I've had the opportunity to work with a lot of traders, and I've found that many of them live in a state of constant flux, stuck between two worlds that combine both the best and worst that trading has to offer. On the one hand, individual traders can move in and out of markets with an ease and efficiency larger funds can only dream of. Traders have the freedom to carve out specific niches for themselves that a huge pension fund could never achieve or duplicate. However, with so much freedom comes a price: The markets cannot protect a trader from him or herself. An individual trader, unlike a fund manager, is unsupervised and has the freedom to act unchecked in any way that they choose. This freedom typically reinforces bad habits, and the net result is a market that moves and thrives in such a way as to prevent as many people as possible from consistently making money. This is why it is imperative for a trader to find a group of high probability setups to follow. Once the setups are discovered, it is then up to the trader to have the discipline to follow a specific set of rules for both entries and exits. Traders that do this have an edge over everyone else, and a higher probability of success. Traders who have a low probability of success generally rely on their own gut feelings to manage a position. The bottom line is that traders who have developed a set of rules to trade by have a chance at doing this full time for a living. Those that don't bother to develop a set of rules become fresh meat for the rest of us!
It shouldn't be surprising to hear that I learned all of this through the best teacher that the market has to offer: extensive pain and suffering. My father, a broker with Morgan Stanley, got me started trading options when I was a sophomore in high school. I continued to trade actively through high school and into college. I quickly developed a very consistent approach to my trading: I would routinely turn a $10,000 account into the high five or low six figures over the course of a year. I would then buy myself a piece of rental property and a couple of nice gizmos. Then I would sit back and decide what other bigger and better things I wanted to buy. Once I figured that out, I would go back to trading. Armed with these visions of "bigger and better things," I would dive back into the markets. A peculiar thing would then happen to me: I would tend to give back the rest of my trading account in less than a month, and I would have to start again from scratch. This happened not once but three times. The most memorable trade happened right out of college, when I was able to give back most of a $150,000 trading account in less than a week (that's what happens when you buy 200 OEX Puts at $7.20 and sell them a week later for 75 cents). Luckily I did have enough real estate at this point that I could sell one of the properties to raise a new trading stake.
This caused me to go on "the trader's quest." I threw out all of my indicators and started fresh with a clean chart. I visited with other traders, those that had been successful doing this for over 20 years, through many different market conditions. The thing that struck me when visiting their offices is that they all had very simple systems, but where they excelled was in their trading methodology. During these visits, there were two things that were pounded into me:
- You can know a market better than any other trader alive, but if you apply the wrong trading methodology to that market, you will lose money.
- You can know more about technical analysis than any other trader alive, but if you are trading the wrong market for your personality, you will lose money.
This was a real eye opener on both counts, and I have found that the CBOT mini-sized Dow is a great market to trade for many people's personalities. This is something I will talk more about later.
There was something else about these visits that also rang a bell with me. It took me a while to figure it out, but I finally got it: Whenever I focused on the setups and not the results, I did fine. Whenever I focused on the results and not the setups, I got killed. Why is this? Once I got my hands on a decent sized trading account, I would start to think of things like, "I want to turn this account into a million dollars." Instead of focusing on the setups, I would focus on making a million dollars. This caused me to jump into the trading habits that ruin all traders: betting it all on one trade, not using a stop because the trade "had to work out," and focusing on making a million bucks instead of the trade setup. Once I realized this, I started to do two things differently: First, I started taking any profits out of my trading account at the end of each week. This kept me focused on producing a steady income, as opposed to making a grand killing. Second, I started a competition among the various setups I used. This way I could measure the performance of each of my setups at the end of each month. The setups that made money, I kept using. The setups that lost money, I dumped.
This was incredibly important to my trading. The only way I could keep my competition going was to execute my trade setups the same way each and every time. Anytime I deviated from a standard setup, I would mark this down in my trading journal as an "impulse trade." I kept track of the performance on these too. After about six months of tracking my impulse trades (wow, this market is going higher, I have to get in), I realized that they were not making me any money. I fired my impulse trade and learned to stick with my setups. Once this started to work consistently, I began focusing on trading full time, and I haven't looked back. A large part of my transition was mental and developing what I call a "professional state of mind," something I will talk more about in section 6.
These trading lessons were created for the active trader, and is a collection of strategies presented in both written form and through videos that I currently use in my own trading. I discuss exact entry, exit and stop loss levels for all of these setups. Day traders who utilize this CD-ROM will learn why relying on indicators alone is a losing game, discover specific strategies to get into a trade early, and learn the differences of knowing when to bail, and knowing when to hang on for the ride. Swing traders will learn how to set aside their prejudices and let the trade take them in when price action confirms that it would be a good move to do so. While this CD-ROM is aimed at full time traders, there are setups throughout this guide that will work for individuals who are working full time and are only able to trade part time. This is what I did for a number of years, and it does have advantages if done correctly.
My favorite intraday trading strategies are all utilized mainly on the CBOT mini-sized Dow futures. However, I also have some favorite strategies that I utilize for CBOT Electronic 100 oz. Gold and 5,000 oz. Silver futures, as well as the CBOT U.S. 30-year Treasury Bond. In these trading lessons, I will spend some time discussing the futures markets and how they work. This is for novices who have never traded futures - my approach will take the mystery out of them. From there, I will talk about why I prefer trading the CBOT mini-sized Dow over stocks, E-mini S&P, and the E-mini Nasdaq. After this section, I will then talk about my main intraday and swing trading strategies. I hope this knowledge will help improve your own trading program the same way it has improved mine.
Trading is the most deceptive profession in the world. A person cannot walk into an airport, jump into a 747, and take off down the runway without any prior training. Yet people will routinely open an account and start trading without any guidance whatsoever. For me, the biggest difference in my trading occurred when I learned to ignore my brain and just focus on a handful of good setups. Once I learned the setups, the next challenge was to have the discipline to follow them the same way, each and every time. I did this by recording my trading activity and focusing on the results for each setup. Although I can't stand over your shoulder and help you with your discipline, I can show you the setups that I use to trade for a living. If you are unfamiliar with the futures market, be sure to read the next section (Section 2) on how futures markets work. Otherwise you can jump right into the setups. Let's get started.