The Traders U E-Letter: Issue # 160
Wednesday, November 9, 2005
Tom Busby: Winning the Day Trading Game…Three Lessons From a 25-Year Veteran Trader
By D.R. Barton, Jr., Chairman, Trader's U
Like many of you, I read about top traders and investors every chance I get. My shelves are full of books that let me peer into incredible minds, both past and present. Folks like Benjamin Graham, Jesse Livermore and, of course, Warren Buffett.
But today, I'd like to introduce you to a new book, Winning The Day Trading Game by Tom Busby. Tom is an experienced trader who has a lot to teach us from his years of trading. And I'd like to highlight three great lessons from his book that all traders and investors can apply.
This Fortune Could Have Used a Risk Management Check-Up
Tom Busby has had extremely useful experiences in his 25 years as a trader. He went from booming success to painful crash, and back to booming success.
The progression that Tom took as a trader is a familiar one for those of us who have read the stories of other top traders - he paid his dues to learn the ropes of the trading game and became very successful.
But his successes led to complacency, especially with regard to risk management. And on Black Monday (October 19, 1987), he had a huge unhedged option position that eventually cost him everything he had - house, car, the works.
But Busby bounced back, both psychologically and materially, from that blowout loss. Even by itself, the story of how he regained his confidence to trade makes his book worth reading.
Fortunately, there are other good lessons in the book as well.
Three Valuable Investing Lessons from Tom Busby
1. Manage risk first, and the rewards will come. I know that we have talked about this many times in Trader's U. But Tom's poignant personal stories help drive home the point and etch it in our brains. Since his Black Monday collapse, Tom has incorporated a wide range of risk management tools in his own trading and recommends them for his students. There are some standard, well-known tools, like using protective stop losses, but Tom also has some twists on managing risk.
One is setting a maximum loss for a given period of time. For a day trader, this might be a maximum 2% loss per day. After that amount is hit, there is no more trading for the day. For a swing trader, this might be 5% per week. For a position trader, perhaps 10% to 15% per month. The exact percentages aren't as important as the concept. And limiting daily, weekly or monthly losses is especially important when you're just starting to trade or learning a new system or strategy.
2. Importance of the yearly opening price. Busby puts a lot of emphasis on the yearly opening price for any instrument he trades, whether it's an index future, a commodity or a stock. When an instrument is trading above its yearly opening price, this is bullish in the big picture. And when the price is below the yearly opening price, this is a bearish indicator.
You can find the yearly opening price in all commercial charting packages. If you don't have access to a charting package, you can always use Yahoo! Finance (www.finance.yahoo.com). Just enter the symbol in the box at the top of the home page. This will bring you to a quote. On the left-hand side, click on "Historical Prices." From there, you can scroll back to the yearly opening price for the stock or index you're interested in.
3. Study a market and know its characteristics before you trade or invest in it. This is a very common sense item, but it is amazing how many people ignore this simple rule. Many people act on a piece of news and never even look at the key points about the stock or commodity before buying it. Some great questions to ask are (some of these are Tom's, some are mine):
- What is the daily volume? Will I be able to get in and out easily when I need to?
- What is the daily range? Is this a volatile or well-behaved instrument?
- What moving averages does this instrument "respect"? In other words, what moving average does it follow in up-trends and down-trends?
For example, in Busby's study of the gold market, he has found that the 65-day moving average is very important. In fact, he has a longer-term (six to 25 weeks) strategy for trading gold that uses the 65-day moving average. But he would not have found this relationship if he didn't study the characteristics of the gold market for many years.
Despite the fact that it is a day trading book, I recommend it for all traders and investors because:
- It allows us to peer into the mind of a successful trader
- It has many concepts that are useful regardless of your trading time frame
- In the strategy section, it has useful tactics for managing your mutual fund portfolio and longer-term trades in stocks, gold and oil futures, and other investment vehicles.
Because I know some of the key people in Busby's group, they have a special offer for Trader's U readers on his book, Winning the Day Trading Game. If you click on this link: http://www.dtitrader.com/signup/2005/amazon.asp, you can buy the book at Amazon and get two bonuses:
- A well-written special report: Insider Tips to Navigating the Financial Markets
- A month's subscription to Tom Busby's live trading chat room
Today's TU Tips & Tricks
- My favorite Warren Buffett biography is also written by one of my very favorite financial writers - Roger Lowenstein. His book is called Buffett: The Making of an American Capitalist, and can also be found on Amazon.
The Chart of the Week
In the chart above, we see that venerable DuPont (NYSE: DD) has bumped up against resistance in the $43.40 area. It has also not yet filled the gap made back in July. With a confirming MACD, if DD breaks above $43.50, it should have the momentum to make a 10%-plus move to the upside. (Disclosure: Please note that I worked for DuPont for 15 years and my wife is still an engineer for the company. She owns DD stock and options through employee plans and bonuses.)
- Investment Books: What To Read-An Investment U Classic
- Investing Books: Dr. Mark Skousen & Dr. Steve Sjuggerud detail below their recommended list of top investing books of all time.
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