at-ed, or circumvented.
= As soon as you are aware of the above, act accordingly to reme-dy the problems.
= Attempt to deal only with specifics when it comes to trading.
Matters of opinion, expectation, and prediction are useless and
counterproductive in a successful approach to day trading.
Above all, maintain a fully disciplined approach to your day
trading.
= No matter how intuitive you may be, remember that a method-ological and operational approach to trading will ultimatelyprevail. Minimize your reliance on intuition.
= Refer to your trading rules frequently.
= Remember that even the slightest change in your methodologycould have a major impact on your results.
= Know that just because a change in your system that has violat-ed the rules has worked for you in the past, it is by no means anindication or a carte blanche that the same change in rules willwork for you again.
= Refer to your trading rules as often as necessary in order tomake certain that they are literally burned into your consciousand unconscious mind.36
Chapter Three
Art versus Science: What to Do?
Note that I have no complaint against art in trading. There are, infact, many traders who are excellent artists and who are quitecapable of using their intuitive powers in successfully trading themarkets. They are capable of doing things that the vast majority oftraders cannot do. They are talented, psychic, and gifted. As longas they are able to make money consistently with these skills, theyare to be commended.
If, on the other hand, their skills are not capable of generatingconsistent profits, then they must question their methods, ask-ing specifically if they are trading for profits or trading to makea case in favor of their intuitive abilities. Odds are that the vastmajority of individuals who trade intuitively will be consistentlosers. I am not denying here that clairvoyance exists. Nor amI denying that some individuals have an uncanny ability topredict the future (or futures). I am merely saying that forthe overwhelming majority of us this method simply does notwork.
The Best Place to Be
While I have the utmost of respect for those traders who havebeen able to achieve consistent success using their intuitivepowers, it’s clear that this does not apply to the vast majority oftraders. Most of us are relegated to using our limited powers ofintuition and psychic abilities. The best place to reside as a trad-er is in the home of discipline and operational methodologies.While I could likely write an entire book on intuition and psy-chic skills in the markets, this is not the subject of the presentbook. Nor is it my intention to imply that intuitive traders can-not make money. However, I will state clearly and without hesi-tation that if you want to succeed, you will follow the rules—whether these rules are mine, yours, or those of another writeror system developer. It’s that simple, and it’s that complicated.Follow the rules and, in the long run, you will come out ahead.Attempt to be psychic and, in the long run, you will lose money.If you are successful as an intuitive trader, then you are to becommended for being able to achieve what few traders haveever accomplished.Day Trading 37
Day Trading: The Good, theBad, and the Ugly
As a child I thought that life was blissful, that there was no evil inthe world, and that somehow all of life’s needs would be magical-ly fulfilled. As an adolescent I was convinced that good triumphedover evil, that the more education I had the more money I wouldmake, and that government exists to help us. As an adult I havecome to realize that life is full of little disappointments, that thingsrarely turn out as we expect them to, and that the brutal, cold real-ities of life prevail.
But I have also realized that there is good news and bad news inalmost every situation and every event. And futures trading is nodifferent. Here are some of my thoughts on the good news and thebad news of futures trading. In reading my commentary, pleaseremember the following: New traders are coming to the futuresmarkets in droves; many of them lured to the trading arena bypromises of sure profits from small investments. Take a little timeand listen to the heating oil options ads on the radio and on televi-sion. Read the ads in trade publications offering guaranteed profits,and you'll see what I mean. (Before you put money into any courseor trading program, make certain that they contain the proper riskdisclosures.) Next time you get some futures advertising in the mail,read it carefully. Look at the claims and then reach your own conclu-sions about what the newcomer to trading is being told orpromised.
Within this context, it’s no wonder that so many people are dis-illusioned about what they actually experience when they becometraders. But even veteran traders are not immune from the teach-ings of cold and hard experience with the futures markets. Hereare a few of the brutal realities of futures trading as I see them.Take issue with them if you like, believe them if you find themfamiliar, or take your anger out on me for telling it the way it real-ly is in the world of trading.
Most Trading Systems JustDon’t Work
No matter how you look at things, the simple and painful fact isthat the vast majority of trading systems work well in certaintypes of markets but not so well in other types of markets. Thegood news is that there are a few systems that have worked consis-3s
Chapter Three
tently over the years. The bad news is that their accuracy isn’tvery high. A system with 60 percent or more accuracy that hasbeen a consistent performer for over 20 years is a rare find indeed.
What to do? You can abandon systems altogether and use tim-ing methods and intuition. But this will work for you only if youhave iron discipline and can take your losses when they’re rela-tively smal] while riding your profits. Or, you can develop yourown style.
Commissions Can Eat YouAlive if Your Trading MethodIs Marginally Successful
Paying reasonable commissions for your trading is important. Topay too much is to engage in a futile exercise. If you pay for ser-vice, then you must get service. If you do not need service, then donot pay for it. This is especially true for options trading. Somefirms charge a percentage of option premiums as their commission.
Be very careful of these firms. If you buy an option that costs$2500 and the commission is 25 percent of the premium, then youpay $625 commission. This is outrageous! You could pay as littleas $14 for that option at the right brokerage house. Even if youpay $75 for full service (which will get you a broker’s input), youstill come out way ahead.
Professionals Win, the Public Loses
It’s that simple, that direct, and that predictable. It’s like playingpoker with a table full of professionals; the beginner will mostlikely provide grist for the mill. If you want to play the game withprofessionals, you will need to act, think, and trade like a profes-sional. The bad news is that it’s hard to do, but the good news isthat it can be learned. .
Do you Have Protectionagainst Bad Price Fills?
The good news is that there are rules that will work for you onoccasion. The bad news is that most of the time the rules don’twork in favor of the public. Furthermore, the regulatory agenciesthat supervise futures trading will rarely be of assistance to you,since they are most often more concerned with making examplesDay Trading 39
out of people with high visibility than they are in going after theinsidious crooks.
Therefore, if you have a problem with an order fill, with a bro-ker, or with an exchange, don’t wait for help from the regulatoryagencies; take matters into your own hands and complain directlyto the firm’s management or to the exchange itself. While it maybe difficult for some traders to be forceful when they’ve beenwronged, the fact is that the squeaky wheel gets the grease.
Misinformation andDisinformation Run Rampant
The computer age has made it even simpler for savvy operators tofool the public by creating seemingly perfect trading systems. Thesystems appear to be very good on paper but in reality are opti-mized to show the best-possible back-test. scenario. In reality theyhave very little probability of going forward successfully in realtime. Let the buyer beware. The good news is that systems areplentiful; the bad news is that most of them don’t work. °
Traders Love S&P Trading,but Most Traders Lose in S&P
Why? The reasons here are simple indeed. First, most tradersdon’t want to hold S&P overnight because the margin is too high.Hence, they day trade S&P. What makes their S&P trading a losingproposition is the fact that traders use very small stop losses inthis market. My work suggests that even a 500-point ($1250) stoploss in S&P is, at times, insufficient. When a market trades in anaverage range of 600 points daily, a 500-point stop loss is neededto take the daily range into consideration. The good news is thatS&P futures offer great trading opportunities, particularly for daytrading. The bad news is that a large stop is required and the oddsof being stopped out, unless you use a wide stop, are very high.
Futures Options: Reality and Myth
As many of you may know, the good news with futures options isthat your risk on a long position is limited to the cost of the optionplus commission. Risk is, therefore, well defined and limited onlong positions. However, although you will lose only a predeter-40
Chapter Three
mined amount of money, the odds are that you will lose it. This isa variation on the theme of “if you buy you lose; if you sell youlose; but if you don’t trade, you're missing a great opportunity.”
At first blush, the idea of futures options seems reasonable andrational. After all, since most traders lose their money by stayingwith a position too long or by thinking too much, the idea of afixed loss is very appealing. However, there are three importantissues that many traders fail to consider and that many promotersof options fail to address: delta, premium, and time decay.
Premium is the dollar amount of the option. All too often, thepremium on options is higher than it should be, based on thelength of time the option has remaining and the value of theunderlying market. Floor brokers mark up the premiums so thatthey can profit. In other words, they buy their options or createtheir options (by taking a short position) at wholesale prices, yetthey sell them to the public at retail, making money on the differ-ence.
Time decay is the perennial enemy of the options buyer but theeternal friend of the options seller. Since the vast majority ofoptions expires worthless, it’s the options seller that makes themoney, while the options buyer watches. his or her trade slowlylose value over time. Unless you are timely with your optionsentry and unless you pay a reasonably low premium for youroption, your odds of success are relatively low.
A third and equally important options concept is delta. Veryfew traders have ever heard of delta and fewer yet understandits implications. Delta, in simple terms, is the degree with whichan options contract fluctuates with its underlying futures con-tract. A delta of 90 percent (0.9) means that the option will go upor down about 90 percent of the amount that the futures marketgoes up or down. Options with low deltas tend to be options thathave a very low probability of becoming profitable unless themarket makes a relatively fast and large move in the desireddirection.
An option for which you paid a high premium, that is close toexpiration, and that has a low delta is, therefore, highly unlikely tobe profitable other than in the most unexpected of circumstances.Yet such options are low in price and often attract the unsophisti-cated trader. Mind you, I am not saying that money cannot bemade in options trading. I am merely stating that being a buyer ofoptions is not where you will experience the greatest odds of suc-cess.40
Chapter Three
mined amount of money, the odds are that you will lose it. This isa variation on the theme of “if you buy you lose; if you sell youlose; but if you don’t trade, you're missing a great opportunity.”
At first blush, the idea of futures options seems reasonable andrational. After all, since most traders lose their money by stayingwith a position too long or by thinking too much, the idea of afixed loss is very appealing. However, there are three importantissues that many traders fail to consider and that many promotersof options fail to address: delta, premium, and time decay.
Premium is the dollar amount of the option. All too often, thepremium on options is higher than it should be, based on thelength of time the option has remaining and the value of theunderlying market. Floor brokers mark up the premiums so thatthey can profit. In other words, they buy their options or createtheir options (by taking a short position) at wholesale prices, yetthey sell them to the public at retail, making money on the differ-ence.
Time decay is the perennial enemy of the options buyer but theeternal friend of the options seller. Since the vast majority ofoptions expires worthless, it’s the options seller that makes themoney, while the options buyer watches his or her trade slowlylose value over time. Unless you are timely with your optionsentry and unless you pay a reasonably low premium for youroption, your odds of success are relatively low.
A third and equally important options concept is delta. Veryfew traders have ever heard of delta and fewer yet understandits implications. Delta, in simple terms, is the degree with whichan options contract fluctuates with its underlying futures con-tract. A delta of 90 percent (0.9) means that the option will go upor down about 90 percent of the amount that the futures marketgoes up or down. Options with low deltas tend to be options thathave a very low probability of becoming profitable unless themarket makes a relatively fast and large move in the desireddirection.
An option for which you paid a high premium, that is close toexpiration, and that has a low delta is, therefore, highly unlikely tobe profitable other than in the most unexpected of circumstances.Yet such options are low in price and often attract the unsophisti-cated trader. Mind you, I am not saying that money cannot bemade in options trading. I am merely stating that being a buyer ofoptions is not where you will experience the greatest odds of suc-cess.40
Chapter Three
mined amount of money, the odds are that you will lose it. This isa variation on the theme of “if you buy you lose; if you sell youlose; but if you don’t trade, you're missing a great opportunity.”
At first blush, the idea of futures options seems reasonable andrational. After all, since most traders lose their money by stayingwith a position too long or by thinking too much, the idea of afixed loss is very appealing. However, there are three importantissues that many traders fail to consider and that many promotersof options fail to address: delta, premium, and time decay.
Premium is the dollar amount of the option. All too often, thepremium on options is higher than it should be, based on thelength of time the option has remaining and the value of theunderlying market. Floor brokers mark up the premiums so thatthey can profit. In other words, they buy their options or createtheir options (by taking a short position) at wholesale prices, yetthey sell them to the public at retail, making money on the differ-ence.
Time decay is the perennial enemy of the options buyer but theeternal friend of the options seller. Since the vast majority ofoptions expires worthless, it’s the options seller that makes themoney, while the options buyer watches his or her trade slowlylose value over time. Unless you are timely with your optionsentry and unless you pay a reasonably low premium for youroption, your odds of success are relatively low.
A third and equally important options concept is delta. Veryfew traders have ever heard of delta and fewer yet understandits implications. Delta, in simple terms, is the degree with whichan options contract fluctuates with its underlying futures con-tract. A delta of 90 percent (0.9) means that the option will go upor down about 90 percent of the amount that the futures marketgoes up or down. Options with low deltas tend to be options thathave a very low probability of becoming profitable unless themarket makes a relatively fast and large move in the desireddirection.
An option for which you paid a high premium, that is close toexpiration, and that has a low delta is, therefore, highly unlikely tobe profitable other than in the most unexpected of circumstances.Yet such options are low in price and often attract the unsophisti-cated trader. Mind you, I am not saying that money cannot bemade in options trading. I am merely stating that being a buyer ofoptions is not where you will experience the greatest odds of suc-cess.Day Trading 41
Insiders Still Reap
the Rewards
Although legislation and regulations have been enacted to keepthe markets fair, the fact is that insiders are still the big winners infutures and options trading. By insiders I mean commercialtraders and pit brokers. The good news is that futures trading stillrepresents the last bastion of capitalism—the place where anyonewith persistence, discipline, and some knowledge can make it big.
The bad news is that it’s getting harder and harder to win as themarkets become more competitive and as insiders grab ontoopportunities before the general public has had a chance to do so.Fortunately, the basic rules of profitable futures trading still apply.
Therefore, if you follow the rules, you will improve your oddsof success, even though they may be less than they would havebeen 15 years ago.
Your Odds of Success AreWorse Now than Ever
I'm certain that this assertion will cause many of my readers—par-ticularly those who are professionals in the futures industry—tobristle. But my opinions are based on good, solid, and lengthyexperience. Can I prove what I’m saying by using hard statistics toback me up? No, I can’t. But my experience counts for something,and it tells me, without a doubt, that there are fewer winnerstoday, on a percentage basis (i.e., out of the universe of traders),than there were 15 or 20 years ago.
Believe me, I'd like it to be otherwise, but I just don’t see it. Thequestion is why. The answer is severalfold. First, there are manymore green traders today than ever before. They’ve been attractedby the lure of advertisements for trading courses that pander.They’ve been promised that they can make a year’s worth ofincome in the futures markets by starting with only a few thou-sand dollars. And they’ve been shown how they can generate sev-eral hundred percent of their money by buying heating oil calloptions for a seasonal play. None of the above is true. Still, theycome to the markets like lemmings to the cliff.
Second, the markets today are more volatile than ever before.S&P futures trading is so volatile that a 500-point daily range($1250) is commonplace. Given the fact that many traders haveless than $5000 in their accounts and they want to trade S&Pfutures, the odds of their making money are slim to none.42 = Chapter Three
Consider also the wide swings in virtually all other markets, andyou have the necessary ingredients to small-trader ruin.
The third reason is based on an overabundance of information.While you may think that today’s computer power and intensiveresearch has helped create better traders, I disagree. The reality ofthis situation is that it has created an excess of information, whichthoroughly confuses the novice trader and undermines discipline.The end result is that the average trader today is more confusedand actually less educated than the new trader of 15 or 20 yearsago. While good information is important, an excess of informa-tion will likely lead to confusion and obfuscation, as opposed toclarity and direction.
The fourth reason is that when traders finally do have profits ina trade, they are often scared out or stopped out of the trade(s)before the big move has taken place. Again, this is a function ofvolatility. While the nimble and experienced trader can use volatil-ity to his or her advantage, the average trader and the new traderare only hurt by it.
Computers: Help or
Hindrance?
Summary
In many cases and for many traders, the use of a computer for thepurpose of generating trades won't help. In fact, it may hinder.Let’s face it; most people aren’t computer-literate. They have avery poor understanding of what a computer can and cannot dofor them as a vehicle for generating trading profits. Only after atrader has defined his or her direction can a decision be madeabout the value of a computer in the trading program.
So if you're new to the futures markets and you can’t afford sev-eral thousand dollars for a computer and software, then you needto put your efforts toward using simple systems that don’t requirethe added expense. The fact is that there are many ways to tradewithout a computer.
This chapter reviewed the major issues and obstacles that awaitand confront the day trader. Specific answers were given as sug-gestions for overcoming the limitations and roadblocks to success.Day Trading 43
I stressed that day trading, more than any other form of trading,should be considered as a science and not as an art. While the daytrader has the advantage of not being concerned about overnightmoves, the limitation of day trading is clearly that there is a limitto the profits one may make within the time frame of a single day.However, if the trader is careful to operate only in volatile mar-kets, then the problem of limited profit potential will be overcome.Since day trading occurs within a strictly circumscribed timeframe, there are rules and operational procedures that are uniqueto the day trader.Basic Method
The 30-MinuteBreakout
Multum in parvo ANONYMOUS
Of all the day-trading methods I have found or developed duringmy 30 years in the markets, there are few that can compare to the30-minute breakout (30MBO) either in terms of simplicity or interms of their ability to grab the “big ones.” But do not forget thatday trading is a two-way street: it can reward handsomely or stingpainfully. While the 30MBO is simple to use, understand, andimplement, it also requires the utmost in discipline as well as con-siderable courage, since it requires the trader to do the two thingsthat are most difficult for traders to do. Specifically, 30MBOrequires traders to buy or sell on a breakout to new high groundfor the day or to new low ground for the day, and thereafter tomaintain their position until the end of the day, unless stopped out.
The 30MBO rules are as follows:= Do not enter any trades for the first 30 minutes of trading in the
markets for which the 30MBO is being used (a list of suggestedmarkets will be provided later).
4546
Chapter Four
= Make note of the high and low price for the first 30 minutes oftrading.
= After the first 30 minutes, buy if the ending price of the 30 min-utes is greater than the high of the first 30-minute price bar by apredetermined number of ticks.
= After the first 30 minutes, sell short if the ending price of the 30minutes is less than the low of the first 30-minute price bar by apredetermined number of ticks.
= Your stop loss can be either a predetermined signal (i.e., fail-safeor “dead” stop) or the opposite signal (i.e., a sell signal after aninitial buy signal, or vice versa).
® A trailing stop loss can be used to follow up an open position,since it has reached a given profit objective.
= In the event of a stop loss on a reversing signal, liquidate yourcurrent position and establish an opposite position (this willbecome clearer in the examples that follow).
= Exit your trade at the end of the day either several minutesbefore the close of trading or MOC (market on close).
™ Trade only in active markets.
= Ifa long trade moves limit up in your favor, then take your prof-it; if a short trade moves limit down in your favor, then takeyour profit (assuming that the market you are trading has adaily trading limit).
The 30MBO buy signal is illustrated graphically as shown inFigure 4-1.
As you can see from Figure 4-1, a buy signal is generated whenthe market ends any half hour after the first half hour a givennumber ticks or more above its first half-hour high. The exactnumber of ticks is determined by market. The statistics for S&Pfutures are shown and discussed later in this chapter. Note thatthe signal can occur at the end of any half hour after the first halfhour. Following a buy signal, the trade is followed up with eithera stop loss or a trailing stop loss procedure (to be discussed). Nowlet’s examine the ideal sell signal, shown in Figure 4-2.
As you can see from Figure 4-2, a sell signal is generated whenthe market ends any half hour after the first half hour a givennumber ticks or more below its first half-hour low. Note that thesignal can occur at the end of any half hour after the first halfhour. Following an entry signal, the trade is followed up eitherThe 30-Minute Breakout 47
Buy Signal
Exit on Close
Figure 4-1. The 30-minute breakout system ideal buy signal.
Sell Signal
Sell SignalFigure 4-2. The 30-minute breakout system ideal sell signal.
with a stop loss or a trailing stop loss once a given profit objectivehas been hit.
Additional Parameters
Now that you have the basic rule, note the following additionaldetails of this system:48
Chapter Four
Initial Stop Loss. An initial stop loss is used. The stop lossmust be large enough to give the market sufficient room to swingback and forth without stopping you out. In the case of S&P 500futures, the stop loss must be large. Note the system test resultspresented later in this chapter for specifics.
Number of Ticks Penetration. Typically, only several ticks“closing” penetration above or below the first half-hour tradingrange are necessary for valid signals to occur. The most recentresults in S&P futures show that the ideal penetrations are 12 tickson the buy side and 12 ticks on the sell side. These numbers willvary for different markets. However, as a rule, at least a two-tickpenetration is needed. Note here that by a “closing” penetration,I’m not referring to an actual close of the market. It is, rather, theend of the 30-minute price bar.
It should also be noted that under different market conditions adifferent penetration amount could be used. As a rule, the moreticks closing penetration you require, the fewer trades you willhave; however, the more accurate your results will likely be. Thestatistics for S&P presented in this chapter show the optimum val-ues from January 1997 through late November 1997, covering 274trades.
Floor Amount. | have found it useful to use a “floor amount”for a trailing stop loss. In other words, once your 30MBO trade hasreached a given profit objective, a trailing stop loss is used inorder to lock in a profit in the event of a trend reversal.
Percentage Trail. Once the floor profit has been reached, I rec-ommend using a percentage trailing stop loss of the open profit. Inother words, if the floor amount of $1000 open profit is triggered,then the initial stop loss is discarded in favor of a trailing stop thatconsists of a given percentage of the open profit equity peak.Assume, for example, that you enter S&P futures on a 30MBO buysignal. You place an initial stop loss of $2050 below your entry.The market moves up as expected and reaches the $1000 openprofit floor level. You then cancel your stop loss and use a trailingstop that is equal to 50 percent of the open profit intraday equityhigh. The market continues in your favor and makes a new highfor the day. Your new open profit is now $2000. At 50 percent trail-ing stop, a retracement of $1000 will cause you to exit the trade,going flat (i.e., no position). Assume you are not stopped out andThe 30-Minute Breakout 49
the market continues higher, reaching a new profit peak of $3000.Your trailing stop is now 50 percent of the new open profit peak(ie., $1500). If you are not stopped out and if there is no reversingsignal, then you exit on the close using an MOC (market on closeorder).
Trades Per Day. At times, a 30MBO buy will reverse to a30MBO sell. Hopefully, you will have been stopped out at a profitbefore a reversing signal occurs. If, however, it does reverse at aloss, then you will take the new signal in the given direction.According to my latest work, you can take up to five trades withinone day on reversing signals. Note that once you have beenstopped out of a long position, your next trade must be a shortposition or no position at all (and vice versa).
Now that I have illustrated the 30MBO buy and sell signals intheir ideal form, let’s examine a few actual market examples, com-plete with their breakout prices, entries, and exits, to illustratehow the signals appear in actuality. Figures 4-3 through 4-10 show30MBO buy and sell signals as captioned.
Stop Loss and Trailing
Stop Loss
What to Expect
Since the backbone of many systems is the way in which they taketheir losses, it behooves us to spend a little time and effort explain-ing and illustrating the stop loss procedures. The 30MBO stop lossprocedure is very simple but concise, as explained above. Use it!
The 30MBO is an excellent method for day trading, provided youadhere to the following rules and procedures. Frequently there is aconsiderable difference between what is described in theory andwhat transpires in reality regarding a trading system or method.Here are a few observations based on my actual experiences withthe 30MBO. My observations are not necessarily presented inorder of importance.
While the 30MBO rules of application are straightforward andsimple to understand, many traders are either incapable or unwill-ing to follow the rules. This, of course, denigrates the validityand/or performance of the method, rendering it virtually useless.50 Chapter Four
FutureSource Copyright (C) 1996-1995. fill rights resersed.172 Hour Breakouts OAV 7:59
 
  
Lineal Seth sygm?Cove Ssor cess) (we Sup loss)
Figure 4-3. 30MBO ideal buy signal (left). 30MBOideal sell signal (right).
 
The greatest difficulty in using the 30MBO is waiting until the endof the day to close out your position or using the stop losses indi-cated. Another serious difficulty is reversing your trade when andif the time comes to do so.
There is a great temptation to use a trailing stop once a profit hasbeen made, or to add more positions. There are ways to do thiseffectively without jeopardizing your open profit. The temptationof most traders is to use a trailing stop loss that is very near thecurrent market price. I have found this to be an ineffectiveapproach. More often than not, you will get stopped out only towatch the trend continue in its existing direction. You are left withno position. My studies suggest that if a trailing stop loss is to beused, it must be a wide stop—in other words, a stop loss that is faraway from the current market price. Typically, an effective stop lossThe 30-Minute Breakout 51
FetureSource Copyright (C) 1996-1996. ALL rights reserved.1/2 Hour Breaborts 1/aa/n 11:20
WAI it Me 6190 L= 6605 C= 6155 +178 WRIT 3m He 6190 Le C005 C= 615d +18
¥ aAM AeE* oS
 
Figure 4-4. 30 MBO signals in heating oil on 10/