Winning the Day Trading Game

01/01/2007 12:00 am EST

Focus:

Tom Busby

Founder and CEO, DTI

Tom Busby has had plenty of experience in the futures markets and has traded during all of the tumultuous market periods of past 20 years. In fact, his current career and part of the impetus for writing Winning the Day Trading Game came from his experiences during the 1987 stock market crash. Many of today's traders were not in the markets at this time and should therefore pay particular attention to Tom's description of what happened during this period. It was a tough time for Tom, and he was nearly wiped out financially; even worse, it took him five years to regain his confidence. The silver lining was that he refined his trading method and started facing each new day with a clean slate.

This is the focus of the first part of the book, as he correctly points out, in my opinion, the fragility of being a consistently profitable, short-term trader. Although he feels that it is important to analyze ones trades at the end of the day, Tom emphasizes that you cannot let this analysis carry over to the next trading day. This is a common problem that many traders have faced, myself included, as the mistakes of the previous day adversely affect the next day's performance. His solution to this is to do your homework, develop a plan, stick to it, and, above all, use stops. As part of his plan, he advocates following the world stock markets if you want to be a successful day trader in the stock index futures. This means that you monitor not only the major US averages but also the German Dax Index as well as Japan's Nikkei.

This is solid advice, and is followed by most serious stock index traders. Tom does not think the day trader should ignore the big picture and therefore suggests recording yearly opening prices and then following this by writing down the monthly and weekly opens to develop a picture of the major trend. Tom believes there are key numbers for each market, and he suggests that the trader identify them and use these numbers not only for establishing positions but also for exiting them and for determining profit-taking zones. Some of the indicators that Tom feels are essential are the TICK and TRIN, which allow one to gauge the underlying strength or weakness of the market. He has also developed two of his own indicators. The first is the V-Factor, which uses volume to compare the number of buyers and sellers, and second is the TTICK, an indicator that combines information from the TICK and the S&P futures. The exact formulas for these are not revealed but their concepts sound interesting.

Quite a bit of the book deals with how one should approach trading with advice like always have an exit plan and prepare for the worst; both of which are things the novice day trader should do. His overall philosophy after day trading for so many years is risk averse, and he recommends taking a market position that can be broken into three parts, termed the tick, trade, and trend. In the tick portion, he closes out with just a few ticks of profits. The trade portion looks for 1 or 2 points of profit. Finally, the trend portion is where he tries to maximize his profits by riding the trend of that day's market. This, he notes, has a psychological benefit as it helps the trader better cope with the competing forces of fear and greed, which are amplified in a day trading approach. Additionally, Tom reveals his strategy for trading crude oil, bonds and gold, where he specifically advocates using a 65-day moving average to help trading.

If you have never day traded, this book should help you confront the realities, as it is not easy. Those who have day traded might find some comfort in knowing that Tom has had some of the same experiences as the rest of us. Here is one last tidbit that I found especially interesting: in his classes, Tom uses what he calls the Green Circle Country method of tracking winning and losing days. A green circle is put on the day if any profit is made (no matter how small), while a red circle goes on the losing days. Visually I think this would help the day trader get a quick read on their recent trades, as it is easy to lose track of the bottom line.

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