Living the Dream

Dreaming the dream and living it are two different things. One is

based on fantasy and the other on reality. To live the dream, you

have come to the realization that short trading is like nothing you

have ever experienced. The reality is that short-term trading is going

to be one of the hardest things you have ever done, and without the

proper training and psychological preparation, your stress level will

most likely be off the scale. Mental training and conditioning will be Living the dream successfully depends to a great extent on

you—and what kind of short-term trader you are. Identifying what

kind of short-term trader you are is critical to your entire trading

plan. I have trained over 4,000 individual traders from all over the

world. This group includes professional traders, hedge fund managers,

mutual fund managers, and the general public. The first two

questions I ask are as follows:

1. What kind of predator are you?

2. What is your time frame?

These questions have an important interrelationship. What kind of

predator are you? Knowing what kind of predator you are is very

important because the market is a food chain. In this food chain,

various predators are waiting to ambush you and devour your capthe ital. In order to develop the appropriate strategy, you must know

your enemies and how they think.

Short-term trading is divided into three different styles: day

trading, microtrend trading, and position trend trading. One reason

that short-term traders have such a high percentage of losses is that

they are trained to use a standard one-size-fits-all approach. Usually,

the entire focus of this approach is to follow short-term momentum

and order flow represented by the ticker. This type of trading is

referred to as scalping. There are two fundamental problems with

this approach. First, time and sales are usually late, which no one

addresses, and second, individuals are not all the same. Your trading

strategy needs to be tailored to your trading ability. What works

for someone else won't necessarily work for you. Another reason

for failure is that short-term traders, especially day traders, aren't

usually trained to screen for high-probability, high-profitability

trades. I am going to introduce you to seven short-term trading

strategies that are extremely successful. With seven strategies to

choose from, it is up to you to select those that fit your needs and

apply them. This leads us back to my first question. What kind of

predator are you? You have to determine what kind of trader you

are. Let's define the three types of short-term traders so that we all

understand specifically what we are talking about.

1. Day trader: A day trader by our definition is a trader who enters

the market at some point during the day and is totally in cash (flat)

by the end of the day. At no time does a day trader carry a position

overnight. Some day traders trade for fractions of a point—usually

1/ 16, 1/8. This is called scalping. This type of day trading has a high failure

rate. One out of a hundred thousand people can consistently

make money by scalping. You always hear about the exceptions,

don't you? The small profit per trade, commissions, slippage, and

the possibility of a series of losing trades, make scalping a technique

that may not be for you. You may be the exception, but don't

lose all your money trying to prove it. Not all day traders are

scalpers. For example, intraday trend traders will stay in a trade until

the trend reverses. This could take a few minutes or several hours.

Both types of day traders typically buy 500 to a 1,000 shares or

6 the strategic electronic day trader

more at a time and must be highly capitalized. The minimum day

trading capital for an individual trader is usually $50,000 to

$100,000. Day trading requires large amounts of operating capital.

Most day traders trade several times a day. It's not unusual for a

scalper to make 30 to 150 trades or more per day, while the intraday

trend traders will make 3 to 9 trades per day.

2. Microtrend trader: A microtrend trader by our definition is a

trader who takes a position with the intention of holding it for three

to five days. The microtrend trader is attempting to trade a small

part of a larger trend. A day trader never carries a position

overnight, but the microtrend trader does. Usually a stop is strategically

placed at the end of day to take the trader out if the trend

dramatically reverses. For microtrend trading to be successful the

entry must be made when the trend is strong. This usually occurs

when the trend is under way or begins explosively. The momentum

should carry the price for three to five days. Unlike the day trader

who trades for fractions, the microtrend trader typically trades for

points. After three to five days, the microtrend trader liquidates his

or her position and looks for another microtrend. The minimum

trading capital for an individual microtrend trader is usually

$30,000. Most microtrend traders are very well capitalized, with

trading accounts of $100,000 or more. The psychological stress on

the microtrend trader is, in most cases, far less than on a day trader,

because time is more an ally than an enemy.

3. Position trend trader: A position trader attempts to ride the

trend for 10 to 14 days or longer. A position trader usually takes a

position of size (large number of shares) and holds until another

position becomes more promising. If a trend is intact, the position

trader will roll up stops until the market takes them out. The intention

is to stay in the position for 10 to 14 days, but if the trend continues,

the position trader will stay with the trend as long as

possible. In many cases, a microtrend trader can become a position

trend trader if the three- to five-day holding-period trend explodes,

carrying prices further. Because position traders are in a trade for a

longer period of time, they must allow for price volatility and intelligent

stop placement. The minimum trading capital for a position trader varies. If you hold a position beyond one month, you are considered

an investor. According to this definition, most fund managers

are position traders. In many cases, institutional position

traders will add to their positions if they feel the long-term outlook

for the stock is positive. Position traders usually move the market

because of the collective size of their accumulation (buying) or distribution

(selling).

What is your time frame? It should become obvious that

understanding your time frame is critical to everything you do in

trading. Your trading strategy, application of technical indicators,

entry and exit, and so on, are determined by your individual time

frame. As a professional who trains individuals to trade, one of the

most amazing things I hear when I ask "What is your time frame?"

is "I don't know." The very definition of what kind of trader you are

is dependent on your concept of time as it relates to trading. Time

can be your friend or your enemy, and nothing makes the case

clearer than day trading. Each tick in real time, positive or negative,

amplifies stresses that exist in your mind. Everything is magnified,

and each moment becomes urgent. Decisions have to be

made on a second-by-second basis, and as each second passes,

another agonizing decision to buy, sell, or hold must be made. At

the end of the day, you feel as though you just completed a marathon.

Mentally and physically exhausted, you know that tomorrow

you must run this marathon again. Obviously, not everyone will

succeed as a day trader. This is proven by the failure rate of individuals

who attempt to day trade. Many would-be day traders fail

because the wrong trading strategy and methodology causes them

to overtrade. Many day traders are, in fact, gamblers and can't stop

trading. Success in day trading will come when you learn to effectively

slow down time. This is accomplished by making fewer

trades and selecting those with a higher probability of success and

a positive reward-to-risk ratio. In Chapter 3 you will be introduced

to various trading strategies. These strategies put time on your

side making it far less likely that you will become a market statistic.

Before you begin to trade with real money, you absolutely need to

define your time frame.

Dreaming the dream and living it are two different things. One is

based on fantasy and the other on reality. To live the dream, you

have come to the realization that short trading is like nothing you

have ever experienced. The reality is that short-term trading is going

to be one of the hardest things you have ever done, and without the

proper training and psychological preparation, your stress level will

most likely be off the scale. Mental training and conditioning will be Living the dream successfully depends to a great extent on

you—and what kind of short-term trader you are. Identifying what

kind of short-term trader you are is critical to your entire trading

plan. I have trained over 4,000 individual traders from all over the

world. This group includes professional traders, hedge fund managers,

mutual fund managers, and the general public. The first two

questions I ask are as follows:

1. What kind of predator are you?

2. What is your time frame?

These questions have an important interrelationship. What kind of

predator are you? Knowing what kind of predator you are is very

important because the market is a food chain. In this food chain,

various predators are waiting to ambush you and devour your capthe ital. In order to develop the appropriate strategy, you must know

your enemies and how they think.

Short-term trading is divided into three different styles: day

trading, microtrend trading, and position trend trading. One reason

that short-term traders have such a high percentage of losses is that

they are trained to use a standard one-size-fits-all approach. Usually,

the entire focus of this approach is to follow short-term momentum

and order flow represented by the ticker. This type of trading is

referred to as scalping. There are two fundamental problems with

this approach. First, time and sales are usually late, which no one

addresses, and second, individuals are not all the same. Your trading

strategy needs to be tailored to your trading ability. What works

for someone else won't necessarily work for you. Another reason

for failure is that short-term traders, especially day traders, aren't

usually trained to screen for high-probability, high-profitability

trades. I am going to introduce you to seven short-term trading

strategies that are extremely successful. With seven strategies to

choose from, it is up to you to select those that fit your needs and

apply them. This leads us back to my first question. What kind of

predator are you? You have to determine what kind of trader you

are. Let's define the three types of short-term traders so that we all

understand specifically what we are talking about.

1. Day trader: A day trader by our definition is a trader who enters

the market at some point during the day and is totally in cash (flat)

by the end of the day. At no time does a day trader carry a position

overnight. Some day traders trade for fractions of a point—usually

1/ 16, 1/8. This is called scalping. This type of day trading has a high failure

rate. One out of a hundred thousand people can consistently

make money by scalping. You always hear about the exceptions,

don't you? The small profit per trade, commissions, slippage, and

the possibility of a series of losing trades, make scalping a technique

that may not be for you. You may be the exception, but don't

lose all your money trying to prove it. Not all day traders are

scalpers. For example, intraday trend traders will stay in a trade until

the trend reverses. This could take a few minutes or several hours.

Both types of day traders typically buy 500 to a 1,000 shares or

6 the strategic electronic day trader

more at a time and must be highly capitalized. The minimum day

trading capital for an individual trader is usually $50,000 to

$100,000. Day trading requires large amounts of operating capital.

Most day traders trade several times a day. It's not unusual for a

scalper to make 30 to 150 trades or more per day, while the intraday

trend traders will make 3 to 9 trades per day.

2. Microtrend trader: A microtrend trader by our definition is a

trader who takes a position with the intention of holding it for three

to five days. The microtrend trader is attempting to trade a small

part of a larger trend. A day trader never carries a position

overnight, but the microtrend trader does. Usually a stop is strategically

placed at the end of day to take the trader out if the trend

dramatically reverses. For microtrend trading to be successful the

entry must be made when the trend is strong. This usually occurs

when the trend is under way or begins explosively. The momentum

should carry the price for three to five days. Unlike the day trader

who trades for fractions, the microtrend trader typically trades for

points. After three to five days, the microtrend trader liquidates his

or her position and looks for another microtrend. The minimum

trading capital for an individual microtrend trader is usually

$30,000. Most microtrend traders are very well capitalized, with

trading accounts of $100,000 or more. The psychological stress on

the microtrend trader is, in most cases, far less than on a day trader,

because time is more an ally than an enemy.

3. Position trend trader: A position trader attempts to ride the

trend for 10 to 14 days or longer. A position trader usually takes a

position of size (large number of shares) and holds until another

position becomes more promising. If a trend is intact, the position

trader will roll up stops until the market takes them out. The intention

is to stay in the position for 10 to 14 days, but if the trend continues,

the position trader will stay with the trend as long as

possible. In many cases, a microtrend trader can become a position

trend trader if the three- to five-day holding-period trend explodes,

carrying prices further. Because position traders are in a trade for a

longer period of time, they must allow for price volatility and intelligent

stop placement. The minimum trading capital for a position trader varies. If you hold a position beyond one month, you are considered

an investor. According to this definition, most fund managers

are position traders. In many cases, institutional position

traders will add to their positions if they feel the long-term outlook

for the stock is positive. Position traders usually move the market

because of the collective size of their accumulation (buying) or distribution

(selling).

What is your time frame? It should become obvious that

understanding your time frame is critical to everything you do in

trading. Your trading strategy, application of technical indicators,

entry and exit, and so on, are determined by your individual time

frame. As a professional who trains individuals to trade, one of the

most amazing things I hear when I ask "What is your time frame?"

is "I don't know." The very definition of what kind of trader you are

is dependent on your concept of time as it relates to trading. Time

can be your friend or your enemy, and nothing makes the case

clearer than day trading. Each tick in real time, positive or negative,

amplifies stresses that exist in your mind. Everything is magnified,

and each moment becomes urgent. Decisions have to be

made on a second-by-second basis, and as each second passes,

another agonizing decision to buy, sell, or hold must be made. At

the end of the day, you feel as though you just completed a marathon.

Mentally and physically exhausted, you know that tomorrow

you must run this marathon again. Obviously, not everyone will

succeed as a day trader. This is proven by the failure rate of individuals

who attempt to day trade. Many would-be day traders fail

because the wrong trading strategy and methodology causes them

to overtrade. Many day traders are, in fact, gamblers and can't stop

trading. Success in day trading will come when you learn to effectively

slow down time. This is accomplished by making fewer

trades and selecting those with a higher probability of success and

a positive reward-to-risk ratio. In Chapter 3 you will be introduced

to various trading strategies. These strategies put time on your

side making it far less likely that you will become a market statistic.

Before you begin to trade with real money, you absolutely need to

define your time frame.