Best Thread 55000 % in ONE month !
fifty2aces
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Scalping will also allow higher profits in %age terms, and if you're trading a liquid instrument, you can get a decent size on.
Think of it like this - you give £20k to Buffet, and £20k to Rotter - who's going to be first to a million?
On the other hand, if you give them each £200M, who's going to be first to £10B?
Most people don't have £200M to play with, so for most situations, short term is more profitable than long term, all other things (e.g. trader ability) being equal.
BSD
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Mate you're losing me...
The ONLY difference between daytrading and scalping is TIMEFRAME, the latter is simply shorter term than the former, and the fact that scalping is not as compoundable as daytrading for eventual liquidity reasons.
But the richest people in the world with NET wealth NOT tied up in stocks are NOT investors, they are hedge fund traders, and the most successful of them like Soros or Cohen are SHORT term traders.
The only people to have ever earned NET one or even 2 BILLION in ONE year are hedge fund traders.
Please open up your own thread if you want to start a debate about scalping vs investing as this is now going around in circles, and as this is a thread about scalping / daytrading / short term trading, NOT long term investing.
tar
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Ok maybe paul will reach 1 mil , but he will stop while buffett will be heading higher ...
BSD calm down i am not against this thread
tar
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But it is not equal , ok scalping faster money , longer time frames more money . ( ofcourse if u r good at what u r doing )
BSD
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Tar, again, Buffett is only where he is because of the stock evaluation Berkshire Hathaway, NOT because of his performance.
It's like shares of some dot.com that exploded even though thge numbers were not trhat great, and Buffetts performance is not that great when compared with hi short term trading hedge fund peers.
Besides, he cannot sell his shares in BH and hope to realize even anywhere close to what his paper worth is, while his short term trading hedge fund peers - some of whom earned more in the last years than any human being has ever earned in one single year - are taking their pay home in cash.
It's like shares of some dot.com that exploded even though thge numbers were not trhat great, and Buffetts performance is not that great when compared with hi short term trading hedge fund peers.
Besides, he cannot sell his shares in BH and hope to realize even anywhere close to what his paper worth is, while his short term trading hedge fund peers - some of whom earned more in the last years than any human being has ever earned in one single year - are taking their pay home in cash.
BSD
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Elementary maths...
The shorter time frame you trade in the higher percentage returns you can achieve...
Which is why a scalper can make hundreds or even thousands of % return per year...
Of course the caveat - for the umpteenth time - is that such returns are not endlessly compoundable, but only due to eventual liquidity reasons.
But the amounts you can make via micro scalping still allow people like Rotter to make 50 mill in a year.
Now, if you move on and grow with your account size, you can then adapt and learn to compound those sums like say Mr Soros who started out with no more than 250K, and through trading somewhat longer timeframes you can then scale that up to a point where you can run billions with your day and swingtrading strategies.
Cohen whose firm routinely accounts for as much as 3% of the New York Stock Exchange's average daily trading, plus up to 1% of the NASDAQ's -- a total of at least 20 million shares a day runs Billions and daytrades and has outstanding annual returns.
Of course now your returns cannot be as high as earlier any longer, but you can still make returns in the good teens PER YEAR and even the odd 100 or so percent year running sums like that.
The shorter time frame you trade in the higher percentage returns you can achieve...
Which is why a scalper can make hundreds or even thousands of % return per year...
Of course the caveat - for the umpteenth time - is that such returns are not endlessly compoundable, but only due to eventual liquidity reasons.
But the amounts you can make via micro scalping still allow people like Rotter to make 50 mill in a year.
Now, if you move on and grow with your account size, you can then adapt and learn to compound those sums like say Mr Soros who started out with no more than 250K, and through trading somewhat longer timeframes you can then scale that up to a point where you can run billions with your day and swingtrading strategies.
Cohen whose firm routinely accounts for as much as 3% of the New York Stock Exchange's average daily trading, plus up to 1% of the NASDAQ's -- a total of at least 20 million shares a day runs Billions and daytrades and has outstanding annual returns.
Of course now your returns cannot be as high as earlier any longer, but you can still make returns in the good teens PER YEAR and even the odd 100 or so percent year running sums like that.
If price moves 500pts over 3 months in a series of up and down movements then the longer term trader may make those 500pts however the scalper/day trader may well make many times more as they catch series after series of 20,30,40,50,60 pt moves..
Obviously that's no guarantee but on the other hand the longer term trader needs to be spot on with that one trade and stay in during every retracement to realise those 500pts.
tar
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That is exactly what i am talking about from the begning , scalping is doable and can make u good money i agree , but u cannot keep up of the huge performance by scalping for ever there is limit , at the end u will switch to swing trading to compound your wealth to be real rich .( And because of that u will not find scalpers at the forbes list )
Ps. I meant in my replies to talk about swing trading from few days and higher not only investing for years
BSD
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OK, back to business with yet another read:
Part 1:
"Interview with Lewis Borsellino -
World Renowned S&P Trader
Lewis J. Borsellino, author of "The Day Trader: From the Pit to the PC" . Mr. Borsellino is known as "one of the biggest and best traders" in the S&P pit by CNBC. Mr. Borsellino trades S&P futures on the floor of the Chicago Mercantile Exchange and off-the-floor at his Chicago-based trading firm.
1. What's the difference between scalping on or off the floor?
Scalping on the floor of an Exchange is dramatically different from scalping and/or day trading at a computer. When you're trading off the floor, the trades are usually longer in duration - 5, 7, 9 minutes, an hour, two hours, half a day � -- than when you're trading in the pit. For me, personally, when I'm trading in the pit, I can trade hundreds of contracts within a minute or two. That's if I'm truly scalping.
When you're trading on the floor - with the brokers and locals and amid all the market activity - you're part of the market. Locals in the futures pits are really like the market-makers in stocks, providing the bids and offers for the institutional players.
When I trade on the floor, I have a definite bias of whether I want to be long or short. I have my technical research that shows me the support and resistance areas that I want to buy and sell. For example, I may want to buy them at 1500 and have a mental sell stop in at 1496, and a profit objective of 1508. But when I'm on the floor and I see S&Ps go down to 1499, 1498.50, 1498 � I'll be buying on the way down too. Then as it turns around and goes above 1500, I'll be buying and selling out of those positions up to my profit objective. Off the floor, I buy 1500, put a sell stop in at 1496, and look to exit at 1508. I'm not scalping the way I would be on the floor.
2. Do you personally use pivots down on the floor?
Every morning my traders and I have our "Morning Meeting," which we also feature on the web site, TeachTrade, under Market Calls. We highlight the pivots that are likely to emerge for the day. We use a combination of technical analysis to determine these pivotal areas, above which the market is likely to be bullish and below which it becomes bearish.
3. Can a new trader with a good knowledge of the S&P's come onto the floor and have somewhat of a minimal learning curve, or do the rules of the pit differ dramatically from off the floor - such as your "spot" on the floor, whether the locals know you or not, etc.?
Wherever your trade - whether it's in a pit or off the floor - you have to know your environment. Trading on the floor is dramatically different than when you're at your PC in your home or in a trading firm. If you've been successful trading S&P's off the floor and you know that market well, you can make the transition to the floor, but it will take time to master that environment. It's not only your "spot" where you stand, it's also the pace of the pit, the ebb and flow of the orders, and trading with open outcry (shouting out your bids and offers) and using hand signals, instead of "pointing and clicking" with a computer or picking up a phone and calling a broker.
Another challenge of the pit is not to be unduly influenced by large locals as they 're trading and the overall excitement and emotion of the pit, which is very easy to become caught up in. I know there are some off the floor traders who really like the "squawk box" that gives them the action and the noise of the pit. Others are distracted by it because it influences them too much. When you're on the floor you have to be able to shut out the noise and the confusion.
4. What charts do the floor traders look at before the day and while they are trading?
There are not different charts for traders off the floor and on the floor. We're all looking at the charts. But one of the interesting things for on-the-floor traders is how do you extract yourself from the front-line action that is making those charts! Here's what I mean, when you're off the floor, you're looking at a support or resistance area that's being violated. You say to yourself, looking at your price chart, this is where I should buy or sell.
But when you're on the floor, you're in the thick of things. That chart you're looking at is really plotting what's happening around you. Off the floor, you may look at what appears to be a good top in the market, which you should be selling. When you're on the floor - having looked at that same chart - it's hard to sell when you see a lot of buys being executed at the top because some stops have been run, or to buy when you see the sells coming in.
When you're on the floor, you're living the action that's on the chart. You have to identify where you are as part of that chart without getting caught up in the emotion.
5. Do floor traders use beepers for alerts when approaching key moving averages?
In 1986, I was among a group of traders who bought the original rights to Gann. I put a chartist in my office and, every half hour or when need be, a runner would go up to the office and bring the charts down to me. Then we evolved to using a pager, which he would use to page me to tell me about a market move. Then we moved to alpha numeric pagers that he could use to send me a message. Now, at the Merc, we're allowed to use wireless headsets to connect with our technicians.
6. Do guys trade off the "basis?"
The basis (futures versus cash) is one indicator. But the key to being a successful trader is not being tied to just one indicator. There are so many possible indicators out there - the premium or discount to cash, correlation with bonds, the correlation among stock indexes, etc. A good trader knows how to look at all the indicators and decide which is dominant given the tone of the market at the moment.
7. How many people who come down to the floor make it to the point where they can make a living at it? And of those people what is the single biggest factor separating them from those who do not make it?
The rule of thumb is that for every 10 people who come to the floor to trade, 2 or 3 will be able to make some money. Then perhaps 1 trader will make a really good living. In any business, including trading, about 80% of the volume is done by 20% of the people. The biggest single factor that separates those who are successful from those who are not is discipline. This discipline - both mental and physical - enables you to stick by your plan, to control your emotions, and to handle both your losses and your profits without shaking your confidence or developing a huge ego.
8. How have you dealt with the transition from the floor to off-the-floor trading? Are there skills that you have acquired on the floor that are transferable to the upstairs trading desk?
Probably the biggest factor in trading off-the-floor versus on the floor has been the different dynamics. As I said earlier, when I'm trading on the floor, I can make far more trades than when I'm at the PC. Why? Because the action on the floor is instantaneous. I buy-sell-buy-sell-buy-sell in rapid succession. Off the floor, I make fewer trades, but when I do they tend to be a larger position and I may hang onto them longer. The skills that are transferable from the floor to the trading desk is the ability to gauge market sentiment. Watching the screen, you can see the market building momentum, for example, to break through a resistance level. Or, you may see a rally fade before it reverses. Either way, you have to be in sync with the market. You can't pick the top or the bottom. You have to let the market establish it's own levels.
9. You undoubtedly have seen hundreds, if not thousands, of traders come and go. What would you tell anybody thinking of coming down to the floor - or for that matter, what would you tell someone considering day trading - before they make that commitment?
When I first went to the floor, I began as a runner. Even though I was a college graduate, I had to start on the bottom rung. Why? Because trading is unlike any profession. You can have a PhD in nuclear science, and it won't do you any good when it comes to trading. The market demands and education of its own.
That's one of the reasons why I started TeachTrade.Com. It's an educational web site for stock and futures traders that includes market calls on stock index futures, stocks and options - as well as tutorials and lessons. The Market Calls, for example, allow you "look over our shoulders" as we trade - seeing where we'd get long or short or sit on the sidelines. That's essential, because the best form of education is imitation.
The goal is to help day traders know exactly what they're getting into. The media and the television commercials have portrayed day-trading as some sort of bonanza that will enable anyone to become a millionaire. The truth is 70% of stock day-traders aren't making any money, and the average life span of a day trader is about three months. Whether you want to trade on the floor or off the floor, you have to educate yourself.
10. When a big "A" local steps up to buy a falling market, is there a way to tell if he is covering or initiating a position? Will there be a different type of reaction by the locals.
Being a major player in the pit, there are other locals who will watch me when I'm buying or selling. I've used that to my advantage. For example, there are times when I really want to sell the market, I might be in there bidding, instead - and I'll use an order filler to execute my sell orders. If I want really want to buy the market, I'll do the opposite - I'll be selling and the order fillers will be buying.
On the other hand, the S&P pit is a small enough place that it's pretty easy to see when a big local is amassing a position. The other players know whether that local is long or short.
11. If you are listening in on the LOS player to the floor and the market breaks through a support level, and there is no noise (crowd roar) is that a good place to get long futures or stock? What would you be looking at to make your trading decision?
The noise can help you if you know how to interpret it. For example, say there is a big roar from the pit, as stops have been run, and then there is quiet. That quiet means there is no follow-through on that move. That's usually a good place to fade that rally or that break.
12. If you were a new trader, what would you look for to get experience?
If you want to trade on the floor, try to get an internship or an entry-level job at a brokerage firm. This will expose you to all aspects of trading and give you a good foundation from which to build. If you're doing this on your own --perhaps as a second career - you must educate yourself not only on the techniques (how to enter an order, etc.) but on the emotional and psychological aspects. As I say in TeachTrade.Com, I believe 90% of trading is psychological and emotional.
Whether you trade on the floor or off, you have to make this your life. You have to become totally dedicated to trading, the way the market moves, the emotional and psychological side of it, all the nuances �
13. How important is it for a new trader to trade small?
It's very important. Here's why. The biggest evil that can befall a new trader is trading too big. Truly, there is no such thing as an under-capitalized trader, I believe. There are only traders who trade too big for the amount of capital that they have and for where they are on the learning curve. Here's what happens:
A new trader begins with one S&P contract or 200 shares of stock. He does really well for one month. Then he starts thinking that if he had been trading 3 S&Ps or 600 shares of stock then he would REALLY be making some money! What happens is, he increases his trade size and, as a result, he's increased his risk level, which he's not used to. This then begins to change his emotional decision-making process.
The first commandment in our 10 Commandments at TeachTrade is to trade for success and not for money. But when a new trader suddenly faces more risk than he's been used to, he begins thinking about the money on the line. That will impact his trading decisions.
14. How about money management ideas for a new trader?
The key to trading is money management, and that entails keeping your risk and reward in balance. Our rule of thumb is that for every $1 you lose, you must make at least $2.00-$2.50. Put another way, for every $2.00 you make, you can't risk more than $1. To do that, you must keep your losses small and let your profits run. Plus, you have to know yourself and the kind of risk that you're comfortable with.
15. Would you recommend a new trader scalp or be more position-oriented?
As I've said before, scalping from the floor is far different (and easier) than scalping at the screen. That having been said, I think all new traders - on the floor or at the screen - have to get used to trading frequently. When I bring a new trader to the floor, I want to see him trade as many as 30 contracts a day, all one-lots. I want him to get used to buying and selling frequently, just for a scratch (or no profit, no loss). Same thing at the screen, get the feeling of buying and selling frequently. Get over being "trigger shy." And you have to know how to get out of position quickly, particularly if it goes against you. The hardest thing for most new traders is to get out of a losing position when the market turns against them.
Do you know how to turn a day trader into a position trader? Have the market move against him. Then he'll hang on and on and on �
16. Are the floor guys concerned about all the talk about regulating day traders? Essentially, upstairs stock day-traders aren't radically different from the guys on the floor. So, presumably, if they regulate us, they'll lump you guys in as well.
I'm really not concerned about regulation of day traders. Retail day-traders and investors are already signing reams of disclosure documents, and many are still taking on too much risk for the amount of capital they have. How can you regulate people to protect them from their own greed? While I hate to draw an analogy with gambling, it's like going to Vegas and standing outside the casinos with a warning sign telling everyone their odds of winning. The casinos would still be full.
Instead, and as a matter of good conscience, brokerages and clearing firms should offer more education and resources to their clients. That's why TeachTrade has met with such success. Our site is for traders, by traders, and we have no commission-ties to brokerages. We tell people what it's like to trade, and with our market commentary, we let them "look over our shoulders" as we go short, go long or sit on the sidelines. Our motto is institutional-quality research (now available for free) at retail prices.
17. Being an "A" local, do you sometimes find it hard to buy a few hundred cars without all the other locals front-running you?
I don't believe front-running is a huge problem. But I can tell you one thing, when you're putting on size (taking a large position), if you're wrong, you can get all you want! Seriously, you can amass as large a position as you want. The only question is how far you want to step out to get them.
18. How frequently does the floor run stops?
The beauty of having an arena like the S&P pit is that there are so many people in the pit, all of whom have a different opinion. Those different opinions end up as different stop areas. True, sometimes they congregate around the same areas, since technical research tends to pinpoint similar levels. But the role of the local on the floor is not to set off the stops. That's what some people believe. The locals are there to provide liquidity and to take advantage of the markets during those times when the market is out of equilibrium because of big orders coming in.
19. How about the open outcry system vs. the rise of electronic trading? Could electronic S&Ps ever have the liquidity that the pit has?
I think liquidity could be a problem for a volatile contract such as S&Ps. The contracts that will most easily adapt to an electronic venue are high-volume, low volatility contracts such as currencies and eurodollars, which tend to be dominated by institutional players who trade "order to order." S&Ps, however, still have an important local presence in the pit. In fact, a recent study found that some 50 percent of all S&P trading is executed through a local, versus only 10 to 20 percent in eurodollars or currencies. The local is necessary in S&Ps during exceptionally high volatile times when speculative buyers and sellers must step in to handle the orders that come into the pit. At the same time, I believe that electronic trading is here to stay. Take a look at the success of Eurex, the all-electronic European exchange. Clearly this shows that an electronic exchange is viable.
What will happen, I believe, is that a hybrid marketplace will develop. Eventually, we'll see electronic trading of the S&P major (not just the E-mini) during the day, side-by-side with the pit. The customer will have the choice of how and where orders are executed. Where the volume goes, the market will follow. Open outcry will be here as long as locals on the floor are needed to provide liquidity.
20. Let's talk a little about your book. The book was entertaining and insightful, and I especially enjoyed your views on the "personality" attributes of successful traders.
Thanks. I wrote the book for several reasons. With the day-trading boom, I saw there was a real need to let people know that this isn't "easy" or a slam-dunk for retail investors. Trading is hard, and it takes discipline. That's what a lot of retail investors don't understand. They think they can buy the bid and sell the ask and be a millionaire. The fact of the matter, day-trading stocks or futures takes a professional approach. It's not for hobbyists.
The second reason is, as a floor trader, I wanted to give readers an inside look at what it's like to be "in the pit." And, I wanted to pay a tribute to my fellow traders and to futures trading in general.
I do believe that there are some personality attributes that are common to successful traders, including discipline - both mental and physical, the ability to assess and manage risk, the ability to devise and stick with a plan based on technical research, and so forth.
So many people responded positively to the book - they wanted to be able to trade as I do - that I founded the web site, TeachTrade.Com
21. Give us a little background on yourself . How did you get involved in trading? What were your early experiences as a trader? Did you get 'tossed' around and lose money when you first got started? If so, how did you overcome that?
When I started trading, I was in the gold futures pit. Gold was at $800 an ounce in those days and liquidity was drying up. I was having a very difficult time largely because I was under-capitalized, which is a common problem for a lot of rookie traders. I was also plagued by outtrades, and I found some traders tried to intimidate me into eating errors that weren't mine simply because I was new. But being an athlete - I played football at DePauw University - and not being the kind of guy you can easily push around, I didn't swallow the outtrades that I wasn't responsible for.
Still, I was getting discouraged because I'd make money two or three days in a row, and then give it all back --- and then some - at the end of the week. Most weeks I was barely making enough to make my seat lease. I had to earn money at night to help support my trading.
Then I had the luckiest mistake of my life. It was during the Falkland Islands crisis. Gold was moving on every bit of news. One day we saw a news flash that the Falklands had surrendered. Gold dropped $50 an ounce. Then came the second headline - there was no surrender. Gold rallied $50. I was trading fast and furiously and, according to my trading cards, I had bought at the low and sold at the high. As I checked my trades with another trader named Mike, however, we saw that we were "sell-sell" at the high. That meant we each thought we had sold to the other. Now gold was $50 lower. "I'll buy yours and you buy mine," Mike told me. That's what we did - and we each netted about $57,000 on the outtrade. I had sufficient capital for the first time, and I went off to the new S&P pit. That's where I've been ever since.
22. Do you use support and resistance numbers? If so, do you calculate support and resistance via the 'pivot' formula or some other method?
Trading without technical research would be like driving blindfolded. You have to use technical research that includes support and resistance numbers, pivots and so forth. If you don't use research, you might as well go to Vegas and put your money on the pass line.
23. Do you hedge while you are trading? If so, with what instruments?
No, I do not hedge. I go home flat most days. And the number one rule I follow is "buy low, sell high." I'm not being facetious. Too many times traders forget that rule.
24. Do institutions such as Merrill and Goldman hedge their proprietary S&P trades?
Very few desks on the institutional level take directional positions. However, if Merrill or Goldman, for example, is buying, that does not necessarily mean it's for their proprietary desks. It could be for a hedge fund that's a client, or for a variety of different trades. Some of those could be directional trades."
Parts 2 & 3 to follow over the next couple of days.
Part 1:
"Interview with Lewis Borsellino -
World Renowned S&P Trader
Lewis J. Borsellino, author of "The Day Trader: From the Pit to the PC" . Mr. Borsellino is known as "one of the biggest and best traders" in the S&P pit by CNBC. Mr. Borsellino trades S&P futures on the floor of the Chicago Mercantile Exchange and off-the-floor at his Chicago-based trading firm.
1. What's the difference between scalping on or off the floor?
Scalping on the floor of an Exchange is dramatically different from scalping and/or day trading at a computer. When you're trading off the floor, the trades are usually longer in duration - 5, 7, 9 minutes, an hour, two hours, half a day � -- than when you're trading in the pit. For me, personally, when I'm trading in the pit, I can trade hundreds of contracts within a minute or two. That's if I'm truly scalping.
When you're trading on the floor - with the brokers and locals and amid all the market activity - you're part of the market. Locals in the futures pits are really like the market-makers in stocks, providing the bids and offers for the institutional players.
When I trade on the floor, I have a definite bias of whether I want to be long or short. I have my technical research that shows me the support and resistance areas that I want to buy and sell. For example, I may want to buy them at 1500 and have a mental sell stop in at 1496, and a profit objective of 1508. But when I'm on the floor and I see S&Ps go down to 1499, 1498.50, 1498 � I'll be buying on the way down too. Then as it turns around and goes above 1500, I'll be buying and selling out of those positions up to my profit objective. Off the floor, I buy 1500, put a sell stop in at 1496, and look to exit at 1508. I'm not scalping the way I would be on the floor.
2. Do you personally use pivots down on the floor?
Every morning my traders and I have our "Morning Meeting," which we also feature on the web site, TeachTrade, under Market Calls. We highlight the pivots that are likely to emerge for the day. We use a combination of technical analysis to determine these pivotal areas, above which the market is likely to be bullish and below which it becomes bearish.
3. Can a new trader with a good knowledge of the S&P's come onto the floor and have somewhat of a minimal learning curve, or do the rules of the pit differ dramatically from off the floor - such as your "spot" on the floor, whether the locals know you or not, etc.?
Wherever your trade - whether it's in a pit or off the floor - you have to know your environment. Trading on the floor is dramatically different than when you're at your PC in your home or in a trading firm. If you've been successful trading S&P's off the floor and you know that market well, you can make the transition to the floor, but it will take time to master that environment. It's not only your "spot" where you stand, it's also the pace of the pit, the ebb and flow of the orders, and trading with open outcry (shouting out your bids and offers) and using hand signals, instead of "pointing and clicking" with a computer or picking up a phone and calling a broker.
Another challenge of the pit is not to be unduly influenced by large locals as they 're trading and the overall excitement and emotion of the pit, which is very easy to become caught up in. I know there are some off the floor traders who really like the "squawk box" that gives them the action and the noise of the pit. Others are distracted by it because it influences them too much. When you're on the floor you have to be able to shut out the noise and the confusion.
4. What charts do the floor traders look at before the day and while they are trading?
There are not different charts for traders off the floor and on the floor. We're all looking at the charts. But one of the interesting things for on-the-floor traders is how do you extract yourself from the front-line action that is making those charts! Here's what I mean, when you're off the floor, you're looking at a support or resistance area that's being violated. You say to yourself, looking at your price chart, this is where I should buy or sell.
But when you're on the floor, you're in the thick of things. That chart you're looking at is really plotting what's happening around you. Off the floor, you may look at what appears to be a good top in the market, which you should be selling. When you're on the floor - having looked at that same chart - it's hard to sell when you see a lot of buys being executed at the top because some stops have been run, or to buy when you see the sells coming in.
When you're on the floor, you're living the action that's on the chart. You have to identify where you are as part of that chart without getting caught up in the emotion.
5. Do floor traders use beepers for alerts when approaching key moving averages?
In 1986, I was among a group of traders who bought the original rights to Gann. I put a chartist in my office and, every half hour or when need be, a runner would go up to the office and bring the charts down to me. Then we evolved to using a pager, which he would use to page me to tell me about a market move. Then we moved to alpha numeric pagers that he could use to send me a message. Now, at the Merc, we're allowed to use wireless headsets to connect with our technicians.
6. Do guys trade off the "basis?"
The basis (futures versus cash) is one indicator. But the key to being a successful trader is not being tied to just one indicator. There are so many possible indicators out there - the premium or discount to cash, correlation with bonds, the correlation among stock indexes, etc. A good trader knows how to look at all the indicators and decide which is dominant given the tone of the market at the moment.
7. How many people who come down to the floor make it to the point where they can make a living at it? And of those people what is the single biggest factor separating them from those who do not make it?
The rule of thumb is that for every 10 people who come to the floor to trade, 2 or 3 will be able to make some money. Then perhaps 1 trader will make a really good living. In any business, including trading, about 80% of the volume is done by 20% of the people. The biggest single factor that separates those who are successful from those who are not is discipline. This discipline - both mental and physical - enables you to stick by your plan, to control your emotions, and to handle both your losses and your profits without shaking your confidence or developing a huge ego.
8. How have you dealt with the transition from the floor to off-the-floor trading? Are there skills that you have acquired on the floor that are transferable to the upstairs trading desk?
Probably the biggest factor in trading off-the-floor versus on the floor has been the different dynamics. As I said earlier, when I'm trading on the floor, I can make far more trades than when I'm at the PC. Why? Because the action on the floor is instantaneous. I buy-sell-buy-sell-buy-sell in rapid succession. Off the floor, I make fewer trades, but when I do they tend to be a larger position and I may hang onto them longer. The skills that are transferable from the floor to the trading desk is the ability to gauge market sentiment. Watching the screen, you can see the market building momentum, for example, to break through a resistance level. Or, you may see a rally fade before it reverses. Either way, you have to be in sync with the market. You can't pick the top or the bottom. You have to let the market establish it's own levels.
9. You undoubtedly have seen hundreds, if not thousands, of traders come and go. What would you tell anybody thinking of coming down to the floor - or for that matter, what would you tell someone considering day trading - before they make that commitment?
When I first went to the floor, I began as a runner. Even though I was a college graduate, I had to start on the bottom rung. Why? Because trading is unlike any profession. You can have a PhD in nuclear science, and it won't do you any good when it comes to trading. The market demands and education of its own.
That's one of the reasons why I started TeachTrade.Com. It's an educational web site for stock and futures traders that includes market calls on stock index futures, stocks and options - as well as tutorials and lessons. The Market Calls, for example, allow you "look over our shoulders" as we trade - seeing where we'd get long or short or sit on the sidelines. That's essential, because the best form of education is imitation.
The goal is to help day traders know exactly what they're getting into. The media and the television commercials have portrayed day-trading as some sort of bonanza that will enable anyone to become a millionaire. The truth is 70% of stock day-traders aren't making any money, and the average life span of a day trader is about three months. Whether you want to trade on the floor or off the floor, you have to educate yourself.
10. When a big "A" local steps up to buy a falling market, is there a way to tell if he is covering or initiating a position? Will there be a different type of reaction by the locals.
Being a major player in the pit, there are other locals who will watch me when I'm buying or selling. I've used that to my advantage. For example, there are times when I really want to sell the market, I might be in there bidding, instead - and I'll use an order filler to execute my sell orders. If I want really want to buy the market, I'll do the opposite - I'll be selling and the order fillers will be buying.
On the other hand, the S&P pit is a small enough place that it's pretty easy to see when a big local is amassing a position. The other players know whether that local is long or short.
11. If you are listening in on the LOS player to the floor and the market breaks through a support level, and there is no noise (crowd roar) is that a good place to get long futures or stock? What would you be looking at to make your trading decision?
The noise can help you if you know how to interpret it. For example, say there is a big roar from the pit, as stops have been run, and then there is quiet. That quiet means there is no follow-through on that move. That's usually a good place to fade that rally or that break.
12. If you were a new trader, what would you look for to get experience?
If you want to trade on the floor, try to get an internship or an entry-level job at a brokerage firm. This will expose you to all aspects of trading and give you a good foundation from which to build. If you're doing this on your own --perhaps as a second career - you must educate yourself not only on the techniques (how to enter an order, etc.) but on the emotional and psychological aspects. As I say in TeachTrade.Com, I believe 90% of trading is psychological and emotional.
Whether you trade on the floor or off, you have to make this your life. You have to become totally dedicated to trading, the way the market moves, the emotional and psychological side of it, all the nuances �
13. How important is it for a new trader to trade small?
It's very important. Here's why. The biggest evil that can befall a new trader is trading too big. Truly, there is no such thing as an under-capitalized trader, I believe. There are only traders who trade too big for the amount of capital that they have and for where they are on the learning curve. Here's what happens:
A new trader begins with one S&P contract or 200 shares of stock. He does really well for one month. Then he starts thinking that if he had been trading 3 S&Ps or 600 shares of stock then he would REALLY be making some money! What happens is, he increases his trade size and, as a result, he's increased his risk level, which he's not used to. This then begins to change his emotional decision-making process.
The first commandment in our 10 Commandments at TeachTrade is to trade for success and not for money. But when a new trader suddenly faces more risk than he's been used to, he begins thinking about the money on the line. That will impact his trading decisions.
14. How about money management ideas for a new trader?
The key to trading is money management, and that entails keeping your risk and reward in balance. Our rule of thumb is that for every $1 you lose, you must make at least $2.00-$2.50. Put another way, for every $2.00 you make, you can't risk more than $1. To do that, you must keep your losses small and let your profits run. Plus, you have to know yourself and the kind of risk that you're comfortable with.
15. Would you recommend a new trader scalp or be more position-oriented?
As I've said before, scalping from the floor is far different (and easier) than scalping at the screen. That having been said, I think all new traders - on the floor or at the screen - have to get used to trading frequently. When I bring a new trader to the floor, I want to see him trade as many as 30 contracts a day, all one-lots. I want him to get used to buying and selling frequently, just for a scratch (or no profit, no loss). Same thing at the screen, get the feeling of buying and selling frequently. Get over being "trigger shy." And you have to know how to get out of position quickly, particularly if it goes against you. The hardest thing for most new traders is to get out of a losing position when the market turns against them.
Do you know how to turn a day trader into a position trader? Have the market move against him. Then he'll hang on and on and on �
16. Are the floor guys concerned about all the talk about regulating day traders? Essentially, upstairs stock day-traders aren't radically different from the guys on the floor. So, presumably, if they regulate us, they'll lump you guys in as well.
I'm really not concerned about regulation of day traders. Retail day-traders and investors are already signing reams of disclosure documents, and many are still taking on too much risk for the amount of capital they have. How can you regulate people to protect them from their own greed? While I hate to draw an analogy with gambling, it's like going to Vegas and standing outside the casinos with a warning sign telling everyone their odds of winning. The casinos would still be full.
Instead, and as a matter of good conscience, brokerages and clearing firms should offer more education and resources to their clients. That's why TeachTrade has met with such success. Our site is for traders, by traders, and we have no commission-ties to brokerages. We tell people what it's like to trade, and with our market commentary, we let them "look over our shoulders" as we go short, go long or sit on the sidelines. Our motto is institutional-quality research (now available for free) at retail prices.
17. Being an "A" local, do you sometimes find it hard to buy a few hundred cars without all the other locals front-running you?
I don't believe front-running is a huge problem. But I can tell you one thing, when you're putting on size (taking a large position), if you're wrong, you can get all you want! Seriously, you can amass as large a position as you want. The only question is how far you want to step out to get them.
18. How frequently does the floor run stops?
The beauty of having an arena like the S&P pit is that there are so many people in the pit, all of whom have a different opinion. Those different opinions end up as different stop areas. True, sometimes they congregate around the same areas, since technical research tends to pinpoint similar levels. But the role of the local on the floor is not to set off the stops. That's what some people believe. The locals are there to provide liquidity and to take advantage of the markets during those times when the market is out of equilibrium because of big orders coming in.
19. How about the open outcry system vs. the rise of electronic trading? Could electronic S&Ps ever have the liquidity that the pit has?
I think liquidity could be a problem for a volatile contract such as S&Ps. The contracts that will most easily adapt to an electronic venue are high-volume, low volatility contracts such as currencies and eurodollars, which tend to be dominated by institutional players who trade "order to order." S&Ps, however, still have an important local presence in the pit. In fact, a recent study found that some 50 percent of all S&P trading is executed through a local, versus only 10 to 20 percent in eurodollars or currencies. The local is necessary in S&Ps during exceptionally high volatile times when speculative buyers and sellers must step in to handle the orders that come into the pit. At the same time, I believe that electronic trading is here to stay. Take a look at the success of Eurex, the all-electronic European exchange. Clearly this shows that an electronic exchange is viable.
What will happen, I believe, is that a hybrid marketplace will develop. Eventually, we'll see electronic trading of the S&P major (not just the E-mini) during the day, side-by-side with the pit. The customer will have the choice of how and where orders are executed. Where the volume goes, the market will follow. Open outcry will be here as long as locals on the floor are needed to provide liquidity.
20. Let's talk a little about your book. The book was entertaining and insightful, and I especially enjoyed your views on the "personality" attributes of successful traders.
Thanks. I wrote the book for several reasons. With the day-trading boom, I saw there was a real need to let people know that this isn't "easy" or a slam-dunk for retail investors. Trading is hard, and it takes discipline. That's what a lot of retail investors don't understand. They think they can buy the bid and sell the ask and be a millionaire. The fact of the matter, day-trading stocks or futures takes a professional approach. It's not for hobbyists.
The second reason is, as a floor trader, I wanted to give readers an inside look at what it's like to be "in the pit." And, I wanted to pay a tribute to my fellow traders and to futures trading in general.
I do believe that there are some personality attributes that are common to successful traders, including discipline - both mental and physical, the ability to assess and manage risk, the ability to devise and stick with a plan based on technical research, and so forth.
So many people responded positively to the book - they wanted to be able to trade as I do - that I founded the web site, TeachTrade.Com
21. Give us a little background on yourself . How did you get involved in trading? What were your early experiences as a trader? Did you get 'tossed' around and lose money when you first got started? If so, how did you overcome that?
When I started trading, I was in the gold futures pit. Gold was at $800 an ounce in those days and liquidity was drying up. I was having a very difficult time largely because I was under-capitalized, which is a common problem for a lot of rookie traders. I was also plagued by outtrades, and I found some traders tried to intimidate me into eating errors that weren't mine simply because I was new. But being an athlete - I played football at DePauw University - and not being the kind of guy you can easily push around, I didn't swallow the outtrades that I wasn't responsible for.
Still, I was getting discouraged because I'd make money two or three days in a row, and then give it all back --- and then some - at the end of the week. Most weeks I was barely making enough to make my seat lease. I had to earn money at night to help support my trading.
Then I had the luckiest mistake of my life. It was during the Falkland Islands crisis. Gold was moving on every bit of news. One day we saw a news flash that the Falklands had surrendered. Gold dropped $50 an ounce. Then came the second headline - there was no surrender. Gold rallied $50. I was trading fast and furiously and, according to my trading cards, I had bought at the low and sold at the high. As I checked my trades with another trader named Mike, however, we saw that we were "sell-sell" at the high. That meant we each thought we had sold to the other. Now gold was $50 lower. "I'll buy yours and you buy mine," Mike told me. That's what we did - and we each netted about $57,000 on the outtrade. I had sufficient capital for the first time, and I went off to the new S&P pit. That's where I've been ever since.
22. Do you use support and resistance numbers? If so, do you calculate support and resistance via the 'pivot' formula or some other method?
Trading without technical research would be like driving blindfolded. You have to use technical research that includes support and resistance numbers, pivots and so forth. If you don't use research, you might as well go to Vegas and put your money on the pass line.
23. Do you hedge while you are trading? If so, with what instruments?
No, I do not hedge. I go home flat most days. And the number one rule I follow is "buy low, sell high." I'm not being facetious. Too many times traders forget that rule.
24. Do institutions such as Merrill and Goldman hedge their proprietary S&P trades?
Very few desks on the institutional level take directional positions. However, if Merrill or Goldman, for example, is buying, that does not necessarily mean it's for their proprietary desks. It could be for a hedge fund that's a client, or for a variety of different trades. Some of those could be directional trades."
Parts 2 & 3 to follow over the next couple of days.
BSD
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Yup tar that's the thing, when I scalp I do it the same way as when I swing trade, I keep my winners many times the size of my losers, but off of 1 min charts is the only difference.
I enter at places where I can place a pretty tight stop, so that when I do get a good winner that will more than make up for the previous losses.
I posted this earlier, this is how Bill Greenspan does it as an exchange member on the CME:
Mark Etzkorn: Can you describe how much you typically risk on a trade and how you take profits?
Bill Greenspan: Initially, I'll typically risk 50 points. That's enough heat. So, you have to go for at least a 250- to 350-point profit. As far as getting out, nobody ever went broke taking profits. But as a scalper, I try to facilitate the market. (That's actually half a point and two and a half to three and a half respectively, something that obviously isn't coded in granite but rather needs to be adjusted for volatility)
http://www.trade2win.com/boards/general-trading-chat/44624-55000-one-month-17.html#post572546
If there is a holy grail in trading then for me this is number one, cutting your losses short and letting your winners run. And the power of compounding then hands you the keys to the magic kingdom.
Right.
On to part II of the Lewis Borsellino articles:
"Traders Interview: Lewis J. Borsellino Talks With Marc Dupee
Marc Dupee: In the last two months we've seen a big drop in the S&Ps to a three-year low and then a rally that has taken the index up over 20% off the September lows. I know that you're very good at integrating market dynamics into your trading plan. Could you discuss how you have incorporated market dynamics into your trading plan in the past few months, particularly at the inflection points: when the market dropped, and when it changed direction and came back.
Lewis Borsellino: I'm a firm believer that if we could take the news out, the market would have gone down there anyway. The news accelerated the process. Of course, you can't take the news out, but I think people tend to overreact in times of tragedy. They get up and go to work -- unfortunately, not the people in New York -- but the rest of the country, and they really haven't psychologically experienced what most of the people in New York have gone through. What happens is like it's a one- or two-week eulogy, and then people seem to feel they have to go on -- business as normal for those who have to survive the economic downturn.
So I look for inflection points like the August 1998 lows. It had to hold those levels. If it didn't hold those levels, I think there would have been a major, major problem. The only thing I had to fall back on there was experience. The two major ones that I've been through are two major world conflicts and a major correction in 1987. In '87, we saw that the market corrected percentage-wise more than what we've seen recently. But what I saw was when we looked like we were in trouble, the government and the Fed came to the rescue of the markets. Right now, with all the stimulus that is pumped into the market, the money that's being printed -- and it is printed money -- that's why the market has sprung back. People have kind of forgotten about New York -- if you're not in New York, you're everyday life hasn't changed. The panic -- there is still a lot of terrorism out there -- but the panic is sort of out of the market.
Marc: So you're saying you were expecting a kind of a eulogy sell-off to the August '98 lows and from there a snap back as part of the market dynamics?
Lewis: Exactly. What I've seen since Sept. 11 is the market dynamics are starting to switch, where the consolidations are starting to make lower lows and higher highs. And a big key area for us right now is in the 1120 area in the (S&P 500) cash, exactly where we've stopped. But the consolidation that took place and the way we defended the important 1050 to1060 area is key. Also the way the Dow defended the 9000 area.
For the first time in almost a year and a half, the sellers are jumping in up there at the tops and guess what, the market is not retracing like they expected. And I think that's what you saw in the 1050 area, they got short looking for a retest and they stampeded each other to get out.
Marc: Are you talking about locals in the pit where you see them doing that?
Lewis: No, you've got to remember that locals are always short. No, just people in general trading the market. The market keeps holding the key levels. The market dynamics right now, as far as I'm concerned, we're at the do-or-die point. We're going to have to consolidate now at this point between 1110 to 1120, 1100 possibly, basis cash. We need to consolidate this area because the next step is 1200. We're actually looking for 1160, then 1200. If the market can get to 1200 and the Nasdaq to 2000-2200, and the Dow can get above 10,000, we will finally be, for the first time in almost two years, out of a bear market and into a neutral market.
Does that mean we are out of the woods? No. What it means is we are going to have big, big volatility swings, big ranges.
Marc: A neutral market means big volatility, but range-bound trading?
Lewis: Yes. It will start with big ranges, and then it will consolidate with smaller ranges, and then when that happens, look out. Whatever way we break out from there will be dramatic.
Marc: You say in your book The Day Trader's Course that capital preservation and making a well-executed trade should govern everything you do as a trader. How do you define a well-executed trade?
Lewis: I would define a well-executed trade as one where my entry point gave me the least amount of stress and pain and worry from going in a positive direction. Everybody likes to buy the bottom and sell the top. But one of the most painful things that happens to most traders is when you buy it or sell it and it goes immediately against you -- within minutes -- and you're stopped out. And you're sitting there with this loss and you're asking, "What did I do wrong?" And you have to go back to the drawing board.
Marc: You want it to go in your direction right away.
Lewis: You'd like that to happen. The painful thing is that you may be trading in a consolidation area where it hit your stop and the market turns around and goes back. You would have been right. You've got to be able to identify what kind of market or what kind of time period you're in. You've got to develop a system that says "this market is trending, I can get in, I can ride this trend, and I can get out." A lot of times you get stopped out. I wish over the last 20 years I had a nickel for every time I was stopped out because I was too early in putting on my trade.
Marc: What's the lesson from that in terms of the well-executed trade? How would -- or have you learned to execute better?
Lewis: Well, it comes with being patient. And not believing that if you don't get into the market this particular time, that you're going to miss out. One of the things I love to look at is the Market Profile of tick data: where the market has spent most of its trading range for the life of the contract, where it's spent most of its trading range for the last week, the last month, the last day. I also break it down to hourly.
For example, let's assume you're bullish, and you think the market is going to go to, arbitrarily, to 1300. And the market is at (again, arbitrarily) 1200. And the market has a big range of consolidation trading between 1230 to 1235. And you also have a big range at the 1185 area, okay? So the market has spent a lot of time at 1235 and also at 1300 and a lot of time at 1185. You're at 1235 and think, "This thing is going to consolidate and go to 1300." Sure enough, you get up to 1235, you get in, and the market spends the rest of the time consolidating that day, not getting much higher than 1235. You put your stop in, let's say, 600 points (pit points = 6.00) from there, and you end up getting stopped out.
The next day the same thing occurs where you break down to the 1185 area. So what happens is the market moves between these consolidation areas and a lot of times, you get in on the wrong side of it because you're wishing and hoping and projecting that it's going to get to that 1300 area, and you haven't let the market make its mind up. You've got to watch what happens during those consolidation areas. If you look at most consolidations, they have higher highs and lower lows and then it goes down into a smaller range where you have lower highs and higher lows. When you're in a consolidation area and you need to be watching it down to the five-minute chart, when it breaks from that consolidation, that's when you want to jump on that trade, when it's coming out of that consolidation. Otherwise, you'll be stuck in a trade that has a chance of going to either of the two consolidation extremes.
Marc: In The Day Trader's Course, I like the way that you define support and resistance by calling it areas of two-way trade, areas of high volume where traders are willing to commit long AND short to trades, and generally, areas of high volume where the market trades for extended periods of time while it "makes up its mind." How do you locate areas of two-way trade, especially intraday when volume figures for futures have not been determined or released yet? Some range-bound trade that marks support and resistance comes with light, choppy volume.
Lewis: You don't need volume, you need price action. You need price and time. You can develop a gut feeling by watching how long it has been churning in that area. That's precisely what've we've been talking about right here. Consolidation areas are where everybody's different opinions come to meet. It's a period where my opinion and your opinion, where the bulls and the bears, are equally matched. I give the analogy that it's like the "Rocky" movie. Rocky is getting his head pummeled, and it really looks like he's going to go down in the first two or three rounds. But what happens? He keeps coming on stronger, the other guy gets tired, and Rocky ends up winning. It's the same thing with bids and offers. These ranges, the buyers really look like they are going to win on the top, but the sellers keep coming in. And on the bottom it's the reverse, the sellers keep pushing, but the buyers keep coming in. And eventually, one of them gives up!
That's how a consolidation gets figured out. That's one of the things we look at the most. One of the things we learn to do is to walk away from trading in a consolidation range. We wait for it to break out.
Marc: Is there any way to determine where two-way trade is going, or might occur, before it gets there, and where the market will trade to next?
Lewis: I would look at old tops, old highs. But it comes down to this. Once it breaks out, the people that were wrong are getting out, and the people who didn't get in during the consolidation time are jumping into the market, and what happens is they force it to the next level. And when it gets to the next level, you've got the people who were right cashing out. Then the new people are saying, "It broke out of that range, so I'm going to get long here."
The last time we got together (Oct. 5-6, at TradingMarkets 2001 at the Venetian in Las Vegas), you might remember I asked everybody in the room to raise their hand about what they thought would happen because of the (9/11 terrorist) bombing; Is the market going up or going down? Remember about a third thought it was going up, another third thought it was going down, and the other third had no opinion. Well, now you know why markets move.
Marc: I think all traders ask themselves what's going to happen when the spooz or any market approaches a key zone or level. When you're looking at potentially "key" zones that you determine in your morning meetings or zones that you let members know about intraday on TradingMarkets.com, these zones, what do you look for (what market dynamics) to determine if it is going to break through or hold at a certain zone? On the floor, you may be able to see this more readily with the pit heating up, with volume and order flow coming in, basically defining the move in one direction through a key level. How can you see that when you screen trade? Basically, how do you get an edge on whether the market will break through or hold at a key level or not?
Lewis: When it gets to one of our key or major areas, and I haven't been in the market yet, I basically step back and say, "Where were we? How long did it take us to get there? What time of day is it?" When you get to the end of a journey, you've got to be able to look and see where you came from and figure out what's going to be the next leg of this trip. That's exactly the way I look at it.
For example, the other day I'm looking at it on that rally -- we had a consolidation, we came up, rallied, made highs, and got up and made highs in at 1128. Early in the morning, though, on the opening, we opened up between 1114 and 1116. The range of the opening range was 1113.70 to 14-half. I sold 14-halfs because we had just come off a big rally from the day before, we had a gap (down) opening, opening up 500 lower (5.00), and I knew we had a big consolidation range between 1005 and 1008.50. And I had resistance up there at 1118.50 to 20. I let my opinion influence me. I said I think we're going to break down to the consolidation area because we've had a big move up, and I think this move is going to retrace a little, and we're going to move back to the 1108-1110 area, consolidate there, where I think it will be all right to buy it.
Well it opened up and rallied right to our first resistance area at 1118, couldn't get through and went back to the bottom of the opening range and couldn't get through the opening range. Went back to 18-half and broke back down to the opening range again. This all happens in the first half-hour of trading. When it consolidated above the opening range, I knew I had to get out, and I did.
Marc: How long did it take to bail on that position? When did you decide to get out of your short at 1114.50?
Lewis: After we failed the second time; after we failed to go back through that opening range again. When we broke through that 1120 level, the rest of the day it rallied and made a high at 1128. And it didn't sell-off until the close.
That was a bad trade, and I'll tell you why. I was basically sitting in the middle of two consolidation ranges. Here I was at 14-half, and we have strong resistance at 1118 to 20 and strong support from 1108 to 10. Here I am playing in the middle of the frickin' range.
Marc: Something you just said you choose not to do if you can avoid it.
Lewis: Right, but I did it. Twenty years I've been doing this, and I did it.
Marc: One of the things you say in your book is that each time you trade, you are weighing the success and/or failure of your plan (p. 50). Markets change; they are evolutionary beasts, similar to humans. At what point do you say your trading plan no longer works and create a new trading plan?
Lewis: Are we talking in a daytrade or in an overall scope?
Marc: However you want to answer it.
Lewis: Well, right now I think people are going to start reevaluating their plans because I think for the past two years people have been selling highs, looking for retracements. I think the evaluation of your trading plan is a constant process that has to be done every day. It's done every day. It's going to be based on your success, what works for you.
Marc: How does that tie in to the notion of following the discipline of your trading plan, if it is changing every day?
Lewis: My overall plan is I'm gonna buy low and sell high. That's my overall plan. Whether I'm trading from the short side or the long side, that's my plan. There are some traders that only feel comfortable trading from the long side, or only feel comfortable trading from the short side. If you know that's your personality, you have to find what your comfort zone is. You may miss out on a lot of other trades, but the point is if you only take the ones you're comfortable with and you feel you can manage, you'll be ahead of the game. Because if you get into the ones you're not comfortable with, you'll start making irrational decisions.
Marc: What about intraday? How do you go about creating a new trading plan intraday?
Lewis: It would have to be based on market dynamics. Different days might require a different trading plans. For example, today (Friday, Nov. 9, 2001), and last Friday (Nov. 2, 2001), and the Friday before that (Oct. 26, 2001), have had real quick moves between 8:30 (a.m. CT) and 9:30, and if you haven't caught that move, the market has spent the rest of the day in very small consolidating trading ranges. So there is a plan right there. If I haven't made my money by 9:45, I missed that move, and I just better forget about trading the rest of the damn Friday. That sounds like, "What kind of advice is that -- don't trade." But sometimes that's the best advice. Don't trade when you've seen a pattern of low-volume consolidation and no interest in the market on Friday afternoon.
The nice thing about being a trader is you have a whole array of plans. You have to be able to execute the plan that the market is dictating. People say, "How do you do that?" Look. Marc, you've been on the floor with me (click here to read the article). You walked in and saw what we had. That day we happened to peg the market absolutely perfect.
Marc: Definitely.
Lewis: If I would have gotten short and had gotten my stop stopped out, I would have had to re-evaluate what I was going to do for the rest of day. I'd have to step back and say, "Ok, this didn't work. Why didn't it work? Where is the market now, and where could it go from here?" I think that that is crucial that people don't do that. They tend to stick with the plan because it is very unnatural for them to take a loss.
Marc: Definitely. That is a difficult thing for some people to do that on the fly. In your book, one of the quotes you use in relation to an element of successful trading, or success in any entrepreneurial venture, is the capacity to "conceive, develop and merchandise a plan, an idea, a new trading strategy." That can be difficult, to determine a new plan mid-stream.
Lewis: Right. And in business, most people are used to putting a plan together, doing studies -- very methodically -- working out every detail of that plan. It is the same thing with trading, except your plan gets executed in fast forward. Trading is like watching a movie in fast forward. When you're wrong, it's like fast forward. When you're right, it's like normal speed. And when you're trading in markets that aren't moving, it's like playing it in slow motion. When you're right on in your trading, and everything's going according to your plan, it's like sitting down and watching a feature -- everything flows. The market hits where you expect it to.
It's almost like being a pro golfer. They tell these pro golfers all the time, "You gotta envision the shot, get up there, make your swing, and the ball should go where you envision it." Your vision should be determined by your technical analysis. And you should envision what the market is gong to do. And you should adjust you plan according to good research, experience and knowing you have the ability to alter the plan. Even if you get stopped out, that's really going according to your plan.
Marc: That's right.
Lewis: Because what you're saying is if the market reaches this level, this is the part where I would bail because my anticipation of the market was wrong.
Marc: And at that point, you would potentially shift your plan. Because it says, in part, that part of the conception and development of my plan was wrong.
Lewis: Well, part of my plan was wrong -- I got stopped out. Now, what do I want to do? Do I want to stop and reverse and use my point of entry as a new stop? There is a conceived plan, if I'm playing this as a support area and it doesn't work and I get stopped out. And now the market stays onto that area, and it tries to get back above it, and it can't. Then maybe it's time for me to short it and use that old entry level of mine just above it as a point to stop me out on the upside. Now that tends to be kind of risky because people get whipsawed. They get whipsawed when they trade consolidation ranges.
Marc: One of the other things you spell out in the book is how you use primary technical indicators like moving averages. And you use them in ways that I find more satisfying than, say, a moving average crossover technique. For instance, you say, (in an up trend) "the farther the market is above any moving average, the less likely it is to break below it on the first attempt." Now that's a valuable market dynamic. You relate this to "distance/energy" analysis, applied to moving averages. Would you like to expand on that?
Lewis: I think the other aspect of that is not only how far it is from the average, but how long it has been above it or below it. If you equate the time factor in there, you'll realize that the longer time it's spent above the average and the longer time it's spent below it will impact the move when it moves through the average. Ninety eight percent of most stock traders love to play the 50- and 200-day moving averages. Everybody knows that. So when a stock approaches those moving averages, that's when market activity increases. Everyone keys off them. That's when everybody's opinions are made. This is the time when it's going through the roof. "It's worked four times in the past. I gotta buy it."
Marc: So the longer time it has been away from the moving average, the more difficult it is to go through, like with price?
Lewis: I think it is just the opposite. Here's the way I like to see it. Intraday, it can dip below it. But I want to see a confirmed close above it or below it.
Marc: So if you're expecting a breakdown, you want to see a close below it; and if you're expecting a breakout, you want to see a close above it?
Lewis: Right. When you get a confirmed close below it, say, after six months or a year. That's when the energy on the downside will continue.
Marc: You mentioned in your last book The DayTrader, From The Pit To The PC, that you bought the Gann material. Do you use a conversion factor for the S&Ps?
Lewis: No. We use a smoothing factor for time. When you're talking about time, is it an 8:30 to 3:15 (CT) market, or is it a 24-hour market now? You have to use some smoothing factors because of volume. It's ironic, though, when you look at the night volume and the night ranges, they usually have a high and a low near two points that have been heavily traded areas -- they go there and test them again..
Marc: You had Maury Kravitz on last night in a live webcast. Maury Kravitz is a major veteran trader from back in the time when the Chicago Mercantile Exchange was the Egg and Butter Exchange and also traded onions. At one time, Maury had the biggest deck -- that is, did the most volume -- of any broker in the Chicago Merc's gold pit. The guy is something of a legend. You describe Maury as your mentor in the commodities markets, someone whom you apprenticed for. Besides discipline, which you guys are both huge on, what are some of the specific actual trading techniques or keys that Maury taught you that you still use today?
Lewis: Maury is a guy who got me into the idea of being very well prepared technically. He used to sit up there, before computers, doing his charts by hand. He had this thing about the 60-day moving average (simple) for the S&P index. He'd say, "Lewis, this is a big average when it gets over the 60-day." Maury is the one who said, "Look, when you get a confirmed close above or below this, you get your biggest moves." He did some historical studies.
And I think that from being a young guy sitting in an arena, flinging numbers around, taking advantage of market gyrations, the biggest thing I learned from Maury was one, try to understand that fundamentals control your environment. Try to become in tune with them. And then base your trading decisions on the environmental situations. I thought most guys just went to work every day. And I think to this day, most of the guys that are floor traders are very bad technicians. Very few of them spend the time to actually find out where the market is and where the market is going to go. They're in there trying to take advantage of temporary market gyrations -- when the market is thrown out of equilibrium by institutional people and retail people putting orders in. So, I think the biggest thing I learned from him is being prepared and trying to understand what makes the market move.
Marc: Markets change. In recent years, are there any specific things that Maury has shared with you?
Lewis: You know, Maury is kind of retired from the business, and he's been chasing Genghis Khan. Actually, he came in and looked at what we are doing with our trading systems and said, "Lewis, you have far surpassed me in anything I ever developed." That man is one of the smartest men I know. And the gold market is his baby. Most people don't get it when he says gold is a demand product only.
Marc: Which do you think are the most opportune times of the day, week, month or year to trade and why?
Lewis: Definitely the first hour-and-a-half to two hours and the last hour-and-a-half.
Marc: And for days, Fridays?
Lewis: Friday, it depends. Fridays before a big holiday, you want to trade early in the morning. And then the best movement days? The day before a big number. It used to be the day of the number. But people are flattening out the day before. That's why you'll see volatility on the Thursday before unemployment (the report).
Marc: Or the Monday before the Tuesday Fed meeting.
Lewis: Well, no. That's one exception. But the Thursday or Friday before a Tuesday Fed meeting is very volatile. Here's an interesting point. We had a Fed meeting on Tuesday (Nov. 6, 2001). If you've come from a big move... Here's an example. The week before the Fed we had had a low of 1053. On the Thursday before (Nov. 1, 2001), we tested 1055 for the last time and closed the week up at 1090-something. So, we had a 3000 point (30.00) rally from the bottom. The reason being, the shorts gave up and 1055 had been tested before. Because we failed down at the 1055 level three times, the shorts gave up before the weekend, before the Fed meeting, and flattened out. People were talking about time. They're saying, "We're running out of time for this market to go through the lows, and we got Greenspan coming, and we know he's going to do another 50 basis points."
It's very simple. Just think if it were you or if you're a fund manager. You've got somebody who potentially can hurt you with a comment. So the market bottomed out.
Marc: And what about the best or worst times to trade on a yearly basis?
Lewis: I can tell you the worst time for me to trade as a trader is during the rollover. Because that two- to three-week period, the front month and the back month, the volume between the two starts to get distorted. So, you don't actually see the order flow. Plus, you have options expiration with people laying off positions.
Marc: That's where you'll cut back on your trading?
Lewis: That's when I'll take my vacations!
Marc: Interestingly, your mentor, Maury Kravitz, has been studying Genghis Khan for the past 40 years, and it appears he may have found the long-searched-for tomb in Mongolia of one of history's greatest conquerors. Khan and the Moguls conquered two-thirds of the world. Your friendship with Maury, one of the world's authorities on Khan, might give you a special insight. Do you think there is a similarity between great traders and Genghis Khan, and how do you think Khan would have done trading in the pit? He could not succeed if he killed everyone!
Lewis: (Laughing) I said that to him, that I don't know if I could make money being the only trader in the pit. I would say that Genghis Khan was aggressive and disciplined. He had to be to be the conqueror that he was. And he probably was a disciplined person.
One of the things I look for when I'm recruiting traders is a very well-rounded person who has been an achiever either athletically or intellectually, but well-rounded. I don't go for somebody that graduates number one in their class at Harvard. Engineers do not make great traders. You can't say, "Do this, this, and this, and here is the end result." But people who understand that along the way, that there are going to be bumps, that you have to adjust to the bumps in the road, those are the people who will end up becoming good traders. You have to understand that and have discipline and understand that everything doesn't always go right, but that when things don't go right, it isn't the end of the world. Then you have to have the strength to go on and make a new decision. People who tend to be high achievers don't like the idea of being wrong. And when they get caught up in that, they don't like the idea they did not pick the area in the market that wasn't the exact bottom or wasn't the exact top. I look for people who are well-rounded, disciplined people. Genghis Khan was probably like that, and not a one-way thinker.
Marc: Finally, what's changed, if anything, in your thinking about trading over the past 18 months, the greatest bear market of our generation?
Lewis: The biggest thing that's changed -- I have to go back more than 18 months. The biggest thing that's impacted the trading world over the last four years is the computer -- Internet access, heightened anticipation and participation from the American public at large. The world has now become traders. I think that is the biggest thing: market participation. In my opinion, if you think the last market surge we saw on the upside was big, the next one will make that one look miniscule.
Losing money in trading is like a woman giving birth to a child. When my wife gave birth to our first child, I said she'll never want to do this again. After, as we were talking, the doctor said, "There is a hormone that is secreted after the childbirth that kind of blocks the memory of the pain." And then the pleasure of having the baby and raising the child and then the maternal instincts take over, that's what allows one to say we're going to have more kids, more children. Well, the moment the market starts performing on the upside and people start making money again, they forget about all the pain."
This thread actually has pretty much everything in it already that anyone could ever need to become net profitable as a trader.
Part III next week.
I enter at places where I can place a pretty tight stop, so that when I do get a good winner that will more than make up for the previous losses.
I posted this earlier, this is how Bill Greenspan does it as an exchange member on the CME:
Mark Etzkorn: Can you describe how much you typically risk on a trade and how you take profits?
Bill Greenspan: Initially, I'll typically risk 50 points. That's enough heat. So, you have to go for at least a 250- to 350-point profit. As far as getting out, nobody ever went broke taking profits. But as a scalper, I try to facilitate the market. (That's actually half a point and two and a half to three and a half respectively, something that obviously isn't coded in granite but rather needs to be adjusted for volatility)
http://www.trade2win.com/boards/general-trading-chat/44624-55000-one-month-17.html#post572546
If there is a holy grail in trading then for me this is number one, cutting your losses short and letting your winners run. And the power of compounding then hands you the keys to the magic kingdom.
Right.
On to part II of the Lewis Borsellino articles:
"Traders Interview: Lewis J. Borsellino Talks With Marc Dupee
Marc Dupee: In the last two months we've seen a big drop in the S&Ps to a three-year low and then a rally that has taken the index up over 20% off the September lows. I know that you're very good at integrating market dynamics into your trading plan. Could you discuss how you have incorporated market dynamics into your trading plan in the past few months, particularly at the inflection points: when the market dropped, and when it changed direction and came back.
Lewis Borsellino: I'm a firm believer that if we could take the news out, the market would have gone down there anyway. The news accelerated the process. Of course, you can't take the news out, but I think people tend to overreact in times of tragedy. They get up and go to work -- unfortunately, not the people in New York -- but the rest of the country, and they really haven't psychologically experienced what most of the people in New York have gone through. What happens is like it's a one- or two-week eulogy, and then people seem to feel they have to go on -- business as normal for those who have to survive the economic downturn.
So I look for inflection points like the August 1998 lows. It had to hold those levels. If it didn't hold those levels, I think there would have been a major, major problem. The only thing I had to fall back on there was experience. The two major ones that I've been through are two major world conflicts and a major correction in 1987. In '87, we saw that the market corrected percentage-wise more than what we've seen recently. But what I saw was when we looked like we were in trouble, the government and the Fed came to the rescue of the markets. Right now, with all the stimulus that is pumped into the market, the money that's being printed -- and it is printed money -- that's why the market has sprung back. People have kind of forgotten about New York -- if you're not in New York, you're everyday life hasn't changed. The panic -- there is still a lot of terrorism out there -- but the panic is sort of out of the market.
Marc: So you're saying you were expecting a kind of a eulogy sell-off to the August '98 lows and from there a snap back as part of the market dynamics?
Lewis: Exactly. What I've seen since Sept. 11 is the market dynamics are starting to switch, where the consolidations are starting to make lower lows and higher highs. And a big key area for us right now is in the 1120 area in the (S&P 500) cash, exactly where we've stopped. But the consolidation that took place and the way we defended the important 1050 to1060 area is key. Also the way the Dow defended the 9000 area.
For the first time in almost a year and a half, the sellers are jumping in up there at the tops and guess what, the market is not retracing like they expected. And I think that's what you saw in the 1050 area, they got short looking for a retest and they stampeded each other to get out.
Marc: Are you talking about locals in the pit where you see them doing that?
Lewis: No, you've got to remember that locals are always short. No, just people in general trading the market. The market keeps holding the key levels. The market dynamics right now, as far as I'm concerned, we're at the do-or-die point. We're going to have to consolidate now at this point between 1110 to 1120, 1100 possibly, basis cash. We need to consolidate this area because the next step is 1200. We're actually looking for 1160, then 1200. If the market can get to 1200 and the Nasdaq to 2000-2200, and the Dow can get above 10,000, we will finally be, for the first time in almost two years, out of a bear market and into a neutral market.
Does that mean we are out of the woods? No. What it means is we are going to have big, big volatility swings, big ranges.
Marc: A neutral market means big volatility, but range-bound trading?
Lewis: Yes. It will start with big ranges, and then it will consolidate with smaller ranges, and then when that happens, look out. Whatever way we break out from there will be dramatic.
Marc: You say in your book The Day Trader's Course that capital preservation and making a well-executed trade should govern everything you do as a trader. How do you define a well-executed trade?
Lewis: I would define a well-executed trade as one where my entry point gave me the least amount of stress and pain and worry from going in a positive direction. Everybody likes to buy the bottom and sell the top. But one of the most painful things that happens to most traders is when you buy it or sell it and it goes immediately against you -- within minutes -- and you're stopped out. And you're sitting there with this loss and you're asking, "What did I do wrong?" And you have to go back to the drawing board.
Marc: You want it to go in your direction right away.
Lewis: You'd like that to happen. The painful thing is that you may be trading in a consolidation area where it hit your stop and the market turns around and goes back. You would have been right. You've got to be able to identify what kind of market or what kind of time period you're in. You've got to develop a system that says "this market is trending, I can get in, I can ride this trend, and I can get out." A lot of times you get stopped out. I wish over the last 20 years I had a nickel for every time I was stopped out because I was too early in putting on my trade.
Marc: What's the lesson from that in terms of the well-executed trade? How would -- or have you learned to execute better?
Lewis: Well, it comes with being patient. And not believing that if you don't get into the market this particular time, that you're going to miss out. One of the things I love to look at is the Market Profile of tick data: where the market has spent most of its trading range for the life of the contract, where it's spent most of its trading range for the last week, the last month, the last day. I also break it down to hourly.
For example, let's assume you're bullish, and you think the market is going to go to, arbitrarily, to 1300. And the market is at (again, arbitrarily) 1200. And the market has a big range of consolidation trading between 1230 to 1235. And you also have a big range at the 1185 area, okay? So the market has spent a lot of time at 1235 and also at 1300 and a lot of time at 1185. You're at 1235 and think, "This thing is going to consolidate and go to 1300." Sure enough, you get up to 1235, you get in, and the market spends the rest of the time consolidating that day, not getting much higher than 1235. You put your stop in, let's say, 600 points (pit points = 6.00) from there, and you end up getting stopped out.
The next day the same thing occurs where you break down to the 1185 area. So what happens is the market moves between these consolidation areas and a lot of times, you get in on the wrong side of it because you're wishing and hoping and projecting that it's going to get to that 1300 area, and you haven't let the market make its mind up. You've got to watch what happens during those consolidation areas. If you look at most consolidations, they have higher highs and lower lows and then it goes down into a smaller range where you have lower highs and higher lows. When you're in a consolidation area and you need to be watching it down to the five-minute chart, when it breaks from that consolidation, that's when you want to jump on that trade, when it's coming out of that consolidation. Otherwise, you'll be stuck in a trade that has a chance of going to either of the two consolidation extremes.
Marc: In The Day Trader's Course, I like the way that you define support and resistance by calling it areas of two-way trade, areas of high volume where traders are willing to commit long AND short to trades, and generally, areas of high volume where the market trades for extended periods of time while it "makes up its mind." How do you locate areas of two-way trade, especially intraday when volume figures for futures have not been determined or released yet? Some range-bound trade that marks support and resistance comes with light, choppy volume.
Lewis: You don't need volume, you need price action. You need price and time. You can develop a gut feeling by watching how long it has been churning in that area. That's precisely what've we've been talking about right here. Consolidation areas are where everybody's different opinions come to meet. It's a period where my opinion and your opinion, where the bulls and the bears, are equally matched. I give the analogy that it's like the "Rocky" movie. Rocky is getting his head pummeled, and it really looks like he's going to go down in the first two or three rounds. But what happens? He keeps coming on stronger, the other guy gets tired, and Rocky ends up winning. It's the same thing with bids and offers. These ranges, the buyers really look like they are going to win on the top, but the sellers keep coming in. And on the bottom it's the reverse, the sellers keep pushing, but the buyers keep coming in. And eventually, one of them gives up!
That's how a consolidation gets figured out. That's one of the things we look at the most. One of the things we learn to do is to walk away from trading in a consolidation range. We wait for it to break out.
Marc: Is there any way to determine where two-way trade is going, or might occur, before it gets there, and where the market will trade to next?
Lewis: I would look at old tops, old highs. But it comes down to this. Once it breaks out, the people that were wrong are getting out, and the people who didn't get in during the consolidation time are jumping into the market, and what happens is they force it to the next level. And when it gets to the next level, you've got the people who were right cashing out. Then the new people are saying, "It broke out of that range, so I'm going to get long here."
The last time we got together (Oct. 5-6, at TradingMarkets 2001 at the Venetian in Las Vegas), you might remember I asked everybody in the room to raise their hand about what they thought would happen because of the (9/11 terrorist) bombing; Is the market going up or going down? Remember about a third thought it was going up, another third thought it was going down, and the other third had no opinion. Well, now you know why markets move.
Marc: I think all traders ask themselves what's going to happen when the spooz or any market approaches a key zone or level. When you're looking at potentially "key" zones that you determine in your morning meetings or zones that you let members know about intraday on TradingMarkets.com, these zones, what do you look for (what market dynamics) to determine if it is going to break through or hold at a certain zone? On the floor, you may be able to see this more readily with the pit heating up, with volume and order flow coming in, basically defining the move in one direction through a key level. How can you see that when you screen trade? Basically, how do you get an edge on whether the market will break through or hold at a key level or not?
Lewis: When it gets to one of our key or major areas, and I haven't been in the market yet, I basically step back and say, "Where were we? How long did it take us to get there? What time of day is it?" When you get to the end of a journey, you've got to be able to look and see where you came from and figure out what's going to be the next leg of this trip. That's exactly the way I look at it.
For example, the other day I'm looking at it on that rally -- we had a consolidation, we came up, rallied, made highs, and got up and made highs in at 1128. Early in the morning, though, on the opening, we opened up between 1114 and 1116. The range of the opening range was 1113.70 to 14-half. I sold 14-halfs because we had just come off a big rally from the day before, we had a gap (down) opening, opening up 500 lower (5.00), and I knew we had a big consolidation range between 1005 and 1008.50. And I had resistance up there at 1118.50 to 20. I let my opinion influence me. I said I think we're going to break down to the consolidation area because we've had a big move up, and I think this move is going to retrace a little, and we're going to move back to the 1108-1110 area, consolidate there, where I think it will be all right to buy it.
Well it opened up and rallied right to our first resistance area at 1118, couldn't get through and went back to the bottom of the opening range and couldn't get through the opening range. Went back to 18-half and broke back down to the opening range again. This all happens in the first half-hour of trading. When it consolidated above the opening range, I knew I had to get out, and I did.
Marc: How long did it take to bail on that position? When did you decide to get out of your short at 1114.50?
Lewis: After we failed the second time; after we failed to go back through that opening range again. When we broke through that 1120 level, the rest of the day it rallied and made a high at 1128. And it didn't sell-off until the close.
That was a bad trade, and I'll tell you why. I was basically sitting in the middle of two consolidation ranges. Here I was at 14-half, and we have strong resistance at 1118 to 20 and strong support from 1108 to 10. Here I am playing in the middle of the frickin' range.
Marc: Something you just said you choose not to do if you can avoid it.
Lewis: Right, but I did it. Twenty years I've been doing this, and I did it.
Marc: One of the things you say in your book is that each time you trade, you are weighing the success and/or failure of your plan (p. 50). Markets change; they are evolutionary beasts, similar to humans. At what point do you say your trading plan no longer works and create a new trading plan?
Lewis: Are we talking in a daytrade or in an overall scope?
Marc: However you want to answer it.
Lewis: Well, right now I think people are going to start reevaluating their plans because I think for the past two years people have been selling highs, looking for retracements. I think the evaluation of your trading plan is a constant process that has to be done every day. It's done every day. It's going to be based on your success, what works for you.
Marc: How does that tie in to the notion of following the discipline of your trading plan, if it is changing every day?
Lewis: My overall plan is I'm gonna buy low and sell high. That's my overall plan. Whether I'm trading from the short side or the long side, that's my plan. There are some traders that only feel comfortable trading from the long side, or only feel comfortable trading from the short side. If you know that's your personality, you have to find what your comfort zone is. You may miss out on a lot of other trades, but the point is if you only take the ones you're comfortable with and you feel you can manage, you'll be ahead of the game. Because if you get into the ones you're not comfortable with, you'll start making irrational decisions.
Marc: What about intraday? How do you go about creating a new trading plan intraday?
Lewis: It would have to be based on market dynamics. Different days might require a different trading plans. For example, today (Friday, Nov. 9, 2001), and last Friday (Nov. 2, 2001), and the Friday before that (Oct. 26, 2001), have had real quick moves between 8:30 (a.m. CT) and 9:30, and if you haven't caught that move, the market has spent the rest of the day in very small consolidating trading ranges. So there is a plan right there. If I haven't made my money by 9:45, I missed that move, and I just better forget about trading the rest of the damn Friday. That sounds like, "What kind of advice is that -- don't trade." But sometimes that's the best advice. Don't trade when you've seen a pattern of low-volume consolidation and no interest in the market on Friday afternoon.
The nice thing about being a trader is you have a whole array of plans. You have to be able to execute the plan that the market is dictating. People say, "How do you do that?" Look. Marc, you've been on the floor with me (click here to read the article). You walked in and saw what we had. That day we happened to peg the market absolutely perfect.
Marc: Definitely.
Lewis: If I would have gotten short and had gotten my stop stopped out, I would have had to re-evaluate what I was going to do for the rest of day. I'd have to step back and say, "Ok, this didn't work. Why didn't it work? Where is the market now, and where could it go from here?" I think that that is crucial that people don't do that. They tend to stick with the plan because it is very unnatural for them to take a loss.
Marc: Definitely. That is a difficult thing for some people to do that on the fly. In your book, one of the quotes you use in relation to an element of successful trading, or success in any entrepreneurial venture, is the capacity to "conceive, develop and merchandise a plan, an idea, a new trading strategy." That can be difficult, to determine a new plan mid-stream.
Lewis: Right. And in business, most people are used to putting a plan together, doing studies -- very methodically -- working out every detail of that plan. It is the same thing with trading, except your plan gets executed in fast forward. Trading is like watching a movie in fast forward. When you're wrong, it's like fast forward. When you're right, it's like normal speed. And when you're trading in markets that aren't moving, it's like playing it in slow motion. When you're right on in your trading, and everything's going according to your plan, it's like sitting down and watching a feature -- everything flows. The market hits where you expect it to.
It's almost like being a pro golfer. They tell these pro golfers all the time, "You gotta envision the shot, get up there, make your swing, and the ball should go where you envision it." Your vision should be determined by your technical analysis. And you should envision what the market is gong to do. And you should adjust you plan according to good research, experience and knowing you have the ability to alter the plan. Even if you get stopped out, that's really going according to your plan.
Marc: That's right.
Lewis: Because what you're saying is if the market reaches this level, this is the part where I would bail because my anticipation of the market was wrong.
Marc: And at that point, you would potentially shift your plan. Because it says, in part, that part of the conception and development of my plan was wrong.
Lewis: Well, part of my plan was wrong -- I got stopped out. Now, what do I want to do? Do I want to stop and reverse and use my point of entry as a new stop? There is a conceived plan, if I'm playing this as a support area and it doesn't work and I get stopped out. And now the market stays onto that area, and it tries to get back above it, and it can't. Then maybe it's time for me to short it and use that old entry level of mine just above it as a point to stop me out on the upside. Now that tends to be kind of risky because people get whipsawed. They get whipsawed when they trade consolidation ranges.
Marc: One of the other things you spell out in the book is how you use primary technical indicators like moving averages. And you use them in ways that I find more satisfying than, say, a moving average crossover technique. For instance, you say, (in an up trend) "the farther the market is above any moving average, the less likely it is to break below it on the first attempt." Now that's a valuable market dynamic. You relate this to "distance/energy" analysis, applied to moving averages. Would you like to expand on that?
Lewis: I think the other aspect of that is not only how far it is from the average, but how long it has been above it or below it. If you equate the time factor in there, you'll realize that the longer time it's spent above the average and the longer time it's spent below it will impact the move when it moves through the average. Ninety eight percent of most stock traders love to play the 50- and 200-day moving averages. Everybody knows that. So when a stock approaches those moving averages, that's when market activity increases. Everyone keys off them. That's when everybody's opinions are made. This is the time when it's going through the roof. "It's worked four times in the past. I gotta buy it."
Marc: So the longer time it has been away from the moving average, the more difficult it is to go through, like with price?
Lewis: I think it is just the opposite. Here's the way I like to see it. Intraday, it can dip below it. But I want to see a confirmed close above it or below it.
Marc: So if you're expecting a breakdown, you want to see a close below it; and if you're expecting a breakout, you want to see a close above it?
Lewis: Right. When you get a confirmed close below it, say, after six months or a year. That's when the energy on the downside will continue.
Marc: You mentioned in your last book The DayTrader, From The Pit To The PC, that you bought the Gann material. Do you use a conversion factor for the S&Ps?
Lewis: No. We use a smoothing factor for time. When you're talking about time, is it an 8:30 to 3:15 (CT) market, or is it a 24-hour market now? You have to use some smoothing factors because of volume. It's ironic, though, when you look at the night volume and the night ranges, they usually have a high and a low near two points that have been heavily traded areas -- they go there and test them again..
Marc: You had Maury Kravitz on last night in a live webcast. Maury Kravitz is a major veteran trader from back in the time when the Chicago Mercantile Exchange was the Egg and Butter Exchange and also traded onions. At one time, Maury had the biggest deck -- that is, did the most volume -- of any broker in the Chicago Merc's gold pit. The guy is something of a legend. You describe Maury as your mentor in the commodities markets, someone whom you apprenticed for. Besides discipline, which you guys are both huge on, what are some of the specific actual trading techniques or keys that Maury taught you that you still use today?
Lewis: Maury is a guy who got me into the idea of being very well prepared technically. He used to sit up there, before computers, doing his charts by hand. He had this thing about the 60-day moving average (simple) for the S&P index. He'd say, "Lewis, this is a big average when it gets over the 60-day." Maury is the one who said, "Look, when you get a confirmed close above or below this, you get your biggest moves." He did some historical studies.
And I think that from being a young guy sitting in an arena, flinging numbers around, taking advantage of market gyrations, the biggest thing I learned from Maury was one, try to understand that fundamentals control your environment. Try to become in tune with them. And then base your trading decisions on the environmental situations. I thought most guys just went to work every day. And I think to this day, most of the guys that are floor traders are very bad technicians. Very few of them spend the time to actually find out where the market is and where the market is going to go. They're in there trying to take advantage of temporary market gyrations -- when the market is thrown out of equilibrium by institutional people and retail people putting orders in. So, I think the biggest thing I learned from him is being prepared and trying to understand what makes the market move.
Marc: Markets change. In recent years, are there any specific things that Maury has shared with you?
Lewis: You know, Maury is kind of retired from the business, and he's been chasing Genghis Khan. Actually, he came in and looked at what we are doing with our trading systems and said, "Lewis, you have far surpassed me in anything I ever developed." That man is one of the smartest men I know. And the gold market is his baby. Most people don't get it when he says gold is a demand product only.
Marc: Which do you think are the most opportune times of the day, week, month or year to trade and why?
Lewis: Definitely the first hour-and-a-half to two hours and the last hour-and-a-half.
Marc: And for days, Fridays?
Lewis: Friday, it depends. Fridays before a big holiday, you want to trade early in the morning. And then the best movement days? The day before a big number. It used to be the day of the number. But people are flattening out the day before. That's why you'll see volatility on the Thursday before unemployment (the report).
Marc: Or the Monday before the Tuesday Fed meeting.
Lewis: Well, no. That's one exception. But the Thursday or Friday before a Tuesday Fed meeting is very volatile. Here's an interesting point. We had a Fed meeting on Tuesday (Nov. 6, 2001). If you've come from a big move... Here's an example. The week before the Fed we had had a low of 1053. On the Thursday before (Nov. 1, 2001), we tested 1055 for the last time and closed the week up at 1090-something. So, we had a 3000 point (30.00) rally from the bottom. The reason being, the shorts gave up and 1055 had been tested before. Because we failed down at the 1055 level three times, the shorts gave up before the weekend, before the Fed meeting, and flattened out. People were talking about time. They're saying, "We're running out of time for this market to go through the lows, and we got Greenspan coming, and we know he's going to do another 50 basis points."
It's very simple. Just think if it were you or if you're a fund manager. You've got somebody who potentially can hurt you with a comment. So the market bottomed out.
Marc: And what about the best or worst times to trade on a yearly basis?
Lewis: I can tell you the worst time for me to trade as a trader is during the rollover. Because that two- to three-week period, the front month and the back month, the volume between the two starts to get distorted. So, you don't actually see the order flow. Plus, you have options expiration with people laying off positions.
Marc: That's where you'll cut back on your trading?
Lewis: That's when I'll take my vacations!
Marc: Interestingly, your mentor, Maury Kravitz, has been studying Genghis Khan for the past 40 years, and it appears he may have found the long-searched-for tomb in Mongolia of one of history's greatest conquerors. Khan and the Moguls conquered two-thirds of the world. Your friendship with Maury, one of the world's authorities on Khan, might give you a special insight. Do you think there is a similarity between great traders and Genghis Khan, and how do you think Khan would have done trading in the pit? He could not succeed if he killed everyone!
Lewis: (Laughing) I said that to him, that I don't know if I could make money being the only trader in the pit. I would say that Genghis Khan was aggressive and disciplined. He had to be to be the conqueror that he was. And he probably was a disciplined person.
One of the things I look for when I'm recruiting traders is a very well-rounded person who has been an achiever either athletically or intellectually, but well-rounded. I don't go for somebody that graduates number one in their class at Harvard. Engineers do not make great traders. You can't say, "Do this, this, and this, and here is the end result." But people who understand that along the way, that there are going to be bumps, that you have to adjust to the bumps in the road, those are the people who will end up becoming good traders. You have to understand that and have discipline and understand that everything doesn't always go right, but that when things don't go right, it isn't the end of the world. Then you have to have the strength to go on and make a new decision. People who tend to be high achievers don't like the idea of being wrong. And when they get caught up in that, they don't like the idea they did not pick the area in the market that wasn't the exact bottom or wasn't the exact top. I look for people who are well-rounded, disciplined people. Genghis Khan was probably like that, and not a one-way thinker.
Marc: Finally, what's changed, if anything, in your thinking about trading over the past 18 months, the greatest bear market of our generation?
Lewis: The biggest thing that's changed -- I have to go back more than 18 months. The biggest thing that's impacted the trading world over the last four years is the computer -- Internet access, heightened anticipation and participation from the American public at large. The world has now become traders. I think that is the biggest thing: market participation. In my opinion, if you think the last market surge we saw on the upside was big, the next one will make that one look miniscule.
Losing money in trading is like a woman giving birth to a child. When my wife gave birth to our first child, I said she'll never want to do this again. After, as we were talking, the doctor said, "There is a hormone that is secreted after the childbirth that kind of blocks the memory of the pain." And then the pleasure of having the baby and raising the child and then the maternal instincts take over, that's what allows one to say we're going to have more kids, more children. Well, the moment the market starts performing on the upside and people start making money again, they forget about all the pain."
This thread actually has pretty much everything in it already that anyone could ever need to become net profitable as a trader.
Part III next week.
tar
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Yup tar that's the thing, when I scalp I do it the same way as when I swing trade, I keep my winners many times the size of my losers, but off of 1 min charts is the only difference.
I enter at places where I can place a pretty tight stop, so that when I do get a good winner that will more than make up for the previous losses.
I posted this earlier, this is how Bill Greenspan does it as an exchange member on the CME:
Mark Etzkorn: Can you describe how much you typically risk on a trade and how you take profits?
Bill Greenspan: Initially, I'll typically risk 50 points. That's enough heat. So, you have to go for at least a 250- to 350-point profit. As far as getting out, nobody ever went broke taking profits. But as a scalper, I try to facilitate the market. (That's actually half a point and two and a half to three and a half respectively, something that obviously isn't coded in granite but rather needs to be adjusted for volatility)
http://www.trade2win.com/boards/general-trading-chat/44624-55000-one-month-17.html#post572546
If there is a holy grail in trading then for me this is number one, cutting your losses short and letting your winners run. And the power of compounding then hands you the keys to the magic kingdom.
BSD which was the best instrument u scalped and which was the worst ?
How much far u mean by tight stop ,can u give an example ?
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BSD
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tar, basically whats best imo is to eyeball charts of various instruments and look at their daily ranges, stuff that has a big range and some smooth, trendy moves are where i would go, and that is really stuff that changes regularly, so you really need to keep updating your portfolio of core markets.
Tight stops ?
Have a look here at Maoxians "Dummy" trades (they are anything but...):
MaoXian.com -- Archive: By Category
Tight stops ?
Have a look here at Maoxians "Dummy" trades (they are anything but...):
MaoXian.com -- Archive: By Category
BSD
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tar, the way Maoxian does it from my earlier post is pretty much the way i do it.
The two ideas behind stops are that if breached it invalidates your trade, and it allows you to size your position, the distance from entry to stop loss translates into whatever you want to risk per trade, 1% or whatever.
If you look at €/$ and you would have sold the breakdown of just for the sake of argument the swing low @ 1.2840 at 12:15 CET then the stop would probably have gone a distance beyond the swing high at around 1.2880.
If you had sold the pullback @ 1.2860 at say 12:00 CET your sl would have been smaller, giving you a bigger bang for your buck because your position size would have been smaller.
Will your stops get run ?
Of course.
But who cares with risk / reward ratios like that.
The two ideas behind stops are that if breached it invalidates your trade, and it allows you to size your position, the distance from entry to stop loss translates into whatever you want to risk per trade, 1% or whatever.
If you look at €/$ and you would have sold the breakdown of just for the sake of argument the swing low @ 1.2840 at 12:15 CET then the stop would probably have gone a distance beyond the swing high at around 1.2880.
If you had sold the pullback @ 1.2860 at say 12:00 CET your sl would have been smaller, giving you a bigger bang for your buck because your position size would have been smaller.
Will your stops get run ?
Of course.
But who cares with risk / reward ratios like that.
tar
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tar, the way Maoxian does it from my earlier post is pretty much the way i do it.
The two ideas behind stops are that if breached it invalidates your trade, and it allows you to size your position, the distance from entry to stop loss translates into whatever you want to risk per trade, 1% or whatever.
If you look at €/$ and you would have sold the breakdown of just for the sake of argument the swing low @ 1.2840 at 12:15 CET then the stop would probably have gone a distance beyond the swing high at around 1.2880.
If you had sold the pullback @ 1.2860 at say 12:00 CET your sl would have been smaller, giving you a bigger bang for your buck because your position size would have been smaller.
Will your stops get run ?
Of course.
But who cares with risk / reward ratios like that.
I understand what u r talking about , but i thought we r talking about scalping like Mag .... stop loss within few pips ...
Anyone scalp cable can share about their stop loss ? i tried 8 pips now i got caught few times but 1 win will erase many losses