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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
  • What I Learned From Jake Bernstein's Book, "All About Day Trading" 4 comments
    Jun 16, 2014 10:02 PM

    In the 1980s and 1990s, I read nearly every book Jake Bernstein wrote, as he was known then for seasonal trading and cycles. Well, I happened to be in a bookstore and located his 2013 book ALL ABOUT DAY TRADING, and devoured the book this weekend. Retail is $22 but I ordered mine from half.com and got it for $8 counting $3 shipping, and mine was new and not used. I strongly urge anyone who wants to daytrade, to buy the book. The book covers trading in both stocks and commodities, but no matter what you trade, I believe you will be glad you read this book.

    The book gives several trading systems that have been proven to be profitable, but what is probably more important, is his discussions of what things to avoid, and how to handle risk. Jake explains the various pitfalls of trading in great detail and helps the reader analyze where their weak points are, and where they need to improve.

    When I read the book, I saw myself when he described the guy who makes dozens of consecutive winning trades, and then has one loser that blows out a majority of the gains. What good is it to have 85% winning trades if a lot of the gains are diminished by one or two of the 15% losses. In my last article, click here, I told how I traded two E-mini Nasdaq contracts on Friday, and made a 4 point and 6 point gain in about 5 minutes for $200 minus about $10 in commissions. I lamented that I did not have a third contract that I should have held less than an hour for a 20 point ($400) gain. Jake fixes this problem by trading futures contracts in groups of 3, and shares of stock in groups of 300 shares. He takes a short-term gain (1 contract or 100 shares), a medium term gain (2nd contract or 100 shares), and hopefully a long-term gain (3rd contract or last 100 shares), all in a day. His winning percentage is sometimes just above 50%, but usually around 35% to 40%, yet he makes an excellent living trading. He keeps his losses small and most of his gains small, but he has a few large gains that make all the difference at the end of the year. The long-term outsized gains is where I find myself lacking.

    Also Jake would totally slam my article about using my intuition. He is correct that it is not necessary to be able to predict the future to be a successful trader, and for most people, it is probably a distraction. Jake is right on when he demands the traders that he mentors, be objective and disciplined. One must first create a trading plan, then stick to the plan and evaluate what went wrong. Otherwise they will continue to make the same mistakes day in and day out, year in and year out.

    One of the reasons that I have become so unconventional in my trading style is that I see the shortcomings of convention. So many of the stock indicators that we use are trailing indicators. They tell you a lot about the past and little about the future. Other indicators are more useful because they work in the present. The best indicators project the future. Mr. Bernstein has a few of these in his book, and I gleaned a small bit of information which I am going to modify and add to my personal toolbox of indicators, and am quite excited about the future profit possibilities. I have not had time yet to do backtesting, but I am so very happy I ran across this book, quite by accident.

    Jake also says that everyone has to develop their own style. He can teach the exact same method to 3 people. All 3 will swear they are following the plan perfectly. But one will be making money, the second will be breaking even, and the third will be losing his or her shirt! I know that I am who I am, and after this many years, I am only going to change so much. So, will I keep taking quick profits. Sure. However, I am going to only take quick profits on 1/3 to 2/3 of my position, and let the remaining position enjoy a free ride, protecting the last portion with a breakeven stop. I will strive to focus and be more disciplined. I employ maybe 200 trading strategies in a month or year, and I would be better served if I did a profits analysis and watered it down to the most profitable 10 strategies and only take the trades with the highest probability of success.

    Now, one thing I disagree with Jake on, when I trade commodities, I do spread off. Jake Bernstein would say to never spread off, just get out and take your loss. However, when I trade commodities, I have learned how to trade full contracts vs. mini contracts in a teeter/totter approach as I did today, being short up to 3 mini (32 ounce) August gold contracts, against a full August (100 ounce) contract long.

    Until I learned to spread off and work out of trades, I never achieved consistency of profits and would have occasional massive capital drawdowns. Another current example, I am trading copper at present. I am long the July contract and have not taken profits yet, a single time. When copper rallies, I go short (sell) the September copper contract (spreading off) to lock in profits, instead of liquidating the July long. Then over and over during the day, as copper falls back 50 cents to $1, I buy back the September, at a profit of $125 to $250, and then sell the September contract again on the next rally. At the end of the day, I make sure that I am spread off so that I don't have to worry about some news event causing a quick massive move against my position. I only unlock the spread for a few minutes at a time and then relock it.

    Also, I have made a whole trading system out of spreading off. Here is an example. Suppose live cattle has rallied strongly for several days and is approaching significant overhead resistance. I may decide to short live cattle by selling to open a position that I can later buy back cheaper on a selloff, and profit from the difference. With futures, you often sell first at a high price, and then buy back later at a low price, similar to shorting stock. Now suppose live cattle pauses at resistance and then punches through. If I am short the October Live Cattle Contract, and starting to lose money, I can immediately buy an August Live Cattle contract, locking in say a 40 cents loss ($160). If cattle continues showing strength, I buy a 2nd August Live Cattle Contract, making me more long than short, and on a move to say $1 higher, I will be making more on the 2 longs, than I am losing on the 1 short, and recoup my loss. More likely, I will just keep the spread on, and like Lefty does when playing the teeter/totter of NUGT & DUST simultaneously, I will find a spot to take profits on the side that is making money. In the live cattle example, if I got the August contract 40 cents higher and it rallies 60 more cents, I will take the 60 cents of profit ($240) against the next resistance level, and then buy the August back a few ticks lower to spread back off. If the strength is sustained, I will use dips to add another August, making me slightly more long than short, and then take profits on the extra contract on rallies to get balanced again with one contract long (August) and one contract short (October). It sounds crazy, but it really does work. I am quick to stop the bleeding on the losers, and then work them off at a net profit. The winners require little adjustment. For an untrained novice, it might be better to just take a quick loss, but I usually end up making more money on the trades that start out as losers, as I do on the trades that are instant winners. I seem to know what to do with the losers and am very comfortable managing the spread for profits. The winners, I need to learn to let run a bit more.

    If anyone decides to read Jake's latest book, they are free to email me directly with any questions or comments. I will point out the indicators that I found most useful. Till then, happy trading!

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

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Comments (4)
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  • donnavet4pet
    , contributor
    Comments (2) | Send Message
     
    Thanks for the article, RE. My book is on its way and I look forward to reading it and hope I glean many pearls of wisdom from it as I have from you and your forum colleagues.
    16 Jun, 11:33 PM Reply Like
  • random 4
    , contributor
    Comments (15) | Send Message
     
    From my experience, the idea of a system that "lets it ride" and a system that "scalps" is totally dependent on what's being traded. Incorporating both systems on a single trade-able might work, but I haven't found that to be true. For example, in the systems of trading I have, I scalp gold and "long"-term real estate. Both DIFFERENT systems show back tested results (10+ years) above 30%, but if the systems were interchanged with the trade-able show results less than 10%. I look at a complete trading system as involving only 5 entities-sp500, bond, gold, real estate and international. The rest of the stuff just moves in time with one of these groups. Running 20% on these 5 trade-ables, provides a steady income (do the spreadsheet for yourself). Developing a system for all 5 entities will provide the "punch". I have only had success trading 3 entities and lack successful systems for bonds and international at this time. I am working with scaling, but at this point am not so certain about its overall effectiveness. In a leveraged system, scaling would appear to make "logical" sense. As far as watching the fluctuations every minute, I am trying to avoid that by utilizing only trading systems based on end-of-day data. After all the point behind profit is to have time to spend it. Also, successful trading systems appear to need as few factors as possible-we are dealing with "business majors"-successful trading does not appear to be conducted by scientists with complicated mathematical algorithms, it is conducted by business "managers" and cheaters (high speed traders, inside knowledge, etc..) and guys who write simple equations on napkins (after all, how complex is "blood on the streets" and "irrational exuberance"). I thought I would offer a slightly philosophical overview as well as technical overview that you might enjoy-hope it was entertaining.
    17 Jun, 06:59 AM Reply Like
  • Growfast
    , contributor
    Comments (273) | Send Message
     
    Rob,

     

    Thanks for the thoughts and I too will get a copy of this book and am interested in the "leading indicators", especially if you are finding they provide any kind of edge. Indicators I've been using show what is happening now and are helpful to see a trend change, but there are a lot of fake outs too.

     

    As for your system of spreading out, I agree on the approach, although the time frames I intend to use perhaps longer-term. There was a nice online trading course covering credit spreads earlier this week and how to adjust the position if price action starts to move against you. There are many thoughts on picking the strikes at different probability levels, how to adjust/when to adjust/how often to adjust, but the principles are the same regardless of the time horizon.

     

    Look forward to what can be learned from the book and seeing more of your thoughts as you work with these new indicators.
    19 Jun, 08:18 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (413) | Send Message
     
    Author’s reply » One thing I did not mention about Jake's book, is his assertion that "less is more". Doing less trades makes more money than doing more trades. First of all, doing less means you are being more selective and only taking the highest probability of profit trades. Also, trading less means you are probably letting your trades run longer. Instead of trading on the 1 or 2 minute charts, I have been experimenting with the 10 minute charts and finding the results quite appealing.

     

    I needed Jake to wake me up and to return to trading with a more disciplined approach. I just transferred my trading indicators and algos to NinjaTrader and am going to force myself to only take trades my indicators are giving me. It has and will continue to be an adjustment but the days of fun and being a "wild man" are over and it is time to settle down, grow up, and get really serious. Thanks Jake!
    20 Jun, 03:37 PM Reply Like
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