Most traders like a lot of monitor space. I would recommend at least two 19" monitors, three is even better. Be aware that 3 monitors adds quite a bit of setup complexity and expense. You can't just buy your standard off the shelf PC and attach 3 monitors to it. But IMHO 3 monitors is really the way to go.

If you are purchasing a PC and you're not a "techie", it's a good idea to purchase from a company that will help you choose the right PC and get is built and configured for you. Call up a few retailers and speak to their tech support people about your purchase requirements. Remember good support can be really valuable.

Day Trading Lesson: Roadmap Step 6

2008-05-01T00:29:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 6:

Determine how much money you will need to fund your trading account

"What is the minimum height to become a basketball player in the NBA?" the coach was asked. "There is no minimum height" was his reply "But if you're under 6 feet you pretty much have no chance".

"What is the minimum amount of cash I will need to get started in Day Trading?" you ask. There is no minimum amount, but if you start with less than my recommendations in this post you pretty much have no chance. And as in basketball, having just the minimum can put you at a disadvantage.

Luckily, if you are an American citizen and you wish to trade stocks, the SEC has been kind enough to give you a definitive answer. And that answer is $25,000. Let me explain. The SEC has specific rules regarding what they call a Pattern Day Trader. Anyone who Day Trades will be labeled as a "Pattern Day Trader" very quickly (I wear the label proudly). And the SEC requires "Pattern Day Traders" to have a minimum account size of $25,000.

With this in mind you open a brokerage account with $25,000. You make a half dozen trades, and after commissions, your account value dips to $24,951. You try to place another trade, but the trade simply won't execute. No, there's nothing wrong with your trading platform - your broker is just enforcing the SEC rules. Your feeling of annoyance is misplaced - you should really be thanking your broker for going out of his way to support the SEC. So a more practical minimum account size for stock trading would be somewhere around $30,000.

Hey guess what? Just when you thought the SEC was close to perfect, I'm here to tell you they forgot something. They forgot about futures traders. If you trade futures (including e-mini futures) there is no minimum account size set by the SEC or any other agency of your friendly Uncle Sam. You are only limited by broker minimum account sizes, margins and common sense. Some brokers have a minimum account size of $10,000 and some are less.

In case you are not familiar with e-minis let me explain what I just said about margins above. When you trade e-minis you buy (or sell) a contract, as opposed to a share in stock trading. A small trader of e-minis might buy 1 or 2 contacts, in the same same way that a small trader of stocks might buy 100 or 200 shares. The e-mini margin requirement is the amount that your broker requires you to have in your account per contract you trade. Depending on who your broker is, and which e-mini you are trading, the margin requirement would be somewhere in the area of $2000 to $5000 per contract. Add a little common sense to the broker account minimums and the margin requirements, so a ballpark minimum amount of cash you need to get started in trading e-minis is $15,000.

Please note that you need this much that you can actually put into your trading account. This does not include other trading expenses, like a decent computer or monthly data feed expenses. But more importantly you must consider that the money put in your trading account must be money you are willing to put at risk. Your available cash should be much more that the amount you use to fund you account. How much more in not for me to say.

A friend of a friend of mine once asked my advice. He said "I have about $6000 total cash. I hope to raise another few thousand by selling my car, and a few thousand more on a credit card cash advance. This should give me about $12,000 to open a Trading account. Can you recommend a good broker?" My response was "No, but I can recommend a good psychotherapist".

Day Trading Lesson: Roadmap Step 5

2008-04-29T21:00:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 5:

Create Risk Management Rules

Suppose you had a specially weighted coin that when flipped came up heads 55% of the time and tails 45% of the time. You have a pot of $30,000 to wager on coin flips.   You can choose to bet as much or as little as you want on each flip. The amount you wager is added to your pot if you correctly call the flip, or subtracted from your pot if you're wrong. You can go on forever as long as you still have money in your pot. Obviously you want to increase your pot as much as possible. Seems hard to lose with a weighted coin!

Now the game begins. You wager $1000, and call heads (of course). The coin lands on heads, you win, so you now have $31,000.   You wager $1000 again, call heads, coin lands on heads again, so you now have $32,000. Things are going your way, so next you wager $12000. This time you lose, so you're down to $20,000. No problem, you know the odds are in your favor, so you wager $12000 again. Again you lose, so you are down to $8000. This upsets you a bit, but you figure with a weighted coin there no way there could be 3 tails in a row. So you wager the remaining $8000. Unbelievably, you lose again, & you have nothing left. Game over!

You sit there stunned, pondering how it is possible that you lost $30,000 when the odds were clearly in your favor. The answer, of course, is that you used poor money management. Favorable odds will play out over the long term, but not necessarily over the short term.  In order to let the odds play out, you have to risk a smaller percentage of your total pot.

This coin flipping game is analogous to trading. You start out with a fixed amount of cash in your trading account, and each trade is like a coin flip.

Now suppose you have a $30,000 trading account. You decide to buy 500 shares of a stock that's selling for $40/ share: that would cost $20,000. Obviously $20,000 is too much to risk $30,000 trading account - this is why you should use a STOP LOSS. So when you buy the stock, you instruct your broker to immediately sell if the stock goes to $39. Thus you limit your risk to $500.

The STOP LOSS is the basic building block of any Risk Mangement plan. There can be much discussion as to what size to set your STOP LOSS, but there should be no discussion as to whether or not you should use a STOP LOSS. Use a STOP LOSS or eventually you will wipe out your account. Period.

So here's your first Risk Management Rule. Always use a STOP LOSS with every trade

A simple Risk Management plan consists of just 4 more Rules:

Maximum % of your account value you will lose per trade (determined by your STOP LOSS)
Maximum % of your account value you will lose per day
Maximum % of your account value you will lose per week
Maximum % of your account value you will lose per month

Here is an example of the Risk Management Rules:

Maximum I will lose per trade is 1% of my account
Maximum I will lose per day is 3% of my account
Maximum I will lose per week is 7% of my account
Maximum I will lose per month is 10% of my account

The % numbers I use above are only meant to be an example. You will need to decide on the exact numbers you want to use. Setting a good STOP LOSS for a particular stock or commodity is something of an art: a "tight" stop loss reduces risk per trade but can lead to getting stopped out too often.

To illustrate the sample rules above, suppose you have a $30,000 trading account. Per Rule #1, the max you can lose per trade is 1%, or $300. So you could buy 300 shares of a stock selling for $40/share, and set your STOP at $39. Or you could buy 100 shares at $40/share and set your STOP at $37. Per Rule #2, the max you can lose per day is 3%, or $900. Once you have lost $900, you MUST have the discipline to quit trading for the rest of the day. Now suppose you have lost $750 so far today - can you make a trade risking $300? NO! Because if the trade went against you, you would exceed your $900 daily max loss. Per Rule #3, the max you can lose per week is 7%, or $2100. If you've lost this much and it's only Wednesday, you MUST have the discipline to quit trading for the rest of the week. Per Rule #4, the max you can lose per month is 10%, or $3000 - you get the idea.

Create your own Risk Management Rules before you make even one trade.

If you don't have the discipline to follow your Risk Management Rules, you may wish to purchase my "Bash-O-Matic Traders Helper". This highly sophisicated, programable, electromechanical device is compatible with most PC's and mounts conveniently on your desk. Once installed, a large hammer automatically hits the trader over the head as soon as it senses any Risk Management Rule has been violated. To order yours, simply send $9999.99 cash to:

Miracletech LLC
PO Box 123
Cayman Islands

Day Trading Lesson: Roadmap Step 4

2008-04-24T17:54:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 4:

Understand the importance of Discipline and Trader Psychology

Self-Discipline means doing all the things that you need to do be a good Trader, even when you don't feel like doing them. As a Trader you will need greater self-discipline than as a employee. As an employee much of the discipline necessary to do your job comes from the outside, from your boss, company rules, etc. As a self-employed trader, all your discipline must come from within. Plus any lack of self-disipline is likely to be more serious for the trader than the employee, as the employee is usually just one part of a larger whole.

The thing to realize about self-discipline is that it can go a long way, but it can only go so far. That's why you really have to love trading, & be fascinated by the markets, in order to be successful. It's just very difficult to motivate yourself to do something day after day if you don't like it. So if you're thinking about trading just for the money, but it doesn't really turn you on, forget it now because you'll never be able to find the self-discipline necessary to be successful. This is probably true of any field, but trading is much less "forgiving" than most.

I suggest you read this Self-Discipline article by Steve Pavlina. It is not specific to Trading but definitely is worth while.

How will you develope expertise as a Trader? How will you find your specific trading niche? These are questions of Trader Psychology. To learn about this I suggest you read Enhancing Trader Performance by Brett Steenbarger. This is is best book I know of on the subject.

The other part of Trader Psychology you need to be aware of is the tendency of human beings to make irrational Trading decisions. This is not just a lack of education or experience, but there seems to be evidence the problem is actually be built into the human brain. Read a good explanation of this in Dr Dorn's "Your Rat Brain Is Out To Get You"

Kahneman and Tversky's paper on Prospect Theory won them a Nobel Prize in Economics. This is not what I would call light reading, but essentially they prove empirically that people act irrationally when faced with decisions involving Risk. If you think even casually about what Day Traders do, it's constantly making decision after decision on Risk. After all, placing a trade is just making a decision on risk, whether you think of it that way or not.

OK, so at least you want to trade as unemotionally as possible, right? Not necessarily. There's a lot of evidence emotions are necessary in good decision making. Blink by Malcolm Gladwell is a good book on the subject (not specific to trading).

The point of this post is to make you aware of the some of the issues regarding Discipline and Trader Psychology, and stress their importance. But even if you read everything is this post's links, you will just be scratching the surface of the understanding of these topics you'll need to be a successful Tuff Trader

Day Trading Lesson: Roadmap Step 3

2008-04-23T17:51:00Z

In my post Day Trading Lesson: The Roadmap I present a list of steps to learn to Day Trade. Here are the details of Step 3:

Learn the basic terms & concepts related to Day Trading

If you are a newbie, of course you need to know the basic terms and concepts before you can go much further. IMHO Investopedia does a great job of explaining these basics, thus the many links to them below. Just try to ignore all the annoying ads.

There are two conceptually different methods (schools of thought) for making trading decisions that you must understand i.e,  Technical Analyses vs. Fundamental Analyses. As a Day Trader I largely ignore Fundamental Analyses.   Technical Analyses mostly involves making trading decisions based on Chart patterns or indicators. There are probably hundreds of technical indicators. As a beginner you should become familiar with as many as possible, but it's only necessary to truely master just a few to become a profitable Day Trader.

Next understand the difference between Long and Short. When you enter a trade, you either take a Long Position or Short Position. When you go Long you hope the price will increase so you will make a profit. When you go Short you hope the price will decrease so you will make a profit. It's that simple - that's all Day Traders really do. Your technical analyses tells you the price of an instrument (Stock, Future, e-mini or whatever)is about to go up, so you enter the trade Long - if you are correct you make a profit. Or, technical analyses tells you the price of the instrument is about to go down, so you enter the trade Short - if you are correct you make a profit. This is the basic concept, but in practice Short Selling of stocks presents a few additional complications you'll need to understand (if you chose to trade stocks) as you are actually borrowing the stock from your broker - these complications do not exist with Futures.

You can trade either Futures (which include E-Minis) or Stocks (or Forex, which I do not discuss in this Blog). They are quite different in many ways, but from a Day Trader's point of view they are very much the same in one aspect: You can use the same Chart patterns and Indicators to make trading decisions with Stocks or Futures.  Depending what the Chart shows you either go Long or you go Short.

One big difference between Stocks and Futures is Leverage. Futures are more highly leveraged. That means for a given amount of money risked on a Futures contract, you stand to make (or lose) more money for a given percentage of movement than if you had put that same amount of money in a stock.

Ok, so you know that whatever instrument you are trading in can either go Long or go Short. But of course there is one more choice, which it simply to stand aside (ie stay out of the market). This may seem too obvious to mention, but it is the very essence of successful Day Trading. Failure to "Get" this point will cause even experienced Traders to lose money. A good trader spends most of his day waiting, not trading. There a some moments during the day when the statistical odds are that the stock will drop, so the good Trader goes Short.  There a some moments during the day when the statistical odds are that the stock will rise, so the good Trader goes Long. But there are many moments during the day when the statistical odds point to no particular direction, so the good trader stands aside, and the Schmucks trade.

Next you should understand something about the nature of Electronic Trading.

Other important terms are:

Volume

Bid, Ask and  Bid-Ask Spread

Slippage

CandleStick

Index

Market Order vs Limit Order

Tick

So, did I cover all the terms and concepts you need to know to Day Trade? Of course not! But hopefully it's at least a small start. You can look up terms you don't know as you come across them.

>day trading learn day trading

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Day Trading Lesson: Roadmap Step 2

2008-04-21T17:46:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 2:

Start a Traders Diary

This is simple in concept but extremely valuable. Essentially all you do write a daily entry on all your trading activities. Your diary software can be as simply a Word Document, or any software you want to use is OK. You can even write it in a paper notebook if you like. Just type is today's date and whatever you did today in your trading or your trading education.

The purpose of the diary is to allow you to periodically look back at it and gauge your progress as a trader. Keep this in mind as a guide as to what you should include in your daily entries. You should include concrete things like "today I spend 2.5 hrs analyzing the 5 period moving average of the YM e-mini over the past 7 trading sessions". But you should also include your feelings like "today I got really frustrated when I was trying to ... So I took a 30 minute break & when I got back I felt a little better"

It's OK that everyone will do their Diary differently, as a reflection of their own personality.  But I strongly suggest you follow 2 RULES:

1. Write an entry every single day. Even if on a particular day you did not work on trading, write a quick diary entry to say so - this is valuable info too. One reason you must write every day is because it's too easy to gradually forget about doing the diary. If you make up your mind that you will do it every day, it's more likely you can keep doing it forever. Suppose you make up your mind that you will do it every day, and after a week or so you just forget about it? This may be a clue that you don't really have the discipline necessary to be a successful Day Trader.

2. Periodically review your entries.  For example, you could every Sunday review your entries for the past week, and the 1st of every month review your entries for the past month.  The idea is to judge your progress as a trader - to gain perspective. Ask yourself questions like: Am I consistently making progress? Am I putting in enought time? What mistakes have I made? If I continue to do what I have been doing, am I likely to meet my goal for trading cash profitably?

You have probably heard the saying "The definition of insanity is doing the same thing over and over and expecting different results".  Think of your diary as illumination tool to help you avoid this sort of insanity.

>day trading learn day trading

Day Trading Lesson: Roadmap Step 1

2008-04-18T19:27:00Z

In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 1:

Decide if Day Trading is really for you

This is not a trivial decision. Because Day Trading is NOT for everyone! Here are some of the reasons folks want to Day Trade:

Be your own boss
It sounds cool!
Make money based on your actual skill and efforts, as opposed to someone else's opinion of your skills and efforts
No credentials are necessary
Set you own hours (only somewhat true)
Work from home - no commute - no dress code
Avoid all the crap of working for Corporate America

But you need to fully accept these realities before you decide Day Trading is really for you:

It's going to take a long time to learn and its going to take a lot of effort
There is risk involved. Yes, you can lose money! In fact you definitely will have losing trades. Let me repeat that: you will have losing trades! Probably daily. Taking loses is just part of the game. Not everyone has the personality to live with this. In fact, you may not even know if you can live with it until you've taken a few losses.
You will spend a long time each day indoors staring at a computer screen. And you will mostly be working alone. Not for everyone
You need to be self disciplined. A lot a folks will just skip over this one, because their ego tells them "of course I'm self disciplined" - don't make this mistake - this is a key element of trading and not everyone has it. If you have been working a regular 9 - 5 job there is a lot of discipline imposed on you from the outside that you may not even be aware of. As a day Trader you and you alone are responsible for every single action you take (or fail to take). And you need to have the discipline to say no to your "Rat Brain". You can read about the "Rat Brain" here but suffice to say it will try to get you to make irrational trades. Again, you may not even know if you have the necessary discipline until you've been trading a while
You will need a sizable amount of money to fund your Trading account. A future post will help you determine how much you'll need, but right now let's just say $15,000 is a realistic minimum. This does not include purchasing a decent computer if you don't already have one
You need the creativity to develope your own unique trading method. You will not be successful if you take someone else's method and simply try to repeat exactly what they do. Even if you were lucky enough to find a successful trader who was honestly willing to try to share with you everything they knew. The best you can do is take someone elses general method, and modify it to be your own.
There is a high rate of failure among those those trying to Day Trade. Let's not sugar coat it - failure usually means losing a lot of money then throwing in the towel. I created the Roadmap in the hope of reducing the rate of failure among those newbies willing to follow it.

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