make daytrading work for you. Some of us will even need to learn how tokeep from snatching failure from the jaws of success and toaccept, without self-sabotage, the financial rewards that can bewon in this arena.The stock market is a picture of human emotion and crowdmentality in action. You have seen a stock fluctuate wildly overan hour or two or longer. These fluctuations have little to do withthe underlying value of the stock. Rather, they are reflections ofhow market participants see the stock through the twin lenses offear and greed. Emotions and psychology are important components in the market. Your ability to read and deal with emotionalfactors, yours and those of other market participants, will determine your success or failure in trading.The following questionnaire is an invitation to examineyour emotional assets, as well as potential risk factors, in order tooptimize your chances of success before putting your capital atrisk.Please read the following statements. None of them has aright or wrong connotation. They either apply to you or theydon’t. Try not to spend too much time in thinking about the“right” answer, but rather, let yourself have the response that
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occurs to you spontaneously. Then enter the appropriate numberinto each box in accordance with the following point scale:
Section ANever=4Rarely=3Sometimes = 2Often=1Always=01. ( ) If my plans go wrong, I stay angry with myself for quitea while.2. ( ) I tend to worry a lot about money.3. ( ) I know that having a lot of money will finally make mehappy.4. ( ) I need people around me to be able to work effectively.5. ( ) I find it difficult to work in disorganized situations.6. ( ) When things suddenly don’t go according to plan, I losemy concentration.7. ( ) Little things tend to upset me.8. ( ) I tend to be critical of myself.9. ( ) I have a tendency to second-guess myself.10. ( ) I trust luck more than skill.11. ( ) I tend to gamble and take big risks, and I cannot controlthis habit.12. ( ) I tend to use drugs and/or alcohol to make myself feelgood.13. ( ) I have major financial problems.14. ( ) I feel dissatisfied with myself and my life.15. ( ) I often feel overwhelmed by problems.16. ( ) In trading, I will be pleased only with above-averageprofits.17. ( ) I need the money I will make in trading to solve severalmajor life problems.18. ( ) I buy lottery tickets all the time.
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19. ( ) When I make an error in judgment, others will lookdown on me.20. ( ) I like having things my own way.21. ( ) I don’t like rules and prefer to do things my own way.22. ( ) I want to do things perfectly the first time and get angryat myself when I cannot.23. ( ) I blame the market when my trades do not go well.24. ( ) I get carried away by the feelings of the moment.25. ( ) I take failure very personally and tend to think about itfor a long time afterward.26. ( ) I have had a problematic relationship with money.27. ( ) I don’t like making decisions until I feel totally sure thatI am right.( ) TOTALSection B
1. (2. (3. (4. (5. (6. (7. (8. (9. (
Point Scale:Always=4Often=3Sometimes = 2Rarely=1Never=0) I believe I can become financially secure by hard work.) My life is good and successful.) I feel confident in myself.) I get nervous under stressful situations, but I usuallyrecover quickly.) I enjoy working hard.) I am happy with how successful my life has been and is.) I feel in control of my life most of the time, and I knowwhere I want it to go.) I believe I can find solutions to most problems life presents to me.) When I am in pursuit of an important goal, I can be verypatient and determined.
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10. ( ) I believe that one of the keys to success in trading is toalways take responsibility for the consequences of mydecisions.11. ( ) I can focus for hours on things I am interested in.12. ( ) The market never ceases to fascinate me.13. ( ) I can easily work by myself and don’t need anyone todirect me.14. ( ) I am by nature an optimist and have a positive attitude.15. ( ) I believe in the saying that the harder I work, the luckierI get.16. ( ) I think that failure is just another word for learningexperience.17. ( ) I love learning new skills and working on challengingsituations.18. ( ) I feel that I have sufficient training to start trading.19. ( ) I would not like to lose my initial trading stake, but if Idid, it would not be the end of the world.20. ( ) I have a clear understanding of the trading process andcan navigate the software with ease.21. ( ) When I enter a trade, I have a clear picture in my mindabout when to exit and how.22. ( ) I see management of loss of trading capital as the mostcrucial discipline in trading.23. ( ) Having begun to trade, I adhere rigidly and invariably tomy mental stops.24. ( ) I have committed myself to make trading work for meand will provide the necessary financial and timeresources for myself.25. ( ) I believe an up or down market will provide daily trading opportunities so vast and bountiful that I cannotever exploit them all.26. ( ) When I feel stressed, I have a routine in place that willhelp me cope.27. ( ) I have a good social support system that includes othertraders with whom I exchange ideas on a regular basis.
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28. ( ) I read financial publications and books and keep a trading journal in order to improve my performance and todocument what works.( ) TOTALCongratulations! You have finished the questionnaireexcept for the scoring and the interpretation of your score.Point RangeGroup A224–168Group B168–112Group C112–56Group D56–0
InterpretationThose of you who scored in the 224 to 168 range have superiorprospects of doing well in day trading. Your attitude is excellentas are your motivation and commitment to the process. Whateverobstacles you encounter, you will likely overcome fairly easilyand quickly. With more than sufficient emotional, technical, andfinancial resources, your outlook is indeed bright.The prospects for those scoring in the range of group B areobviously not as good as for the higher-scoring group, but youhave a more than fair chance at doing well. There are some issuesconcerning motivation and emotional stamina, but you ought tobe able to overcome them with practice, training, and some guidance. You may want to examine some of your basic attitudesabout your life—emotional issues and the way in which you handle feelings and stress.Group C scorers show some serious problems in the areas ofself-esteem, money, and conduct of life in general. It would bewise to resolve these before you start trading seriously becauseyou may find it difficult to deal with financial losses and theirimpact on your life. In this group, as in the others, motivation,practice, and determination can still produce gratifying results.Guidance and mentoring would nonetheless be helpful and perhaps even mandatory.
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Group D is going to be in a difficult situation. In spite ofmotivation, there are serious limiting factors in the areas of personality style, excessive expectations and risk taking, lack offlexibility, and difficulty in handling the emotional and stressfulaspects of high-speed and intensely charged market situations.Extreme caution is advised before proceeding with any trading.The Trader’s Quiz courtesy of Dr. Peter Berndt.
TRADE ANALYSISWith computers it is possible to amass large amounts of data, andwith the data it is possible to construct information. That isexactly what the technology is designed to do, to produce usefulinformation. Data collected and not interpreted are useless; butthe opposite is true when data are formatted into information,which can be learned on an ongoing basis. What follows is a sample of what a database of trading activity can produce for traders.The data are captured each day, but the information that is produced is capable of saying a lot about a particular trader that willhelp him or her grow toward his or her ultimate goal. Inspect whatyou expect is a critical rule to follow once trading has begun.This process has led to many small discoveries about atrader’s preferences and confidence levels. This is one of the easiest and surest ways I have found to understand yourself andyour trading. I have observed patterns of success related to thetime of day trader trades or the amount of time a trader remainsin a trade. For example, many traders do extremely well from theopening to midday. In the afternoon, they often give back theirprofits. Why? Was it fatigue, boredom, or something else? Whoknows for sure, but the cure is often to take the afternoons off. Toaddress this set of circumstances, the Trade Analysis softwareprogram shown in Tables 9.1 through 9.3 was designed to quantify the trading patterns of traders. This allows us to show tradersobjective analysis of the type of trades that are profitable andunprofitable. This, of course, is not a shortcut to success—thereare none. It is just another tool to help you put your trading intoperspective. You, as an individual trader, can do it for yourself ifyour firm does not provide such services, and I recommend you
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do it at least for the first year because the practice of collectingthe data is as valuable as analyzing it. To get you started, I wouldsuggest you look at the following:• Type of trade (long or short)• Number of shares traded (less than 200, 500, 1000, etc.)• Price per share (less than $10, $50, $75, $100, $150, etc.)• Term of trade (day, swing, midterm, or long term)• Minutes in trade (0 to 5, 6 to 15, 16 to 30, 31 to 60, 61 to120, over 120)• Trades by stock symbol (AOL, CSCO, EBAY, VRNS,MOT, etc.)• Trades by industry group (electronics, financial services,internet, manufacturing, etc.)• Time of day• Profit or loss (and how much)• Emotional factors (fear, greed, indifference, etc.)• Number of losers and/or winners• Best trade in each classification• Worst trade in each classification• Percent of gainers and/or losers• Average gain and/or loss in each classificationOnce this information can be created, it can be interpretedwith objectivity as well as from a psychological perspective. Inthe end, I see the psychological dynamics of trading the sameway I see the laws of supply and demand. They are the precursors or the cause that must exist before the effect can be seen orrealized. What your mind believes, your body achieves, such asa strong profitable month; hence, the mind is a precursor toresults just like supply-demand imbalances are precursors tomovements in stock prices.To drive the importance of trade analysis home, I have profiled three actual traders from our firm. While the names remainanonymous, the utility of the analysis is clear.
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The first trader we will explore wishes to be a “plunger.” Aplunger trades heavy size, therefore the confidence level of thistype of individual must be high. His or her winning percentagemust also be strong. While this trader is not very active in comparison to the day trader who takes no overnight positions, it doesindicate that results can be found with many methodologies.
Trade Analysis 1. The PlungerI call this trader the plunger because he finds an idea and tradesit very heavily in terms of share size (see Table 9.1). The following is known about this trader:1. He is really good. He is correct 91.5 percent of the time.That is incredible.2. He likes the long side of the market more than the short,but he is multidimensional and will go short.3. This trader, being the plunger that he is, trades less frequently, and he definitely has a swing trader style, buthe also participates in day trades. It could be said thistrader picks his trades very carefully and is not emotional at all. A cold hard logician. It also proves thatovertrading is not necessary to profit. This trader averaged only one round turn per day (two transactions).4. This trader also trades with options in conjunction withthe underlying equity, another strong attribute.5. Finally, this trader is definitely a tech trader, with awide variety of interests, including health care andbiotech, computer hardware, electronics, software, andwireless communication.6. The improvement opportunities for this trader are few,but as the analysis shows, there was one large loss on anoptions position that could have been cut sooner. WhenI interviewed the trader about this, his response was fastand clear. He said, “That was a covered call, and theprofit on the underlying far outweighed the option loss;therefore, I was hedged.” All I could say next was,“Great Job!”
TABLE 9.1 Trade Analysis for Anonymous Plunger(From January 2, 2000, through May 2, 2000)
164
Trades
Gains
Losses
Profit
Best Trade
Worst Trade
% Gainers
Avg. Trade
Long vs. shortLongShort
6517
6114
43
$355,443.34$18,594.10
$159,803.25$24,311.55
−$48,530.42−$104,001.74
93.8%82.4%
$5,468.36$1,093.77
Shares tradedLess than 200 shares201–500 shares501–1000 sharesMore than 1000 shares
1912636
1612632
3004
$41,052.66$1,442.02$34,062.67$297,480.09
$24,311.55$1,442.02$8,360.58$159,803.25
−$104,001.74$0.00$0.00−$48,530.42
84.2%100.0%100.0%88.9%
$2,160.67$1,442.02$1,310.10$8,263.34
Share price$1–$10$10.01–$25$25.01–$50$50.01–$100$100.01 and up
17911396
15711366
22030
$141,098.25−$88,291.90$46,051.98$270,386.88$4,792.23
$24,311.55$9,996.00$14,787.66$159,803.25$1,251.71
−$4,125.81−$104,001.74$0.00−$48,530.42$0.00
88.2%77.8%100.0%92 .3%100.0%
$8,299.90−$9,810.21$4,186.54$6,933.00$798.70
Term of tradeDay tradeShort term (1–3 days)Midterm (4–10 days)Long term (10+ days)
32241610
3122148
1222
$26,628.36$136,963.63$89,223.32$121,222.13
$4,465.36$21,970.18$17,811.39$159,803.25
−$250.61−$5,250.23−$4,125.81−$104,001.74
96.9%91.7%87.5%80.0%
$832.14$5,706.82$5,576.46$12,122.21
Minutes in day trade0–5 minutes5–15 minutes16–30 minutes31–60 minutes61–120 minutesMore than 120 minutesNot a day trade
107353450
97353444
1000006
$2,672.19$4,104.35$3,676.16$8,814.34$1,984.78$5,376.54$347,409.08
$637.50$917.60$2,797.89$4,465.36$1,251.71$2,279.14$159,803.25
$250.61$0.00$0.00$0.00$0.00$0.00−$104,001.74
90.0%100.0%100.0%100.0%100.0%100.0%88.0%
$267.22$586.34$1,225.39$1,762.87$661.59$1,344.14$6,948.18
165
Trades by industry groupundefinedElectronics, semibroadDrugs, biotechnologyDrugs, drugs, otherInternet software and servicesInternet service providersElectronics, semi int cirComputer soft and svcs,biz software and servicesDrugs, diag substancesComputer hardware,netwk and communication devComputer hardware, PCsComputer hardware, PeriphElectronics, semiequip and matComputer soft and svcs,application softwareTelecom, processing systems andproductsTelecom, wirelessElectronics, diversifiedDiversified svcs, researchComputer hardware, diverssystemsTelecom, long distanceTotals
Trades
Gains
Losses
Profit
Best Trade
Worst Trade
% Gainers
Avg. Trade
1872653112
1562543112
31110000
$41,002.88$189,048.27$88,883.39$9,783.06$1,447.77$2,493.46$624.59$715.38
$24,311.55$159,803.25$21,970.18$5,085.34$742.80$2,493.46$624.59$637.50
−$104,001.74−$48,530.42−$2,131.67−$602.62$0.00$0.00$0.00$0.00
83.3%85.7%96.2%80.0%100.0%100.0%100.0%100.0%
$2,277.94$27,006.90$3,418.59$1,956.61$482.59$2,493.46$624.59$357.69
11
11
00
$1,038.53$497.76
$1,038.53$497.76
$0.00$0.00
100.0%100.0%
$1,038.53$497.76
3142
2142
1000
$697.95$1,436.75$16,815.05$1,944.45
$698.80$1,436.75$8,360.58$1,575.77
−$250.61$0.00$0.00$0.00
66.7%100.0%100.0%100.0%
$232.65$1,436.75$4,203.76$972.22
1
1
0
$1,060.58
$1,060.58
$0.00
100.0%
$1,060.58
1211
1211
0000
$1,442.02$2,871.31$8,517.28$778.25
$1,442.02$2,279.14$8,517.28$778.25
$0.00$0.00$0.00$0.00
100.0%100.0%100.0%100.0%
$1,442.02$1,435.65$8,517.28$778.25
1
1
0
$2,938.71
$2,938.71
$0.00
100.0%
$2,938.71
82
75
7
$374,037.44
$159,803.25
−$104,001.74
91.5%
$4,561.43
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RULES OF THE TRADE
Trade Analysis 2. The Day TraderThis analysis (see Table 9.2) shows the classic active day trader,grinding out profits every day and cutting losses short, with minimal overnight positions.
1. This trader is almost perfectly balanced between thelong and short sides of the market. This indicates a trueday trader at work, completely indifferent to the market.This is a strong attribute for a day trader.2. This trader is fairly active, averaging approximately 35round turns per day and 70 transactions. This againindicates the purest day trader.3. Notice that this trader is only correct a little better than50 percent of the time, yet this trader is still profitable,netting over $68,000 for the month. While not yet highlyprofitable, this trader is very disciplined for a new daytrader.4. The analysis shows that this trader trades good liquidstocks as evidenced by the share price. Stocks in therange of $50 or more is where this trader lives, and thatspells liquidity and another strong attribute to his success.5. There are very few overnight positions as evidenced bythe term of his trades; in fact, 95 percent of this trader’strades are closed the same day. This way the tradersaves the high cost of margin interest and the highercost of market risk.6. The length of time in the majority of trades is also quiteimpressive. This trader is a skilled “tape reader” andgets out of trades within 15 minutes in the majority oftrades.7. Finally, the analysis shows this trader has found hisniche in trading, averaging only $93 per trade, but limiting market risk with limited time in trades while grinding out an attractive living.
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Trade Analysis 3. The New TraderThis trader is having some trouble; his losses are big, and heappears undisciplined (see Table 9.3). The problem is not hisideas or even his ability to trade, but rather his discipline to cutlosses. This trader has potential, but a long way to go:1. This trader has good activity and is quickly gainingexperience through transactions, which is the best wayto learn. In fact, the trader is also very balanced in termsof longs and shorts.2. Another positive to be seen is that this trader is tradingin lower share size while he learns. Most of his tradesare between 200 and 500 shares, which makes it moredifficult to profit from short-term trades. The fact thatthis trader is willing to lower his size to learn and understand his emotions while trading is a strong attribute.3. I also like that this trader is trading stocks with good liquidity. His stocks range from $50 and above which isalso a good sign.4. “New trader” is also doing a good job as a day tradersince he does cover most trades intraday, which is whathe set out to do. But as further review will reveal, thistrader has trouble cutting losses, and the losses are whathe takes home when he does keep an overnight position. This is a mistake that is costing this trader money.5. By reviewing the “best trade” and “worst trade”columns, you can see this trader has a problem withlosses. Some of these losses are huge and simply inexcusable. If this trader can control his emotions betterand cut his losses sooner, he will be well on his way tomaking a good living trading.6. As you can see, this trader averages only $8.62 pertrade. You may say that it is crazy to try and make a living on that kind of margin, but remember, with highactivity, traders don’t need to make huge profits pertrade; instead, they need to be consistent at cuttinglosses and the numbers will work. The day trader in thesecond example is proof of that phenomenon.
TABLE 9.2 Trade Analysis for Anonymous Day Trader(From April 1, 2000, through April 30, 2000)
168
Trades
Gains
Losses
Profit
Best Trade
Worst Trade
% Gainers
Avg. Trade
Long vs. shortLongShort
397334
213164
184170
$51,391.57$16,609.78
$7,067.54$8,109.19
−$14,713.38−$10,554.04
53.7%49.1%
$129.45$49.73
Shares tradedLess than 200 shares201–500 shares501–1000 sharesMore than 1000 shares
42185373131
239419169
199118262
$5,978.67$15,625.88$45,627.69$769.11
$8,109.19$4,227.41$5,497.73$7,067.54
−$14,350.04−$3,362.78−$2,050.49−$14,713.38
54.8%50.8%51.2%52.7%
$142.35$84.46$122.33$5.87
Share price$1–$10$10.01–$25$25.01–$50$50.01–$100$100.01 and Up
721912143188
35116922834
3785220354
−$5,530.74$381.56$27,453.65$51,829.36−$6,132.48
$8,109.19$3,535.17$7,067.54$6,077.18$4,058.91
−$14,713.38−$7,870.34−$1,622.26−$3,177.16−$10,554.04
48.6%57.9%57.0%52.9%38.6%
−$76.82$20.08$226.89$120.25−$69.69
Term of tradeDay tradeShort term (1–3 days)Midterm (4–10 days)Long term (10+ days)
6962663
3571721
339942
$71,659.90$24,040.00−$1,554.88$26,143.67
$5,497.73$8,109.19$2,642.32$2,919.75
−$3,362.78−$10,554.04−$2,203.47−$14,713.38
51.3%65.4%33.3%33.3%
$102.96$924.62−$259.15−$8,714.56
Minutes in day trade0–5 minutes5–15 minutes16–30 minutes31–60 minutes61–120 minutesMore than 120 minutesNot a day trade
404205422412935
18712023147620
2178519105315
$10,719.94$44,974.15$4,159.39$6,406.37$3,156.22$2,243.83−$3,658.55
$4,091.65$4,227.41$5,497.73$2,847.36$3,183.51$1,567.90$8,109.19
−$1,747.84−$3,177.16−$2,756.48−$3,362.78−$2,914.28−$1,468.20−$14,713.38
46.3%58.5%54.8%58.3%58.3%66.7%57.1%
$26.53$219.39$99.03$2