We were recently asked the following question by one of our customers.  It’s situation that all new traders face, but few actually ask the question before really diving in.  Our answer comes from years of experience developing and trading (successfully and not-so-successfully) a large number of strategies across many instruments.  We hope this “real life” advice will help our readers become and remain successful traders.


I am a Quality Engineer living in California and am very interested in starting active day trading as second job and in case of consistent results switch to this as a full time job. I have a strong knowledge background in statistics. I have done some DOE and regression modeling related to my quality engineering job. I have been reading some books on technical analysis and how to read charts and indicators, etc, but I am at a stage that I feel lost and frustrated (I have made some unsuccessful trades that haven’t helped).  I am very interested in the concept of automating my trades to generate consistent profits. What is your recommendation for me? How should I restructure my approach so I can  take advantage of my technical/mathematical knowledge in order to improve my trading? I am on the verge of giving up but have a feeling this is a very good field for me and gives me the freedom I need. Your advice would be very appreciated.


As an engineer you’re on the right track.  All new traders (and most old traders!) go through multiple periods of losses.  The people who ultimately succeed take time off between big losses to rebuild capital and try something different — maybe it’s refining their strategy, fixing trading behavior issues, enhancing risk management, or finding a trading coach to help (we highly recommend this).  Learning to become a consistently profitable trader is an occasionally painful process and you should be OK with “giving up” periodically to see if trading really works for you.

The thing about trading is it is 100% psychological.  It immediately brings out the unconscious human tendencies toward the fear and exhilaration — it’s an ingrained cycle that we cannot escape.  That is why it is extremely difficult to follow a strategy, and why it is critical to have a structured strategy (automated or not) that you follow.

Here is what we have learned that works:

1) Trade much smaller size than you think — at least 50% of your original size and often 10% of the original size.  Get good at making a small amount of money first, then learn to manage your position sizes based on risk:return.  Trading small keeps you in the game long enough to learn and improve.  It will take you 2-3 years to get consistently profitable, and you will still make mistakes, but it’s like riding a bicycle — learning takes a while and hurts but the skill can be leveraged for a lifetime.  Keep a long term view.

2) Ignore company-specific news and opinions of all types.  There is nobody that knows what the market is going to do or why it did it.  It is for you to find and take advantage of patterns, not somebody else.

3) The most reliable strategies are based on short term reversals and surges in money flow.  In other words, pullback swing strategies and breakout strategies.

4) If like to bet on reversals at support/resistance points:  Buy or sell very small lots at your expected reversal points, then build on winning positions and exit losing positions quickly.  Never go all-in at a point where you think the market will reverse.

5) If you play breakout strategies:  Buy or sell 1/2 your desired position size on the breakout, and the second 1/2 once the position is in the money and another good entry point (breakout or pullback) appears.  50% of breakouts fail, so you want to be small on entry and quick to exit if price goes against you.

6) Never walk away from your strategy.  If you’re day trading, never go to the bathroom, take your dog for a walk, etc. while you have a position on.  Never go on vacation without closing out your positions.  Falling asleep at the wheel WILL lose you big money, guaranteed.

7) Don’t quit your day job until you have 1 full year of salary in the bank.  Even if you are a great trader, strategies can become ineffective for a long time and it’s easy to make big mistakes and lose a lot of money.  Making a living by only trading becomes 10x harder to succeed because the psychological stress of having to make money ruins your balance and makes you take too much risk.

8) 10% of your trades will make 90% of your profit.  You don’t know which trades, so you have to take all of them.  Give winning trades plenty of time and room to develop, then add to them as they go your way.  This is the difference between a trader who is moderately successful and a multi-millionaire. But remember, you still need to manage your risk even if a trade is going your way.  Set trailing stops, etc. so you don’t give back all the big money you earned — never let a big winning trade turn into an investment!

9) Traders sometimes “anger trade” after losing several times in a row.  This always happens when the person is tired or emotionally distracted.  You need to be centered to trade well.  It happens a lot when the market changes and your strategy gets out of sync with prices — this naturally causes a string of losses and the resulting psychological reactions of anger and frustration.  The solution to anger trading is to reduce your position size to 1/10 the original position.  This takes all the pressure to “win” off and allows you to keep trading and regain your confidence.  Many gurus say it’s best to walk away from trading for the day or week, but this just fixes the failure in your mind (aka “anchoring”) and doesn’t teach you how to recover your mojo.  Keep trading.  Get back on your bicycle or horse.  Dramatically reduce your position size until you can string together a good run of small wins again.  Your trading mojo will come back.

10) Have a second or third project going on (money-making or not) that is positive, has flexible hours and is completely different than trading.  Write a book.  Start a part-time gardening business.  Learn to surf.  Volunteer to help the elderly. Whatever.  Otherwise trading will completely consume your life and you won’t know what to do when your trading strategy isn’t working — you will end up forcing it to work and that’s when you lose a lot of money.

11) Find an analogy for trading well.  If you played baseball try using the analogy of a “strike zone” and different types of hits.   Look for pitches (trade opportunities) that you have hit consistently well and match your strategy.  Go for singles and doubles.  Sometimes you will hit a home run but it’s only when everything lines up perfectly.  If you don’t get a good pitch then don’t trade that opportunity.  You can do the same thing with golf — keep the ball in play, be conservative, use a driver only when the wind and terrain is in your favor.  Using an analogy with any activity involving probabilities — soccer, hockey, surfing, fishing, dating — will teach you to look for your strategy’s “sweet spot” and stick with it.  It’s also good for reviewing and scoring your past trading or system performance.

12) Look at the chart upside-down.  Does it still look like a good risk-return opportunity?

13) Only take trades with a 3:1 return-to-risk ratio or greater.  Risk is determined by your stop.  Return is determined by your target.  Both can be based on patterns or statistical analysis.   Common techniques include volatility multiples (ATR, standard deviation, etc.), chart patterns and Fibonacci retracements/extensions.  Do the risk:return math BEFORE you take the trade.

14) Use 3 different strategies on completely different assets.  Diversify by time frame — long term, mid term and short term.  Split your money 3 ways and then split it again by position so no more than 1/10 of your money is in any given trade.

15) Never try to create the “perfect system”.  That’s for quant programmer geniuses with the most sophisticated tools working for big institutions.  Stable and reliable systems are not necessarily great systems.  Use reliable and simple strategies that are easily understood and tested.  One simple trend pullback system applied on different time frames to different asset classes combined with an effective position sizing strategy may be all you need.  You can enhance your returns over time by trading the equity curves of each system.  When a system isn’t working well, you can reduce the capital allocated to that system or stop trading it until it works again.  We call this the “symphony” approach.  Essentially you’re treating your systems as investment opportunities and allocating capital to them the same way a portfolio manager allocates capital to certain investments in a watch list.  It’s not your systems — it’s how you use them — that will make you a successful trader.

16) Shorter time frames mean you lose money faster. They are also more random and cause information overload (which causes reversion to bad habits).  If you can’t make money swing trading daily bars, you will certainly lose money trading 5 minute bars.

17) Never trade options.  Ever.  The odds are massively against you and the bid-ask spreads are a mile wide.  Time value decay (or unlimited losses if you’re selling options) will murder you.  (NOTE:  This rule is for beginning to intermediate traders.  There are obviously valid reasons to trade options and they can be highly profitable, but the average trader can make a great living without ever touching options.  They are complicated to manage and strongly favor quantitative and financial modeling skills that most traders don’t have.)

18) Never day trade Forex mini accounts.  You’re trading against your broker’s arbitrage machine, not in an open market.  We have never seen a mini forex broker’s price chart match the prices at which trades are actually executed.  If you trade forex, do so on a longer time frame and at small size, and assume the bid-ask spreads will be significantly wider than those shown on any chart.

19) Never use futures to leverage up.  Either maintain a significant cash collateral balance, trade with mini futures or just trade the cash underlying or ETF if you can.  High leverage and the limit up / limit down market liquidity triggers on many futures contracts will kill your account eventually.

20) Never think your Internet connection will be 100% up all the time.  Have a backup wireless connectivity or trade longer time frames to give you time to find another computer.  This is really important for automated trading.

…and one more:  Read the Edwin Lefevre book “Reminiscences of a Stock Operator” about the 20th century trader Jesse Livermore.  It will teach you how the markets and money flow actually work.