The Professional Day Trader
Many people have asked me over the years what it takes to be a successful day trader. The answer is not clear but here are a few observations.
First, you must have a complete commitment to trading and do it full-time. If it is a hobby or a secondary occupation, I know how the bottom line will be – a big minus. Day trading must be addressed as a profession because if you do not treat it as such, let me assure you, those who do treat it this way will separate you from your money very quickly.
Second, you must fit your trading habits to your individual personality. The day trader is a cross between an extrovert and an introvert with both characteristics in balance. The introvert is a reclusive workaholic. The extrovert is an aggressive, competitive, self-motivated individual striving to be the best. If you are an impulsive individual, you are likely to be a more active trader rather than a more calculating trader, who waits for all the indicators to fall into place. The personality factor, more than any other factor I know of, determines success or failure.
If you are an emotional person, admit that you are and structure your trading habits to make emotions a positive influence, not a negative one. If you act out of greed or fear, your decisions will tend to be wrong. My best trades are taken against, not with, my emotions. Whenever I am fearful of taking a new position, that fear helps me realize that its time to get in. I can’t get rid of my emotions, but I can, and have, learned to use them.
Every successful trader must be flexible, alert and feisty. Flexibility is used to shift from being long to being short literally within seconds. Alertness is used for observing price movements that are an aberration from the norm. Feistiness is the savvy aggressiveness to fight back with a vengeance to regain money you’ve lost. I don’t know how many times I’ve seen people lose money in the morning and quit. My most profitable days often come when I lose money in the morning and then stay in and fight to win it back.
The work ethic can never be overstated. I watch the market all day long from the opening bell to the closing bell. I have kept diaries on every day in the market for the last seven years, sometimes posting over 40 entries in my diary during the day. If I do not do my work, my profit suffers. There is no short cut in trading; the market will quickly find you out if you are lazy.
The expectation of the day trader is to make money a very high percentage of the time but not much on any one trade. Success for a day trader comes down to one word, consistency. The battle plan of a day trader is to take a small profit as quickly as possible and then run.
I am a creature of habit, going through a daily ritual before the markets open. I outline in detail all three possible scenarios for that day: up, down and sideways. I assign a probability to each scenario and make a written strategic plan. That daily plan has been incorporated into a trading fax service that is devoted to teaching people how to trade. Because I am required to produce this plan each day for my clients, a disciplined trading plan is imposed on me.
Planning is the objective part of trading. My trading plan considers all options for the day. I start with the worst-case scenario and work from there. You will never be more objective than before you execute a trade. Once you are in a trade, emotions take over so the plan must be in place before you take the trade. Your plan should tell you when you are wrong. If a trade is not working, admit it. Get out, retreat, live to fight another day. This is a cowardly approach, but it will keep you from the traders’ obituary.
Once the trading day begins, all of my focus is on the quote screen and on three markets: S&P 500 Stock Index futures, 30-year T-bond futures and the S&P 100 Index options (OEX). All day long I record the trading patterns for that day in my diary. This is a ritual I’ve kept for 12 years, and the diaries have been priceless. Recurring patterns are much more frequent than people realize, and referring to the diaries has reinforced the adage, “If you don’t know history, you are doomed to repeat it.” The diaries clearly show that trading activity ebbs and flows at different times of the day. This record has helped me develop the following set of daily trading rules:
- Do not trade the last hour of the day in the S&P futures market. The probabilities of a successful trade diminish during this period due to impulsive and reckless buying and selling by institutions who could not or did not get their trading done earlier.
- If you do not like the trade you’re holding, get out. I have to fight my emotions on this one because I hate to lose. But if I think that there is a probability that the trade will separate me from my money, the trade must be eliminated. Have you ever felt relief after exiting a bad trade because you were out of a mess? Losing trades use up more mental energy than winning trades. A day-trader must become very mechanical, almost robotic. Many people who have come to the office to observe my trading style have commented that I appear almost emotionless. I believe that to show emotions is to give in to them. When I sense that a trade is going to go bad, I act. Delay only magnifies fear. When your hand is shaking so much you can’t pick up the phone, you’ve waited too long. You are then a victim about to be slain.
- After two hours of trading, ask yourself, “Do I feel good about my trading today?” Once two hours have passed in the trading day, you should have made at least two or more trades; enough in any case to evaluate what you have done. If you can answer “yes” to the question, continue trading. If your answer is “no,” stop trading. You can’t bring happiness to a “blue” day by trading. Your emotions won’t allow it, and a big losing day is likely to be the result. September 1995 is a true example for me of turning a bad family health situation into a bad financial situation. My father suffered a heart attack. He always was a pillar of strength to me, and to see him in intensive care was just too difficult. Some people drown their problems with alcohol. My escape is trading. But during that time, my heart wasn’t in it. My focus was gone, my energy level was low, my enthusiasm was non-existent. It turned out to be the worst trading month I had had in seven years. The person who knows you best is yourself. Listen to yourself.
- All cylinders must run efficiently. During your trading day, keep track of the money you have made or lost. It is like knowing the score of a basketball game when you are the coach. Day trading is a job, and your paycheck is determined by your ability to trade well. You can maximize your ability only if you have all the information you need to make trading decisions. If your phone, quote machine or any other mechanical function of your daily routine is out of whack, stop trading. Frustration is the best friend of a losing day. The more frustrated you are, the less efficient your trading decisions will be, lowering the probability of a winning day. Don’t fight a losing battle; there is always another day with opportunities.
- Have faith in your method. This is a must for success. Many times your indicators give a buy or a sell signal, and you don’t follow it because you just don’t have the confidence that the signal is right this time. Successful day traders believe in their indicators even though they are aware that nothing is 100% foolproof. Not taking a trade that is set up by your indicators amounts to calling yourself and your indicators liars. When that happens, grade yourself with a big red “F,” and go sit in the corner.
- Observe those who are successful. Any information you can procure on trading philosophies, mechanics and techniques of successful professionals is well worth your while. If learning from those who have experience steepens your learning curve, isn’t it worth it? I’ve heard people say they were going to learn trading on their own. Learning to trade without the benefit of others’ experience will cost you time and money. Stubbornness and pride can be hazardous to your wealth. If you do pursue learning from the “masters,” do not be surprised to find that there are many different ways to trade profitably. Do not try to clone another individual’s method, because your personality is never exactly the same as his. Observe, learn and test to arrive at the confidence level you need to achieve consistent success.
- My final daily rule is to take every trade and dissect it. This will provide a roadmap for success by showing you where you have been, which mistakes you can learn from and which situations to avoid.
Day trading is a long-term commitment. I fervently believe it takes several years of full-time trading to become a true professional. Each year you should become more consistent in your profits and enjoy more confidence as a trader. Day trading is not easy, but as a business, it can provide the American dream — financial independence.
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