• What does it mean to be a disciplined trader?
• Tape reading.

- What does it mean to be a disciplined trader?

In virtually every trading book or course, there is at some point talk about the need to be a disciplined trader. Of course there is the most basic and popular definition of “execute your stop losses when price gets to your number.”

I have a slightly more detailed version that I feel every active short term stock trader should know.

Trading Discipline:
• To exit a trade immediately when your stop loss is reached. To exit a trade when your profit target is reached
• To not trade when market conditions do not match your style, to trade actively when market conditions meet your criteria.
• To always manage risk appropriately for the particular stock you are trading. One share size does not fit all.
• To review your performance every day some time after the close.

I am sure everyone reading this is well schooled in taking a loss when you are supposed to. It is not however widely talked about how important it is to book a profit, when its time has come. If you are a scalper you must book profits on your entire position into momentum, there is no last second decision to scale out, get out and go to the next trade. If you are an intra day position trader and the trend is obvious, scale out and maximize the remainder of the trade. You shouldn’t be afraid of a temporary pullback and get out of your entire position because of noise.

One of the first considerations you should make before you write your trading plan is deciding what style of trader you want to be. This is important because you will then be able to fill out your plan with scenarios to enter and exit your stocks based on your style. It is very hard to make money in all market conditions. What conditions suit your style? What does the stock action need to look like for your method?

Once you have a clear answer, you should only trade actively when conditions match your method.

I have seen more position traders get chopped up in a market that is in consolidation, and scalpers lose their shirt when a trend has formed. Position traders keep trying to guess when the trend will start and scalpers, who make most of their money through sniper like attacks of the markets ebb and flow, get hammered when the market picks a direction. Discipline means waiting for the market to present the conditions that suit your plan, don’t try to force your plan on the market.

I once watched a very successful and long time trader complaining he was getting horrible fills for about a week. After listening to this for what seemed like an eternity because of the way he was carrying on, I decided to watch his trades.

He was normally a short term scalper who traded very liquid stocks. He decided he would trade faster moving stocks that were less liquid because there was a new trader in the room who was trading that style. After about 3 seconds of watching him trade it was obvious he was not trading in a disciplined manner. He was trading the same size blocks in the new stocks that he was trading in his old style.

There was no possible way he was going to get the same fills. The stock was too thin to warrant the size he was trading. It was trading 100 -400 share lots consistently in time and sales (quoting the same size as well) and he was trading 5,000 share blocks. To make a long story short, he lacked the disciple to adjust his old share size to the new stocks.

To be a discipline trader you must never just trade one size fits all for every stock. Stop loss parameters and liquidity vary from stock to stock.

Keep a trading Journal. You must have a method help yourself improve. Professional athletes have coaches, you should too. Your journal is your coach. Having the discipline to write entries every day after the close and reading your entries daily to monitor progress is the only for the average trader to improve. If you don’t keep a journal you will be depriving yourself of the most valuable class you will ever pay for, your own experience.

- Tape Reading

Tape reading is a method of forecasting the next immediate move in your stock

- A method of forecasting, from what is taking place now, to anticipate what is likely to happen in the future.
- The essence of tape reading is interpreting the action of the volume (the prints), combined with bids and offers.
- Are they “marking up” or “marking down” their inventory? (bid/offer quotes) Securities are similar to inventory in a department store. Is it flying off the shelf or is it being offered at a discount?
- How urgent are the participants? How do we see this? From the size and consistency of the prints.

One of the most common opinions our instructors hear during our Equity Trader 101 course is this:

“I don’t need to learn to read the tape, I trade off charts.” Well my trader friend, how are the charts formed? That’s right, from the trades (prints)

Let’s say your stock is trading at new highs, but all the prints are on the bid, and for size. Do you think you should look to tighten up a trailing stop on a good position or should you keep your eyes closed and wait till the stock breaks down on the chart and you give back half your profits?

One more example, let’s say you are short and your stock has a fast move against you. The stock normally trades 2,000- 4,000 share prints on the tape. During this bounce against you, I notice the only prints that went off were of the 100-300 variety. I stay in the trade and you bail out. What did I see? The circumstances did not change. The tape told me nobody stepped up to the plate and did any buying of significance.

Next time you are at your screen, give the tape a little more “eye time.” Watch for significant prints that actually move the stock, not every trade. Pay attention to where they are happening. Are the significant prints occurring at the end of a move or out of a breakout? These are all necessary observations to become a good tape reader and a better trader. Until next time, have a great week trading.

To get a computerized system edge, you need to figure out the basic human trading weaknesses and include them in your software. Anyone can buy a trading system these days, but it will have little value unless it is unique and different from the crowd. Here's some easy-to-understand ideas I use that add in the human fears!

What’s another advantage to using a trading companion for day trading the e-mini futures contract? The human emotions are sometimes unreliable for trading. We are all basically hardwired the same. I can tell you how you will react because it’s how I do too. You need to write a program that does the opposite of the normal human tendency.

Panic is a perfect example of human tendency under stress. Another is releasing ourselves from pain as quickly as possible. A third is the desire to enter comfortable situations. A forth is fear of compounding a mistake or painful situation. And a fifth is holding on, thinking good times will never end. All these are clues to what you need to find in the e-mini futures market and program into yourself and computer.

You want to identify things are against the human grain to do and are painful to do - remember that! What could possibly be an e-mini futures trading method that would simulate these ideas? First, a system with no stop loss orders will provide the requirement of not running away and releasing ourselves quickly from pain. Am I crazy? Maybe… but you need to be different, even if only a little bit.

Next, how about adding to a loser instead of running? Well, at least add once or twice, compounding your pain - but having an eventual “uncle” point, which is also painful. And how about entering a market when they are bleeding in the streets - when you are SURE it’s going to keep going? And, how about scaling out half the profitable position when we think the e-mini market will go on in our favor forever?

All these solutions sound crazy and opposite the conventional trading wisdom of going with the trend, limiting losses, using stops, never averaging down and letting your profits run. The conventional wisdom is meant to make us feel COMFORTABLE! You want to feel comfortable? Then spend a day at the beach or stay in bed. You want to trade e-mini futures contracts and make profits? Then expect to be uncomfortable, to sometimes feel pain, want to run and second-guess yourself!

I have some friends who put up radio towers for a living. I love to climb them. A 200' climb is easy. I remember the first time I climbed with an experienced buddy. I could barely make it up to 20’ before I froze and hung on for dear life. I had this crazy notion that I had to stay below the point where I could fall and die. I figured 20' was the limit.

My buddy, at 100' looking down, just laughed at me and said, “You wanna be a woman all your life?” HA! I saw that he could do it, and so could I! I worked my way higher and higher until I could finally climb to the 200' top alone. Over the next twenty years I’ve climbed thousands of times and can now climb without fear. Some of my non-climbing friends remark… “You’d never get me up on that tower!” We are all programmed to fear heights. Unless we get desensitized, it will always remain this way.

I feel my e-mini futures trading companion is the equivalent of my climbing buddy. My computer and program show me how it should be done. It has no fear and can take on positions with nerves of steel. It’s what we would all like to be. The computer is all business, getting the job done. No second-guessing. No fear of averaging down. No greed stopping it from scaling out half the profitable position early in case the market reverses. Isn’t this the biggest problem - not knowing when to get out? I know it is for me, so it is for you too.

The important thing is that we need each other to succeed - I need the computer and it needs me. More on this next.