For inexperienced traders (2024)

If you know absolutely nothing about trading, my first piece of advice for you is don’t do it. The stories of million dollar traders are real. It can be done. But the amount of time, energy and money which is required to make it happen is substantial. You are not going to start printing Benjamins as fast as you think.

If you’re not going to heed that warning and the decision to trade has already been made, then continue reading. I am going to give you an inside look into what it’s all about.

Let’s start with a few questions.

Question #1:

Can you afford to lose?

If you were to take whatever money you’re thinking about trading with and dump that money into a pile on the floor of your living room and light it on fire, could you watch it burn and know that it’s not going to make a bit of difference to your lifestyle? I’m being serious. You have to be able to trade without fear. This doesn’t mean you trade without sense. It means, if you need money right now, you shouldn’t trade. If you’re trying to make the rent money, you shouldn’t trade. If losing that money is going make you suicidal, you shouldn’t trade. If you cannot afford it, DO NOT trade. And you need way more than $500. If you think you’re going to turn $500 into $20,000 (which is what at least half of the day trading courses out there will tell you is possible), good luck to you. Buy a coffee call option before the winter kicks in and hope for a freeze. Or go to Vegas and let it ride on the pass line. Your odds are about the same. You’ll have more fun in Vegas though.

Question #2:

Can you sit in front of a computer screen during opening market hours every Monday through Friday?

If you have a 9 to 5 job, you obviously cannot day trade. If you cannot afford to sit there for five or six months (or longer) and make no money, don’t trade. There is a learning curve and it takes some time to pick up on what’s happening. Notice I said opening market hours. Trading in the afternoon can be quite different than trading in the morning. There tends to be less liquidity in the afternoon and the moves can be more erratic. There are often good opportunities in the afternoon, particularly in the stock indices, but you have to understand the movement can be very different from the morning activity. The general rule is: if you don’t know how to make money during the opening hours, you usually will not make it in the afternoon.

Question #3:

Can you admit you’re wrong?

This is trading. You are going to be wrong a lot. As soon as you know you’re wrong, you must must must click your mouse and exit the trade for a loss. Period. A small loss is often the best loss. You cannot let three tick losers turn into eight tick losers. You cannot hesitate. Hesitation causes death.

Question #4:

Do you have access to an extremely stable, high-speed internet connection?

This may sound like a stupid question but there are plenty of places which still do not have really fast dsl lines or cable modems. Test your connection for speed and stability and make sure your broker will answer his phone if your connection goes down. Also, always have an emergency stop-loss in place.

Question #5:

Can you temporarily suspend any preconceived notions you may have about trading?

You have ideas about trading. You probably think you know something. Maybe you do. The real question is: have you been able to use that knowledge to make money? What’s the bottom line? Because that is the ONLY thing that matters in trading. Have you made money? And did you spend that money or lose it back to the market?

It’s not just about how much you make. It’s about how much you keep.

If you’ve never made money six months in a row and/or your trading profits don’t exceed $100,000, I would ask that you open your mind to some new ideas. Ideas which revolve around the word “scalping”. I can almost guarantee that it’s not what you think it is.

Scalping is based on reading the orderbook. Scalpers watch the bids, offers, time and sales, and market profile and this is how they make their decisions. There is way more information in the orderbook than most novices realize. The idea of reading the orderbook (or orderflow) is definitely not a new one. Jesse Livermore was a well-known trader during the early 1900s and when you read about his exploits in the book Reminiscences of Stock Operator, it is clear that he was reading the orderflow.

In the famous Market Wizards book, it sounded like the majority of the traders in there based trades on technical analysis but after trading for a substantial amount of time, I read that book again and I now wonder how many of those traders actually made decisions based on technical analysis. I started to read between the lines and things they said which didn’t make sense before make perfect sense now. The best interview in that book is the one with Tom Baldwin and it’s the one that Jack Schwager thought was the most irrelevant to his readers. Not his fault, though. He just didn’t get it and to be fair, the book was written before electronic trading exploded so at the time, it was irrelevant to most. But not knowing what Tom was talking about is why ‘most’ lose money day trading.

Jack: “How did you figure it out?”
Tom: “It’s like any other job. If you stand there for six months, you have to pick it up.”

Jack: “How do you make your decisions?”
Tom: “You see the orders and you just trade it.”

Jack: “How is size an advantage?”
Tom: “You’ve obviously never traded on the floor.”

It would seem size does matter.

(By the way, neither Schwager nor Baldwin endorse my products;)

I’m going to slam technical analysis in the following paragraphs but I’m also going to give you my reasoning behind the slams. It’s not that technical analysis cannot be beneficial. At times, it definitely can be if you use it in conjunction with reading the orderbook. Everyone seems to think charts are important but very few people make money by only using charts so you tell me why they are so addictive.

Charts work when the traders making decisions based on charts cause the “level” or “formation” to become a self-fulfilling prophecy. It’s important to understand that even if a technical analysis setup works, it doesn’t work because it’s a technical analysis setup. It works because more money went with the setup than against it and one cannot anticipate which way the most money is going to go by simply placing a buy or sell order because this is a “major level”. There may be people buying or selling who are completely unaware that this is a “major level” and could care less. You have to know how to read the volume and also how to get a feel for the macro picture. Learning how to read the orderflow can help you pick much better entry and exit points.

Charts appeal to that part of our brain which loves to recognize patterns. It’s the reductionistic part. The part that wants to find meaning in the chaos. It wants to reduce everything to its simplest form and then label it. It’s a “head and shoulders” or it’s a “double bottom”.

No. It’s not. It’s black lines on a white screen which show previous trades in a graphical form but the formation you see is determined by the duration of each bar (2 minute, 5 minute, 30 minute) and the scale of the chart (intraday, daily, weekly, monthly). Charts are an easy sell because hindsight is 20/20 and anyone can invent a formation which accurately predicts the past.

Charts have always been around but they gained a lot of popularity during times when the markets trended heavily in one direction. When the market closes higher everyday, I don’t need a chart to tell me the market is trending higher. If you’re making a long-term play based on the current trend, you don’t need anything but a newspaper to pick your spots.

Reducing and labeling is generally a bad idea. Just tell anyone who’s not a trader that you’re a trader and you’ll find out that, actually, you’re a broker. An inside joke for the traders of the world…

If you want to have a decent shot at being profitable, there is one thing in particular that you always have to keep in mind. People move markets.

Greenspan did not move markets. Bernanke did not move markets. Powell does not move markets. Economic numbers such as the unemployment rate and durable goods reports do not move markets. People move markets. The people who buy and sell. This would seem to be self-evident but surprisingly it’s not. People who run the trading desks of major banks move markets. Guys who run billion dollar hedge funds move markets. Sometimes an individual trader who can afford to swing three or four thousand contracts moves markets. You and I alone do not move markets. However, if you and I and 1,000 other small traders all go in the same direction at once, we will move the market.

The only reason to buy a futures contract or a share of stock is because you think someone else is going to be willing to buy it at a higher price and you will be able to sell it to that person. You buy. Someone else offers to buy it higher. You sell it to him. You profit. Buy low. Sell high. It’s that simple and that is all that is happening. It is a game and don’t let anyone tell you otherwise. The only difference between you and the other guy is how much money each of you has. The more money you have, the more influence you will have on the market. If you want to play in one of the biggest poker games on Earth, the game of day trading futures and stocks, there is something you must understand. You have the shortest chip stack by far. You are playing against guys who have access to more money than you will ever see in your life and if you go up against them, you will lose. Which is why you don’t go against them. You go with them.

It was once a common belief that the markets were manipulated. Over the years, it has become a common belief that they are not. The biggest myth perpetuated by those in the business is that one person cannot move the market. That is simply not true. It is true that one person cannot move the market for an extended period of time, meaning days or weeks (although that’s basically what the Hunts did when they tried to corner the silver market way back when) but you better believe that one person can move the market around over the course of a few minutes and at the right spot, one person can set off a chain reaction which can determine market direction for the next hour or more.

There is a guy called the ‘Flipper’. He was, at one point in time, the biggest individual Bund/Bobl/Schatz trader in the world. To be honest, when I first heard about this guy, I thought he was a fictional character. Turns out, he is real. Google him. Here are two interviews with him.
Paul Rotter – Flipping Out
Insight from the Flipper

The Flipper was called the Flipper because he flipped. What is flipping? Let’s say the Bund is trading near a “support level”. The Flipper might have bids in all three markets. He might be bid 600 contracts in the Bund, 2000 in the Bobl and 8,000 in the Schatz. His bids make the market look strong but in reality, he has been getting short. When he feels the time is right, he pulls his bids and then offers several thousand across all three markets. He reverses or “flips” his size. His flipping causes a chain reaction. Hyper day traders sell to get short because they are hoping for a sharp break. Weak longs sell to get out because they’re already down 4 ticks and don’t want to lose 8 ticks. While everyone else is selling, the Flipper is buying back his shorts and profiting substantially on a move that he helped create. He helped create it because he trades Size.

Let me give you another example. One from my own personal experience.

I briefly worked for a firm which was applying statistical arbitrage models to related stocks. I won’t bore you with the details but basically we would pick two stocks in the same industry, health care for example, and buy one and sell the other. One day, one of the stocks I’m long, ICOS, is halted from trading (ICOS is no longer publicly traded). This is usually very, very bad. So as we await the news, I’m contemplating exit strategies. As luck would have it, the company released a statement saying it had developed a new product which had officially been approved by the FDA. The stock re-opened over $2.00 higher. I had 1,000 shares. Nice lottery win. So what happens next? It goes up, of course. It goes up about another $1.00 and then something very interesting takes place. At something like $32.50 per share ( I don’t recall the exact price), it stops. It doesn’t stop because there aren’t any more buyers. There are plenty of buyers. It stops because someone with a lot of money (or a lot of shares to dump) has decided that $32.50 is the perfect place to sell.

I start watching the time and sales. For those of you who don’t know what that is, it’s the screen which shows the actual trades taking place. So you can see that 100 shares traded at $32.50, 500 traded at $32.50, 2,000 traded at $32.50, etc.

Over 500,000 shares of ICOS trade at $32.50 in a matter of minutes and when all of the buyers were done buying, a magical thing happened. The stock began going down. $32.40 offer/$32.30 bid. I hit the 30s. I wasn’t filled. ICOS was traded on the NYSE which, at the time, was run by specialists. The specialists could see the book. The specialists knew where the orders were. The specialists had a license to steal but that’s another story altogether. After I placed my order electronically, the specialist still had to fill it. My order hit with, I’m sure, several thousand more shares from other people around the world and the specialist dropped the bid. $32.20 offer/$32.10 bid. I offered at .05. I was filled. Over the course of the next few hours, the stock continued to sell off and ended the day below the price at which it was halted.

How did that happen?

I’ll tell you how. More money was interested in selling than in buying. That’s how. Did one person sell 500,000 shares? I don’t know but I can tell you that no day traders were selling there. No day trader can swing 500,000 shares. But a bank can. Or a hedge fund. Or a board member of ICOS who sees this as a perfect opportunity to dump his stock. Think about it. How many chances do you get to sell 500,000 shares of a stock and not move the market a penny against yourself?

And no, $32.50 was not a technical analysis spot of any kind. It wasn’t a resistance number or a Fibonacci number or part of a trend line. There was no technical reason to sell the stock at that price.

Manipulation isn’t really the right term to describe what’s taking place in a situation like that. Manipulation implies doing something illegal based on inside information. That’s not what happens. What happens is…someone with a lot of money buys a lot of contracts or shares and moves the price up. He does so in hopes of starting a move. When others start buying, that someone sells and covers for a profit. Could someone else sell more contracts or shares and drive the price down? Absolutely. But we are still talking about just a few people dictating the direction. In the ICOS case, it’s the guy (or guys) selling. The everyday average day trader who is just trying to scalp some ticks here and there isn’t capable of moving the market. He cannot initiate moves like that. He can, however, ride a move like that. So as soon as the day trader sees that the buyer has lost the battle, he sells. As do others. The market moves down. People who are long begin to panic and cover their positions. This, in turn, drives the market down even further.

Do you see? Nothing is happening. The market isn’t moving. Someone decides to buy 5,000 contracts. Someone else says, “I’ll sell you 5,000 and offer 5,000 more.” The seller has more money to play with at that moment in time and his selling sets off a chain reaction. The reaction might lead to a three point move or a fifteen point move. It depends upon how many people around the world are watching their screens and who feels like playing.

And there it is. Professionals know where your stops are. They know there is support at 05. They can afford to sell 2,000 contracts at 05 and then offer another 2,000 at 04 and while you and 100 other small traders are busy covering your long positions at 03 and 02, they are covering their short positions. Buying back those 05’s. From you. And taking your money. Everyone has a pain threshold and if you can push the market just past that threshold, he will puke out. That’s what we called it at my prop firm when we knew people were bailing out of a trade for a loss. Puking out.

The idea, obviously, is to try and anticipate which way the most money is going to go next. In order to anticipate this, you have to think like the traders who are trading huge size because they are the ones who are going to move the market.

How do I know this is the way the game is played? Because I’ve seen the business from the inside. I worked for a proprietary trading firm in Chicago. I’ve been one of fifteen guys in a room who were all hitting the bids at once and helping to drive the market down. I’ve seen guys throw up huge size on the bid in an effort to scare out weak shorts and push the market up a few ticks. A lot of people seem to think that this kind of stuff doesn’t work as well anymore because of computers. Computers and algorithms and high frequency trading machines all work the same way because their design was originally based on scalping strategies. Hence the term “high…frequency…trading”. And computers lose all the time. It’s still a zero sum game. if two computers are taking opposite sides of a trade, one wins and one loses. In addition, the program trading can actually be a benefit at times because it can cause moves to be larger than they would be otherwise. Therefore, you can make more money on a move than you may have made if only humans were trading.

As a scalper, you are looking for sharp, fast moves which have a lot of momentum behind them. When the momentum stops, you get out. End of story.

What I’m trying to convey here is that there is way more information to be had from looking at the time and sales than there is to be had from looking at charts, moving averages, oscillators, bands, etc. Even if you refuse to give up the charts and indicators, you could improve your entries and exits by learning how to read the orderbook. If you’re in a six tick winning trade, there is no reason to give back three ticks just because your method calls for a trailing stop. Forget trailing stops. Try to figure out how to see the signs that a market is going to bounce or perhaps even reverse. If you can learn how to do this fairly consistently, you can save yourself two or three ticks (or more) on your winning trades and dramatically improve your bottom line.

You ask, “What if I miss out on more money because I get out too early?”

I answer, “How often has this happened? Has the extra money made by using trailing stops which weren’t hit exceeded the amount of money lost by allowing the market to come back to the stop? Why give back three ticks if you’re really certain that the market is going to bounce three ticks? Take the profit, watch it bounce and then get back in if you’re still biased.”

“Easier said than done.” Yes, it is. But I’ve called reversals to the tick with people watching and I explained why I thought the market was going to stop there. It’s not a full-proof, guaranteed science but there is a method to the madness and sometimes the big players tip their hands.

Some of this may make sense to you. Some of it may not. The more you re-read it and think about it while you’re watching the markets, the more sense it will make. If your curiosity is piqued, check out the No BS Day Trading basic course.

Here are some of the things you will learn from the course:

• How to anticipate what the most money is going to do next.
• How to make decisions based on reading the price action.
• Why discretionary trading will typically outperform an automated system.
• What technical analysis really is and why it usually doesn’t work over the long-run.
• How to keep from being whipsawed.
• How to pick exit prices for winning and losing trades (just as important as entries if not more so).
• How to determine ‘real’ support and resistance levels and what to look for at those levels.
• When it does pay to know what numbers everyone else is watching.
• How to stay out of the market when volatility dries up.
• How to determine whether the bids and offers are from major players looking to move real size or if the bids and offers are being thrown up by guys looking to scalp one or two ticks.
• Why understanding psychology is the most important part of successful trading. You must understand your own psychology as well as that of the traders you are up against. Remember: people move the markets. People have brains and emotions. Two things which often work against one another.
• Which brokers offer the best commission rates. This is extremely important to your bottom line. Do not be afraid to ask for a lower rate. The worst they can do is say no and you would be surprised at how low they will go if you’re doing a significant number of trades on a monthly basis.
• How to determine position size when you first start.
• How to determine the number of contracts you should add when you’re winning and the number you should subtract when you’re losing.
• Which economic numbers are important and how to trade them.
• The advantages to trading futures instead of stocks.
• Which markets are the best for day trading.
• When to take your hand off the mouse.
• When to turn off the computer and call it a day…win or lose.

Plus:

• Tax advantages of trading futures vs. stocks. I am constantly surprised at how many stock traders do not know about this. Look up ‘section 1256 contracts’. The tax laws for futures are much more favorable than they are for stocks.
• How to keep your overhead to a minimum.
• Why leasing a seat on an exchange could be well worth your time and money.

Once you read the book and watch the videos several times, I think you will start to see the advantages which come with learning how to read the order book. It might look like it’s completely indecipherable at first but with time, it starts to sink into the brain. The game becomes clearer. The reasons for the movements become clearer. It starts to make more sense. Will you make money after going through the course? I have no idea. I cannot guarantee you riches. I cannot guarantee that you will “get it”. I cannot make you click your mouse to get into a trade and I cannot make you click your mouse to get out of a trade. I cannot make you sit on your hands and wait for only the prime setups. I cannot make you turn off your computer when you’re on a losing streak and have lost all common sense and discipline. I can only tell you what’s worked for me and various other professionals that I’ve known throughout the years.

**A brief word on day trading vs position trading.

Many people think day trading is more risky than position trading. They tend to think this because they hear about thousands of day traders blowing out and prop shops closing and meanwhile, some guy they know inherited stock that his grandfather bought twenty-five years ago for $2.00 a share and now it’s $45.00 a share and the guy is rich. The market always goes up in the long run. Right?

The thing to keep in mind is that his grandfather bought it twenty-five years ago. Can you hold something for twenty-five years? Not to mention, the market does not always go up in the long run. It seems that way because when stocks on an index start looking like they may be going the way of the dodo bird, they are removed from the index and replaced with the next hot thing. The Dow Jones and S&P 500 that you see today are not the same ones your grandparents knew. Stocks have been subtracted and added over the years. It helps keep the illusion alive.

I never hold a position overnight. Ever. I think position trading is a very bad idea unless you know something no one else does. Do some big traders make money holding positions? Yes. But they can afford to hold them. Let me illustrate.

When oil was at $85 many years ago and it was looking like it was going to make a run at $100, I was pretty sure it was going to $100 and I was also pretty sure that if it hit $100, it was probably going to $110. Did I buy it? No. I did not because it’s way too volatile and I don’t have the capital to swing enough size to make it worthwhile. I could have bought it at $85 but it might have dipped back to $75 before going to $100. That’s $10,000 a contract. I don’t have that kind of staying power on size and I doubt you do either but T. Boone Pickens does and he can buy enough to make it worthwhile.

Even if you make a really good call on a long-term trade, you have to be able to buy or sell enough contracts to make real money. If you only have $15,000 in capital and you’re trading a market that has volatile swings and the margin per contract is $2,000, you can only afford to pick up maybe five contracts. That’s $10,000 in margin and $5,000 to cover the swings. Even if the market makes a huge move in your favor and you make $5,000 per contract (and that’s a huge move in any market), you only make $25,000. That’s not a living and chances are you will not make a call like that very often.

There’s a guy in a cowboy hat who offers a trading system (or at least he did offer a system for a very long time). His was the first course I ever bought. If you like your money, I don’t recommend trading the way he teaches. A general strategy of his is to wait for a market to reach extremely low levels and then buy it and hold it. What a novel concept, huh? The thought is that a commodity will not go to zero. Unlike stocks, which go to zero all the time. So buy some contracts or some out of the money calls. Eventually it will go up again.

Many years ago, cattle and hogs dipped to 20+ year lows. Supposedly, the man in the cowboy hat was long 400 feeder cattle contracts at the time. The market rebounded and he made a fortune. I’m sure he did. He claims to have educated over 1,000,000 customers. If that’s true, that would mean he’s made several hundred million from the sales of his trading courses. He was also part owner of a brokerage firm that charged $85 per round turn. If you have a couple hundred million in the bank and are making $85 per round turn, you can buy 400 contracts and hold them. But if you are like the rest of us and don’t have a couple hundred million lying around, you do what a friend of mine did. You buy hogs at 27 cents and bail at 22 cents only to watch them go to 18 cents and then rebound to 33 cents. The moral of the story is…it is highly unlikely that you will ever make a fortune position trading unless you already have a fortune. And if you already have a fortune, do something else with your time.