Strategies for the Electronic Futures Trader

"What was once the domain of the pit broker in commodities is now open and available to all traders."

With that opening line, Jake Bernstein throws down the gauntlet. Strategies for the Electronic Futures Trader is a valuable resource and reference work for traders who want to trade futures online-using computerized strategies and order entry to control their own financial destiny-but who need to sharpen their skills and methods. Whether you're an experienced futures trader, or an electronic stock trader looking for new challenges and profit potential, Strategies for the Electronic Futures Trader explains how you can quickly understand and take advantage of intraday and short-term price swings in Treasury bond, stock index, and currency futures. Jake Bernstein, veteran futures trader and author of The Compleat Day Trader, The Compleat Day Trader II, and other no-nonsense investment tomes-tells you clearly what hardware, software, and data you'll need. He reveals specific systems, methods, and indicators designed to spotlight profit opportunities, packing each page with valuable information to keep you one step ahead of the electronic futures markets.

"Change equals opportunity."

And never before has the opportunity been better for serious, knowledgeable futures traders to make the jump to the screen. Jake Bernstein delivers a step-by-step program that gives you:

Eight factors critical to the success or failure of an electronic trader
Special chapters on managing risk and honing your trading psychology
A systematic, disciplined trading approach-integrating hardware, software, and data
Guidelines to develop your own methods and trading systems
Strategies to structure winning futures trades in bull, bear, and sideways markets

In addition, Strategies for the Electronic Futures Trader looks into the next generation of trading systems being developed. It discusses the role of advanced computer theories like artificial intelligence -and neural networks in the future of electronic day trading and tells you what to ask and what to watch for.

"While the rewards of day trading are clearly there, they are not there merely for the taking. Work, experience, persistence, and good trading techniques are necessary if one wants to reap the rewards."

Start to reap the rewards today. Since immediate order execution and instant knowledge of price fluctuations have become a reality, there simply are no more exciting profit opportunities than today's electronic futures trading market.

And Jake Bernstein can show you how. Filled with electronic futures trading tips and pointers-plus explicit details on trend following systems, breakout systems, market pattern systems, and support/resistance methods-Bernstein's latest guidebook, Strategies for the Electronic Futures Trader, will help all futures traders make a successful, confident, and permanent jump to the computer screen.

Contents

Preface ix
Acknowledgments xiii

Introduction

The Changing Landscape of Stock and Commodity Trading 3
Affordable Computers and Data and the Revolution in Day Trading 4
The Declining Role of the Pit Broker 5
Opportunities in Increased International Market Volatility 6
The Risks and Rewards of Short-Term and Day Trading 7
Factors Affecting Success or Failure as an E-Trader 9
Is Electronic Futures Trading Right for All Futures Traders?, 11
Do You Have What It Takes to Succeed as an E-Trader? 12

1. Short-Tenn Futures Trading: An Overview 13

The Traditional View of the Short-Term Futures Trader 13
Economic Importance and Significance of the Pit Broker 14
Advantages of Contemporary Short-Term Trading 15
The Pros and Cons of Day Trading 15
Day Trading, Discipline, and Persistence 19
The Electronic Short-Term and Day Trader 23
The Game Called E-Trading 23
Sad Fact of the Game: Your Chances of Success in Trading 27
Enter the Electronic Age of Trading 33
Advantages and Disadvantages of E-Trading 35
The Scope and Limits of Computerized Trading 37

2. Mechanical Requirements 38

How Much Computer Power Will You Need? 38
The Pace of Progress: How Requirements Will Change 39
Coming Advances in Computer Hardware 39
Data Storage and Retrieval 40
The Dos and Don'ts of Data 40
Selecting a Historical Database 45
Record-Keeping Methods and Procedures 46
Brokerage Accounts 46

3. Software Requirements 48

A Multiplicity of Choices 48
Categories of Trading Software 48
Trading-System Software Versus Market-Analysis Software 49
How to Determine What's Right for You 50

4. Systems, Methods, Techniques, or Seat-of-the-Pants 53

What Is a Trading System? 53
Assets and Liabilities of E-Trading Without a System 57
The Lure of E-Trading Methods and Techniques 59
Dynamic Systems Versus Static Systems 60
Do Markets Have Personalities? 61
Personality Characteristics of the Futures Markets 62
The Intuitive Approach to Market Evaluation 63
A Brief Overview of Markets by Their Personality Traits 68
System Adaptivity to Changes in Market Personalities 79
Seat-of-the-Pants Trading: Assets and Liabilities 80
The Psychology of Trading the News 81

5. Characteristics of Effective Short-Term Trading Systems 85

Determining If a Trading System Is Likely to Be Effective 85
Average Winning Trade and Average Losing Trade 88
Average Trade (Win and Lose) 89
Evaluating a Trading System 90
The Good and Bad News About System Testing 90
Optimization: Tips and Strategies 93

6. Basic Categories of Trading Systems 95

Trend-Following Systems 95
Breakout Systems 98
Market Pattern Systems 99
Support and Resistance Systems 100
Artificial Intelligence (AI) Systems 101

7. Two Trend-Following Strategies for the E-Trader 104

The Essence of Trend-Following Systems 104
The Parabolic System for Short-Term Trading 105
The Momentum System: Jake's MOM/MA 112

8. Two Market Pattern Systems 120

The Open/Close Oscillator System: Short-Term Version 120
The S&P Day-of-Week System 126

9. Two Breakout Systems 133

The Channel Break System: Short-Term Model 133
The Range Breakout System 139

10. Two Support and Resistance Methods 140

Computerized Short-Term Trading with Support and Resistance 140
The 3/3 High/Low Channel Method 142
The Momentum and Moving Average (MOM/MA) Method 144
Numerous Trades 153
Conclusions 153

11. Trading Example: The MOM/MA 154

12. Additional Methods and Issues 160

Systems, Methods, Indicators, and Techniques: Similarities and Differences 160
System Testing and Optimization: Friend or Foe? 163
A Rational Approach to System Development 168
Market Sentiment 169
Accumulation Distribution Derivative 171

13. How to Capitalize on Market Volatility 174

Techniques to Capture Volatile Intraday Market Moves 174
Bull and Bear Market Strategies 175
Unexpected News 176

14. Aspects of Risk Management and Portfolio Development 180

The Myth of Small Stop Losses 180
The Good News/Bad News Stop Loss 180
Smaller Stops Equal Smaller Profits 181
Side-by-Side Comparison 181
Trailing Stop Losses 182
Position Size and Profits 184

15. Artificial Intelligence (AI) and Neural Network (NN) Systems for E-Trading

The Goals of Al- and NN-Based Systems 185
What to Look For in an NN System 187
What to Ask and What to Watch For 188

16. Practical Trading Considerations

Trader Psychology and Short-Term Trading 191
Some Thoughts on Trader Discipline 194
Would You Like to Lose Money Trading Futures? 197
Emotions Versus Markets, History, and You 200
A Few Cogent Rules for E-Traders 202
The Psychology of Trading Systems 205
Discipline-Maximizing Profits, Minimizing Losses 209
Overcoming Losses 216
The Principles of Learning 218
Other Considerations for the E-Trader 222

Afterword: The Future of Electronic Trading 226
Appendix: Sources and Suppliers of Trading Software, Data, and System Development Software 228
Readings and References 230

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