How I Trade for a Living I . . . WILEY ONLINE TRADING FOR A LIVING Electronic Day Trading to Win/Bob Baird and Craig McBurney Day Trade Online/Christopher A. Farrell Trade Options Online/George A. Fontanills Electronic Day Trading 101/Sunny J. Harris How I Trade for a Living/Gary Smith II . . . How I Trade for a Living Gary Smith III . . . This book is printed on acid-free paper. Copyright © 2000 by Gary Smith. All rights reserved. Published by John Wiley & Sons, Inc. Published simultaneously in Canada. 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If professional advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data: Smith, Gary, 1947 Apr. 21– How I trade for a living / Gary Smith. p. cm.—(Wiley online trading for a living) Includes bibliographical references and index. ISBN 0-471-35514-3 (cloth : alk. paper) 1. Electronic trading of securities. 2. Investments. I. Title. II. Series. HG4515.95.S57 2000 332.64'0285—dc21 99-38492 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 IV . . . Nicholas Darvas. Your trading methodology had a big impact on an impressionable 14-year-old in 1961. Bruce Babcock. I will be forever appreciative of everything you did for me. My parents, Sidney and Esther Smith. And, of course, Sandy and the gang— Bandit, Whitney, Beige, Lover Girl, Samson, Tomas, and King. V Contents Acknowledgments ix Prologue A Typical Trading Day 1 Introduction 5 Chapter 1 Help for a Desperate Trader 9 Chapter 2 Dreams of Easy Money 17 Chapter 3 The Futures Market Beckons 23 Chapter 4 Almost Down for the Count 31 Chapter 5 Putting it All Together 41 VI Chapter 6 Why the Stock Market? 45 Chapter 7 Trading is a Profession 51 Chapter 8 Perceptual Trading Filters 61 Chapter 9 My Favorite Indicators 67 Chapter 10 Technical Indicators 91 Chapter 11 Monthly Seasonality 103 Chapter 12 The Nitty-Gritty of Trading 111 Chapter 13 Money Management 151 Chapter 14 Trading Mutual Funds 155 Chapter 15 Trading Junk Bond Funds 183 Chapter 16 Trading Stock Index Futures 193 Epilogue Strictly Personal 229 Recommended Resources Reading and Researching Your Way to Success 231 Endnotes 241 Index 249 VII . . . Acknowledgments The three people who helped me most with the charts in How I Trade for a Living deserve special recognition: Bob Miller of Foremost Futures, Chicago, Illinois; Jonathan Matte of Defender Capital, Portland, Oregon, and, most especially, Janet Boivin for her time and patience. Special thanks also to Carl Swenlin at DecisionPoint.com, Eric Calvert at Caveland.net in Glasgow, Kentucky, and John Bollinger CFA, CMT of Bollinger Capital Management and Equitytrader.com. My editor Pamela van Giessen and her assistant Mary Todd are to be commended for effectively dealing with my frustrations during the writing of the manuscript. Michael Detweiler, managing editor at John Wiley & Sons, and Ginny Carroll, of North Market Street Graphics, deserve special mention for their professional handling of the day-to-day production of my book. VIII . . . Prologue— A Typical Trading Day Many traders would be disappointed at how I spend a typical trading day. It's not glamorous nor is it bone-chillingly exciting. That's fine with me because I don't trade for a living for either the glamour or the excitement. I do it for the money and the freedom it brings me. Prior to 1996 I lived out west in Reno, Nevada. Since that time I have lived in the cave-and-cow country of south central Kentucky. The town I reside in reminds me of something out of a 1960s sitcom—like Andy Griffith's Mayberry. After all, our county sheriff is named Barney and the guy who runs the local body shop is Goober. But I digress. I don't get up in the morning until the 9:30 (sometimes later) opening of the stock market. What can I say? Ever since my childhood I have been a late riser. When I lived out west I never slept well knowing I had to be up for the 6:30 A.M. PST opening. Everyday I battled constant fatigue. Since living in the east, I'm always refreshed. However, I do set my VCR to begin recording CNBC at 8:00 A.M. I try to be up by the 9:30 opening since the first 50 minutes of trading often sets the tone for the day. The action of the futures during that time period can often portend how the rest of the day will unfold. It's also during this first 50 minutes of trading that I'm most alert to any developing strength, weakness, or divergences that may be evident on the tape. 1 . . . I'll eat my breakfast/lunch at 10:30 A.M. and review my CNBC tape for any relevant news or interviews I missed during the 1 1/2 hours prior to the market open. After that quick review, I begin recording again. I always have my recorder running during trading hours and the two hours after the close. I don't want to miss anything. Around 11:00 A.M. , I turn on my computer and check my e-mails and what's going on in some of the newsgroups. I then check the foreign markets at Yahoo.com and the portfolios of any funds I may be trading or thinking about trading at Quicken.com. This is something I do throughout the trading day. I also check how the various industry groups are performing at the www.dailystocks.com Web site. It's important for me to know each day precisely where the action is in the market. Between 12:00 and 3:00 P.M. I try to sort out the moves I will make in my funds. Almost every day involves a constant adjusting of my trading positions. Will I add or decrease my exposure to the market? I stay in close contact with the CNBC ticker tape throughout the day. I'm sensitive to the slightest changes occurring intraday between the Dow, Standard & Poor's (S&P), the Nasdaq 100, and the Russell 2000 indexes. I am not glued to the TV screen during the trading day until 3:00 P.M. Prior to that time I will shower and if necessary run an errand or two to the bank, post office, or grocery. If I do go out, I play back my tape upon returning to check the behavior of the market while I was gone. It's important that I stay in synch with the daily rhythm of the market. In the old days I couldn't trade without reading my Wall Street Journal and Investor's Business Daily as soon as I got up. Now that I trade primarily pure price action (momentum and divergences), I don't read these papers until much later in the trading day. Between 3:00 and 4:00 P.M. it's showtime, especially the last 30 minutes. This is the home stretch and I have to get ready to make my move before the close of trading. Going into the last hour, I always have some idea of the moves I will be making at the close. In the last hour I'm completely focused on the tape, the stocks in my portfolio, and the action in the various indexes. It's during the last hour that I formulate an exact trading plan, detailing how much and into which fund. There is usually a fake-out move, albeit slight, in the market between 3:30 and 3:45. I call this the Rydex jiggle. The market likes to confuse the Rydex timers, since their orders have to be in before 3:45. I call INVESCO between 3:50 and 4:00 P.M. It can get hectic if I also 2 [...]... strategies and philosophies presented in How I Trade for a Living will enable you to better understand price action to exploit that momentum How I Trade for a Living will detail as precisely as possible all the trading techniques I use to trade for a living More than that, it will be a distillation of everything I have learned over a 33-year trading career—the good, the bad, and the ugly I must be doing... credentials are for writing a book about the realities of trading for a living I' m a professional home-based trader whose trading passion is the stock market Trading for a living was a dream of mine ever since 1961 when I was 14 years of age and read Nicholas Darvas's book, How I Made Two Million Dollars in the Stock Market 1 The road to successfully trading for a living was bumpy and filled with numerous... mental rigors of trading One of my fatal trading flaws was thinking I could get rich overnight by taking my small trading stake and turning it into $100,000 instantly My get-rich-quick trading mentality, coupled with limited trading capital, caused me to violate many of the trading principles I had learned from Darvas and Livermore While I was in college, my main problem with trading was fear of giving... Two Million Dollars in the Stock Market Although only a high school freshman at the time, I decided after reading the Darvas book that my destiny in life was to trade for a living To this day, it remains my favorite trading book of all time Nicholas Darvas was a professional dancer His introduction to the stock market came in November 1952 when he was given stock in a Canadian mining company in lieu... potholes I stumbled blindly for 19 years as a part-time 9 and break-even trader with a trading account that fluctuated between $2,000 and $4,500 My epiphany as a trader came in March 1985 After nearly 20 years of dreaming, wishing, and praying for trading success, it finally fell into place for me Since the spring of 1985, my trading capital has steadily increased without interruption At the time of... one financial positive that came out of the late 1970s for me I went to work on a part-time basis as an insurance investigator for Equifax Services in 1978 This was a job that paid well and gave me the flexibility to watch the market at my leisure It was also a fun job and one at which I was very competent Frustrated at my continual inability to profit from trading futures during the 1970s, I decided... extended period of time using real money How I Trade for a Living details techniques and strategies based on actual trades over many years This book also stands as evidence that successful home-based trading is within the grasp of the average trader Everyone has read about the trading exploits of the well-known market wizards and other superstar traders But upon closer examination, you will notice that most... trading materials were well received within the trading community As a result, I received numerous invitations to speak at trading seminars and was profiled in several national trading publications Much of the notoriety resulted not so much from how much money I made as a trader, but from my trading consistency Over a 10-year period, I rarely encountered a losing month I garnered additional publicity... Mid-America corn market In my Mid-Am corn trade I didn't place a stop, since I figured such a small position couldn't hurt me much if prices went against me But I was definitely hurt as I watched the market slowly erode day after day, and I ended up losing a significant amount of money before I closed out the trade The positive result was that never again would I make a trade without setting a stop-loss... has exceeded $2,000 I trade according to the philosophy that wealth accumulation involves a systematic and disciplined compounding of trading capital over time As capital accumulates and compounds each year, so will trading profits Never in my wildest dreams did I ever imagine my capital would compound to such a degree that I would be cranking out $196,000 in annual returns, as in 1998 I apologize for . Online/George A. Fontanills Electronic Day Trading 101/Sunny J. Harris How I Trade for a Living/ Gary Smith II . . . How I Trade for a Living Gary Smith III . . . This book is printed on acid-free paper. Copyright. credentials are for writing a book about the realities of trading for a living. I& apos;m a professional home-based trader whose trading passion is the stock market. Trading for a living was a dream. momentum. How I Trade for a Living will detail as precisely as possible all the trading techniques I use to trade for a living. More than that, it will be a distillation of everything I have learned