PREFACE

Trading has truly evolved since the early days.

Participants have came and gone while newer market instruments have been introduced.

In the early days, retail traders would choose between the bonds, stocks or futures
markets because forex was largely restricted to the huge financial institutions such as the
banks and businesses who have to hedge their risk against their trading activity.

Depending on their risk appetite, traders would go for bonds if they are risk-adverse
while the risk-taking traders would go for stocks or futures.

Futures contracts require higher margin requirement to trade. It is mostly due to this
reason that most traders are equity traders, preferring to buy and sell company stocks.

As the markets evolved, the more established exchanges went global and more exchanges
were sprang up around the world.

Electronic exchange of data between the exchanges both established and new, was
becoming commonplace with the birth of the Internet.

New trading instruments were created to complement bond and stock trading to further
enhance and diversify the portfolios of traders and fund managers alike.

New indices were formed. Instruments like Exchange Traded Funds (ETFs), Single Stock
Futures (SSF), Options for the Equities and Futures were introduced to offer more
choices to the masses.

Rules and regulations changed with newer protocols and infrastructure introduced to
support the development of these newer instruments.

By leaps and bounds, research in science and technology has greatly improved to fuel the
growth and development of the Internet, which in turn supported the explosions in data
exchanged between the various establishments.

Online trading was not only possible but feasible as real-time data could be fed through
all the trading terminals in the world within split seconds.
Brokerages houses began to offer online trading as a viable alternative. One no longer has
to call up his broker to place a trade. With a live Internet connection, one can place their
trade electronically anytime anywhere in the world.

In the last decade, the number of retail and institutional traders exploded.

To meet the demands of the ever-growing trading community, development of the

markets were inevitable.

Electronic Mini futures contracts, simply known as the e-minis were introduced and very
soon, the volume of the electronic contracts surpassed that of the pit-traded futures
contracts.

While the futures markets enjoyed newer developments with the creation of even newer
trading instruments, the forex markets also lowered their barriers-to-entry by providing
the retail traders with similar levels of leverage.

In an attempt to attract the ever-increasing pool of new traders to sign up with them,
brokerage houses began defining their competitive edge. Margin requirements were
lowered with day-trading enjoying the lowest rates. With lower margin requirements,
there is greater leverage. This greatly benefited the day traders because the capital outlay
is greatly reduced, allowing them to buy and sell multiple contracts and accelerate their
wealth creation process.

Mini lots were introduced in place of the standard lots and more recently, micro lots
became the fashion in the forex trading.

With each lowering of trading capital requirements, the leverage available to traders is
enormous.

With so many brokers are now offering e-mini futures trading and micro-lot currency
trading, barriers-to-entry are as good as non-existent.

For once, trading is truly accessible for everyone.

With each trading revolution, a new breed of traders is borned.

And it is no different this time.

Riding on this new revolution is a new era of traders we call The Savvy E-mini Day
Trader.

So why do savvy day traders prefer the e-minis over forex, read on to find out.
 CONCEPT OF RISK MANAGEMENT

SmartMoney Philosophy
TM

Trading Risk is Manageable and is to be managed to be Profitable.

Trading is an endeavour that entails risk.

Unbeknownst to many traders, there are smart ways to mitigate trading risk.

By themselves, they are already potent. When combined, they form an intelligent system
that greatly reduces the high initial risk that many new traders so unknowingly expose
themselves.

Depending on the type of instrument you trade, there are several factors to taken into
consideration for each of the above form of trading.

Amongst which are trend trading, exposure duration, liquidity, volatility and last but
not least, volume analysis.

Let us learn to mitigate risk by exploring and appreciating each of these potent concepts.
 CONCEPT OF TREND TRADING

Money can be made from the markets in a couple of ways.

However, if the objective be to grow a trading account quickly, the most effective way is
to trade with the trend.

To trade with the trend, other simply known as trend-trading, requires market movement
in strong favour of either the bulls or the bears.

SmartMoney Philosophy
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The best trading opportunities exist when there is a strong imbalance in market forces
and once in, a trader should only look to exit when the imbalance is no longer present.

This is only possible if there is strong interest in a particular instrument which means
sufficient trading volume (liquidity) and price swings which are large enough to be traded
(volatility), two other concepts which we will explore later.

The best way to identify price trend is by plotting price on charts and then study the
charts.

This is an old art commonly known today as Technical Analysis.

Knowingly or unknowingly, most traders employ some form of analysis in their trading
endeavour in order to predict the future price of a security or instrument.

To date, the three most common forms of analysis are fundamental analysis, news
analysis and technical analysis.

Let’s begin with news analysis.

Whether you realize it or not, news analysis was the first form of analysis. Since the first
days of trading, there has always been a group of traders who trade based off rumours or
insider information.

Nowadays, with the evolution of the media and the advent of the Internet, there is no lack
of news pertaining to any one company.

Regardless of how our human brain has evolved and developed with improvements in
science, there is still a limit to the amount of information that one can process.

Overwhelmed by the pool of information that bombarded the trader’s mind, subjective,
not objective judgment is made.
Two traders can process the same piece of information and end up with two very
different assessments.

One ends up buying while the other ends up selling.

End result? Emotions get the better of both traders regardless of whether the outcome
agrees with the assessment.

The trader who got it right may close his position too early or too late. Either way, his
profit is curtailed.

The other trader who got it wrong may hold on to his position without rationalizing his
loss, often ending up with accumulated losses over the long term.

How about fundamental analysis?

Conventional wisdom has it that a company’s share price is a reflection of the company
true worth, otherwise known as its intrinsic value.

While the purpose of performing fundamental analysis is to attempt to predict a company

share price based on the above premise, truth is, markets are usually inefficient and there
will always be considerable lag between the actual worth of a company and the market’s
realization of that worth.

Hence, by dissecting a company’s financial reports and looking into key ratios such as
ROE (Return on Equity), ROI (Return on Investments), P/E (Price to Earnings),
fundamental analysts attempt to project what they believe the company share price should
be based on the intrinsic value of the company.

While he or she may be right today in his fundamental analysis of that company, it may
take weeks, if not months, for the rest of the market to realize the true value of the
company and for the company share to reach the projected price.

For one to strongly believe that fundamental analysis is the best form of analysis, the
assumptions are the market is efficient and all the market players are rationale in thought
and action. This is possible if the only market players trading a company’s shares know
everything inside out about the company and its future performance.

On the other hand, technical analysis works on the belief that everything that can affect a
company’s stock price be it fundamentals, economics, demand and supply of the shares
and so on, has already factored into the company’s share price. This belief does has its
merits, considering that all market participants would have to place an order to buy or sell
a particular security and all that market action is captured and plotted on a price chart.
In the early days, the prices of each security have to be plotted by hand on graph paper.
Accuracy of the data was a considerable factor in the success of technical analysis.

Today, with the advent of the Internet and ever-advancing technologies in the computing
realm, all of this data can be easily gathered and transmitted electronically between the
exchanges and plotted real-time on charting platforms split seconds.

Today, all a savvy technical analyst needs to do in order to predict the future price of the
underlying security or instrument, is to load his preferred charting platform to analyze a
price chart.

Everything is updated in real-time and all the technical analyst needs to do is to focus on
applying the right strategy, instead of having to physically plot price by hand.

Over the years, charting has developed in such a way that not only price and volume can
be plotted but indicators that have been developed by famous technical analysts can also
be automatically plotted alongside as price and volume develops in real-time.

Technical analysis is fast gaining ground and becoming the preferred form of analysis for
all traders around the world.

SmartMoney Philosophy
TM

For one to be consistent in trading, one must master trends.

To master trends, one must be well-versed in charts.
That said, the future of trading lies in technical analysis.

All said, fundamental analysis may still be applicable for the large institutional trading
firms who have the finances and time to wait for the market dynamics to work out, in
order to bring a company’s share price to an equilibrium which the institutional trading
firms believe to be a true reflection of the intrinsic value of the company.

For the average retail traders, whose finances are not as deep as the institutions and the
timeliness of information being a critical component to the success of their trading
endeavors, technical analysis is fast proving itself in becoming the ultimate solution for
better near-term accuracy as well as leveling the playing field for all market participants.

Sometimes, it appears that a particular instrument is not suitable for trading because there
is hardly any day-to-day market movement.

However, if one cares to read into the trading signals further on an intraday basis, he or
she may realize that there are countless gems of opportunity waiting to be exploited
almost every day!

This brings us to the next important concept of Exposure Duration.

 CONCEPT OF EXPOSURE DURATION

Exposure duration is one factor that is highly correlated to managing risk.

Depending on the length of duration you keep your positions opened, you may be
classified as one of the following 3 types, a day trader, a swing trader or a position trader.

Day-trading is the act of opening and closing a trading position within the very same day.

In swing-trading, traders seek to open a trading position with the intention of closing it
days or weeks later.

As for position-trading, the plan is to open a trading position, only to close it months or
years later.

The key basic difference amongst the three lies in the duration of exposure to the
markets otherwise known as the duration of keeping your trade positions opened.

Zero Exposure = Zero Risk

And Yet

Zero Risk = Zero Profits

In general, the longer your exposure to the markets, the higher is your risk.
Yet, generally, the higher your risk, the greater the profit potential.

Many traders believe day-trading to be a riskier undertaking than swing or position

trading.

This cannot be further away from the truth.

With no opened positions, whatever happens to the market the very next day between
today’s close and tomorrow’s open will not affect your trading capital.

So how can day-trading be any riskier than swing-trading?

Of course, since the profit potential is directly related to the risk level, and risk is directly
linked to the exposure duration, the profits one can amass from a single position can be
substantially larger if one were to hold it for a longer duration.

Not to mention, commissions accumulated will be much lower in percentage terms.

This is provided the trend is still intact and there are no reasons to exit the trade based on
the trading timeframe of consideration.

Unfortunately, volatility over the years have increased substantially and the buy-and-hold
strategy is getting very outdated. Many have bought and hold for years as position traders
(otherwise known as long-term investors), only to turn winning positions into losing
positions.

Given the relatively higher risk inherent to swing and position-trading and lowered
trading requirements for day trading as more brokerage houses compete for business, it
seems that day trading is the best way to start for retail traders.

I hope this addresses the single most largest misconception that most traders have:
“Day-trading carries the highest level of risk.”

With this understanding that duration of exposure is the key difference amongst the 3
forms of trading discussed, the next question that should come to your mind would be,
“What is the level of commitment I can afford to monitoring my position in the
markets?”

Only you, yourself, can answer this question. No one else can do it for you.

Each one of us has different levels of commitment to ourselves, family, friends and work.

We all live in different time zones as well. Depending on which part of the world you
reside in, day trading may not be a realistic option for many who need to work during
market-open hours.

Therefore, similar to why trading may not be for everyone, day-trading may not be
suitable for every trader.

Since day-trading carries the lowest risk, should you begin day-trading whichever
instrument that you have been swing-trading or position-trading all this while?

To better answer this question, you should ask yourself, “Which market or instrument is
suitable for day-trading?”

Besides duration of exposure, there are several factors to consider as a trader.

Let us explore the concept of liquidity next.

 CONCEPT OF LIQUIDITY

What is liquidity and why does it matter?

Liquidity is a measure of the volume of contracts bought and sold for a particular
instrument.

Why does liquidity matter?

Imagine yourself as a buyer and you want to buy 1 contract. If there are at least 100
floating contracts in the market at any one time, there will hardly be an issue if your
bidding price matches at least the lowest asking price of another seller.

Now imagine yourself wanting to buy 10 contracts. Your price may be right but you need
sellers who are willing to let go a total of 10 contracts at your bidding price. It can be a
single seller who owns 10 contracts and is willing to sell to you at your bidding price or
10 single sellers who owns 1 contracts and are willing to sell to you at your bidding price
or any number of sellers in between the two possible scenarios.

If the average floating contracts in the market is about 100 at any one time, you may find
a little difficulty is getting your 10 contracts. Unless you are willing to buy at any price (a
term we call Market Price), you will get your 10 contracts at any price the market is
willing to sell to you.

This example uses you as buyer. It is no different if you were a seller.

If you are letting go of your contracts at a price above the market consensus, be prepared
to wait for a while for a buyer willing to pay that price. Otherwise, you may not even get
to sell your contracts should your asking price be too high.

This is where Market Makers come into the game.

The role of market makers is to create liquidity. They achieve this by matching the orders
of different buyers and sellers as long as their asking and buying prices does not deviate
too much from the market price.

There are basically 4 ways to make money.

Buy low, sell high

Buy high, sell higher
Sell high, buy low
Sell low, sell lower

If the market makers simply match the buying and asking prices of the traders, then there
is no profit to be made. However, if they were to absorb the buy and sell orders with an
objectivity to turn in a profit or at least breakeven, there is a chance for them to make
money while still fulfilling their roles of creating liquidity in the marketplace.

It is of no question that forex markets offer the highest liquidity. But as a day trader, does
the instrument with the highest liquidity means that it is the best instrument for day
trading?

The answer is no.

Although forex stands for Foreign Exchange, there is no such thing as an exchange on
which forex is traded.

What many traders do not understand is that most forex traders are trading AGAINST
their brokers. Although there is such a thing known as Straight Through Process (STP),
most brokers do not offer that.

There are no regulations and your broker can give you ANY quote. This is also the very
reason why forex quotes are provided for free and some brokers use it as a selling point!

As mentioned, there are several other factors to consider if one has to choose the best
instrument to trade.

Therefore, the question we should ask ourselves is, “How much liquidity do we really
need as a retail day trader?”

As long as the average daily volume for our preferred instrument exceeds 100,000 and
our trade size is not more than 1% of the average daily volume, that instrument passes
our requirement in terms of liquidity assessment.

The e-mini futures pass this requirement with the highest volume belonging to the index
e-mini futures.

Amongst the most popular index e-mini futures are the Dow Jones e-minis, the Nasdaq e-
minis, the S&P 500 e-minis and the Russell 2000 e-minis.

The first 3 are trade on the Chicago Mercantile Exchange (CME) while the Russell 2000
e-minis is traded on the Intercontinental Exchange (ICE).

Of the 4, the S&P 500 offers the highest liquidity, with an average daily volume
exceeding 2 million contracts*.
*(Information from Chicago Mercantile Exchange, as of 19 Nov 2010)
So liquidity for the e-mini futures is definitely not an issue.

However, as trading volume increases over time, liquidity is not the most important
consideration. Let us consider another element in trading, volatility.
 CONCEPT OF VOLATILITY

Volatility refers to the price flunctuations.

Although stocks generally exhibit higher volatility, indexes and exchange traded funds
(ETFs) prove to be a better choice of instrument selection because we will only be
exposed to market risk as opposed to both market risk and company risk.

For a safer approach to trading in general, always look for index or exchange-traded
funds (ETFs), whereby the equity in your trading account will not be greatly affected by
the collapse of one single company.

It is quite uncommon for listed companies to go bust and get de-listed but it does happen
from time to time and you do not want to be one of the unfortunate souls holding onto
such a losing position.

For day traders, trading may be halted should there be a need for further investigation
into the company activities. In a way, this helps to mitigate the risk for day traders in a
way, why subject yourself to such needless worry with an existing position waiting to go
wrong when trading resumes?

Furthermore, for a day-trading to be effective in the long run, you’ll need an instrument
which enjoys better continuity in data between trading days. It is well known that
company stocks, even the blue chips, are subjected to frequent gapping between the close
of one day and the open of the next. As a collective group however, such phenomenon
are less observed.

Once you have selected your instrument, you may then zoom in to further select your
security.

Should one prefer to trade price itself without having to consider the effects of time
decay, index futures may be more appealing instead of index options.

Traders used to be priced out of the futures market even though the futures exhibit higher
intraday volatility and more suitable for day trading as compared to equities.

The good news is that we can have the best of both worlds today.

With introduction of index e-mini futures, we are able to trade equity safely in the form
of indexes and yet enjoy the higher intraday volatility that futures have to offer.

Besides the futures, it is well known that the forex market offers great volatility for
trading as well. Considering between both, why should we settle for one over the other?

The answer lies in our last and most important concept, volume analysis.
 CONCEPT OF VOLUME ANALYSIS

Volume analysis is the art of studying volume in an attempt appreciate price movements
better.

If price is the automobile, volume is the engine.

If price is the engine, volume is the driving fuel.

Without volume, price cannot move.

Once you grasp this important concept, your way of trading changes.

As more traders become aware of this concept, you can be sure that there will be newer
and better ways to spot volumetric patterns and interpret price with volume.

SmartMoney Philosophy
TM

The trader who is able to interpret volume in the most efficient fashion will greatly
increase the odds in his favour and achieve consistency in his trading.

To this end, the forex markets do not qualify. Although it is the largest market in terms of
volume, volume is NOT reflected on the charts.

Thus, even though forex appears to be the top choice for day trading in terms of volatility
and maybe liquidity using STP orders, it still clearly fails on the aspect of volume
analysis which is the ultimate key to understanding price.

Given all the above considerations, it is not hard to see why trading the e-mini futures is
the way to go if you plan to start with a small capital and grow it consistently over time.

SmartMoney is able to help you increase the odds in your favour by studying volume
TM

behind price movements to generate signals with a high probability of generating a

positive return on your trading margin.
 SmartMoneyTM

SmartMoney is a Trade Management Advisory Service.

TM

Trade Management is all about Entry Precision, Stop Loss Placement, Profit
Maximization, and lastly Position Closing.

Every trader is actually a risk manager and Trade Management is just a subset of Risk
Management.

Risk Management comprises of many components besides those of Trade Management.

It also encompasses Market Selection, Instrument Choice, Capital Preservation and
Psychological Balance.

Capital Preservation is about capital allocation and diversification.

Capital allocation must be carried out efficiently without incurring opportunity cost.
While diversification must be done sufficiently to mitigate risk levels without spreading
trade capital too thinly.

Psychological Balance is about balancing the emotional state when you are trading.

While the best traders are detached from their emotions when managing trades, many
others find it hard to control their fear of losing as well as their elation and greed when
they are winning.

Without addressing the key issues from the very onset of a trading career, the trader is
more than likely to be end up disappointed and not to mentioned, a totally spent trading
account.

SmartMoney is able to directly address issues that directly affects Trade Management.
TM

We believe that by guiding you in the aspect of Trade Management, you can then better
manage your own trading psychology and your mind will be freed up to focus on capital
preservation which leads to capital growth and ultimately wealth creation.

Tracking 4 of the more popular US indexes, SmartMoney offers e-mini futures day-
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trading solutions.

To find out if SmartMoney is The Solution for you in your trading endeavour, you are
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invited to read up on the philosophies and concepts behind SmartMoney and sign up for
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a trial today.

Let your journey with SmartMoney begin today.

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