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What I Learned From Jake Bernstein's Book, "All About Day Trading"

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.