Phantom of the Pits - 8. Day Trading
|<< 7. Trading with Rules One and Two
|9. Options >>
ALS - Just by the title of this chapter I can see a picture being painted by an artist. All these traders standing with notebooks, bow and arrows, alarms ready to sound and no bids in the pit as quiet sets in.
POP - Phantom of the Opera maybe but not the Phantom of the Pits! You must remember that no one knows who the Phantom of the Pits is. In fact I can argue that there will be but this one book! Only this one!
POP - That is something I want to discuss with you. There is no big profit is writing unless you can really write. I can't and don't want to write except for my own keeping. You can make more money trading than writing. This brings me to my point of insight in trading.
I wouldn't do this insight on my own for it would be a waste of my time. In fact I am sure that because of this reason is the primary cause of lack of knowledge presented to traders based on experience. Theory is great but not a learned behavior. Behavior is the key.
ALS - Phantom, you forget easily as it was YOU who came to me about giving back by helping other traders. You were as sincere as Michael Jordan is on the court. You don't fool me! I know what your plan is!
POP - Never, in trading forward from now. Looking back you could say there are certainly times when you would have been far better off to forget the rules. But that is looking back and that is not how you trade. You must plan for what will eliminate you from trading in the long run and protect yourself.
POP - Let me point some things out here. Many years ago when I first started to use computers and their speed was slow, I had so much to do that I had to get outside help. I had this one program which I could have written but it would have taken too long.
It was sort of an experiment within itself. I narrowed my choice down to about four of five possible candidates. I asked each one of them to solve a problem for me and gave them access to a computer and a basic programming language. The question I asked first was what is the answer to every number from 1 to 100 added up.
Think about how you would solve that problem for a minute before you see the final conclusion to it. One programmer used the computer and came up with the correct answer. It took him all of three minutes plus. Of the candidates one put down his paper computer and said the answer is 5050 within ten seconds. I asked the individual who only took ten seconds how he came up with that answer.
His remark was "I don't see or do things the way everyone else does. I take and split the numbers into pairs such as 1 and 99, 2 and 98, 3 and 97 and when I am done I have 49 pairs which make 100 with two numbers of 100 and 50 left. If you multiply the 49 pair times 100 you get 4900 and then add the 100 and 50 you get 5050 as the answer. Well that made an impression on me I still keep.
Now I want you to understand about day trading the same way. WE DON'T ALL SEE OR DO THINGS THE SAME WAY! We are all after the correct answer. My answer is to keep you in the game for the longest possible time.
They were all able to give me a program to do what I asked of them in Basic language. I judged their success on how quick the computer would give the answer and not by looking at the program. I used 1 to 10,000 because I knew it would take longer.
All of the programs came up with the correct answer but at different speeds. Since we were using Basic language it was slower than I wanted for my particular program but I was pretty well decided I wanted to understand the program for my own protection. The ranges of speeds were from 48 seconds to 3 minutes for all but one.
The last one took less than a second did in basic. That surprised me so I took the fastest two programs and called in the programmers. The 48 second program ended up with a loop of : N=0, for NN=1 to 10,000, N=N + 1, next NN. Print N. 48 seconds was still slow as far as what I wanted. The fastest program was N=N squared + N divided by 2. print N.
Just as each programmer came up with a different style and program, not everyone was correct for what I wanted. It is the same in trading. The common ground here is that we are all after the ability to not ever having to stop trading and we are all after the ability to make more than we lose.
You see there are variables in all of our trading styles. It is just that my rule one and two are designed to give you the longest answer when it comes to trading longevity (rule one) and the shortest time to get to your goal of return (rule two.) You need them both.
POP - Let the debate continue for we all benefit from knowledge brought forth with each different situation. The only time I have a closed mind is when there is total lack of understanding of what is required of a trader. That part of a program, which is not a control from a program but the required execution by the trader.
POP - It is the traders desire to be able to trade and not worry overnight about their positions, risk and exposure of positions beyond a short period of time while expecting the maximum possible gain in the quickest possible time. Actually the desire is to have rules one and two in a short time frame is a perfect prelude to day trading.
POP - There are advantages in day trading but not many because restrictions come into play. In day trading you are more apt to lose than win due to the time limit being a restriction which creates a situation of who is ahead at the buzzer wins. In basketball, when the fourth quarter time runs out, the game is over. The high score wins.
I did a study on day trading and came up with some very interesting findings. First learned in the study was that you could use the day traders to your advantage in trading by knowing that they would have to get out by the close. Second learned was that day traders actually do a better job of keeping ranges smaller than do scalpers whose purpose is to fade small moves for quick profits.
Third learned was that day trading did afford traders a way of keeping risk smaller and allow them to work larger positions in the short run as opposed to large positions in the long run. Without going into the next ten learned points we will concentrate on the first three. The first three are probably the most important but they all have merits.
Day trading is good for some traders, as this is the only way they know to keep risk smaller because of shorter time frames. There are those traders who do not want to put up the margin to carry overnight positions and have the risk (better known as under funded traders who don't have the money in the first place and should not be trading such size.)
A scalper is quicker to take a loss but tends to let profits run a little less than day trader's ability to take losses. In other words a day trader tends to lose on a trade more than a scalper makes. This leaves a margin of loss in losing trades.
Believe it or not, guess who picks up that extra loss which day traders make? It is usually the position trader. So that to me is the edge. You must know when you have the edge and just what it is. It is not an exact thing but I feel it is because day traders are not as good or don't have the ability to execute as scalpers. A day trader would do better if execution became a market order on exits. Especially on taking losers.
POP - Not at all as the day trader is a more disciplined trader. It you take rule one, which is the assumption of being wrong until proven correct, you will have the other side of the coin for most day traders. They could become better traders if they were to use rule one. Day trader's odds are lower because of their limitations on overnight carries.
Another big drawback is delayed reactions on what the market prices have done. If they use criteria such as opening range break outs, they will have to be fast at getting the orders into the pits. On that type of trade they are better to take a position on the open and protect it than to take the opening range break out. But they want the position proven before they take the position and wait until the breakout.
As a day trader, they would do better if their trades were within criteria, executed and protected by rule one instead of the delayed trade due to the lag in information. They must pick the points almost exact. This is another drawback for them. You put yourself at the mercy of how the orders enter into the pits as a day trader.
It is almost impossible to be exact in your estimate of price. A better situation is to be able to pick a range instead of a price on execution. Same with exits. This all reduces your potential profit from day trading. So what is the answer?
A day trader can do better by averaging but you never want to average in an established trend. The trend will tease you into bad entry positions if you don't do your research on market characteristics. Counter trends will do the same thing. Mainly because there will always be those weak positions that turn into profit taking. This is a day trader's nightmare in day trading.
POP - The best traders will take what I have to say, study it, research it, and decide how exact it is. They will judge accordingly and make their own trades based on improved judgement of day trading. That is what we want them to do. It is too easy to think day trading is everyone's game and a good one. It is a good one for some but not most. It can be improved by understanding the drawbacks. All trading has drawbacks so it is critical as to how they view their trading probabilities.
POP - A day trader tends to take bigger positions because they know they will exit quicker than most position traders. This will give less risk long term and affords them a way to overtrade. Or I guess I should say gives them a way to trader bigger. In rule two, the idea is to be bigger after proven correct and I suppose that is what the day trader is thinking in trading bigger as a day trader.
Right or wrong, it is correct in being bigger within correct criteria. The bad side is that they tend to be wrong as often as right. This keeps it more of a 50/50 game than an advantage that they would have if only being larger on correct moves.
Being larger on correct moves as a day trader is difficult at best due to limitations of the day's range keeping the adds requirement to be quicker after the initial position. Often day trading will not allow more than one add if any add at all. Often too the profit side gets taken off sooner, restricting the range even more.
POP - You bet there is! Now I have every day trader's attention. For a price I will be glad to give that information out. I am just kidding of course. The answer lies in their research. Look at what causes the most losses in day trading. Now study your own entry and exit criteria and decide what doesn't work. Look at the other side and assume a day trading criteria does not work and expect it to be wrong.
Next devise a way of removing positions until they prove correct. There you have the answer. Can you incorporate it? Not in all situations, such as we said previously. Trends and counter trends tend to do a number on day traders due to their not caring what a trend does. Next set up a criteria for removing your positions. You must not allow the clock to dictate when you get out.
Most important in day trading, you must never play everyone else's game. Say that for example you play the opening range break out. Everyone does that. You will wash in the long run even though you just want to day trade. You set your criteria differently. Let us say you trade the third move through the opening range.
Why? The market tends to be a trading market if you get the third move through. That is what you are, a day trader. You can now expect the market to be on your terms as a day trader. You expect it to come back but what if you are wrong? Well, then you will make your profit instead of being prepared to break even on a swing trade.
You can also as a day trader without an existing trend, fade the market. Let us say the last 10 days range averages 8 cents in onions (never heard of them.) Your criteria could be the old fib number of 5. Wait for a 5-cent set back to buy or a 5-cent rally and sell. I am not saying this works in your particular market but you can study it and establish your criteria in a non-trending market.
I know some day traders who take the day off until they have had two days in a row of a non-trending market in the same direction. The next day is theirs, as they will wait until it looks like the reversal is about to take place and then counter the two-day move. Day trading is a psychology study of the past few days.
If you use rule one, you stand a better chance of being up in the long run. It is not exact and as long as that is understood and losses are kept low, it is a possible money-maker in the long run. If you like the odds, you can be satisfied if you do everything correctly regardless of the outcome.
A critical point in day trading is not to just use the prior days high, low, range and close as inputs to your criteria of signals to use. Point and figure charts are closer to the market as P & F charts don't restrict to within a day's range. Remember you are staying away from the same methods used by most day traders in order to get the edge on them as well as the position traders who most likely use bar charts only.
Last of all, don't just take someone's word on day trading. Check out your particular market and see the characteristics in action during the day. What you think is a good trade might not even be possible when you try to place the position. Use market orders to make sure you have a position but do it with intelligence. A non-position is a wash.
ALS - Phantom, I have a question and sort of a remark from a successful day trader. Using a volatility break out system and using a stop after a series of consecutive losing trades, can you use rule one and two correctly?
POP - I can tell you whose idea that is and what course it is in but I don't want to disclaim or endorse the data. There are some markets this method is an excellent method for day trading. Not all markets will be good markets to this method.
I am sure traders who use this method know which markets to shy away from by experience. Yes, you can use rule one correctly as it is saying that you assume your positions is wrong until proven correct and by taking a position after a series of losses, you are certainly aware that you are going for probabilities of turn around. If no turn around you certainly were expecting to get out. Naturally the market will have to prove you correct after your entry within your established criteria.
On one of our examples of an onion trade earlier, we used end of day criteria as an example of what some would consider there last resort criteria for day trading. It is the end of day criteria to get out. Day traders tend to be or get out by the close.
To watch a market go against you all day and not get out until the close is certainly a challenge in trading criteria but sometimes your criteria will require this situation to be set up. You just know you will be out on the close if all does not prove out. This alone keeps you from carrying a loser overnight.
On using rule two in your question, would you say the odds of increasing the position after a series of indicator losses allows you a better opportunity to add if the initial position is taken after those losses? Only if the position was to prove to be correct.
The swift would be able to determine if the position had proved itself and at that time add or removal should take place without the fade to enter. I would agree that with this plan if your data feed is quick and your line to the floor is quick, you would certainly be in a position to improve your pay out.
Keep in mind that rules one and two do not negate a successful trading system at any time. They are to keep you from a huge drawdown of which you would never recover. This could be additional protection outside the plan or could be incorporated within the plan itself.
I appreciate that question and understand where that trader is in his career. It sounds like proper research for the proper criteria in his style of trading is paying off. It's good to hear when that happens. It proves out that trading is not easy but is behavior modification and knowledge.
You can learn from other traders but you never learn to be them. Just the other day on a business channel I heard them indicate that a particular trader was selling all day and the question was why they would sell now. One of the answers was correct. He was offsetting his positions.
I remember one day when I bought all day and at the end of the day when the market was down on the close, one trader asked me why I went long all day. He didn't know I had orders twice as large selling after every buy I made. My point being that you don't know what a trader did, you only know what you have seen him do at the time.
You see my plan was to establish what the market was going to do that day. Every time I bought I had a broker with my exit double the other way. I would try to offset my new short position and getting out was wrong so we doubled it the other way again.
At the end of the day I had a position twice as large as I had intended and the opposite way I intended to go. I only knew that it was the day I had to be swift. Sometimes your criteria may be that you must be swift to take any possible loss. Especially when a certain Fed Chairman speaks.
|<< 7. Trading with Rules One and Two
|9. Options >>