- 2000: Volume 9, No. 1 Successful Trading: The Middle Ground

Years ago in college, I remember reading Greek mythology. These were wondrous stories of adventure, courage, exploration and searching. Yet there is one principle that stands out from these many great tales that has served to guide my life in business and most especially trading. The Greek word "sophrosene" or "balance." It teaches that in all human endeavor, true success is attained when one learns to achieve the middle way.

Learning this lesson is, in my judgment, the first critical step to becoming a successful trader. It is key to overcoming a natural obstacle all traders face. I call it the "greed/fear syndrome" or the "going to the moon/going below ground" tendency.

Greed is a natural human emotion. But for traders, it can be toxic-you get in a trade, it starts going your way and you see no reason to get out. Suddenly you find yourself shooting for the moon. Greed blinds you-but, the next thing you know, the market reverses and instead of making money you are down.

Or you become consumed by greed's opposite number: fear. The realization grips you that you really don't ever have certainty about which direction the market is going to move. You sense that you can lose your capital if you are wrong. Indecision paralyzes you. You go below ground and huddle there trembling in despair.

The truth is that both of these extremes can destroy a beginning trader. It is equally true that both are completely natural. The key to overcoming them is to learn how to find the middle ground; how to balance greed and fear. This is probably the most valuable lesson for the trader to learn: understand that it's not all wins and no losses. Aspire for success but know that there will also be failure. Remember that hogs get fat but pigs get slaughtered. And remember too that he who hesitates is lost.

Learning how to balance these two natural and highly dangerous human emotions is among the most important lessons I have tried to teach the more than 400 students from all over North America who have who come to the DayTrading Institute in Mobile, Alabama. Indeed, its importance to my own trading was one of the reasons I started the school to begin with. I found that by teaching others, I constantly forced myself to remember what I knew to be true but which all traders find so hard to master: the art of balance; overcoming fear but avoiding greed.

The method I teach to accomplish this goal is the product of years of making mistakes as a trader, as well as all the successes I thankfully have had. I try to learn from the mistakes as well as the wins. And I teach my students to do the same. I found that the teaching has made me a more successful trader. Because of the school, I have had to explain and codify my methodology and rules, and thus I am now a more disciplined trader constantly in search of that middle way.

The search begins with choosing a market to trade where elements that contribute to the balance I'm talking about can be found. I've been day trading since the early 1980s. The vehicle that I have been using to day trade is the S&P 500 market. The S&P 500 is a futures contract that trades on the Chicago Mercantile Exchange and offers several important features that can contribute to the trader's ability to find success in day trading:

• Liquidity: The market for the S&P 500 futures contract has become sufficiently large that there is substantial daily trading volume, an ample supply at most times of both buyers and sellers, and therefore reduced risk that a trader will be unable to get in or out of a trade when he or she wants to and at a chosen price (what is called a "limit price").
• Volatility: The S&P futures market exhibits relatively greater price volatility-alternating upward and downward movements in short time intervals-so that opportunities exist to take both long and short positions throughout most trading days, and correspondingly, opportunities to make profit.
• Accessibility: The S&P 500 futures market operates 24 hours a day, is accessible via electronic trading platforms, and offers ease of trade placement.
• Leverage: With the S&P 500 futures market the cost of admission is reasonable-one can control approximately $300,000 worth of stock value for a margin requirement that is typically only one percent or two percent and enter and exit a position for less than $25 in commissions.
• Risk Management: It is easy to place stop loss orders to hedge every position a trader takes. This permits prudent risk management to contain losses to affordable levels in order to allow the trader the chance to be wrong on a trade but still preserve his or her trading capital.

Each of these elements contribute to the equation for finding the balance in trading that is the key to becoming a successful day trader. At the DayTrading Institute, I try to teach ways to put these elements together to form a comprehensive trading approach to maximize the probability of success. Although the method will vary for each trader according to his or her own proclivities, skills, talents, and preferences, there are some aspects that are common to all successful methods. I try to teach that every trader must develop a structure that is understandable, accessible, and adaptable to changes in the market that one is trading.

I suggest that the student start off every day at the same time and gather certain basic information. This includes price data, timing of scheduled news events, trade volume information and the status of certain market correlates that our research at DTI suggests may be helpful in tracking market movement. I also teach that the trader should reserve time to review the previous day's trades, analyzing what went right and what went wrong and why.

One of the lessons I have learned is that, as a trader, one does not have time to do a doctoral thesis on the true value of what you are trading. Therefore, the successful trader must assemble his or her tools and indicators in advance of the trading day and develop a comfortable method that is easy enough to answer quickly the basic question that must be asked constantly throughout the trading day: whether to be long, or short, or out of the market.

The method I teach to integrate the various elements discussed above consists of three main parts:

• Key numbers: Key numbers are price levels that most traders call support (where the market has buyers stepping in supporting the price) and resistance (where sellers are stepping in and offering the market.) These numbers help the trader in finding the balance I believe is critical to success: when to temper greed and when to overcome fear.
• Time of day: I have identified certain time zones for trading. Since the market is a combination of people's beliefs and how they vote those beliefs (either by being a buyer or a seller), it is very important to have a good understanding of people. I have observed that people are creatures of habit, and that people generally do the same thing-whether it is for good or for bad-every day. I have observed that there are market reactions to how and when people rise in the morning, or go to lunch, or go home for the day. Since we are part of a global economy and the S&P 500 is a world market, one can watch the behavior of the markets and see that there are very discernible time-based trends that can be used in combination with key numbers in the balancing act of trading.
• My RoadMap: The RoadMap to the Market™ is a proprietary software program we have developed based on more than 20 years of observing the market that allows us to track the market 24 hours a day. We have made this software available to traders to provide a constant watch of the indicators that make up the direction of the market. It is an analytical tool that we use to evaluate the market and answer that basic question of whether to be long or short or out of the market. It is the heart of the method I teach and draws together in one easy-to-grasp location each of the indicators that combine with the key numbers and time zones to give us the tools to achieve balance in our trading.

In addition to developing a structured method, finding the right balance to fear and greed and becoming a successful trader also requires one to be able to take a disciplined-approach to the market. In my years of trading, another problem I have observed is traders who overtrade. When I first started in this business I spent about 90 percent of my time trading and 10 percent thinking. Over the years, the percentages have reversed. When you plan on a trade you must use a stop. It is always good to have a target or target area in mind, and the way you stay in a trade is to use a stop and then an adjustment to that stop to move it up or down as you approach your target. I have always been a firm believer in letting the market take me out of a trade instead of taking myself out. The reason I believe in this is that I have found that for my own personal trading that I do a lot better if I let the market tell me when it is time to exit a trade. Trading is an all-encompassing experience; it is a continuous process of planning, acting, and evaluating.

I'm a short-term day trader; I trade the market everyday. The goal of a new trader is to survive-to last-while they find that middle way and balance of successful trading. The industry trend is that most new traders are gone within thirty to forty days. Their failure is due to fear, mistakes, and/or a lack of understanding/training of how to trade and succumbing either to fear or greed. One of the first things we teach our students is capital preservation. My goal is to make sure that after thirty or forty days they will not only maintain their capital base, but also at the same time increase their awareness and education.

I am often asked, "what is the difference between trading the markets and gambling?" A gambler will take risks just for the action. A speculator, on the other hand, only takes risks when the odds are in his favor. The art of successful day trading lies in learning this difference. And the difference is defined in developing the ability to overcome the push-pull of greed and fear through balanced trading that comes from learning the markets, understanding the importance of a disciplined method that combines key numbers, trading psychology, time, and important market indicators, and managing both risk and the trade itself. Becoming a successful day trader is all about learning a balanced technique to increase the odds of being right in trade decisions and reduce the odds of being wrong.

Lastly, the world of the day trader can be a lonely one. Too often, it is a solitary task of sitting for hours in front of a computer screen, watching charts, the market indicators, data sources and perhaps even my RoadMap to the Market™. One can become hypnotized by all the information. Or burnout from loneliness can occur. I try to teach my students to find ways to humanize the process. Trading with a partner can help. Networking daily with other traders can be useful. Recently, I launched a live audio continuing education service via the Internet called "www.traderoom.net" in response to requests from former students who wanted a way to continue their training and interact with colleagues. Having this human contact, hearing what other traders are doing, is an important source of validation and encouragement that also helps to foster the balance that is critical to success in the elusive but rewarding art of day trading.

Tom Busby is the president and chief instructor of The Daytrading Institute in Mobile, Alabama. More information about the educational and informational services of The Daytrading Institute, The Roadmap to the Market software, and the new Traderoom live audio Ionternet service may be obtained by calling toll-free 1-800-970-9791 or by e-mail to tbuz@daytradingschool.com.