MAKING A DAY TRADE OF IT
Day trading is sometimes presented as a profitable hobby. Anyone who buys a day trading DVD course via infomercial can make money easily in just a few hours a week, right? Well, no. Day trading is a job. It can be a fulltime job or a part-time job, but it requires the same commitment to working regular hours and the same dedication to learning a craft and honing skills as any other job.
The best traders have plans for their business and for their trades. They know in advance how they want to trade and what they expect to do when they face the market. They may find themselves deviating from their plans at times, due to luck or circumstance or changing markets, but in those cases at least they understand why they are trying something else.
Failing to plan is planning to fail. And if you can’t remember that right now, don’t worry. I repeat it several times in this book.
Here’s another reason for planning: Trading comes in many flavors, and many of those who call themselves day traders are actually doing other things with their money. If you know in advance what you want to do, you’ll be less likely to panic or follow fads. You’ll be in a better position to take advantage of opportunities in a way that suits your personality, trading skills, and goals. And that’s why this entire chapter is devoted to planning.
Planning Your Trading Business
The day trader is an entrepreneur who has started a small business that trades in securities in hopes of making a return. You’ll get your business off to a good start if you have a plan for what you want to do and how you’re going to do it. That way, you know what your goals are and what you need to do to achieve them.
You can find a lot of sample business plans in books and on the Internet, but most of them are not appropriate for a trader. A typical business plan is designed to not only guide the business, but also to attract outside financing. Unless you are going to take in partners or borrow money from an outside source, your day trading business plan is for you only. No executive summary and no pages of projections needed.
So what do you need instead? How about a list of your goals and a plan for what you will trade, what your hours will be, what equipment you’ll need, and how much to invest in the business?
Setting your goals
The first thing you need in your plan is a list of your goals, both short term and long term. Here is a sample list to get you started:
- Where do you want to be in the next three months, six months, nine months, a year, three years, five years, and ten years?
- How many days a year do you want to trade?
- What do you need to know to trade better?
- How much do you want to make?
- What will you do with your profits?
- How will you reward yourself when you hit your goals?
Be as specific as possible when you think about what you want to do with your trading business and don’t worry if your business goals overlap with your personal goals. When you are in business for yourself, the two often mix.
You might be tempted to say, “I want to make as much money as I possibly can,” and forget the rest, but that’s not a goal that’s quantifiable. If you don’t know that you’ve reached your goal, how can you go on to set new ones? And if you don’t meet your goal, how will you know how to make changes?
Picking the markets
There are so many different securities and derivatives that you can day trade! Sure, you want to trade anything that makes money for you, but what on earth is that? Each market has its own nuances, so if you flit from futures to forex (foreign exchange), you might be courting disaster. That’s another reason why you need a plan. If you know what markets you want to trade, you’ll have a better sense of what research services you’ll need, what ongoing training you might want to consider, and how to evaluate your performance.
And what do zero sum, leverage, and upward bias mean? Well, zero sum means that for every winner, there is a loser. There is no net gain in the market. Leverage is the use of borrowed money, which increases potential return and also increases risk. Upward bias means that in the long run, the market is expected to increase in price, but that doesn’t mean it will go up on any given day that you are trading.
Table Popular Things for Day Traders to Trade
The characteristics of the different markets and assets will affect both your business plan and your trading plan. The business plan should include information on what you will trade and why, as well as on what you hope to learn to trade in the future. The trading plan looks at what you want to trade each day and why, so that you can channel your efforts.
Many day traders work in a few different markets, depending on their temperament and trading conditions, but successful traders have narrowed down the few markets where they want to concentrate their efforts. Start slowly, working just one or two different securities, but consider adding new markets as your experience and trading capital grows.
Fixing hours, vacation, and sick leave
The markets are open more or less continuously. Although many exchanges have set trading hours, there are traders working after hours who are willing to sell if you want to buy. Some markets, such as foreign exchange, take only the briefest of breaks over the course of a week. This gives day traders incredible flexibility — no matter what hours and what days are best for you to trade, you can find something that works for you. If you are sharpest in the evenings, you might be better off trading Asian currencies, because those markets are active when you are. Of course, this can be a disadvantage, because no one is setting limits for you. Few markets are great places to trade every hour of every day.
If you want to, you can trade almost all the time. But you probably don’t want to. To keep your sanity, maintain your perspective, and have a life outside of your trading, you should set regular hours and stick to them. In your business plan, determine when you are going to trade, how often you are going to take a vacation, how many sick days you’ll give yourself, and how you’ll know to take a day off. One of the joys of self-employment is that you can take time off when you need to, so give yourself that little perk in your business plan.
Trading is a stressful business. You need to take time off to clear your head, and you’ll probably find that working while sick is a sure-fire route to losses. Build in some sick and vacation time — and read more information on how to manage the stress of the markets.
Getting yourself set up
Part of your business plan should cover where you work and what equipment you need. What can you afford now, and what is on your wish list? Do you have enough computing equipment, the right Internet connection, and a working filing system? This is part of your plan for getting your business underway, so put some thought into your infrastructure.
And yes, this is important. You don’t want to lose a day of trading because your computer has crashed, nor do you want to be stuck with an open position because your Internet service provider has a temporary outage. And you certainly don’t want to lose your concentration because you are trying to work in the family room while other members of your household are playing video games.
Investing in your business
You won’t have the time and money to do everything you want to do in your trading business, so part of your business plan should include a list of things that you want to add over time. A key part of that is continuous improvement: No matter how good a trader you are now, you can always be better. Furthermore, the markets are always changing. New products come to market, new trading regulations are passed, and new technologies appear. You will always need to absorb new things, and part of your business plan should consider that. Ask yourself
- What percentage of your time and trade gains will go into expanding your knowledge of trading?
- Do you want to do that by taking seminars or by allocating the time to simulation testing?
- What upgrades will you make to your trading equipment?
- How are you going to set yourself up to stay in trading for the long haul?
It takes money to make money — another cliché. It doesn’t mean that you should spend money willy-nilly on any nifty gadget or fancy video seminar that comes your way. Instead, it means that an ongoing, thoughtful investment in your trading business will pay off in a greater likelihood of long-run success.
Evaluating and revising your plan
One component of your business plan should be a plan for revising it. Things are going to change. You may be more or less successful than you hope, market conditions may change on you, and you may simply find out more about how you trade best. That’s why you should set a plan for updating your business plan to reflect where you are and where you want to be as you go along. At least once a year, and more often if you feel the need for a change, go through your business plan and revise it to reflect where you are now. What are your new goals? What are your new investment plans? What are you doing right, and what needs to change?
Business plans are living documents. Use your plan to run your trading business; as your business runs, use the results to update your plan. You can keep the old ones around to show you how much progress you have made, if you are so inclined.
Planning Your Trades
A good trader has a plan. She knows what she wants to trade and how to trade it. She knows what her limits are before she places the order. She’s not afraid to take a loss now in order to prevent a bigger loss in the future, and she’s willing to sit out the market if nothing is happening that day. Her plan gives her the discipline to protect her capital so that she has money in her account to profit when the opportunities present themselves.
In this section, I cover the components of trade planning. When you start trading, you’ll probably write notes to set up a trading plan for each day that covers what you expect for the day, what trades you hope to make, and what your profit goals and loss limit are. As you develop experience, trade planning may become innate. You develop the discipline to trade according to plan, without needing to write it all down — although you might find it useful to tape a list of the day’s expected announcements to your monitor.
Like a business plan, a trading plan is flexible. The markets don’t know what you’ve planned, and you’ll probably end up deviating on more than one occasion. The key thing is knowing why you deviated: Was it because of the information that you saw when you were looking at your screen, or was it because you became panicky?
What do you want to trade?
The first step in your trading plan should also be addressed in your business plan: What is it that you want to trade? Many traders work in more than one market, and each market is a little different. Some trade different products simultaneously, whereas others choose one for the day and work only on that.
You need to figure out which markets give you the best chance of getting a profit that day. It’s going to be different. Some days, no trades will be good for you in one market. If you are too antsy for that, then find another market to keep you busy so that you don’t trade just to stay awake. (Of course, many traders report that the big money opportunities are in the slower, less glamorous markets.)
As a day trader, you are self-employed. You don’t answer to a boss and don’t have to trade today if you don’t want to. So if you have a headache, or if no good trades are available to you, or if recent losses have gotten you down, take the day off and do something fun.
How do you want to trade it?
Figuring out how to trade an asset involves a lot of considerations: What is your mood today? What will other traders be reacting to today? How much risk do you want to take? How much money do you want to commit? This is the nittygritty stage of trade planning that can help you manage your market day better.
Starting the day with a morning review
Before you start trading, take some time to determine where your head is relative to the market. Is today a day that you can concentrate? Are there things happening in your life that might distract you, are you coming down with the flu, or were you out too late last night? Or are you rearing to go, ready to take on whatever the day brings? Your mindset should influence how aggressively you want to trade and how much risk you want to take. You have to pay attention to do well in the markets, but you also have to know when to hang back during the day’s activities. For example, many traders find that their strategies work best at certain times of the day, such as at the open or before major news announcements.
Think about what people will be reacting to. Go through the newspapers and check the online newswires to gather information. Then figure out the answers to these questions:
- Are there big news announcements scheduled for today? At what time? Do you want to trade ahead of the news or want to wait and see what the market does?
- Did something happen overnight? Will that affect trading on the open, or is it already in the markets? Do you want to trade on the open or wait?
- What are the other people who trade the same future, commodity, stock, or currency that you do worried about today? How are they likely to respond? Do you want to go with the market or strike a contrary position?
Drawing up a sample order
Once you have a sense of how you are going to tackle the day, you want to determine how much you are going to trade. The key considerations are the following:
- Do you want to be long or short? That is, do you want to bet that the asset you are trading is going up in price or down?
- Do you want to borrow money? If so, how much? Borrowing — also known as margin or leverage — increases your potential return as well as your risk. (Margin, leverage, and short selling)
- Some contracts, such as futures, have built-in leverage. As soon as you decide to trade them, you are borrowing money.
- How much money do you want to trade — in dollars, and as a percentage of your total account size?
Once you have those items detailed, you’re in good shape to get started for the day.
Figuring out when to buy and when to sell
Once you get insight into what the day might be like and how much money you want to allocate to the markets, your next step is to figure out when you will buy and when you will sell. Ah, but if that were easy, do you think I’d be writing a book on day trading? No. If knowing when to buy and sell were easy, I would be too busy taking private surfing lessons in front of my beachfront mansion on Maui to be writing a book.
The very best traders aren’t selling trading advice, because they are already retired. Everyone else is figuring it out as they go along, with varying degrees of success.
Many traders rely on technical analysis, which involves looking at patterns in charts of the price and volume changes. Other traders look at news and price information as the market changes, rather than looking at price patterns. Still others care only about very short-term price discrepancies. But the most important thing, no matter what approach you prefer, is that you backtest and simulate your trading before you commit real dollars. That way, you have a better sense of how you’ll react in real market conditions.
Setting profit goals
When you trade, you want to have a realistic idea how much money you can make. What’s a fair profit? Do you want to ride a winning position until the end of the day or do you want to get out quickly once you’ve made enough money to compensate for your risk? There’s no one answer to this question, as so much depends on market conditions and your trading style. In this section are some guidelines that can help you determine what’s best for you.
But first, I take a detour and define all the different terms for profits that you might come across.
The language of money
Profits are discussed differently in different markets, and you may as well have the right lingo when you write your plan:
- Pennies: Stocks trade in decimal form, so each price movement is worth at least a penny — one cent. It’s an obvious way to measure to a profit.
- Pips: A pip is the smallest unit of currency that can be traded. In foreign exchange markets (forex), a pip is generally equal to one one-hundredth of a cent. If the value of the euro moves from $1.2934 to $1.2935, it has moved a pip.
- Points: A point is a single percentage. A penny is a point, as is a 1 percent change in a bond price. A related number, a basis point, is a percent of a percent, or .0001.
- Teenies: Many securities, especially bonds and derivatives on them, trade in increments of 1⁄8 of a dollar. Half of an eighth is a sixteenth, also known as a teeny.
- Ticks: A tick is the smallest trading increment in a futures contract. It varies from product to product. How much it works out to be depends on the contract structure. For the Chicago Mercantile Exchange’s E-Mini S&P 500 contract, a tick is equal to $12.50, calculated as a 0.25 change in the underlying S&P 500 index multiplied by $50 multiplier. A tick on a Chicago Board of Trade E-Mini soybean contract is $1.25, calculated as 1/8 cent on a bushel of soybeans in a contract covering 1000 bushels. You can get information on the tick size of contracts that interest you on the Web site of the offering exchange.
No one ever lost money taking a profit, as the cliché goes. (The trading business is rife with clichés, if you haven’t noticed.) The newer you are to day trading, the more sense it makes to be conservative. Close your positions and end your day when you reach a target profit — and then make note of what happens afterward. Can you afford to hold on to your positions longer in order to make a greater profit?
Thinking about profits
Your profit goals can be sliced and diced a few different ways. The first is the gain per trade, on both a percentage basis and an absolute basis. The second is the gain per day, on both a percentage basis and an absolute basis. What do you have to do to reach these goals? How many successful trades will you have to make? Do you have the capital to do that? And what is right for the trade you are making right now, regardless of what your longer-term goals are?
Setting limits on your trades
It’s a good idea to set a loss limit along with a profit goal. For example, many futures traders have a rule to risk two ticks in pursuit of three ticks. That means that they will sell a position as soon as it loses two ticks in value, and they will also sell a position as soon as it gains three ticks in value. And for anything in between? Well, they close out their positions at the end of the day, so whatever happens happens.
Even traders who do not have a rule like that often set a limit on how much they will lose per trade. Other traders use computer programs to guide their buys and their sells, so they need to sell their positions automatically. Brokers make this easy by giving customers the choice of a stop order or a limit order to protect their positions.
You want to limit your loss per trade as well as your loss per day. If today is not a good one, close up shop, take a break, and come back fresh tomorrow.
A stop order, also known as a stop loss order, is an order to sell a security at the market price as soon as it hits a predetermined level. If you want to make sure you sell a block of stock when it falls below $30 per share, for example, you could enter a stop order at $30 (telling your broker “Sell Stop 30”). As soon as the stock hits $30, the broker sells it, even if the price goes to $29 or $31 before all the stock is sold.
A limit order is an order to buy or sell a security at a specific price or better: lower than the current price for the buy order, higher than the specific price for a sell order. If you want to make sure you sell a block of stock when it falls below $30 per share, for example, you could enter a limit order at $30 (telling your broker “Sell Limit 30”). As soon as the stock hits $30, the broker sells it, as long as the price stays at $30 or higher. If the price goes even a penny below $30, the limit is no longer enforced. After all, no buyers are going to want to pay an above-market price just so you can get your order filled all the way!
Stop limit orders
A stop limit order is a combination of a stop order and a limit order. It tells the broker to buy or sell at a specific price or better, but only after the price reaches a given stop price. If you want to make sure you sell a block of stock when it falls below $30 per share, but you do not want to sell it if it starts to go back up, for example, you could enter a stop order at $30 with a limit of $31 (telling your broker “Sell 30 Limit 31”). As soon as the stock hits $30, the broker sells it as long as the price stays under $31. If the price goes above $31, the order is no longer enforced. There’s a very small price range where this order will be executed.
Are you confused? Well, the differences may be confusing, but understanding them is important to helping you manage your risks.
What if the trade goes wrong?
No matter how in tune you feel with the market, no matter how good your track record, and no matter how disciplined you are with setting stops, stuff is going to happen. Just as you can make more money than you plan to, you can also lose a lot more. If you are going to day trade, you have to accept that there are going to be some really bad days. So what do you do? You suck it up, take the loss, and get on with your life.
Yes, the market may have blown past your stops. That happens sometimes, and it’s hard to watch real dollars disappear into someone else’s account, someone you will never know. Still, close your position and just remember that tomorrow is another day with another chance to do better.
Don’t hold in hopes of making up a loss. The market does not know what you own and will not reward your loyalty and best hopes.
After you take the loss and clear your head, see if there is something you can learn for next time. Sometimes a loss can teach you valuable lessons that make you a smarter, more disciplined trader in the long run.
Closing Out Your Position
By definition, day traders only hold their investment positions for a single day. This is important for a few reasons:
- Closing out daily reduces your risk of something happening overnight.
- Margin rates — the interest rates paid on money borrowed for trading — are low and in some cases zero for day traders, but the rates go up on overnight balances.
- It’s good trade discipline that can keep you from making expensive mistakes.
But like all rules, the single day rule can be broken and probably should be broken sometimes. In this section, I cover a few longer-term trading strategies that you may want to add to your trading business on occasion.
Swing trading: holding for days
Swing trading involves holding a position for several days. Some swing traders hold overnight, whereas others hold for days or even months. The longer time period gives more time for a position to work out, which is especially important if it is based on news events or if it requires taking a position contrary to the current market sentiment. Although swing trading gives traders more options for making a profit, it carries some risks because the position could turn against you while you are away from the markets.
There’s always a tradeoff between risk and return. When you take more risk, you do so in the hopes of getting a greater return. But when you look for a way to increase return, remember that you will have to take on more risk to do it.
Swing trading requires paying attention to some basic fundamentals and news flow. It’s also a good choice for people who have the discipline to go to bed at night instead of waiting up and watching their position in hopes that nothing goes wrong.
Position trading: holding for weeks
A position trader holds a stake in a stock or a commodity for several weeks and possibly even for months. This person is attracted to the short-term price opportunities, but he also believes that he can make more money holding the stake for a long enough period of time to see business fundamentals play out. This increases the risk and the potential return, because a lot more can happen over months than minutes.
Investing: holding for months or years
An investor is not a trader. Investors do careful research and buy a stake in an asset in the hopes of building a profit over the long term. It’s not unusual for investors to hold assets for decades, although good ones sell quickly if they realize that they have made a mistake. (They want to cut their losses early, just as any good trader should.)
Investors are concerned about the prospects of the underlying business. Will it make money? Will it pay off its debts? Will it hold its value? They view short-term price fluctuations as noise rather than as profit opportunities.
Many traders pull out some of their profits to invest for the long term (or to give to someone else, such as a mutual fund manager or hedge fund, to invest). It’s a way of building financial security in the pursuit of longer goals. This money is usually kept separate from the trading account.
Maxims and Clichés that Guide and Mislead Traders
- The stock doesn’t know you own it.
- Failing to plan is planning to fail.
- Your first loss is your best loss.
A lot more are out there. Clichés are useful shorthand for important rules that can help you plan your trading. But they can also mislead you because some are really obvious — too obvious to act on effectively. (Yes, we all know that you make money by buying low and selling high, but how do you tell what low is and high is?) Here’s a run-through of some that you’ll come across in your trading career, along with my take on what they mean.
Pigs get fat, hogs get slaughtered
Trading is pure capitalism, and people do it for one primary reason: to make money. Sure, a ton of economic benefits come from having well-functioning capital markets, such as better price prediction, risk management, and capital formation. But a day trader just wants to make money.
However, get too greedy, and you’re likely to get stupid. You start taking too much risk, deviating too much from your strategy, and getting careless about dealing with your losses. Good traders know when it’s time to take a profit and move on to the next trade.
This is also a good example of an obvious but tough-to-follow maxim. When are you crossing from being a happy little piggy to a big fat greedy hog that’s about to be turned into a pork belly? Just know that if you are deviating from your trading plan because things are going so great, you might be headed for some trouble.
In a bear market, the money returns to its rightful owners
The corollary cliché for this is “Don’t confuse brains with a bull market.” When things are going well, watch out for overconfidence. It might be time to update your business and trading plans, but it’s not to time to cast them aside.
The trend is your friend
When you day trade, you need to make money fast. You do not have the luxury of waiting for your unique, contrary theory to play out. An investor may be buying a stock in the hopes of holding it for decades, but a trader needs things to work now.
Given the short-term nature of the market, the short-term sentiment is going to trump long-term fundamentals. People trading today may be wrong about the direction of foreign exchange, interest rates, or stock prices, but if you are closing out your positions tonight, you need to work with the information in the market today.
In the short run, traders who fight the market lose money. There are two problems with The trend is your friend. The first is that by the time you identify a trend, it may be over. Second, there are times when it makes sense to go against the herd, because you can collect when everyone else realizes their mistakes. This is where the psychology of trading comes into play. Are you a good enough judge of human behavior to know when the trend is right and when it’s not?
Buy the rumor, sell the news
Markets react to information. That’s ultimately what drives supply and demand. Although the market tends to react quickly to information, it can overreact, too. Lots of gossip gets traded in the markets as everyone looks to get the information they need in order to gain an advantage in the markets. And despite such things as confidentiality agreements and insider-trading laws, many rumors turn out to be true.
These rumors are often attached to such news events as corporate earnings. For whatever reason — good news, analyst research, a popular product — traders might believe that the company will report good quarterly earnings per share. That’s the rumor. If you buy on the rumor, you can take advantage of the price appreciation as the story gets more play.
When the earnings are actually announced, one of two things will happen:
- They will be as good as or better than rumored, and the price will go up. The trader can sell into that and make a profit.
- They will be worse than rumored, everyone will sell on the bad news, and the trader will want to sell to get out of the loss.
Of course, if the rumor is bad, you want to do the opposite: sell on the rumor, and buy on the news. For more information on short selling — selling securities in hopes that they fall in price.
The problem with Buy the rumor, sell the news is that rumors are often wrong, and there may be more opportunities to buy on bad news when other traders are panicking, thus driving prices down for a few minutes before sanity sets in. But it’s one of those rules that everyone talks about, whether or not they actually follow it.
Cut your losses and ride your winners
I mentioned already in this chapter that you need to cut your losses before they drag you down. No matter how much it hurts and no matter how much you believe that you are right, you need to close out a losing position and move on.
But the opposite is not necessarily true. Although good traders tend to be disciplined about selling winning positions, they don’t use stops and limits as rigorously on the upside as they might on the downside. They’re likely to stick with a profit and see how high it goes before closing out a position.
Note that this conflicts a little with Pigs get fat, hogs get slaughtered. Trading maxims can be so contradictory! To prevent overconfidence and sloppiness from greed, ride your winners within reason. If your general discipline is to risk three ticks on a futures contract in order to make five, and a contract goes up six ticks before you can close it out, you might want to stick with it. But if you also close out at the end of every day, don’t give in to the temptation of keeping that position open just because it’s still going up. Keep to your overall discipline.
You’re only as good as your last trade
The markets churn on every day with little regard for why everyone trading right now is there. Prices go up and down to match the supply and the demand at any given moment, which may have nothing to do with the actual long-term worth of an item being traded. And it certainly has nothing to do with how much you really, really want the trade to work out.
One of the biggest enemies of good traders is overconfidence. Especially after a nice run of winning trades, a trader can get caught up in the euphoria and believe that he finally has the secret to successful trading under control.
While he’s checking the real estate listings for that beachfront estate in Maui, BAM! The next trade is a disaster.
Does that mean that the trader is a disaster, too? No, it just means that the markets won this time around.
Most day traders are working in zero-sum markets, which mean that for every winner, there is a loser. Hence, not everyone can make money everyday. The challenge is to maintain an even keel so as not to be distracted by confidence when the trading is going well or by fear when the trading is going poorly. The next trade is a new trade.
A Day in the Life of a Trader
What’s it like being a day trader? James Okada Lee, a day trader in Tokyo and proprietor of the Traders Laboratory (www.traderslaboratory.com) answered a few questions about what he does and why he does it. “I trade the U.S. markets from Tokyo, which means I work from 11 p.m. to 6 a.m. every day. Most people think I am insane, but I got used to it after two years,” he says.
Q: What do you trade, and how long have you been trading?
I currently specialize in Chicago Mercantile Exchange eMini futures contracts, especially the eMini Dow and Russell contracts. I have been trading for four years now. Before that, I was a professional poker player, which has helped me tremendously in the mental aspects of trading.
I was introduced to trading through a poker buddy of mine when I was 20. He had a friend who was a full-time day trader at 22. I visited his office (he was a prop trader) and that day was the day my life made a complete 360. I remember clearly walking in to the office and seeing a 12-monitor setup with charts, Level 2 quotations, and blinking lights. It was then I decided that I was going to be a day trader and do whatever it takes to be good at it.
One of the biggest reasons why I decided to become a trader was because I felt I had a psychological edge over other people. I spent hours analyzing my poker game for why I was able to consistently win. The biggest reason was player psychology. I kept winning because my psychological makeup was stronger than that of the other players on the table. I understood that poker was a game of patience and discipline. I was also good in reading people and questioning every single move they make. I would constantly ask myself: Why did he spend an extra 20 seconds to bet? Does he look nervous? Why did he take a deeper drag from his cigarette? Did his pupils get wider? Why is he betting smaller than usual? Why is he betting bigger than usual? And so on. These questions help me analyze a player for clues of weakness or strength.
Now, these questions are related when it comes to trading. As a day trader I constantly ask myself: What is the market trying to do now? Is there price acceptance or rejection outside of value? Is the market running out of momentum? Is the market being supported only by small buyers? Are we likely to test the overnight high or the previous day high? Is there selling volume at a key pivot level? What is the tape telling me? And so on. These questions help me understand the language of the markets. What I’m trying to do is follow the big buyers and sellers and decide what they are trying to do, which is similar to reading my opponents in poker.
Q: How did you get started trading?
I never had an opportunity to learn directly from a trader or trading mentor, so 90 percent of my trading was self-taught through trial and error. I committed every amateur mistake in my first year of trading: selling lows, buying highs, using lagging indicators, trading without a plan, not understanding significant support and resistance levels, not understanding the basic concept of supply and demand. As an amateur I thought I had to short because the price was too high or buy because price was too low. How foolish I was! I blew my first trading account in six months.
To get back in, I built a stake through poker and took an office job with an IT company. I was in Tokyo then, and my job had night hours, 9 p.m. to 9 a.m. local time (7 a.m. to 7 p.m. EST). My boss worked daytime hours, so I was alone. I wasn’t able to install my trading software on the office computers, so what I did was watch a simple bar chart on a browser (www.futuresource.com) with 15-minute delayed data. I would refresh my browser every 15 minutes to see how the price changed while I worked. This weird method of observation helped build my trading style today.
What I did was use simple Support and Resistance levels on my charts. Since all I could see was a bar chart (no volume, no indicators) the only thing I could do was imagine what price would do in the next 15 minutes when I would refresh my browser. I focused on confluence areas: in other words cluster points of various support and resistance levels, such as pivot points lined up with previous day high/low, weekly pivots lined up with daily pivots, 50-percent range lined up with pivots, and so on. This became the foundation of my trading. I was getting good at identifying these levels of support and resistance, and more often I saw price move the way I had anticipated. This went on for 10 months, 12 hours a day, 24–26 working days a month.
After 10 months I went back to trading full time. I started reading the time of sales tape and created my edge by looking at support and resistance levels and deciding whether the price was going to hold or break according to the tape. Very simple, but it took quite a while to reach this level of simplicity.
Q: Do you close out trades every day, or do you carry some over?
I never hold any overnight positions. I’m based in Tokyo — a 13-hour time difference with New York. So I trade the morning session only 70 percent of the time. I prefer to start each day fresh. It’s like getting dealt a new hand.
Q: What piece of equipment or software could you not do without?
Day traders need to be techies. I use four 17-inch LCD monitors and have two Internet providers in case one goes down. In my opinion, day traders need at least two monitors (I recommend more), a fast Internet connection, and a decent computer with at least 1 GB of RAM. I also have several whiteboards on my wall to post notes of various price levels for the day. I currently use TradeStation (www.tradestation.com) for my charting software — definitely something I cannot live without. My job only exists because of advancement in technology. I couldn’t possibly do what I do now 20 years ago.
So execution is very important. There are various platforms day traders can use to execute orders. But it is very important that the execution platform allows advanced orders, such as OCO (one cancels the other), bracket orders, and OSO (order sends order) If a platform has the ability to place an automatic stop or target, it makes the life of a day trader much easier. Energy is wasted in manually putting a stop. It can also affect the trader psychologically.
Day traders need a good charting package and good execution software. Software fees can be costly but it’s all a part of the expense in this business.
Q: What is a typical day like? How easy is it to quit at the end of the day?
I tend to be a workaholic, so a typical day is pretty intense. I wake up around 1 p.m. Tokyo time (12 a.m. EST). The first thing I do is to check my charts, my Web site (www.traderslaboratory.com), and my trades from the day before. I have a poker habit in that I tend to think about my trades (hands for poker) all throughout the day. Analyzing yourself is very important in both trading and poker. I may decide to go to the gym during this time, but by 9 p.m. Tokyo time (7 a.m. EST) I am back at my desk, concentrating on the upcoming session. From 1 p.m. to 9 p.m., I work about 5–6 hours. I do not have a TV or a phone in my office space, which allows me to concentrate 100 percent on my work. (I tend to get extremely carried away with work and time flies without even noticing.) Once the markets open, I am trading until 1 a.m. Tokyo time (11 a.m. EST). If I choose to come back for the afternoon, I will take a break until 4 a.m. Tokyo time (2 p.m. EST) and then resume trading. If I met my daily in the morning, I am usually done by 1 a.m. Tokyo time (11 a.m. EST).
It is relatively easy for me to quit trading during the day whenever I want. I am very aware of my own mental level in terms of fatigue and do not trade when I am tired. I learned this habit from poker when I used to play 12-hour sessions daily. Fatigue turns into mistakes. And mistakes are very costly in this game. It is quite contrary to what people may assume, since I trade during the night hours. While U.S. traders have the luxury of calling it a day and playing golf, the city is pretty much dead here during my working hours.
Q: What is your secret to managing the stress of trading?
I use several methods to handle stress. I am a student of neuro-linguistic programming, and I use a lot of visualization techniques to ease my mind. Meditation and self-hypnosis also work to clear my mind from any thoughts, positive and negative. Another weird method I use is watching bad movies with Chuck Norris, Arnold Schwarzenegger, Sylvester Stallone, or Jean-Claude Van Damme. Almost any movie with those actors in it is horrible, and for a full two hours I don’t have to use my head. Very relaxing in my opinion!
As much as I work, I always take a regular weekly break. Every Saturday I am out partying with friends. I find these moments necessary to eliminate a lot of the work stress. Other than that, I do not have break times and I have not gone on vacation in over six years.
Q: What’s your best piece of advice for someone considering day trading?
It is important to know yourself. Without understanding who you are and what kind of trader you are, you are doomed to fail. You have to know your time frame and style as a trader. Once you find your style of trading, you must become an expert in it and have an edge. New traders tend to jump from one style to the next in search for the Holy Grail. There is no Holy Grail in trading. One needs to understand that trading is a game of probabilities and psychology. The futures market is a zero-sum game. One person’s mistake is another man’s profit. Do not treat trading as a hobby. Hobbies cost money. Trading should be treated as a full-time job and business.
Second, specialize in one market first. Know the market inside out instead of jumping around. A trader must find a market that fits his style also. This is why the trader needs to know who he is first before engaging in the markets. It is also important to be in sync with the markets. A trader who is completely absorbed with his or her market of choice is able to read the language of the markets. Whenever I feel out of sync and unclear about market direction, I will spend the time to observe until I have a clearer understanding.
Third, learn the psychology of the markets. There are the short-term market participants and the long-term market participants. The short-term trader may be looking to make money in the next 5 to 30 minutes. The long-term trader may be looking to make money in the next 3–5 weeks. Both traders are trying to profit under the same rules of the market. In the futures market, for every buyer there must be a seller. Under the same exact information, they have a difference in opinion. Now, if Trader A buys from Trader B, Trader A must sell in order to profit or to cut losses short. If the market goes against Trader A, where will he sell? It’s the simple law of supply versus Demand, combined with trader psychology. Understand what the losing traders are doing and learn to exploit their mistakes. If the majority of the traders are short, who is left to sell? Supply has run out. The markets must reverse, which will cause shorts to cover and price to rally.
We are not trading the markets. We are trading other traders. Traders trade their own belief systems. Last, patience and discipline are your best friends. Trading is not gambling. Hold a professional mindset and not a gambler’s mentality. Most of the trading day is spent sitting tight and waiting for opportunities. If you lack patience, trading is not right for you.