179 The game has changed a lot since I started playing it. Back in the 1980s, there were no discount brokers, no online trading, no two- or three-second order fills. Every trader didn’t have a computer with access to mountains of information at his fingertips. Orders were called into the clearing houses and everything took time. I’m not a computer person, but if I wanted to keep on top I had to learn enough to survive. There is a real generation gap between me and younger traders. They grew up with a mouse in their hands and they are very comfortable with technology and its advances. I survived because I have had a lot of people help me and because I wanted to play the game and win. If you want to be a successful day trader today, you must take advantage of the huge technological advances that have been made.
In this appendix, I go through the steps to take in order to get started as a day trader. If you are already trading, you may not need this information because it is very basic. You probably already know it, and hopefully you like the set-up that you have. Therefore, you probably want to just skim this information to see if anything in it may be new to you.
What Do You Want to Trade?
The first issue that you must resolve is what trading vehicle you will trade.
If you want to trade futures, you must open a margin account. If you want to A P P E N D I X B
trade equities, you need an equities account, and if you want to day trade equities, you need a margined equity account. Recall that when I opened my first brokerage account, I intended to trade pork bellies, a commodity. Yet, I opened an equities account. I did not know the difference. Some traders are more comfortable with one vehicle while others prefer another. I like fu- tures, but many traders only want to trade equities. Still other traders prefer options, or commodities, or bonds. Think about the particular characteristics of the item that you are trading. Do you have the personality for trading it?
Do you have the education and knowledge that you need or can you acquire the necessary knowledge? How much capital is needed? How much time?
Consider your answers carefully and select what you want to trade.
I have known some people who were very good at trading one thing and very bad at trading another. For example, some folks just seem to re- ally understand the equities market while others seem to intuitively grasp options. It really doesn’t matter what you select; just as long as it matches your skills and your resources. After deciding what you will trade, immerse yourself in it and learn all that you can. In this game, knowledge really is power. And, of course be sure that you open the type of account that you need in order to trade the vehicle of your choice.
Get Educated
Do not try to trade without getting educated. Start by reading and re- searching. The bookshelves are lined with books on all aspects of trading.
You, however, must know that because you are reading this one. Also, there are many courses that are taught online and at various cites around the United States and around the world.
At DTI, we teach courses in Mobile, AL and in other major U. S. cities.
There are a number of other programs and courses taught by very experi- enced traders. The Chicago Board of Trade (CBOT) offers educational materials and so does the Chicago Mercantile Exchange (CME). Some bro- kerage firms offer training also. Just be careful and don’t believe anyone who tells you that you will get rich quick with no risk and no loss. Some people have systems that can beat Wall Street. At least that is the claim. Be very careful about that because there is no system that will work in all phases of the markets. You must be educated and change as the environ- ment changes. That is the only way to stay on top.
Remember that education is not cheap so plan to allot some financial resources to education.
Open an Account
Next, you need both a brokerage firm and a clearing house. A brokerage firm places your trades for you but the clearing house transacts them or clears
them through the exchanges. Today, there are so many companies out there offering so many types of services. Some offer very low commissions and have low margin requirements. Other firms charge greater commissions and may require greater margins. Still other companies may cost a little more but offer a wider array of services and assistance. Check to get the best deal that you can. Shop around because there are some really good deals out there. Once you start trading, the commission structure and other costs of your trades is very important to you. Commissions will eat you up if you overtrade.
In addition to cost, find out how statements are received, what type of support the company has, and who to contact if there is a problem. Believe me, there will very likely be times when you will have a problem, techno- logical or otherwise, and need to contact either the broker or the clearing house. Be sure that you know what to do when these times arise. Get emer- gency numbers and keep them at your fingertips for easy access.
Remember that if you want to trade futures you need a margin account.
To trade equities, get an equity account, and to day trade equities or op- tions, you need a margin equities account. Be sure that you have the correct account to meet your needs.
A Computer
When you trade you need a computer that can handle the vast amount of data coming through it. You will be receiving real time quotes and execut- ing trades. You do not want your computer to freeze up when orders are in the market. I have had that happen to me and it is not a good feeling. There- fore, you need to be sure that your computer can handle the huge quantity of data and other programs that will be required.
I confess that I do not know a lot about computers, but Geof Smith, my Chief Instructor knows a great deal. He grew up with a mouse in his hand and he keeps me informed about what I need. Therefore, I will give you an overview of the basic equipment required. Technology changes daily. At the time of this writing (May 2005), I recommend that you use at least a 2.6 GHz or higher or its equivalent Pentium 4 or equivalent processor. You need at least 1 GB of RAM.
You also need a video card so that you can operate two or more moni- tors at the same time. When you have various markets that you are monitor- ing and charts that you are observing, it is handy to have at least two monitors. That is not to say that you can’t trade with one monitor, you can.
I use one monitor when I travel. But, two is just a little more convenient.
I suggest that your hard drive have at least 40 giga bytes of hard drive with 7,200 RPM SATA drive, with 8 MB cache. This allows for faster read- ing and writing.
You can either get a hyper-threaded processor or a computer with two processors. You need this in order to run two processes at the same time.
Also, you must have at least one monitor. Get at least a 17-inch flat screen. You may want more.
Finally, you will need to have a LAN port for proper broadband ac- cess. I actually know of a few people who trade without a high-speed in- ternet connection. They still rely on modem access. I do not recommend that you do it. The market moves too quickly and you want to be able to move with it. Therefore, get a high-speed connection. You can either get DSL through your telephone provider or cable through your cable provider. Just be sure that the service you get is reliable. Nothing is more irritating than being in a trade and having your cable or telephone con- nection go down. You will be scrambling to call your broker to take your trade to the market or check your stops. I’ve been there. You do not want to be. Another option is to have your trading computer custom built. A friend of mine, John Chittenden at www.xview. com, has built several computers for me over the years. He takes all of the guesswork out of what a trader truly needs in a computer.
Get a Trading Platform
Next, you need a trading platform. There are many companies that offer them, and they have a lot of different capabilities and services that may come with them. They also come with a variety of cost structures. Again, shop around and get your best deal. You may be surprised by what is out there.
Once you get a platform, practice using it. For at least a week do simu- lations. Learn how to enter orders and how to exit positions quickly. Some platforms have a flatten button that allows you to exit all of your positions with the click of that one button. Other platforms allow orders to be exe- cuted in a preprogrammed manner. There are all sorts of possibilities.
One of the most common mistakes of traders is making an error with the trading platform. It is so easy to click on the wrong side of the trading dome and sell when you mean to buy or vise versa. That is why you need to practice on your program before you trade real contracts. Do many simu- lations and practice placing orders, changing orders, moving orders, and checking order status. Be sure that you are comfortable with the process and that you are able to get into and out of the market very quickly.
Data Feed
You cannot trade unless you have the correct data. You need a real time quote system that brings you accurate and timely information. Be sure that your data provider can get you the information you need for what you are
trading. Some sources do not offer futures data, others may handle futures but not equities. Some may offer data from domestic markets, but not for- eign exchanges. Be sure that you will get the data that you need.
The cost of data feed depends on what you get. There is a base fee charged by the exchanges so the more you get the more you pay.
It is critical that the data you receive are reliable. There are some sites that offer free data, but it is delayed information. I know of no site that of- fers free real time quotes. You have to pay for it, but it is worth it. You just cannot afford to trade using old data. The markets can move at breath- taking speed and you have to know the real numbers. Also, some data feed providers are just not as reliable as others. Ask around and find out what other traders have to say. Then, select the provider that offers you what you need reliably.
Quote and Charting Program
You may want a quote and charting program that will accept data that you receive. I use RoadMap software. It can create charts and do all sorts of other functions for me like storing data and other things. You probably will want some sort of program. Again, there are a lot of them out there. Re- search and find out what is best for you.
A Few Other Thoughts
In addition to having the right equipment, you need the right time and space.
Find a place that is quiet so that you can concentrate. Trading requires concentration. If you are distracted, you may miss some important data or information. You need to be focused on the task at hand—making money.
Also, day trading profits and losses are governed by specific and par- ticular IRS rules. Therefore, get a CPA who knows about trading and can properly handle your taxes. This is very important so be sure to inquire about the knowledge that your tax preparation specialist has in this area.
CHECK LIST FOR TRADING 1.Decide what you want to trade.
2.Get educated. Learn about the investment of your choice.
3.Open an account.
4.Get a computer that is powerful enough to handle trading requirements.
5.Select a trading platform and spend many hours practicing on that plat- form. Be sure that you know how to enter and exit the market quickly.
6.Purchase reliable data. Be sure that your data are timely and accurate.
7.Find a quote and charting program that meets your needs. This will probably not be free.
8.Allocate time for trading.
9.Locate a quiet place where you can trade and concentrate with a mini- mum of distraction.
10.Be certain that your CPA knows the tax laws regarding day trading and that your tax filings are handled correctly.
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nderstanding and placing orders can be confusing. None of us were born with a mouse in our hands, and it is easy to accidentally enter the wrong type of order or click on the wrong side of the trading dome. Therefore, before you start trading you need to become very famil- iar with order types and you need to practice placing orders in simulated situations. Making mistakes in order placement can turn an otherwise prof- itable trade into a major loser. Every trader has made a mistake by placing the wrong type of order and suffered financially because of it.If you trade different indices simultaneously, you might even enter the wrong market because the domes all look remarkably alike. I remember one day recently when I intended to trade the S&P Index Futures. Don’t ask me how I did it, but I actually placed a trade for Japanese yen. Seconds after I made the trade I realized that something was wrong. It took me a few sec- onds to figure out that I had just bought the yen. I stopped everything else and focused on getting out of that market.
By sheer luck, I actually was profitable on the trade, but even if I had lost money, I would have taken the trade to the market. I never want to be in a market accidentally. I always plan, prepare, and strategize. My point, however, is that even experienced traders make mistakes when placing or- ders. Therefore, it is very important that you learn all you can about order placement and practice the process before you ever begin trading. This will minimize your errors and should help you improve your profits.
Now let’s get down to order placement.
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