- 2001: Volume 10, No. 5 The Game Plan for Success

For traders to succeed, they must have a game plan, specific strategies and tactics to approach the market, and achieve a balance in their trading. Defining a game plan provides preparation and knowledge. Specific strategies and tactics that work yield the consistency traders must develop. In addition, a trader must find a balance with which he is comfortable. Balance keeps the trader on a steady path that provides the ability to diverge when necessary. This article will examine all three of these elements traders must implement before being able to attain long term trading success.

Game Plan
"Know Thyself"—Socrates—It is vitally important to know yourself as you approach the trading arena. Are you the individual trader, or an institutional investor? Institutional investors have enough weight to make their own waves in the market, while the individual trader is best served by riding the waves made by others. Many new individual traders tend to get carried away, thinking they can shape market consequences like larger investors. In reality most traders are miniscule in relation to the markets. Only when a trader accepts his place in the market and sets his own course can he benefit from the ride provided.

Know Your Risk Potential—Can you afford to lose? It is a harsh question, yet one that must be asked. The term risk capital applies to the balance of your account. It is the money you can afford to risk. Being in financial positions where the loss of money impinges on your financial well-being is not advisable. If you cannot afford to lose, then the overriding factor becomes the money, which can cloud a trader's judgment and cause anxiety. Trade numbers, not money. Market analysis needs to be pure, untainted by financial concerns.

Managing risk capital is another area of concern. The entire balance of a trading account should never be on the line. An "all-or-nothing" approach will make for either a very short or a very costly trading career. If the market is going against you, don't lose all of your risk capital trying to force it into going with you. Understand when it is not in your favor, and get out. It is very important to come to this conclusion before your risk capital has been depleted.

Understand Your Goals—While everyone would like to make a quick fortune, a trader's goals should be attainable. You need to start at the bottom and build yourself up. IBM is not going to hire a recent college graduate to be their CEO. Gradually build up risk potential by gradually increasing the size of profits. The more you have, the more you can afford to risk. Unless a trader approaches his trading career as a building process, early losses aimed at unrealistic goals will end a trading career before it ever begins.

Strategies and Tactics
Time—There are times during the day when the market tends to move in patterns. Knowing these patterns and adhering to them can make all the difference in the world. A smart sea captain would not try to navigate through a shallow reef during low tide. A trader should demonstrate that same constraint. If you were trading during a time where the market traditionally rises, it would be unwise to be taking a short position, or vice versa. The key is to recognize these patterns and ride them to profits.

Be cautious of times zones when a churning market can play havoc on a trend trader. The first half hour and the last half hour of the day markets are extremely dangerous and can pull the unwary trader under. Other times to beware are 1:30 p.m. and 2:00 p.m. CST, and occasionally 10:30 a.m. through 11:00 a.m. CST. Position traders are best served by avoiding these time periods.

As a trader, you may find that there are certain times during the day where you can't help but be right, and there may also be those times when you can't win for losing. Identify these times quickly, and make advantageous use of these zones. In my history of trading, I have found four time zones that are most profitable for me, including the early morning, the morning, the noontime, and the afternoon. While the best time zones may vary greatly from person to person, each trader must learn to identify their own "prime times" and stick to them.

Indicators—Time can only do so much. It puts you in the right place, but knowing where to go from there is the real measure of talent. The primary determination that must be made before trading any market is whether to be long, stay out, or short the market. An easy way of remembering this initial decision is the acronym LSD.

• Long: Trade positioned with an expectation of rising market prices.
• Stay Out: No trade positioned due to no expectation of movement, or no understanding of the fundamental reasons for a market move.
• Down (or Short): Trade positioned with an expectation of falling market prices.

In the early morning trading I have found the best indicators to be found in the foreign markets, specifically the European markets, as they are the active markets for the early day. We generally look for alignment. If the major European markets (the FTSE, the DAX, and the CAC), are all moving higher, it can be expected that the S&P, my primary trading vehicle, will follow.

As the day takes us from the early morning shadow of the European markets to the bright lights of New York City, we look for other indicators. At the beginning of New York's trade day, all eyes are focused on the NYSE, and its many indicators including statistics like the TRIN and the TICK. As the clock continues to turn, examine the futures markets in Chicago. At the Chicago Mercantile Exchange you can track the NASDAQ 100 Futures and our trading vehicle, the S&P 500 futures. In addition, just down the street is the Chicago Board of Trade where you can follow the Dow futures and the ever influential bond market.

Key Numbers—Learning when it is best for you to trade puts the market in front of you only when best and indicators show market direction. However, trend traders must complete the picture, knowing not only where a market is, but where it is moving, and at what point a chosen direction is proven wrong. This is where key numbers come into play. Key numbers are those numbers that bear the greatest import on the markets. They can be breaking points, pivots, or targets. We determine key numbers through three means: common focal points, previous day's action, and historical data.

Common Focal Points—Common focal points are those numbers that hold obvious significance. Examples are Dow, 10,000; S&P, 1200.00; or NASDAQ, 1600. These numbers are often referred to as "round" numbers. They are typically fifties, or hundreds, and can sometimes be thousands. On rare occasions, as seen in the Dow, these "Round" numbers are in the 10,000s. As the power of 10 rises, so does the significance of the number.

Previous Day's Action—Finding the numbers that were important in the previous days trading can often help a trader's knowledge of their immediate surroundings. If the market approaches the previous day's low, you can expect the number to either provide support, causing a directional change; or to fail, spurring a quick run at new lows. Other numbers of import aside from the open, high, low, and close include time-based numbers that I feel are important. Among these are the 12:30 PM CST number and the 3:30 a.m. CST number.

Historical Data—Historical data consists of the compiled information from previous days. The numbers that bear notice in the forefront are those that continually show up. For instance, the number 1212.00 has been a 3:30 number, a 12:30 number, a high, a low, an open, and a close. All have occurred more than once, and all on varying days. Thus it has earned the distinction of being considered a historically significant number.

Balance—Greed/Fear
The Courage to Act—Knowing what is happening, and getting involved do not always fall under the same category. Once the decision has been made as to what direction the market is going, where protective stops need to be placed, and what your likely target is, you must quickly make the transition from analyst to trader. Making the transition from an effective paper trader to that of an actual trader is a stumbling block for most. If you have a sound methodology, you need to have faith in it. If you do not fully believe in the method you are using, your emotions will take over your trade decisions, resulting in financial disaster.

The Fear of Staying Too Long—Often traders will enter a trade, but then start to doubt their analysis. This voids the time spent identifying the risk and possible reward. It is a fact that the market may change, but if your methodology is proven to be accurate, you need to give it the opportunity to succeed. Quick profits are nice, but the old axiom of the market is cut losers quick, and let the winners run. The quick cut is determined through key numbers with the use of a protective stop. If your stop gets hit, then you were wrong. If it doesn't take you out, you may still have a winning trade on your hands. Take your losses with a grain of salt and wait for the next opportunity.

The Greed of Not Taking Profits Soon Enough—On the opposite end of the spectrum is greed. Greed has the capacity to nullify decisions made through a methodology. If the target price has been reached, some acknowledgment of that fact needs to occur, whether profit taking, or tightening of stops. The worst kind of loss is when your analysis was correct and your target was reached, only to find your desire for more, leaving you in a falling trade that becomes a loser. Accept your goals and acknowledge a "win" by taking your profits and/or tightening your stop.

Confidence/Humility
The Confidence to Trust in Your Own Judgment—If you have a method that works, use it and do so with confidence. You need to believe in yourself. Without confidence in your own ability, you will not succeed.

The Humility to Listen to the Market—Try not to let confidence go to your head. No matter how successful the trader, the market can always prove the trader wrong. A trader needs to let the market tell him what to do. A good trader does not get caught up in the frustration of attempting to tell the market what to do.

The Judgment to Know the Difference—Balancing confidence and humility is perhaps the greatest feat any trader will face. There is no black and white. Traders must be able to admit when they are wrong. Without admission of error, the best trader can wipe out an account that took months to build in a matter of days, if not minutes. I use stop orders to force myself to adhere to this principle. If I am long in the market, there is a sell stop out there protecting me both from the market and from myself. I reject the proposition of mental stops. In the heat of trading, mental stops can be discarded, or even forgotten. If stops are moved, they should not be moved away from the market, but towards it. The name of the game is elimination of risk and protection of profits. Becoming an investor just to prove that eventually the market will listen to you will only result in losses.

Repetition/Innovation
Consistency—If you have a method that works, then diverging from it because of short-term pitfalls could take you out of the next great trade. Don't change to suit the moment. A moment is just an instant in time, it does not define a pattern. If you start changing things on a whim, you will not be able to settle into the subtle pace of confidence.

The Flexibility to Change and the Maturity to be Consistent—A trader needs to understand that what worked last year may not work this year. You need to be open to the prospect of change, but not too quick to embrace it. Change should not occur by the actions of one day, or even one week. The key here is consistency. If your method is consistently not working then you need to improve it.

Review
In the world of the trader, one must combine knowledge of self with knowledge of the markets. Understand and appreciate your goals and risk potential and be able to approach the market with a concise strategy. Strive to achieve the balance necessary for success. Don't let either greed or fear influence your decision making process. Be consistent while allowing yourself the flexibility to adapt to the ever-changing market. Confidence is the hallmark of a good trader. The ability to temper that confidence with humility is the sign of a great trader.

Thomas L. Busby is the president and founder of The DayTrading Institute. Tom has more than 23 years of experience in day trading.

In 1996, he founded the DayTrading Institute located in Mobile, Ala., a program designed to teach its students how to trade in the S&P 500 and the Dow Jones Markets.

In his trading approach, Tom uses technical analysis combined with money management to trade the futures market.

The DayTrading Institute was founded in 1996 to provide specialized training and education for individuals interested in learning to trade the futures markets, specifically the S&P 500, but also the NASDAQ and DJIA as well. You will be taught in DTI's state of the art training facility using newly available technology that gives individual traders the same information and technology that was previously only available to Wall Street professionals.

The goal of DTI is to teach a proprietary method of trading that can be applied to the S&P 500 futures markets. Tom's "RoadMap" methodology is based on his more than 22 years of experience trading the equities, options, and commodities markets. The "RoadMap" method is comprised of three main elements: time of day, key numbers, and the RoadMap (tracks key indicators). Using a combination of technical analysis and money management techniques, Tom will teach you a comprehensive strategy for trading the S&P 500 that emphasizes capital preservation and risk management.

DayTrading Institute
1555 South University Blvd.
Mobile, Alabama 36609
E-mail: info@dtitrader.com
Phone: 1-800-970-9791

Tom is also a featured speaker at the Futures Industry Association's Futures and Options Expo 2001 taking place November 28 - 30. For regsitration information, please visit www.futuresindustry.org/expo.