25 Rules Of Day Trading (2003).pdf

discipline for

The success that a trader achieves in the markets is directly correlated to one’s trading

discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is

very simple: Trade with discipline and you will succeed; trade without discipline and you

will fail.

I have been a trader and member of the Chicago Board of Trade (CBOT) for 20 years.

During my successful pit-trading career as a scalper, I traded in three different contract

markets: 30-Year Treasury bonds at the CBOT, the S&P 500 at the Chicago Mercantile

Exchange (CME) and the Gilts at the London International Financial Futures Exchange

(LIFFE). Currently, I also trade the electronic $5 Dow futures contract on the CBOT as

time permits.

Although my formal academic education consists of a bachelor’s degree in business

administration from the University of Denver, I never considered myself to be an

extremely gifted student. I have no formal training in market technical analysis. I’m

unable to even set up a Fibonacci study or Moving Average study on a charting pack-

age, let alone know how to trade with such data. I have no formal training in market fun-

damental analysis. I don’t understand the economic causal relationship between the

actions of the Federal Open Market Committee and Treasury bond prices or equity

prices.

How, then, have I been able to succeed, day after day, trading the markets for more than

20 years? The answer is simple: I trade with discipline, and I respect the market. When

I’m wrong I get out immediately, and when I’m right, I don’t get too greedy. I’m content

with small winners and I’m accepting of small losers.

Just as I now mentor my trading clients regarding performance, discipline and

profit/loss management, I was mentored by one of the best traders ever to set foot on

the CBOT trading floor, David Goldberg. David was a long-time spread scalper in the

wheat pit and a principal of Goldberg Bros., at the time one of the largest clearing firms

at the CBOT, CME and Chicago Board Options Exchange (CBOE). David taught me the

rules of trading discipline. I listened to his guidance and gradually, over time, became

more and more successful. The student has now become the teacher.

Provided by permission of SFO Magazine February 2003. ¨ 2003 Wasendorf & Associates, Inc. ¤ 3812 Cedar Heights Drive ¤ Cedar Falls, IA 50613

day trading

Provided by permission of SFO Magazine February 2003. ¨ 2003 Wasendorf & Associates, Inc. ¤ 3812 Cedar Heights Drive ¤ Cedar Falls, IA 50613

By Douglas E. Zalesky

The Wheel of Success

loss of thousands of dollars. A trader can ruin his entire day with an

inadvertent trade entry error.

There are three spokes that make up, what I call the ÑWheel of SuccessÒ

as it relates to trading. The first spoke is content . Content consists of

all the external and internal market information that traders utilize

to make their trading decisions. All traders must purchase

value-added content that provides utility in making

their trading decisions.

Once you have mastered order execution, though, it is like riding a

bike. The process of entering and exiting trades becomes seam-

less and mindless. Fast and efficient trade execution, espe-

cially if you are trading with a scalping methodology,

will enable you to hit a bid or take an offer before

your competitors do. Remember, the fastest sur-

vive.

The most important type of content is internal

market information (IMI). IMI simply is time

and price information as disseminated by the

exchanges. After all, we all make our trading

decisions in the present tense based on time

and price. In order to ÑscalpÒ the markets

effectively, we must have the most live and

up-to-date time and price information seam-

lessly delivered to our PCs through a reliable

execution platform and/or charting package.

Without instantaneous time and price informa-

tion, we would be trading in the dark.

discipline

The third and most important spoke in the

Wheel of Success is discipline . You must

attain discipline if you ever hope to achieve

any level of trading success. Trading disci-

pline is practiced 100 percent of the time,

every trade, every day.

Review the following 25 Rules of Trading

Discipline. You must condition yourself to

behave with discipline over and over again. Many

of my traders and clients read through the rules every

day (believe it or not) before the trading session begins.

It doesnÔt take more than three minutes to read through them.

Think of the exercise as praying Ð reminding you how to conduct

yourself throughout the trading session.

The second spoke is mechanics . Mechanics is how you

access the markets and the methodology that you employ to

enter/exit your trades. You must master mechanics before you can

enjoy any success as a trader. A simple keystroke error can result in a

THE MARKET

PAYS YOU

TO BE

DISCIPLINED.

Trading with discipline will put

more money in your pocket and

take less money out. The one

constant truth concerning the

markets is that discipline =

increased profits.

All good traders follow this rule.

Why continue to lose on five lots

(contracts) per trade when you

could save yourself a lot of

money by lowering your trade

size down to a one lot on your

next trade? If I have two losing

trades in a row, I always lower my trade

size down to a one lot. If my next two trades are profitable, then I

move my trade size back up to my original lot size.

ALWAYS

LOWER YOUR

TRADE SIZE

WHEN YOU’RE

TRADING

POORLY.

Being disciplined is

of the utmost

importance, but

itÔs not a some-

times thing, like

claiming you quit

a bad habit, such as

smoking. If you

claim to quit smoking

but you sneak a cigarette every

once in a while, then you clearly have not quit smoking. If you trade

with discipline nine out of ten trades, then you canÔt claim to be a dis-

ciplined trader. It is the one undisciplined trade that will really hurt

your overall performance for the day. Discipline must be practiced on

every trade.

BE DISCIPLINED

EVERY DAY, IN EVERY

TRADE, AND THE MARKET

WILL REWARD YOU. BUT

DON’T CLAIM TO BE

DISCIPLINED IF YOU ARE

NOT 100 PERCENT

OF THE TIME.

ItÔs like a batter in baseball who has struck out his last two times at bat.

The next time up he will choke up on the bat, shorten his swing and

try to make contact. Trading is the same: lower your trade size, try to

make a tick or two Ð or even scratch the trade Ð and then raise your

trade size after two consecutive winning trades.

We have all violated this rule.

However, it should be our goal

to try harder not to violate it in

the future. What we are really

talking about here is the greed factor.

The market has rewarded you by moving in the direction of your posi-

tion, however, you are not satisfied with a small winner. Thus you hold

onto the trade in the hopes of a larger gain, only to watch the market

turn and move against you. Of course, inevitably you now hesitate and

the trade further deteriorates into a substantial loss.

NEVER TURN A

WINNER INTO A

LOSER.

When I state that Ñthe market will reward you,Ò typically it is in rec-

ognizing less of a loss on a losing trade than if you were stubborn and

held on too long to a bad trade. Thus, if I lose $200 on a trade, but I

would have lost $1,000 if I had remained in that losing trade, I can

claim that I ÑsavedÒ myself $800 in additional losses by exiting the

bad trade with haste.

ThereÔs no need to be greedy. ItÔs only one trade. YouÔll make many

more trades throughout the session and many more throughout the

next trading sessions. Opportunity exists in the marketplace all of the

time. Remember: No one trade should make or break your perform-

ance for the day. DonÔt be greedy.

Provided by permission of SFO Magazine February 2003. ¨ 2003 Wasendorf & Associates, Inc. ¤ 3812 Cedar Heights Drive ¤ Cedar Falls, IA 50613

Keep a trade log of all your trades

throughout the session. If, for

example, you know that, so far,

your biggest winner on the day

is five e-Mini S&P points, then do

not allow a losing trade to exceed those

five points. If you do allow a loss to exceed your biggest gain then,

effectively, what you have when you net out the biggest winner and

biggest loss is a net loss on the two trades. Not good.

YOUR BIGGEST

LOSER CAN’T

EXCEED YOUR

BIGGEST

WINNER.

Too many new traders think that

because they have $25,000

equity in their trading account

that they somehow have the

right to trade five or ten e-Mini S&P

contracts. This cannot be further from the truth. If you canÔt trade a

one lot successfully, what makes you

think that you have the right to trade a

10 lot?

EARN THE

RIGHT TO TRADE

BIGGER.

If you have a

proven

methodology

but it doesn’t

seem to be

working in a

given trading

session, don’t

go home that

night and try

to devise

another one.

I require my ÑstudentsÒ to actu-

ally write down the specific

market prerequisites (set-

ups) that must take place in

order for them to make a

trade. I donÔt necessarily

care what the methodology is,

but I do want them to make sure

that they have a set of rules, market set-

ups or price action that must appear in order for them to take the trade.

You must have a game plan.

DEVELOP A

METHODOLOGY

AND STICK WITH IT.

DON’T CHANGE

METHODOLOGIES

FROM DAY

TO DAY.

I demand that my students show me a

trading profit over the course of ten

consecutive trading days trading a

one lot only. When they have

achieved a profitable ten-day period,

in my eyes, they have earned the right

to trade a two lot for the next ten trad-

ing sessions.

Remember: if you are trading poorly

with two lots you must lower your

trade size down to a one lot.

If you have a proven methodology but it doesnÔt seem to be working

in a given trading session, donÔt go home that night and try to devise

another one. If your methodology works more than one-half of the

trading sessions, then stick with it.

You are not a ÑloserÒ because

you have a losing trade on.

You are, however, a loser if

you do not get out of the losing

trade once you recognize that the trade is no

good. ItÔs amazing to me how accurate your gut is as a market indica-

tor. If, in your gut, you have the idea that the trade is no good then itÔs

probably no good. Time to exit.

GET OUT OF

YOUR LOSERS.

In all of my years as a trader

I never traded more than a

50 lot on any individual

trade. Sure, I would have

liked to be able to trade like col-

leagues in the pit who were regularly trading 100 or 200 lots per trade.

However, I didnÔt possess the emotional or psychological skill set nec-

essary to trade such big size. ThatÔs OK. I knew that my comfort zone

was somewhere between 10 and 20 lots per trade. Typically, if I trad-

ed more than 20 lots, I would ÑbutcherÒ the trade. Emotionally I could

not handle that size. The trade would inevitably turn into a loser

because I could not trade with the same talent level that I possessed

with a 10 lot.

BE YOURSELF.

DON’T TRY TO BE

SOMEONE ELSE.

Every trader has losing trades throughout the session. A typical trade

day for me consists of 33 percent losing trades, 33 percent scratches

and 33 percent winners. I exit my losers very quickly. They donÔt cost

me much. So, although I have either lost or scratched over two-thirds

of my trades for the day, I still go home a winner.

Once you come to the realization

that your trade is no good itÔs best

to exit immediately. ÑItÔs never a

loser until you get outÒ and ÑNot to

worry, itÔll come backÒ are often said

tongue in cheek, by traders in the pit. Once the phrase is stated, it is an

affirmation that the trader realizes that the trade is no good, it is not

coming back and it is time to exit.

THE FIRST

LOSS IS THE

BEST LOSS.

Learn to accept your comfort zone as it relates to trade size. You are

who you are.

Never put yourself in the pre-

carious position of losing

more money than you can

afford. The worst feeling in

the world is wanting to trade

and not being able to do so

because the equity in your account

is too low and your brokerage firm will not allow you to continue

unless you submit more funds.

YOU ALWAYS

WANT TO BE ABLE

TO COME BACK

AND PLAY THE

NEXT DAY.

When I was a new

and undisciplined

trader, I canÔt tell you

how many times that I

prayed to the ÑBond god.Ò My

prayers were a plea to help me out of a less-than-pleasant trade posi-

tion. I would pray for some sort of divine intervention that, by the

way, never materialized. I soon realized that praying to the ÑBond

godÒ or any other Ñfutures godÒ was a wasted exercise. Just get out!

DON’T HOPE AND

PRAY. IF YOU DO,

YOU WILL LOSE.

I require my students to place daily downside limits on their perform-

ance. For example, your daily loss limit can never exceed $500. Once

you reach the $500 loss limit, you must turn your PC off and call it a

day. You can always come back tomorrow.

Provided by permission of SFO Magazine February 2003. ¨ 2003 Wasendorf & Associates, Inc. ¤ 3812 Cedar Heights Drive ¤ Cedar Falls, IA 50613

I have never understood why

so many electronic traders

listen to or watch CNBC,

MSNBC, Bloomberg News or

FNN all day long. The Ñtalking

headsÒ on these programs know very little about market dynamics and

market price action. Very few, if any, have ever even traded a one lot

in any pit on any exchange. Yet they claim to be experts on everything.

DON’T WORRY

ABOUT NEWS.

IT’S HISTORY.

NEVER TAKE

A BIG LOSS. ONLY

A BIG LOSS CAN

HURT YOU.

Please review rules #5, #8,

#10, #11 and #15. If you

follow any one of these

rules you will never violate

rule #17.

Big losses prevent you from having a winning day. They wipe out too

many small winners that you have worked so hard to achieve. Big

losses also Ñkill youÒ from a psychological and emotional standpoint.

It takes a long time to get your confidence back after taking a big loss

on a trade.

Before becoming a Ñtrading and markets expert,Ò the guy on CNBC

reporting hourly from the Bond Pit, was a phone clerk on the trading

floor. Obviously this qualifies him to be an expert! He, and others, can

provide no utility to you. Treat it for what it really isÈ. entertainment.

The fact is: The reporting that you hear on the business programs is

Ñold news.Ò The story has already been dissected and consumed by the

professional market participants long before the ÑnewsÒ has been dis-

seminated. Do not trade off of the reporting. ItÔs too late.

MAKE A

LITTLE BIT

EVERYDAY. DIG

YOUR DITCHES.

DON’T FILL

THEM IN.

When I was a young bond trad-

er, my goal every day was to

make 10 bond tics. A tic is

$31.25, so if I made 10 tics

on the day, I would be up

$312.50.

In all of the years that

I have been a trader

and associated with

traders, I have never met a

successful speculator. It is impossible to speculate and consistently

print large winners. DonÔt be a speculator. Be a trader.

DON’T SPECULATE.

IF YOU DO, YOU

WILL LOSE.

It may not sound like a lot of money to you, but it surely was to me.

My mentor, David Goldberg, told me that if I could make 10 bond tics

every trading day of the year, at the end of the year I would be up

$72,500 in my trading account. Not bad for a 23-year old kid in 1982.

It is amazing how quickly your trading account will build up over time

just by making a little bit every day. If you are a new e-Mini S&P trad-

er try to make just 5 or 6 points per day. If you can do that youÔll have

that $72,000 at the end of the year.

Short-term scalping of the markets is the answer. The probability of a

winning day or week is greatly increased if you trade short term: small

winners and even smaller losses.

Just as I donÔt know of

any successful specu-

lators, I donÔt know of

any trader who goes into a

trade expecting to hit a home run and then actually having it happen.

You should never approach a trade with the idea that itÔs going to be a

huge winner. Sometimes they turn out that way, but the times that I have

a hit a home run on a position is most definitely luck, not skill.

HIT SINGLES

NOT HOME RUNS.

This rule is the one that I get

the most questions and feed-

back on by traders from all

over the world. Traders ask,

ÑWhat do you mean, love to lose money. Are you crazy?Ò

LOVE TO LOSE

MONEY.

No, IÔm not crazy. What I mean is to accept the fact that you are going

to have losing trades throughout the trading session. Get out of your

losers quickly. Love to get out of your losers quickly. It will save you

a lot of trading capital and will make you a much better trader.

My intent on the trade was to produce a small winner but, because I

had the trade on, and at the same time (as luck would have it), the Fed

unexpectedly entered the market, I unwittingly had a huge winner.

This probably has happened to me less than five times in 20 years.

This rule relates to the

theory of capital

flow. It is trading

capital that pushes a

market one way or

another. An oversupply or

imbalance of buy orders will push the

market up. An oversupply of sell orders will push the market lower.

IF YOUR TRADE

IS NOT GOING ANY-

WHERE IN A GIVEN

TIMEFRAME, IT’S

TIME TO EXIT.

How nice is it to be

able to turn on

your PC in the

morning knowing

that if you play by the

Rules, trade with discipline and stick to your methodology, the proba-

bility of a successful day is high.

CONSISTENCY

BUILDS CONFIDENCE

AND CONTROL.

IÔve had years where I could count on one hand the number of losing

days that I had. DonÔt you think that this consistency allowed me to be

extremely confident? I knew that I was going to make money on any

given day. Why would I think otherwise? Making a little bit everyday

(Rules #18 and #19) will allow you to trade throughout the trading ses-

sion with confidence and control.

When price stagnation is present (as typically happens many times

throughout the trading session), the market and its participants are

telling us that, at the present time, they are happy or satisfied with the

prevailing bid and offer.

You donÔt want to be in the market at these times. The market is not going

anywhere. It is a waste of time, capital and emotional energy. ItÔs much

better to wait for the market to heat up a little and then place your trade.

Remember Rule #9: If you make a little bit every day, then you have

earned the right to trade bigger. Thus, by following the Rules of

Discipline, your Ñlittle bitÒ can soon turn into much more profitable days.

Provided by permission of SFO Magazine February 2003. ¨ 2003 Wasendorf & Associates, Inc. ¤ 3812 Cedar Heights Drive ¤ Cedar Falls, IA 50613

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