- 2001: Volume 10, No. 1 Day Trading: Winning Around the Clock

As a trader, you must learn to balance all of the emotions and issues that influence success. Many traders, including myself, have experienced periods of loss that create the wrong mental state necessary to stay on a consistent path towards success. A competent trader must ask and answer each of the following questions:

• When I win, how do I respond; what is my psychological state?
• When I lose, how do I respond; what is my psychological state?
• How can I avoid extreme psychological highs?
• How can I avoid extreme psychological lows?
• How can I achieve balance?

Create a Plan for Winning...
The issue most difficult for both beginners and experienced traders to deal with, is winning. Since winning is our ultimate goal, we must have a clear plan for dealing with success. The elation of winning often causes traders to become careless. As a result, they will "shoot from the hip," ignoring relevant market indicators, over-trading and thriving on over-confidence. These golden-touch trading habits will ultimately lead to losses, and if the "easy streak" continues, the potential for big losses increases exponentially. When I have successful days, I try to reward myself with something tangible, such as an afternoon on the golf course. By doing so, I am building a foundation for success that acts as a support by building confidence and self-reliance.

But Be Ready to Deal with Losing
While winning is our ultimate goal, learning to effectively handle losses is equally important. The successful trader not only creates a plan for winning, but also has procedures in place to review, learn, and benefit from losing trades. For example, when I lose, I will read an article on trading and try to learn something new. Instead of dwelling on losses, I use these experiences to further educate myself so that I can avoid these mistakes in the future. Therefore, by using each loss as a learning experience, I am replacing my losses with positive mental reinforcement.

Toxic Highs/Psychological Lows
In order to be successful, traders must also have measures in place in preparation for dealing with winning. There are many times when trading wins are too easy. Sometimes it seems that no matter how I trade, it works. After trading for over 20 years, I have found that these periods are toxic. They lead to a psychological high that can be very dangerous. I have learned that when trading reaches this level, I need to pull out. My 20-plus years of experience save me from toxic overload.

As with toxic highs, traders also experience periods of psychological lows. I find dealing with these periods the toughest. The healthiest way for a trader to deal with these difficult times is to have pre-determined rules in place to alert you to this condition. For example, after a set number of losses, you should quit trading for a specific amount of time.hen every effort leads to a loss, successful traders are cognizant of these tendencies and step to the sidelines. I recommend planning an activity that it is stress-free and can completely separate your mind from trading. Personally, I use golf because it is an outside activity that allows me to open my eyes and think. Golf separates me from the market, temporarily puts me out of communication, and allows me to erase the day’s biases.

One way to avoid extreme psychological highs as well as lows is to create and implement a game plan that protects a trader at both ends of the spectrum. For example, when traders experience heavy losses, they put discipline aside and try to recoup losses all at once. The disciplined trader is going to follow a plan that not only avoids putting himself in such a position, but also combats his losses in a different manner. Setting conservative goals and letting time be your friend, not a burden, is an effective way to recoup losses and accumulate profits in the process. While small profits are not as glorifying as catching a bounce in the market, if implemented over time, they can lead to substantial gains.

The key to having a winning psychological attitude is to achieve balance. Remember, you can only do your best, don’t go to the ground on the losses or fly too close to the sun on the wins. When the day is over, review your activity, go to bed, hit your mental erase button and begin the next day with a fresh start.

Now that we’ve taken a look at what goes on inside the head of a day trader, let’s examine what’s happening in the markets themselves.

While You Were Sleeping
Most people consider "day trading" (the act of purchasing or selling a contract between 08:30 CST to 15:15 CST), a very risky strategy to employ when approaching the financial markets. However, one must understand that this strategy does not start at the opening bell of the New York Stock Exchange.

At the DayTrading Institute, we approach the markets, beginning on Sunday at 17:30 CST and lasting throughout the close on Friday at 15:45 CT. Therefore, the trading day is based on a 24-hour clock, beginning at 15:45 CST and lasting until 15:15 CST the following day.

The premise that "day trading" covers a period of 24-hours gets credibility as you begin to watch the inter-relationships that develop among the markets around the world. First, we teach to observe the Far East markets and observe the movement of the Nikkei Index (Tokyo). We observe not only how it trades, but also its effect on the S&P futures market. Next, we shift our attention to the Hang Seng Index (Hong Kong) and look for the development of index correlation. Both the Nikkei and the Hang Seng form the early structure for examining the U.S. market.

As the Sun Sets
As we move into the night, we then look to the European markets for further indication of what lies ahead for the U.S. financial markets. The markets that open first and become instrumental in furthering the Far East trend, whatever that may be, are the CAC (France) and the DAX (Germany). If one observes these inter-relationships, one will notice that there tends to be a reversal in the S&P during times of conflict, or an acceleration if the S&P is in sync throughout the markets. The final markets in Europe on which to focus are the FTSE (United Kingdom) and the SSMI (Switzerland) markets. Once again, the trader should be looking for agreement or divergence.

As we open in New York, the astute trader now has a foundation from which to trade. While it is important to recognize the correlation between the Asian and European markets to those of the United States, the art of trading takes into consideration many other determinants. The art of trading involves gathering relevant data and applying this information in a manner that puts the odds of victory in your favor.

Visualize the Numbers
Technical trading should in its purest sense be based upon the numbers of the market being traded—in this case the S&P 500 futures Index. We use the S&P 500 futures market as our trading vehicle because it offers: 1) liquidity, 2) leverage, 3) 24-hour availability, 4) easy access, and 5) low transaction cost.

A firm grasp of the key numbers can provide the individual trader a significant advantage in determining market trends. The numbers though, in the abstract, tend to be difficult to visualize. For this reason, many, in fact most, traders use some sort of charting technique. A chart after all is nothing more than a visual representation of the numbers.

The time frame that we feel most adequately identifies the overall market trend without getting caught up in the noise and confusion is the 30-minute chart. It is a long enough time frame to keep the bigger picture in the forefront, and short enough to identify trades as they happen rather than after the fact. The trend can be easily identified with bars for an uptrend, continually setting higher highs and higher lows, or for a downtrend, setting lower highs and lower lows.

Prior to entering any market, one must first determine not only how much he or she is willing to risk, but, more importantly, if he can withstand the loss. Although taking a loss is a clear possibility in this industry, many traders are slain each year because they fail to accept the possibility of loss. After trading the markets for over 20 years, I can tell you without hesitation that you will have losses. Whether you are a trader or investor, the key is to keep your losses a small percentage of your equity.

In summary, day trading is not any more risky than investing as long as you adhere to a solid strategy and continue to become educated about the ever-evolving market. So many pundits perpetuate the myth that day trading is more risky than investing, without understanding that overnight risk is the real grim reaper. If you study the history of the market, you will find that the big losses occurred while you were sleeping.

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 (a live audio internet-based service) may be obtained by calling toll-free 1-800-970-9791 or by e-mail to dti@daytradingschool.com.