Bernstein, All About Day Trading

Jake Bernstein, who already has more than 44 books to his credit, is back with yet another: All About Day Trading (McGraw-Hill, 2013). It’s written for the novice who wants to try his hand at trading stocks and/or futures intraday.

Some of the advice, such as not to trade with a delayed quote feed, is directed at those whom I would unkindly call dim bulbs. But most of Bernstein’s dos and don’ts (mostly don’ts) are not only good tips for beginners but useful reminders for those traders, and not just day traders, who have amassed more experience than profits.

Bernstein advocates what he calls the STF (setup, trigger, and follow through) trading model. The setup is a testable algorithm—no subjective, “look like” patterns allowed here. The trigger can be defined in terms of a technical indicator, preferably one that’s not bounded since indicators that have upper and lower limits, such as RSI and Lane’s stochastic indicator, give too many false signals. Follow through includes both managing risk and maximizing profit. Exits, in the author’s view, are less mechanical than entries.

Bernstein offers some specific examples as they relate to the STF trading structure. For instance, trading with gaps, an open-close moving average method, a moving average channel method, and a 30-minute breakout method.

A key chapter deals with trade management. Bernstein argues that “every trade you make must have a predetermined stop loss, as well as a predetermined first profit target.” (p. 109) How does the trader set his stop loss and profit target? “The stop loss for each trade must be a function of the underlying system” and/or market volatility, “not just a function of what you can afford to risk.” (p. 110) Six tables illustrate his point. Each shows the same trading strategy with different stop loss amounts: $500, $1000, $1500, $2500, $4000, and no stop loss. “Note,” he says, “the significant improvement in performance as the size of the stop loss increases. Note also that the stop loss size eventually reaches a point of diminishing returns, at which an increase in the stop loss no longer improves performance commensurately.” (p. 111)

As for profit maximization, big money is made in the big move; “80 to 90 percent of your money is going to be made on 10 to 20 percent of your trades.” (p. 118) Trading more than one lot, preferably multiples of three, “allows you the flexibility of taking in some profits … and holding some profits for the anticipated large move.” (p. 111)

Bernstein also touches on the “higher”-frequency trading that is available to the retail trader. He describes some futures trades he himself made using one-minute charts to generate trading opportunities during established trends.

All About Day Trading is, as the title indicates, quite comprehensive. It’s a very good place for the novice trader to start.