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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Stay in the trade until one of four things happensHOW MUCH MONEY AM I GOING TO ALLOCATE TO EACH TRADING STRATEGY AND SETUP? Determining how much money to allocate to each trading strategy and setup is, of course, critical. The key is to find an allocation that doesn't cause any stress, allows the chance for a trade to do its work, and won't violate any daily drawdown rules. One of the biggest problems 1 see with newer traders is that they are trading way too big in relation to their account size. Trading 10 lots on a $10,000 account is like introducing your mistress to your wife. Yes, you can do it, but that doesn't make it a good idea. (Luckily my wife has a great sense of humor.) These numbers will seem conservative to some of you and aggressive to others. I've seen traders take a $100,000 account and start trading 60 ES contracts at a lime. Pretty soon they are trading six contracts, because that's all the money they have left to trade. The goal with this plan is to make a living, not a killing. WHAT EXECUTION METHODS WILL I BE USING? WHAT PARAMETERS? This is where I decide my primary execution method. Am I scaling in? Scaling out? Getting all in and all out? What is my risk-to-reward ratio? This is a lengthy part of the plan as 1 will write down sample plays for all my categories. I'm not going to do that with all my plays here, but I will spell out my parameters for gap plays. For all of my intraday plays. 1 will get in all at once and scale out as the position goes my way. The target on the first half of my play will be small, the equivalent of I to 2 ES, or 10 to 20 YM points. Once I have this initial profit, I will give the second half more room to play out. For my swing plays, I will get in all at once and get out all at once, trailing my stop to protect any gains. For 5-minute squeeze plays on YM, get in all at once, using 10 contracts per $100,000. Use a mechanical target of 10 points on the first half for choppy days, and 20 points on the first have for more volatile days, as determined by the volume on the ES on a five-minute chart (Chapter 5). If the target on the first half is hit, move your stop up to breakeven. Stay in the trade until one of four things happens: Your stop is hit. You get a reading of 800 ticks in the opposite direction of your trade. There is a reading of 1,000 ticks in the direction of your trade. The squeeze loses momentum. I do this for each of my plays so there is no question as to how they should be executed. This is crucial because it ties in directly with the next portion of the plan. HOW AM I GOING TO TRACK AND RANK MY TRADES? This is where I detail how I am going to track each of the setups I trade and how they are working. I track this information in Excel, which calculates a running average. 1 will track all my trades and rate them as follows: 1. Target hit 2. Out at a different price from target, but profitable 3. Out at breakeven 4. Out at a different price from stop, but a losing trade 5. Stop hit I will add up my daily score and divide by the number of trades to get an average. This provides a grade point average on the different setups and how they are doing. 1 separate the trades by the specific setup that is being used. At the end of the month, I will have an average by setup, and an overall cumulative average. This will help me to weed out the setups that aren't working. For example, I may have something at the end of the month that reads, Gap plays: 4.24, squeeze plays: 3.57, pivot plays: 3.87. By looking at this I can see trends in these setups and potentially drop setups that aren't working, or allocate more funds toward setups that are working. It is imperative that traders do two things well in order to do this. First, they have to spend 10 minutes a day keying their trades into an Excel spreadsheet, or into a journal. Second, they have to follow their setups the same way each and every time. This brings me to an important rule regarding my trading plan: Any trade 1 take that does not fail into a specific setup or ehart pattern I have outlined, I will label as an impulse play. This includes plays in which 1 took a specific signal to get in, bul got out of the trade too late or too early because T wasn't paying attention or because I was feeling hopeful or scared or whatever. This is a weakness, and if I succumb to this temptation, I must track it and see the impact it has on my trading. I know from past experience that the results of any of my impulse plays over time are poor, and this reminder keeps me from taking these trades. However, I do not want to get lax, and T will continue to write these down and track them if I take them. I will jot notes on these trades. Did I jump in too soon? Did I miss a fill? Did I chase? I have found that by tracking these things, I'm also holding myself accountable. The more I start tracking my trades, the fewer impulsive trades I take and the fewer overall amateur mistakes I make. To this end, I also grade my trades on how well [ followed the setup. 1 will give a trade a 5 if L followed the setup to the letterwhether or not it makes money. Any trade that is not a 5 is an impulse play. You have to be brutally honest with yourself here. If not, you're only hurting yourself and anyone who depends on your trading income. I will also note any overall trends in my trading. How many days did 1 start off losing but ended up on the plus side? How many days did I start off strong only to give it all back? What was going on that day in terms of interruptions, phone calls, family stuff, and the like? I know from past experience that I get in trouble when I start off strong and start to go for bigger trades with house money. 1 will keep track of any days in which I let greed get the best of me, then work on reducing the number of those days. WHAT ARE MY DRAWDOWN RULES? If I am down by 15 percent for the month, I will cut my position size in half for the rest of the month. If 1 am down by 20 percent for the month, 1 will stop trading the rest of the month. If I hit a 30 percent total drawdown, it is time for a six-week break from trading. My daily drawdown max for imraday trading is $3,000 per $ 100,000. If at the end of the day I exceed this (evel, 1 am on probation the next day. If 1 exceed $3,000 per $ 1 Of),000 again that week, I am done for the rest of the week. This is my punishment for breaking my trading rules. I have to point out that many hedge funds and money managers are much more conservative when it comes to drawdowns and annual targets. A monthly drawdown of over 5 percent for a hedge fund can be devastating to its business, and an annual gain of 20 percent, year after year, opens the floodgates to billions and billions of dollars for any fund. I have a couple of comments on that. First off, the day-trading strategies discussed in this book are not going to work on a $400 million fund. There is nowhere near enough liquidity to gel in and out of the markets with that much money in that short a time frame. Many funds, however, will allocate a portion of their $400 million to take advantage of intraday trading opportunities I describe in this book. Out of $400 million, how much would they allocate? Maybe a million. That is % of I percent of the entire fund. I bring this up because people need to treat their trading account for what it isa high-risk way to make a living. Most of a trader's funds should be kept in conservative vehicles things like bonds or funds run by conservative money managers. Only a portion of total funds should be allocated to an aggressive trading account designed to generate monthly income. WHAT ARE MY PROFIT RULES? My target daily average goal for intraday trading is $500 per day per $100,000. This is conservative and achievable, and it adds up quickly. 1 will focus on generating five $2,000 per $100,000 days per month. This means I don't have to trade every day. I know from past experience that my best trading days are Tuesday, Wednesday, and Thursday. Therefore, I will focus more on trading these days. If I am up over $2,000 per $ 100,000 before noon, I will continue to trade umil I have a losing trade, at which point 1 will stop for the day. If I have a day in which I make $5,000 per $100,000,1 will take the next day off to escape those feelings of euphoria that cause traders to do stupid things like double up on positions or trade without a stop. 1 will stop trading for the rest of the month at $20,000 per $100,000. I will track my daily equity curve through using an Excel spreadsheet. I will withdraw 50 percent of my trading profits at the end of each quarter. I will never add money to an account that is down, and I will never meet a margin call. I will add money to an account that has proved itself with positive returns. The reason 1 will withdrawal profits is because this is the best way to protect them. It is with these profits that I get to invest in more real estate, buy more gold coins, pay for a family vacation, and fund my projects. It also is a reminder that the numbers on the screen are real and represent real cash. WHAT IS MY OFFICE SETUP GOING TO BE LIKE? I have a separate condo that I have set up specifically for trading. The condo is sparse, one of the bedrooms is completely empty, and the other bedroom is set up as an office for my assistant. 1 have taken over the living room as my trading station. 1 have 5 computers and 12 monitors. I have cable Internet access with back-up dial up, plus two phone lines, a fax, and a cell phone if things go wrong. My goal this year is to get another assistant who helps only with order entry, and to program more of my trading setups to generate mechanical signals. I have had my trading office located at regular office space but found the solicitors and general banter too distracting for trading. Also, when other people in the office building found out I had quote screens all over the place, they would start stopping by to check out what the markets were doing. This was fine the first few times, but then it got real annoying, real quick. In contrast, in my private office, I have pictures on the wall that L enjoy and a large fish tank to watch when 1 want a break from watching the computer screens. And best of all, no unwanted interruptions. WHAT ARE MY REWARDS IF MY TRADING IS GOING WELL? This is where I establish goals that motivate me to stick to my plan. I know that if I stick to my plan, my trading has a better chance of succeeding. And if I succeed. I get to reward myself. If 1 hit 60 percent for the year. I will take the next four weeks off, [f this occurs in the fourth quarter, I will take the rest of the year off. I could go for more money, but it's enough. For 2005,1 want to spend two weeks in northern Italy and Switzerland I want to take four long weekends and go to a beach and do nothing. I want to visit Australia, Hong Kong, Taipei, and Tokyo this year, whether on business or for pleasure, I like to watch movies, and I would like to upgrade my home theater system. [ have a farm in southwest Nebraska, and [ would like to buy another section of farmland in that area. I realize that I need to focus on the setups and not focus on the money needed for the rewards. If I focus on the money, I will lose. If I focus on the setups, 1 will win. ARE THERE ANY GROUPS, PEOPLE, OR ORGANIZATIONS I'D LIKE TO HELP OUT THIS YEAR? I used to send noney to the Salvation Army, but I don't really feel any impact when I donate money to big charities. I would rather help out individuals. Each year I find a struggling artist who has talent and support that person for a year, and I provide start-up funds to an inner city youth who wants to launch a business. My rute for this is that I never give the funds to people who find out that's what I like to do through an article and e-mail me. I look for people in my local area by asking teachers and other school personnel. I also like to spring for the occasional vacation that brings all the family members together. WHAT ARE MY SPECIFIC PLANS FOR STAYING ON PLAN THROUGHOUT THE YEAR? This is where I add any notes I have gained from my own experiences to help me stay prof Stable in my trading. After you have a $5,000 per $100,000 day, escape any feelings of euphoria by taking the next day off and doing something that humbles you like playing golf or flying a plane or sparring with a black belt in tai kwon do. Do not trade the S&Ps between 12:00 noon and 2:00 p.m. except if you are managing an existing position (do not initiate any new trades). Between 8:30 a.m. Eastern and 10:30 a.m. Eastern leave your instant messaging service off, do not check e-mail, and do not answer phones. In the trading room let people know you will not answer questions during this time. Minimize the trading room window so you do not read what is going on in the room. You can talk about what you are looking at and what you are doing over the microphone. If people have questions, they will have to wait If they don't like that, they can leave. Do not trade anything during the overnight S&P session. Belter yet, don'I watch it either. If you quit early because you had a 20 percent month, physically get away so you cannot trade. Go to Cape Cod if it is summer or go skiing if it is winter. Do not trade after 12 noon on Fridays. Focus on trading lighter during the last three days of options expiration, or not trading at all. Review your performance during this time and consider this as your time off during the month. For the past year the market seems to do absolutely nothing during this time. Focus heavily on the First two trading weeks of the month. After the first two trading weeks are over, take the next two trading days off and gel away from the markets. Give your brain a rest. Take off the entire week of Thanksgiving. Take off the last two weeks of the year. Plan your vacations in August so you won't be missing anything. WHAT AM I DOING ABOUT MY PHYSICAL HEALTH? Your ability to trade effectively and consistently directly relates to your physical well being. You sharpen your mind through physical activity and plenty of exercise, as well as healthy eating. I'm going to share with you my recent health experiences. I debated about whether to include this or not, as this is a book on trading, not on health kicks. And, of course, I'm certainly not a doctor. However, I do feel strongly that optimum health is important for a trader, so I'll talk about my recent experiences and you can take it for what it's worth. I've always been health conscious, though I certainly go through *'less healthy periods of time. I try to work out regularly, watch what I'm eating, not drink too much alcohol or caffeine, and take vitamins. Last year, when I was 34, I took a couple of physical fitness tests and detailed exams, and was surprised by the results. First off, my cardiovascular health and flexibility were rated as excellent. This means that my running and aerobic activity over the years were keeping me in good shape. That was where the good news ended. I then discovered my body fat percent waA much higher than I thought, and I would need to lose 20 pounds of fat. This was a total surprise. Second, I discovered that I had an extremely low pH level, which means that my body was highly acidic. I then went on to find oul the many pleasant things that are associated with having a continuous low pH/high acidic reading in the human body. Some of you will know what this means, while others of you won't. I'm going to condense this as much as possible and share it, so people who are interested can research this for themselves, form their own opinions, and make their own decisions regarding their health. I swear on my unborn child that this is not going to lead into a multilevel marketing pitch. In a nutshell, a low pH level (high acidity) is the root cause of over 50 percent of all diseases leading to hospitalization, including all the killers like heart disease and cancer, as well as psychological diseases. More specifically, it causes plaque to form on artery walls, and it causes imbalances in the brain which lead to insomnia, anxiety, and impairment of memory, [t also leads to calcium deficiencies as calcium is pulled from the bones to tight the high acidic levels in the body, which leads to weakened or collapsed vertebrae, poor posture, and back pain. A high acidic reading in the body leads to dysfunction of the digestive system causing indigestion, gaseousness, bloating, and abdominal cramping. Because of this, not enough nutrients get absorbed from the food we eat, and the entire body can experience malnutrition. This also causes undigested foods to ferment in the intestines, causing toxicity. High acidity also interferes with the basic functions of the colon, causing constipation as well as many other pleasant side effects. The list goes on and on with the immune system, respiratory system^ urinary system, and glandular system all affected by a low pH level (high acidity) in the body. I had no idea about any of this until I was told about it, and I was admittedly obstinate with the doctor when he was telling me about this. Did I have cancer? No, Were my bones weak? No. He assured me in time this wouJd become a problem, but he did pinpoint an immediate problem, and that was with my digestive system. He asked me if I had to take antacids frequently because of heartburn. t4Yep, I answered. He also asked, rather delicately [ might add, if, upon emerging from the bathroom after doing my business 1 noticed a strong, almost embarrassing odor. This applied equally to any gas I might be passing into the atmosphere. Uh, yeah, that happens sometimes, 1 said. He smiled and told me this was due to the high acidity in my system, which caused the digestive system to falter and not fully digest the food I was eatingwhich also was the cause of my extra 20 pounds of fat. Before [ embarrass myself further, let's jump into the next obvious question. What causes high acidity? Not surprisingly, it's the foods we eatmostly the ones that are manufactured and come in cans or boxes. Even more so, it is based on what we drink. Sodas are the worst culprit, regular or diet. I used to suck down three or four Diet Cokes a day. I love sodas. Unfortunately, the more doctors I've talked to. the more convincing the argument that sodas are killers, just like cigarettes. Believe me, that is something I never thought would be coming out of my mouth, I stopped cold turkey and haven't had one since. With respect to diet, I found it amusing that many of the things I thought were healthy were responsible for my current condition, m the mornings, I would pour soy milk on my cereal. Well, white soy is good for you, processed soy is like drinking soda, and most cereals are highly acidic because of the high proportion of refined flour in them. For lunch, I would have a sliced turkey sandwich, soup, and a diet soda. Well, the turkey is bad because packaged lunch meats carry nitrates that ruin a person's stomach. The bread was bad because of the refined flour, and of course the soda was bad. For dinner I would have something similar to what L had for lunch. To top if off, I also found out that all of the vitamins I took were worthless because they were synthetic. This applies to every vitamin a person takes that lists ascorbic acid for Vitamin C, which is pretty much every vitamin. What about all the health benefits that you read about and hear in the media? It's called marketing. Anyway, here is the list of foods by category, regarding overall health for the body. Foods that promote a healthy pH level are listed first, and the killers are listed at the bottom. 1.Eat all you want Raw fruits Raw vegetables (or lightly steamed) Brown rice Selected herbs Unprocessed fruit and vegetable juices Whole grains Ezechiel bread (also referred to as flourless) Drink one ounce of water for every two pounds of body weight each day. 2.Eat with some moderationone part for every three parts from item I Clean meats, cooked rare Roast fish Eggs Raw dairy Unrefined molasses Raw nuts and seeds 3.Occasionally Processed cheese Commercial pizza Commercial butter Real ice cream (no gum) Canned foods Alcohol Coffee Pasteurized dairy 4,Not in this lifetime Soft drinks French fries Doughnuts Potato chips Refined protein powders Margarine Mayonnaise Hydrogenated oil snacks (salty snacks) Diet soft drinks NutraSweet/aspartame Processed soy (soy milk, soy cheese, soy protein isolate, soy lecithin) White bread Admittedly, eating these foods from the first group on a regular basis took some getting used to. I love cereal, but now in the mornings I eat oatmeal with fruit. I love deli sandwiches and sodas, but now for lunch I eat a Greek salad with grilled chicken and water For dinner Til have vegetables, salad, and either chicken or fish. For snacks throughout the day, instead of grabbing something from the vending machine, 1*11 have an orange, a banana, or a handful of raw almonds that have been soaking in water I still drink alcohol, but only on Fridays and Saturdaysand only a few drinks. The biggest challenge was cutting back on caffeine, but I went at it piecemeal, reducing consumption over the course of a couple of weeks. Once I adjusted, I noticed 1 had more energy because I was drinking so much water. The biggest change during ihe trading day is that instead of sucking on sodas and coffee and having my energy move up and down like a stochastic on a five-minute chart, I drink six bottles of water (16.9 ounces each) a day, and my energy level stays high and constant. The transition was difficult, but after four weeks of doing it, I couldn't imagine going back to my old habits. I'm including this information because it was a real eye opener for me, and a big key to my improved health. One side benefit to all this, besides tee I ing better and sleeping better, is that I lost the extra 20 pounds I was carrying in five months, without increasing the amount of exercising 1 was doing, h was just a matter of eating foods that helped the functions in my body instead of harming them. For anyone interested in more information, a good place to start is a book called Alkalize or Diet by Theodore A- Baroody. Also, you can go on Google and search for acid and alkaline foods or ''high pH foods, and you will get all the information you need. If you are interested in the tests I took, feel free to contact me and I can give you more information. My own research has convinced me that by eliminating refined sugars and refined flours from our diet and significantly increasing our intake of clean water, we are preventing more health issues than just about anything else we could do. Good health and good trading go hand in hand. |
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