I doubt any of the investment bank heads even knew/cared about Bhutto’s death. They cared about taking profits after a planned short squeeze.

Economics and net returns can make strange bedfellows during weird and wonderful economic events. Stagflation has been one of the possible scenarios touted as a consequence of the sub-prime mess, which is just a more complex form of hyper inflation that also brings low growth rates. Those looking to make money in a hyper inflation environment observe a myriad of paradoxical concepts, most notably the fact that both traditional investing and holding money as cash are both poor options on paper. The usual reaction from the crowd is to invest in secure interest-bearing deposits, like CD’s. As usual, the crowd calls the situation incorrectly. Stable asset growth may look attractive, but at the end of the cycle an investor may find he’s actually lost real money (which is much different to what he thinks he’s making when he receives his quarterly statement). CD rates often fail in beating inflation during these scenarios, and the only way to protect your money in relative terms is to place it somewhere that utilises the effects of inflation.

Mish in his economics blog outlines some potential asset classes:

• In hyperinflation the last place one wants to be is in cash.
• Commodities in general are a standout.
• Gold is a standout.
• Precious metals are a standout.
• Property is a winner.
• Equities are a winner.
• Treasuries are distinct losers if not an outright short.
• Foreign currencies
• Energy

The standout asset for someone looking to expand their net worth and take some risks is without a doubt, property. During periods of high inflation, economic theory says that the value of money is moved from lenders to borrowers. This is good news for those with a mortgage, as repayments now become lower relative to the new value of money. Another benefit is the opportunity to increase rental rates at the price of inflation. This allows the property owner to price fix his cash inflow amounts according to market conditions — a luxury not possessed by stocks or bonds. The anomaly that exists is whether property prices will rise or not. Considering a hyper inflation scenario may be the product of stagnant housing prices, the idea is starting to look less like an easy proposition. Mish says it best:

Is there a catch? Why yes there is. One needs to be able to make mortgage payments on the loan. That means the timing of the hyperinflation better be spot on. It also means that property values better keep on rising from the moment the leverage is taken or income must rise enough to afford the mortgage if it does not.

Should ever one get in a position via excess leverage to not be able to sell the asset for more than one paid while not being to afford the mortgage payment, foreclosure or bankruptcy occurs. Losing a job ad being underwater on leveraged property is an instant enormous headache.

In order to beat your mortgage payments and make money on the investment, housing prices need to climb higher. As the property markets becomes more fragile, its apt to one making a 6:1 roulette bet, but with only an even money pay out. Much risk for an investment vehicle that is supposed to be defensive. What about the much hyped commodity market? Well, the double edged sword rears its ugly head again. This type of economic environment will probably lead to a slowdown in the US. The rippling effect on emerging economies, the ones eating up resources like Kirsty Alley at a buffet, will likely depress the already over-speculated asset prices. Gold has probably seen the most speculation since the 70’s, and it too is a high risk/low return proposition. Even if the price of gold rises above $1000 in a year, it still means a meager 17% return on its current prices. $1000 gold is the most bullish estimate I’ve seen, too.

Foreign currencies can work (or better still, combining the two with property prices), but once again, you’re hoping the knock on effect doesn’t create too much domestic disruption in your chosen investment currency. Some currencies seem to buckle under pressure, like the Australian dollar did against the greenback during 2000.

So what’s my advice? Wait for the cards to be revealed. No sense making a big bet now, especially during historically unprecedented volatility. Wait for the smoke to clear, then make your move. The thing about inflation spikes is, they usually carry through for at least 3-4 years. Once hyper/stagflation becomes a reality, its usually not too late to plan a portfolio around the new economic conditions. Just remember the fundamentals of debt during high inflation, and beating the markets real returns should be a breeze.

I’m speechless. That was outstanding.

It’s my birthday today, so I’ll be taking a week long break from blogging. Don’t worry, I’ll be working long and hard on some ardeous tasks over the Christmas period, because the true spirit of Christmas is working off the indebtedness one has to Mastercard!

Many people I talk to are intimidated by the thoughts of financial planners. They see it as something only upper class people do, and only necessary if your assets are over an exaggerated figure, like $2 million. Truth is, everyone can benefit from a financial planner. Even just managing your super contributions to ensure a solvent retirement is a crucial thing to assess now, rather then later. Why not let a professional do it? Like an accountant, often they pay for themselves by bringing you in more money.

Financial ViewPoint has written an excellent article on choosing a financial planner. It’s worth two minutes of your time, believe me. The one tip I’d give, keep an eye on money magazine (or any other financial publication), and note the most consistent funds. Colonial is my pick, always a consistent performer (and award winner). Start with the upper echelon, and you shan’t go wrong.

Television has existed for more than 60 years, but like all mediums of communication, there comes a time when the model just doesn’t fit in with new release technologies. The writer’s strike could very well be the death of the format known as television. As we speak, Venture Capitalists and Writer’s are meeting together to discuss a variety of ideas to launch new ways of pushing entertainment into the home. Money quote:

“Dozens of striking film and TV writers are negotiating with venture capitalists to set up companies that would bypass the Hollywood studio system and reach consumers with video entertainment on the Web.

At least seven groups, composed of members of the striking Writers Guild of America, are planning to form Internet-based businesses that, if successful, could create an alternative economic model to the one at the heart of the walkout, now in its seventh week.

Three of the groups are working on ventures that would function much like United Artists, the production company created 80 years ago by Charlie Chaplin and other top stars who wanted to break free from the studios.

“It’s in development and rapidly incubating . . .”

Stirring the beehive of entrepreneurial innovation in America is just asking to get stung. Its not like they couldn’t find someone with the capital to launch these ideas. I’ll make a bold prediction; within 15 years, television as we know it will not exist. A hybrid internet style digital broadcast combining both elements of entertainment variety like the internet, but with similar production standards as current broadcast television. All it’ll take is one genius to come up with a strong advertising model, and any barrier still left in the way of progress will cease to exist — unblocking the future.

I found these here, thought I’d share:

I recently read a quote that inspired me and thought, “Why not share it with others?” Here’s a list of quotes from entrepreneurs and other quotes that are relevant to entrepreneurship. Skip and I also included our own at the bottom of the post. I hope one of these quotes inspires you as well.

1. I have not failed. I’ve just found 10,000 ways that won’t work - Thomas Edison, inventor and scientist
2. The only place where success comes before work is in the dictionary - Vidal Sassoon, entrepreneur
3. Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t - Anonymous
4. The best reason to start an organization is to make meaning - to create a product or service to make the world a better place -?? Guy Kawasaki, entrepreneur, investor, author
5. Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph; a beginning, a struggle and a victory - Mahatma Gandhi, political and spiritual leader
6. Failure defeats losers, failure inspires winners - Robert T. Kiyosaki, author, entrepreneur, investor
7. Entrepreneurs average 3.8 failures before final success. What sets the successful ones apart is their amazing persistence - Lisa M. Amos
8. Once you say you’re going to settle for second, that’s what happens to you in life - John F. Kennedy, U.S. President
9. In preparing for battle I have always found that plans are useless, but planning is indispensable - Dwight D. Eisenhower, U.S. President
10. The greatest reward in becoming a millionaire is not the amount of money that you earn. It is the kind of person that you have to become to become a millionaire in the first place - Jim Rohn
11. Some people dream of great accomplishments, while others stay awake and do them - Anonymous
12. Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make - Donald Trump, real estate and entertainment mogul 
13. The entrepreneur in us sees opportunities everywhere we look, but many people see only problems everywhere they look. The entrepreneur in us is more concerned with discriminating between opportunities than he or she is with failing to see the opportunities -?? Michael Gerber, author, entrepreneur
14. An entrepreneur tends to bite off a little more than he can chew hoping he’ll quickly learn how to chew it - Roy Ash, co-founder of Litton Industries
15. The critical ingredient is getting off your butt and doing something. It’s as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer - Nolan Bushnell, founder of Atari and Chuck E. Cheese’s
16. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful - Warren Buffet, investor and billionaire
17. I never perfected an invention that I did not think about in terms of the service it might give others… I find out what the world needs, then I proceed to invent - Thomas Edison, inventor and scientist
18. Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover - Mark Twain, author
19. There is a tide in the affairs of men
    Which, taken at the flood, leads on to fortune;
    Omitted, all the voyage of their life
    Is bound in shallows and in miseries.
    On such a full sea are now afloat;
    And we must take the current when it serves,
    Or lose the ventures before us - William Shakespeare, author
20. Genius is 1% inspiration, and 99% perspiration - Thomas Edison, inventor and scientist

Absolutely. Rolling the dice is the best thing you can do in life.

It may be cliche to say it, but us Australian’s love our beer. We love it so much, we’re ranked 4th in the world for beer consumption, consuming 109.9 litres of beer per year per person. Yes, that figure includes babies, old people, devout Christians/Muslims, and recovering alcoholics. Why is it that beer price rises have caused little outrage among the public, press, and politicians? The great poker machine heist (the legalisation of poker machines in any alcohol serving venue) was sold as an offering to pubs to keep beer prices down. Yet, in the last 10 years, beer prices have risen at a rate of 16% per year. Compare that to milk (17% PA), bread (9%) and eggs (14%) It may look like beer is part of the norm, but considering the ease of importing, the product differentiating, and the lack of sensitive legislation (all the mentioned products went through a deregulation phase that increased produce prices), its clear beer shouldn’t be seeing the type of inflation it is, not without some kind of variable.

To figure out the cause, we must first look at the world markets. Not only does beer go through the standard free trade import/export before the selection is stacked on bottle shop shelves, ingredients are also impervious to fluctuations in agriculture prices. It’s not to far fetched for a flood throughout Eastern Europe to cause a $3 price rise in a case of very Australian beer, like XXXX. Global hops acreage last year was barely half of what it was way back in 1996. The yield is just 63% of what it was a decade ago. Money quote:

He said the brewery has contracts that ensure it will have a sufficient supply of barley malt and hops, but prices are up sharply.

Climate change may be one factor. An Australian drought that some experts blame on global warming has cut that country’s barley production in half, while European floods earlier this year led to sharply lower yields of hops there.

In addition, some farmers have switched to growing corn, which commands a higher price because of its use in alternative fuels, cutting the acreage devoted to barley and hops.

Maybe it’ll get better? Nope:

“I’m guessing, at a minimum, at least a 10 percent jump in beer prices for the average consumer before the end of the year,” said Terry Butler, brewmaster at central Washington’s Snipes Mountain.

Another side of the bottle label with raw ingredient price rises is the reduction of aggressive discounting. Beer makers whom face rising costs because of raw product expenses don’t need an illegal price collusion to figure out close competitors are feeling the same pain. With little incentive to discount, most companies simply stick to steady mark ups, with no relief for the consumer.

Worst of all, small brewery’s, referred to as ’boutiques’ will probably see the worst of it:

Small brewers from Australia to Oregon face the daunting prospect of tweaking their recipes or experimenting less with new brews thanks to a worldwide shortage of one key beer ingredient and rising prices for others.

As a large beer fan myself, it sucks to see the market work so efficiently. I retain my optimism in the long run, however. If high hops and barley prices encourage more farmers to devote land to those very crops, prices will begin to stabilise, and hopefully a revival in the micro-brew industry will be forged.

I’ve heard of some bizzare theories on stock movements, but here’s one that saw the light of day. (Yes, I kill me). Moneyquote:

University researchers in Toronto say they have found that bond and stock markets move in conjunction with the seasons, partly because some market participants are affected by seasonal affective disorder.

SAD, a form of clinical depression that affects people in the fall and winter, makes investors more risk averse, the study suggests.

Why not? It sounds more reasonable then Fibonacci numbers, used by followers of the Elliot Wave system.

Even mid-tier bands have trouble competing in a marketplace full of high sunk costs and a large percentage of docked pay. The Dresden Dolls are an attractive ‘indie’ band, although probably not able to sell out the super stadiums, can still hold their own in the medium sized venues. Even these guys are forced to constantly be on tour just to pay bills. The huge expenses of marketing and production means these guys require close scrutiny of every last penny just to stay afloat. Money quote:

Palmer and Viglione might be budding rock stars, but they’re still pretty broke. They have to pay their road crew three to four times what they pay themselves — which is a modest $1,500 a month. Remember, this a band that has toured with Nine Inch Nails.

“In order to go on that tour, we had to lose money,” Palmer says. “Just because we’re up on a giant stage, playing in front of 5,000 people, doesn’t mean any money in our pocket.”

That’s because the headliner band takes about half of the gross ticket sales at a big, sold-out show. The venue and the promoter take almost all the rest. Deals vary greatly, but an opening band that wants the exposure might be paid a few hundred dollars to $1,000 a night. The Dresden Dolls’ expenses are twice that: They have to pay their sound techs, manager and other support crew, and rent the bus.

As a music lover, it strikes me as crazy that bands like these guys might be struggling to survive. The more I think about the music industry logically, the more I envision a structure much like a game of poker; the top 5% are making the big dollars, while the middle 55% struggle to stay afloat. The bottom 40% are over run quickly and usually don’t make it to their first album. To make it as a top 5% band, you need a lot more then skill, you need strong appeal as dictated by the trends in music. In other words, you need to write great music, but also be lucky your music is considering ‘hip’ and ‘cool’. You think if the members of Fall Out Boy were born 10 years prior they’d be showing the same success they are now? Not a chance (in my musical opinion, of course!).

Attention!: A PDF Version can be downloaded here

Introduction

Everyone has heard of it, everyone has been warned about it, and everyone feels reluctantly curious as to the daily life of a successful Day Trader. The thought of making quick, fast, and ‘easy’ money from home by reading the markets is strongly appealing. So appealing, in fact, many people use this as the basis in arguing that can’t be profitable. The expression “if it’s too good to be true, it probably is” is a cliché that guides our life choices. We’d rather risk missing out on a large opportunity then look like suckers. Luckily in day trading, there’s a time-proven method of avoiding becoming just another ‘sucker’. Developing a fundamental understand of the market, creating a system that matches this system, trading within its rules, and using sound money management to ensure this works into the distant future. A combination of aptitude, hard work, discipline, and strict capital management are the key ingredients to a successful Day Trader.

I’ve heard it’s impossible to be profitable Day Trading. Who is right?

This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).

The myth that Day Trading can’t be profitable is one which usually leads back to the gospel perpetuated by academics. Academics have a vested interest in keeping Day Trading as a ‘gambling’ venture, theoretically unprofitable; most economic and financial models are based on theories which were written under the assumption that the market is ‘perfectly efficient’. They have half a point, but it’s not the full story. A better way to think of the markets is them being ‘effective’ rather then ‘efficient’. The price rarely ever sits at its mean, its rational value, all factors considering. Instead, it’s like a rubber band, which bounces around the mean like a pinball. Much like a rubber band, the further price moves away from its true mean (or value), tension grows, and using certain systems we can devise the strength of that tension, and what the short or long term expectancy is for that price.

This is of course, my opinion. You’re entitled to your own. What I do ask, is instead of pointing fingers using second hand evidence, take a step back and look at the whole picture. Read both sides; think about the rationality each exhibit. If you’re convinced of a side of thinking, stick to it. Buy and hold is a viable strategy, not the strategy I would choose, but some great thinkers have turned it into great money, so I respect that. At the same time, there are undoubtedly traders that have turned great fortunes using a different strategy, but still with the idea of exploiting pricing differences. Day Traders, Market Makers, Swing Traders, Arbitragers, Value Buyers, there’s a rich guy behind every level.

Is our job as a Day Trader to predict the market?

NO! Prediction is for CNBC analysts and ivory tower banking macro economic think tanks. Seldom is either on target and even if they were, the advice they give is to obscure and based on too many variables to be profited off in a realistic sense. The goal of an astute Day Trader is to develop theories about his chosen market(s) through observation and testing, and using risk managements strategies, in order to show a long term profit. This is not prediction. We’re exploiting statistics in order to create a competitive advantage in the market place.

How does one profit from Day Trading?

By constructing two facets; build a dynamic system, and tailoring a risk strategy to that system. A risk strategy is using your capital, or ‘bankroll’, and optimally allocating it for each trade you make. Obviously, risking too much on a single trade can be disastrous, and increases our risk of ruin. Allocate too little, and we may see sub optimal profits. A balance must be struck. TraderMike has a fantastic article on the types of position allocation and the conventional thinking among traders:

Position sizing could very well be the most important aspect of a trading system, yet, like expectancy, it’s rarely covered in trading books. A position sizing model simply tells you ‘how much’ or ‘how big’ of a position to take. Position sizing can be the key factor in whether or not you stay in the game or whether your gains are huge or minimal.

Dr. Van K. Tharp did an experiment which shows the importance position sizing. In his book “Trade Your Way to Financial Freedom” Van gives the results of his testing of four different position sizing models. He tested the models on the same trading system, so the only variable was the position sizing. The simulations were run with an initial equity of $1,000,000 and took 595 trades over a 5.5 year period. The models produced drastically different results:

• The worst was the baseline model which just bought 100 shares of stock whenever a signal was given. That model returned $32,567 or 0.58% annualized.
• Fixed-amount model: This method traded 100 shares per $100,000 in equity. It returned $237,457 or 5.75% annualized.
• Equal leverage model: Each position in this model was 3% of the account equity. So at the start of the trial each position was $30,000. This method returned $231,121.
• Percent risk model: According to this model positions were sized such that the initial risk exposure was 1% of the account equity. So with $1,000,000 equity the initial risk would be $10,000. So if the initial stop on a trade was $1 the system would trade 10,000 shares. For an initial stop of 50 cents the system would trade 20,000 shares, etc. This model returned $1,840,493 or 20.92% annualized.
• Percent Volatility model: Positions were sized based on each stock’s volatility — the more volatile the stock the fewer shares are traded. For this trial positions were pegged at 0.5% volatility (initially $5,000 per position) — so if a stock’s average true range was $5 the system would trade 1,000 shares. This model returned $2,109,266 or 22.93% annualized.

You can see how important position sizing is by that simple experiment. Remember that’s the same trading system with the only difference being the size of the positions.

In the past when I was swing trading I used to simply divide my equity by 5 and that would determine my position size. I wanted my maximum risk per trade to be 1% of my equity so that dictated that my maximum loss per position was 5%. I still do that with my long term account but I’m seriously considering changing that.

Now that I’m daytrading it makes a lot more sense to me to use the percent risk model. I always liked that model but I never felt comfortable using it when I was holding stocks overnight. Now that I don’t have to worry about overnight gaps I feel much better about using this method. It allows me to put a lot of money to work when I have an entry with a tight stop. But despite the fact that I could have 2 or 3 times as much money in play versus my old position sizing model I can still keep my risk per trade very small. It’s also kept me out of trades that were just too risky because it forces me to really look at where my initial stop will be. Often the stop will be so wide that I can only buy a handful of shares so it becomes clear that the trade isn’t worth the effort. This method also allows me to equalize my 1R risk across all trades which help in my expectancy calculations.

Here is some position sizing resources:

• Van Tharp’s books are by far the best work I’ve seen on position sizing, expectancy and money management. I’ve read “Trade Your Way to Financial Freedom” and “Financial Freedom Through Electronic Day Trading” and recommend both highly.
• Money Management or Position Sizing or Bet Size… No Matter What You Call It, Better Know It
• Michael Taylor on his position sizing trials.
• Stephen Vita on his position sizing model.
• Jon Tait’s argument for trading many small positions. (I don’t necessarily agree with Jon’s conclusion but he covers some important topics in this post.)
• Position Sizing: Why Size Matters to All Investing Greats
• TradersCALM - Introduction to Position Sizing
• Position Sizing - The Most Powerful Investment Concept
• Size Really Does Matter! Position-Sizing Management Can Make a Difference Between Profit and Loss - (Free subscription required)
• T.I.P.S. - Trading is Position Sizing
• My position sizing spreadsheet
• TradeStars’ position sizing calculator
• Dave Laplander’s position sizing calulators

How does one go about designing a system?

This is the million dollar question, no pun intended. To develop a winning system is worth its weight in gold, for obvious reasons. First, it’s important you tailor a system suited to your personality. Here are some possible dimensions for your system:

· Time frame (this article examines day trading, but some of you might be suited for longer trading time frames, so I’ll go in to it later).

· Mechanical or discretionary

· Trend-following (also referred to as ‘momentum trading’), or bracket trading

· Security type (index future, commodity, or shares)

· Risk vs. Reward (high percentage of small winners vs. small percentage of large winners)

All of these dimensions must be considered at some stage within the context of your risk tolerance and personality. The biggest pitfall I see amongst poker players when they begin trading is the lack of patience. Most successful poker players own the game by dominating it, attacking other competitors, and changing the games style to suit them. This strategy is the fastest way to get wiped out. The market will move regardless of what you think of it. Your stubborn trading of 5 e-mini’s is completely irrelevant, a drop in the ocean. Your interpretation of the market can’t force it to reconsider its position. In poker, when a player is weak, we can raise them, forcing them to fold, and us to win the pot. In trading, even if you know the market is structurally weak and due for a fall, aggressively trading it isn’t going to cause a collapse. The market can remain structurally weak longer than you can stay solvent, believe me. This is why its important to identify a system based on percentages rather then intuition. Irrationality regularly shadows the market, and the trader who refuses to believe this is the trader who now owns a lighter wallet.

The first step is to read, read, and then read some more. On the bottom I’ve picked out my favorite books on trading. Buying a few at a time, reading, and trying to develop a theory or understanding of the market is essential to building a system. People don’t sell winning systems pre-packages, and even if they did, markets change and systems become obsolete, forcing its user to tweak inputs. If you don’t understand the system you’re trading, you’ll get wiped out. It’s not an if, it’s a when. The year 1999 was a major boon for technical traders, using simple stock momentum systems to make a boat load of money. During the tech boom, traders used to exploit the pile on effect for tech stocks. Statistical models supported this; during this time, a price jump in a stock almost always incurred a follow through of 5 or more cents. This may sound insignificant, but when you’re heavily leveraged, the effect happens a high percentage of the time, and you only need to hold the position for a minute too scoop a profit, the system only need be performed several times a day to make a handsome living for its trader. Then the dot com’s went bust, and like magic, the system didn’t work anymore. Many traders went broke, protesting that it was somehow the markets fault. Some even had the audacity to blame newly design quantitative and hedge funds, saying they scoop too many profits away, creating ‘too efficient a market’. Truth is, they never understood their system, thus couldn’t make the needed modification to keep themselves solvent. Learn from their mistakes; always be examining new theories and ideas in the pursuit of the truth.

One of my favorite ways to find new ideas is just to read all the news headlines and blogs. I’ve included some of my favorite reads down the bottom. The key is, always be thinking about everything within the context of the market. Experts distort the truth. Like a power game, no one wants to reveal their true position. Everything is a smoke screen. This abstract thinking can help inspire you to test new ideas and new theories, which is the key to developing a winning system. It doesn’t happen overnight, but the long, arduous journey is as much fun as it is profitable.

What do you mean by time frames? How does this apply to a Day Trader?

I’m going to steal some of James Dalton’s ideas on time frames, mostly because his seem to fit nicely, and from anecdotal experience, it seems to hold true. Five time frames exist, grey areas obviously exist, but I find it’s a good starting point when dissecting the charts. Scalper, Day Trader, Short-Term Traders, Intermediate Traders, and Long-term Traders are the five main divisions.

• Scalper

The scalper lives by the minute hand, continually buying and selling in order to take advantage of fleeting discrepancies in order flow. Scalpers may make as many as several hundred trades a day, comprising thousands of contracts. Scalpers rely on intuition. They buy and sell from all timeframes, and their ability to respond to the immediate needs of the marketplace provides essential liquidity. This timeframe is utterly detached from longer-term economic trends, for obvious reasons. For these guys, its all about reading order flow.

• Day Trader

The day trader enters the market with no position and goes home the same way. Day traders process news announcements, reflect on technical analysis, and read order flow in order to make trading decisions. They also have to deal with the other timeframes buying and selling, margins calls, major economic news, even seemingly harmless speeches by Fed insiders (hello Greenspan effect!). Anyone who believes the markets are rational should spend a day trying to digest and react to the landslide on conflicting data day traders must wade through to make a decision.

• Short-Term Traders

Short-term traders often hold trades longer than a day, but usually not longer than three to five days (a trading week). Short-term traders usually have to be much more aware of economic trends, and monitoring important junctions that exist, such as trend lines, new highs and lows, etc. They’re always on the look out for break outs, either to fade (which means to bet against the movement continuing), or get on board the momentum.

• Intermediate Traders (or investors?)

The difference between intermediate traders and short-term traders is simply they operate on a longer term view. Rather then thinking of a set timeframe, Intermediate Traders (often referred to colloquially as “swing traders”) are usually more focused on the time the market spending bracketing, rather then an actual set time piece of a month or 3 months. They usually attempt to buy at the bottom of a bracketing market, hoping to sell at the top, or vice versa. They may also, like the other timeframes, pile aboard powerful break outs or short when the market tanks. Swing traders usually process a lot more fundamental information then both Short-Term and Day Traders, because the sheer amount of different technical ideas can make it difficult to judge which is important in the context.

• Long-Term Investors

Long-term investors are far more attached to the securities they own. They have a stronger tendency to buy securities and put them away for some time, with holding periods from months up to several years. When they are active, they deal with very large positions that are very visible to all participants in the market. Shorter term participants that wish to stay solvent understand to either get on board or move out of the way when the long-term investors decide to take a position.

Note that when you see a major, powerful move in the markets or a stock, its almost always all the timeframes moving in unison. Like the food chain, the longer timeframe is the dominate force over the smaller one, taking on an alpha like role. Short-term traders, no matter how stubborn, will always get run over by the long-term investors, through the sheer weight of the contracts/stock quantity they use when entering the market.

What kind of money can someone make?

This is completely dependent on your capital, your margin, your trading style, and how powerful your system is. There is no real way to answer this question, but when it comes to futures, I’ll give you an example.

A Dow Jones Industrial E-mini is worth $5 per tick. A tick is the minimum movement a security can make. For a stock, it might be $0.01. For futures indexes, it’s usually a point. If I’m going long (i.e., buying contracts with the intention on selling them for a higher price) with 10 contracts of E-mini’s. If I make a profit of 20 points (that’s the same 20 points you’ll see on a quote of any index, for example, holding this position from the DJIA from 13450 to 13470), the math is simple:

$5 x 10 contracts x 20 points = $1000 profit.

Of course, your trade could go the other way, netting you a loss of the same magnitude. Using this and the expectancy article I posted, you should be able to deduce profits you can make depending on your bankroll.

What’s the best method for obtaining charts? What broker should I use?

There are many charting platforms around; all vary in complexity, power and cost. Personally, I prefer to go for something that’s overkill for my problem. It seems to inspire me to experiment and push the boundary. Here’s a list of charting platforms:

• E-Signal
• TradeStation
• Metastock
• Qtstalker
• CQG
• Sierra Chart

One feature of a dedicated charting program is access to a real time feed and downloadable past history for back testing. All of these software companies have a huge database of past data for a trader to tap, and can be requested at any time using the system. The two most popular from my observations is E-Signal and TradeStation.

Another program you may need is an execution platform. Each comes with their own interface and broker compatibility options. Brokers usually support multiple options, such as Zen-fire, OpenTick and IQFeed. Talk to your broker about which their preferred execution system is, as each as a different opinion about which has the fastest quote and trade execution delivery. A List:

• FXTradeStream - Takes signals from emails and executes them in the MetaTrader platform.
• HyperOrder - Takes signals from TradeStation, MetaStock, ESignal or a custom application and sends them to a broker’s API including FXCM, EFX Group, MetaTrader, Interactive Brokers and more.
• Neoticker - Create automated systems and execute them into MB Trading, EFX Group, Interactive Brokers or FXCM
• NinjaTrader - Sends signals from TradeStation, ESignal or a custom application into Interactive Brokers, MB Trading or Gain Capital
• SnapDragon - Sends signals from TradeStation to Oanda’s API
• Thinking Stuff - Backtest and automate your trading system into Gain Capital and Oanda with the click of a mouse. No programming knowledge required.
• Trade Bolt - Takes signals from TradeStation, ESignal, MetaStock or WealthBuilder and sends them to Interactive Brokers
• TradeBullet - Sends orders from TradeStation, eSignal and custom applications into Interactive Brokers, EFX Group and MB Trading
• TradeCompanion - Automates your trading systems written in TradeStation, Excel, Visual Basic or any other proprietary platform and executes them into the BGCFX trading platform.
• TradeItself - Takes trading signals from emails and sends them to the FXCM Trading Station

The two most popular from my observations is Neoticker and NinjaTrader.

Next on the shopping list is deciding on a broker. This all depends on the market and instrument you wish to trade. It doesn’t make much sense to pay for services like being able to phone your broker to make trades, when you can cheaply use your internet platform to perform everything. That said, you want a broker reliable enough so in the event on an emergency, you still can make the call and close a position if necessary.

There are many, many, brokers out there, so I’ll just talk about two that I’ve used and would highly recommend. Both have similar costs per contract(in the case of futures), but InteractiveBrokers offers share trading as well (at the lowest rate I could find). The third is Bell Direct, I have a friend who trades the Australian market using them and seems very happy with them. I, however, have no personal experience with them, so sign up at your own peril.

• InteractiveBrokers
• Mirus Futures
• Bell Direct

About E*Trade and other brokers… Stay away. Don’t even think about it. Their commissions are terrible, their execution platform sucks, and I don’t trust anyone who markets their site like that anyway. Stick to the guys that keep costs low, and know what you want; reliability and compatibility. Remember, this is in a Day Traders context. If you’re a buy and hold type trader, it’s a different story. We need every edge we can get, believe me.

What books should I buy?

I like keeping a diversified bookcase, one with many different ideas and theories. I even read books who say its impossible for me to be profitable (‘A Random Walk Down Wall Street’). Thinking is the name of a game. If a book like Random Walk makes me question my beliefs, perhaps they’re not strong enough to consider risking money over. I read this book and picked up tones of logical fallacies, and even used it to think up new market beliefs. If you’ve read this book, PM me and I’ll pass along some of my thinking. Here’s a list of books with a short description. If you’re going to buy, be kind and use my Amazon affiliate links:

• Technical Analysis of the Financial Markets by John Murphy. The bible of technical analysis. Although its crude, and probably too simplistic to be worked into a real system, the break down on theory and the explanation of indicators is the best place to start for a beginner to learn the subtle hand of TA.
• Technical Analysis Explained by Martin Pring. I love Pring’s writing style. His book is a lot like Murphy’s, but his analogies are fantastic. You could probably buy one or the other, though. Murphy has more content, Pring has a little more color in his writing.
• Martin Pring on Market Momentum by Martin Pring. Understanding the effects of momentum (or lack thereof) on price is very key to understand the supply/demand relationship that exists. Although once again, its probably too simplistic to base a system on it alone, thinking about how two seemingly identical price charts can convey a different tone is the next step in the learning process.
• Intermarket Analysis by John Murphy. This is another mind expansion book past the bible. It talks about the roles the bond markets, other markets, indexes, and commodity futures play in altering each others course. To emphasize how good this book is, I still overtly use its ideas in my trading today. Its moved me to decode the web of intermarket movement, and explore how I can improve the effectiveness of my system by looking at how other markets are reacting.
• The New Market Wizards by Jack Schwager. This book is just about inspiration. It’s an interview with 10 or 12 ‘market wizards’, guys who run hedge firms, investment banks, mutual funds, and talk about how they became the top performers in their field. The stories are a fantastic read, even for a non-trader. It shows that every trader’s path is wildly different, and failure is inevitable in this business. Those with the true conviction and persistence shine through.
• Trading Day by Day by Chick Goslin. I love Goslin, this book is little known but I love its message. Goslin takes us through his strangely simple system, and shows us how he uses basic indicators in conjunction to produce a winning system. Goslin talks about his trades in real time (I can confirm this), and his market thinking is so simple yet so effective. If anything, this proves you don’t need to be super human to trade; you just need to perfect your craft and trade with a positive expectancy. He’s the ultimate probability trader.
• Trading in the Zone by Mark Douglas. Psychology will break you. You may think your tough, but trading is not like anything else in life. There’s no rules, no boundaries, unlimited freedom. All you’re doing is guessing price movements. And without this book breaking down my psychological inhibitions, I probably would never have been a profitable trader. It’s a book that humbles you, but at the same time, empowers you with the truth.
• Way of the Turtle by Curtis Faith. The turtles are legendary, if you don’t know the story, read about it here. Faith tells his story like an autobiography, but relates it to a trader’s journey, and the pitfalls one must avoid. He also explains his market beliefs, and why they remain profitable using a system expectancy system. His back testing ideas on how to avoid curve fitting is important, if that’s the type of thing you’re into. Also, being 19 years old and making $32 million dollars in 4 years, how is that not inspirational?
• Trading Your Way to Financial Freedom by Van Tharp. This guy is the ultimate level headed trader. He’ll cool your hot headed ways, and show you how to mould yourself into a winning trader. His book was the basis for TraderMike’s expectancy article. Although most of this stuff is elementary for poker players, its still essential we consider risk of ruin in all system analysis. He also shows how multiple time frames and ideas can be profitable, and how loose thinking can bankrupt you easily. His writing is like that of an old sage, soothing, responsible, but not afraid to share wisdom.
• Financial Freedom through Electronic Day Trading by Van Tharp. This book is outdated and covers a lot of what his other book does, but I still recommend it because it takes ideas from a different perspective, talking about the bid/ask, and making trading ideas a little more practical. It has ideas about avoiding big institutional moves against you, and this thinking is invaluable for any system.
• Enhancing Trader Performance by Brett Steenbarger. A fantastic book for traders and non-traders like. This book talks about developing skills from a psychology perspective. Steenbarger is a professor and PhD holder, and he takes a different approach to exploring the mind of a top performer, whether it’s a trader, an athlete, or anyone in a performance based field. Personally, this book inspires me so much more then any generic self-help book. I think it’s a must buy, because he also talks about some great trading system ideas that you won’t find in many other places.
• Freakonomics by Levitt and Dubner. Nothing to do with trading. But it shows the importance of thinking outside the box and never taking anything for granted. The reasons why events happen is not as simple as the headlines CNBC spouts every 30 minutes. Stocks don’t rise because of good earnings, or fall because of bad ones. Using Freakonomics logic, you can go behind the scenes and learn why moves really happen, and which ones can be traded profitably.

These books should provide a good starting point. I’m sure more people will recommend more books on this thread, that’s fine, but I’d probably start here no matter what anyone else says. Next, I’ll list some blogs that I read. There are too many good ones to list, but this should be a great starting point for finding new ideas. Some of these guys are great traders, others are not. But it’s dissecting the thinking that counts.

• Alchemy of Trading - Market theories
• Curtis Faith - Original Turtle
• Deh Trader - Stock scalper
• High Probability Trading - Advanced Futures Trading
• Lord Tedders - Russell Futures Scalper
• Move the Markets - Alternative Ideas
• Phileo - Chartist Commodity Scalper
• The Big Picture - Market Overview * Recommended
• Trader Feed - Trader Psychology * Recommended
• Trader Gav - Misc Trading Thoughts
• Trader Mike - Stock Watch and Moves * Recommended
• Trader X - Candlestick and Fib Stock Trading
• Trading Digest - Future scalping videos
• Trembling Hand Trader - ASX Trader
• Van Tharp’s Blog – Trader Theory * Recommended
• Ugly Chart - Stock and Futures Watcher
• Wall St Warrior - Stock Dummy Trader

Feel free to ask any questions or make any comments. I’m sure there’s a lot of stuff I missed out. Hopefully people find this useful. I’m not suggesting day trading is right for you, but even if you don’t trade for money, sometimes its fun just to muse about the market and its random workings. There’s always something new to learn, new to analyse, and it’s ever humbling.