- 2001: Volume 10, No. 1 A Day Trader’s Secrets

Why is day trading so popular? In a word, it’s seductive and it gets the adrenaline pumping. There are those who believe day trading is an easy way to make a killing (but these are the people who get killed!). It looks to be liberating in that there are no sleepless nights (but in reality day traders are slaves to their screens). The myth abounds that one can effectively day trade with a lot less money because you don’t need to worry about overnight margins. In reality, those who are not adequately capitalized will ultimately drown in the deep financial sea. It may look exciting, but those who day trade for excitement only end up lost and dying of thirst in the financial desert.

After thousands of day trades, I can tell you this; day trading is much more demanding than position trading. It takes total focus and total concentration.

It is true that advances in technology and the Internet offer better opportunities for day traders. The democratic dissemination of information has leveled the playing field to a major extent, and today, traders no longer need to sit by the phone waiting for their broker to call them with fills. Yet, the odds are still stacked against the day trader, so the big question is why do it?

Well, there are positives. The big one it that you do not have overnight exposure, with its associated overnight stress. Day traders have a fresh start each and every trading day. They sleep like babies, not having to worry about Central Bank intervention or how the USDA Crop Report (released before the market opens) might help or hurt them. Then there is the element of instant gratification which, trust me, can be very emotionally rewarding. No doubt, the shorter time frame does make for (all other factors being equal) lower risks, and without overnight margin requirements, the leverage can be greatly magnified. Then again, the greater the trade activity the greater the costs, and I am not just speaking in terms of commissions. Since slippage (price fills other than what you anticipate you will receive or what you see on the screen when your order is submitted) is such an important cost of trading, it is imperative you find a brokerage firm that has excellent trade execution capabilities for the markets you trade. Slippage, in my opinion, is of even greater importance to bottom line profitability than fees, and it takes on an even greater significance when day trading.

Here I share with you my "secrets" learned from 20 years of day trading. These secrets are absolutely essential to successful day trading.

1. You will not be a scalper. Pit traders can successfully scalp for a few ticks because they have enormous scalper’s advantages. They can buy the bid and sell the offer (you generally cannot), and they pay extremely low fees as exchange members (fees which can make trading for just a tick at a time profitable). Floor traders can react instantly to big orders as they hit the pit, they can hear the noise rising and know something is afoot, you can’t. On the other hand, off the floor can be a big plus because you will not get caught up in the emotions of the pits, which often result in false messages.
2. You will be a day trader, not a daily trader. A day trader by definition is in and out the same session, but nobody can do it successfully every day. The right kinds of market conditions are not present every day, and it is psychologically too intense to day trade day in and day out. One tremendous advantage you have is freedom of choice, you do not need to take every signal or trade every market. You do not need to be in a position before an important, but risky, employment report. You have the luxury to wait and watch and witness the market’s reaction before taking action. If a market is "newsless" and quiet, or range bound, you can always relax and let your most important quality—patience—work for you. I personally use a great S&P day trading system which has given me consistent returns. It trades on average only 2.5 times per week.
3. You will treat day trading as a business. It is not a part-time diversion. It is very demanding. You need total focus and total concentration. To be totally focused you must eliminate outside distractions. Lock your door if you have to. I know from personal experience, the more outside annoyances, the harder it is for me to trade effectively.
4. You will feel good. If you do not feel well, you cannot day trade effectively. If you stayed out late last night drinking or are physically ill or have emotional stress from outside influences, you should not do any kind of trading and this is especially important when day trading. Day trading is much more demanding and it is absolutely essential you be sharper and quicker than your competition. When the optimal "set-up" presents itself, you must feel strong, because you will not have the luxury of hesitation!
5. You will be totally disciplined! Period. What this means is you will follow written and well-defined rules systematically, which is the only way to avoid the emotionalism of the markets. In other words, you will construct a game plan, which you will follow without bias. Let me repeat this, you will have NO biases. (I have always had my biggest losses when I have had a strong opinion about some market and overruled my technical game plan.) If you do not follow your game plan, you will miss some of the best and most profitable trades. Sound familiar? What will your game plan look like? It will have well defined entry and exit rules from a program or system you have tested and have confidence can win over time. Your well-tested system will have a positive outcome (not necessarily a high win-to-loss ratio, which is not easy to achieve for any system). If for every dollar you lose your system over time makes on winning trades(after fees and slippage) then a marginally positive win-to-loss ratio will still result in profitability. Your rules will be very strict in terms of capital preservation, especially during drawdown periods. Personally, I will not tolerate a drawdown of greater than five percent in any single day, and five percent would be exceptional. Total discipline means you will always use stops (just do it), and never cancel a stop just because the market is getting close to it. Finally, never add to a losing position.
6. You will never let a decent profit turn into a loss. Here is what I do: if I have a reasonable profit on paper, I move my stop up so that, if half of these profits slip away, I am gone for that day. The reason is obvious; in this way you escape with at least a portion of your profits.
7. You will become very cautious after a "Home Run." After you make a big hit, the temptation to overtrade grows geometrically. After a home run, look for singles (or better yet, take a vacation).
8. You will go only where the action is. It is essential to be aware of the current trading environment. Day trading requires volatility and liquidity. Not all markets are volatile enough to allow for ranges required for consistent profitability; you need a market that not only moves, but moves within a limited time frame. You shouldn’t day trade markets like oats. Not all markets are liquid enough to minimize slippage. You shouldn’t day trade markets like lumber. Even large markets should be avoided when they are quiet and/or range bound. Look for markets in the news
9. You will day trade only markets suited to you. Not every market is suited to everyone and there is no rule that says you have to trade anything and everything. For day trading, I like the S&P, the currencies, crude oil, bonds, and (when active) the soybeans and metals. One more thing—you need the right temperament to day trade. If you require numerous confirmations, or only can take action after extensive research, you are probably not suited to day trading. Additionally, I’ve found, (maybe due to a simple mind), that simple is better. Keep it simple! Some of the most basic indicators can be incredibly profitable if you follow the rules outlined above.

George Kleinman is President of Commodity Resource, and Commodity.com. If you have questions or would like additional information about his day trading and or position trading programs, George welcomes questions. E-mail: geo@commodity.com Phone: 775-833-2700