Thore are several pomts to be made about the series of trades Ive just shown, The first is that I "stayed iri the water" until the trend developed to the point where money couid be made. I also lost money on my last entry. This is part of trading. I have no way of inowing when the trade is over until 1 get stopped out. The very same principles would have applied had this been a daily chart, or a sixty minute chart, or a fifteen minute chart. 1 intentionally did not trade any Ross hooks on the series ot trades for the purposes ol simplicity. I intentionally did not use an offset moving averacje to define the trend. I intoniionaJly ignored all reversal bars (open Tiigfi-close low in an up market and open low close iiigh in a down market} iJi titis series of trades. The concepts left out here are adequately covered in Trading by the Bk and in my teacfiirig Iciter Traders Notebook.

Any or ad of the things I left out could have made this scries of Trades even miore profi:able. In the chapters that follow, I will move out to charts of a larger time-frarTie. I will also show different combinations of techniques in the way I traded tliern at the times shown in the iJlustralioos.

I ha\/e no way of knowing how others feel about trading in various markets. I know thni some prefer to trade in only one or two markets, while others follow as many as thirty or forty markets, I an% one of those who follov about twenty markois, watch twelve, and actively trade in about eight to twelve depending on where the actioii is.

My personal preference is for variety, f like to browse through the various markets daily and intraday and choose those I feel show the most promise, Sometimes I get "hung-up" on trading a particular market and will stay With It until it becaroes dull and uninteresting, or 1 just tiro of trading it.

1 also like to trade in ddforing time frames for the sake of variety. 1 have been very fortunate in being successful in developing a nurnler of ways of trading, so I don*t hove to do the same things ail the time. I dont believe 1 could have lassed as long as I have as a trader without havirig had the variety of tradifig ihat has been aljle to fiold aiy interest.

1 Dill aware that some systems traders trade as many as a half do2en mechanical systems. Perhaps it is done to achieve variety. Trading can be pretty hum-drum if you trade the same markets in the same ways all the time.

I am also an advocate of periodically trading a "mono-technique." This is pretty much wtiat I have done in the S&P illustration in this chapter. By trading only one tjasic method, [ am able to prove to aiyself that the method still vorks. and am able to corTipare the results with how well tho method worked in the past. Tliis enables me to fine ttrne my melfiods, and to discard or temporarily lay aside those that are not working as vcH as 1 might like. I have gone so fcir as to trade one method for one entire year just so I could fine tune it to current market action.

By having variety, Im able to enjoy trading. If something doesnt seem to he working as well as I might like. Im able to switch. By conibiinng mono-techniques, I have been able to come up with enougfi excitement !() hold my interest over tfio ycors.

Chapter 22

Fiftces Miiujte Trading

In this chapter I wiil introduce vhat has become known as a doji. Also I will also be showing a way to find the trend using a simple count, and showing how 1 compute average volatility. The emphasis in this chapter is on the simple count to identify the trend, and on how to use average volatility.

One of my favorite, easy-to-trade commodities is bean oil. I call It the "litllo S£iP," because on iha daily cfiarts, it trends very much Irke the five minute S&P chart. Often, when I have had a rough time in the markets. I will turn to my ofd friend bean *\. Somehow i: helps me to regain my perspective, its the commodity I cut my teeth on. When I trade bean oih ( always go back to the most basic fundamentals of trading.

\ diligently follow the trend. I carefully count the bars going in one directron, i am very mindful ot rising bottoms and falling tops even when the market seems to be going novhere.

Bean oil is a market in which I can be braver than I am m most otfier markets, It is an old ally, and somehow trading it puts everything back the way its sLipposcd to be. Too often, 1 neglect it to go after bigger game. Sooner or later I return for comfort and confidence. If the day ever comes wfhere I fail in the bean oil, that is the day I will quit trading forever.

Bean oil is a low risk trade in most instances. If you are just starting lo daytrade. and don4 want to risk a lot of money, it is an excellent vehicle for initiation into daytrading. Even with the worst execution./tumaround. almost anyone can trade a fifteen minute bean oil chart. Another point of interest about the bean oif is that, except under tfie most volatile circumstances such as a drought, t can stay in ovnrniglit without great fear of a horrible opening gap. If t am at all conceosed ahou; voEatiliiy, 1 can spread the risk off against Soy Meal overnight, and then drop tiie weak end of the spread when 1 see the market commit itself one way or the other.

2055 Z052 2049 ZQ4rj Z043 2040

2o:jv

Z031 Z031

zozs

2013 2016

1

2G10 2007

ITJU

1 JJZ

iguj

What I want to show here is a typical series of trades in bean of. Nothing spociacufar, just the normaf way i make money by trading. Sometimes I win, sometimes I lose Sometimes I donl make all that much. Perhaps if I show the "reality" of trading as I actually do it, my readers wil gain the correct perspeciive on their own trading.

This series oi trades began at a time when \ needed my old friend, The first fifteen minute bar is shown by the iirrow. From that point iitiht the bar at whfch Ive shown the next arrow, I never was able to couru tfiree consecutive new highs, or three consecutive new lows. Ive boxed olf that entire area as shown on the chart above,

Al next day, J got short a ten tot after three consecutive new tows. At the fourth bar, I sold the breakout of the low of the third bar. My stop was ten ticks away the typical amount willing to rtsk on a trade. My entry price was 2023.

As can be seen, the bar at which I went short was a reversal bar [lower open, higher close), Tfie market went elmosi immediately against me closing one tick above the higfi of the previous bar I can now begin to count a correction, Ive numbered that as bar 1 of the correction. Tfien follow two additionat correcting bars.

BO 15 niMUTE

2Q55 2G5Z 2045 2046 2043 2G40 2037 2034 2031 2028 2025

2022 2019 2016 2013 2010 2007 2004 2001 1930 1935 1992 rJC3 1986 1983

Whet it becioie aiiparent tfiat the third bar of correction was going to nu-iieriaiize, 1 called in e order to exit my short position jjnd eni<jr a long position at a breakout ol ifie high of the third bar. I covered my sfiort at 2033 and simultancousfy weru long a tveniy foi [Point Bl. As prices climbed to a fiigh of 20bL3. 1 v.cis t)t>le tn cover 11 costs and move my stop tf) a iiosiiion of protecting prohts. Its important at this point to have a brief discussion about costs. They can make :i huge diiference in tfie ouicrnrrni nf truidiiif

Lets look at three different situations. These are extromcSy mlportont, because anyone who wLiiUs to be £i diytrader must realize ifiu cuitsetiuences ol wfiat tiicy are about to CO.

S6 Per Round Turn

Payiru] $6 a round turn [}er contract as I do at ifie , on ih;h last series of trades, trading hrst a ten lot and then a twenty lot in the tiean od, my costs were $180. Add to that the ten points per contract 1 lost on tfie trade before rtversing, and I would have had a total loss plus costs of S7S0 going into my reversing long position. In order to cover c"ill riin;ct costs of tfie two trades, I would noed to earn $180. In other words, i need thirty points Oh one of my contracts to cover costs. Looking at tiie bear> oil I can sec that tfiats more points than average volatility has been yreldirig in the bean oil,

TO COMPUTE AVERAGE CURRENT VGIATIUTY I TAKE THE SUM OF THE DIFFERENCES BETWEEN THE HIGH AND TLIE LOW OF THE LATEST FIVE PRICE BARS AND DIVIDE BY FIVE. In this case, including the bar on which I went long, average volatility is a fraction over five. In nilier words, on an average, bean oil price bars are nioving five points from top to bottom. At tirncs, I use average volatiiiiy to set both my stop loss and my cost covering liquidation point. If average volatility is greater tfian thcj amount Im willing to risk, I eitfier dont trade at all, or 1 drop it in favor of a ton point stop loss, and perhaps an even smaller cost liquidation stop. Corversely, if average volatility rs so low that it would require more than fialf my position just to cover costs, I do not enter trade. In these cases, Ive used it as a filter.

That means that if 1 want a reasonable chance to tuiver costs on this trade, I will linvc to oasfi six of my twenty contracts wfion I see five points of gdin tn the bean ojI {6 x 5 x G). I must place ifiat order in the markrji MfT and risk a little slippage, or I can cash seven of my twenty contracts at five points 1 to make up for the slippage I might get.

I chose to cash seven cortracts, in the ftopes I would at least cover costs on this trade and tfie previous trade. As it turned out, by the hme prices reached their high at 2055, I fiad 22 points in the trede. I wos able to ccjsfi seven contracts at 2039. Instead of slippage, I picked up one point of windfall proliis. As soon as prices had n"iovcd safely ahead, I pullod my stops to breakeven, and wfien prices t0[)ped out at 2055, I moved rny stops up to protect eleven points (50%) of profit in the trade, 1 wys stop[)ed out thtire at 2044 on tho fifice bar foflowing the one that reached 2055.

Tfrat guve rue tfiirteon conircicts at eleven points of profit per contract far a total of 143 points of profit. That translates to $QbS in profits, 1 had to subtract 5600 from that which left me S253 for the entire series. I can add to tfiat my vindfalt :irofit of 542 for a grand total oi 5300 in profits.

S 1 5 Per Round Turn

Now. itts lot]k at wfu-ii would have iiappencd on Uiis series of trades if had to pay costs of S 1 found torn.

Instead of having costs of SI 80 at the time of reversing my position, 1 would have had to absorb S450 in costs for the trade. In order to do that, I would need a total ol seventy-five potnis in order to break even. That means I vfouEd [lave hatl to lif]uidate fifteen contracts at five points (average vokiiility) eacfi in order to cover my costs.

Tfiai would feave me only five contracts wirh wfnch to cover tlie S600 in losses I fiad incurred, I would have to get tyventy points apiece on those five contracts to break even on the trade.

That was okay this time because ihe trade made twenty-two points beyond my entry point. Allowing for possible slippage, 1 wouid have had to place my order to fiquidate those five contracts at 2054 MIT. I probably would have been able to get 2053. 2054, or even 20bb. But I would have been very lucky to have broken even or even luckier to make a coupte of trucks on the trade.

525 Per Round Turri

At $25 per round turn, tfiere was no way to hove made a profit on ifiis series ol trades utilizing the money management scheme Ive been showing. The best I cobid do would be to mitigate my losses. At 525, I would have been facing a staggering $750 in costs, plus the $600 in losses from my failed short position.

That doesnt mean ail would have been lost, ft only means that my money management scheme would have to be a lot different.

Please recall there were twemy-two points of profit available in the trade. With a twenty contract position, that means that at. its best point, tfiere was $2640 profit available in the trade, With total costs and losses of S1350, I still could have almost doubled my money by staying long the entire tvs/cnty contracts and exiting at the point yhere 1 had twenty-two points.

Obviously, that is not very likely, nor is it commensurate with human nature. 1 had no way of knowing where the top would be. Once I had twenty*two poirtts, vhy wouldnt I be looking for twenty-five, or tfiirty points?

If f were an absolutely bfifliant trader I would possibly have exited on the clo.se nf tho price bar that made the fiigh. But Im not ttiat good. The best I Cfifi see 1 wnuld have rlnne were I holding all twenty contracts, would tie to have gotten out at the close of tfie bar following tfiat. Until t saw that the bar was not going to make a new higfi, I would have stayed in Ifie trade eommuing to live in hope. That next price bar closed at 2041. Rcalisticafly, Itie very liest I could fiave gotten frorn tfie trade woufd fiavo been 5 60 in the plus column against a total of $1350 in the mitnjs column.

1-12

Another possibility VMould have been to use a different filter for entering tliis trade. Certainly, I would have needed to see a great deal more volatility before being able to enter a trade. Perhaps I would have needed to use an entirely different meth.od Such as taking a major entry signal frotTi tho daily chart.

Whets the point of all this? Am I trying to keep people from daytrading? Tlie answer is nof Its sinrily that so aiany {jaytraders and would-be dayiraders call nie up and tell rue th.ey are paying anywfiere frorti 525 - 565 per round sum. Then they tell me they are losing in the markets.

s it arw wonder? How can anyone trade a five minute or evert a fifteen minute chart and liope to make money paying that kind of overliead? It simply doesnt compute. Yet, invariably, I am told by these callers that they are trading on one minute charts, three minute charts, five minute cfiarts, six minute charts, ten minute charts, twelve minute charts, etc.,. etc. ad ridiculum.„.

When I ask them if they arc calling straight to the floor, the answer is "no" or "I dont knew."

It is simply impossibie to com)ete in the very short time frames with that kind of overhead, and wilh tfie kind of execution that even ihe best broker in ifie world can give when there arc so many desks that fiave to be gone through for tfie trade to reach the floor.

Traders wfio sutjject themselves to such turnaround and overhead are doomed to frustraiion ar-id failure.

If a person irtsists an trading the short time frames, then a way must be found to call directly to ifie floor, and a way must be found to trade at a low price per round turn. For now. lets got on with the bean oil tradmg.