system,even the best trading system in the hands of an undisciplined trader isnothing more than a destructive tool. Consequently, you must developyour skills as a day trader along the guidelines I have given you in thischapter.
Occasionally, traders will have idiosyncratic difficulties in the marketswhich must be addressed on an individual basis. If this is the case, thenI suggest you identify your particular problem as succinctly as you canand, if you cannot formulate a good method for minimizing the prob-lems which this behavior causes you, I suggest you contact a profession-al for assistance. If you are not successful in your search for help, pleasedrop me a line and I may have some helpful suggestions for you (MBHCommodity Advisors, Inc., P.O. Box 353, Winnetka, Ill. 60093).23
The Impact —of 24-Hour Tradingon Day Trading
Increased activity in the European futures markets as well as 24-hourfutures trading through the Globex system has had a significant impacton the U.S. futures markets. Some day traders are concerned that theseinfluences will adversely affect their systems, methods, procedures, andprofits. I disagree. As long as we remain cognizant that markets are nowglobally traded on a round-the-clock basis, we can adjust our methodsaccordingly. Here are some suggestions and observations regarding theEuropean markets and 24-hour trading with respect to your role as aday trader:
1. First let me define what I mean by the European markets. Time willcertainly alter my list, but I mean primarily the markets traded at theLondon International Financial Futures Exchange (LIFFE) and theMATIF exchange in Paris. The specific markets which I find extreme-ly reliable using the indicators and methods in this book are Gilt,Bund, Italian Bond, EuroMark, Short Sterling, FTSE 100, Pibor,CAC40, DAX, and Notionell Bond.
2. The systems, methods, and indicators discussed in this book appearto be effective in all markets no matter what their geographic loca-tion. As examples consider Figures 23-1 through 23-5, which illus-trate a number of the indicators discussed in the preceding chapters.From all indications these methods work just as well, if not better, inthe European markets.
3. When using the gap trading system on the currency, stock index, andinterest rate futures markets, which are traded overnight in the
207208 = Chapter Twenty-Three
 
Figure 23-1. Critical time of day (CTOD) method in September gilt.
SET Se Pa VT SIE ee SC I
 
Figure 23-2. The 10/8 moving average channel (MAC) in 30-minuteItalian bond.The Impact of 24-Hour Trading on Day Trading 209
 
je ei er 27 67 3] 7 6] er 7 67 8] 6 9] 6/10] 6713] 6754] 6715] 6716] 6717] 6720) 6721
Figure 23-3. The 10/8 MAC in 60-minute Italian bond.
 
Figure 23-4, The 10/8 MAC on 60-minute Notionell.210 ~~ Chapter Twenty-Three
 
Figure 23-5. A 1/18 oscillator in 60-minute Pibor.
Globex, do not use the night session data, since they tend to obscurethe gaps. I’ve found that the gaps are working very well as long asthe Globex trading is ignored for the purpose of calculating gap high-er or lower openings. :
4. Remember that as the trading world grows smaller, we will find our-selves in an international market which will be affected by news allover the world. This is expected to be very beneficial for the day trad-er, since it will create more market swings as well as more volatility.As you know, change begets opportunity.24
Twenty Keysto Successas a Day Trader
It is not possible for me to overemphasize the fact that great traders, inparticular great day traders, are great because they have mastered thediscipline of trading as well as the mechanical techniques. I’ve placedgreat emphasis on discipline and feel that since it is undoubtedly theweak link in the chain of trading behavior, no consistent success is possi-ble without it. There are many opinions as to what constitutes discipline.Different traders and different writers will give you distinctly differentopinions. My point of view has been tempered and shaped by over 22years of trading, trading which has exposed me to every conceivabletype of market and every conceivable type of news event. This has forcedme to develop an arsenal of time-tested procedures which I now sharewith you. The best way for me to convey this information is by listingthe items. So here they are, not necessarily in order of importance:
1. Find your place. One of the most important considerations in daytrading is for the trader to find his or her place in the vast world of daytrading. There are many things a day trader can do, but only so manycan be done at one time. I suggest you find one or several techniqueswhich you can relate to well and which you feel particularly confidentwith. These are the techniques which you should then use in your trad-ing. Use them consistently, day in and day out. You will find that certaintechniques work best in certain markets: S&P futures, for example, areespecially well-suited to the gap opening systems I have described earli-er. T-bond futures are particularly well-suited to the support and resis-tance, scalping type methods I have discussed. Currency futures, giventheir sharp and fairly quick moves, are especially well-suited to hit-and-
211212
Chapter Twenty-Four
run trading also discussed earlier. The gap method also works well incurrencies but with some variation on the theme. Determine whichapproaches suit you best and devote your time to those methods consis-tently and for a reasonable period.
2. Don't expect immediate results. Many a trader, in fact, many a daytrader, has been sorely disappointed when immediate success was notattainable. I urge you to persevere. Be consistent in giving yourself suffi-cient time to achieve success. It’s one thing to learn how to ride a bicycleby reading a book (which is basically what we're doing here), yet it’s afar different thing to actually get on that bicycle and ride it after readingthe book.
I assume that most of you have already done quite a bit of trading.Although you may feel that this experience will serve you well, it will asa matter of fact most likely be detrimental, since you come to the marketwith preconceived notions which may stand in your way. You will needto abandon these ideas in favor of those in this book, provided of coursethat what I’ve said makes sense to you. Therefore, it is important toremember that the process will take time. Some failures at first will benecessary. You will need to fall off the bicycle a few times before you canride it. At first your riding will be shaky and slow. After a while, how-ever, you will feel at home on the day-trading bicycle, and it will takeyou where you choose to go, provided you follow a smooth road. Howlong will it take? There is no answer other than perhaps more than 2weeks and less than 2 years, but these are certainly not hard-and-fastrules. Some individuals can be successful in several weeks, whereas oth-ers are still not capable of achieving consistent success as day traderseven after many years.
3. Have minimal expectations. Some books on positive mental attitudewill tell you to have great expectations, but I caution you against it. Donot have great expectations. Expect to lose. Expect that with time youwill begin to break even. Expect that with more time you will begin tohave profitable results. Do not expect profits, but rather expect thatlearning the game will cost you tuition both in terms of time and money.There are hundreds if not thousands of traders who came to the marketswith great expectations and a fistful of dollars but who left the marketsbeaten, broke, and broken. If anything, you ought to expect failure whilehoping that, through your efforts you can minimize the failures andmaximize the successes.
4. Play your own game. If you allow yourself to be exposed to andinfluenced by the many fantastic claims for ultimate trading systemsand incredible seminars, then you will be distracted on the road to suc-cess. There is nothing wrong with attempting to improve on what youTwenty Keys to Success as a Day Trader 213
are doing, but the act of searching, ever searching, tends to distract youfrom your goal. Don’t be side-tracked from your goal. Persevere andignore the claims as much as you can.
The world of futures trading is constantly barraged by those claimingto have better systems, better methods, fool-proof indicators, outstand-ing results, and fail-safe methods. Before you give any of these seriousattention, make sure that what you're doing is not intrinsically better.Every system you test, every seminar you attend, every piece of soft-ware you buy, and every path you take may prove to be a costly excur-sion away from your final destination. They take time, effort, andmoney. And these, my friends, are the most precious commodities in the world.They are limited resources, not easily replaced. Therefore, I suggest youfind a methodology and commit to it for a predetermined length oftime. And during this period of time do not allow yourself to become dis-tracted by anything else, even if it means that you need to close your eyes andears to the magazines, newspapers, and mail you receive.
5. Admit to your losses. I have stated repeatedly throughout this bookthat the single worst offense a day trader can commit is to carry a posi-tion beyond the end of the trading day. To do so is to violate the essence ofday trading and to risk exposure to everything that a day trader seeks to avoid.Do not, under any circumstances violate this cardinal rule regardless of whatthe excuse or excuses may be. If, perchance, you are “locked in” to a posi-tion due to a limit move against you, then you have no choice. Youcould spread a position off (take an opposite position in a different con-tract month if possible) in order to avoid the exposure; however, there isstill danger, even in a spread. You are either a day trader or you are not.If you are not a day trader, that’s fine. You must not, however, changehorses in midstream since this will, in the long run, not serve you well.In the short run, you may be very pleased with the results. But, in timethey will return to haunt you.
In the event of a limit move in your favor, you may be tempted tohold your position overnight, expecting that there will be more profitsin the morning. Even this is a dangerous procedure because a limit movein either direction on any given day does not statistically guarantee follow-through in the same direction on the next day. My research has shown thatover the next several days there may be follow through; however, whathappens between now and then may wipe you out. I have already givenyou certain very specific conditions under which a day trade may bekept overnight, but beyond these suggestions, I emphasize once againthat a day trade must be closed out by the end of the day.
6. Set your daily goal as a day trader. 1 encourage you to have one sim-ple goal every day of your life as a day trader; attempt to end the day with214
Chapter Twenty-Four
a profit. Place no dollar amount on the profit or it may distract you. Toset a goal too high would be unrealistic and to set a goal too low mightbe unfair. However, to set another type of goal—the goal of followingyour rules and being true to your methods—this is the goal of the daytrader. If, however, you do need to establish yourself a goal in terms ofdollars, then tell yourself that you will strive to end each day with asmall profit at the very minimum.
7. Prepare for the end of the day. The disciplined day trader knows thatthe end of the day is, most often, the end of all trades that day. There is aspecific time limit on how long a profitable trade may be carried duringthe day. The end of the day is, after all, the end of the day, and positionsmust be closed out. Some of the techniques I have discussed clearly indi-cate market exit under very specific circumstances, and others are moreadapted to exit on the close of trading. Ideally, a profitable position willbe kept for as long as possible. It is not uncommon for market moves tobecome accentuated toward the end of the session and, therefore, forconsiderable profit to be derived from your trades as the day draws toan end.
As the end of the day approaches, therefore, I want you to be more andmore inclined to take your profit at the slightest indication that the exist-ing trend may reverse itself. Unfortunately, this is, many times, a judg-ment call rather than an objective formal procedure. An intuitive sensemay need to be developed in order to achieve this goal. No matter whatsome traders may tell you about the tremendous systems they’ve devel-oped, the fact remains that it is impossible to day trade without somedegree of judgment. Some things in the markets just aren’t regular—they’re random events which have no prescribed method of response. Itis my most sincere hope that what you will learn within these pages willhelp you make such judgment calls successfully.
In view of the above, make certain that as the end of the trading dayapproaches, you continue to raise your stop loss (mental or actual) clos-er and closer to the current market price, thereby allowing the market toget you out when the trend reverses. In addition, there are certain typesof orders you can use (previously discussed) which can help consider-ably. But remember, your goal is to be out by the end of the day.
8. Don’t let good profits turn into losses. Many a good day trade hasbecome a bad day trade, by turning from a profit into a loss, due to poorintraday risk management. Please remember the rules I have given youabout raising stop losses (mental or otherwise) to the point of breakevenplus commission. This is an important rule which you must not violate.Preservation of capital is quintessential to consistent success as a daytrader.Twenty Keys to Success as a Day Trader 215
9. Don't force trades. Many traders have the personality type thatcraves action. This fatal flaw causes them to search out trading opportu-nities where and when none exist. If you have seen no opportunity forday trades but find yourself idly searching through your screens andintraday charts for opportunities, then you are headed for a disaster. Ifyou find yourself looking at markets which you never trade, for oppor-tunities which you have not seen previously in the day, then you aremost likely headed for trouble. Do not attempt to create an opportunitywhere one does not exist. Be patient. There will be trades tomorrow or thenext day. The market always provides opportunities over time eventhough none may exist today. Don’t ever, ever force yourself to trade if anopportunity is not readily apparent.
10. Don’t hesitate. This is one of the worst enemies of the day trader.The expression “he who hesitates has lost” is more true in the futuresmarkets than anywhere else. Since day trading is encapsulated in a cir-cumscribed period of time, every moment you lose in entering or exit-ing a position is a moment that may cost you money. If you choose tohesitate then do so with premeditation and calculated caution. Do nothesitate out of fear or indecision. Hesitation subsequent to a clear tradingsignal or opportunity indicates lack of confidence, and lack of confi-dence indicates that you are not comfortable with your choice of sys-tems and/or methods or with your skills as a day trader. Hesitation canbe costly.
11. Keep a diary. I have elaborated on this topic earlier but I emphasizeit here once again due to the great importance it can play in helping youlearn from your mistakes and of course from your successes. A diaryshould not only be kept, but it should also be referred to both at the endof each trading day and at the beginning of the new day. Refer to every-thing you did the day before and learn from it. Please refer to the exam-ples I have given you previously for specifics.
12. If you have to watch the markets, then don’t trade. Some of the tech-niques I have discussed in this book are so totally mechanical that yourpresence is not required and live price quotes are unnecessary. Othermethods, however, require your presence and close attention. If a situationarises during the day which requires you to leave your quote system,then either close out your positions immediately or give your brokerstop close only or market on close orders. Do not attempt to keep in touchwith the markets by calling frequently for quotes or by using a portable quota-tion system. This is not a good way to operate.
13. When in doubt, stay out. The old expression “when in doubt, stayout” is particularly appropriate for the day trader. Not all indicators or216
Chapter Twenty-Four
signals will be completely clear all the time. Furthermore, some otherdevelopments such as news, reports, or short-term fundamentals makesignals unclear or market response uncertain. In such cases my bestadvice is to stay out; do not trade. There will always be plenty of trades,and there is no need to enter a trade unless its potential outcome is rela-tively clear and free from the erratic influence of news or other funda-mental events.
14. Do your homework. It never ceases to amaze me how few tradersconsistently do their market homework. Even though they have devel-oped good market indicators and effective trading techniques, they failto consistently keep up to date on the markets and allow a goodmethodology to turn into a bad one, by virtue of their laziness. Thismakes no sense to me whatsoever. The fact is that if you develop some-thing which works, and if it is making money for you or facilitatingyour ability to make money, then by all means you ought to continuewith it.
Too many traders become complacent about their market studies, failto do their homework, and then wonder why they lose money. If youintend to succeed, then you must do your homework no matter howsimple or complex it may be.
Perhaps you have developed a trading system which requires nohomework. This is certainly possible. A number of the techniquesdescribed in this book do not require homework. However, you will stillneed to work on your trading diary, and you will still need to keep inclose touch with trading opportunities which may develop during thenext trading day. The only way to do this is to study the markets. This iswhat I mean by homework, and this is why it must be done.
15. Monitor your performance. Some traders refuse to monitor theirtrading results as a form of defense against being distressed by badresults. This is neurotic behavior and should not be engaged in. Alwayskeep close track of your results on a trade-by-trade and day-by-daybasis. Know where you stand at all times in order to acquire effectivefeedback about the techniques you are using. Unless you know whereyou stand, you will not have sufficient information about how well orhow poorly your methods are performing. I suggest you use one of themany computerized accounting programs to keep track of your results,or, at the very minimum, a spreadsheet which is updated manually willcertainly do the job. Pay especially close attention to your average win-ning trade and your average losing trade. Your average winners shouldbe consistently larger than your average losers. If they are not, then youare risking too much and getting too little for your efforts. This is anindication that change is necessary.Twenty Keys to Success asa Day Trader 217
Another good reason for keeping track of all your trades and theirresults is for determining if and when your trading technique, system,or indicators have deteriorated and are in need of change or review.Unless you check your performance you will not be cognizant thatchange is necessary, other than perhaps a vague feeling that all is notgoing well.
16. More complicated is not necessarily synonymous with more profitable.There is no doubt that you will be tempted many times to use morecomplicated trading systems. You will be tempted to build more andmore rules into your system feeling, erroneously, that your system willwork better if it has more rules. You may feel that if your system takesmore market variables into consideration, you will trade more prof-itably. My experience strongly suggests otherwise. With the exception ofartificial-intelligence-based systems which can process vast amounts ofdata in exceedingly complex ways, relating data to market patterns andrelationships, adding new inputs or variables to your own analyticaltechniques does not necessarily improve them and may in fact causethem to deteriorate.
I have found that if there is a relationship between complexity of sys-tem and profitability of system, then it may well be an inverse relation-ship. The simpler a system is, the more likely it is to be profitable. So please,don’t confuse apparent complexity with profitability.
17. Beware of market myths. The markets are forever subject to the emo-tional influence of traders. Through the years traders have come tobelieve that certain relationships exist in the markets when in fact theserelationships do not exist at all. Statistically, few consistent market rela-tionships have persisted over many years. Therefore, be careful not toget caught up in the cycle of hope which perpetuates market myths.
18. Beware the dangers of pyramiding. Pyramiding is the act of addingincreasingly larger units to your position as a market moves in yourfavor. Therefore, you may begin by buying one unit and adding twoadditional units once the trade has moved in your favor. If the tradecontinues to move in your favor, you may add four new units and then,assuming it continues in your favor you might add six or eight units.The essence of pyramiding is that increasingly larger positions are added asthe trade moves in your favor. The upside of this methodology is that youwill accumulate a very large position consistent with the trend and youwill use the capital available in open profits to margin new positions.The danger of pyramiding is that this is a pyramid clearly built upsidedown. It is heaviest at the top and rests on only one unit at the bottom.It is, therefore, subject to violent collapse at the slightest indication of atrend reversal. If you intend to build a pyramid, then do so by establish-218
Chapter Twenty-Four
ing your largest position first and follow it up by successively smallernumbers of units.
19. Trade active markets only. Here is a bit of advice I’ve given yourepeatedly throughout the book; however, I cannot stress it too strongly.By trading in active markets only, you will avoid the problems whichcome with thinly traded markets and the relatively poor price execu-tions which are so common in such markets. As a day trader, you musthave liquidity in order to move into and out of your positions easily andwithout too much slippage. Moreover, if you intend to trade large posi-tions, then liquidity is absolutely essential for success. As a day trader,you do not have the time to wait too long for price executions to bereported to you, nor will you have the time to go back and forth withdifferent price orders in an effort to have your positions either enteredor closed out.
Since markets wax and wane in terms of trading activity, you willneed to evaluate this on an ongoing basis in order to make certain thatyou are participating in actively traded markets. If you find yourselftrading thin markets and experiencing all the difficulties which go alongwith such markets, then I assure you that you have no one to blame butyourself since you have violated one of the cardinal rules of day trading.
As this book is being written, the active futures markets are as fol-lows: S&P 500, Treasury bond, Swiss franc, Deustch mark, British pound,crude oil, Eurodollar, and a handful of other futures markets. As youcan see, the number of vehicles open to the day trader is rather small.But this, I assure you, is a blessing in disguise. An effective day tradercannot spread him- or herself too thin among too many choices.
20. Be a contrarian. Some of the largest intraday moves occur whenthey are least expected. The general trading public and a vast majorityof professionals will be on the wrong side of the market when thesemoves happen simply because they get blindsided by their collectivesentiment. Mob psychology is a very important factor which may beused to the advantage of the day trader. If you find that the market sen-timent (see previous discussion of market sentiment) is heavily weight-ed on one side of the market or another, then watch closely for timingindicators which will give you market entry on the opposite side ofmajority opinion.
While these are just a few of the important things to remember if yousincerely want to be a successful day trader, they are by no means theonly prerequisites to success. I urge you to develop and maintain yourown list which is derived from your experiences as a day trader, sinceyour own list will be considerably more meaningful to you. The forego-Twenty Keys to Success asa Day Trader 219
ing is merely a beginning, a base upon which I urge you to build onyour own.
Now it’s time for you to strike out on your own, and/or to integratemy tools into your trading style. I don’t claim to have all the answers,and I don’t give you any guarantees other than to tell you that with per-sistence, patience, and motivation you will succeed. If I can help you,then don’t hesitate to contact me at the address previously given. I havelearned enough about the markets in my more than 20 years of tradingto know that the more I learn, the more there is to learn. And I alsoknow this: that which has worked best for me is that which is both the mostsimple to do and the most simple to understand.Appendix
Formulae
Stochastic
Fast Stochastic
Fast %K. The system identifies the highest high, lowest low, and thecurrent price (either open, high, low, close, midpoint, or average), for aspecified period (number of bars.) It subtracts the lowest low from thecurrent price, then divides the difference by the range (where the rangeis the highest high to lowest low). The result becomes the first fast %Kvalue. The system continues to calculate fast %K values by excludingthe oldest bar and including the next more recent bar before repeatingthe above calculation.
Fast %D. This is a moving average of fast %K values.
Slow Stochastic
220
Fast %K and Fast %D are calculated as above (not displayed). Slow %Kis equal to the fast %D. Slow %D is a moving average of slow %Kvalues. ee
When slozw stochastic is selected, the system internally calculates boththe fast and slow stochastic; however, only the slow %K and slow %Dlines are displayed on the screen.
The following are variables for the two stochastic studies above:
S Stoch Period and price used for the calculation of an unseenFast %KAppendix 221
S Stoch %K Period and type of average used for the calculation of anunseen Fast %D. This value is also slow %K
5 Stoch %D Period and type of average used for the calculation ofslow %D
F Stoch Period and price used for the calculation of a fast %K
F Stoch %D Period and type of average used for the calculation of afast %D.
Note that the price for the calculation of %K is usually the close. The peri-od and type of moving average for the calculation of the %D is usually3-period smoothed. Other prices, periods, and types may be entered in thestudy variables setup.
Smoothed Moving Average
The following indicator formulae are reprinted with permission of CQGInc. These are the indicator calculations used on my CQG System One.These formulae can be programmed into your computer, computed byhand, or programmed into Omega TradeStation of SystemWriter.
A smoothed moving average differs from a simple moving average in termsof the value that is subtracted before each calculation. In a simplemoving average, the oldest value is subtracted. In a smoothed movingaverage the previous smoothed average value is subtracted. The firstvalue for a smoothed moving average is determined by the formulaSM1. It is plotted on the chart at the third bar from the left side of thescreen.
Price 1 + price 2 + price 3
M1 Period
The next value would be determined by formula SM2. It is plotted at thefourth bar from the left side of the screen.
Previous sum — previous avg + price 4SM2 = :Period
For the calculation of SM2, previous sum is the sum of price 1 + price 2+ price 3; previous avg is the value of SM1.
The next value would be determined by formula SM3. It is plotted at thefifth bar from the left side of the screen.222 = =Appendix
Previous sum — previous avg + price 5Period
 
SM3 =
Subsequent values would be determined by subtracting the previousavg from the previous sum, adding the next more recent price, thendividing by the period.Adaptability, 6Analysis:
daily, 8-9
diary in, 196, 215
(See also Technical analysis)Artificial intelligence, 27-29, 217
Back-weighted (loaded) moving averages, 31Behavior of Prices on Wall Street, The (Merrill),148, 153,Bid-offer spread, 133Bid price, 131, 133Breakaway gaps, 117British pound futures, 55, 77, 104, 218Brokers:discount, 2, 143full-service, 201Buy signals:critical time of day (CTOD), 188delayed gap, 64-65gap open, 58-60
Capital, sufficiency of, 202-203Channel breakout system (CBO), 106-110Chart analysis (see Technical analysis)Checking out, 147Chicago Board of Trade, 61, 137, 146Chicago Mercantile Exchange, 146Close, 57consecutive closes system, 170-1745-minute closing price, 170, 188orders on, 146Close trailing stop, 53-54Cocoa futures, 85Coffee futures, 79, 129Commissions:commodity fund managers, 34discounted, 2, 143
Index
Commissions: (Cont.):
negotiated, 2scalping and, 130, 132
Commodity Futures Trading Commission
(CFTC), 12
Commodity Quote Graphics (CQG), 93Competition, with self, 5, 212-213Computers, 2-3
in market quotation systems, 3revolution in, 2
software for, 2, 27-29, 217spreadsheets on, 194, 195
trading systems and, 23-24, 27-29, 217
Congestion, 119
Consecutive closes system, 170-174Consistency, 6
Copper futures, 149
Cotton futures, 55, 169
Critical time of day (CTOD), 186-190
Globex system and, 208market sentiment and, 184-185
Crossovers:
moving average, 34-39, 40-42relative strength index (RSI), 164-168stochastic indicator (SI) and, 45-47, 53
Crude oil futures, 52, 55, 69, 103, 202, 218Currency futures, 52, 69, 78, 202, 211-212, 218
(See also specific currencies)
Curve fitting (optimization), 17, 24
Daily seasonal tendencies, 153-162Daily sentiment index (DSI), 176-177Day traders, 3-9
advantage in use of support and