Day Trade Futures Safely For Reliable Profits. David Bennett
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Even as my technique improved, I couldn’t resist watching the trades long after I needed to. And, sometimes, I would commit the cardinal sin for a system trader and interfere with my trades, or even revert to a few hours of (often calamitous) intuitive trading.
Not only that, but I would occasionally make mistakes. I would go long when I meant to go short, enter a limit instead of a stop order, or some other equally silly thing. Despite a lot of practice, these things would happen, because of trading stress and the time constraints imposed when reacting to events in fast moving markets.
That led me to develop software so that my computer could trade for me. This improved my trading. Nowadays I don’t watch the market. I have a comprehensive trading plan for each market session and let my computer trade the plan for me. No mistakes, no intuitive lapses, just planning my trade and trading my plan. When the market closes, I look to see how I went today. Before the market opens, I submit my trading plan. It is usually the same plan every day, so it only takes a couple of minutes.
Breaking the addiction to trading action, through automation of my trading plan, was my first and most important step to becoming profitable.
Chapter Two: Planning
Shortcut to penury
If you don’t have a plan, you’ll soon have nothing. Trading without a plan is plain stupid. The inexperienced crash out quickly and those who by some fluke survive long enough to gain a bit of experience can still be wiped out in an instant. That’s no way to live.
A trading plan brings order out of chaos, structure out of confusion. It enables me to manage my reaction to change, following predefined and well-thought-out paths.
The greatest benefit of all is that it enables me to manage risk. (For the record, there is nothing more important than managing risk when handling leveraged financial instruments, which are akin to financial hand grenades.)
Taking time to carefully define a trading plan is an essential prerequisite for successful trading. Even an intuitive trader needs a plan indicating when those intuitive decisions need to be made and what needs to be decided.
Undocumented plans are worthless. Incomplete plans are worthless. Ambiguous plans are worthless. The properly documented plan must have no loopholes requiring ad hoc decision making in real time. Every contingency must be foreseen and allowed for. I want to plan my trade and trade my plan.
Having no plan, or a sloppily prepared plan, is the quickest way to the poor house!
What’s in a plan?
My trading plan provides points of reference as market action unfolds quickly in real time. It enables me to know what to do next, and how to do it. It thus answers four questions:
1 When should a trade by opened? I need a trigger that tells me when to enter the market. If and when I see this trigger, I act.
2 How large should the trade be? I need to know how many contracts to trade. This is the key risk and money management decision. If my position is too big, I am overexposed to risk. If it is too small, I am not taking full advantage of the opportunity.
3 Where should the initial stop be placed? I never trade without a physical stop loss order in the market. Period. Stops are not perfect, but they are my best protection against disaster. The plan must tell me exactly where the stop is to be placed.
4 How will I close the trade? Before getting in I must know where I will get out. It’s easy if my initial stop takes me out of the trade and it ends as a loser, but, oddly enough, it’s harder with a winner. Will I set a target, trail stops, or both? Traders beat themselves up over winners all the time. Why didn’t I hang on? Why didn’t I get out while I could? How could I have let that win turn into a loss? Don’t beat yourself up, don’t agonise; have a plan and trade that plan.
Guiding principles
I always keep the following principles in mind as I develop and make use of a trading plan:
Don’t overtrade. Seek high quality trades, and keep out of the market if the entry trigger doesn’t appear during a session. My personal rule is to take at most one trade each day (in any particular market). Leverage on futures trading is such that just one or two trades can yield an excellent monthly return, so why look for more? I need to be honest with myself – am I looking for profits, or am I looking for action? If I am addicted to action, I am not a serious day trader.
Keep it simple. I know I have truly understood a complex idea if I can express it in a simple, clear, concise form. I work hard to eliminate unnecessary complexity from my plans.
Stick to the plan. I may as well not have a plan if I don’t adhere to it. It is much easier to stick to a simple plan than a complex one, which is one reason why simplicity must be an overriding goal.
Eliminate errors. Just one implementation error can totally destroy a trading month. Errors are hard to eliminate because trading is stressful and fast moving. This is one of the great advantages of automation. A computer doesn’t get tired, impatient or flustered, regardless of market conditions. When trading manually, a simple system is much less error prone than a complex one; another reason to strive for simplicity.
Understand the rationale. Plans should be based on a sound trading idea. In my case, I look for entries based on intraday support and resistance levels and how I believe the market reacts to them. Other traders may use different stimuli. The point is your trade should be based logically on the assumptions you make about market action in certain situations; I never enter a trade if it is not in accordance with one of my theories of market action. For example, I might look at the market over the last three years and notice that a particular strategy would have been successful if I used it every Tuesday. (These kind of things do happen, and people publish books about them.) Now, if I can come up with a rational reason why that is happening, I might trade that strategy, but, if not, I will keep well away from it. All sorts of coincidences can occur when you look back over history…
Have patience. Things sometimes seem to happen slowly – even for a day trader. I may not get a trade for a few days. I may have a string of three or four losing trades and be in a drawdown for a while. When I was addicted to trading action, these periods were excruciating. Now I trade automatically and remain detached from the process. I resist temptation to change my plan because nothing is happening. A no-trade day is a good day because I maintained discipline. Opportunities will come – the market will be waiting for me tomorrow.
Automate for perfection
As a manual day trader I had a plan. Of course I did!
Was it complete? I think so, but I could always sort out a tricky decision at the time if there was an ambiguity… right?
Did I stick to it? Of course I did! Well, most of the time, unless it was telling me to do something obviously wrong.
Did I trade it accurately? I did my best, but I’m only human. Everybody makes the odd mistake. That’s not the end of the world, is it?
Did I have fun? You bet! Nothing matches the buzz you get from trading, especially on those winning days.
If any of this sounds like you, let me tell you how I made a quantum leap forward in my trading performance, and improved my lifestyle at the same time.
I wrote computer software (TradeOnAUTO) that let me record a trading plan and then request my computer to automatically trade the plan while I was doing something else. (As I live in Australia and trade in Chicago, the something else was usually sleeping.)
Let’s ask those questions again, this time from the point of view of an automated trader:
Is my