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Chapter One: The Way I Trade

Different traders, different approaches

There are as many approaches to trading as there are traders, and that is as it should be. What works for me may not work for you, and vice versa, because our psychological makeup, knowledge and implementation skills are all different.

This book is about my way of trading, how I perceive the market, how I develop a trading plan and how I implement it. It is neither right nor wrong, because in trading there are no absolutes. I am not saying you should do it this way, because it may not suit you, but I hope that at very least you will find some useful pointers for your own trading approach.

Why futures?

I am a futures trader because, when I started trading, I didn’t want to put much capital into it. If I was to make a lot of money quickly, I needed a leveraged instrument.

Futures contracts are highly leveraged. They are traded in genuine markets (unlike the artificial contracts offered by many forex and CFD brokers). Their commission structure is low. There are several liquid markets to choose from, each with their own character and feel.

So futures were a perfect choice for me, providing an opportunity to make good money on a relatively small capital investment. But, like many tyros, I didn’t pay enough attention to the obvious fact that, if you can make money fast, you can lose it equally quickly.

That is why this book is focused on trading futures safely.

Why day trade?

I am a day trader for three reasons.

First and most importantly, if it is done properly, I think it’s the safest form of trading there is. Why? Because I don’t spend much time in the market! If I aim to take one trade each day, and spend an average of 60 minutes in the trade, my money is in danger for about 5 hours a week. For the remainder of the time it is protected in the relative safe harbour of a money account.

Why is that a good thing? Because catastrophic losses happen when big surprises hit the market without warning. So the less time you are in the market, the less you are at risk!

If disaster strikes while the market is closed, there is nothing to be done about open trades until the next trading day. By then the damage is done. Prices can easily gap through stop loss levels over night, ruining risk management plans. I don’t have open trades when the markets are closed, so I don’t have that particular problem.

I only trade during primary sessions when the market has high liquidity. If something cataclysmic does happen while I am in the market, there is every chance that my stops will be hit almost immediately at electronic speeds. Sure, I could suffer nasty slippage, but the chances are I won’t be wiped out.

The second reason I am a day trader is that I tend to be impatient. I like to see the outcome of my trade quickly, not weeks (or, perish the thought, years) after I open it.

The third reason I am a day trader is that I hate worrying about work at night and at weekends. That’s family time. As a day trader, I hold no positions at the end of each and every trading day, so there is nothing to worry about during my leisure time.

Automation to defeat addiction

I have traded daily since I retired from my corporate career in 1998. For about half that time I traded manually at my computer, making trading decisions in real time. It was exciting, tiring and psychologically draining.

In those days, I couldn’t wait for the market to open, even though it was in the middle of the night (trading in Chicago, living in Australia). It was sheer excitement, better than visiting the casino or playing poker. Even as my technique improved, I couldn’t resist watching the trades long after I needed to. And, sometimes, I would commit the cardinal sin for a system trader and interfere with my trades, or even revert to a few hours of (often calamitous) intuitive trading.

Not only that, but I would occasionally make mistakes. I would go long when I meant to go short, enter a limit instead of a stop order, or some other equally silly thing. Despite a lot of practice, these things would happen, because of trading stress and the time constraints imposed when reacting to events in fast moving markets.

That led me to develop software so that my computer could trade for me. This improved my trading. Nowadays I don’t watch the market. I have a comprehensive trading plan for each market session and let my computer trade the plan for me. No mistakes, no intuitive lapses, just planning my trade and trading my plan. When the market closes, I look to see how I went today. Before the market opens, I submit my trading plan. It is usually the same plan every day, so it only takes a couple of minutes.

Breaking the addiction to trading action, through automation of my trading plan, was my first and most important step to becoming profitable.