Learning To Day Trading - The Learning Progression

Beginning to day trade, or learning to day trade, as an indicator trader is very typical.  This is also logical when you consider - HOW are you supposed to initially learn how to trade?  Trading indicators are available to anyone who has a charting program, and simply using line crosses, or histogram color changes, provide 'easy' signals to understand.  If you will also take the time to learn the arithmetic behind your indicators, as well as learning what each indicator is specifically intended to do, not only is this a logical way to begin, it is also a good 'step' in your learning progression - understanding the WHAT you are doing, instead of attempting to create 'canned' indicator only trading systems, without any regard as to WHY you are trading this way.

This does become one of the 'sticking' points in your learning progression, as you come to find out that you are unable to profitably trade indicators as signals only - now what?  Now what - you 'can't' develop your own indicators, so you start doing google searches for day trading indicators and start buying your 'collection' - they don't 'work' either.  Now what - you buy a mechanical trading system - what does hypothetical results may not be indicative of real trading or future results mean?  Now what - you start subscribing to signal services OR you start joining the 'latest and greatest' chatroom - am I really the only person using the signals who isn't profitable?

Now what - you never learn how to trade.

I began trading as an indicator trader, and I did try to learn everything that I could about the various indicators, as well as trying to combine indicators that were consistent with how I wanted to trade - I just could never develop a mechanical day trading system from what was available to me.  I read a couple more books that didn't really help me, so I then started looking for someone who could teach me.  From what I now know about gurus -vs- teachers, I am very lucky that I got involved with a money manager-trader who taught me a tremendous amount, but I still couldn't get profitable, in part because there was also 'pressure' to learn how to trade using real money.  As well, any discussions or thoughts about trading psychology and the issues involved, especially to beginning traders, was non-existent.

Now what - learning but losing - I stopped trading.

Learning to trading using real money, and 'scoffing' at trading psychology as simply individual weakness, really was something that I now regard as misinformation.  I always mention this as I now feel that this cost me as much as a year of time, and was very close to costing me my trading future, as stopped trading was VERY close to quitting trading.  How can't trading psychology be real to a beginner, when you consider that you are risking losing money at a very fast pace as a day trader, and when you further consider that you are also doing this when you really don't know what you are doing - this is NOT by definition being weak.  And if trading psychology is real, how are you going to learn to make 'good' trading habits with real money while you are fighting the implications?

Now what - not trading and not ready [quite] to quit - still studying and searching.

Probably the single most important 'thing' that got me to a next step in learning how to trade, was the concept of a trading setup, and that a setup and a signal were not the same.  This was extremely meaningful to me, as it also led to an understanding of how to better use trading indicators for the information that they can provide, but not to use them as trading signals - in essence I began learning about trading method where discretion could be consistently applied -vs- trading system that was mechanical and arithmetic rules.

When I think about the steps in my learning progression - I would list them as follows:

2/95 - 6/96

indicators only

teaching service that included signals

learning to trading with real money and trading psychology issues

stop trading

 

6/96 - 3/97

understanding of trading psychology issues

learning about trading setups concept

trading method -vs- trading system

trade setup - trade trigger are not the same

method development

understand the importance of the left side of the chart and what is happening 'across' the chart

related trading setups and how/when they triggered

indicators + pattern

indicators + pattern + price

indicators + pattern + price + market conditions

3/97 - 11/97

able to paper trade profitably

able to real money trade profitably

able to trade for a living

WHY Use Indicators For Day Trading?

I have no inherent problem with trading indicators, nor do I feel that my trading is diminished because indicators are used.  Ever hear a 'guru' say that indicators are worthless, as they show you their charts with the arrows on them that invariably are placed at the tops and bottoms of each price swing?  Now assuming that those arrows are real of course, and that the charts shown are also typical - ever wonder what kind of 'indicators' they have on THEIR charts that you aren't shown?

I am a directional trader that 'believes' that tradeable price movement starts from the 'center' AND with a build in momentum that leads to momentum expansion, moves to the 'outside' BUT when this is 'extreme' is reached, a reverse is not imminent.  Instead, price can hold a retrace to trade support or resistance, stall, and then resume the previous move by building-expanding momentum again, leading to a higher-lower swing 'extreme'.

Trading indicators, as I have come to use them, give me specific information while reading a trading chart, and let me read that chart faster and more accurately than I could without the indicators.  The trading indicators that I use have been developed or customized to 'fit' this trading method and approach to trading, and thus are an important component of the trading setup because of the specific information that they provide, as well, they help give the right side timing or trigger to a setup trade - they are NOT trading signals. 

Day Trading Chart With Trading Indicators

Indicators On The Price Bars

(1)  9 period high-low channels:  The channels have been coded so that they are bright green on top after the bottom channel breaks and slow momentum is red/bright red on the bottom after the top channel breaks and slow momentum is green. 

If this was traded as a mechanical system, I would be long when the channel was bright red and short when the channel was bright green.  As I am what I would refer to as a directional trader, this would work very well in markets that are a combination of longer continuation swings and shorter congestion periods, but would 'overtrade' and typically get chopped up during periods of extended tight ranges and congestion.  Consequently, I trade a method and not a system, in an attempt to eliminate certain trades during the periods that are the weakest for this 'base' indicator mode.

(2) Direction-Congestion:  The purple-blue dots have been located in the area of the price channels - the difference between using actual price and a channel indicator based on price.  The dot colors and whether there are single or double dots above or below price is not an arithmetic formula, but have been determined by a number of different 'conditions' that have been written in an attempt to define price continuation or price congestion. 

The 'strongest' combination of conditions for directional trading gives single purple dots - on the bottom for long, and on the top for short.  This particular combination is similar to that of the price channels, but adds the congestion conditions to the indicator, in order to help 'filter' trades during this period.

Indicator Below The Price Bars

(1) Fast-Slow Momentum:  For a momentum indicator, I have used the difference between moving averages instead of the actual macd or 'canned' momentum indicator.  The histogram is the difference between a 23 period and 4 period, and the line is the difference between a 10 period and 3 period. 

Whatever you use for a momentum indicator, if you use a momentum indicator, always remember that this is the 'worst' indicator that you can use in congestion as it will keep 'flipping' during what is clearly meaningless price moves, and if you mechanically trade each one of these 'flips, you are going to get a series of losses that although 'small' individually, will accumulate to the point where  you will not be able to gain them back from a 'good' winning trade.  I use the momentum indicators for information, and as setup components.  For instance, one of my favorite setups uses a fast momentum 'hook' in the direction of slow momentum, which is very useful as the eventual entry during a 'sideways' period.

(2) Slow Momentum Flow:  This is the purple-blue lines, and has been coded to 'force' slow momentum into a fixed range oscillator. By doing this, I can see when momentum, and thus price, is at a supposed 'extreme', but this isn't my most specific use of this indicator.  When I refer to momentum flow, I am looking at two things:  (1) what is momentum doing when price is retracing (2) when does momentum resume and start to 'build' again during sideways or congestion periods.

Day Trading Method - Using Trading Indicators

This chart begins with the market 'congesting', I can see this from the overlapping price bars AND I can see this from the direction indicator 'double dots'.  The location that this is occurring at is significant to me, as the dark cyan line on the chart is the floor pivot trying to hold as support AND the blue line which keeps hitting as resistance, is a price line that I have seen from the left of this chart that has been both support and resistance, what I refer to as a price specific.

Green Dot Buy:  You can see the line has broke on 3 bars, and you can see that the histogram has gone green-red-green while in this sideways period - WHY is the green dot bought?  While momentum is green there is also 2 bars which are higher lows AND then the flow indicator 'rolls back' - this becomes the timing of this 'ledge' breakout buy.

Yellow Dot Sell:  This is where the trading indicators reverse 'into sell' BUT at this time I do not have a sell setup coupled with with the indicators - I might exit the buy if I don't chose to hold it back to support, but I do not have a sell yet.

Red Dot1 Sell:  The indicators have reversed, and price hits the blue line now as support, and then retraces to a lower high.  I am now getting a sell setup to combine with the indicators - this includes the hit of  the res:sup price into the lower high WITH the flow indicator continuing down, a double hold of the price channel [our method has a concept that doubles hold and triples break], and a hook of the fast momentum indicator - the red dot was then sold.

Red Dot2 Sell:  After short, price moves back to the floor pivot and stalls - actually it probably was bought by a trading method that I refer to as a mixed method, meaning that this method's typical setups are counter to our method - buying a pullback to the floor pivot would be one of these trades.  This trade is done as an addon, meaning that the red dot1 short is still open and an additional short is done.  The dark blue lines shown are a continuation wedge - falling tops with a flat bottom - the actual timing of the trade is a triple break/the red dot breaks into the 2 dark blue dots AND synchs with the roll back of the flow indicator.  As well, and very significant in the decision to do a trade addon which will risk the gains of the initial sell, this setup is a failure of the mixed method trade, meaning that there will be additional selling pressure as their counter buy is 'stopped' out, and the momentum of the directional trade resumes.

Left Chart:  This chart is the continuation of the chart above - a very strong directional move down.  I don't use the terminology downtrend or uptrend when talking about day trading - I don't think we 'find' trend on a day trading chart.  For instance, the chart/trade being discussed is an emini russell, and for day trading this contract I tend to use a 52 tick chart with a 120 tick chart.  Depending on trading activity-volume, the fast chart time equivalent is faster than minute bars - not the time frame I would ever think to use to establish trend.

This chart is an example of a number of things: (1) it shows the strength of our trading method in terms of trading 'big' directional moves (2) it shows the issue with using momentum indicators for trading signals - this issue being magnified by the time dependency impact upon your trading indicators.  This downswing is too strong for me to consider taking a buy from any 'first' indicator reverse BUT why did it reverse?  This happens because the pause in momentum and price retrace, 'lasts' for enough bars, that when compared to the size and rate of the move down, simply causes the indicator arithmetic to cause a reverse.

Red Dot Sell:  As mentioned, there was no consideration of doing a buy, and there also wasn't a big enough retrace to even exit the trailing contracts in the short.  The blue lines are a bear flag pattern, which is a resumption-continuation pattern to the downswing.  You can also see that there was still value to the trading indicators, the bear flag break/red dot sell timing - also synchs with the resumption of the indicators going from buy to sell.  Additionally, something that is considered and used for trading is that of a slower chart, again this is a 52 tick chart and the slower chart is a 120 tick chart.  When the fast chart indicators reversed, the slow chart didn't AND when the fast chart resumed, the slow chart gave a fast momentum hook.  This trade was actually another addon sell done, 2 addons to the same swing is not typical BUT certainly indicative to how strong the move down is - the combination of the fast chart indicator resumption WITH the slow chart fast momentum hook, is one of my favorite addon setups.

Right Side Chart:  The chart that you are looking at is that of the emini sp - the green-red dots occur when there is a ticki of +/-22, which is an extreme measure to me, and the yellow bars will occur when there is a premium buy or sell program.  These are both indications of program trading activity, and considering that program trading is greater than 50% of the total volume of the NYSE, I have tried to incorporate this into my trading.  I place these indicators on my emini sp chart, instead of my emini russell chart for 2 reasons:  (1) I simply don't want anything else on top of my price bars - there are times where the market is congesting inside of a tight range and there is a continuum of these ticki extremes making the chart look like it has been caught in a paintball crossfire.  Seeing this is actually valuable, it is a market condition/situation warning (2) I am trying to synch the impact of program trades between movement on both markets.

Blue Circle1 - Synch With Red Dot Sell:  The green dots show a ticki high, which is a counter ticki to the downswing.  This gives more information when seeing that retrace that caused the fast chart momentum reverse, price bounced with the ticki high - in the 'best' of circumstances I don't want to enter a trade with a ticki extreme, but I certainly wouldn't want to do this on a counter trade.  As well, this counter ticki extreme gives another component to the red dot sell - after this extreme the sell resumes, this was a very good timing indication.

Blue Circle2 - Synch With Blue Dot Sell:  First look at the left chart again - the red dot sell breaks through the yellow line low AND now retraces back to the line to try to shift it to resistance, as well there is a ticki high when the line hits.  Price consolidates between this line as resistance, and the low as support which obviously has to break to continue the swing. 

During this consolidation there is another test of the yellow line AND this synchs with the 2nd ticki high, which is also a double top.  The double top ticki high reject, leads into the yellow line-blue line/blue dot continuation wedge break AND momentum resumption as another addon sell setup.

Yellow Bars - Program Trades and Trade Management:  Unfortunately, I didn't do this blue dot addon also, but I did have short contracts available to take a partial profit when the premium program hit.  My emini russell trading is typically done as 3 contract 'sets', which will then be scaled out of at 2 separate profit targets - parital1 has a base size of 7 ticks, and partial2 has a base size of 14 ticks.  Although there are situations where 2 partials may be taken at the same time, or the 2nd partial is done at a reduced size, 7 ticks for the first partial is a minimum.  The typical trading loss is around 4 ticks - NOT entered as a fixed stop, but as an average of a 6 loss which is usually a worst case, and the trades that maybe gain 1 ticks and are exited as a reversal trade OR a trade that loses 1-2 ticks as there wasn't quite enough room to gain a partial profit, but there was an adjustment made for this amount of price movement where the full initial loss isn't taken.

I referred to these partials as base size, but the objective is to be able to expand this size into bigger partial profits - trading into a ticki-premium combination program, especially with the bigger direction, is one of the primary tools for achieving this.  In the case of the red dot sell - partial1 was 14 ticks -vs- 7 ticks, and partial2 was 26 ticks -vs- 14 ticks = 40 ticks -vs- 21 ticks base on these 2 partial profits, achieved by not entering fixed profit targets, and by using the additional swing size due to the program trade as a tool to increase the profit size.

Granted, trading into premium programs, and getting partial profits of this size, is not the typical case.  But it does occur, and there are numerous opportunities to get some amount of partial profit expansion, for instance the additional movement that often happens from a ticki extreme reject that 'leads' into a trade entry, and is then also followed by a ticki extreme in the opposite direction.  This then gives a 'quick' additional movement of 3-5 ticks, which may be available to increase a 7 tick base partial1 into a 10 tick partial.  All trades considered, with a minimum partial1 of 7 ticks and the amount of times that this partial can be expanded, my average partial1 is at least 10 ticks. 

Indicator Only Day Trader - Setup Including Indicators Method Day Trader

I have attempted to discuss the way I started day trading, and the way I think many-most traders typically begin.  Along with this, I have pointed various issues and problems that I had - those regarding how to learn to trade, and then progressing into a profitable trader.  My experiences have been both personal, as well as those of many traders that I have worked with over the last 8-9 years through Tactical Trading - that a very large number of these problems are due to day trading only with indicators, the specific indicators used, along with trying to turn these indicators into a mechanical trading system.  This is not to say that this can't be done - I simply couldn't do it.  However, I would strongly suggest that anyone who is in the early stages of day trading, or struggling with their day trading, consider these things that have been discussed.

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