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Random Thoughts About Day Trading S&P 500 by Don M
I started collecting intra-day data (recently), delayed data for the first couple of months or so and real-time data for the past 5 months. I have done very little trading during all of this time. My advice to most people new to day trading would be to do likewise. You may have the right knowledge, signals or method for day trading the S&P, but you may not have the right psychology. Inability to trade your signals in a consistent and decisive manner is a problem you can never fully appreciate until you begin day trading the S&P.
Here's why I fail to trade my signals: Stress avoidance--stress of a possible loss--stress of picking up the damn phone and calling in the order--stress of picking up the phone and moving stop loss to break even--stress of having a position in the market--stress of having to follow up a loss (perhaps very soon) with another trade--stress of continuously and aggressively looking for new trades--stress of acting decisively during moments of uncertainty.
My signals often come at tops and bottoms and that's when you have to have tremendous confidence in the probabilities of your signals. You have to believe, without question, that you may lose on this next trade and will lose on many trades-- but you will definitely come out ahead, in the long run, if you consistently trade your signals. A considerable amount of psychological adjustment may be necessary before the inexperienced day trader can act decisively in this very uncertain environment. Again, acting decisively without hesitation, and without undue emotion during times of considerable uncertainty can be really tough for the newcomer.
The old saying: "He who hesitates is lost" is extremely pertinent to day traders. I often find myself hesitating and then looking at the other S&P charts for confirmation. Then it's usually too late to take the signal. By other S&P charts I mean the tick and 5-min charts. The 3-min bar chart is my main S&P chart. 1-3 minutes is all the time I have to take most of my signals. I may soon stop using 4 chart layouts and have only a 3-min bar chart of the S&P on my screen. Then, I'm more "locked-in" to taking my signals. I may delete all markets, except the S&P, from my hard disk. The S&P is really where it's at!
The stress and emotion of day-trading is much greater than that experienced by the long-term trader using daily bar charts. The "live" market confronting the day trader is much more intimidating than the "sleeping" market the intermediate and long-term traders deal with. I recall the relaxed environment daily charts and longer-term trading afforded me. I would often call in my orders at 9 or 10 p.m. Very quiet, calm and relaxed. Also, the long-term trader doesn't have to experience his losses while they happen! And, he doesn't have to take the next signal within the next few minutes. Big, big differences!
The famous trader and author Larry Williams once expressed his definition of what a trader should be. He was called the good trader, "The Impeccable Warrior." Impeccable meaning his trading approach and psychology are viable and warrior referring to the positive aggression effective trading requires. These are my definitions of what Larry means.
I gave Dave a copy of a new form I made-up. It's a sheet of paper with the title, "Daily Signals." Date: is to the right of this and numbers 1 thru 7 follow below. After each number are the words, "Took ---- Missed and several spaces followed by the word Why? Just my way of holding myself specifically accountable for each and every signal that occurs throughout the trading day. Expect such a form would be of help to many.
Failing to trade my signals has not resulted in a complete loss of time and money, having continued to learn more about how the S&P moves during the day. One thing really standing out is the fact that the price will very often do the unexpected. No, my signals have not been proven wrong. In fact, I have more confidence than ever in them.
When I say "the unexpected" I mean unexpected to the typical trader. I have heard it said that to be a good trader you must be able to turn your head around 180 degrees. There's a lot of truth to this. Larry Williams said you have to learn that what looks good is usually bad and what looks bad is usually good. Once again, from the viewpoint of the typical trader.
I find that often there is a false move and then the really big move goes the opposite direction. A kind of "set-em up and stick it to-em" procedure! Newcomers Beware!
The questions the money management rules need to address are:
- 1. How much
trading capital is needed to finance one contract in a particular
market? For example, a trader may decide he needs $40,000 (margin)
to trade one Treasury Bond contract and $30,000 to trade one Japanese
Yen contract (or international commodity markets).
- 2. What percentage
of capital is to be risked on each trade. For example, is it 2%
or 5%?
- 3. Are opportunities
across competing instruments treated as equal?
- 4. Are trading
opportunities within the some instrument treated as equal?
- 5. Are successive opportunities in the same instrument treated as equal?
Once a trading plan and a set of good money management rules have been developed, we need to take the plan into the market. It is at this point that we will not only discover more about our plan, but more importantly we will discover more about our own psychology. For instance, we may discover we are unable to execute the plan in the market, or we are unable to execute it flawlessly.
Before we can progress, we must remedy any problems which have arisen so far. To overcome these problems, we may need to adjust our trading plan and/or look closely at our own psychological makeup. For instance, the trading plan may need to be made simpler or more robust so that we find it easier to execute it. Another example, could be that we find our psychology is such that we are more suited to a type of trading other than the trading style of our plan, for example long-term trading rather than daytrading.
Once we are able to execute the trading plan flawlessly, then we can go to the next step - that is, are we ready to accept the rewards from the perfect execution of our plan? We may suddenly find ourselves unable to accept a steady stream of money from the market. This problem normally manifests itself with having a series of wins only to give back profits in one or two unplanned trades finishing from where we started. Again, we will have to go back and look at our own psychology and try to remove any blocks that are stopping us from reaping the rewards of our efforts.
At the completion of this task, we will be back at the beginning of the loop - the trading plan. After completing the loop we will not only have new ideas to test and incorporate, but also be able to adjust the plan to better suit our psychological development as a commodities futures trader.Once again quoting T. S. Elliot, "through the unknown, remembered gate when the last of earth left to discover is that which is the beginning."
June 20th- SP 500 Index Forecast with Video
Back in Mid-April I penned a forecast calling for a top in the markets and suggesting a drop from 1220 or so on the SP 500 index down to 1130 as the first leg down. That was a minimum downside and based on the rally off the February 5th lows to the April highs. In the last many weeks, the market actually ended up correcting 31% of the 13 month rally from March 2009 to April 2010. This type of corrective action had the exact same patterns as the prior two corrections since the Bull began in 2009.
On May 25th in pre-market, I wrote a forecast with a video predicting a bottom at 1030-1040 ranges, and we did in fact bottom that day. The market has since traced out a rally followed by a re-test in early June, and since then another rally to new highs since May 25th. I expect this type of chopping action to continue until Mid-September as I predicted back in April. The preceding 13 month bull leg rally must be corrected both in sentiment and price over several months of time. The price objective may have already been met on May 25th and again with the June re-test, but the amount of time for a correction is not nearly enough. Expect continuing choppy action for the next 3 months, after which I believe the market will firm up and we could run to new highs by the end of the year.
We should see a pullback early this week, followed by a rally if I’m right.
