Winning the Day Trading Game

- Trading is a risky business that involves a great deal of discretion and skill. Accurate market analysis, correct execution, emotional control, discipline, consistency and good money management are some of the skills that are required to trade successfully. In addition, there are times when any method, even when executed correctly, will result in a loss.

- After Black Monday, I questioned whether or not I had foolishly selected a profession in which years of work and labor could vanish in a single day.

- Trading is a very psychological game. If you are under too much stress or if you are too fearful and pessimistic, you cannot trade successfully.

- Sometimes you experience an event that has a profound effect on you. You can't explain why, but it just does. The experience speaks to you in a unique and dramatic way and it impacts your life.  On that particular day you were ready for the message you received and you took it seriously and changed.

- Not one day passed since 1987 that I had not revisited my mistakes. Could I forgive myself and be free?

- Solve the problems you can solve and handle the situations that you can handle that day. This is all that you can do. No human being is expected to do more than that.

- At the end of each trading day, I started analyzing my trades and trying to learn from them. My goal is to be the best trader that I can be today.

- After Black Monday, my focus turned to managing the risk and taking profits became secondary.

- One of my favorite trading vehicles is futures and many analysts consider futures inherently risky. To the uneducated trader, that is true. Futures are highly leveraged trading instruments that allow skillful trader to make a lot of money and unskillful trader to be fleeced. Therefore, I had to design a strategy for managing my risk while trading futures. The most significant thing is that after Black Monday, risk management became the single most important element of my trading.

- The key is to learn a market-tested strategy and and learn how to execute it.

- How do successful traders know when to trade? As for me, I ask myself one central question. Should I be long, short or out of the market? Experience taught me that if I consistently answer the big question right, I make money.

- Overtrading is typically not profitable trading.

- To make money when trading, it's essential to have liquidity and volatility.

- I do a lot of trading in the morning and I often trade the S&P 500 Futures Index. Therefore, I use that market to explain my most lucrative trading times. 

- Initially the markets are highly volatile. Typically, it jumps around quite a bit for the first five to ten minutes. Watch and wait. Be a spectator until it settles down and you are able to get a real sense of its intended direction. In some cases it's probably a good idea to give the futures markets a good 30 minutes or so to calm down.

- After the market has a chance to settle, it's generally a good time to trade. I like to trade 9:00 am and 10:15 am during the first two hours of the trading.

- As morning hours pass, volume falls off and trading becomes very slow. This is not always true but it is most of the time. Around 10:15 am I walk away from my computer and do other things. If you sit in front of computer all day long, unless you have tremendous discipline, you will overtrade and your profitability will suffer. I don't generally place any new orders during this time. Due to the usually slower movement of the major exchanges, trading becomes riskier for my method. 

- If I am in a trade from earlier in the morning, I check to make sure that I have a protective stop in place and I leave it. If the market is signaling a reversal, I may exit my positions entirely and take my profits. But I rarely place new orders between 10:15 am and 12:30 pm. 

- Sometimes my caution causes me to miss out on good trades. But so what? I don't need to make every trade. If most of my trades are winners and I practice good money management, I will be OK. 

- After lunch I look at the market again. 12:30 pm is a very important trading time.  It's a pivotal time because, after lunch, the market tends to reset and either reverse the morning move or accelerate it. The 12:30 pm number is so important that I record it and use as a major pivot for the next 24 hours. If the market trades above the 12:30 pm number, it signals a bullish move. If it trades below the 12:30 pm number, it signals a bearish move. Of course, I consider the 12:30 pm pivot as only one factor among others, but it's important number to watch.

- One of my cardinal rules is that I never go short between 12:30 pm and 1 pm. Too often, the market appears to be going down during this time, but the move is not long lasting. If I want to short the market, I wait until after 1 pm. If I am already short going into 12:30 pm, I make sure that my stop is in a good place and see if the trade continues through to 1 pm. 

- If you trade in the afternoon, you need to be aware of a time that I consider to be very dangerous for most traders. Often between 1:30 pm and 2:00 pm there is a counter trend. Sometimes this trend can be rather dramatic and the market becomes extremely volatile and unpredictable. 

- The third and final time during the trading day that I frequently trade is near the daily close. As the market nears the end of the session, the daily trend may reverse. This trading time can be very lucrative because many traders have to liquidate their positions before the close, and if you are educated, you can take advantage of that fact. It all boils down to key numbers, time and RoadMap indicators, long, short or out!!!

- To simplify my trading, I identified certain periods throughout the trading days when I look for opportunities. I refer to these time frames as trade zones:

*Trade zone one  9:00 am - 10:15 pm

*Trade zone two  12:30 pm - 1:15 pm

*Trade zone three 2:15 pm - 10.15 pm

- I designated these times as trade zones because my multiple contract trading method works best during times of greatest liquidity and volatility. 

- I always keep tabs on the German DAX and trade it often in the early morning hours before the US day market opens. 

- Globally, trading follows the movement of the sun. The geographical part of the world where the sun is shining will be the part of the world where trading is most active. 

- Divergence among the global markets tells you to stay out. If domestic and foreign markets are all trending lower, it's a sign of weakness and you may be able to take advantage of it with a sell. 

- In trading, ignorance is not bliss. Ignorance generally translates into an empty account and a lot of heartbreak. You may be trading US markets, but it pays to be aware of what is happening in the other major financial centers around the globe. 

- Using a 24 hours trading clock gives me an edge and helps me to be a better, more informed trader. It also opens new trading avenues for me, such as allowing me to trade the DAX Futures Index.

- I consider the yearly opening price of a market to be the single most important pivot number for that market during the entire year. 

- Throughout the year, I keep my eye on this number. If the market fell to it and broke below it, I know that the bears are strong and I prepare for a sell off!!!!

- Time is also a healer - it clears the mind. 

- The best thing you can do for yourself is seek out, test and incorporate trading tools that simplify your trading career. 

- Keep up with the markets,  but remember to trade only when you have a high probability of making money. 

- In order to make more money, you need to trade less, but with deliberation. A trader who trades too much will, very likely, waste both time and money. 

- Every index, stock or commodity has certain numbers that are recognized as more important than others, and I refer to them as key numbers. If you want to be a successful trader, you must also learn to use key numbers to your advantage.

- A key number is a price that the market respects  for some reason. It's a point at which the market has a tendency to exert some level of support or resistance. 

- If you don't take at least some of your profits at support and resistance levels, you may live to regret it. 

- The opening bell on January 2nd of each year is the start of the trading game. This date is the single most important day in the market during the entire year. Write it down!!!

- Trading is an art and not a science. The trading process is as intricate and delicate as the finest ballet. In fact, just like a ballet, the markets have a unique ryhthm. If you want to be a good trader, you have to learn to understand the market's beat, and step to it.

- Sometimes you can't see the forest for the trees. In order to read the tape accurately, you have to analyze the information in context. 

- If you don't have some structure or framework to work from, you will not be able to understand the numbers that you are seeing and you will not be able to know what they mean. The rhythm of the market will escape you and every little false move that is made will lure you into a losing position. To read the tape accurately, get a big picture view. 

- Sometimes I miss moneymaking opportunities. That is true. But, I would rather err on the side of caution than frivolously throw my money away. If you miss a trade, do not worry. There will be another one. That is one redeeming thing about Chicago and New York: They always give you a second chance. Just be patient and wait for it. The market generally offers numerous opportunities each and every day. 

- Divergence between indices and exchanges generally spells trouble. Many times I've been saved because I correctly read the warning signal that was being sent by one lagging market. 

- Never read the price in isolation. Always put it in the context of the sector and the overall market.

- Use key numbers for market entry, for protection and for profit taking. For example, if you plan to buy an index, you don't want to buy it just before it  hits major resistance. Wait and see how the market responds when the resistance hit because you must know of the up movement is strong enough to break through support.

- The market usually follows the path of least resistance. A market that cannot move down will move up; and a market that cannot move up will move down. This is one of the laws of the Wall Street. 

- The issues: The NYSE issues is an indicator that reflects the number of issues that are above their previous day's close as compared to the number of issues that are below their previous day's close on the New York Stock Exchange. The Nasdaq Issues measures the same factors but is a Nasdaq indicator. I consider these indicators to be very important. When gauging the NYSE issues, I believe 500 to be somewhat of a watershed number. If 500 of the issues are above their closing price, I will be generally looking more to the bullish side. Unless there is strong evidence to the contrary from other indicators, I will be hesitant to sell the market. Likewise, if the NYSE issues is -500. I will be looking toward the short side. Again, unless the market has been far more negative and there is strong evidence that the market is reversing to the upside, I will be hesitant to buy the market with such a negative reading.

- I always watch these two indicators. Sometimes the NYSE Issues will be strongly moving in one direction and the Nasdaq Issues will not follow, or vice versa. Such divergence raises flags of caution. Look for opportunities when both of these gauges are giving the same message. As I stated above, I consider the NYSE Issues and Nasdaq Issues to be significant indicators and I always take them into account when trading during the daytime sessions. 

- The New York Tick (TICK): Another indicator that I rely on is the New York Tick or the TICK. This indicator reflects the difference between the number of stocks ticking down and the number of stocks ticking up in the price on the NYSE. The TICK is a leading indicator for market direction. It is like the RPM gauge of Wall Street. If the TICK is positive, start looking up, if it's negative you probably want to consider the short side. A TICK reading of plus or minus 300 tends to be a neutral zone and is not affirmatively pointing in either direction. On the other hand, if you see a reading of plus or minus 1000, the market has a definitive view of things. The message is unmistakably clear. However, exercise caution because extremely high readings probably mean that the market is overbought or oversold. Generally, after the market reaches such levels, it needs to take a breather and there is a correction. The correction may be slight and it may be brief, but the market is unable to sustain a 1,000 TICK reading for a prolonged period of time. After a breather, if there is enough momentum, it may surge again. 

- I use TICK as one indicator among a number of  other indicators and criteria. I never rely upon any single indicator. Also read the TICK in relative terms. For example, if the TICK reading has been -450 and it moves into positive territory, say to a positive 200, the movement of the market is bullish. The number reflected by the reading is not particularly bullish, but in relative terms, there is some strength in the market. Perhaps a shift of some degree is in the making. Before taking any action, look at other indicators and check markets and indices for confirmation or denial.

- The TRIN: The TRIN, which is also known as the Arms Index or Trading Index, measures volume and the previous day's close.The TRIN is a ratio of ratios. It's calculated as follows:

TRIN = (Advancing Issues / Declining Issuer) / (Advancing Volume/Declining Volume)
A TRIN of 1.00 is considered neutral. The lower the TRIN, the more bullish the indication, the higher the TRIN, the more bearish. Like the TICK, the TRIN is an inverse indicator. As TICK moves up, the TRIN moves down and vice versa. The TRIN may go as high as 3.5 or as low as 0.30. Between 1.20 and 0.80 tends to be a noise zone in which no direction is indicated. When watching the TRIN, look at relative price action and not absolute value. For example, if the TRIN was 1.5 and it moves to 1.2, the direction is bullish even though the absolute value is slightly bearish. 

- Again I read this indicator in relation to other indicators. Sometimes the markets will appear to be moving in a certain direction. For example, say that the S&P Futures moves up a point or two and some of the other futures markets join in the move. But the TICK and TRIN are not showing signs of strength; they are telling a different strory. I pull my hand away from the mouse and take a closer look. By reading the tape carefully, I'm less likely to hastily join the potential losing party.

- After trading so many years, I designed two additional indicators. One of these is the V-factor; it records and reflects volume. The other is TTICK which uses the TICK  and S&P Futures Index movement  and merges them. It then smooths out this information and numerically reports it. 

- Do not rely upon your preconceived ideas or your emotions. If the numbers and the tape tell you to go long and the time is right, just do it. Never impose your bias on the market. Read and trust the numbers. 

- Trading is complex. The only way to win at this game is to learn to read the tape and to read it consistently and correctly. 

- Remember that  you cannot read a stock quote, an index price, or a market indicator in isolation. The tape must be read in the context of the overall market. 

- If you want to win at the trading game, you have to get your emotions under control and keep them on an even keel. The significance of emotional balance cannot be overstated. Greed, fear and arrogance are three of the most destructive forces that you will ever face in trading. 

- Letting your emotions overpower your reason will sabotage your trading every time. A lot of traders don't understand the pshycological aspect of the game. They totally discount it.

- Setting realistic and achivable goals is one secret to success. Being overly aggressive in the market puts your assets at great risk and threatens your ability to stay in the game long enough to learn how to play it. 

- He had to give up trading because greed consistently got the best of him. 

- Don't get greedy. That is one of Wall Streets elementary lessons. Greedy traders don't comprehend the skill involved in making money in the markets and they don't respect the risks. 

- I have a degree in law. Earning a juris doctorate takes three years of intense post-graduate study. The tuition is expensive and the hours spent reading, researching and writing are many. Geof Smith, my business partner and one of the instructors at my trading school, has a master's degree in engineering. He, too, wrote a lot of big checks to educational institutions and spent many years studying and working before he earned that degree. Yet, novice traders think that they can earn millions in the markets overnight  without paying the price for education and experience. It doesn't happen that way. In the financial marketplace, just like in the courtroom, in the operating room, or in the board room, education, training and experience pays off. Inexperience and ignorance are costly. 

- Being careful is always wise, but being overly careful and letting fear overwhelm you is lethal: It will paralyze you. Taking calculated risks is the name of the game. 

- You must know how to deal with losses so that they don't defeat you. Winning traders don't ignore their mistakes; they learn from them and get better and stronger. 

- Do not be so arrogant that you cannot identify a mistake and deal with it quickly. If arrogance wins, you lose. 

- Always have an exit plan: In 1987 I didn't have an exit plan. It was the single worst day of my life because I was at the mercy of the market. It took me over six years to get my emotional ship on an even kneel. Eventually, I was able to analyze my past mistakes and take responsibility from them. I realized that my problems arose not because the market caused them, but because I caused them. Since that time, I have a tremendous respect for risk and when I enter a position I always have an exit plan. 

- Set realistic profit targets and take your profits: Trading is a business. Threat it like a business. No one wants to work hard all day and go home empty handed.

- Never trade without a protective stop: Prepare for the worst and never trade without a protective stop. Every trader makes mistakes. When you make a mistake, you want to be sure that you have limited your risk and protected your capital. Trading without stops exposes you to unidentified and limitless risk. You just can not afford to do that.

- On 9/11 I wasn't trading naked. 

- Another strategy that I often use to deal with a trade that is not working for me is the two-minute rule. Generally, if my trade is a good one, I know whitin two minutes because I am making money. 

- The mind is a very powerful thing. It controls both our emotions and our actions. Many traders pshycologically sabotage their trading and they don't even know it. They are not prepared for the flood of emotions that sweep over them when they are trading and therefore they are unable to deal with them. 

- If you recognize your emotions and acknowledge the power that they have over your trading, you have taken a big step forward.

- Do not waste time and energy with regret. Do not demand perfection of yourself. Analyze your mistakes and learn from them. Then, move on.

- Being lost is a miserable feeling. Traders without a proven strategy know how confusing and unsettling it is because they feel lost everyday. 

- I purchase a block of futures or stock and liquidate my positions in portions. I take the first section out of the market after only a few ticks. Next, I take out the second part after a point or two of profit. Finally, I maximize my profits with my final contracts and try to follow the daily trend of the market. I always try to get paid and I work hard to limit my losses. 

- Some traders believe that all they need is a system. They will execute their system day in and day out, year in and year out. Let me assure you that that will not work. It will not work because the markets are dynamic. They are constantly changing. What you have to do is learn to read the markets and adapt to the changes. It takes education, patience, and persistance.

- Worry about the risks, the Rewards will come: Trading requires a long-term commitment. You have to be persistent, learn from your mistakes, and continuously improve. That is why risk management is so important. If you don't preserve your capital you will not have the staying power that you need to master the game and reap the real profits.

- Remember that this multiple contract approach only works if you are skilled at selecting correct points and times of entry. 

- If the broader market appears to be particularly bearish and one of the markets seems to be weaker than the others, I trade that market; the chances are that it will be the first one to go down. Conversely, if the general market is very bullish , and the S&P or Dow seems more bullish than other futures markets; I'll favor them. Always try to choose the leader of the pack and join it.

- I build a list of positives and negatives in a T list to determine the direction of the trade.

- Once I am able to identify a market position, I look for confirmation or denial. I do this by looking at the other markets. If I am trading S&P, I look at the DAX and the Dow. 

- Generally, within five minutes or so after a scheduled report is released, the market reacts and then it quickly settles back down. 

- Day trading rules: Watch for the news and don't trade until any news settles. 

- If you gain just one or two helpful  insights from a book, it's probably worth reading. Those insight might give you the edge that you need.

- With cloudy vision they are concentrating on a market that is dead and gone. - Trade in the present.

- Once the trade is over, win or lose, move on to the next trading  opportunity. The market will always present you with another chance.

- She gets swallowed up by her losses. Until she learns to balance her emotions, she will not win.

- Beginning traders always have a tendency to take huge losses and tiny profits.

- Get a trading buddy: Trading can be a lonely job. 

-  Study the past but trade in present.

- Suggested reading:

* The Day Trader: Borsellino

* Kiyosaki - Rich Dad's Prophecy

* Livermore - How to Trade in Stocks

* Roosevelt - 12 Habitudes of Highly Successful Traders

* Schawager - New Market Wizards

* Smitten - Jesse Livermore