I have been trading, in front of a screen, for twenty-eight years. I always emphasize “in front of a screen” because it is a totally different animal than floor trading. Some of the mistake traders commonly make are concepts that came from “the floor”, because until just the last 12-15 years ago there really weren’t that many screen based traders. Floors traders that transitioned from the floor to the screen naturally carried their habits and floor techniques with them, and a lot of them continue to promote the things that worked on the floor to screen based traders. What worked on the floor does not work in front of a screen for a lot of reasons that are outside the main point of this particular blog. We’ll save that one for a later date.
It is the age of the screen based trader, IF you realize where your edge lies.
Let’s cover some common mistakes almost all screen based traders have made at one time or another during the learning curve.
Time Frames
The smaller the time frame you trade the less likely you are to succeed. Daytrading is more difficult than position or swing trading. Everyone wants to “daytrade.” That’s fine, I daytrade, most of my clients daytrade. BUT, I am always willing and encourage my clients to be willing to take that daytrade into the next time frame if the opportunity presents itself. The big money and the “easiest” money is made outside the intraday timeframe. To be consistently successful over the long term you have to at least occasionally have the big winning trade.
Let’s talk about intraday trading and intraday timeframes for a minute. One thing that almost all intraday traders can do to increase their probability of success is to use a chart duration of nothing less than 5-minutes. 30-minutes is even better. You do not decrease risk by trading from tick charts or one minute bar charts. You are actually dramatically increasing your risk because you end up trading nothing but noise – the normal gyrations and probing up and down that is a characteristic of an Auction Market. Anyone that thinks they can devine special meaning from every change in the bid/ask in the ES (or any market) all day is delusional. There is no edge there!
You must be able to see the larger context of what the market is doing to be able to distinguish what may be opportunity from just random price rotation and noise.
Someone is reading this and saying to themselves, “yeah, but I know a guy that made millions scalping the ES/EU/Forex market so I know it can be done.” Yes it can. The lottery is won somewhere every day. It’s never going to be you.
I know a lot of traders that made millions scalping in the late 1990’s to early 2000’s. The overwhelming majority of those traders gave it all back and most of them gave back much, much more.
Go with the probabilities. Don’t try the “savant” stuff.
Time is the screen based traders best friend. Don’t make the mistake so many screen based traders make and turn it into an enemy.
Which Markets to Trade
It is a huge mistake to focus on one market. This is especially true for daytraders. Look at this form a business perspective. Why should you care if you trade the ES (S&P Mini), the EU6 (Euro currency), Corn or Gold? Trade opportunity. This is one of the key edges the screen based trader has – the ability to look across the entire spectrum of tradable assets for the market(s) that may be setting up for the best reward to risk opportunity. Why trade the chopfest in the ES day after day if the Australian Dollar offers better opportunity?
Expectancy
A simple way to express is that expectancy is that it is probability over the long-term of having positive results. There are two parts to expectancy.
The probability of the trade working.
The relationship of the potential gain if the trade works to the loss if it doesn’t work.
You can have a positive expectancy by having a large percentage of winning trades.
You can have a positive expectancy by having fewer winners but larger winning trades.
The focus of most traders is to try and have a high percentage of winning trades. This is actually quite easily achieved and is the prevalent method you will see in trading chat rooms. It also almost always yields net negative results. It “feels good” to have winning trades. Here is a guaranteed way you can right now have a bunch of winning trades. Buy/sell the ES. Place a 4- tick stop. Take a profit at 3-ticks. Do this all day long one day and let me know if you make a net profit. In addition to a mind-numbing endeavor all day, it loses money – very quickly. But you will have lots of winning trades.
Or, you can do a little homework the night before, pick out several markets that look promising with potential reward a multiple of the risk that must be assumed for the opportunity, wait for those trades to set up and take them. If you take three or four trades often you will only need one to work to make a net profit. Sometimes none of them work; sometimes all of them work. Overall this style of trading has a huge built in margin of error because its essence is to let profits run and cut losses short with the added advantage of a method that consistently identifies the opportunities that are most like to offer the high reward/low risk situation. This isn’t a fairy tale. I have a lot of clients that do this every day.
Gimmicks vs a Sound Foundation
This is tied to the larger issue of how trading is promoted. Trading is both implicitly and explicitly promoted as a way to take a little money and get rich. Lip service is paid to the common knowledge that most traders fail. All you need is this oscillator/software/magic number generator/chat room/system and you will be different. It reminds me of when I was in high school and wanted long hair so I’d be different. I look in my old yearbooks and we all had long hair! Yeah…I was different. If almost all people fail at trading, is it wise to do what almost all traders are doing?
The inconvenient truth about trading is that it is a serious business. It is difficult. There is a learning curve. There is nothing that can replace an understanding of the markets from a worldview that is based in logic and not magic. As I am sure many of you are (painfully) aware, you can spend thousands of dollars and seem to get nowhere in terms of results. If you are struggling sit down and be honest with yourself about what you are doing and why. If it is not working it probably isn’t valid.
I hope the above observations and tips will get you closer to your goals, or help take you to the next level.