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"PRINCIPALS
AND
PSYCHOLOGY
OF

DAYTRADING"
ByGeorgeSlezak

C19972017 ,GeorgeSlezak,23371OldeMeadowbrookCir.BonitaSprings,FL34134Phone2399479131

ANYSTATEMENTOFFACTSHEREINCONTAINEDAREDERIVEDFROMSOURCESBELIEVED
TOBERELIABLE,BUTARENOTGUARANTEEDASTOACCURACY,NORDOTHEYPURPORT
TOBECOMPLETE.ASTOPLOSSMAYNOTLIMITYOURLOSSTOTHEAMOUNTINTENDED.
FUTURESTRADINGINVOLVESFINANCIALRISKANDSHOULDBECONSIDEREDCAREFULLY
BEFOREMAKINGANYTRADES.PASTPERFORMANCEISNOTINDICATIVEOFFUTURE
RESULTS.

SEEREGULATORYDISCLOSURESREGARDINGHYPOTHETICALRESULTS

(UsePgDnPgUptoview)

ClickhereformoreinformationaboutGeorge

DescriptionofConferenceSession
Whenyoufirststartedtradingyoulearnedthatexternaldistractionscostyou
moneyinyourtradesandyoufoundcommonsensewaystodealwiththem.As
youprogressinyourtradingyouwillalsofindinternaldistractions,thingsthat
comefromwithinyourself,willcostyoumoneyinyourtrades.

Intheconference,Georgesmemotitled"PrincipalsandPsychologyofDay
Trading"willbediscussed.Thememoisacollectionofstoriesabouttrading
principalsandcommonmisunderstandingsthatGeorgeregularlyobservesin
himselfandinothersduringshorttermdaytrading,bothinthepitsandasan
offfloortrader.Hehasseenmanytraderstradeintoruinbecausetheywere
stubborninholdingontocommonmisunderstandingsuntilitwastoolate.He
feelsrecognizingandunderstandingtheissuesarecriticaltofindingsuccessin
daytrading.

AmongtheitemsGeorgewilltalkaboutare:"neveraddtoalosingposition,""it
isthemarketsreactiontonewsthatcounts,""wheneveryoneisin,itistimeto
getout,""sizekills,""itisalwayseasiertoenteralosingtrade,""whenyouwake
up,yourinstinctsarewrong."

IntroductoryNotefromGeorge:
Thememobeginswithasummary,calledthe"dailyreading",andisfollowedby
anexpandeddiscussionofeachitem.
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Thismemoisanaccumulationofideasthathavedevelopedoverseveralyears.
Itisaworkinprogressandwillbeexpandedwithnewissuesovertime.The
memoandfutureupdatesarepostedontheInternetatthefollowingwebsite:

www.stockindextiming.com/rp/
Subjectstobeaddedonnextrewrite:Continuousjudgmenttest.***whattodo
withagifttrade***Fearless***Manysimilarentrystrategies,butexitstrategies
varygreatly.

GoodluckandGoodTrading!

GeorgeSlezak

OtherGeorgeSlezakWebsites:

http://www.stockindextiming.com/

www.CommitmentsofTraders.com

http://www.georgeslezak.com/

DAILYREADINGONTHE
"PRINCIPALSANDPSYCHOLOGYOFDAYTRADING"
C19972017GeorgeSlezak,23371OldeMeadowbrookCir.BonitaSprings,FL34134

Formoreinformation,callGeorge:12399479131

THETRADEDECISION

1.Neveraddtoalosingposition.

2.Alwaysdetermineastopandaprofitobjectivebeforeenteringatrade.Placestopsbasedonmarket
information,notyouraccountbalance.Ifa"proper"stopistooexpensive,don'tdothetrade.

3.Rememberthe"powerofaposition."Nevermakeamarketjudgmentwhenyouhaveaposition.

4.Yourdecisiontoexitatrademeansyouperceivechangingcircumstances.Don'tsuddenlythinkyou
canpickaprice,exitatthemarket.

THEMARKETHASCHARACTER

5.InaBullmarket,neverselladullmarket,inBearmarket,neverbuyadullmarket..

6.Therearetimes,becauseoflackofliquidity,orexcessivevolatility,whenyoushouldnottrade.

7.Tradingsystemsthatworkinanupmarketmaynotworkinadownmarket.

8.Thereareatleastthreetypesofmarkets:uptrending,rangebound,anddown.Havedifferent
tradingstrategiesforeach.

9.UpmarketanddownmarketpatternsareALWAYSpresent,merelyoneismoredominant.Inanup
market,forexample,itisveryeasytotakesellsignalaftersellsignal,onlytobestoppedouttimeand
again.Selecttradeswiththetrend.

10.Abuysignalthatfailsisasellsignal.Asellsignalthatfailsisabuysignal.

11.It'salwayseasiertoenteralosingtrade.

12.Inthe"blowout"stageofthemarket,upordown,riskmanagersareissuingmargincallposition
liquidationorders.Theydon'tcheckthescreenforoverboughtoroversold,theyjustkeepissuing
liquidationorders.Don'tstandinfrontofarunawayfreighttrain.
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13.Youaresuperstitious,don'ttradeifsomethingbothersyou.

NEWS

14.Buytherumor,sellthenews.

15.Newsisonlyimportantwhenthemarketdoesn'treactinthedirectionofthenews.

16.Readtoday'spapertomorrow.Whenyoureadyesterday'spapereachdaywiththeknowledgeof
whatthemarketalreadydid,youwillaffirmthatthismorning'spaperwithyesterday'snewshasnothing
todowithtoday'smarket.

ATIMETOTRADE

17.Ontheopen,neverenteranewtradeinthedirectionofagap.Neverletthemarketmakeyou
makeatrade.(Closinganexistingpositionisobviouslyok.)

18.Thefirstandlasttickarethemostexpensive.Getinlateandoutearly.

19.Wheneveryoneisin,it'stimetogetout.

20.Nevertradewhenyouaresick.

TRACKINGYOURTRADES

21.Sizekills.Onlychangeyourunitoftradingunderaplanofattainedgoals.Also,haveaplanfor
reducingsizewhenyourtradingiscoldormarketvolumeisdown.

22.Confidencekills.Remember,youreallydon'tknowanything.Respectthemarketeverysecondof
everyday.Expecttheunexpected.Alwaysknowyourpositionandexityourtradeimmediately
wheneveryoufeeluneasy.

23.Measureyourselfbyprofitable"daysinarow,"notbyindividualtrades.

24.Thebestwaytobreakastreakof"losingdaysinarow"istonottradeforaday.

25.Don'tstoptradingwhenyouronawinningstreak."Whenyourhot,yourhot."

26.Threestrikesandyourout!Don'tturnthreelosingtradesinarowintosixinarow.Whenyouroff,
turnoffthescreen,dosomethingelse."Whenyournot,yournot."

27.Scalpersreducethenumberofvariableseffectingmarketriskbybeinginapositiononlyfor
seconds.Daytradersreducemarketriskbybeingintradesforamatterofminutes.

28.Ifyouconvertascalpordaytradeintoapositiontrade,bydefinitionyoudidnotconsidertherisks
ofthetrade.

29.Don'teverfretaboutamissedopportunity.Thereisalwaysanotheronejustaroundthecorner.
Besides,severaljusthappenedthatyoudidn'tevenknowabout.

MARKETOPINIONS

30.Ifyoulookformarketsecretsyouwillonlyfindthingsthatnoonecaresabout.Usethe
conventionaltools.

31.Neveraskforsomeoneelse'sopinion,theyprobablydidnotdoasmuchhomeworkasyou.

32.Whenthemarketisgoingup,say"themarketisgoingup."Whenthemarketisgoingdown,say
"themarketisgoingdown."Sayitwithoutqualifications,no"buts"attached.Thisisarealitycheck,
you'llbeamazedathowharditistosaywhatisliterallygoingoninfrontofyouwhenyourmindisfull
ofpreconceivedopinions.

33.THEDAILYMARKETCOMMENTARY:I'veneverhadanopinionIdidn'tlike,however,successful
daytradingrequiresflexibility.Doyourhomeworknottodevelopamarketopinion,butratherto
understandthepotentialforbothsidesofthemarket.Thiswillallowyoutomakeyourtradesbasedon
whatthemarketisdoingatthetimeofthetrade.

34.Hereisaquotetoremember:"Whenyouwakeup,yourinstinctsarewrong."
SOMEFINALTHOUGHTS

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35.Whenyoumakeamistakeofdiscipline,whinelikeafooltoanyonethatwilllisten.Errorsin
disciplinearemistakesyouwillkeeponmakingformanyyears.Wearingashesandsackclothmay
helpextendthetimebeforeyoudoitagain.

Inpoker,overtimeit's90%skilland10%luck.Intrading,it's90%discipline.

36.Ifyousquirmedandmoanedwhileyoureadthislist,thenyousharetwoobviouscharacteristics
withmanyofus:

1.Youhavetradedlongenoughtorecognizethatyou(notthemarket)makemistakes,andyoutryto
overcomethem.

And2.,nowthisisugly,youhavebecomepartofthemarketandyoucanneverleave.

Nomatterwherelifetakesyou,youwillalwayscheckthemarketandalwayswanttocontinuebeinga
partofit.It'slikethatfirsttruelove,itwillalwaysbetherenomatterwhatthedistance,nomatter
whethertheyarealiveordead.

Whyisitsohardtospent3minuteseachdaytorereadthislist?

Checkhereifreadbeforethetradingday.

Checkhereifshouldareadbeforetrading!!

THETRADEDECISION

1.Neveraddtoalosingposition.
Back

JesseLivermore's(EdwinLefevrepenname)ReminiscencesofaStockOperatorisabookIreadearlyinmy
tradingcareerinthelate1970's.Itisaboutastocktraderduringthe1920'sand30's.Oneofthetrading
principlesthatherepeatedthroughoutthebookis"neveraddtoalosingposition."Priortomyreadingthisbook,
IhadtheideathatIcould"averagedown"onalosingtrade.IE.,buysomeat10,andbuysomemoreifitgot
downto8.Afterallifitwasagoodbuyat10itmustbeagreatbuyat8.

ThinkaboutthebeautyofWallStreet'sabilitytogetyoutoaveragedown!Theyactuallymakeyouthinkyour
gettingabargainbybuyinglower!Withtheideaofabargaininyourhead,youdon'tevenconsiderthatyou
mightbetotallywrong,andthestockisgoingdown.Whenyoumadeyourfirstpurchase,thebrokerspent20
minutestellingyouthebenefitsofthisstock.Whenhecallsyouto"averagedown",it'sa30secondsellandhe
gotyoutodoubleyourposition.Thatsecondcommissionisabonustothebrokerforbeingwrong!

OnceIsawthat"averagingdown"wasnotnecessarilyapropertradingtactic,Iwasfreetoconsiderthatifthe
tradewasgoingagainstme,maybeIshouldgetout.Overtime,atraderlearnsthatthemarketwillalwaysbe
theretomorrow,andthatmakingafreshdecisionwithnopositionisusuallybetter.Averagingdownwillusually
conflictwiththetradingdisciplineofhavingastoplossandprofitobjective.Goodmoneymanagementwillalso
usuallynotallowanadditionalposition.

Butwhataboutpyramidingapositiononabigmove?Pyramidingisusingprofitsinatradetoaddadditional
positions.Ifapositionisinaloss,therearenoprofitstouse.NEVERADDTOALOSINGPOSITION.

2.Alwaysdetermineastopandaprofitobjectivebeforeenteringatrade.Place
stopsbasedonmarketinformation,notyouraccountbalance.Ifa"proper"
stopistooexpensive,don'tdothetrade.
Goodtradingdisciplinerequiresthatyouchooseastopandprofitobjectivebeforeenteringatrade,butpicking
therightpointforastopisoftendifficult.

Thereisagreatdealofliteratureonthestreetthatgivesarbitraryrulesontheplacingofastop.I'veheardclients
saytheyalwayswanta$300stop,(or$500,or$1,000),nomatterwhichcommoditytheyaretrading.

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Astopshouldnotbebasedonyourpersonalfeelingaboutamaximumloss.Astopshouldbeplacedbasedon
thepointwherethemarketactionwouldsuggestthatyouroriginaldecisiontoenterthetradeisincorrect.Ifthat
pricepointistoomuchforyourdecisionaboutlosstolerance(moneymanagement)thendon'tdothe
trade.
Areasonableprofitobjectiveisalsoacriticalcomponentofthetradedecision.Thisgivesyouanamounton
whichtobaseyourriskrewardanalysis.Whywouldyouwanttotakeatradewhereyourprofitobjectivewassay
$300away,butyourstopis$600?Thebestprofessionaltraderswilltellyoua65%winlossratioishardto
attain.

The80%andhigherwinlossratiosadvertisedarenotapracticaltradingmethodforaprofessionaltrader.Isaw
thedetailsofonetradingsystemthatboastedan85%winlossratioovertenyears.WhenIsawthedetailsI
realizeditonlytradedtwiceayearandexitedbythecloseofthesecondday!A"professionaltrader"isnotgoing
tositinfrontofascreenallyeartoonlybeinthemarketforfourtradingdays!

Aprofessionaltraderwantstofindtradingmethodsthatofferconsistentprofitsmonthaftermonth.Hetakesa
profitatapointwherehehasstatisticallyshownhehasagoodprobabilityofsuccesswithreasonablestops.

Thereareseveralsimplewaystosetprofitobjectivesbeforeenteringatrade.Oneistolookatprevioushighs
andlowsthatcanbeconsideredpastsupportorresistance.Exityourtradejustbeforethemarketbeginsatest
ofthatlevel.YoucanuseGannlevelsorFibonacciretracementsasyourprofitobjective.IfIcatchaturnnearthe
high,Iwillusuallyexitjustbeforethemarketgetstoahalfwayback.

ThedecisiontocloseaprofitableshouldNOTbebasedonareversingtechnicalsignal.Thedecisiontoexita
tradeISNOTadecisiontoenteratradeintheoppositedirection.Thedecisiontoenteranewtradeshouldbe
basedonanewtechnicalsignalwithastatisticalprobabilityofsuccess.

Let'ssayyouaretradingonasimpletechnicalsignallikeaDojistaronafiveminuteBondchart.ADojistarisa
fiveminutebarwhereafteramarketmovetheopenandcloseofthefiveminutebararethesameprice.You
mighthaveafilterthatdefinesa"marketmove"ashavingtheStochasticsonthefiveminutecharttohave
movedfromoversold(undertwenty)tooverbought(over80).YoumightsellimmediatelyontheDoji,withyour
stoponetickabovethehighoftheDoji.

Withthissignalyoucangobackandstudymarkethistorytodeterminethedistributionofthemaximum
profitabilitybeforethemarketeventuallyreversedandwouldhavetheoreticallystoppedyouout.Youcanalso
createadistributionofthenumberoffiveminuteperiodsthatpasseduntilyouwerestoppedout.

Youcanthendosomeoptimizingtocalculatewhatprofitobjectivewouldhavegivenyouthewinlossratiothat
makesyoucomfortable.Let'ssaythatanalysisconcludes12ticks.Thedistributionhasprofitlevelsaslowas
zerotickstoperhapsasmanyashundredsofticks.Buttobeconsistentandavoidthelargelosses,youtakethe
12ticksasyourprofitobjective.Inthisexample,yourprofitobjectiveisnotbasedonareversing"signal"butona
reasonablestatisticalanalysisofpasthistory.

SinceinthisexampleIamusingaDojitosignaltheendofamove,youcouldcalculateyourprofitobjective
basedonhowoftenthereversingmoveretracedhalfwaybackthepreviousmove.Ifthatmeetsyourwinloss
thresholdthenusethatlevelasyourprofitobjective.

Thesefewexamplesillustratethattheprofitobjectivecanbeverydifferentthanwaitingfora"reversing"signal
andcanbecalculatedbeforeenteringatrade.

3.Rememberthe"powerofaposition."Nevermakeamarketjudgmentwhen
youhaveaposition.
"Rememberthepowerofaposition."Onceyouhaveputonatrade,thatfactthatyouhaveapositionwilltotally
biasyourjudgment.Youneedtoremembertheparametersofthetradeyousetdownbeforeyouenteredthe
trade,andfollowthoseparameters.

IoftentellclientsthestoryofhowIwasadvisingaclientonashorttermdaytradeinBonds.Ihelpedhimget
short,thenplacedastopabovethemarket.Duringthetrade,Ifeltuneasyabouttheactionofthemarket,and
hadtheclientcoverhisshortatasmallprofit.Heinstructedmetocancelhisstop,butbecauseofsome
distraction,Ididn'tturninthetickettocancelthestop.AsIhadthought,themarketmadeaquickrallyup,butstill
lookedweak,soIcalledtheclientandadvisedhimtoreestablishhisshort.Weplacedanewstopabovethe
market,andwerelookingforaretestofthedayslows.

Afewmomentslater,Ireceivedacallgivingmethefillonthestop.Thestophadbeenelectedatapricejust
abovewhereIhadjustrecommendedashort.Itwasmyerrorinnotcancelingthestop,soIwasnowlonginmy
erroraccountanditwastradingatasmallloss.

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Ineededtoclosetheerror,butIlookedatthemarkettoseeifthemarketmightrecoveralittlesoIwouldn't
realizealoss.ThemarketwasheadingdownasIhadexpectedwhenIadvisedmyclienttogoshort,butIwas
sittingtheretryingtoseeifIcouldimagineasituationthatwouldgiveasmallrallysoIcouldexittheerror.Iwas
tryingtomakeanewmarketjudgmentwhenIalreadyhadaposition,Iwastryingtorationalizethatjustbecause
Iwaslong,themarketmightletmerecover.

Ilearnedlongagothatbeforeyouenteratrade,youestablishastoplosspointandaprofitobjective.NowIwas
lookingatthemarkettryingtomakethosejudgmentsbasedonatradethatwasalreadyon,andalready
underwater,andexactlyoppositewhatIthoughtthemarketwasgoingtodo.Andevenworse,Iwastryingto
makethosejudgmentsbasedonthecurrentpriceofthemarket,notwhereIenteredthetrade.Iwashesitating
writingthetickettoclosetheerror.InthepitofmystomachInewmyhesitatingtoclosetheerrorwaswrong,but
Ijustwouldn'twritetheticket!

Ithoughtofoneparticularclientwhowouldregularlyrefusetogivemeastoporderuntilsometimeafterhehad
enteredatrade.Hewouldsay,Iliketousea$500stop,butwouldplaceitbasedonwherethemarketwasatthe
momenthewasonthephonegivingmethestoporder.Ifthetradewasalreadyagainsthim$100,hewould
placehisstop$500fromthere,notfromwhereheenteredthetrade.Itwoulddrivemenuts!Hewantedtotrail
thestoponawinningtradeby$500,buthealsoendeduptrailingthestoponlosingtrades!Hetalkedgood
disciplinebeforeheenteredthetrade,butwhentradeswentbad,heconsistentlytooklargerlossesthanhis
originalplan.

Alloftheabovewentthroughmyheadinafewmicroseconds,andIfinallywrotethetickettoclosetoerrorwith
afourtickloss.Iwasamazedthataftertwentyyearsoftrading,Istillhadtogothroughthatprocess.

Themarketcontinuedondownanother16ticksandretestedthelowoftheday.Icalledmyclientthatwasshort
andhadhimcoverhistrade,andcanceledhisstop.

Asareminder,Itookacopyofthefillticketclosingmyerrorandreduceditonthecopymachinetoaboutone
inchbytwoinches.Ihavethattickettapedtothesideofmycomputerscreenwithboldlettersthatsay"ALWAYS
REMEMBERTHEPOWEROFAPOSITION."

Oneothernote,ifyouagreewithmyargumentsabove,thenitisinconceivabletoenteratradethatreverses
yourpositionfromsaylongtoshort(IEgoingfromlongfivetoshortfivebysellingten.)Firstexittheposition,
thentakeabreath,thenmakeadecisionifyouwanttogotheotherway.Normallyyouwillfindthereasontoexit
atradeisNOTareasontoenteratradeintheotherdirection.Theexitispartofyourdefenseofcapital.The
offensivedecisiontoenteratradeSHOULDbeforcompletelydifferentreasons.

4.Yourdecisiontoexitatrademeansyouperceivechangingcircumstances.
Don'tsuddenlythinkyoucanpickaprice,exitatthemarket.
ManytimesIfindclientstakingapositionlongorshortandwhiletheyareinthetradetheyindicatethatitdoesn't
seemtobegoingthewaytheythought.WhenIhearthis,myadviceis"whenindoubtcoverhalf,orcompletely
getoutandtakeafreshlook."Theywillagreewithme,andthengivemealimitorder,justslightlyawayfromthe
market,toclosethetrade.

Theydon'tfeelthetradeisgoingright,buttheynowthinktheycanpickupanextrathreeorfourticksbeforethey
getout.Ifitwasthateasytojustpickupfourticks,whynotjustdothatallday!Timeaftertime,thetradethen
getsawayfromthemandtheyenduptakingthefulllosstotheirstop.Theirstomachtoldthemtherightanswer
(togetout),butthatlittlewindofgreedorpridekeptthemfromavoidingtheloss.

IFTHETRADEISN'TGOINGTHEWAYYOUTHOUGHT,GETOUTATTHEMARKET!

THEMARKETHASCHARACTER

Back

5.Neverselladullmarket.
Therearetimeswhenamarketisoutofseason,or,justdriftingquietly.ManytimesovermytradingcareerIhave
followedtherule,"Neverselladullmarket."ThereasonisthatmostpeopleareNATURALBUYERS.Hasa
stockbrokerevercalledyouwhennothingspecialwasgoingontojustsell?No,peoplewantto"buy"thingswith
theirmoney.

Sowhenthemarketisinavacationmood.Notdoinganythingspecial,thegreaterriskisbeingontheshortside.
Ifabrokerwantstomakeacommission,heknowsitiseasiertobringa"buyside"ideatoaclient.Ifhebrought
a"sellside"ideatoaclient,andthemarketwasactingdull,theclientcouldn'timaginethatasharpselloffison
thehorizon,"notinamarketthatisthisquite".

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Thereareexceptions,inparticularthegrainsinaquitesummermarket.Whilethecropisinthegroundand
doingwell,thenaturalmarketisforthefarmertosell.Afterharvest,thenaturalmarketinthegrainsturnstothe
buysideaspreviouslyhedgedpositionsareliftedinthecourseofnormalusage.

Ihavebeencorrectedonthecompletenessofmyquote.Neverselladullmarketisinfact,INABULLMARKET
NEVERSELLADULLMARKET,AND,INABEARMARKETNEVERBUYADULLMARKET.TheS&P'sbegan
tradingin1982,whichisgenerallyconsideredthebeginningofthisGreatBullthatisstillinplaceasofmid1997.
IfweevergointoaBEAR,wewillseeiftheoppositeistrue.

Eitherway,IcanapplyittosimplysayNEVERTRADEinadullmarket.Asadaytraderwearegenerallyusing
technicalindicatorstohelpustradewiththetrend.Inadullmarketthetradingpopulationhas"gonefishing"and
expectingthetradingcharacteristicsofapopulationoflargenumberstoapplytoasmallpopulationisproven
timeandtimeagaintobetreacherous.

6.Therearetimes,becauseoflackofliquidity,orexcessivevolatility,when
youshouldnottrade.
Overtheyears,IhavehadclientsthatwouldcalleverydayatlunchtimetotrytodoanS&Ptrade.I'vetraded
theS&P'ssincetheyopenedin1982.Thelunchhour,orthenoonballoon,isaquietmarketthatcanspurtfora
fewmoments,butthenfallbacktowhereitwas.Myruleofneverselladullmarketappliestothenoonballoonin
theS&P.(Therecanbeabusynoonballoontothedownside,butthat'sarareexceptioninmyopinion.)

Whenthereisliquidity,thismeansthepopulationthattradesagivencommodityiscompetingforprice.The
largerthetradingpopulation,themorelikelyitbecomesthatthepricemovementswillconformtoour
expectationsbasedontechnicalindicators.Whenthereislackofliquidity,thenanywildhaircancomeintothe
marketunexpectedly,andjamitonewayortheotherontheirwhim.Theresimplyisnoonetheretostophim.

Whenmarketsgetexcessivelyvolatile,the"locals"or"marketmakers"widenoutthespreadbetweenthebidand
asked.IntheS&P'sbeforethecrashin1987thebid/askdifferentialwasonetick.Duringthecrash,themarkets
inthepithadabid/askdifferentialof2.00points!(25000bid,offeredat25200).Thebidaskdifferentialwentfrom
$25to$1,000.Thereasonthebidaskdifferencegotsowidewasthatthelocalsdidn'twanttotradeinamarket
thatwasactinginsane.Ifthepitdoesn'twanttotrade,neithershouldyou.Whenthathappenstoamarket,close
yourpositionsandjustdon'ttrade.

7.Tradingsystemsthatworkinanupmarketmaynotworkinadownmarket.
Thereisabigdifferencebetweenanupmarketandadownmarket.

Inanupmarket,orBullMarket,buyersareattractedtothemarketbytherisingprices.Risingprices,evenin
commodities,aregenerallyconsideredgoodnews.

Traders,andinvestors,accumulatemoneybeforetheybegintotradeandonlywhentheyhaveadequatecapital
dotheybegintotrade.Sotheirfundamentalstateofmindis"Inowhavesomemoney,Iwanttobuysomething."
Peoplegenerallylookforsomethingtobuy.

Soamarketthatisgoingup,isgenerallyattractingmoreandmorebuyers.Markettopsaregenerally
characterizedbyrisingopeninterestandrisingdailyvolume.

Inadownmarket,generallythepeoplethatpreviouslyboughtaretryingtogetout.Tradersthatlookfor
opportunitiesontheshortsideofthemarketaregenerallyabitmoresophisticatedintheirtradingapproach.
Theyhavetradedforawhileandcanseetheprofitpotentialinparticipatinginadownmarket.Mostlikely,they
startedtheirtradingcareerlikethemajorityoftraders,asbuyers.

Soinanupmarket,thepopulationofpeopleinthemarketkeepsonincreasingrightintothetop.Inadown
market,thosethatwerelongaretryingtogetout.Whenthemarketstartsdown,shortsellersarepushing,but
thedowntrenddoesn'treallysetinunlessthelongsareliquidating.Marketbottomsaregenerallycharacterized
bydecliningopeninterestanddecliningvolume.Atthebottomnoonecaresaboutamarket,andgenerallyvery
fewpeoplearetradingthemarket.

Imaginesittinginatheateranhourbeforetheperformanceandwatchingtheaudiencecomein.Overthecourse
ofthehour,theentiretheaterfillsup.Peoplewanderin,getupandgoout,thencomebackinagain.

Nowimaginehowthetheateremptiesaftertheshow.Somegetupearlyandleave,butgenerallythemajorityof
thecrowdgetupandleaveatthesametime,andcertainlyafter15minutes,theplaceisempty.

Thisprocessofbringingpeoplein,andthengettingthemout,issimilartothemarkets.Anupmarketjustkeeps
fillinginmoremarketparticipantsalongtheway,adownmarkethaseveryonetryingtogetoutassoonasthey
can.Apanicattempttoexit,justisn'tpretty.
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Generally,adownmarketslastabouthalfaslongasupmarkets.

IthasbeenmyexperiencethattheindicatorsIuseinupmarketsjustdon'tworkwellindownmarkets.Ibelieve
thebasicreasonistime.IndaytradingtheS&P'sforexample,Ihavefoundthatthe30Stochasticisagood
indicatorforanupmarkettrend.Inadownmarket,the15minuteStochasticisbetter.Similarlyforcandlesticks,
inanupmarketIfollowthe30minutecandlesformarketdirection,andindownmarkets,the15seemsbetter.

Inthestockmarketoverall,the9daymovingaverageversusthe18daymaybeoneofthebesttrendindicators.
Butinadownmarket,the3dayversusthe5dayisprobablymuchbetter.

Findindicatorsthatworkwellinanupmarket,anddifferentindicators(oradjusttimeperiods)thatworkwellina
downmarket.Whicheverindicatorisgivingprofitabletradeswillhelpyouunderstandthemarkettrend.

Ifyoudocomeupwithanideafortriggeringatrade,makeanefforttobacktestforatleastfiveyears.

Backin1994,Iobservedthat"outsidedays"intheBondsseemedtobeaprettygoodsignalIcouldusewith
"retailcustomers."Everyonewantsa"system"formakingtrades,butretailcustomerswithnothingmorethanthe
dailynewspaperforaninformationsourceneedsomethingsimpleandeasytounderstand.

Itestedasimplepremiseon1993dataandfoundittohavebeencorrect18outof20occurrences.WhatIwas
testingiswhenthereisanoutsidedayintheBonds,atradingdaywithahigherhighandlowerlowcomparedto
thepreviousday,basedonthecloseofthatdaybeingaboveorbelowthemidpointofthatdayIwouldentera
tradewitha30tickstopanda30tickprofitobjective.

Istartedtradingit,anditranbythenumbersforpartof1994,thenstreakedwith5lossesinarow.Idecidedto
doalittlemoretestingandusing1992datahad18losersoutof20!THISWASN'TA"SYSTEM"ITWASA
"SYMPTOM."1992wasanelectionyearandBondsseemedtobepushedaroundbytheTreasurywithSocial
SecurityTrustFundInvestments.FriendsfromtheBondpitconfirmedthat1992wasjustanawfulyearfor
trading.Thingsjustdidn'ttraderight.

ButnowthatIrecognizethat"trigger"thatworkedsowellin1993andtestedbadlyin1992isawaytogain
informationaboutthemarket.Ifthat"triggerisworking,thenmaybetradingwillbemoretechnicalwithexpected
followthrough,ifitisnotworking,thenachoppytradingapproachmaybebetter.

8.Thereareatleastthreetypesofmarkets:uptrending,rangebound,and
down.Havedifferenttradingstrategiesforeach.
AsIdiscussedabove,Iperceiveadifferenceintradingactionofanupmarket,comparedtoadownmarket.But,
thereisanotherkindofmarketthatmustbeconsidered,therangeboundmarket.Indicatorsthatsimplyoscillate
betweenoverboughtandoversoldaregoingtohelpyoumostinarangeboundmarket.

Also,liketheindicatorsdiscussedabove,thetimeperiodofthetradingdayisveryimportant.Usingafiveminute
chart,sellingoverboughtandbuyingoversoldduringthelunchhourmaybeaprofitablestrategy,eventhough
thetradingdayonthe30minutechartisinasoliduptrend.

Buttradingthe5minutestochasticoverbought/oversoldduringthelasthourofthetradingdaycanbea
disaster.Ifindthelasthourofthetradingdayinmostmarketsissimplyafunctionofpeopledoingwhatthey
havetodotounwindtheirdaytradingpositions,irrespectiveofwhattheindicatorsaresaying.Daytrading
shorts,particularlybadshortsonanupday,aregoingtocoverbeforetheygohome.Longsonadowndayare
probablygoingtogetout.IntheStockmarketfutures,thereisthemutualfundtradingneartheclosetosettleup
redemptionsornewmoneyfromcustomerrequestsoverthepast24hours.

Ibelievethereisalwaysanindicatorthatisgivingprofitablesignals.Youneedtomakesomedecisionsaboutthe
timehorizonyouwanttotrade,thenfindanappropriateindicatortofollow.

9.UpmarketanddownmarketpatternsareALWAYSpresent,merelyoneis
moredominant.Inanupmarket,forexample,itisveryeasytotakesellsignal
aftersellsignal,onlytobestoppedouttimeandagain.Selecttradeswiththe
trend.
Thisisaveryinterestingphenomena.Haveyoueverwonderedwhyinabullmove,thebearsjustkeepselling
andgettingstoppedout?Well,I'vebeenthere,donethat.

Iunderstandnow,thattheindicatorsIusedtomakemoneyonthedownside,weredoomedtofailureinanup
market.

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Justlookforasimpleheadandshouldersmarketpatternonafiveminutechart.Overallthispatternhasabouta
35%successrate,butwhenitworksitcanbeverygood.Ifhoweveryoulookatbackdatathatwasclearlyinan
uptrend,youwillfindthattheinvertedheadandshoulderspatternsweresuccessfulprobably75%ofthetime,
andthattheregularheadandshoulderstoppatternsjustwhippedthesellerstimeandtimeagain.

Nowgolookbackatamarketthatwasinadowntrend.Thereyouwillseeheadandshoulderspatternsonthe5
minutechartworkingtimeafterthetime.Theinvertedheadandshoulderspatternsfailedoverandover.The
bullsthatmademoneyonthepatternintheuptrend,keepbuyingthebreakoutandjustdon'tunderstandwhatis
goingwrongnow!

IsawthiseffectseveralyearsbackwhenIopeneda"discount"accountforanS&Pdaytrader.Hehadbeentoa
seminaronJapaneseCandlesticksandwastradingata"wirehouse"usingthe15minutecandlestickcharts.He
wassimplysellingeveryDojistarandtakingacoupleofpointsprofitveryregularly.Hewantedtogetacheaper
commissionratebecausethe"wirehouse"justdidn'tgivehimanyhelp.

Iopenedhisaccountandofferedmy"fullservice"ratetohimsayingatafullservicerateIwouldbeavailableto
sharemyunderstandingofthemarketswithhim.Heexplainedhismethod,andsaidhedidn'tneedanyhelpand
wantedthecheapestrateavailable.SoIputhimonthediscounttable,andlethimgo.

Overthefollowingtwoweeks,hedoubledhisaccount.Hehadnearly15winningtradesinarow.Icalledhimand
commentedonhowwellhewasdoing,andagainaskedifhewouldconsidera"fullservice"rateandtrade
throughmesoIcouldofferhimhelpwhenthesituationmightariseduringthecourseoftrading.Irelayedmy
storyaboutthe"oldguy"onthetradingfloor(seeitem21)whenIfirstgotintothebusiness.Hesmirkedandsaid
hedidn'tneedanyhelp,hewouldjustkeephismoneymachinegoing,buyingandsellingon15minuteDojisand
taking1to2S&Ppointseachtrade.

Aboutamonthlater,hecalledtobalanceouthisaccountbecausehisaccountwassosmallhewasn'tallowedto
daytradeanylonger.Heaskedmewhathappenedtothemarketoverthepastseveralweeks?Hesaidhehad
beenwaslosingoneverytradehemade.IsaidIdidn'tknowwhathehadbeendoing,butthatthemarkethadn't
beenthatvolatile,itsimplyclimbedupslowlyeverydayforthepasttwoweeks.Isuggestedthatmaybehis
"system"onlyworkedinvolatilemarkets(whicharetypicallydownmarkets),wherethingsmovefast.Thequiet
upmarketoverthepastseveralweeksmaynotbetherightkindofmarketforhismethodoftradingDoji
breakouts.Hesaid,"wellthanksfortellingme,you'realousybroker."Isaid,"Iwasn'tyourbroker.Youwanted
thecheapestcommissionrateavailablesoyouwenttothediscounttable.Youdidn'twanttopayforabroker,
yougotwhatyoupaidfor."

Ithought,"hereIam,tryingtodefendmyselfbecausesomeoneelse,whowasn'tmyclient,istappedout."The
"oldguy"wasright.Traderscome,andtradersgo.Ifyoudevelopafriendshipwith"newkids",andiftheycan't
survivetheirmistakesthentheywillbegone.ThefriendsItalktoaboutthemarketsarepeopleI'veknownfor
twentyyears,thathavebeentradingfor20years.ImentionedtoonefriendthatIfeltbadaboutthistrader
tappingout,Ihadthoughthecouldbeprettygood,andhesaid"don'tletthatbeatyouup,yougotthemarketto
beatyouupeveryday."

10.Abuysignalthatfailsisasellsignal.Asellsignalthatfailsisabuysignal.
ThisisalessonIlearnedmanyyearsagowhenIwasonthetradingflooroftheCBOE.Iremembertalkingwitha
groupoffriendsthatwere"technical"traderswhokeptmanyofthesameindicatorsinguidingtheretrading.On
oneoccasion,severalofthemreferredtothe"breakout"oftheadvancedeclinelinetonewhighs.Ihadread
"Barons"overtheweekendandthe"breakout"wasmentionedinoneofthearticles.

Now,Ididnotalreadyhaveapositioninthemarketinthedirectionofthe"breakout"soIwasjustwatchingthe
marketandthehowthegroupoftradersweredoingwiththeirpositions.Ithoughtthemarketwasnotactinglike
itshouldforthebeginningsofamajormovetotheupside,andtheindividualtradersthathadpositionslooked
concerned.AstheyslowlylightenedupontheirlongpositionsIputonheavyshorts.

Eventuallythemarketturneddownandtheothertradersbecameaggressivesellerspoundingthemarkettoget
outoftheirpositions.Themarketresumedit'sdowntrendforseveralweeks.

Therehadbeenanimportant"buysignal"thatwaswellpublicized.Whenthe"buy"turnedouttobewrong,itwas
agreat"sell"trade.Thesellsidewaseasytogeton,andprettymuchneverhadadrawdown.WhenIreviewed
themarkettoponmychartsseveralweekslaterIlookedfor"whattechnicalsignal"wouldhavegivenmea
reasonfordoingthetradetothesellside.Therewasn'tanyspecialsignalinthemarketactionthatIcouldfind,it
justturnedandwentstraightdown.

Irealizedthatthesignalforthetradetothedownsidewassimplythatthe"buysignal"hadn'tworked.Ihave
alwayskeptthatlessoninmindwhenI'mtrading

...."Abuysignalthatfailsisasellsignal."
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Sincethelate70'sandearly80'screationoftheS&PfuturesandtheBondfutures,manybookshavebeen
writtenaboutdaytrading.Myobservationthat"abuysignalthatfailsisasellsignal"issharedbymanyauthors
whocommonlyrefertotheconceptasa"breakoutfailure."Breakoutfailuretradesareparticularlyspecialtrades
becauseofthegenerallysmallstoplosspointonthetrade.

Iftherehasbeenabreakouttoanewhighorthroughatrendlinethatthenfallsbackbelow,youcantakea
positionoppositethebreakoutwithastopatanewhighabovethebreakout.Itisanaturalplaceforyourstop
becauseitishardtosayithasfailedifitthenclimbstonewhighs.Also,theinitialbreakoutprobablyranthefirst
groupofstops,sowhenitcomesbackupandhitsyourstopyoushouldbeabletogetareasonablefillbecause
themaingroupthatcoveredonthefirstbreakouthasalreadybeenhit.

11.It'salwayseasiertoenteralosingtrade.
Don'tyoujusthatethat!Let'ssaythereisanupmoveinthemarketandyourtryingtogetin.Finallyitstartsto
pullbacksoyoudoaquickcalculationofthehalfwayback,andplaceyourbuyorder.Themarketpullsback
threetimestoonetickaboveyourorder,thenexplodestotheupside.Younevergotinsoyoustartmovingyour
bidup(chasingitup),butitjustkeepswalkingawayfromyou.

Thenexttimeyouseethemarketissetupthesameway,youplaceyourbidaquarterpointabovethehalfway
back.Themarketcomesdown,letsyouin,andjustkeepsslidingdownthroughhalfway,thentwothirds,then
newlowsfortheday.Youneversawdaylight,andhadtochasedowntoexityourtrade.

Thishappensallthetime.TheadviceIwanttoofferistoplaceyourstopsBEFOREyougetinthetrade.Ifthe
tradegoesbad,ittendstogobadrightaway.Sowhenyouplaceyourbuyunderthemarketatsay67530,atthe
sametimeplaceyourstopatsay67430.Youdon'thavetowaituntilyourfilledtohaveyourstopinthemarket.
ReReaditem2,above.

12.Inthe"blowout"stageofthemarket,upordown,riskmanagersare
issuingmargincallpositionliquidationorders.Theydon'tcheckthescreen
foroverboughtoroversold,theyjustkeepissuingliquidationorders.Don't
standinfrontofarunawayfreighttrain.
Thisdoesn'thappenoften,butitdoeshappen.It'sthekindofsituationthatjusttakesyourbreathaway.Itgoes
andgoesandgoessomemore.Ifyourluckyenoughtohaveapositionwiththemarket,trailyourstopata
comfortablelevelandexitMOC.Ifyourrightthiskindofmarket,itwasjustluck.Don'tthinkyoucanplanitagain.

Ifyourwrongthiskindofmarket,rememberyoushouldplaceyourstopbasedonwhenandwhereyouentered
thetrade.Justbecauseitseemsoutofcontrolisnotareasontoletalossgofurther.Getout.ReRead2above.

Whenamarketlikethisishappening,I'lloftengetcallsfromcustomerssayingtheywanttojustgetonandgofor
theride.I'llask,didyouplanthis?Isitpartofyourtradingstrategy,whereareyougoingtoplaceyourstop?How
willyoufeelifyoustopisfilled2or3pointsworse?Themarketisinchaos.Itisnotfollowinganyrules.Would
youbet,say$3,000percontract,onatossofacoin?Andifyouwin,willyoueverbeabletofollowyourday
tradingstrategyagain?Watchthemarketcloselytherestoftheday,andthenwatchtomorrow.Thistypeof
marketmoveischaracteristicoftheENDofamove.Whenitsettlesdown,wearelikelytoreversetrend.Thatis
whata"blowout"is,theendofthemove.Wedon'tknowwhereitends.

13.Youaresuperstitious,don'ttradeifsomethingbothersyou.
Theonlythingworsethanputtingonatradeandhavingtheorderclerkconfirmtheordergivingyoubackticket
666ishavingtheclerkgiveyouticket666whenyougetoutofatrade.Ifhegivesittoyouonthewayin,atleast
youcanimmediatelyputinanotherordertoclosethetrade.Whenhegivesyouthatnumberonthewayout,itis
justhangingthere.What'sgonnahappennext?

Ortryingtobuy20atacertainprice,andbeingtoldtheyarestillworkingit,butsofaryourfilledon13.Youjust
knowyourgonnagetfilledonthebalance,andstoppedoutwithin10seconds.(WhenIwasinthepitbiddingon
20andsomeonewouldsaysellyou13,I'dsay,"I'llbuy12."IfIhadtotake13,Isellitoutimmediately,preferable
takingatickloss.Getitoverasquickaspossible.)

Ordrivingoverablackcatonthewaytotheoffice.(Ooo,thatwasabadmonth!)

OrtradingonFridaythe13th.

Orforgettingyourluckypen.

Orwritingyourorderswithredink.

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Orhavingyourpartneropenhisumbrellaintheofficeandplaceitbehindyoutodry.(GeeDave,youmightas
wellputavudoodollwithapinstuckinit'swalletundermychair!)

Orshowingmeapictureofanelephantwithhistrunkhangingdown.

Orwearingsocksduringthesummer.

Orthrowingoutmyluckytie!!!(oohthathurts!)Youcan'tbelieveuntilyouseeitonthetradingfloorhowsome
tradershavewornthesametieeverydayfortenyears.Thesetiesareshreddedscrapsofcloth,butstillworn
everyday.

Oroneofyourkidsgivingyoua"newluckytie"forFather'sDay.(Nowyougottawalkaroundwearingtwoties,
afterall,itmightbeagoodone.)

JusttheotherdayIdroveat45MPHina30rightpastaCopwithradar.Hedidn'tevenblink.ThatdayIhad12
winningS&Pdaytradesinarow!

ThewealthiestpanhandlersinthecitystandjustoutsidetheChicagoMercantileExchange.I'veseenguysgive
hundreddollarbillseverydaywhentheyareonaroll.

ThenumberoneSalvationArmyChristmascollectionbucketisonthestreetbetweentheChicagoBoardof
TradeandtheChicagoBoardofOptionsExchange.

NEWS

Back

14.Buytherumor,sellthenews.
IthinkifyouspendsometimefollowingtheBondFuturesreactiontotheneardailyeconomicnews
announcements,youwillunderstandthatthemarketanticipatesnearlyeverynewsitem,andthemarkets
reactiontothenewsisbasedonhowclosetheestimatesweretotheactualnews.Sowhenanewsitemcomes
out,andsomeonesays"wowthat'sbullish,"youneedtoask"why,wasthatbetterthanexpected?"

Irememberthedayafterthe1994Congressionalelection.Theannouncementovernightwasthatthe
RepublicanshadwoncontrolofboththeHouseandtheSenate.Ihadtofightoffmyclientsallmorningtokeep
themfrombuyingontheopen.Themarkethadbeengoingupforthepastcoupleofweeks,andwhentheresults
becameknown,themarketopenedup1%,thenwentstraightdownallday,andcontinuedtogodownforthe
nextmonth.

Thinkaboutit.Howcouldthatbeunexpectednews,whentherehadtobethemajorityofvotersvotingforthat
result.Itcouldhavebeenasurpriseiftheannouncementwas25%ofthevotewenttotheDemocratsand75%
wenttotheRepublicans,butthewinnerwastheDemocrats.Youwouldhavetosaythatresultwouldhavebeen
unexpected.

AnotheroneofmyfavoritesiswhenoneofmyclientscallsmeandtellsmethetemperatureinFloridagotbelow
freezingthenightbeforeandhewantstobuyOJ.Ithink,doeshethinkhecangotothetrackandwaittosee
whowonthefirstrace,andthengotothewindowtobuyaticketontheracethatalreadyhappened?

IfafreezeisgoingtohitFlorida,itisbecauseaseverecoldfrontstartedinCanadaandpusheddownthrough
theMidwestandfinallytothesouth.Itmightbeunexpectedtomyclient,whodoesn'tbothertoturnonthe
weatherforecast,buteveryoneelsehasbeentrackingthestormforaweek,anddaybydaythepriceoftheOJ
futureswasrising,anticipatingthatthecoldfrontwouldmakeitdowntoFlorida.Oncethefronthits,thequestion
ishowbadwasthedamage?Wasitworsethanexpected?Usuallyitisn't,andaftertheupopening,everyone
whobetonthathorseiscashingintheirtickets.

Remember,thoseofuswhoanticipatedthenewshavetofindsomeonetobuyourpositionsowecantakeour
profits.Weneedthoseguyswhoreactonthebigopenings.Godblesstheneachandeveryone.

15.Newsisonlyimportantwhenthemarketdoesn'treactinthedirectionof
thenews.
It'sthemarketsreactiontothenewsthatisimportant,notwhatthenewsis.InaBullmarket,goodnewsisgood,
andbadnewsisgood(climbsthewallofworry.)InaBearmarket,goodnewsisbad,andbadnewsisbad.

Whenamarketgoesupafterbadnews,itjustdidn'tcareaboutthebadnews,"it'sabuyingopportunity,"it'sa
Bullmarket.

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Whenamarketgoesdownongoodnews,"it'sasellingopportunity,"it'sabearmarket.

16.Readtoday'spapertomorrow.Whenyoureadyesterday'spapereachday
withtheknowledgeofwhatthemarketalreadydid,youwillaffirmthatthis
morningspaperwithyesterday'snewshasnothingtodowithtoday'smarket.
Anythingthatisinthismorningsnewspaperwasonthewireservicesasithappenedyesterday,andthemarket
reactedalready.Unfortunately,youmaynothaveseenthenewsitemwhenithappened,soreadingthepaper
mightbeinformingyouofsomethingyoudidn'tknowanditcouldaffectyourtradingtoday.Toavoidthat,always
readthepaperonedaylate.Ifyoucatchsomethinginthetwodayoldpaperyoumissedduringthedaytwodays
ago,itiseasiertoletitgoandnotletiteffectyourtrading.

Also,thebestwaytobringhometherule"buytherumor,sellthenews"istoseethefeaturearticleintheWSJ
about,say,cotton,andknowalreadythatthemarketopenedonthehighofthedayandthenwentstraightdown.
Youbegintorealizethatarticlewasprobablytheresultofseveraldaysofresearch,wentthroughseverallayers
ofreview,it'soldnews.Itisnottellingyouthatsomethingmighthappeninthenearfuture,itistellingyouhistory
thathasalreadyhappened.Thestorysuckeredinthefinalgroupofbuyers,andgaveeveryonethatwasalready
inachancetogetout.

Itdoesn'ttakelongtounderstandthattheendofthedaynewsreportsofwhythemarketdidwhat,ismerely
basedonthelogicalassumptionthatwhathappenedtodayhadaneffectontoday.IsquirminmychairwhenI
listentothe"NightlyBusinessNews"saytheTransportationindexwasupstrongtodaybecauseofthe$1dropin
oilprices.Iknowyesterday,crudeoilrose$1,andtheTransportationindexwasalsoup.Sowhydoesthefact
thatitcrudefellbackdowntodayexplaintoday'sriseintheTransports?(Thenthenextdaycrudeisbackup
again,andsoaretheTransports,andtheyignoreconnectingthetwo.)

ThereasonI'msoawareofwhatIconsiderthisincredibleinconsistencyisbecauseIalwaysreadthepaperone
daylate.Theirexplanationofwhathappenedthatdaymadesenseonthatday.Butmerelyseeingifitstillmade
sensetheseconddaysooftenprovestobethewronganswerthatIjustdon'twanttolistentothem.

ATIMETOTRADE

Back

17.Ontheopen,neverenteranewtradeinthedirectionofthegap.Neverlet
themarketmakeyoumakeatrade.(Closinganexistingpositionisobviously
ok.)
BeforeIexplainthis,Iwanttofirstsay,ifyouhaveapositionandthemarketisopeningthroughyourstop,you
mustfollowgoodtradingdisciplineandcloseyourtradeontheopen.Neverrationalizeyourselfoutofyour
predeterminedstop.

Mostofthetradersintheworldgohomeflat.Wemakeourmoneygettinginandoutofthemarketoverjusta
coupleofminutes.Itjustdoesn'tmakesensetoatradertotakehomeapositionandhave16hoursofrisk.So
whenthereisabigsurgeopen,sayup,whoisgoingtoselltothesurgeofbuyers?Thinkaboutit,ifbuyingthe
bigupopenwassuchagreatdeal,whywouldthetradersthatarethemostconsistentmoneymakerssell?The
reasonistheyhavepricedtheopensofarup,thattheythinkatthislevelitisagoodsale.Intheirjudgment,it
morethanreflectstheirexpectationofwhatisnecessarytosatisfythetemporarysurgeindemand.Soasaleat
thislevelwillbeaprofitablesale.

Sonomatterhowbadyoufeelaboutmissingthemovethatcausedthebiggapupopen,attheopenthemoveis
alreadyover.Itisallalreadyinthemarket.

IhadaclientwhowasanuclearengineerandspentseveralyearsstudyingtheimpactontheBondmarketof
economicnewsreleases.Herecognizedthatthemarketmovementwasbasedonavarianceofexpectations
versustheactualreport.Healsoquantifiedthatbasedonatenyearstudyoftickbytickdata,within3minutes
afterthe"unexpectedreport"themarketreturnedtoit'snormalnoncorrelatedtradingpatterns.Histrading
strategywastocalculateaprobabilityofwhentheexpectationswerewrong,andenteratradeintheBonds30
secondsbeforethenumber,andexitwithin3minutes.

18.Thefirstandlasttickarethemostexpensive.Getinlateandoutearly.
Ifyoupickanumberthatyouthinkisgoingtostandasthehigh,whynotseeifitactuallystopsthereand
reverses,atleastforaminute,beforeyougetinonthenewdirection.You'llmisstheexacttopnumberifyou
wereright,butIthinkthatisbetterthanhavingthemarketnotsomuchaspauseforasecondasitblowsthrough

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thenumberyouthoughtwasthehigh.Youknowasa"numberpicker",ifitgetsthroughthisoneyouwillsimply
doanewcalculationandpickanotherone.

Further,ifyouwererightinpickingthenumber,considerplacingyourtradebasedonthestopyouwanttouse.
Let'ssayyoupick65560asthetop,andusuallyuseaonepointstop.Whynotenteryourtradeatsay65470,
afteritstoppedandturneddownfrom65560,andplaceyourstopat65570.Ifyournumberwasthetop,you
haveagreattradeandastopthatshouldn'tgettriggered!

Sothereisnothingwronginenteringyourtradealittlebitaftertheturn.Bywaitingforsomesignofchanging
momentumbeforeyougotinyouincreasedthechancesofasuccessfultrade.

Thesameistrueonexitingyourtrade.Ifyouhaveagoodmethodoftradeentry,youwillhaveagreaternumber
ofsuccessfultradesbyexitingyourtradebeforethemarketputsinaturntheotherway.

Thinkaboutit.Howmanytimeshaveyouhadatradethatwasprofitable,butbythetimeyouexited,youclosed
thetradeataloss?Asadaytrader,yoursuccesswillcomebyhavingahighratioofsuccessfultradesinthe
bank.

Let'ssayyouhaveacertainbreakoutpatternyouusetoenteratrade.Firstofall,youhavemomentumonyour
sidebecausebydefinitiona"breakout"tradehasalreadyputinaturnandhasmovedtoahigherhighorlower
lowthanthelevelyouarebreakingoutfrom.Yournottryingtocatchthe"firsttick"ofthechangeinmarket
direction.

Ifyouarefollowinga"breakout"trademethodyouareadmittingyoucan'tcatchthe"firsttick"ofthemarket
move,sowhyshouldyouthinkyoucanhangonuntilthe"lasttick"ofthemove?Ifyouthinkyoucanpickthe
"lasttick"thenyoushouldbea"numbertrader"tryingtopickthe"firsttick",afterallthelasttickgoingonewayis
thefirsttickgoingtheotherway.

Inthiscase,the"signal"isbasedonactualpriceactionsoyoucangobackinhistoryto"test"theactualresults
ofthemethod.

IdidthisonasimplebreakoutmethodIusedintheDMark.Iwentbackthroughfiveyearsoffiveminutedataon
theDMarkandcalculatedadistributionofmaximumprofitbasedondifferentlevelsofstops.ThenItookthe
informationtofindoutatwhatleveldidIhave60%,70%,80%winners.Ifoundthemaximumoverallprofitofthe
approachhadonly30%winners,andtestingthroughmonthlyperiodsoftimehadmanyconsecutivelosing
monthsinarow.IalsofoundthatIcouldhave80%winnersatthe7tickprofitobjectivelevelanda10tickstop,
nolosingmonthsbuttheoverallfiveyearprofitabilitywasabouthalfofoptimum.

Whichwouldyouchoose?Themaximumprofitmethodobjectiveorthemoreconsistentprofitobjective?Can
yousustainthreemonthsoflossesatanygiventimeordoyouexpectaregularincomefromtrading?

Ichoosethe7tickprofitobjectivewhichwasstatisticallyguaranteetobeexitingearlynearly70%ofthetime.My
egoneedswinnerstobewillingtogetupthenextdayandtryagain.

19.Wheneveryoneisin,it'stimetogetout.
SeveralyearsbackIwrotea"FuturesFax"recommendingthatmyclientsexitalongGoldtrade.Itoldthestory
aboutabeachinHawaiiwhereIoftentookmychildrenwhentheywereyounger.

ThebeachwasonthewestendofOahu,andduringtheweek,wewouldgothereandbetheonlypeoplethere.
Thebeachwasposted"Danger,strongundertow."Iwouldputlifejacketsonmythen12yearolddaughterand5
yearoldtwinboys(theyareover21now)andletthemrollaroundinthesurf.Iwouldstandabout10yardsoutin
thewater,facingthebeach,andwatchthemeveryminute.Thewaveswouldcomeupandknockthemofftheir
feetlikebowlingpins.Theywouldgetup,makeanawfulface,wipetheireyes,gigglelikecrazy,themget
knockedoveragainbythenextwave.Theywouldplaylikethatforhours.

Ononetrip,wewentthereontheweekend,andtherewasalotmorepeoplethere.Apparently,the"locals"on
theirdaysoff,preferredthismoreremotebeachtothe"tourist"beaches.Iputthekid'slifejacketsonandtook
mypostinthewatertowatchthem,butinashortperiodoftime,therewerealotofkidsinthesurf.

Theirmomsanddadswereuponthebeachstartingbarbequesandsittingnexttocoolers,andthewaveswere
knockingallofthekidsover.Withsomanypeoplethere,itwasn'talotoffun.Babieswouldwanderintothesurf,
andmomwouldcomescreamingovertopickhimup.Groupsofkidswouldgetknockedoverandgooutwhining
tomomanddadaboutsandintheireyes.

Whenweweretheonlypeopleonthebeach,Iwasableto"control"theriskofthehighsurfbeach.Withthe
beachcrowdedfullofpeopleandkids,Ijustfeltthereweretoomanydistractions,toomanythingsthatcouldgo
wrong,Ididn'tfeelcomfortableaboutthesafetyofmykids.Wepackedupandwenttothetamebeachbythe
hotel.
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ItoldtheabovestoryinrelationtothepositionmyclientshadbeinglongGold.Iexplainedthatbasedonthe
CommitmentsofTraders,wehadgotinlonggoldnearthelowsandhadtradedinandoutandbuiltaposition
withnearlya30dollarperozprofitpercontractoverthepastsixweeks.IexplainedthatfromthechartsIdidnot
haveasellsignal,andthatwehadstillnotmettheprofitobjectivethatwasabout$20higher.

But,theWallStreetJournalhadanarticlethatdaythatlaidoutthereasonwhyGoldwasgoinghigher.CNBC
hadseveralfeaturesthatdayonGoldandGoldStocks,includingJohnMurphyshowingthestrongcharts
explainingthatitshouldgo$20higher.

ItjustseemedeveryonewasinGoldwiththesameopinion.Wherewehadbeentrailingourstopsandeasily
movinginandout,suddenlythereweregapsandmorevolatility.Isaiditlookslike"everyoneisin,solet'sget
out."Ididn'tfeel,ifhit,ourstopswouldgetfilledwell.Ijustwasn'tcomfortablerecommendingthepositionany
longer.IsaidIdon'thavea"sellsignal"butlet'sgetoutandgofindsomequite,ignoredmarketwithanewCOT
"signal."

Acoupleofdayslater,Goldopenedwitha$12downgapandquicklyslidallthewaydowntothelows.

Sometimes,thesametypeofthinghappenswhenyourdaytrading.Youjustsensethateveryoneisinonone
sideofthemarket.It'soneofthosedayswhereCNBCsays,"basedonthelasttenyearsthemarkethasbeen
uponthisday85%ofthetime."Thismaynotbethetimetogooppositewhateveryoneelseisdoing,butthereis
nothingwronginjuststeppingaside,andwatchingwhenyougetthatfeeling.

Asatraderyouhavetostrugglewiththeknowledgethat"everyone"issayingthesamething.Youhaveto
rememberthatbythetime"everyone"isawareofsomething,theoneswhoanticipatedtheeventaregettingout
byunloadingtheirpositionstothe"Johnnycomelately's."

Ifyoucorrectlyanticipatedthesituationyouhavetoovercomethe"seeItoldyouso"feelingbecauseyouhave
toavoidtheegotripofbeingright.YoumadeyourmoneyonthetradebygettinginBEFOREanyoneelse
believedyou.Nowthateveryonepatsyouonthebackandagreeswithyou,thatisasuresignthatitistimeto
exitandrethinkthesituationormovetoanothermarket.Youknow"everyone"toldyouwerewrongwhenyou
enteredthetrade,butyouwereright.If"everyone"nowtellsyouarerightyoumustexpectthat"they"areall
wrongagainbecausethatistheirtrackrecord.

20.Nevertradewhenyouaresick.
Overmy15yearsasatraderonthetradingfloorthereobviouslyhavebeentimeswhenIhadacold,orasore
throat,ortheflu.IhavelearnedmanytimesoverthattryingtotradewhenI'msickhasalwayscostmeagreat
dealofmoney.

Tradingrequiressplitsecondjudgment,bothwhenyourinthepit,orsittingatascreen.Asimplemomentary
hesitationcanbethedifferencebetweenagoodtradeandabadtrade.

ManytimesIhavegonetothedoctorforasorethroat,andaskedforashotofantibiotictoknockitoutofme,
onlytohavethedoctortellmetotakeaprescriptionofanewpillformantibiotic.Hewouldtellmethattheseare
nondrowsy,theywillhavenosideeffects.

I'dfeelbetterthenextmorningandgotowork.AttheendofthedayI'dlookatmytradesandfindImade,say20
losingtradesinarow!Wherewasmydiscipline?WhydidIkeeptrading?Thesimpleanswerissomesmallpart
ofmewasalittlenumb.Myreactionswerejustalittlebitoffcenter.Iwasnotfeelingthatturninmystomachthat
becomespartofthereflexingettingoutofatrade.

IhadgottenintotradesonmynormalmethodthatIfeelgivesmeaprobabilityofsuccess,butoftenafterhaving
hadaprofitinthetrade,IletitturnintoaloserbeforeIgotout.

Knowingwhentogetoutofatradeataprofitisoneofthemostmisunderstoodpartsoftrading.Thisiswhere
tradingistrulyan"art."WhenI'mtradingwell,IfindIoftengetoutearly.Ifeelgreatattheendoftheday
countingthenumberof"winning"tradesIhadinarow.

Ifyoursick,andtakingoneofthe"newwonderantibiotics"thathave"nosideeffects"(butwillalsocleanthedirt
outfromunderyourtoenails)orsomeothermedicationoutsideofyournormalwayoffeeling,JUSTDON'T
TRADE.Abigpartoftradingisthatsubjectivewayyoufeeljustalittlebitdifferentwhileyourinatrade.Ifyour
onsomeunusualmedication,orfeelingundertheweather,youjustdon'thavethatusualbuiltinbasisof
referencetoyourfeelingsaboutthetrade.

TRACKINGYOURTRADES

Back

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21.Sizekills.Onlychangeyourunitoftradingunderaplanofattainedgoals.
Also,haveaplanforreducingsizewhenyourtradingiscoldormarketvolume
isdown.
Whenyoufirststarttrading,doesn'titmakesensetotradejustonecontractuntilyouhavesomepatternof
successbeforebeginningtotradetwocontactsatatime?

Asyoufindyourniche,thengoto3,5or10.Youwillfindthatasyouincreaseyoursize,yourtradingstrategy
beginstochangefromwhenyouweredoingonlyone.Youmaytakeafewoffearly,youmayaddanextra
couple,thentakethemoffagainquickly.Eachtimeyouincreaseyoursize,youaregoingintoanewareaofyour
tradingpattern.Youwillfelldifferent,butifyoucontinuesuccessfultrades,youwillbuildacomfortleveland
eventuallypushlarger.

Traderscommonlymakethemistakeoftradingatasizelevelthatisperpetuallyundercapitalized.Let'ssayyou
startyouraccountusing"daytrade"margins,whicharegenerallysetathalfthefullovernightmargin.Ifyouhave
somesuccessfultrading,andincreaseyouraccounttoanamountequalto"full"margin,shouldyouthendouble
yoursize?Mostpeopledo,andeventuallygetknockedallthewayout.

Itseemsminimummarginsaresetatanamountequaltoaboutonetimesthelargestexpected(twostandard
deviations)averagedailyrangepercontract.Idon'tbelievetheExchangeshaveapublishedhardandfastrule
thattheyarelockedinto,itjustseemsthatiswheremarginsareusuallyset.Thepointismarginsaresetin
relationtothecontract'sdailyvolatilityfortheprotectionoftheExchangeandtheFCMs.

Soifyourtradingaccountonlyhasdaytrademargin(halftheexchangeminimummargins)tocoveryourtrading,
onecommontradingerrorcanwipeyououtifthereisabigmoveday.Themostcommonerrorsthatwipe
tradersoutareputtinginabuyinsteadofasell.Orforgettingtocancelastopafteryoucloseatrade,andthen
havingthestophitasthemarketmakesaruntowardsalimitmove.Undereithercircumstance,youhavea
positionthenextmorningthatyouhadnotplannedforandyouhaveabigmargincall.Yourtoast,adios,bye
bye,signora,screwed,gottheshouldawouldacoulda's,mad,onthebench,etc.

You'vebeenasuccessfultrader,havingthemajorityofyourtradesaswinners,builtupyouraccount,andnowa
tradeerrorhasknockedyouout,andmaybeputyoudeficit.Youcan'ttradeuntilyouputinsomecapital,andyou
seethesuccessfultradesyouwouldhavedonehappeningallday.Yourtradingjudgmentwasright,yourjust
madeamistakerelatedtothedetailsoftrading.Suckshuh?

Ican'ttellyounottostartoutundermargined,everyonedoes.Icantellyouhowever,thatyoushouldnot
increaseyourdaytradingsizeuntilyouhavemorethantwotimesfullmarginpercontractaccountbalance.Soif
theS&Pmarginis$12,000,Youshouldnotgototwocontractsuntilyourover$24,000.

Youmightsay,"waitaminute.Istartedoutwithsay8ktradingonecontract,nowI'mupto16k,Iwanttotrade
two's."Myresponseisifyoucanmake8ktradingone,waituntilyoumakeanother8k,bringingyouraccountup
to24Kbeforeyouincreaseyoursize.Justbecauseyougotawaywithittradingundercapitalizedforawhile
doesn'tmeanyoushouldignorethatriskforever.Mytradingexperiencesaysit'sgonnahappensometime.Ithas
happenedtomeaswellaseveryoneIknow.Mistakes,baddaysanderrorsarejustacostofdoingbusinessand
youbetterhavethereservesifyouwanttostayinthisbusiness.Ifyourgonnabetradingforthenexttenyears,
delayinganothercoupleofmonthsjustdoesn'tmatterinthebigschemeofthings.It'sbetterthangetting
knockedoutforthecountbyablindside.

IfyoutalktotradersthattrademanagedmoneyyouwillfindthatmostrequireFOURtimesmarginsetasideto
determinetradinglevel.Theytrytoneverhavepositionswheremarginrequirementexceeds25%ofaccount
capital.Theyhaveabusinesstoprotectandtheyknow"overtrading"eventuallywillcatchuptoyou.

Youalsoneedaplanonwhentoreduceyoursize.

UsingmyS&Pexampleabove,ifyouraccountdropsbelow$24,000,youshouldbebacktotradingones.Ifyou
waitedfor24KbeforeincreasingtotwoS&P'sinyourdaytrading,ifyouraccountdropsbelowthatnumberyou
gobacktoones.Theprocessofincreasingyoursizeneedsthedisciplineofcuttingbackyoursizewhenyour
tradinggetsoffbalance.Thisisessentialbecauseasyouincreaseyoursize,themoneycomesalotfaster,and
cangoalotfaster.If,whenyoutradedones,youwouldmakeorlose$500aday,whenyougetuptofives,you'll
bemakingorlosing$2,500aday.

22.Confidencekills.Remember,youreallydon'tknowanything.Respectthe
marketeverysecondofeveryday.Expecttheunexpected.Alwaysknowyour
positionandexityourtradeimmediatelywheneveryoufeeluneasy.
Trytostayinthegame.Survive

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IrememberwhenIfirstwalkedontothetradingfloorasamemberbackin1978.

Priortomygoingintotrading,IwasaCPAwithamajorPublicAccountingfirm,andhadworkedinInternational
Finance.IthoughtIknewsomethingaboutbusiness,andthatthiswouldhelpmeasatrader.Ineededtopick
thestocksIwasgoingtotradein(Istartedtradingasamemberoftheoptionexchange,Ididn'tmovetothe
CommodityExchangesuntiltheS&Psopenedin1982),soIreviewedseveralAnnualreportsand10Ks.

Rightfromthebeginning,Iwaslosingmoneyfairlyconsistently.ItwasprettyclearIdidn'thaveacluehowto
tradefromthefloor.Iwatchedtradersthatappearedtometobemakingmoney.Itriedtounderstandwhatthey
weredoing.Imadeanefforttotrytojoindifferenttradersatlunchorhavingcoffee.

Therewasthisone"oldguy"whowasalwaysonthefloor,butstoodoffinthebackground.Iwentovertohim
onedayandintroducedmyselftohim.Hecutmyintroductionshortandsaidhetriednottomakeacquaintances
withtradersonthefloor.Hesaidtraderscomeandgotoofast.Hesaid"ifyourstillhereayearfromnow,then
we'lltalk."Thenheturnedandwalkedaway.HesaiditinakindvoicesoIdidn'tfindhimrude.

OverthecourseofthefollowingyearIfoundmanydifferentwaystolosemoney.Oneparticularlyprominent
memberofferedmesomeadviceoneday,andevenletmeparticipateinpartofoneofhistrades.Hesold1,000
"outofthemoney"optionsfora1/16thminimumtick(atiny)justmomentsbeforetheoptions"expired".He
graciouslyturnedtomeandaskedifIwantedahundred.SoIsold100,hesold900.

Iwasnowshort100$20optionsat$6.25each,oratotalof$625.ThestockclosedontheexpirationFridayat
$19.75sotheoptionswereconsideredworthless.ThenextdayIwasexercisedonthe100optionsmakingme
shorttenthousandsharesofstock.Ilearnedthisjustastheannouncementofa$28takeoverbidofthat
companywasonthenewstape.

OnMonday,thestockdidn'treopenfortrading,therewasapossiblesecondbid.IfoundstockinEuropeon
Wednesdaytocovermyshorts.Thestockdidn'treopenfortradingfortendays.Whenallwassaidanddone,I
hadlostabout$100,000inreturnfortheopportunitytomake$625.

Whenthestockreopened,itstartedtradingat$28,andwithinaweekwalkedbackdownto$20.Twomonths
later,thedealwasdoneat$28.

The"prominenttrader"lostabout$800,000,andshruggeditoffasacostofdoingbusiness.Hejustkepton
selling"teennies".

Oneoldertraderinthepithadaheartattackanddied.

Severaltraderswereneverseenagain(obviouslyputoutofbusiness).AndtwobrothersItalkedtooften,made
millions.Theyhadthoughtsomethingwasgoingonandwerelongbigbeforethedeal.Theyhadn'tletmeinon
theirguess.

Obviously,Ididn'twanttotalktoanyoneanymoretofindouthowtheytradedtomakemoney.Istillhadsome
capitalleft.Ijustputmyheaddownandstartedtrading.Ibecameascalper,justbuyingandsellingevery
momenttryingtomakeaneightorscratch.Ithrewoutthe"annualreportsand10Ks".Istoppedreadingthe
newspaper.Ihadtosurvive.Ididn'twanttoleaveaplaceweretherewasthechancetomaybesomedaymake
millionslikethebrothersdid.

Somehow,Imadeitthroughmyfirstyear.Igotluckyandcaughtthe78Octobermassacrebeinglongabunchof
puts.(Thebrotherswerelongeverythingandnearlywentbrokeinthemassacre.)

Oneday,Iwaswanderingthefloorandsawthe"oldguy".IrememberedwhathehadsaidtomeaboutifIcould
surviveayear.Iwassuddenlyfilledwithpride.Sureithadbeentough,butIrealizedIhadsurvivedmyfirstyear!
Iwasstillhere!Ihadseenalot.Iwasnow"oneoftheboys".Iwalkedovertothe"oldguy"thinkingIwasnow
gonnabeabletotalktohim.Istartedtheconversationsaying"hey,youwererightabouthowharditistomakeit
throughthefirstyear."

Hecutmeshortandsaid"George,ifyoumakeitthroughanotheryear,we'lltalk."Andhewalkedaway.

Everyyeartimesweretough.Everyyeartimesweregreat.Everyyearsomethingnewandunexpected
happened,manytimesover.IknowifIsawthat"oldguy"nowtwentyyearslaterhewouldstillsay"George,if
youmakeitthroughanotheryear,we'lltalk."

Thepointisifyouwanttobeinthisbusiness,Ibelieveyouhavetounderstandthatthemarketisalive,reeling,
unpredictable,animal.Findwhatworkstoday.Expectthatitmaynotworktomorrow.Ifitstopsworking,thenfind
somethingelsethatworks.Ifyougetbumpedfromfirstbase,goplayinrightfield.Learnhowtobeashortstop.
You'llneverhaveachancetohitahomerunifyournotinthegame.Ifyoulovethegame,trytostayinthe
game.Survive.

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23.Measureyourselfbyprofitable"daysinarow,"notbyindividualtrades.
Ihaveoftenheardtraderssay"Imakemoneyeveryday."Manytraderssettheirgoalssimplybysayingthey
wanttomake"50ticksaday."Ongooddaystheymaymake200ticks,orathousandticks,butcominginthe
nextdaytheirgoalisstilltomake50ticksaday.

Asatrader,youwantaneasydailygoal.Youdon'twantto"fail"atyourgoaloften."Failing"knocksyoudown.
Youwanttokeepyouconfidence.Settingadailygoalletsyoupauseforamomentwhenyougettheretodecide
ifyouwanttokeepongoingthatday,orstop.Ifithasbeeneasytogetthere,andyourtradesaregoingwell,
stay.

Ifyouhavebeenbattlingforhoursandseeyoujustgotthere,maybeit'stimetostopfortheday.Tomorrowwhen
youcheckyoursheetsallyouwillseeisthatyoumademoney,andyouarereadytogoon.Youdidsomething
right.

Anotherthingaboutaneasydailygoal,iswhenyouaredownyourgoal,saydown50ticks,ithelpsringabellto
letyouknowsomethingisn'tright.Cutyoursize,payattention,don'tletitgotoofar.

Thinkbackhowmanydaysinarowyouhavemademoney.Overtimeyouknowhowithasgone."Imade
money10daysinarow.Imademoney18daysinarow.Imademoney5daysinarow."Youknowtherewere
breaksintherunandyourestartedyourcount.Ithasalwaysbeenthatway,itwillalwaysbethatway.Iftodayis
turningsour,youcanstopandrestartyourcountofdaysinarowagain.

Thisisanimportantmindsettoacquire.YouknowthemarketWILLstillbeheretomorrow.Thinkingabout
makingmoney"daysinarow"becomepremisedontheassumptionthatyouwillbehereagaintomorrow.You
arenotswingingforthefenceseverytimeatbat.Youwanttoplayagoodgametoday,andcomebackagain
tomorrowtoplayagain.

24.Thebestwaytobreakastreakof"losingdaysinarow"istonottradefor
aday.
Theonethingyoumustacceptasafactisthatthemarketwillopenwhetherornotyouaregoingtotradetoday.
Ifthemarketseducesyouintofeeling"Igottabethere"everyminutethatthemarketisopenthenyouaresetting
yourselfupforthepossibilitythatyoucouldgointoalosingstreakwithoutalifejackettopullyouout.

Everycommodityaccountstatementhasavaluecalledthe"netliquidatingvalue,ortotalequity."Thisisthe
amountthatyouraccountisworthasoftheendofthetradingday.Ifyouhavepositions,thevalueofthose
positionsrelativetoyourentrypriceisreflectedeveryday,positionsaremarkedtothemarket.Thisissimply
whatyouraccountisworth.Itreflectsyourprofitandlossfromdailytradingaswellasyourdailyunrealizedprofit
andlossonpositions.Thechangeinyournetliqtodaycomparedtoyournetliqyesterdayisyourprofitorloss
fortheday.

Everytradershouldkeepaseparatelistofhisdailynetliqandthenetchangefromyesterday.Thenetchangeis
whatyouevaluatetodetermineifyoumademoney,andhowmanydaysinarowyouaremakingorlosing.Ialso
liketoaddacolumnonthatlistofthenumberoftradesIdideachday.

Iknowofseveraltradersthatcharttheirnetliq,includingvolume,asawayofevaluatingtheirdailytrading
performance.

WhatyouneedtobeconcernedabouthereisDENIAL.Itisrealeasytofallintothetrapoflosingmoneyevery
day,andblamingitoncircumstances.

Manytradersinthepitcantellyouexactlyhowmanytickstheyhavemadetradingatanymomentintheday.
Theywillsay,I'mup30ticksorI'mup100ticks,orwhatever.Thepointistheyevaluatehowtheyaredoing
continuouslyduringtheday.

"Overtrading"isthemostcommonresponsewhensomeoneasks"whatamIdoingwrong."

Ifyoukeeptheabovelist,youwillunderstandyouaremostprofitableatacertaindailytradingvolume.Typically
whenyourtradingexceedsyournormalvolumeyouareonthepathtowards"overtrading"whichusuallyendsin
disaster.

Let'ssayyoumakefivetradesadayandmakeabout$1,000.Overtime,youfindthatyournormalprofitableday
usuallyis4to6tradesanddailyprofitis$800to$1,200.Suddenly,youaremaking10,12or18tradesaday,
andstillmaking$800aday.

Somethingishappening.Youarechangingyourmethodoftrading,butnotincreasingyournetprofitabilityper
trade.Ifthisisaplannedchange,andyouexpecttocontinueatthisnewvolumelevel,ok.Butifyouarestill

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tradingbasicallythesamewayyouhavealwaystraded,theincreaseinvolumewithoutacorrespondingincrease
indailyprofitshouldbeconsideredaredflagthatsomethingisgoingwrong.

Youareobviouslyhavingmorelosingtrades,butareabletofindwinningtradestooffset.Ifyouthinkaboutityou
willrealizethatyouaretakingtradesyouwouldnormallyconsidermarginalinordertomakeupforsomelosses.
Probably,themarketischangingandyournotadaptingyourmethodoftradingtothechangingmarket.

Iforecastyouwillsoonfindtradingdayswithbiglossesoverall.Yourincreaseinvolumewilleventuallyallgo
sour,andinadayortwoyouwillwipeoutamonth'sworthofwork.

Myguessisyouhaveatradingapproachthatworksinonetypeofmarket,butnotinanother.Youmaybea
"breakout"traderthatworkswellwhenthemarkethasvolatility,butwhenitsettlesintoatradingrangeyouchew
yourselfup.

Thepointistheincreaseinvolume,oraseriesoflosingdaysinarowmeansyouaredoingsomethingthatisn't
working.Takeadayoffandgogolfing.Spendthenextdayjustwatchingthemarket,nottrading.

Thencomebackandlimitthenumberoftradesyoumaketohalfofwhatyouconsideredyournormaldaily
volume.Ifyoumakemoneyfortheday,thenincreasebacktonormal.Ifyoudon'tmakemoney,thenyouneedto
stepasideandtrytofigureoutwhatisgoingwrong.

Thisiswhenunderstandingmoneymanagementandrelatingyourtradingsizetoyouraccountbalancebecomes
soimportant.Yourina"drawdown"andifyouareundercapitalized,youmightgoallthewaydown.

Youneedtohavecapitalinreservetobeabletogetthroughaperiodofreevaluationwhenyouwillhaveno
income.Youneedtohaveamethodtoprotectthatcapitalreserve.

"ButIneedtotake$5,000amonthoutofmyaccount."Don'trationalizelosingmoneybecauseofyourneedto
makemoney.Youwon'tbetradinglong.

"ButI'mtradingthesamewayIalwayshave."Sowhat,Iknow,yourrightandthemarketiswrong.Youwon'tbe
tradinglong.

"I'monlylosingalittlebitoneachtrade,butI'mmakingitupinvolume."Yourbrokerthanksyou.

Thencomesthephonecall:"Youraccountistoolow,youcan'ttradeanymoreuntilyouputinsomemore
money."Thenextdaythemarketstillopens,andnoonemissesyou.

Goodtradersmakemoneyeveryday.Goodtraderstakealotofvacations.Goodtradersgohomeearlyoften.
Goodtradersdon'tnecessarilytradealotofvolume(relativetotheirnormalvolumeandaccountbalance.)Good
tradersmakemoneyinupdownorsidewaysmarkets.Goodtradersalwaysknowtheiraccountbalance.Good
tradersknowhowmuchmoneytheyaremakingateverymomentoftheday.

25.Don'tstoptradingwhenyouronawinningstreak.Whenyourhot,your
hot.
Adisciplinedtradermonitorshimselfcloselyandknowstheimportanceofcontrollingriskandlookingoutfor
whentimesgosour.Adisciplinedtradershouldalsorecognizewhenthingsaregoingwell.

Whenyourjusttradingright,thisisnotthetimetogetlazyandgohomeearlybecauseofyourteeofftime.This
isoneofthosefortunatetimeswhenyoucanbuildyouraccountbalanceandpossiblymovetothenextlevelin
tradingsize.Whenyourtradingisgoingwell,putyourheaddownanddrive.

26.Threestrikesandyourout!Don'tturnthreelosingtradesinarowintosix
inarow.Whenyouroff,turnoffthescreen,dosomethingelse.Whenyour
not,yournot.
Inadditiontomonitoringyourtrading"daysinarow"Isuggestyoumonitoryourtradesinarow.Agoodtrading
methodhasmorewinningtradesthanlosingtrades.Butwhateveryourmethod,bottomline,tradingisanart.
Thedecisiontoactuallydoatradeisprobablythemostimportantpartofatrade.Ifyouarewatchingascreen
andthebellsandwhistlesgooff,youstillhavetoreactandpickupthephoneandmakethetrade.The
differencebetweenagoodtradethatjustworksbeginningtoendandatradethathasyourbackagainstthewall
theentiretimemaycomedowntosimplyamomentshesitationinpickingupthephone.

Iknowthateverythinginfrontofmecanbeworkingjustright,butthatIRSagentsittingintheofficenextdoor
lookingatmyrecordsmightbeenoughtopreoccupypartofmybrain.Havearulethatifyoumakethreelosing
tradesinarow,stoptradingfortheday.Somethingiswrong,youdon'tusuallymakethreelosingtradesinarow.
Takeabreak,findoutwhatisgoingoninyourhead.Ifotherbusinessisonyourmind,thentakecareofit.
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Thisagainbecomesapointofconfidenceinwhatyouaredoing,andhavingthecapitalizationthatallowsyouto
sometimesjustwalkawayfromthemarket.

27.Scalpersreducethenumberofvariableseffectingmarketriskbybeingina
positiononlyforseconds.Daytradersreducemarketriskbybeingintrades
foramatterofminutes.
Havinganunderstandingthatriskisproportionatetotheamountofspacebetweenyouandatradeisimportant
whenyouhearwhatisgoingoninthepits.IfaMemberinthepitscalps10lots,heisbuyingandsellingalmost
continuouslyduringtheday.Bytheendofthedayhemayhavetraded1,000contracts,andbeup300tickson
theday.Mademoneyonsome,scratchedalot,lostonsome.

Ateverymomentheknowshowmanycontractsheislongorshort.Heistryingtobuyonthebidandsellonthe
offer.Generallyhedoesn'thaveacluewhatisgoingonintheworld,anddoesn'tcare.Heistoobusyfocusing
onbeingonthemarkettobeabletowatchthenewstapes.Ifheislong10andthemarketticksdown,ina
secondhecansellthemandthenpause.Atthatmomentheisoutofthemarketanddoesn'thavetogetbackin,
heisoutofrisk.

A"daytrader"hasahigherlevelofriskthanascalperinthepitinthatheisgenerallyontheothersideofthe
phonetoatrade.Daytradingfocusesonmonitoringpricemovementsastheyappearonacomputerscreenas
comparedtothescalperinthepitfocusingonthebidsandoffersastheycomeintothepit.Thescalperis
reactingtomarketmovementsBEFOREtheyaretraded.Thedaytraderisreactingtomarketmovements
AFTERtheyhavetradedandbeenrecordedontheexchangestransactiontape.

Thescalperreactsinstantlywithanexecutedtrade"soldtenat62550."

Thedaytraderreactsbypickingupthephone,dialing,gettingthephoneanswered,statingtheorder,then
havingtheflooroperationcommunicatetheordertoafloorbrokerwhothenexecutesthetrade"soldtenat
62550."Ifboththescalperinthepitandthedaytraderontheothersideofthephonereactedatthesame
momentyoucanseethatthescalperstradewasexecutedfaraheadofthedaytrader's.

Butthedaytrader'stransactionisfaraheadofthepositiontrader's(orovernighttrader's)transactionwhois
reactingthenextdaytotheitemhereadinthenewspaper.Thedaytrader'stransactionwasafewtickslater
thanthescalper's.Thepositiontrader'stransactioncouldbemanypointsdifferentthanthedaytrader's.

Tocompensateforthisdifferenttraderisk,allotherthingsbeingequal,thesizeofthedaytrader'sunitoftrades
wouldhavetobeverydifferentthanthesizeofthescalper'strade.

BackwhenIwasonthefloor,ifIwasinthepitIwasscalping20'sto50's.IfIwasstandingoutsidethepitgiving
orderstothebrokertoexecutemytradesIwastradingtens.IfIwasupstairstradingoverthephone,Iwas
tradingtwostofives.

MyquantitiesweredifferentforeachstepIwasawayfromthepit,butsoweremytradeobjectives.Inthepit,
holdingfor3or4tickswasalongtrade.FromoutsidethepitIlookedforhalfpoints,fromupstairsIlookedfor
twopointsormore.

28.Ifyouconvertascalpordaytradeintoapositiontrade,bydefinitionyou
didnotconsidertherisksofthetrade.
Youcanseethatthe"positiontrader"referredtoaboveismakinghistradedecisionsonacompletelydifferent
levelthatthescalperordaytrader.Thepositiontradercouldbeshortallday,whilethescalperhasbeenlongor
shortmanytimesduringthedaywhilethedaytradermayhavetradedlonginthemorning,andshortinthe
afternoon.

Generally,thepositiontraderislookingatchartswithdailybars.Theentiretradingdayisrepresentedbyone
markonthechart(orsixtyminute7marks,orthirtyminute14marks.).Thedaytraderislookingatfiveminute
bars.Thetradingdayisrepresentedby78barsonthescreen.Thescalperinthepitismakinghisdecisions
basedonthethousandsofbidsandofferscomingintothepitthroughouttheday.

Whenthepositiontraderenteredhistradehedidsoexpectingcertainparametersonthetrade.Inorderto
compensatefortherisksofallthethingsthatcouldaffectthetradeover24hoursormorethepositionstraders
size(allotherthingsbeingequalwithrespecttothescalperanddaytrader,specificallytradingcapital)wouldbe
substantiallylessthanthedaytraderandthescalper.

Soifyouaredaytradingtensanddecidetoholdyourtradeovernightyousimplycouldnothaveconsideredthe
risksofthepositiontrade.IfyoutoldmeyoudaytradedtensanddecidedtoholdtwoovernightImightsayyou
consideredsomeoftherisks.

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Whendaytraderstradeundercapitalizedrelativetothesizetheytradeduringtheday,thenholdtheposition
overnight,theirlevelofundercapitalizationrelativetoapositiontradeissimplyinmyviewadeathwish.They
arejustaskingforthemarkettoputthemoutofthebusiness.

29.Don'teverfretaboutamissedopportunity.Theisalwaysanotheronejust
aroundthecorner.Besides,severaljusthappenedthatyoudidn'tevenknow
about.
Ioftenhaveclient'scallmetowhinesaying"Whydidn'tyoucallme,themarket'sdown75points!"Or,after
makingsixS&Ppointsonadaytradetheysay,"whydidwegetoutsoearly?TheS&Pwentanothertenpoints!"

The"shouldawouldacoulda's"areacharacteristicofarelativelynewtrader.Theyhavenothadenough
experiencetotrulyunderstandthatthemarketwillALWAYSbethereandtherewillalwaysbeanothertradejust
aroundthecorner.Eachtradetheymakeisstilla"specialone,"andtheythinktheyshouldgetallthereistoget
fromthetrade.

Overtheyears,I'vemadetensofthousandsoftrades.WhenIlookbackatallmytradestheyseemtofallintoa
relativelynormaldistribution(bellshapedcurve)ofwinningandlosingtrades.WhenIthinkaboutthetradesout
inthetailsofthedistributionIhonestlycansayIwouldrathernothavethemtheiratall.Wayoutontheendsare
mybiggestwinnersandmybiggestlosers.Iwouldgladlytradenothavingthewinnersfornothavingthelosers.

Thebiglosershurt,butinretrospect,thebigwinnershurtevenmore!

Thebigloserswereliketheamputationofalimb.OK,thearmisgone.Ithurts.ButnowwhatamIgonnado?I
needtodothisorIneedtodothat.Iwanttosurvive.

Butthebigwinners?I'mKingoftheHill!Iknowhowtodoit!I'mgreat!It'sliketheKungFooguyinthemovieI
candodgebullets!Party!I'mamoneymachine!Icanjustdipintothewellanddrawoutabucketofmoneyany
time.

Where'sthedeepsoulsearchingthoughtafterthebigwinningtrade?Itisn'tthere.Ifitwasthere,youwouldsee
thatjustthemonthbefore,oreventheweekbeforeyourtradeswerewithinthat"normaldistribution."What
happenedtogiveyouthatbigtradeprobablyhadnothingtodowithyouexceptforthefactyouwerethere.You
wereinthemarketwhentheopportunitycame,andthemarketsimplydidn'tletyouout.

Youwereonafreighttrainthatbecamearunaway,butthetrackwasclearalltheway,soyouendedupsettinga
NewYorktoL.A.record.BythetimeyougottoL.A.theygotthebreaksfixedsoyoudidn'tcontinueonintothe
Pacific.

ThehistoryIhaveseenofmyselfandofmanyothersonthetradingflooristhatafterthebigwinnersyouneedto
bejustasconcernedaboutsurvivalasafterthebiglosers.Youneedtounderstandthatitwasthemarket
conditionswhatallowedthatbigprofit,andthatthoseconditionsjustweren'tthereintherecentpastandwon't
bethereagainuntilsometimeinthefuture.

Youdidn'tdoanythingdifferentthanwhatgaveyouyournormalbelldistribution.Afterthecurrentmarket
conditionpasses,youwillbegoingbacktothenormalbellagain.Butyouroldnormalbellwaspremisedon
marketrespectandthedesiretosurvive.IfyougobacktothatnormalbellasMr.Invincible,youwon'thave
thosesurvivalinstinctsintune.Youwon'tstopthoselosses.Yourgonnagetnailed.

SowhenIgetclient'soutofatradeearly,it'smydesiretograbapiecethenstepaside.Iwanttomakemoney
likethewaytheyvoteinChicago,"earlyandoften."Ireallydon'twanttoswingforhomeruns,becausethebig
strikeoutswillthenstartcomingagain.

Ijustdon'twanttobeoneofthose"mystical"trendfollowersthatacknowledgethattheyhaveninelosersoutof
tentrades,butthattenthonecoversallthelossesandmakes"huge"moneybeyond.Myegojustcan'tstand
thoseninelosses.I'llprobablybesobeatupthatwhenthebigonecomesI'lljusttakepenniesandwalkaway.

Besides,ifI'minthemarketandconsistent,Iknowthatrunawaywillcomeacertainpercentageofthetime
anyhow,andwhenitdoesI'lljustbethere.IfImissthatone,theremaybeanotheronejustaroundthecorner.

Iliketotellnewdaytradersthestoryabouttheguyswiththe"BassBoats"onLakeGeneva,Wisconsin.They
areoutonthelakeatdawnandusetheirelectricmotorstoguidethemalongtheshoreline.

Theyareexpertatcasting.Theydroptheirluresunderthepiers,theninbetweenandunderagroupofboats.
Thentheymoveovertothenextpier.Iftheygetabite,theybringitstraightin.Theyknowthatiftheytryto"play
it"theirlineisgonnagetsnaggedonthepierpostsorinamotor,orladder.Eventryingtobringitstraightinthey
stillgetsnaggedoftenandendupcuttingtheirline.Theymaycastathousandtimes,get50bites,andbring
homefivefish.
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Buttheexperienced"BassBoatguy"alsoknowssometimeheisgoingtohookawhale,andthatwhaleisgoing
togostraightoutintodeepwater.Thatiswhenhehasthatbigtrade.Heplaysit,worksit,andifhehassome
skillandisluckyhefinallybringsitinandhasatrophyfish.

Thenextweekendwhenhegoesbackoutonthelakedoeshestartusingadeepsearigwith100poundtest
line."FromnowonI'monlygoingtoafterthebigones."No,hegoesoutwiththesameboat,andthesame
tackle.Maybeinhismindheislookingforthe"bigone"againforalittlewhile,butafter50orsocasts,heisback
intotheroutineofworkingtheshoreline.

IhadonenewclienttellmetocallhimONLYwhenIsawabigtrade.Iheardthebaseballgameoninthe
telephonebackground,andIaskedhimtocallmeONLYwhentherewasgoingtobeadoubleplay.HeknewifI
wantedtoseeadoubleplayIhadtositonthecouchforthewholegame,andmaybeonewouldn'thappenin
thatgame,soIwouldhavetowatchanother.IhadtobepreparedtonotmissanypartofthegamesoIneeded
acomfortablechair,acoolerfullofbevandsnacks,andnonoddingoff!

Itoldhimitisthesamekindofthingtryingtocatchabigmarketmovedaytrade.Yournotgoingtohaveadouble
playifnooneisonbase.Yournotgoingtohaveadoubleplayiftherearetwoouts.Butevenifthereisoneout
andamanonfirst,doesthatmeantherewillbeadoubleplay?Itcanhappeninthatsplitsecondwhenthebatter
bouncestheballtotheshortstop,buttherewereendlessotherpossibilitiesafractionofasecondbeforehehit
theball.Whatiftherewasamanonsecond,acaughtflyball,andtheynailthemanonsecondfornottagging
up?CanIcallhimandcomplainthathedidn'tcallmesoIcouldseeithappen?

Expectmostoftradingtobewithinthenormalbelldistributionofyourtrades.Ifyoumissabigplay,oreven
catchabigplay,orhavea"hot"stringofbigplays,expectthenextdaytoberightbackintothenormalbell.

MARKETOPINIONS
Back

30.Ifyoulookformarketsecretsyouwillonlyfindthingsthatnoonecares
about.Usetheconventionaltools.
WhenIcameintothebusinessinthelateseventiesIscouredtheexchangelibrariesandfoundmostofmy
tradingguidancefrombooksormanuscriptswritteninthetwentiesandthirties.WhenIlookatthebookswritten
today,orthehightechcomputersoftwareusedbytraderstoday,thereisNOTHINGDIFFERENTTHANWHAT
HASEXISTEDSINCETHEBEGINNINGOFTIME.

Thereasonissimple,allwehavetolookatisopenhighlowcloseandvolume.Wehadthatinformation100
yearsago,andwehavethesameinformationnow.Thedifferenceistodaywehavefarmoreaccuratemore
timelydatatoapplytheoldideas.100yearsagoyoucouldn'tdaytradefromHawaii,theboattothemainland
justwasn'tfastenough,onlymembersonthefloorhadthatinformation.Today,anyoneanywherecanhave
instantinformationaboutthemarkets,buttheinformationisthesameasithasalwaysbeen,onlycommunicated
better.

Sowhenyousearchmarketdatatofindyourtradingapproach,don'tspendyourtimelookingforaunique
patternorformula.Spendyourtimelookingattheconventionaltoolstounderstandhowtheywork,whattheir
probabilitiesofsuccessare,andwhentheymightworkwithahigherprobability.

Thinkaboutit.Atanymomenttherearetensofthousandsoftraderslookingatthemovementofthestock
marketwiththepurposeoftryingtomakeasuccessfultrade.Whatisitthattheywillseethatwillmakethendoa
trade?Youdon'thavetopredictthefuturetoknowwhentheyarecoming,youjusthavetobeinamoment
beforethetidalwaveofordershitthemarket.

31.Neveraskforsomeoneelse'sopinion,theyprobablydidnotdoasmuch
homeworkasyou.
Asatrader,IhaveanapproachtotradingthatIhavedevelopedoverthecourseofmycareertrading.Iknowthe
wayItradetodayisnotthewayItradedlastyear,perhapsnoteventhewayItradedlastmonth.EachdaythatI
lookatthemarketsIlearnsomethingnewandmodifythewayIplanmytrades.Iknowthisistrueforalltraders
thathavesurvivedbecausethemarketisalwayschanging,butalwaysthesame.

Amarketopinionisbasedonthemarketfactsasofthismoment,buttothedaytraderinthenextmomentthere
isnewinformation.Doyouthinkatradershouldignorenewinformationandmaintainanopinionatallcosts?Of
coursenot.

Butwhenyouasksomeone'sopinion,doyouunderstandthatopinionisonlygoodforthatmoment?Ormaybeit
wasbasedonthemarketasofyesterdayorthedaybefore!
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Recently,CNBChadthequoteonthedayafterChristmasthat"thedayafterChristmashadbeenupeveryyear
since1947."Wasthisinformationthathelpedadaytrader?Themarketopenedthatdayatthehighoftheday
(theDowupabout70pointsafewminutesaftertheopen)andtradedDOWNallday.TheDowclosedup18
pointsontheday,butthatwasnearthelowoftheday.Ifyoudidanydaytradingyouhadtodoitfromtheshort
side.Soifyouhadtheopinionthatitwasgoingtobeanupdaythatopinioncostyoumoney.

Orsomeone'sopinionthatweare"inaBullmarket"canaffectyourthinkingaboutatrade.Mostwouldsaywe
wereinaBullmarketsince1982orpossiblysincethe1974low.Doesthatmeanyoutriedtodaytradefromthe
longsideinthecrashof1987?Oranyoftheotherperiodsofmarketcorrectionsince1974?

Orevenifyougetdowntoaskingwhatdoyouthinkaboutthenexttenminutes?Wellifthemarketistrendingon
theoneminutechartyouwouldhavetooffertheopinionthatitisgoingup.Butifoneminutelateritbrokethe
oneminutetrendlineyouwouldnolongerhavethatopinion.

SometimebackIhadadaytraderthatwasdoingverywelldayafterday.HehadadiscountaccountsoIwasn't
helpinghimwithhistrades,Iwasjustwatchingoverhisaccountbalance.Iwouldknowwhenheputinatrade,
andbecausehewas"hot"I'dlookatthemarkettoseeifIcouldfigureoutwhatsignalshewasfollowing.There
wasnothingobvious.ImadeanefforttoblockoutknowingwhathewasdoingwhenIwasmakingmyown
trades,buthekeptdoingwellanditwashardtoignoreit.

Overtime,Ihadseveralchancestotalktohimandhewouldoffertheopinionthathewasbuyingbecausehe
thoughtthemarketwouldbeupintheafternoon,orsellingbecausehethoughtitwouldbedowninthemorning.
Hewasdoingprettygood!

WhenIdidmyowntrades,Ihadinthebackofmymindwhathewasdoingthatday.Ifmyworkagreed,Ihad
thatlittleextracomfortlevelthathealsothoughtthemarketwasgoingup.Ifmyworksuggesteddownandhe
waslong,IhadanextradoubttoovercomebeforeIputonmyshort.

OnedayhedidacoupleofreallydumbtradesandIgavehimacalltocautionhimaboutthesizehewastrading.
Wetalkedalittleandhementionedthathedidn'thaverealtimequotes,hedidn'tevenhavecableformarket
pricesoffCNBC!Iaskedwhatwashisstrategyintrading?

Heexplainedthathewouldstayuplateatnightsohewouldbeabletotakeamorningnapandanafternoon
nap.Whenhewokefromthenaphewouldimmediatelywritedownwhathewasdreamingabout.Basedonwhat
hewasdreaminghewouldenteratrade.(Heexplainedifhehadbeenrunningupstairsinhisdreamitwas
particularlybullishforthemarket.)

Isaidtobecarefulwithhissizeandwishedhimgoodluck.Iimmediatelytransferredhisaccounttobeunderthe
supervisionofanotherbrokerkickingmyselfforthetimeIhadwastedlettinghistradesaffectmytrades.

IhaveoftenhadnonclientsorevenotherbrokersaskmewhatIthoughtaboutamarketandItrytoofferan
opinionwitha"basedonthisorthat"qualification,orstronglystateastopwiththeopinion.Thiswaywhenthree
dayslatertheycomebacktomecomplainingthe"yousaidthemarketisgoingup,I'mlongandit'sbeendown
thelasttwodays"IcanatleastsayItoldyoutotrailastop,itwashittwodaysago.Iknowinsidetheyonly
askedmyopiniontotrytogetconfirmationontheirownidea.TheywerehappyIagreedinitially,butdidn'tlike
thethoughtoftrailingastopsotheyignoredthatportionofmyadvice.

Backintheearly1990'sIwasabletodosomecomputerworkforacoupleofCTA'sthathada"hot"trading
system.

IknewtheirreputationofhavingseveralhundredS&P'stotradeatamomentsnotice.Whentheycameintothe
market,theysimplypoundedouttheirtradethendisappearedforawhileobviouslyholdinganewposition.

Iwouldhearfromtimetotimethat"they"hadgotlong,orgotshort,andIwouldconsideritinmyowntrading.

WhenIwroteacomputerprogramtoautomatetheirtradingmodelIfullyunderstoodtheirtradingmethod.Itwas
amoneymakingsystem,butIhadnointerestintradingbytheirmodel.IwassurprisedwhenIunderstoodthat
theirmodelreversedpositionsonaverageoneandtimesperday.

ThatmeantthatinthepastwhenIhadheardthattheyhadaposition,itwasverylikelythattheyhadalready
reversed.Inowknewwhattheyweredoingwastotallymeaninglesstodevelopingamarketopinion,butmany
timesIwasaffectedbyhavingtoovercomethethoughtthatIhadheard"they"hadaposition.

TheopinionthatIhearoftenis"thebabyboomersareputtingsomuchmoneyintotheirretirementaccountsthat
themarketcan'tgodown."OnOctober27,1997,themarkethadanoldfashioned"OctoberMassacre"and
dropped550points.Itwentdown,don'ttellmeitcan'tgodown.FromtheAugust7highontheDowof8299to
theOctober28thlowofunder6900themarketdropped1,400points.

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I'madaytrader,IliveanddieonthenextfiftypointmoveontheDow.Don'ttellmesomebigmacrotypeof
argumentthatisthebasisofyouropiniononthemarket.WhenItellthemthemarketwentdownonagivenday
orweektheysay"yeahbutitisstillupfortheyear!"Idon'twanttohearyouropinionofthemarket.Inthe1400
pointdropImademoney.IfIfollowedtheadvicethatit'sabullmarketforever,I'dbeoutofbusinessinadecline
likethat!

TheMarkethadalowin1932ofaround60pointsandin1997gotover8,000.Basedonthelast65yearsof
marketstatisticsIcantellyouthatthereisovera95%chancethatthemarketwillbeuptenyearsfromnowIF
thesunriseseverydayforthenexttenyears!How'sthatforanopinion,nowgomakeadaytradewithyournew
"insideinformation".

32.Whenthemarketisgoingup,say"themarketisgoingup."Whenthe
marketisgoingdown,say"themarketisgoingdown."Sayitwithout
qualifications,no"buts"attached.Thisisarealitycheck,you'llbeamazedat
howharditistosaywhatisliterallygoingoninfrontofyouwhenyourmind
isfullofpreconceivedopinions.
YoumaybebeginningtosensethatIhaveaprettystrongopinionaboutmarketopinions.Ihavearighttomy
viewbecauseIpaidalotofmoneyovertimebeingdistractedbyhearingwhatotherpeoplethink.Ittakesalong
timetounderstandthecostandeffortittakestoovercomepreconceivednotions.Asadaytrader,youwill
eventuallyarriveatthesameconclusion.Thequestionishowmuchwillitcostyoutocometothatconclusion,
andcanyousurvivethecost.

ThethingItrytotellmyselfeverymomentofeverytradeistosaywhatthemarketisliterallydoingatthis
moment."I'mlookingforasell,butrightnowthemarketisgoingup."Itwillprobablykeepgoingup,unlessit
stallsandstartsgoingdown,butrightnowitisgoingup!

Amomentlater,whatisitdoing?Itisgoingup,shouldIsell?Whywouldyousell?Isitgoingdown?No,it'sgoing
up.

Amomentlater,whatisitdoing?Itseemstohavestalled.I'llsellbecauseIamlookingforittogodown.Butisit
goingdown?No!

Amomentlater,whatisitdoing?Itisgoingup,Ishouldnotbeshort.Coveryourtrade.

Thepointoftherealitycheckistobesureyouaretradingrealitynotimagination.Idounderstandthatmany
tradesaremade"anticipating"amarketturn.Ifthatisyourapproachyouneedtobecoldandcalculatingin
evaluatingyourexpectation.

Ifyouareanticipatingaturn,atwhatpricedifference,orwhattimedifferencewillyouacknowledgeyouare
wrong.Besuretodeterminethatbeforeenteringthetrade.Don'tallowthoseparameterstochangeonceyouare
inthetrade.

Thereisnothingmorefoolishthanatradertrailinghisstopagainsthispositionbecausehestubbornlythinks"I'll
berightinjustafewmoremomentssoI'llmovemystopsoIwon'tgetstoppedout."

WhenIwastradinginthepiteveryday,afterIclearedmyouttradesinthemorningIwouldgotothehealthclub
toswimahalfmile.WhileIwasswimmingIwouldrecognizethattherewasacrowdinmyheadarguingthepros
andconsofthemarket.Ilearnedtofollowaroutinewhileswimminglapstotrytoclearmyheadofopinionsprior
togoingintothepittobegintrading.AsIswam,Iwouldlookdownatthelanelineatbottomofthepoolandsay
tomyself"followtheline."WhenIexhaledonmystrokeIwouldsay"opinions."Repeatedlysaying"followthe
line"andexhaling"opinions"wasaveryimportantritualthatIwentthougheverydayfornearlyfifteenyearsof
tradingonthetradingfloor.

33.THEDAILYMARKETCOMMENTARY:I'veneverhadanopinionIdidn'tlike,
however,successfuldaytradingrequiresflexibility.Doyourhomeworknotto
developamarketopinion,butrathertounderstandthepotentialforbothsides
ofthemarket.Thiswillallowyoutomakeyourtradesbasedonwhatthe
marketisdoingatthetimeofthetrade.
Iknowthebestapproachforadaytraderistonothaveanyopinions,butifyoufindthatyouarecontinually
bombardedwithopinionsthatyoujustcan'tshutoutthenaapproachIhavefoundhelpfulistothoroughlythink
outreasonsforbothsidesofthemarket.

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Let'ssayyouthinkoutthatthemarketcanbebullishforthefollowingfivereasons.Andyoualsothinkoutthat
themarketcanbebearishforanequalnumberofreasons.

Thereasonsforeachopinionaboveshouldbethoroughlythoughtout,thelogictestedandthemarketspast
movementsinrelationtopastsimilareventstested.Nowyoucanwithsomedegreeofauthoritytalkbothsidesof
themarketatanymoment.

Forexample,"Bondsaregoinghighersothatisbullishforstocks."Youcanstudycomparisonsofthestock
marketandtheBondmarketandfindmanytimeswherethatistrue.

"Bondsaregoinghigher(rateslower)andthatisbearishforstocks."Againyoucanstudypastmarket
comparisonsandfindmanyinstanceswherethisisalsotrue.

Studythesesituationsingreatdetailsoyouthoroughlyunderstandthattherelationshipscanhaveahigh
positivecorrelationaswellasahighnegativecorrelationallthewaydowntointradayturnsonthefiveminute
chart.Now,nomatterwhichsideisworking,youcanusethatinformationinyourtradingwithouthavingthebias
thattheeffectonthemarketwillalwaysbethesameway.

ThinkaboutthesituationswheretheFedraisesinterestrates.Youwillhearallofthefollowing:

TheFedraisedratesandthemarketwentdown.

TheFedraisedratesaquarterpoint,"asexpected",andthemarketwentup.

TheFedraisedratesmorethanexpected,whichsuggeststheFedwillnothavetoraiseratesagainforsome
time,andthemarketwentup.

Inasurprisemove,theFedraisedratesmorethanexpected,andthemarketwentdown.

Ifyoufollowthenewsandresultsabove,youwillunderstandthatthenewscommentatorissimplyconnecting
twoeventsthatoccurredthesamedayasiftherewasacauseandeffectrelationship.Hereadonthenewstape
thattheFedraisedrates,andhereadonthenewstapethatthemarketwentdown.Hesimplyreportedthem
bothinthesamephrase.

IoftensquirminmychairwhenIwatchthenightlybusinessnewconnectamoveinthetransportationstocksto
changesinthepriceofcrudeoil.Onagivendaycrudecouldriseadollar,andthetransportsareup.Therisein
crudeisnotreportedwiththeriseinthetransports.Thenextdaycrudedropsaquarterandthetransportsareup
again.Thecommentaryisthetransportsroseonthedropinthepriceofcrude.

34.Hereisaquotetoremember:"Whenyouwakeup,yourinstinctsarewrong."

Thismeansyouhavetotryveryhard,itisdifficult,togetontherightsideofthemarket.Whatcomes
naturallyisusuallythewronganswerwhenitcomestodaytrading.Ifitwasnatural90%wouldwinrather
than90%lose.
SOMEFINALTHOUGHTS

Back

35.Whenyoumakeamistakeofdiscipline,whinelikeafooltoanyonethat
willlisten.Errorsindisciplinearemistakesyouwillkeeponmakingformany
years.Wearingashesandsackclothmayhelpextendthetimebeforeyoudoit
again.
36.Ifyousquirmedandmoanedwhileyoureadthislist,thenyousharetwo
obviouscharacteristicswithmanyofus
1.Youhavetradedlongenoughtorecognizethatyou(notthemarket)make
mistakes,andyoutrytoovercomethem.
And2.,nowthisisugly,youhavebecomepartofthemarketandyoucan
neverleave.

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Nomatterwherelifetakesyou,youwillalwayscheckthemarketandalways
wanttocontinuebeingapartofit.It'slikethatfirsttruelove,itwillalwaysbe
therenomatterwhatthedistance,nomatterwhethertheyarealiveordead.
REMEMBER,themarketwillalwaysbehere.Youmaythinkyouaretryingto
"beatthemarket"or,thatthemarketmaybebeatingyou.Whenyoumake
tradingpersonalyouaremakingamistake.Yourtradeswillneverinfluence
themarket,themarketdoesnottrytoinfluenceyou.
***********************

reg

REGULATORYDISCLOSURESREGARDINGHYPOTHETICALRESULTS
HYPOTHETICALPERFORMANCERESULTSHAVEMANYINHERENTLIMITATIONS,SOMEOFWHICHAREDESCRIBED
BELOW.NOREPRESENTATIONISBEINGMADETHATANYACCOUNTWILLORISLIKELYTOACHIEVEPROFITSOR
LOSSESSIMILARTOTHOSESHOWN.INFACT,THEREAREFREQUENTLYSHARPDIFFERENCESBETWEEN
HYPOTHETICALPERFORMANCERESULTSANDTHEACTUALRESULTSSUBSEQUENTLYACHIEVEDBYANY
PARTICULARTRADINGPROGRAM.

ONEOFTHELIMITATIONSOFHYPOTHETICALPERFORMANCERESULTSISTHATTHEYAREGENERALLYPREPARED
WITHTHEBENEFITOFHINDSIGHT.INADDITION,HYPOTHETICALTRADINGDOESNOTINVOLVEFINANCIALRISK,
ANDNOHYPOTHETICALTRADINGRECORDCANCOMPLETELYACCOUNTFORTHEIMPACTOFFINANCIALRISKIN
ACTUALTRADING.FOREXAMPLE,THEABILITYTOWITHSTANDLOSSESORTOADHERETOAPARTICULAR
TRADINGPROGRAMINSPITEOFTRADINGLOSSESAREMATERIALPOINTSWHICHCANALSOADVERSELYAFFECT
ACTUALTRADINGRESULTS.THEREARENUMEROUSOTHERFACTORSRELATEDTOTHEMARKETSINGENERAL
ORTOTHEIMPLEMENTATIONOFANYSPECIFICTRADINGPROGRAMWHICHCANNOTBEFULLYACCOUNTEDFOR
INTHEPREPARATIONOFHYPOTHETICALPERFORMANCERESULTSANDALLOFWHICHCANADVERSELYAFFECT
ACTUALTRADINGRESULTS

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