Keep Your Eye On The Ball
Contents:
A - Attain The Proper Psychology
Components Of Intuitive Trading
Judging The Mood Of The Market - Trading In The Moment
Learning How To Win, Learning How To Lose
Don't Isolate Yourself
Further Reading On Trading Psychology
B - Begin With Goals
What Motivates The Successful Trader
C - Constructing A Trading Method
Approaching Trades Based On Time Frames:
- Scalp Trading
- Swing Trading
- Position Trading
Identifying Potential Trades:
-Identifying News Trades
-Identifying Anticipation Trades
-Identifying Sympathy Trades
Tools For Judging The Trade:
Technical Analysis
- Further Reading On Technical Analysis
Reading The Tape
- Previous Trades
- Bid/Ask
- Previous/Today's High/Low/Open
- Time
- Trade Size
- Volume
- Level 2 Data(Market Depth)
- Further Reading On Level 2 Data
- More On Reading The Tape
Putting It All Together - The Trading Day
- Before the Open
- During The Day
- After The Close
D - Define Your Risk & Money Management Method
Adequate Capitalization
Diversification
Margin/Bet Size
Stop Losses
Averaging Down
Averaging Up
Holding Winners Overnight
Trade Liquid Markets Only
Know When Not To Trade
E - Evaluate Your Execution System
Broker
Analysis/Order Entry Software Based Brokers
Phone Based Brokers
Analysis Software
Data
Real Time News Sources
Remote Execution System Failure - Contingency Plan
More On Execution Systems
F - Further Help On Trading
Highly Recommended Reading
Classic Reading
Vacation Reading
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A - Attain The Proper Psychology (Trader's state of mind)
Components Of Intuitive Trading:
Intuition plays a key role in effectively processing the large amount of information that a Day Trader is subjected to be able to "Judge The Mood Of The Market" and trade "In The Moment". What follows are the components needed to develop that intuitive faculty:
1) Desire
2) Faith
3) Visualization
4) Specialized Knowledge
5) Organized Planning
6) Decision
7) Persistence
8) Network
9) Sixth Sense
Judging The Mood Of The Market - Trading In The Moment:
Your intuitive ability to determine if the market is in a good, bad or indifferent mood will be the key determinant of your trading success. The longer you are in the market the more aware of this you will become. You should concentrate on identifying the key events and how traders are reacting to them. It is crucial to be trading with the flow of the market to be successful. If you do not feel in tune with the market is best to pull back and not trade until you do.
Ideally you should be able to observe and judge the mood of the market from different time perspectives such as the near term(hourly or by the minute), mid term(daily), and longer term(weekly or monthly).
When you have truly developed the belief that you have the ability to Judge The Mood Of The Market you will begin to act on your intuition without hesitation and ......trade in the moment
Learning How To Win, Learning How To Lose:
How to win?.....DON'T GET EXCITED about a big win. Just take it as a normal part of trading. Always close a winning trade and move on.As a Day Trader you can lose as quickly as you can win.
How to lose?..DON'T GET DEPRESSED about a big lose. Just take it as a normal part of trading. Always use stop loss orders. Always close a losing trade and move on. As a Day Trader you can win as quickly as you can lose.
You must learn to take all your trades in stride and focus on you trading plan. Getting excited or depressed just clouds your judgement and prevents you from take the right action at the right time.
This is the biggest difference between successful traders and losers!
Getting Out
adtrading.com
A Trader's Diary
adtrading.com
Don't Isolate Yourself:
One of the biggest risks of remote online trading is the isolation that can occur and lack of networking intraday. For the trader this can cause problems with keeping their mind on the task at hand, as well as losing their perspective on what is happening with the markets.
To alleviate this problem the Final Frontier Chatroom was created:
The Final Frontier Trader's Lounge:
exchange2000.com
Further Reading On Trading Psychology:
Trading For A Living - Alexander Elder
Market Wizards - Jack Schwager
New Market Wizards - Jack Schwager
Think And Grow Rich - Napoleon Hill
The Winning Edge 2 - Adrienne Laris Toghraie
TAO Of Trading - Robert Koppell/Abel
Sun Tzu's Art of War For Traders and Investors - Dean Lundell
The Day Trader's Advantage - Howard Abell
Intuitive Trader - Koppell / Abel
The Disciplined Trader - Douglas
Art of Contrary Thinking by Neill Humphrey
Trader's Coach Adrienne Laris Toghraie - Articles:
Interview: Adrienne Laris Toghraie
adtrading.com
Trading Psychology
adtrading.com
Fear of Success, Fear of Failure
adtrading.com
The Gambling Trader
adtrading.com
The Perfect Fit
adtrading.com
Holding On
adtrading.com
The Home-Alone Trader
ifta.org
Self Discipline - Prelude to Discipline
finance.wat.ch
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B - Begin With Goals (short/mid/long term)
What Motivates The Successful Trader:
1) Money
2) The desire to maintain control of his/her own mind towards external events, and observe/react correctly to the emotional actions of others in the market.
Your Goals should reflect your trading plan. Obviously the higher degree of risk you are willing to assume the higher the expected rate or return.
A Trader's Business Plan
adtrading.com
Dear Coach,Potty Training for Traders,Brokers and Investors - Adrienne Laris Toghraie
Trader's Business Plan - Adrienne Laris Toghraie
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C - Constructing A Trading Method
Approaching Trades Based On Time Frames:
Scalp Trading
You do not hold Scalp Trades long (1 minute to 30 minutes)and therefore you are only willing to take what the market gives you(1/16 to a point) You may make several trades on the stocks but are unwilling to hold the position unless the momentum continues.
Swing Trading
These are trades which you tend to hold longer(30 minute to several hours)and therefore are looking to make 1/2 to several points.
Position Trading
These are trades which you hold overnight and sometimes days. You are usally looking to make 1 to several points on these trades.
Identifying Potential Trades:
As a short term trader you thrive on volatility. Volatile stocks, sectors, and markets are typically set off by a specific event such as news, potential news, or movement in related stocks/sectors/markets. Trades can be defined by these triggering events. The types of trades are:
- News Trades(trading off recent news)
- Anticipation Trades(trading off anticipated events)
- Sympathy Trades(trading off moves in others markets,sectors,stocks )
Often such triggering events can have impact over fairly long time periods and can lead to consistently volatile markets,sectors and stocks that a trader can take advantage over weeks and even months.
Once you are able to identify opportunities based on these triggering events and you can create a watchlist of potential securities in which to trade.
Identifying News Trades:
Scan news yourself using one of the various news feeds(Reuters,Dow Jones,Bloomberg,Briefing.com,etc) and/or you may rely on other via networking in live/online trading rooms.
- Do you understand what the company does?
- Is the news significant enough to move the stock and attract sustained interest so that you can exit with your targeted profit?
- Is the news recent or is it several hours/days old?
- Is it a repeat of a previous news release?
- Is the news being picked up by major news wires?
( Briefing.com,Reuters,Dow Jones,CNBC )
Identifying Anticipation Trades:
This involves analyzing what markets,sectors,stocks have upcoming earnings, news announcements, economic events, etc. coming in the near term. Generally markets,sectors,stocks will pickup momentum as the timing of the anticipated event grows closer.The lack of anticipation will also create potential opportunities for shorting.
Identifying Sympathy Trades:
By understanding the triggering events of specific securities you can extrapolate this information to related markets,sectors or stocks which can move in sympathy with the security in focus.
Tools For Judging The Trade:
What Charts Are Best?
adtrading.com
Technical Analysis
Once I have identified potential trades candidates and created a watchlist I use 10 and 60 minute intraday charts as well as daily charts to determine support and resistance zones. I visualize and draw trendlines, and insert moving averages and look for chart patterns to help me determine if a potential trade exists.
Technical analysis can take many forms including classical chart patterns, mathematical indicators, and sequential patterns.
Much of this analysis can be performed after market hours by reviewing your watchlist and setting price alerts.
Further Reading On Technical Analysis:
Technical Analysis - Beginners:
exchange2000.com
Recommended Books On technical Analysis
exchange2000.com
Day Trader's Manual - William Eng
Hit And Run Trading - Jeff Cooper
Street Smarts - Larry Connors & Linda Bradford Raschke
Linda Bradford Raschke - Swing Trading
mrci.com
Intelligent Speculator
intelligentspeculator.com
Hard Right Edge
hardrightedge.com
Reading The Tape:
Tape reading is used to determine the character of the underlying price action and help determine the behavior of the potential trade.
Previous Trades:
For me there is no better indicator for trading than previous trades. Trades literally define the leading edge of the trend.
By watching a scrolling summary of trades I am able to determine
whether demand is slowing down or picking up for the stock.
The volume of each trade helps me to determine if there are any serious buyers in the market and how badly they want to buy the stock.
You can get a real feel for the market of a stock by watching the velocity of the trades. As momentum gains the speed of trades intensifies. Whether or not the price can break through on this higher volume is a key in determining support or resistance points.
Knowing these support and resistance levels is a key to knowing when to enter or exit trades.
Often traders or market makers can fool you by jockeying around on the bid/ask, but previous trades denote the true sentiment of the market.
Bid/Ask:
After Previous Trades watching the bid/ask is the next best thing.
There are several components of the bid/ask:
price - the price offered at the bid, and the price offered at the ask
spread - the difference in price between the bid and ask
size - the number of shares at the bid, and the number shares at the ask
For NASDAQ stocks it is possible to get a Level 2 screen of the bid and ask for individual stocks. This gives you additional information such as the size and price of bids and offers behind the current best
bid/ask.
For example if the best current bid for Intel was 1000 shares bid @ $100...Level 2 would show bids below this, such as 1000 shares bid @ 99 15/16.
Additionally Level 2 will give you what brokerage house is bidding/asking, how many shares each is bidding/asking for, at each price differential.
Bid/Ask is a good trading indicator of the strength of the demand/supply because you can see new orders for stock being added or deleted from the market. This information can help you to determine whether prices are likely to move. For example if the size of stock bid is much higher than the size of stock offered it is likely that prices will trend higher. This is not always the case though and that is why previous trades tend to be a better indicator of trends.
The spread is a reasonable trading indicator as well, but it is much better in non-liquid stocks. In liquid markets stocks tend to maintain tight spreads. In non-liquid markets a wide spread can mean that a price movement is eminent. The tendancy of traders to not tighten the
spread means that the market must change the bid/ask up or down to attract more traders to the market.
Once again previous trades tend to be a better indicator than the spread because of opportunity for traders to manipulate the spread, especially in non-liquid stocks. Unfortunately in non-liquid stocks there may not be enough previous trading to get a good feel for the trend...and that is one big reason why I rarely trade non-liquid stocks.
Previous/Today's High/Low/Open:
Keeping an eye on the daily price range of a stock gives me perspective of where the stock is trading with relation to it's longer term (such as hourly, daily of weekly) trends.
Knowing when a stock is approaching or breaking through a new day high/low is critical to helping me visualize that daily range.
Paying particular attention to trades as they happen as the stock is approaching a new daily high/low gives me a good insight as to the momentum of the market and it's willingness to establish new ground.
If a stock trades around new daily high/lows early in the day it helps me throughout the day in establishing Entry and Exit points for that stock.
Time:
The time between trades, as well as the time spent at a particular price level tends to indicate resistance/support levels.
For example - Often when I am watching a stock in an uptrend the pace of trading slows down at a particular level. If there is an increase in the size of trades during this time I will take this as an indicator that resistance has been met.
Often this will mean that a large order has been filled and is being
crossed to an institution before the market makers pullback off their bids.
I see the same thing happen on downtrends, but in this case the market makers are buying from the institution.
Trade Size:
As I referred to in my last post, the size of previous trades can indicate a lot about what is happening with behavior of a stock.
for example - While watching a stock trade in a tight range a series of trades of large size will indicate a struggle that the market makers are having is about to be won by one side, and that the beginning of a breakout is near.
Volume
- Is it real volume or just one or two large block trades?
- Is the volume increasing quickly? or is it a quiet market?
- Is there enough volume to trade it?(minimum 100,000 shares intraday)
Level 2 Data(Market Depth)
An additional tool for Tape Trading is Level 2 Data or Market Depth. This replicates a lot of the data from Level 1 Data but in addition it displays all the information on who is bidding and offering and at what price.
Further Reading On Level 2:
From The Trading Desk
Subject 15612
Elite Trader
elitetrader.com
Underground Trader
undergroundtrader.com
The Electronic Day Trader - Marc Friedfertig, George West
Secrets of the Soes Bandit - Harvey I. Houtkin
More On Reading The Tape:
Summary Of Ken Wolff's Trading Method:
Message 4571285
Putting It All Together - The Trading Day
Before the Open:
1) Review your Trading Plan to get into the proper state of mind for trading.
2) Review overnight markets and news.
3) Judge the mood of the market from different time perspectives such as the near term(hourly or by the minute), mid term(daily), and longer term(weekly or monthly).
4) Update your watchlist to reflect any potential trade candidates.
5) Review charts of potential day trade candidates and set price alerts.
A Checklist For The Open
adtrading.com
Different Dynamics, Different Profits
adtrading.com
During The Day:
1)Follow your watchlist and observe the open.
2)Read the tape of your watchlist securities and add any potential news, anticipation, sympathy trades as you observe the intraday news, network, and judge the mood of the market.
3)Enter and exit trades based on your alerts, reading the tape, and judging the mood of the market.
Tricks Of The Trade
adtrading.com
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
D - Define Your Risk & Money Management Method
Risk Management
adtrading.com
Adequate Capitalization:
For the experienced trader an adequate level of starting capital is in the 75,000 - 150,000 dollar range. The inexperienced trader will most likely start with less which will limit his available opportunities within the market.
Diversification:
My belief is that if you are day trading you should not hold more than one or two positions at the same time. Trading more than or 1 or 2 positions will make it difficult to spot the small nuances in the tape that signal exit points. Although this increases theoretical risk I feel that using other ways to reduce risk are more effective for the Day Trader. In addition trading concentrated positions can result in MUCH higher rates of returns.
Swing Trading offers you the ability to diversify because of it's rigid entry and exit signals and longer time frame.
Margin/Bet Size:
Be careful not to overextend yourself by betting too much on one trade, or using margin to increase your leverage more than you usually would. A good strategy is to determine the bet size you are comfortable with and NEVER increase it. If you feel less confident about a trade REDUCE the bet size until you feel more confident about your trades. The less margin you use the better. Trading on margin is a double edge sword which can cut deeply if a trade runs away from you.
Stop Losses:
You MUST have a stop loss strategy in place to mechanically get you out of trades. Not using mechanical stops is the fastest way to losing everything!
There are two types of stop losses I use. The first is a manual stop loss which I trigger whenever the trade is not proven correct by the market.
The second is the "Act Of God Stop" which is used to protect against spikes in the market.This is a trailing stop set(where possible) @ 5% outside the market)
Stopping Acts Of God:
adtrading.com
Crashes
adtrading.com
adtrading.com
adtrading.com
Averaging Down:
You MUST NOT average down! This only increases the size of the loss you will take from not holding your stop target.
Averaging Up:
If you are position trading it may be a good strategy if the trade is proceeding as you expected.For more read:
Phantom Of The Pit:
futuresmag.com
Holding Winners Overnight:
Often many Day Traders hold overnight if the trade is closing strongly in their favor. What if the market or sector the stock is trading in, gaps dramatically in the opposite direction of your trade the next day at the opening? Are you willing to assume the risk of a gap down on a concentrated position?
Trade Liquid Markets Only:
Liquidity means you can get in and out easily and usually avoid huge spreads. The more liquidity also means the less likely the security is being manipulated by insiders,brokers, or promoters.
Know When Not To Trade:
Often times the market is flat, chaotic, or you do not have the proper state of mind to trade.You have 2 options:
1) Sit back and watch the market unfold. Many times the best thing to do is nothing at all. As a trader most of your time will be spent observing the market for clues as to the market's mood and looking for potential trades.
2) take the day off and relax! The market will be there tomorrow.
Days to Trade, Beware and Avoid:
adtrading.com
E - Evaluate Your Execution System (software/news/research/quotes/broker)
Ultimately there is no perfect execution system for everyone. Because each person has a different approach and trading method what is perfect for me, may be terrible for you. Generally speaking, here are some guidelines:
Broker:
Make sure know what you want from your broker. Good/fast executions, immediate confirmations, reliable data and software, great client service, competitive fees, good website, excellent reporting. Make sure the broker is reputable and has a good capital base behind it.
Getting The Most From Your Broker
adtrading.com
There are two basic kinds of brokers:
Brokers who receive orders by direct order entry software and those which receive orders via phone.
Brokers Offering Direct Order Entry Software
Make sure you know your needs before looking at these brokers.
U.S.Equities
Currently Real Tick III, CyberTrader, Redi Plus, and Tradecast offer the most flexibilty for entering orders.
A step below these are systems such as CyberX, CastleOnline, DeltaTader. These offer a simplified alternative.
A step below these are more limited systems such as E*trades PowerTrade and Fidelity's Fox system.
A step below these are the other browser based systems such as those offered by Datek,Etrade,Web Street etc. Unfortunately these systems have failed to be reliable during peak market hours and combined with current NASDAQ Order Handling Rules make them useless for short term trading or any other trading for that matter.
Futures
LeoWeb currently dominates the futures online brokerage services.
Phone Based Brokers
Using the phone eliminates the worry of reliability of direct order entry and allows you to concentrate on the market. The key issue here is the quality of execution you receive and how efficient the firm is at answering the phone and transmitting orders. There are very few quality phone based firms around so look hard.
Analysis Software
Omega Trade Station,Supercharts,Windows On Wall Street, and Quotes Plus 2 are the most popular.
Data:
Intraday/End Of Day Data
Will most likely come packaged with the software from the broker. If not consider QCharts, S&P Comstock, PCQuote or ESignal.
End Of Day Data
Quotes Plus
Real Time News Sources:
Reuters, Dow Jones, Bridge, and Bloomberg set the standard for news sources. All are excellent but none are complete.
Remote Execution System System Failure - Contingency Plan:
1)Know how to contact your broker in case of problems. Have several backup numbers in case the lines are busy.
2)Know what your broker's procedures are concerning phone in orders/questions.
3)Discuss your broker's liability with regards to missed trades/opportunites. What will he take responsibilty for and under what conditions.
4)Be sure to follow through on orders regardless of execution problems. Hesitation to follow through on trades could cause many headaches including missed opportunities and larger losses. You may not take a loss at the time but a change in your strategy may lead to larger losses down the road if you hold the trade longer because of execution problems.
5) Be sure you now how to reboot your system as quickly as possible. Always find out what the problem is before you waste valuable time trying to reboot. Sometimes the system may be down for lengthy periods of time.
More On Execution Systems:
From The Trading Desk
Subject 15612
The Final Frontier - Online Remote Trading
exchange2000.com
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F - Further Reading On Trading:
For background information on "Keep Your Eye On The Ball" including books, magazines, articles, software vendors, brokers, quote vendors, news sites, research sites, and various educational sources of information useful to traders check out:
The Final Frontier Links
exchange2000.com
Summary of "Daytrading Fundamentals"
Subject 28776
AllStocks
allstocks.com
Canadian Traders Links
Subject 17503
Wahoo - Hot Links For Traders
io.com
Waldemar's Futures Links
apollo.netservers.com
World Exchange Links & Other Traders Links:
adtrading.com
DailyStocks Links
dailystocks.com
Magazines:
Applied Derivative Trading
adtrading.com
Technical Analysis of Stock and Commodities Magazine
traders.com
Futures Magazine
futuresmag.com
Classic Reading:
Intelligent Investor - Benjamin Graham
Contrarian Investment Strategies - David Dreman
The Battle for Investment Survival - Loeb
Reminiscenses of a Stock Operator - LeFevre
Extraordinary Popular Delusions and the Madness of Crowds - Mackay
The Taylor Trading Technique - Taylor
The Alchemy of Finance - Soros
The Great Crash Of 1929 - Galbraith
The Affluent Society - Galbraith
The Crowd - Le Bon
The Money Game - Adam Smith
The Money Masters - John Train
Vacation Reading:
How I Made 2 Million in The Stock Market - Darvas
The Stock Promotion Business - Ivan Shaffer
Fleecing The Lamb - David Cruise, Alison Griffiths
Rainmaker, The Saga of Jeff Beck, Wall Street's Mad Dog - Anthony Bianco
Den of Thieves - James B. Stewart
High Cotton, Love and Death on Wall Street - Sherri Daley |
