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First published in Great Britain in 2013
Copyright © Harriman House Ltd
The right of David Bennett to be identified as the author has been asserted in accordance with the Copyright, Design and Patents Act 1988.
ISBN: 978-0-85719-288-2
British Library Cataloguing in Publication Data
A CIP catalogue record for this book can be obtained from the British Library.
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.
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Preface
When I talk about day traders I think of them falling into two main camps – intuitive traders and system traders.
If you watch markets long enough (some people watch every tick for years), you begin to get a feel for what is about to happen. If you enter and exit trades based on this feeling, you are an intuitive trader. Some of the most successful traders are intuitive and we can only envy their talent and skill.
If you analyse markets carefully enough, you can begin to formulate rules about the way they usually work. On the basis of these rules you can build a trading plan, which says: “If this situation occurs, I will take this particular action, because over time I have seen that it is profitable to do so.” This is the approach of the system trader; it is my approach and it is the subject of this book.
In this book, I will describe my specific trading approach to day trading futures contracts; it is a description of how I personally research strategies, build a trading plan, and submit trades. It will give you an insight into the way that one trader does things.
Central to my approach are two software programs, the first being a tool that completely automates the day-to-day trading process (by implementing pre-defined trading plans), and the second being a simulator that assists in the discovery of profitable trading strategies. I built these tools for myself and I now sell them to other traders from my TradeOnAUTO website (www.tradeonauto.com). It is not essential that you purchase TradeOnAuto software to make use of this book, as you will still find the techniques described instructive, but if you wish to replicate what I do the software tools are essential.
I assume that the reader has some basic knowledge of trading techniques. For those who find this book heavy going, my earlier book Day Trading Grain Futures would be a good place to start. That said, beginners who are willing to do some internet research along the way will get along just fine.
Good charts are essential to the trading plan development process, so it is important to ensure that your broker provides the facility to study historical intraday charts in several different time frames, or to ensure that you have access to some other quality charting product that will enable you to do this.
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