By Tim Racette
The first step to becoming a successful trader is developing a sound foundation of tools and knowledge in which to trade. Whether you’re new to trading or been at it for years, the tools and strategies outlined here provide a solid foundation for a successful trading career.
Before we delve into actual tools and strategy we must address the most important aspect of trading, you. Trading successfully, above all else is dependent on your ability to fully accept the risks associated with placing each trade. If you can learn to detach yourself from the money and trade with size small enough that does not instill fear of loss, then you stand the greatest chance to succeed as a trader.
Now, let us move into the tools of the trade.
My vote for best charting package is Thinkorswim. They provide the most advanced tools, with a full range of customization and features. You can think of them as the Apple of the online brokerage world.
5 Factors to consider when choosing a charting package:
– Quote speed
– User interface
– Data costs
– Customer service
Thinkorswim I’ve found provides the highest value with the lowest costs. Other platforms like Trading Technologies (TT) and CQG have incredibly reliable and lightning fast data feeds, but retain high monthly fees. Do a trial run before you commit, most platforms will let you demo their platform for free.
Order Execution Platform
I prefer to keep my charting package and order execution platform separate for two reasons.
- It provides me with another data feed to confirm I am getting the most accurate data
- In the case that my charting package freezes up I am able to manage my trades separately on my order execution platform (which typically take up a much smaller amount of memory to operate on your computer).
After testing out a number of order execution platforms the one I use and recommend is the Infinity Futures Active Trader (AT) Platform. They offer low commission rates, a state-of the-art trading ladder, and very reasonable intraday margins.
Oh and best of all, no monthly software fees!
Their customer service is top notch and overall quality is the best in the business. My personal broker is Anthony Giacomin, he’s offered outstanding service and rapid response in the rare case where I’ve lost power or my computer has locked up on me.
As I’m sure you’ve already discovered there is a lot of content on the web about trading. The first place to start is with the book Reminiscences of a Stock Operator, the classic account of trader Jesse Livermore from the early 1900s. There is a wealth of knowledge in this book.
When it comes to electronic futures trading and becoming well versed on the markets I refer people to three books…
– Trading in the Zone by Mark Douglas
– Pit Bull by Martin “Buzzy” Schwartz
– Mastering the Trade by John Carter
These three books cover everything from developing a winning mindset, to techniques for profiting from the markets over the long term, and the use and implementation of specific indicators in your trading. They are a must for any trader’s book shelf.
Think Risk First, Then Reward
The number one way new traders fail is by counting the money that could be made on the trade when they should be focusing on how much they could lose on the trade. To succeed you must be able to accept the risks and apply money management techniques such as stop loss orders, max daily loss limits, and account draw down rules.
Stop Loss Orders
In order to limit downside risk, a stop loss must be placed on every trade. It is imperative to your long term success that you do this. There is no getting around losing trades, we all have them. The key is to keep those losers as small as possible.
2 crucial rules for stop loss orders
– Stops must be placed at the time of entry
– A stop can only be tightened, never widened
Max Daily Loss Limits
To prevent the dreaded “blowing up” of your account you must place a max daily loss limit on your account. I recommend setting this loss limit with your broker.
When we are at our weakest is when our rules become the most important, yet the hardest to follow.
A rule of thumb for max daily loss limit is no more than 5% of your account balance. This ensures that you will live to trade another day and not lose everything on what is in some cases, one bad decision or mistake.
Draw Down Rules
Another way to limit your risk is to cease trading after 2 full stop outs on the day. If you have two stop outs the market is telling you that it is not conducive to your setups that day and you need to stop trading.
Chances are your profit/loss statements are made up of a handful of average days, a few big winning days and a few big losing days. If you can eliminate the big loser the profits can then emerge.
Trade with the Trend
Yes we’ve all heard “the trend is your friend,” but how many actually trade with the trend? It is your job as a trader to identify the trend and formulate a method for entering into that trend. Once you are in the trade, your job is to stay in the trade until the trend fails.
Methods for Identifying the Trend
An uptrend can be defined as higher highs and higher lows, while a downtrend can be defined as lower highs and lower lows.
A great exercise for intraday traders is to print out a 5 or 15-min chart of the market you are trading and go through identifying the highs and lows of the day. After a few weeks you will become better able to define the trend.
Whether you’re on a daily, weekly, 15-min, or hourly chart, a moving average can be a great way to identify the general trend. It’s important to place more weight on larger time frames such as the daily and weekly when determining the longer term trend and then look to trade with that trend on the smaller intraday timeframes.
A 20-period Exponential Moving Average is a great tool for intraday trading.
As talked about in the book Japanese Candlestick Charting Techniques, candlestick charting is a great way to identify market sentiment. The open, close, high, and low of these candlesticks have a lot more to say as compared to a bar chart. To get a really clear picture of the trend try switching to a Heikin Ashi chart.
Methods for Entering the Trend
Buying on a retracement as opposed to chasing the market is a great way to enter a trend with less risk that your stop will take you out of the trade. Once you have identified a new trend try drawing from lows to highs (in an uptrend) and waiting for a pullback to the 50% of a Fibonacci retracement before going long.
Buying over the high of a low bar (in an uptrend) or shorting the low of a high bar in a down trend are two ways to enter a trend close to its reversal. These patterns accompanied with a moving average or other momentum indicator can be a sound strategy with very good risk/reward ratio.
How to Become a Winner
Your success as at trader is determined your ability to detach yourself from the money and trading with size small enough that it does not instill fear of loss.
Most people treat trading as a hobby. To win, you must treat trading like a business. In a business, there will be losses, there is risk involved, and it is your job as CEO to limit your risk, identify the trend, and stay in the trend until it fails. In doing this you will give yourself the best chance to succeed in the game of trading, and in life.