Day Trade Futures Safely For Reliable Profits

How to Use Smart Software to Develop Profitable Strategies and Automate Your Trading

David Bennett

• Publisher: Harriman House
• Year: 2013
• ISBN:
  9780857192882
• Edition: 1
• Topic: Business
• Subtopic: Stocks
• Index: Business

David Bennett is a system trader, day trading futures contracts. In 'Day Trade Futures Safely For Reliable Profits' he describes his specific trading approach. He explains how he personally researches strategies, builds a trading plan, and submits trades. By learning about the way one successful trader operates, you will gain an insight into how you can refine your own trading approach.Central to the approach outlined here are two pieces of computer trading software: a tool that automates the trading process and a simulator that assists in the discovery of profitable trading strategies.If you are interested in finding out more about how computer programs can be put to use by system traders, or about how a structured system can improve your day trading, 'Day Trade Futures Safely For Reliable Profits' is for you!

Chapter One: The Way I Trade

Different traders, different approaches

There are as many approaches to trading as there are traders, and that is as it should be. What works for me may not work for you, and vice versa, because our psychological makeup, knowledge and implementation skills are all different.

This book is about my way of trading, how I perceive the market, how I develop a trading plan and how I implement it. It is neither right nor wrong, because in trading there are no absolutes. I am not saying you should do it this way, because it may not suit you, but I hope that at very least you will find some useful pointers for your own trading approach.

Why futures?

I am a futures trader because, when I started trading, I didn’t want to put much capital into it. If I was to make a lot of money quickly, I needed a leveraged instrument.

Futures contracts are highly leveraged. They are traded in genuine markets (unlike the artificial contracts offered by many forex and CFD brokers). Their commission structure is low. There are several liquid markets to choose from, each with their own character and feel.

So futures were a perfect choice for me, providing an opportunity to make good money on a relatively small capital investment. But, like many tyros, I didn’t pay enough attention to the obvious fact that, if you can make money fast, you can lose it equally quickly.

That is why this book is focused on trading futures safely.

Why day trade?

I am a day trader for three reasons.

First and most importantly, if it is done properly, I think it’s the safest form of trading there is. Why? Because I don’t spend much time in the market! If I aim to take one trade each day, and spend an average of 60 minutes in the trade, my money is in danger for about 5 hours a week. For the remainder of the time it is protected in the relative safe harbour of a money account.

Why is that a good thing? Because catastrophic losses happen when big surprises hit the market without warning. So the less time you are in the market, the less you are at risk!

If disaster strikes while the market is closed, there is nothing to be done about open trades until the next trading day. By then the damage is done. Prices can easily gap through stop loss levels over night, ruining risk management plans. I don’t have open trades when the markets are closed, so I don’t have that particular problem.

I only trade during primary sessions when the market has high liquidity. If something cataclysmic does happen while I am in the market, there is every chance that my stops will be hit almost immediately at electronic speeds. Sure, I could suffer nasty slippage, but the chances are I won’t be wiped out.

The second reason I am a day trader is that I tend to be impatient. I like to see the outcome of my trade quickly, not weeks (or, perish the thought, years) after I open it.

The third reason I am a day trader is that I hate worrying about work at night and at weekends. That’s family time. As a day trader, I hold no positions at the end of each and every trading day, so there is nothing to worry about during my leisure time.

Automation to defeat addiction

I have traded daily since I retired from my corporate career in 1998. For about half that time I traded manually at my computer, making trading decisions in real time. It was exciting, tiring and psychologically draining.

In those days, I couldn’t wait for the market to open, even though it was in the middle of the night (trading in Chicago, living in Australia). It was sheer excitement, better than visiting the casino or playing poker. 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 ...