Archive for January, 2008

A near miss….

Thursday, January 31st, 2008

I followed my trading plan perfectly in today’s trade. Price almost touched my target before reversing, and I closed the trade for a small loss.

fills-20080131.png 

Wednesday, January 30th, 2008

I took a short trade today which was stopped out before eventually going on to reach my target. That happens occasionally, and I have no complaints. One thing you absolutely must do in this business is respect your stops. 

I had 4 contracts losing an average of 3.25 per contract, an overall loss of 13 points. I was in the market for approximately 8 minutes.

20080130.png

[Note I have decided to display my daily results with screen shots of the realized P&L, rather than the shots of the "Trades" screen I have been using so far. 

This is because I have received a number of emails from people confused by the trade screen format, and others who wanted to see results in dollars, not points.]

 

 

Missed opportunity!

Tuesday, January 29th, 2008

Somewhat ironically, given the subject of my last post, I missed a rather tight opportunity for a trade today. As is always the case, this turned out to be an almost instant winner. Now the market has got up near its upper limit and, as I have a big day planned for tomorrow, I am closing up shop and accepting this as a no-trade day.   

In my defense, it would have been the first time I’ve used this setup, which is a new variation I’ve decided to add to my toolkit. Consequently, I was a bit slow getting my orders in. On a positive note, it is great to see that the pattern worked as expected. 

As a day trader, when you do something clever you get all the credit! When you don’t…….well, you get my drift…. the buck stops with you.

 

Training is vital for consistent day trading profits

Tuesday, January 29th, 2008

Day trading is a highly competitive, stressful, fast-paced activity. Only a relatively small number of traders are at the top of the pyramid and consistently succeed. What are the characteristics of these people?

The truth is that the top day traders have a lot of traits in common with top artists, or elite athletes. That should not be too surprising. Many people tinkle the ivories, but not many can make a living as a professional pianists. Lots of us enjoy a game of tennis, but not many can earn a living on the pro circuit.

Obviously people who succeed in the arts and sport have a certain amount of talent for their chosen profession, they have the passion to work long and hard to perfect their technique, they have the determination to succeed, the courage to keep going after setbacks, and the self discipline to maintain their technique under intense stress.

All these things are important, but there is another aspect I would like you to consider. Ask yourself how many concert pianists would say they stay at their peak without any practice between  recitals? How many tennis pros would retain their top ranking if the only time they held a racquet was in tournament matches?

So, how many top class traders consistently succeed if the only trading they do is during live trading sessions?

The professional artists or athlete practices or trains for hours each day. This is not something that stops once they reach the top. It is an ongoing part of their lifestyle for as long they remain professional participants.

So what is the equivalent of practising your volley, getting in some putting practice, singing the scales, or any other form of honing your skills, for the professional day trader? 

Well, what I find works well for me is this. At the end of each trading session I make screen shots of the daily chart in whatever time frame(s) I use to make my trading decisions. I save these in a folder for the particular contract. So, for example, I can now go back to the Nov 2007 Soybeans futures contract and look at the 1 minute, 2 minute and 5 minute charts for each trading day during the period when this was the "front contract". That is usually two to three months worth of daily charts for each contract.

I have been doing this for a long time, so I have literally thousands of charts to look at.

Usually before a trading session starts, I like to limber up by pulling up charts for forty or fifty old trading days and go through each one applying my trading rules.  After a while you can do this very quickly, as you spot your various trading setups instantly. 

This is important because when you are trading in a live session you do not have complete patterns to look at. Setups which are glaringly obvious when you are looking at a complete chart can be very difficult to spot when you are watching the charts forming on your screen in real time.

The benefit of the kind of training I am talking about is that the setup patterns become so deeply internalised in your mind that you can watch the bars being painted on your screen in a live session, and instinctively "see" what the next bar(s) need to do to complete a setup.   

When you reach this state, it is like being "in the zone" in any activity. Suddenly you seem to have more time. You are anticipating, not reacting. Note that anticipating is not the same as predicting.  All the training in the world will not enable you to predict the future, but you can learn to anticipate what movement is required to complete a setup pattern.

Often a pattern is not completed. You get your orders in, having anticipated what is needed to complete the pattern, but then price moves in another direction. Now you can instantly see what is needed to complete a different setup. The initial orders are smoothly cancelled, and new ones entered. This might happen a few times before one of the setups completes and you find yourself in a trade.

At that point, there is no hesitation. You swing automatically, instinctively, into your trade management routine. Your stop is entered, your target also if you use one. Stops are adjusted, profits are taken, all according to your trade management plan which you have practised countless times during your out-of-market training sessions. 

I know that one of the much vaunted benefits of day trading is that there is no need to work long hours. Most of the trades I take are over in less than fifteen minutes, so I could say I work for fifteen minutes a day. But ask yourself, does the elite 100 metres sprinter who averages one race each week of the year just work for ten seconds a week?

Of course not! And neither does a top class professional day trader just work for a few minutes a day. If you want to be successful, be prepared to put in the hard yards learning the ropes, then be prepared to build a rigorous training schedule into your routine.

It is still the best job in the world, but be realistic about the commitment you need to put in to get to and stay at the top. 

Trading different markets…

Monday, January 28th, 2008

I took a long signal in today’s wheat session, but the market did not get up and go. As I’ve mentioned before, if this market does not move quickly I like to cut my losses and exit. In this case I was long 4 contracts and I took a 0.5 point loss on 2 of them and a 0.75 point loss on the other two – a nett loss of 2.5 points. 

fills-20080128.png

One of my clients recently raised the issue of trading with my techniques in different markets. I developed my approach trading the emini Russell 2000 futures, but now focus on the grain markets. I trade wheat at the moment, but I often switch to soybeans.  There are a number of points to consider.

  • I prefer markets with high momentum, high volume trading periods. Some 24 hour electronic markets do not really satisfy this criteria as well as commodity markets during their traditional opening periods – the grains, oil, gold, etc. Many stocks are also good day trading candidates.  You have to decide on the duration of the opening period to watch, which varies from market to market.
  • I never vary my entry signals, which are based on the tactics I like to use around support and resistance levels.  However I do vary my trade management practices based on the characteristics of the particular market. The placement of targets and stops is something which I find can be "tuned" to each individual market, although it is always wise to remember the guiding principle that average losses should be smaller than average wins.
  • Some markets just do not have enough volatility to day trade. You can never make day trading profits in markets which do not move enough. You always need the potential to make substantial profits with a positive average win to average loss ratio, after taking into account the impact of trading costs. (See here)

Steady day trading is the way to go…..

Friday, January 25th, 2008

I could find nothing to trade today. Wheat immediately moved higher and any breakouts to the long side would have had targets above the high limit, so naturally they were declined. Maybe price will turn down and take a run back towards the short side, but I’m not inclined to wait around for that. A "no-trade day".

Reviewing the shortened holiday week, there has been 1 winner, 1 loser, and 2 no-trades. The winner made 21 points, the loser lost 7.5 points, so net gain was 13.5 points less commissions. The total time money was at risk in the market was under 10 minutes. Not an awe inspiring result, but I’ll take it….

One of the reasons I started this diary was to illustrate the "steady" nature of earnings when you day trade in a disciplined manner. As the weeks click by, I hope you are seeing this for yourself. Of course, losing weeks will inevitably occur, but they are quite rare. Equally, there are those special weeks when you walk away with three or four wins.

The importance of keeping the average loss less than the average win is reinforced by the fact that I’ve had as many losers as winners in the last two weeks, but still managed to keep earnings positive. A good average win to average loss ratio gives you a margin for error if your percentage of winning trades happens to drop below targeted levels.

 

The day trader is not buffeted by market gyrations

Thursday, January 24th, 2008

You may have noticed that my day trading this week has been just the same as in previous weeks, despite the market turbulence all around us. This is something I like about this kind of trading. You are focussed on short term charts with the specific objective of hitching a ride on momentum moves, whatever their direction.  Your risk is tightly controlled, so there is none of the feeling of hysteria which grips longer term traders and investors when markets collapse.

Today I took a short trade which did not work out.  In the wheat market, I like to quit trades like this fairly quickly, so I keep a tight stop. Sometimes this burns me a bit, because the market turns back and goes my way, but it is worth it to keep my average loss smaller than the average win. As I write, I can see that happened today, with my original short trade winning comfortably at the moment. C’est la vie.

fills-20080124.png

I sold at 909 and bought back at 912.75 for a loss of 3.75 per contract, 7.5 points in total.

 

A nice short trade…

Wednesday, January 23rd, 2008

A day trader does not need to have a "view" on market direction. All (s)he needs to do is follow the price action and be guided by market reality.

Today was a case in point in the wheat market. Price opened with a downward bias, and I was sitting waiting for a confirmed break to the downside. Instead the chart made what is often a pretty good bottoming pattern and turned back up to challenge the session highs. At that point I was almost certain that any trade taken today would be a long.

However, price suddenly broke downwards again and, somewhat reluctantly, I entered orders for a short trade. These were triggered and fortunately I caught a sharp downward spike making 7 points on each of 3 contracts. Money was at risk in the market for just 2 minutes.

080123-fills.png

The moral to this is that the day trader cannot know or predict market direction, but can hope to hop aboard momentum moves and capture a portion of those moves. Of course, this is only worthwhile in markets with sufficient volatility to make these short term trades worthwhile.

I suffered two full points of slippage on the entry to this trade. I aimed to enter with a sell stop order at 928,  but was filled at 926. This can be annoying, although it often indicates the momentum is very strong.

 

 

Turbulent Times

Tuesday, January 22nd, 2008

I hope my readers in the US had a good holiday. While your market was closed, the rest of the world had a rough ride in their share markets. In Australia we were off 7% for the day, and now have an official bear market as the pull back from the peak last November exceeds 20%.

It was interesting waiting for the grain markets to open.  The Dow was way down, but as I write it has recovered somewhat following the Fed’s 0.75% rate cut. I wonder if the Fed’s charge will effect a dramatic rescue, or they will be left looking like King Canute?

There were some sharp moves in the currency markets as well, and I think these often feed through into the grain pits. At all events, wheat traded with a good deal of volatility in the open (see chart below), but I was unable to find a trade and have closed up shop for the day. 

22-jan-08.png 

A legitimate loss…

Friday, January 18th, 2008

Having waited patiently for a breakout, I eventually entered a long trade which didn’t work out. I was long 7 contracts and exited the trade with a 1.25 point loss per contract, 8.75 points in total. I was in the market for just over seven minutes.

fills-20080118.png 

While it is never much fun to take a loss, at least this one was entered according to a valid trading signal. I also managed to exit reasonably gracefully so that the loss was substantially smaller than my average win.  (If you do that consistently, it bodes well for your trading health.)

It has not been a particularly good week (although it might have been). I made a net gain of 16 points less commissions. Performance was marred by the poor discipline trade I took on Wednesday, which cost me over 18 points, more than halving my earnings for the week. Notice that keeping losses smaller than gains has enabled a 50% win rate to end up in the black.

As a day trader, I strive for consistent profits. I really don’t like those trading systems which, while profitable in the long term, require you to trade sometimes for months on end with no return. My aim is to take a monthly "income" out of my account. So, at the end of the day, I’m not going to quibble unduly about a positive week!

Well, it’s a trading holiday in the US on Monday, so I look forward to continuing this diary next Tuesday. 

A quiet session…

Thursday, January 17th, 2008

Wheat rocketed up to limit high in the first few minutes of trading and has been locked ever since, over an hour now. This provides no trading opportunities – not using my methods, anyway.

I’ve been waiting round to see if price comes off the highs, and I get an opportunity to ride a bit of momentum to the short side. However, there’s no sign of that occurring just yet, and I’m feeling tired, so I think I’ll call it a day.

A no-trade day…. 

In day trading, good execution is paramount!

Wednesday, January 16th, 2008

One thing about posting your results is that it can be rather embarrassing when you screw up.

Today I did just that.  I have been doing some research using a shorter chart time period than I normally use, and when I saw a signal develop in that time frame today – I jumped in! That was a disgusting lack of discipline and I was punished as only the market can punish you. A quick loss of 18.4 points in just under 2 minutes. (4 contracts sold at an average price of 916.9 and bought back at 921.5)

It is not the fact that I lost which concerns me – as I’ve said many times before, losing is part of this business. The trader’s job is to minimize the losses, they cannot be totally eliminated. No, what upsets me is that I allowed myself to deviate from my trading rules… 

Still, there is not much time in day trading for self recrimination. You have to take it on the chin, and get right on with the job. Time enough after the session is over (like now) to rebuke yourself and swear not to violate your system again. Meanwhile there is work to be done.

Within 15 minutes, a genuine signal developed and (with some trepidation) I entered another short trade. Fortunately that one worked out OK and led to a gain of 23.1 points after just a tad under 10 minutes. (3 contracts sold at an average price of 916.2 and bought back at 908.5).

The net result for the day was +4.7 points (less commissions) with a market exposure around 12 minutes. Certainly not an outstanding result, but at least it was in the black, which is  better than I deserved.

20080116-fills.png

I received an email from a reader asking why I refer to wins and losses in points and how points relate to dollars. Well, in the grain markets, one point is USD50.

I prefer to think about wins and losses in terms of points because, for some strange reason, it triggers less emotion than counting the dollars.  A lot of trading is psychological, and this is one little trick which helps me to trade consistently. Irrational, but there you are.

Day Trading for a Living

Tuesday, January 15th, 2008

I was reading an article today which maintained it is not possible to make money day trading. Naturally this piqued my interest because I day trade for a living and last time I looked I was doing OK. 

The article began by making the very valid point that the vast majority of day trading articles are not written by traders at all, but rather they are written by people marketing systems with hypothetical track records created with the benefit of hindsight.

That is absolutely true.

It is equally true of articles about every other trading style in commodity futures, stocks, forex and options. Whether it is covered calls, trend following with our extra special absolutely never seen before new indicator, swing trading, pairs trading, spread trading, or selling naked options, or any other style, it will often have a hypothetical track record. The time period of the method being promoted is absolutely irrelevant.

The article quotes CFTC rule 4.41 which every futures trader has seen many times. It says:

"Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown."

This pertinent warning is not confined to day trading systems. It is applicable to ANY trading system in ANY time frame where hypothetical or simulated track records are provided. 

You see, most system developers research historical data to find high probability setup patterns. They develop indicators and trading rules to exploit these patterns. There is nothing wrong with that, so long as it is realized that the resulting system is optimized over this data set. The only valid way to test the system is to test it on a completely different, independent set of data. Often a system that looks spectacular on the data the developer was originally working with will fail miserably when applied over a different period.

The article went on to say that all day trading systems lose because "volatility in short term time frames is random and prices can and do go anywhere, meaning that if you try and use support and resistance levels they wont help you with your trading signal or help you get profitable market timing. You therefore cannot get the odds in your favour and will lose over time. This is fairly obvious when you consider that the price in any financial market is made by a vast diverse group of traders".

Well, that is quite a statement. The fact is "volatility" exists in any time frame and, by definition, it is random in the time frame considered. Indeed, prices can and do go anywhere, whatever time frame you are looking at.

Support and resistance levels are identified from trading charts. If no time scale is displayed it is impossible for any trader to differentiate between a 1 minute chart, a 1 hour chart, a 1 day chart, a weekly chart or a monthly chart if they are not told which market they are looking at. The fact is all charts, in all time frames, exhibit similar characteristics. You will find trends, ranges and most importantly support and resistance levels. It follows that whatever edge you think you can get from identifying support and resistance levels in one time frame is equally applicable in the other time frames too.

Most successful traders use strategies which either (a) sell support and buy resistance, or (b) buy breakouts through resistance and sell breakouts through support. These core strategies are available to any trader working in any time frame.

The distinguishing feature of the day trader is that (s)he always exits trades before the end of the trading session. No positions are held overnight or over weekends. By adopting this approach the trader minimizes "event risk" which is the chance that some dramatic event will so disrupt the markets that you suffer a major loss. (Stop losses are ineffective in this scenario because the market "gaps" through your stop loss level.)

The REAL drawback to day trading is trading costs.

Say that in some hypothetical market, the typical trading costs are commissions (2 points) and slippage on entry and exit (1 point each). So for each trade, trading costs come to 4 points. Now, if a long term trader typically targets 100 points, trading costs would be 4%. For a medium term trader targeting, say, 40 points trading costs are 10%. But for a day trader, targeting 10 points, trading costs are 40%!

Clearly, then, not all markets are good for day trading. If the average market movement is just a few points, the trader will be unable to find short term trades which cover the trading costs. Even where the trading costs can be covered, they often turn what looks like a good system into a poor one. This is because, as a rule of thumb, trading costs are nearly always deducted from theoretical profit in successful trades, and added to the theoretical loss in losing trades. This significantly changes the average win to average loss ratio for the system.

To prosper, the day trader seeks out volatile markets where the the projected trading costs are a small percentage of targeted gains. The Expectancy, allowing for the impact of trading costs on the average win to average loss ratio, must be positive.

Fortunately, many such markets exist. (The rather stodgy forex market, with its high trading costs, is not a prime example.)

 

 

 

A nice trade on a strong open.

Tuesday, January 15th, 2008

Wheat had a strong, volatile opening today and I was able to catch a nice trade.  

20080115-fills.png

I went long 3 contracts at an average price of 930.8, selling them at 937.5. Total profit was 20 points and time in the market was under two minutes.

 

Grains correlated with the dollar

Monday, January 14th, 2008

Wheat, the market I’m following at the moment, went limit up very quickly today. There was a continuation pattern to the long side, but as my target price would have been over the limit, I declined the trade. So another no-trade day!

I noticed that corn was limit up (+20 points) also. Soybeans, with their wider limit (50 points) were up a long way but still trading.

I have often noticed that sharp moves in the dollar often correlate with grain market moves. Today the US dollar was very weak at the open, and all the grain markets surged. I may be quite wrong, but I think this is influenced by the fact that the move in the US dollar price is not reflected for overseas participants in terms of their own currencies.

In other words, the trader thinking in terms of the Euro sees a much smaller price move than the trader whose base currency is the US dollar.

I am not suggesting for one moment that you try to trade this correlation, if it does in fact exist. As day traders, it is far better to concentrate on the formation of high probability chart patterns for your setups. 

 

A good nibble, but no bite.

Friday, January 11th, 2008

Sometimes when you’re fishing, you know there is one out there. You get the nibbles, maybe lose the bait, but never get a firm bite for a strike to set your hook.

I was within a few seconds of taking a downside trade today, but the pattern just didn’t quite form properly and I held off. The wheat market opened high, went close to limit up, before breaking sharply to the downside. The trade I missed would have been a good one. As I write, price made a climatic low (although still not closing the gap down to yesterday’s close), and now is grinding its way up again. Unless it challenges the day’s low again, I won’t be showing any interest.

Reviewing the week, it has been a quiet one for me, despite the volatile nature of the markets. I’ve only found two opportunities to trade, making a total of 18 points on Monday and just 3 points yesterday. Lately I have been typically finding about four trades per week, so this was below average. Still 21 points, less commissions, is a reasonable return, and I had capital at risk in the market for less than ten minutes.

Day Trading is like Fishing!

Thursday, January 10th, 2008

I see a great similarity between day trading and fishing. You figure out where you are going to catch your fish, set your line, and wait patiently. It’s the same for the day trader – you have to wait for your setup before you strike. Impatience must be curbed.

When you do strike, it often feels like an explosion. Suddenly it’s all action. 

Sometimes you catch a big fish, sometimes it’s a little one. Sometimes the fish gets away.

Today I netted a little one.

080109-fills.png

I went in with 3 contracts, made 1.5 points on one of them, and 0.75 points on the other two – three points in total. Total time in the market was just over 5 minutes. Of course, I had targeted about 20 points, but when price didn’t move there quickly I was happy to be out with a small profit.

 

 

Sometimes your trading rules are frustrating…

Wednesday, January 9th, 2008

I did not trade again in today’s session. So far this week, I’ve only had the one trade. Proof positive that day trading is not "more trading".

As it happens, I watched the market longer than I usually do today because I felt it was building for a break to the downside. Sure enough, the break came after about ninety minutes.

Unfortunately, the break didn’t quite form the chart pattern I was looking for, so I missed the opportunity. This was frustrating as the trade was an easy winner.

However, experience tells me that if I do jump in on an incomplete pattern, the odds are not with me in the long run.

About 2 minutes after the initial break, one of my preferred chart patterns was completed – but I didn’t take that one either. The reason was that the profit/risk ratio (after taking expected slippage into account) was less than one. This trade would have been a winner as well.

So, despite my intuition about the market action being spot on, my trading rules held me out of two profitable trades. That’s frustrating! All I can say is that either you have a system, or you don’t.  Tomorrow is another day, and the market will present new opportunities. 

Consistent success requires consistent trading.  

Flirting with a limit move – again!

Tuesday, January 8th, 2008

There was another violent early move in the topsy turvey world of wheat today. Within the first eight minutes of trading, price moved right up to within one point of the upper limit for the day, and I saw no opportunity to jump in.  It was an almost thirty point move.

It is not possible for one of my preferred trading patterns to develop now, so I will sit out the session.

Another no-trade day.

20080102-fills.png 

A short day at the office…

Monday, January 7th, 2008

Today I was fortunate to pick up a short trade early in the session, netting 4.5 points per contract.

080107-fills.png

The nice thing about this trade is that it was in the market for just 70 seconds. 

I have turned off my trading screen and it is time to go back to bed (1:55 am back here in Australia). 

Day Trading is not necessarily More Trading

Saturday, January 5th, 2008

This fill report for Friday speaks for itself!

20080104-fills.png

Wheat is up at unusually high levels at the moment, and one consequence of that is that it is challenging its daily limit moves much more often. In the previous two sessions it was the upside limit. On Friday, it was the lower limit. 

There was a downside breakout pattern which would normally have tempted me, but again I had to hold off because it was too close to the lower limit, limiting potential gain. Whenever I consider a trade, I know what my profit target is going to be. If that target is above the upper limit or below the lower limit (as it was today), then I generally decline the trade.

If wheat remains up at these heady levels, I wonder if the exchange will consider expanding the daily movement limit to fifty points, as it is for soybeans?

I waited for a while to see if the price would bounce enough to re-challenge the daily highs, but it didn’t do that until the last half hour of the session, by which time I was asleep! So it was anther no trade day for me.

Reviewing the first (three day) trading week of the year, I had just one opportunity to trade. Despite making a pig’s ear of the entry, it was a profitable trade and I’ve closed the week out in the black. I’ve had  money at risk in the market for six minutes (including the one minute mistaken trade). That’s a statistic I really like.

There is a perception that day traders are frequent traders, in and out of the market several times per session. Some are, but I’m not. In the past, over-trading has been a problem for me, so I have very strict rules about it. I limit myself strictly to one planned trade per day, and if one of my trading patterns doesn’t occur, I don’t trade at all.

This policy does some good things for me:

  • I don’t rack up excessive commission fees.
  • I don’t "revenge" trade, trying to get even for the day after a loser. (This almost always results in emotional trading on inferior setups.)
  • I don’t give my profits back after a win.
  • I’m careful about choosing the trade I make (because it’s the only chance I’m getting today!)
  • Since the majority of opportunities occur early in the session, I don’t have to watch the screen for hours. (Incidentally, that’s one reason I like the grain markets. The full session is "only" three and three quarter hours long! That’s a lot less time to cover than the equity index and foreign exchange contracts.)

 

Day Trading Strategy has to be Executed Correctly

Thursday, January 3rd, 2008

I have been trading for a long time, and I constantly emphasize the importance of discipline and perfect strategy execution to my students. In the real markets, every little mistake you make usually costs you significant amounts of money. Sometimes you make a "lucky" mistake, but it is a rarity.

Today, my first trade in 2008 was a mistake! After waiting patiently for an opportunity I decided to take a long position if the wheat price broke above 938.75. My normal method of entry is to enter a buy stop order at the breakout level. 

A moment after entering this order, I heard the bell ring on my trading screen and saw that I was short six contracts! I had entered my order in the wrong column and it ended up as a SELL stop order, instead of a BUY stop. As price was still below the target entry level, the Sell was triggered immediately.

So now I was short when I wanted to be long, and I expected price to move up sharply. What to do? Well, one thing NOT to do is accept your error, and hope the short trade works. I set a very tight stop and a limit order at my entry in the hope of getting out flat. In the event, the stop was triggered and I lost an average of .9 points per contract ($270) plus $36.60 brokerage. See the first and third lines in this fill report which record this sorry tale.

20080103-fills.png

Note, the times are in my local (Australian) times, not the time in Chicago. I was in this trade at 2:30:48 and out at 2:31:50 with a loss of over $300. I could have wished for a less expensive object lesson in the importance of executing my trading strategy perfectly.

However, this example also illustrates another important trait that helps you as a trader. There was a time when I would have beaten myself up for my error, been fearful of losing even more, and closed up shop for the day.

But the fact was that my entry signal was still valid, and in the fast moving day trading market there is no time for self recrimination. I immediately entered the Buy stop order correctly, and it was triggered a minute later at 2:32:38. After a further five minutes my target price was hit and I was out with 2.75 points profit per contract.

While it was good to end up in the black, this was not a satisfactory session. A day trader must minimize losses ruthlessly by cutting short losing positions and reducing trading costs (commissions and slippage) to a minimum. My loss tonight was completely avoidable and it will reduce my win to loss ratio.

You can learn more about my trading methods in my eBook

 

 

Straight into a limit up day.

Wednesday, January 2nd, 2008

I am going to stick with the wheat market for the time being. Today’s open was very strong, and I was wary of getting into a long position because of limited upside before the daily limit move (+30 points) was encountered.

Sure enough, after ten minutes the market locked at the upper limit and it looks like it will stay that way for the entire session (very high bid numbers at the upper limit). At all events, I’m not going to stay and watch it.

So my first report for 2008 will show a blank result – no trades today.

 20080102-fills.png 

 

Steady Income From Day Trading Futures

Tuesday, January 1st, 2008

As a means of publicising this site, I publish articles at www.ezinearticles.com. It is interesting to read some of the other articles about trading.

Some of them have titles such as "Why you will never make money day trading". The articles maintain that intraday action is too volatile and unpredictable to enable traders to get the odds in their favour.

I find this a little amusing and a little sad. Most successful traders find a niche which suits their temperament and which they become good at. In the process of doing this they may try different vehicles and strategies which are unsuccessful. However, because they fail in a particular area, it doesn’t mean that it is impossible to make money in that area. All it means is that the trader wasn’t good enough when (s)he tried it.

For example, there isn’t much that you could teach me about various option strategies. Theoretically, I know how to make a lot of money with options, but in practice it never worked out for me. Buying out-of-the-money options doesn’t have enough winners for my temperament. Selling way-out-of-the-money options has plenty of winners, but really high stress levels on those few occasions when the options flirt with the strike price as the expiry date approaches. Fancy multiple option strategies look good, but trading costs are high. However, I do know traders who do well with options, so obviously money can be made if you have the right strategy and temperament.

Authors criticizing day trading are usually trading Forex. The day trader’s enemy is trading costs, and despite the "commission free" trading generally offered by forex brokers, trading cost is high because of the spread. If I were to try day trading forex, I would use futures contracts at the CME (Chicago Mercantile Exchange) during high volume periods.

However, I prefer markets with enough volume to ensure a tight spread, but not such a huge volume that the market becomes hard to read. The grains (soybeans, wheat and corn) fill the bill exactly for me. Equity indeces (Russell 2000, S&P 500, Nasdaq eminis and the Dow $5 contract) aren’t too bad, but I find them more difficult. I don’t like the very high volume bond market at all. I’m not saying you can’t make money in these markets, I’m just not good at it.

Share traders often find a similar effect whereby very high volume shares like Microsoft are harder to day trade than a middle of the pack S&P 500 company. Usually successful share traders watch a group of stocks which they like and feel confident with.

I have discussed the keys to successful day-trading  in other articles, but briefly they are as follows:

  • Understand how support and resistance works in the market.
  • Build a trading method utilising support and resistance levels. (The tactics you can apply near these levels are almost limitless.)
  • Back-test your method on independent data (not the same data you used to design it). Ensure it has a positive Expectancy and good frequency of trading opportunity.
  • Plan your money management strategy so that you know how much to invest in each trade without exposing yourself to too much risk.
  • Practice, practice, practice, so that you can execute your trading plan flawlessly every time the opportunity occurs. This is harder than it sounds when day trading. Things happen fast and there are a lot of things to think about.

The trader who does these things, and has the discipline to stick to the trading plan during winning and losing spells, will be successful. As many, many authors have written, trading is 90% psychology. The main enemies are your own lack of discipline and self-honesty.  Of course, the majority of day trading is done from the trading rooms of large investment banks and brokerages, and the professional traders involved are using somebody else’s money and therefore are not subject to the same levels of stress. You have to learn to perform as well as they do despite the additional anxiety of having your own money at risk.

As I have written previously, day trading has the great benefits of giving fast feedback, reduced risk exposure, and a much steadier income stream than longer term methods. (That’s not to say those methods aren’t successful. Large funds using trend following strategies have shown that they are.)

I suppose this subject could be discussed back and forth forever and a day. The acid test is to look at a trading record. For this reason, I have decided to publish my trade executions report at the end of each session in this diary, starting from 1 Jan, 2008. That way, you, the reader, will be able to form your own views as to the profitability or otherwise of day trading. 

I hope you find this interesting, whatever the outcome!