ALS – Just by the title of this chapter I can see a picture being painted by an artist. All these traders
standing with notebooks, bow and arrows, alarms ready to sound and no bids in the pit as quiet sets
POP – Yeah, and I can tell you the artist.
ALS – Who would it be?
POP – Leroy Neiman! I’m impressed with his work. It is something he would paint. I can’t help but
put him in the class with Oprah, MJ, Don Gibson, LeAnn Rimes, and . . .
ALS – And Phantom of the Pits!
POP – Phantom of the Opera maybe but not the Phantom of the Pits! You must remember that no
one knows who the Phantom of the Pits is. In fact I can argue that there will be but this one book!
Only this one!
ALS – Now wait a minute. You said it depends on the reception of the traders when we started this
project six months ago. Are you backing out?
POP – That is something I want to discuss with you. There is no big profit is writing unless you can
really write. I can’t and don’t want to write except for my own keeping. You can make more money
trading than writing. This brings me to my point of insight in trading.
I wouldn’t do this insight on my own for it would be a waste of my time. In fact I am sure that
because of this reason is the primary cause of lack of knowledge presented to traders based on
experience. Theory is great but not a learned behavior. Behavior is the key.
ALS – Phantom, you forget easily as it was YOU who came to me about giving back by helping
other traders. You were as sincere as Michael Jordan is on the court. You don’t fool me! I know
what your plan is!
POP – Yeah, perhaps but I know you won’t tell anyone unless I let you.
ALS – I am going to tell without your permission right now! You are going to cut your losses if any
in this project and you certainly will press your gain if any from this insight give back.
POP – That’s good. Wish I had thought of that.
ALS – I would like to know in day trading if you should use the same rules as in longer term trading.
Are there times when you shouldn’t use rule one for day trading or any trading for that matter?
POP – Never, in trading forward from now. Looking back you could say there are certainly times
when you would have been far better off to forget the rules. But that is looking back and that is not
how you trade. You must plan for what will eliminate you from trading in the long run and protect
ALS – There are going to be lines of traders lined up to tell you why you are wrong!
POP – Let me point some things out here. Many years ago when I first started to use computers and
their speed was slow, I had so much to do that I had to get outside help. I had this one program
which I could have written but it would have taken too long.
I didn’t want to write it in assembly language because I needed to see every step work before I could
use the program. I contacted newly established programmers and some not so new to help me.
It was sort of an experiment within itself. I narrowed my choice down to about four of five possible
candidates. I asked each one of them to solve a problem for me and gave them access to a computer
and a basic programming language. The question I asked first was what is the answer to every
number from 1 to 100 added up.
Think about how you would solve that problem for a minute before you see the final conclusion to
it. One programmer used the computer and came up with the correct answer. It took him all of three
minutes plus. Of the candidates one put down his paper computer and said the answer is 5050
within ten seconds. I asked the individual who only took ten seconds how he came up with that
His remark was “I don’t see or do things the way everyone else does. I take and split the numbers
into pairs such as 1 and 99, 2 and 98, 3 and 97 and when I am done I have 49 pairs which make 100
with two numbers of 100 and 50 left. If you multiply the 49 pair times 100 you get 4900 and then
add the 100 and 50 you get 5050 as the answer. Well that made an impression on me I still keep.
Now I want you to understand about day trading the same way. WE DON’T ALL SEE OR DO
THINGS THE SAME WAY! We are all after the correct answer. My answer is to keep you in the
game for the longest possible time.
ALS – Who gave you the quick answer?
POP – You know very well who it was! I didn’t say I wouldn’t give you credit in these insights, just
that I wouldn’t take any. And wipe that big smile off your face. That impression was a start but I
wasn’t done with my experiment. Next I asked each of them to
write me a computer program to give me the correct answer for all numbers added from 1 to 10,000.
They were all able to give me a program to do what I asked of them in Basic language. I judged
their success on how quick the computer would give the answer and not by looking at the program.
I used 1 to 10,000 because I knew it would take longer.
All of the programs came up with the correct answer but at different speeds. Since we were using
Basic language it was slower than I wanted for my particular program but I was pretty well decided
I wanted to understand the program for my own protection. The ranges of speeds were from 48
seconds to 3 minutes for all but one.
The last one took less than a second did in basic. That surprised me so I took the fastest two
programs and called in the programmers. The 48 second program ended up with a loop of : N=0, for
NN=1 to 10,000, N=N + 1, next NN. Print N. 48 seconds was still slow as far as what I wanted. The
fastest program was N=N squared + N divided by 2. print N.
Just as each programmer came up with a different style and program, not everyone was correct for
what I wanted. It is the same in trading. The common ground here is that we are all after the ability
to not ever having to stop trading and we are all after the ability to make more than we lose.
You see there are variables in all of our trading styles. It is just that my rule one and two are
designed to give you the longest answer when it comes to trading longevity (rule one) and the
shortest time to get to your goal of return (rule two.) You need them both.
ALS – You’ve made a good point!
POP – Let the debate continue for we all benefit from knowledge brought forth with each different
situation. The only time I have a closed mind is when there is total lack of understanding of what is
required of a trader. That part of a program, which is not a control from a program but the required
execution by the trader.
ALS – Day trading. Where do we begin?
POP – We’ll start with the reason for day trading by most traders. It is a function of my rule one.
And it is a function of my rule two.
ALS – You mean you are going to take credit for day trading? I thought you said you didn’t want
POP – It is the traders desire to be able to trade and not worry overnight about their positions, risk
and exposure of positions beyond a short period of time while expecting the maximum possible
gain in the quickest possible time. Actually the desire is to have rules one and two in a short time
frame is a perfect prelude to day trading.
ALS – Ok, we’ll buy that. A day trader often is doing just what your rules imply.
POP – There are advantages in day trading but not many because restrictions come into play. In day
trading you are more apt to lose than win due to the time limit being a restriction which creates a
situation of who is ahead at the buzzer wins. In basketball, when the fourth quarter time runs out,
the game is over. The high score wins.
In day trading when the last trade is made, you expect to be out of your positions. You are letting
the clock decide if you win or lose. That to me is a restriction.
I did a study on day trading and came up with some very interesting findings. First learned in the
study was that you could use the day traders to your advantage in trading by knowing that they
would have to get out by the close. Second learned was that day traders actually do a better job of
keeping ranges smaller than do scalpers whose purpose is to fade small moves for quick profits.
Third learned was that day trading did afford traders a way of keeping risk smaller and allow them
to work larger positions in the short run as opposed to large positions in the long run. Without going
into the next ten learned points we will concentrate on the first three. The first three are probably
the most important but they all have merits.
Day trading is good for some traders, as this is the only way they know to keep risk smaller because
of shorter time frames. There are those traders who do not want to put up the margin to carry
overnight positions and have the risk (better known as under funded traders who don’t have the
money in the first place and should not be trading such size.)
Whatever the reason for day trading, it is a valid method of expressing my rule one. The only
exception is that they usually expect their position to be right.
A scalper is quicker to take a loss but tends to let profits run a little less than day trader’s ability to
take losses. In other words a day trader tends to lose on a trade more than a scalper makes. This
leaves a margin of loss in losing trades.
Believe it or not, guess who picks up that extra loss which day traders make? It is usually the
position trader. So that to me is the edge. You must know when you have the edge and just what it
is. It is not an exact thing but I feel it is because day traders are not as good or don’t have the ability
to execute as scalpers. A day trader would do better if execution became a market order on exits.
Especially on taking losers.
ALS – You’re going to discourage a lot of day traders.
POP – Not at all as the day trader is a more disciplined trader. It you take rule one, which is the
assumption of being wrong until proven correct, you will have the other side of the coin for most
day traders. They could become better traders if they were to use rule one. Day trader’s odds are
lower because of their limitations on overnight carries.
Another big drawback is delayed reactions on what the market prices have done. If they use criteria
such as opening range break outs, they will have to be fast at getting the orders into the pits. On that
type of trade they are better to take a position on the open and protect it than to take the opening
range break out. But they want the position proven before they take the position and wait until the
As a day trader, they would do better if their trades were within criteria, executed and protected by
rule one instead of the delayed trade due to the lag in information. They must pick the points almost
exact. This is another drawback for them. You put yourself at the mercy of how the orders enter into
the pits as a day trader.
It is almost impossible to be exact in your estimate of price. A better situation is to be able to pick a
range instead of a price on execution. Same with exits. This all reduces your potential profit from
day trading. So what is the answer?
A day trader can do better by averaging but you never want to average in an established trend. The
trend will tease you into bad entry positions if you don’t do your research on market characteristics.
Counter trends will do the same thing. Mainly because there will always be those weak positions
that turn into profit taking. This is a day trader’s nightmare in day trading.
ALS – How can you be so certain on day trading?
POP – The best traders will take what I have to say, study it, research it, and decide how exact it is.
They will judge accordingly and make their own trades based on improved judgement of day
trading. That is what we want them to do. It is too easy to think day trading is everyone’s game and
a good one. It is a good one for some but not most. It can be improved by understanding the
drawbacks. All trading has drawbacks so it is critical as to how they view their trading probabilities.
ALS – You said day trading could be compared with your rule two also. How so?
POP – A day trader tends to take bigger positions because they know they will exit quicker than
most position traders. This will give less risk long term and affords them a way to overtrade. Or I
guess I should say gives them a way to trader bigger. In rule two, the idea is to be bigger after
proven correct and I suppose that is what the day trader is thinking in trading bigger as a day trader.
Right or wrong, it is correct in being bigger within correct criteria. The bad side is that they tend to
be wrong as often as right. This keeps it more of a 50/50 game than an advantage that they would
have if only being larger on correct moves.
Being larger on correct moves as a day trader is difficult at best due to limitations of the day’s range
keeping the adds requirement to be quicker after the initial position. Often day trading will not
allow more than one add if any add at all. Often too the profit side gets taken off sooner, restricting
the range even more.
ALS – Is there a better way to day trade?
POP – You bet there is! Now I have every day trader’s attention. For a price I will be glad to give
that information out. I am just kidding of course. The answer lies in their research. Look at what
causes the most losses in day trading. Now study your own entry and exit criteria and decide what
doesn’t work. Look at the other side and assume a day trading criteria does not work and expect it to
Next devise a way of removing positions until they prove correct. There you have the answer. Can
you incorporate it? Not in all situations, such as we said previously. Trends and counter trends tend
to do a number on day traders due to their not caring what a trend does. Next set up a criteria for
removing your positions. You must not allow the clock to dictate when you get out.
Most important in day trading, you must never play everyone else’s game. Say that for example you
play the opening range break out. Everyone does that. You will wash in the long run even though
you just want to day trade. You set your criteria differently. Let us say you trade the third move
through the opening range.
Why? The market tends to be a trading market if you get the third move through. That is what you
are, a day trader. You can now expect the market to be on your terms as a day trader. You expect it
to come back but what if you are wrong? Well, then you will make your profit instead of being
prepared to break even on a swing trade.
You can also as a day trader without an existing trend, fade the market. Let us say the last 10 days
range averages 8 cents in onions (never heard of them.) Your criteria could be the old fib number of
5. Wait for a 5-cent set back to buy or a 5-cent rally and sell. I am not saying this works in your
particular market but you can study it and establish your criteria in a non-trending market.
I know some day traders who take the day off until they have had two days in a row of a nontrending
market in the same direction. The next day is theirs, as they will wait until it looks like the
reversal is about to take place and then counter the two-day move. Day trading is a psychology
study of the past few days.
If you use rule one, you stand a better chance of being up in the long run. It is not exact and as long
as that is understood and losses are kept low, it is a possible money-maker in the long run. If you
like the odds, you can be satisfied if you do everything correctly regardless of the outcome.
A critical point in day trading is not to just use the prior days high, low, range and close as inputs to
your criteria of signals to use. Point and figure charts are closer to the market as P & F charts don’t
restrict to within a day’s range. Remember you are staying away from the same methods used by
most day traders in order to get the edge on them as well as the position traders who most likely use
bar charts only.
Last of all, don’t just take someone’s word on day trading. Check out your particular market and see
the characteristics in action during the day. What you think is a good trade might not even be
possible when you try to place the position. Use market orders to make sure you have a position but
do it with intelligence. A non-position is a wash.
ALS – Phantom, I have a question and sort of a remark from a successful day trader. Using a
volatility break out system and using a stop after a series of consecutive losing trades, can you use
rule one and two correctly?
POP – I can tell you whose idea that is and what course it is in but I don’t want to disclaim or
endorse the data. There are some markets this method is an excellent method for day trading. Not
all markets will be good markets to this method.
I am sure traders who use this method know which markets to shy away from by experience. Yes,
you can use rule one correctly as it is saying that you assume your positions is wrong until proven
correct and by taking a position after a series of losses, you are certainly aware that you are going
for probabilities of turn around. If no turn around you certainly were expecting to get out. Naturally
the market will have to prove you correct after your entry within your established criteria.
On one of our examples of an onion trade earlier, we used end of day criteria as an example of what
some would consider there last resort criteria for day trading. It is the end of day criteria to get out.
Day traders tend to be or get out by the close.
To watch a market go against you all day and not get out until the close is certainly a challenge in
trading criteria but sometimes your criteria will require this situation to be set up. You just know
you will be out on the close if all does not prove out. This alone keeps you from carrying a loser
On using rule two in your question, would you say the odds of increasing the position after a series
of indicator losses allows you a better opportunity to add if the initial position is taken after those
losses? Only if the position was to prove to be correct.
The swift would be able to determine if the position had proved itself and at that time add or
removal should take place without the fade to enter. I would agree that with this plan if your data
feed is quick and your line to the floor is quick, you would certainly be in a position to improve
your pay out.
The part which I like in this style is that you are required to either do one of two things at a certain
point. Either add or remove.
Keep in mind that rules one and two do not negate a successful trading system at any time. They are
to keep you from a huge drawdown of which you would never recover. This could be additional
protection outside the plan or could be incorporated within the plan itself.
I appreciate that question and understand where that trader is in his career. It sounds like proper
research for the proper criteria in his style of trading is paying off. It’s good to hear when that
happens. It proves out that trading is not easy but is behavior modification and knowledge.
You can learn from other traders but you never learn to be them. Just the other day on a business
channel I heard them indicate that a particular trader was selling all day and the question was why
they would sell now. One of the answers was correct. He was offsetting his positions.
I remember one day when I bought all day and at the end of the day when the market was down on
the close, one trader asked me why I went long all day. He didn’t know I had orders twice as large
selling after every buy I made. My point being that you don’t know what a trader did, you only
know what you have seen him do at the time.
You see my plan was to establish what the market was going to do that day. Every time I bought I
had a broker with my exit double the other way. I would try to offset my new short position and
getting out was wrong so we doubled it the other way again.
At the end of the day I had a position twice as large as I had intended and the opposite way I
intended to go. I only knew that it was the day I had to be swift. Sometimes your criteria may be
that you must be swift to take any possible loss. Especially when a certain Fed Chairman speaks.
ALS – Is there a way to plan for such surprises?
POP – Yes there is, by not ever over trading at any time.
” In day trading when the last trade is made, you expect to be out of your positions. You are letting
the clock decide if you win or lose. That to me is a restriction. “—POP