discipline for
The success that a trader achieves in the markets is directly correlated to one s trading
discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is
very simple:Trade with discipline and you will succeed; trade without discipline and you
will fail.
I have been a trader and member of the Chicago Board of Trade (CBOT) for 20 years.
During my successful pit-trading career as a scalper, I traded in three different contract
markets: 30-Year Treasury bonds at the CBOT, the S&P 500 at the Chicago Mercantile
Exchange (CME) and the Gilts at the London International Financial Futures Exchange
(LIFFE). Currently, I also trade the electronic $5 Dow futures contract on the CBOT as
time permits.
Although my formal academic education consists of a bachelor s degree in business
administration from the University of Denver, I never considered myself to be an
extremely gifted student. I have no formal training in market technical analysis. I m
unable to even set up a Fibonacci study or Moving Average study on a charting pack-
age, let alone know how to trade with such data. I have no formal training in market fun-
damental analysis. I don t understand the economic causal relationship between the
actions of the Federal Open Market Committee and Treasury bond prices or equity
prices.
How, then, have I been able to succeed, day after day, trading the markets for more than
20 years? The answer is simple: I trade with discipline, and I respect the market. When
I m wrong I get out immediately, and when I m right, I don t get too greedy. I m content
with small winners and I m accepting of small losers.
Just as I now mentor my trading clients regarding performance, discipline and
profit/loss management, I was mentored by one of the best traders ever to set foot on
the CBOT trading floor, David Goldberg. David was a long-time spread scalper in the
wheat pit and a principal of Goldberg Bros., at the time one of the largest clearing firms
at the CBOT, CME and Chicago Board Options Exchange (CBOE). David taught me the
rules of trading discipline. I listened to his guidance and gradually, over time, became
more and more successful. The student has now become the teacher.
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
THE
25-POINT
MANTRA
day trading
By Douglas E. Zalesky
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
Precise Trading Feature
loss of thousands of dollars. A trader can ruin his entire day with an
The Wheel of Success
inadvertent trade entry error.
There are three spokes that make up, what I call the Wheel of Success
as it relates to trading. The first spoke is content. Content consists of Once you have mastered order execution, though, it is like riding a
all the external and internal market information that traders utilize bike. The process of entering and exiting trades becomes seam-
to make their trading decisions. All traders must purchase less and mindless. Fast and efficient trade execution, espe-
value-added content that provides utility in making cially if you are trading with a scalping methodology,
their trading decisions. will enable you to hit a bid or take an offer before
your competitors do. Remember, the fastest sur-
The most important type of content is internal vive.
market information (IMI). IMI simply is time
and price information as disseminated by the The third and most important spoke in the
exchanges. After all, we all make our trading Wheel of Success is discipline. You must
decisions in the present tense based on time attain discipline if you ever hope to achieve
discipline
and price. In order to scalp the markets any level of trading success. Trading disci-
effectively, we must have the most live and pline is practiced 100 percent of the time,
up-to-date time and price information seam- every trade, every day.
lessly delivered to our PCs through a reliable
execution platform and/or charting package. Review the following 25 Rules of Trading
Without instantaneous time and price informa- Discipline. You must condition yourself to
tion, we would be trading in the dark. behave with discipline over and over again. Many
of my traders and clients read through the rules every
The second spoke is mechanics. Mechanics is how you day (believe it or not) before the trading session begins.
access the markets and the methodology that you employ to It doesn t take more than three minutes to read through them.
enter/exit your trades. You must master mechanics before you can Think of the exercise as praying reminding you how to conduct
enjoy any success as a trader. A simple keystroke error can result in a yourself throughout the trading session.
All good traders follow this rule.
Trading with discipline will put
THE MARKET ALWAYS
# #
Why continue to lose on five lots
more money in your pocket and
PAYS YOU LOWER YOUR
1 3
(contracts) per trade when you
take less money out. The one
TO BE TRADE SIZE
could save yourself a lot of
constant truth concerning the
DISCIPLINED. WHEN YOU RE
money by lowering your trade
markets is that discipline =
TRADING
size down to a one lot on your
increased profits.
POORLY.
next trade? If I have two losing
trades in a row, I always lower my trade
size down to a one lot. If my next two trades are profitable, then I
move my trade size back up to my original lot size.
It s like a batter in baseball who has struck out his last two times at bat.
The next time up he will choke up on the bat, shorten his swing and
Being disciplined is
try to make contact. Trading is the same: lower your trade size, try to
BE DISCIPLINED
#
of the utmost
make a tick or two or even scratch the trade and then raise your
EVERY DAY, IN EVERY
2
importance, but
trade size after two consecutive winning trades.
TRADE, AND THE MARKET
it s not a some-
WILL REWARD YOU. BUT
times thing, like
DON T CLAIM TO BE
claiming you quit
DISCIPLINED IF YOU ARE
a bad habit, such as We have all violated this rule.
NOT 100 PERCENT NEVER TURN A
#
smoking. If you However, it should be our goal
OF THE TIME. WINNER INTO A
4
claim to quit smoking to try harder not to violate it in
LOSER.
but you sneak a cigarette every the future. What we are really
once in a while, then you clearly have not quit smoking. If you trade talking about here is the greed factor.
with discipline nine out of ten trades, then you can t claim to be a dis- The market has rewarded you by moving in the direction of your posi-
ciplined trader. It is the one undisciplined trade that will really hurt tion, however, you are not satisfied with a small winner. Thus you hold
your overall performance for the day. Discipline must be practiced on onto the trade in the hopes of a larger gain, only to watch the market
every trade. turn and move against you. Of course, inevitably you now hesitate and
the trade further deteriorates into a substantial loss.
When I state that the market will reward you, typically it is in rec-
ognizing less of a loss on a losing trade than if you were stubborn and There s no need to be greedy. It s only one trade. You ll make many
held on too long to a bad trade. Thus, if I lose $200 on a trade, but I more trades throughout the session and many more throughout the
would have lost $1,000 if I had remained in that losing trade, I can next trading sessions. Opportunity exists in the marketplace all of the
claim that I saved myself $800 in additional losses by exiting the time. Remember: No one trade should make or break your perform-
bad trade with haste. ance for the day. Don t be greedy.
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
co
nt
ent
mechanics
Too many new traders think that
Keep a trade log of all your trades
YOUR BIGGEST EARN THE
# #
because they have $25,000
throughout the session. If, for
LOSER CAN T RIGHT TO TRADE
5 9
equity in their trading account
example, you know that, so far,
EXCEED YOUR BIGGER.
that they somehow have the
your biggest winner on the day
BIGGEST
right to trade five or ten e-Mini S&P
is five e-Mini S&P points, then do
WINNER.
contracts. This cannot be further from the truth. If you can t trade a
not allow a losing trade to exceed those
one lot successfully, what makes you
five points. If you do allow a loss to exceed your biggest gain then,
think that you have the right to trade a
effectively, what you have when you net out the biggest winner and
10 lot?
biggest loss is a net loss on the two trades. Not good.
If you have a
I demand that my students show me a
proven
trading profit over the course of ten
methodology
I require my students to actu- consecutive trading days trading a
DEVELOP A
but it doesn t
#
one lot only. When they have
ally write down the specific
METHODOLOGY
6
seem to be
market prerequisites (set- achieved a profitable ten-day period,
AND STICK WITH IT.
in my eyes, they have earned the right working in a
ups) that must take place in
DON T CHANGE
to trade a two lot for the next ten trad- given trading
order for them to make a
METHODOLOGIES
ing sessions.
trade. I don t necessarily
session, don t
FROM DAY
care what the methodology is,
go home that
TO DAY.
Remember: if you are trading poorly
but I do want them to make sure
night and try
that they have a set of rules, market set- with two lots you must lower your
to devise
trade size down to a one lot.
ups or price action that must appear in order for them to take the trade.
another one.
You must have a game plan.
If you have a proven methodology but it doesn t seem to be working
in a given trading session, don t go home that night and try to devise
You are not a loser because
GET OUT OF
another one. If your methodology works more than one-half of the #
you have a losing trade on.
YOUR LOSERS.
10
trading sessions, then stick with it.
You are, however, a loser if
you do not get out of the losing
trade once you recognize that the trade is no
good. It s amazing to me how accurate your gut is as a market indica-
In all of my years as a trader
BE YOURSELF.
tor. If, in your gut, you have the idea that the trade is no good then it s
#
I never traded more than a
DON T TRY TO BE
7
probably no good. Time to exit.
50 lot on any individual
SOMEONE ELSE.
trade. Sure, I would have
Every trader has losing trades throughout the session. A typical trade
liked to be able to trade like col-
day for me consists of 33 percent losing trades, 33 percent scratches
leagues in the pit who were regularly trading 100 or 200 lots per trade.
and 33 percent winners. I exit my losers very quickly. They don t cost
However, I didn t possess the emotional or psychological skill set nec-
me much. So, although I have either lost or scratched over two-thirds
essary to trade such big size. That s OK. I knew that my comfort zone
of my trades for the day, I still go home a winner.
was somewhere between 10 and 20 lots per trade. Typically, if I trad-
ed more than 20 lots, I would butcher the trade. Emotionally I could
not handle that size. The trade would inevitably turn into a loser
because I could not trade with the same talent level that I possessed
with a 10 lot.
Once you come to the realization
THE FIRST
#
that your trade is no good it s best
LOSS IS THE
11
Learn to accept your comfort zone as it relates to trade size. You are
to exit immediately. It s never a
BEST LOSS.
who you are.
loser until you get out and Not to
worry, it ll come back are often said
tongue in cheek, by traders in the pit. Once the phrase is stated, it is an
affirmation that the trader realizes that the trade is no good, it is not
Never put yourself in the pre-
YOU ALWAYS
coming back and it is time to exit.
#
carious position of losing
WANT TO BE ABLE
8
more money than you can
TO COME BACK
afford. The worst feeling in
AND PLAY THE
the world is wanting to trade
NEXT DAY.
and not being able to do so When I was a new
DON T HOPE AND
#
because the equity in your account and undisciplined
PRAY. IF YOU DO,
12
is too low and your brokerage firm will not allow you to continue trader, I can t tell you
YOU WILL LOSE.
unless you submit more funds. how many times that I
prayed to the Bond god. My
I require my students to place daily downside limits on their perform- prayers were a plea to help me out of a less-than-pleasant trade posi-
ance. For example, your daily loss limit can never exceed $500. Once tion. I would pray for some sort of divine intervention that, by the
you reach the $500 loss limit, you must turn your PC off and call it a way, never materialized. I soon realized that praying to the Bond
day. You can always come back tomorrow. god or any other futures god was a wasted exercise. Just get out!
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
Precise Trading Feature
I have never understood why Please review rules #5, #8,
DON T WORRY NEVER TAKE
#
so many electronic traders # #10, #11 and #15. If you
ABOUT NEWS. A BIG LOSS. ONLY
13
17
listen to or watch CNBC, follow any one of these
IT S HISTORY. A BIG LOSS CAN
MSNBC, Bloomberg News or rules you will never violate
HURT YOU.
FNN all day long. The talking rule #17.
heads on these programs know very little about market dynamics and
market price action. Very few, if any, have ever even traded a one lot Big losses prevent you from having a winning day. They wipe out too
in any pit on any exchange. Yet they claim to be experts on everything. many small winners that you have worked so hard to achieve. Big
losses also kill you from a psychological and emotional standpoint.
Before becoming a trading and markets expert, the guy on CNBC It takes a long time to get your confidence back after taking a big loss
reporting hourly from the Bond Pit, was a phone clerk on the trading on a trade.
floor. Obviously this qualifies him to be an expert! He, and others, can
provide no utility to you. Treat it for what it really is& . entertainment.
When I was a young bond trad-
MAKE A
#
The fact is: The reporting that you hear on the business programs is er, my goal every day was to
LITTLE BIT
18
old news. The story has already been dissected and consumed by the make 10 bond tics. A tic is
EVERYDAY. DIG
professional market participants long before the news has been dis- $31.25, so if I made 10 tics
YOUR DITCHES.
seminated. Do not trade off of the reporting. It s too late. on the day, I would be up
DON T FILL
$312.50.
THEM IN.
It may not sound like a lot of money to you, but it surely was to me.
In all of the years that My mentor, David Goldberg, told me that if I could make 10 bond tics
DON T SPECULATE.
#
I have been a trader every trading day of the year, at the end of the year I would be up
IF YOU DO, YOU
14
and associated with $72,500 in my trading account. Not bad for a 23-year old kid in 1982.
WILL LOSE.
traders, I have never met a
successful speculator. It is impossible to speculate and consistently It is amazing how quickly your trading account will build up over time
print large winners. Don t be a speculator. Be a trader. just by making a little bit every day. If you are a new e-Mini S&P trad-
er try to make just 5 or 6 points per day. If you can do that you ll have
Short-term scalping of the markets is the answer. The probability of a that $72,000 at the end of the year.
winning day or week is greatly increased if you trade short term: small
winners and even smaller losses.
Just as I don t know of
HIT SINGLES
#
any successful specu-
NOT HOME RUNS.
19
lators, I don t know of
This rule is the one that I get any trader who goes into a
LOVE TO LOSE
#
the most questions and feed- trade expecting to hit a home run and then actually having it happen.
MONEY.
15
back on by traders from all You should never approach a trade with the idea that it s going to be a
over the world. Traders ask, huge winner. Sometimes they turn out that way, but the times that I have
What do you mean, love to lose money. Are you crazy? a hit a home run on a position is most definitely luck, not skill.
No, I m not crazy. What I mean is to accept the fact that you are going My intent on the trade was to produce a small winner but, because I
to have losing trades throughout the trading session. Get out of your had the trade on, and at the same time (as luck would have it), the Fed
losers quickly. Love to get out of your losers quickly. It will save you unexpectedly entered the market, I unwittingly had a huge winner.
a lot of trading capital and will make you a much better trader. This probably has happened to me less than five times in 20 years.
How nice is it to be
CONSISTENCY
#
This rule relates to the able to turn on
IF YOUR TRADE
BUILDS CONFIDENCE
20
#
theory of capital your PC in the
IS NOT GOING ANY-
AND CONTROL.
16
flow. It is trading morning knowing
WHERE IN A GIVEN
capital that pushes a that if you play by the
TIMEFRAME, IT S
market one way or Rules, trade with discipline and stick to your methodology, the proba-
TIME TO EXIT.
another. An oversupply or bility of a successful day is high.
imbalance of buy orders will push the
market up. An oversupply of sell orders will push the market lower. I ve had years where I could count on one hand the number of losing
days that I had. Don t you think that this consistency allowed me to be
When price stagnation is present (as typically happens many times extremely confident? I knew that I was going to make money on any
throughout the trading session), the market and its participants are given day. Why would I think otherwise? Making a little bit everyday
telling us that, at the present time, they are happy or satisfied with the (Rules #18 and #19) will allow you to trade throughout the trading ses-
prevailing bid and offer. sion with confidence and control.
You don t want to be in the market at these times. The market is not going Remember Rule #9: If you make a little bit every day, then you have
anywhere. It is a waste of time, capital and emotional energy. It s much earned the right to trade bigger. Thus, by following the Rules of
better to wait for the market to heat up a little and then place your trade. Discipline, your little bit can soon turn into much more profitable days.
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
The net effect of
LEARN TO SWEAT
#
scaling out of your
OUT (SCALE OUT)
21
winners will be an
YOUR WINNERS.
increased average
win per trade while keeping
your losses to your pre-defined risk parameters.
I can t tell you
how many times
You should never scale out of your losers. If your trade size is more than
traders have
a one lot and your trade is a loser, you must exit the entire position en
come into my
masse. If your trade size is more than a one lot and your trade is a win-
office terribly
ner, it is best to exit one-half of your position at your first price target.
depressed
because they
If you trade with protective stop-loss orders, you should amend the
knew the
order to reflect the change in trade size (remember you have exited one-
market was
half of your position) and raise or lower the stop price, depending on
going one way
whether it s a long or short position, to your original initiating trade
or another;
entry price. You now are essentially playing with the house s money.
however, they
You can t lose on the remaining position, and that s obviously a fantas-
failed to put a
tic position in which to put yourself. Place a limit order a few tics above
position on.
or below the market, depending on your position, sit back and relax.
A bricklayer shows
MAKE THE SAME
up for work
TYPE OF TRADES OVER
#
every day of his
22 AND OVER AGAIN
working life and We all start out
ALL TRADERS ARE
BE A BRICKLAYER.
#
executes with the the day the same.
CREATED EQUAL IN
24
same methodology We all start out at
THE EYES OF THE
brick by brick by brick. zero. Once the bell
MARKET.
rings and trading begins,
The same consistency applies to traders, as well. Please review Rules it s how we conduct ourselves from a behavioral standpoint that
#6 and #20. I have not changed my trading methodology and execu- will dictate whether or not we will make money on the day. If you
tion strategy in 20 years. I guess I m the bricklayer. follow the 25 Rules, you should do well. If you do not, you will
do poorly.
I can t tell
DON T OVER-ANALYZE.
you how
# DON T PROCRASTINATE.
many times The market moves
23
DON T HESITATE. IF YOU IT S THE MARKET
#
traders have wherever it
DO, YOU WILL LOSE. ITSELF THAT WIELDS
25
come into my wants to go. It
THE ULTIMATE SCALE
office terribly does not care
OF JUSTICE.
depressed because they knew the market was going one way or about you or me. It
another; however, they failed to put a position on. When I ask them does not play favorites. It does
why they did not put the trade on, their responses are always the same: not discriminate. It does not intentionally harm any one individual.
they did not want to chase the market. They were waiting to be filled The market is always right.
at the absolute best possible price (and never got filled), or only two
out of three of their You must learn to respect the market. The market will mercilessly
market indicators were punish you if you do not play by the Rules. Learn to condition
present and they were yourself to play by the 25 Rules of Trading Discipline and you will
waiting for the third. be rewarded.
A bricklayer shows up
for work every day of
The net result of all
his working life and
this procrastination
executes with the
and hesitation is the Doug Zalesky is CEO of eLocal, L.L.C., www.elocaltrad- SFO
same methodology
trader was correct in ing.com. ELocal provides physical and electronic execu-
brick by brick by brick.
deducing market direc- tion, brokerage and clearing services to all major futures
tion but his profit on and equities exchanges. They service electronic Internet
the trade was zero. We traders, floor traders and institutional trading firms. For
don t get paid in this business unless we put the trade on. Don t over- additional information on the firm and Doug s 25 Rules of
analyze the trade. Place the trade and then manage it. If you re wrong, Trading Discipline please contact Doug at
get out. But you ll never be right unless you actually make the trade. doug.zalesky@elocaltrading.com
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. " 3812 Cedar Heights Drive " Cedar Falls, IA 50613
Precise Trading Feature
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