Day Trading Guidelines - The Best

Indicators for Day Trading

TrendFollowingMentor.com
By

Andrew Abraham
[email protected]

Disclosure
While the author have used their best efforts in preparing this book, they make
no representations or warranties with respect to the accuracy or completeness of
the contents of this book and specifically disclaim any implied warranties of
merchantability or fitness for a particular purpose. No warranty may be created
or extended by sales representatives or written sales materials. The advice and
strategies contained herein may not be suitable for your situation. You should
consult with a professional where appropriate. Neither the publisher nor author
shall be liable for any loss of profit or any other commercial damages, including
but not limited to special, incidental, consequential, or other damages.
Past performance is not necessarily indicative of future performance. The risk of
loss in trading futures contracts, commodity options or forex can be substantial,
and therefore investors should understand the risks involved in taking leveraged
positions and must assume responsibility for the risks associated with such
investments and for their results. You should carefully consider whether such
trading is suitable for you in light of your circumstances and financial resources.
This publication contains references to hypothetical trading results. This
publication contains references to hypothetical trading results.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT

LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS
LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN
HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS
IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF
HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT
INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD
CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN
ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND
LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN
SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO
ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE
NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL
OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM
WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF
HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN
ADVERSELY AFFECT ACTUAL TRADING RESULTS
** THE MATERIAL DISPLAYED IN THIS PUBLICATION IS INTENDED FOR
EDUCATIONAL PURPOSES ONLY
Introduction

The goal of this short ebook is to give you valuable advice in order to increase
your trading profitability. I am sure you know that most traders do not succeed in
trading. Something like 90% of traders loses money and quit. My goal is to set
you on the path of the consistent long term 10% of all traders. It is not easy and
you will have to work. Ironically it is not just about some magical indicators. A
lot of your success or failure will come from the proper trading mindset. I am
trying to give you an edge with combining simple robust concepts as a start for
your trading plan. Actually combining simple robust ideas gives the best chance
to stay on the correct side of a trade.

This ebook is broken down into 4 powerful sections.

1. Proper Trading Mindset
2. The Best Liquid Markets to Trade
3. The 3 Robust Indicators to Use
4. How to read a chart like an expert. Learn to easily identify the
beginnings of trends and their ends.

Proper Mindset
There is no Holy Grail with trading. I am presenting robust concepts that will
work on all time frames and all markets. Trading is never easy. There will be
many trades that do not work. You must try to keep your losses small. I strongly
suggest you do not risk more than 1% of your account size on any trade. What
this means is that if you have a $50,000 account do not risk more than $500 on a
trade. You will learn exactly were to enter as well as when to exit. Believe it or
not attitude and goals are much more important than your trading methodology.
Important aspects of being a successful trader is implementing winning thought
patterns & following goals. The vast majority of traders are unwilling to even
hear about the psychology of trading!!! Just give me that “Secret indicator”,
“Trading system” or worse…”Trading Robot”! Once you start learning and
focusing on how to think as a successful trader, you are light years ahead of the
vast majority. As much as this is a solid robust approach there probably will be
numerous losses in a row. You need to think in probabilities and be consistent.
Learning and focusing on being a successful consistent trader means:
Realizing that any trade does not have to work
That any trade has a 50/50 chance of working
That anything can happen.
Because of these simple 3 points you realize you must trade with a complete
trading plan with all potential outcomes pre planned. You realize you must trade
with stops. You realize you must try to keep the inevitable losses small. You
realize when a trade does work you must be patient and follow your exact trading
plan. You need to know exactly how much you are risking on any trade and be
completely comfortable losing that amount of money. Just because you put that
trade on, it does not have to work. Trading psychology is an entire matter that
one must invest their time and energy.
The Best Liquid Markets to Trade

I have been trading and investing with money managers now for 19 years.
My specialty is trend following. I have seen it all. With all of this
experience in my personal opinion when one wants to day trade, they need
the most liquid and diverse markets. More so they need the time to
actually to sit across from the computer. You can trade 5 minute bars, 15
minute bars or even hourly bars. You get to choose the time frame you feel
most comfortable, however when you are trading you need undivided
attention & focus. I believe in the KISS formula. Keep it simple and
stupid. I do not want to scan thousands of stocks that have a high
correlation nor complicated option strategies. I feel the easiest way to day
trade is to look at 4-5 diversified futures markets.
The Markets that are liquid which give diversification are:

SP 500
Eurodollar Currency
Crude oil
30 Year Treasury bonds
Gold
You are completely diversified. You are trading a stock index, a major
currency, energy, a bond as well as gold. Depending on your account size
you can trade full size contracts or if you have a smaller account you can
trade mini contracts. The only market that does not have minis is the 30
year bonds. I have been asked if I would suggest ETFs in these markets
however I personally believe that futures offer greatly liquidity. You can
go long or short and the margin requirements are low for day traders. Do
not let the low margin requirements fool you. There is risk and you need to
have a full and complete risk and money management plan.
The Power of 3 Robust Indicators

The indicators I suggest are well known, however I use them together and
synergize as a basis of a robust trading plan. Using them together serves as
a form of confirmation to take a trade. It puts the probabilities of success
on your side. This is greatly different than how most traders approach
them. In order to be part of the consistent 10% we have to think differently
as trading is a zero sum game. You need to have an advantage against
them. Complicated ideas do not hold up in the real world. What does hold
up are these types of concepts used together which address trend and risk.
Stop looking for magical indicators that will prevent losses. They do not
exist. Once you focus on a core of simple robust ideas you are light years
ahead of most traders. Successful trading is not in the indicators---but
rather, knowing when, how and where to use them. Again this is my goal
for you. You must accept that there will be losses. Do not try to avoid
them. Trying to avoid them will only make them bigger.
 Bollinger Bands
Bollinger Bands have been around since the 1980s. They are used to assist
traders identifying and participating in trends. The use of Bollinger Bands
varies widely among traders. Basically they are two moving averages
distanced by several standard deviations. The idea is to buy or go long
when the price surpasses the upper band and to sell short when prices
surpass the bottom band. We want to trade the momentum. I use Metastock
as it is simple and easy to use.

Bollinger Bands consist of:

an X-period moving average (MA)
an upper band at K times an N-period standard deviation above the moving
average (MA + Kσ)
a lower band at K times an N-period standard deviation below the moving
average (MA − Kσ)
You can adjust the parameters however I suggest a short moving average such as
a 10 or 12 and a 2 standard deviations. This will let you get in quickly at the start
of a trend move. 10-12 is sensitive and apt to cause small losses. You might want
to test the length. There is no magic number. The only magic number is one in
which you can follow.
MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.
Past Performance is not necessarily indicative of future performance
 Uptrends and downtrends can be easily identified by Use of Bollinger
Bands.

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance

The Trend is over or tapering off when the prices stop hitting the bands and the
bands turn flat or turn down.
MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.
Past Performance is not necessarily indicative of future performance

KISS…Keep it simple and stupid…Not Rocket Science…

Using the RSI

The RSI is the relative strength index. The reason I suggest you add this indicator
as it gives confirmation to the Bollinger Band concept. The RSI measures the
strength of the trend. As I stated earlier we are momentum traders we look for
only strong trends. This is what the RSI can help us do.

For Buy confirmation we want to see the RSI above 70. I forget the trader but he
invented this concept called the Stochastic pop. What it signifies is a very strong
trend.

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance
For sells we do exactly the opposite. We look for the prices to be touching the
bottom of the Bollinger bands and the RSI to be below 30. Again not Rocket
Science.

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance
The Powerful & Confirming MACD
Gerald Appel developed the concept of the MACD (Moving Average
Convergence Divergence) in the late 1970s. The MACD is based on taking two
moving averages and subtracting the longer one from the shorter one. The
difference between the two moving averages becomes a histogram which
fluctuates above and below the zero line as well as signal line. The most basic
version utilizes a difference between the 12 and 26 period exponential moving
averages with a 9 period exponential moving average of the MACD line. The
MACD can be used on all time frames and markets. The 9 period exponential
moving averages identifies when trends are changing as well as acts as the signal
line. The MACD lets you follow the trend. You only want to be short when the
MACD histogram is below the zero line as well as the signal line.

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance

Conversely you want to be Long when the MACD is above the Zero line
MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.
Past Performance is not necessarily indicative of future performance

Knowing When to Go Long

You want to use these 3 simple robust indicators together

to confirm an Uptrend. In order to “try” to mitigate the
inherent chance of a whipsaw wait till all 3 indicators
confirm that prices are in an uptrend.

1. Prices hitting upper bands and angling upwards on

the Bollinger Bands
2. MACD above zero
3. RSI above 70

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance

Your exit is any of the three and most happen at around the same time
1. The Bollinger Bands flatten out
 2. MACD turns down
3. RSI drops below 70

Knowing When to Go Short

You want to use these 3 simple robust indicators together to confirm a
Downtrend. In order to “try” to mitigate the inherent chance of a whipsaw wait
till all 3 indicators confirm that prices are in a Down Trend.

1. Prices hitting below bands and angling downwards on the Bollinger

Bands
2. MACD below zero
3. RSI below 30

MetaStock®Copyright© 2012 Thomson Reuters. All rights reserved.

Past Performance is not necessarily indicative of future performance

Your exit is any of the three and most happen at around the same time
1. The Bollinger Bands flatten out
2. MACD turns up
3. RSI moves above 30

These concept works in all markets and all time frames. You do not need to look
for Holy Grail Indicators. Using these simple robust indicators in a synergistic
fashion you put the odds of success on your side.

Do not underestimate the power of this simple trading strategy!

The Next 1,000 Trades

Yes that is really how I think. I look at any one trade as insignificant. I think in a
series of trades. There is no reason to get bent out of shape when a trade did not
work. Any one trade is just one out of 1,000 or 10,000 trades that I will have over
the years. I mostly trade commodities and in the following charts you will notice
some very interesting things. I have had and will always have long series of
trades that do not work.

I “try” to keep my losses small.

The trades that work are much greater than the trades that do not work. I just
keep on going. The goal is consistency once you have your trading plan.

Past Performance is not indicative of future performance

In the above in the yellow highlight you see the series of losing trades. In
between there were two very small profitable trades. How many of you would
quit at this point and look for the next system? It does not matter if you are
trading forex, commodities or stocks. You will always have series of losing
trades.

Past Performance is not indicative of future performance

In the above chart you will see mixed in the group of trades some nice winning trades. If one had given
up during the series of losing trades 4 to 7 in a row; they would not have stumbled onto some of the
“rare” big winning trades.
Past Performance is not indicative of future performance

No one ever rings a bell when there are profitable trades. You just make yourself available. You “try” to
keep your loses small and let the probabilities unfold. You need to be consistent, follow your trading plan
with patience and discipline.
Past Performance is not indicative of future performance

Trading is like fishing. You will not always catch big fish. There will be long periods that you will not
catch any fish. It is all a probabilities game. Most important for the millionth time, devise a trading plan
that matches your trading personality that focuses on risk management and money management. Accept
the inevitable losses. Once you pass this stage of trying to prevent losses you are possibly on track to start
compounding money.

Think of like this, you drive from Florida to New York. You know that there will be traffic jams, you
know that you will need to stop to go the bathroom, you know that you will need to sleep, you know that
you must wear a seatbelt. Basically you have tempered your expectations of getting from Florida to New
York not in 2 hours but more like 24 hours. You know the journey is dangerous and you wear a seatbelt.
You have prepared yourself. It is the same with trading. It is a marathon. It is a journey. You must realize
there will always be losses. You must realize that there is nothing perfect. You must realize that you can
lose money, which is why you trade with stops. You accept the uncertainty of driving to New York. You
know that there is no certainty. You accept the uncertainty, yet so many cannot accept the uncertainty of
trading. Equity curves do not go up at 45 degree angles. There are always pullbacks in the real world and
when trading with real money.
Position Sizing is the Holy Grail of Trading
The difference between traders and great traders is determined by their position
size throughout a trade. Position sizing is exactly how much to buy or sell based
on the dollar size of the trading account and the volatility of the issue. There
exist various books on money management, but most of them talk about one of
the results of money management (risk control) rather than the subject itself.
Money management is essentially that part of your system that determines your
position size-that answers the question “how much” throughout the trade. There
is the Martingale position sizing that some swear by however I prefer my
methods. The Martingale position-sizing strategy in which the position size
increases after you lose money. The classic martingale strategy is where you
double your bet size after each loss. I feel this can lead to a potential blowup.

Position sizing tells you exactly how much to buy or sell is based on the dollar
size of the trading account and the volatility of the issue. The volatility is the $
dollar risk from entry signal to the initial hard stop exit in case the trade does not
work.

Good Trades & Bad Trades

A famous trader once said “Don’t confuse Winning and Losing Trades with Good and Bad Trades

First one needs to define a good trade and bad trade. The definition of a good trade or bad trade is simply
following your trading plan and rules. A good trade cannot work and lose money…but it is still a good
trade. A bad trade is when a trader does not follow their plan and the trade works. They are negatively
rewarded.

Simply A good trade can lose money, and a bad trade can make money.

Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a
priori which individual trade will make money. As long as a trade adhered to a process with a positive
edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated
multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade
regardless of whether it wins or loses because over time such trades will lose money.

Money Management & Risk Management

Larry Hite, a famous successful trader from the 1980s, put it very simply:
Traders make bets when they trade. If you lose all of your chips, you can’t bet!
In other words, you are out of business!

His quotes are monumental:

There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose.
Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can
encourage you to take more bad bets in the future, when the odds will be running against you. You can
also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets,
over time, the law of averages will be working for you.

No matter what information you have, no matter what you are doing, you can be wrong.

One of the great things about the market is, the markets don’t care about you. The market doesn’t care
what color you are. The markets don’t care if you are short or tall. They don’t care about anything. They
don’t care whether you leave or stay.

… The beautiful thing about the markets, they don’t like you, they don’t dislike you, they just don’t care.
They are there every day. You want to play, you can play. You don’t want to play, don’t play. We approach
markets backwards. The first thing we ask is not what can we make, but how much can we lose. We play a
defensive game.

Summation
This is a simple plan.
No second guessing
Do not try to avoid losses it is impossible
You do not violate your rules
You exit when you know you should. Develop a robust trading plan based on your
personality. Devote much time to risk management. Entries and exits are much
less important. Think in terms of risk per trade…risk per sector…risk for the
whole portfolio.
Bio
Andrew Abraham is a commodity trading advisor at the firm Abraham
Investment management as well as the author of the book The Bible of Trend
Following- How Professional traders compound money and manage the
risks. He specializes in systematic and mechanical trend following, utilizing
stringent risk management techniques to limit losses and capturing a small
number of major trends to generate returns. His website is
TrendFollowingMentor.com. Abraham has been trading his proprietary account
since 1994 as well as investing with other commodity trading advisors since the
mid-1990s. He has been quoted in numerous trading publications as well as he
has written for Technical analysis of Stocks and Commodities, Investment advisor
magazine, Futures magazine and many others. Abraham has spoken at Bloomberg
events, presented at the Traders Expo, Emerging Managers Expo, CTA Expo and
other industry conferences and has done webinars for Reuters Metastock.

Look For My Other Books

The Bible of Trend Following

Essential Factors for Being a Successful Stock Trader

Psychology of Trading

The Power to Profit with the MACD

Nicholas Darvis- $2,000,000 Stock Trader

The Most Common Mistakes Commodity Traders Make