Tom's website can be found at ElectronicLocal.com.

Tim: Hello everybody and welcome back to TraderInterviews.com. Thanks very much for joining me for another interview. Today, we're going to be speaking with Tom -- Tom from ElectronicLocal.com. We're going to talk to Tom about how he approaches the markets and finds good opportunities in his overall way and approach to the markets. So Tom, thanks very much, first of all, for being on the phone with me.

Tom Barton:Thank you very much for talking to me, Tim.

Tim: All right. Now, you're calling from France but you're Australian. So do you trade, first of all, US markets or European markets? What do you do?

Tom Barton:I trade primary the US market because they're really the market that drive the world. I do trade some of the Eurex markets as well, the EURO STOXX 50, and the bond to a certain extent. When I was on the trading floor, the bond was a live market and that was my main market on the floor.

Tim: So do you consider yourself a day trader, a swing trader? What type of time frame do you look at?

Tom Barton:I'm a very short-term day trader. I look to catch the troughs to peaks and the peaks to troughs of the range bar charts that I trade from. And when I hit those areas where I think the market is hitting on those points, I get out and I look to reenter the market either in the same direction if it's with the trend or against the trend.

Tim: The type of time frame chart that you use and what you put on the chart kind of describe a garden variety everyday chart that you like to use.

Tom Barton:I'm very, very specific and I use the same thing all the time. I have virtually one chart that I use plus a market profile chart for the context. So I have a garden variety of market profile chart on the side and the chart that I trade from is a range bar chart. Typically, for the E-Mini I would use a five-tick range bar chart and on it I would have two moving averages, a 33 and a 99 exponential, which are really the center of my universe because that's really -- the 33 mainly it's almost like a VWAP but it's the center of value at any particular time. And to catch momentum I use 45 CCI and a 6 or a 9 CCI and I look at either play between those. I've got a longer term momentum and a shorter term momentum, and when I can get them to line up then I'm going to trade. And of course, the order flow I use Market Deltas, Volume Breakdown and I also use some of the inside bar stuff when I'm at a critical point. So that's kind of where -- what I'm looking at.

Tim: Yeah, excellent. Now, the 99 EMA, exponential moving average, I have not heard a lot of people use the 99 -- actually, or the 33. How did you come about using those?

Tom Barton:I think I was -- the old Woody Schrumann, that's the guy they called GB who used the 34 EMA, and that turned out to be a very, very critical thing I think in respect in about 1999, about 12 years ago and I like the 33 but I can't remember why. It seemed to me fit me a bit better, and the 99 is just three times the 33 so it's kind of giving you the trend of another time frame but on the same chart so that you can see a slightly better view of the longer term trends.

Tim: So is it a simple -- beginning to look for a trade when that shorter term 33 EMA starts to cross above the 99 EMA?

Tom Barton:No, it's not quite like that. What I'm looking for is I'm looking for the market to change direction, and I can identify that partly from the relationship between the two EMAs and also from the way that the momentum looks on the two CCIs. And then what I'm looking for is I'm looking for the volume and the way that the market is actually trading to confirm that.

Tim: And the CCIs, I know a lot of people are using those as their momentum. Did you try other things like MACD and some things like that that would help as well?

Tom Barton:I never use that. I was a member of CompuTrac back in about 1979 and Don Lambert came along to our little group and introduced the CCI back then. So I've used it in those times. And the other thing that I looked at was the stochastic because George Lane who invented the stochastic was also a member of the group. So they were my two main indicators that I've been using back -- what is it now? 30 some years.

Tim: And the five-tick chart, that pretty short-term, how many trades a day do you find your indicators in your style give you?

Tom Barton:It's a five-tick range bar chart.

Tim: Oh, I see.

Tom Barton:So it's not just a five-tick chart. So I'm looking to create -- well, it depends on the E-Mini you probably I get in the hours that I trade from which is 7:00 London time until about 5:00 p.m. London time, I can probably get about 8, 9, 10 trades. I also trade the Euro currency future and you're getting a lot of trades out there at the moment. For the last few months it's been a real, real money maker because there a lot of movement and a lot of good tradable movement.

Tim: Fundamental analysis at all, do you follow the news? Do you care what a certain stocker chart is doing in the news?

Tom Barton:When I get up in the morning, I start off by envisioning where the market is trying to go that day and what the market is going to do, and that envisioning process is very, very important because to have a feeling or try and create -- maybe the word "bias" is a little bit wrong but to try and create a feeling of when people are bullish or bearish in the E-Mini or the currency that I'm trading is very, very important because it gives me some sort of a starting point for the day. And when I sit down and I look at the news, I look at what the charts did overnight in Asia, and from that I yield up a feeling for what the market feels and from there I try and look at my chart and say, "Okay, what is the low and the high going to be in the next few hours?" And I start off with that as a bias and that is a way to look for trades, and then I try and match those with support and resistance on the market profile. So from that point I then look at the specific news but I just look for a feeling to help my vision.

Tim: Let's talk a little bit more about how you implement market profile. The last couple of interviews we've done, traders have talked more about market profile. How does that fit into your strategy?

Tom Barton:It's very, very important from the point of view of giving me a slightly bigger picture of the market. I learned profile from Peter Steidlmayer back in the mid '80s and I could never make a goal of it as a standalone way of trading. And so I only buy and incorporating it with the timing from my bar charts that I've found it to be a wonderful, wonderful tool because the profile by itself for me is -- I just don't understand how to use it for timing specifically by itself. But the areas of support and resistance of where to do business is very, very critical and the market profile really shines a light on those.

Tim: So it helps you decide where other traders are lining up to buy or sell it sounds like or where those areas are that might be good for opportunities.

Tom Barton:Yeah. Well, for example, today when the E-Minis opened in real-time, it opened right on the bottom of yesterday's value area. Now, for me that was a very critical point because that was an area where I would want to buy it. There was also a gap between the yesterday's close and today's open so that was a trade that I try and do every day. When I line that with the order flow that I was getting from my range bar chart the two matched perfectly and I bought the bottom of the value area and I wrote it all the way up to the top of the value area which is a wonderful trade. I think it was -- how many tick points was that? It looks like it was something like a five-point trade which is nice. If I can make five points on a trade, I'm really almost done for the day.

Tim: I always ask about goals too so that's a good indication of what some of your goals are for the day. But let's talk about setting stops and profit targets and how you decide where those should be placed.

Tom Barton:Stops, I don't stop myself out as a monetary stop. I have a drop dead stop in the market all the time, but it's something that's very, very rarely hit. What I look for is I look for support and resistance areas to be breached and I look at what the market is doing around those areas, and then I stop myself out manually before it hits my actual drop dead stop. As far as target is concerned, if I've got a reasonable expectation of a move, it's very important for me to scale out because I want to be taking money off the table as I go along because I've got no clue whether it's going to make my target. This whole concept of risk/reward or I know what my risk is but I've got no idea what the reward will be, I know what I hope it will be. So as the market moves towards what I hope is a target, I'll be scaling out a quarter or a third of my position as I go because I've got a wonderful opportunity. If the market doesn't quite get to my target and pulls back, it may allow me to buy back what I've scaled out and then have another go out if the order flows in the direction I wanted to go. So out of the one move sometimes you can make an extra 50% of it out of your position.

Tim: Let's talk just a little bit about how you got to the level of confidence that you have with trading. I get e-mails all the time saying, "Can you ask the trader how long it took them to become confident in their strategies and kind of what path they took to get there?" Were you the type of trader that tried a bunch of indicators and settled on this particular strategy or did you start with this from the beginning? How did that kind of work for you?

Tom Barton:At first, I lost a lot of money like everybody else did. I mean you don't become successful trading until you pay your dues. So I lost a lot of money. To me the big thing -- I was trading before I went down on the trading floor onto like in the mid '80s and to me the floor is really what made me understand how the market worked and to really understand order flow and really actually what happens in trading. I think it's a huge disadvantage if you don't understand that. And once I did that and then when I came off floor, I had a fear of realignment and because to try and get the same information that I was getting in the pits, I had to try and find a way of seeing the same thing on the screen and that took a bit of doing too. So it was kind of I guess trial and error and the markets didn't change and what worked for a while doesn't anymore because they got sophisticated and more volume and they're quicker and high frequency trading came in. And these are all things that you need to incorporate into what you are doing and you need to kind of do it as in a seamless way as you're going along but be aware that the markets are doing things slightly differently.

Tim: Now, how would you recommend somebody who's not a floor trader and won't be a floor trader to try and get that same knowledge? What should they be doing?

Tom Barton:I think you really need to get somebody to teach you. I think people have the expectation of learning this business just by watching. It's like deciding I'm going to be a brain surgeon and then try to find a body you can cut open. You know, the logical thing it doesn't matter what you do in life. If you can get somebody to teach you how to do it, you'll do it more quickly. So to me is to find a good mentor who can teach you to do that because that's really the way to shorten that learning curve. Sure you can learn it by yourself, but it's going to take years and years and years. I was just reading a book called "Outliers" just recently and the guy that wrote that thinks it takes 10,000 hours of practice to master something. And I think that that's possible in trading, but I think you can only do it in that 10,000 hours which is about three to five years if you really have a good training, a good mentor. It took me a lot longer to be really proficient and I did it by myself.

Tim: Would you say that knowing order flow or watching order flow is the foundation? Is that the most critical thing that people need to master before they even start to use moving averages, CCI, anything like that?

Tom Barton:I think you need to understand order flow. I don't know if you can see it so easily because especially now with the way that the electronic markets can hide exactly what's happening. You can really see the footprints of the order flow. You might see it all very critically and immediately in the way that you would expect to. On the floor, we could see when somebody was selling whether he was selling at the bid or hitting the ask. You could see it happen. Now, when you're trading electronically, if somebody's masking what they try to do and he's selling but he's trying to sell at the offer and he's just sitting there and trying to sell it into a strong market, you need to be aware that it's not all selling has been hitting the bid. So a lot of that stuff is getting hit and then with all the iceberg, orders, and things like that where the size is reduced, you don't see the same sort of thing as you would expect. But you can see the footprints of what happens because in the end the orders will move the market and you can see it in the speed of the market, how quickly bars form, the momentum, and all of those things. So you need to watch more than just the actual ticks in the volume by itself. You need to incorporate that into a view of what I call the quotes they are doing.

Tim: You've been very generous in laying out exactly what you watch on a chart and once in a while I get e-mails from listener who says, "I put everything on the chart that that person talked about and I looked at it and I just didn't see the same trades." So how does somebody can proficient even knowing exactly what you do and looking over your shoulder? It's difficult to duplicate it on your own trading system. Is there anything people can do to kind of get better at that or to mimic that and have that work for them?

Tom Barton:I've been programming my methodology into a trading program for myself. So what I now do is I can watch more markets and I have the computer who follows exactly the rules that I have in mind to put a trade on and then it executes the trade for me and puts it on so I don't miss it. Then the alarm goes off and then I can manage the trade manually or I can let the computer keep on managing it. So if you're wanting to learn how to trade, if you can find the rules that people use, all the methodology people use and put it into a very simple program in an easy language or one of the other things that non-programmers can use, you can then have an expert looking over your shoulder that is guiding you can sim trade that and learn by doing it that way. I think sim trading is very, very important for a new trader. You need to build up that muscle memory. You need to really be able to do this whole thing in your sleep before you even risk real money and until you can make money in sim trading, you'd be very foolish to try and risk any money at all because if you can't make it in sim, you can't make it in real.

Tim: Now, you give us the tick chart, the tick range bars that you use and the 33 and the 99 EMA. Can you talk about some of the rules? I know it -- we may not have enough time to go through all of them, but can you give us a general idea of what your system rules are?

Tom Barton:I have two types of trades. Everything falls into two types, either inside out or outside in. An inside out trade is you're looking for the market to thrust in a direction, pull back, and then thrust again. So I'm trying to buy the second thrust after the pullback so I can see which way the trend is going from the indicators I've got on my chart. I look for the push in the direction of the trend. I wait for the market to pull back, and when it starts going you get in the direction of the trend I get onboard. I align that very clearly with areas on my market profile chart or other areas on the actual range bar chart and I use that as my support and resistance line to trade against and it creates a very, very simple methodology and you can see very clearly if you're wrong and you can see very easily if you're right.

Tim: Those pullbacks that you mentioned, those are pullbacks in the area of value on the market profile or into a moving average, the 33 or the 99?

Tom Barton:Yep, exactly. Very, very simple. If you can keep it really simple and no complexity then you make it a lot easier for you because trading is a simple thing. It's not an easy thing but it's a very simple thing, and we overcomplicate it by trying to make it too difficult. You don't have time for difficult. When you're trading you need to make lots of decisions in a short period of time, and you may not be able to completely process the information if you've got too much work to do. So if you can make it simple then you can do it.

Tim: I like that. It's simple but not easy.

Tom Barton:Yeah.

Tim: That pretty much describes it.

Tom Barton:What I mean is -- and I think the most amazing thing is that people see the possibilities and they think it's something they can take money out of and compete against all of the people who are trading against them just because they turn up. And this is a business like nearly any other business, turning up is it's about.

Tim: And you mentioned another trade, the second one, the outside into in, I think is what you said.

Tom Barton:Yes, the outside in trade is really a responsive trade. It's when we're fading the market really down on the floor. That's what really we're doing. We were supplying liquidity so we would be fading every move. Well, you know, you don't want to fade every move. You only want to fade a move when you think you're going to make money out of it. So I try and find the areas again market profile wise where I can find the support and resistance that I can use to lean on. And if I use those areas, I know very quickly if I'm wrong. So I'll use those areas to put an outside in trade and if that area breaks then I know that I'm wrong and I kept my position. Again, very, very simple.

Tim: What are some of the things that would tell you that a move is good to fade because it's going to turn?

Tom Barton:Well, what I look for is I'll put on maybe a quarter or half of a position the first time it gets there anyway because when a market gets to a support or resistance that is a real support or resistance, usually the first time it will hold. So then once I've got the position on there, then I've got time to see if I can get more on. And if the market pulls back or bounces too quickly, at least I've got some of my position on.

Tim: Are you going for a specific percentage of winning trades? Do you know what your percentage at winner to loser is?

Tom Barton:Yeah, my percentage at the moment is somewhere between 70% and 80%. A high percentage winning trades are hugely, hugely important. I think that if you don't have a high percentage of wining trades, it's very, very difficult to reach consistent profitability. The idea of having 30% of your trades to be winners and 70% losers doesn't work for most people because after the third or fourth losing trade in a row you just won't put on that next trade as winner. So to me the real heart of what I do is a very, very high win rate. Now, to achieve a very, very high win rate, you need to be very, very specific and trade in the areas where you have the highest percentage chance of making a profit. And to find those areas requires lots and lots of testing. So I use computers a great deal to test what I do, to validate what I do, and before I make any grave change I go through that same process again so that I know ahead of time whether I'm going to successful or not. You know, the past is a very good guide to the future. The markets basically are very, very much the same. You know, the internal, the dynamics of it will change but the psychology of the market is very, very much the same. So that side of it doesn't change. So if you can create a methodology that you have back tested and that you know what your results are likely to be and if you've got the discipline to follow it, then you'll be successful.

Tim: Yeah. The issue I think with a lot of the back testing is that traders don't take every single trade that the back test does ,and so the results differ because they had discretionarily decide "I'm not going to take this one. I'm going to take this one." And so the results differ afterwards. Do you then if you see signal are you taking that trade every single time to make sure that it matches your back testing results?

Tom Barton:Well, what I've moved to now is the computer will do it automatically for me. So once I turn that computer on, I've got that trader whether I want it or not then I'm just going to manage it. So that is a very good way of forcing yourself to take every trade. You don't need to let the computer manage it. I call it hybrid trading where the computer puts the position on then you mange it manually. That can be -- you can even improve your profitability because the computer will take trades where the context doesn't quite match what you want. It may make you one or two ticks but it's the wrong trade. Well, when you're managing it manually you can see, "Uh, this is a trade I shouldn't be in," and you can cut it and the win right will be improved and also the actually profitability.

Tim: Businesses, everybody does projections about goals of the money they want their company to make, how much profit they're going to have this year. We all do projections. It seems in trading though people don't always set goals. They say, "Well, if I trade well, the money will just come." But do you set goals for yourself? Do you want to make a certain amount of money every year, every month, every week even?

Tom Barton:I do things on a daily basis. Once I've made a certain amount of money, I may just stop for the day. I try not to work too hard. I think you need to work smart. And the big risk you have is every time you put a trade on, you're assuming risk. Now, even though you say, "Okay. I've got a 70% or 80% win rate," if you're trading, you get tired, you make mistakes. Lots of things can happen. So if you've made a certain amount of money that you say, "Okay. For so many contracts I want to make certain amount," and if you think that and you think that it's enough then I stop. Other times when the market is really running in one direction then you just got to keep on hammering it because it's a great opportunity. But on the normal sort of day where the market is rotating backwards and forwards, you don't need to do that. The goal here is not to be sitting in front of a computer all day. The goal is to use the market as a cow that you can milk and then you can feed your family.

Tim: How about on the other side, if you lose so much on a certain day, will you quit for the day?

Tom Barton:Usually not because if I'm in a hold I feel confident I can dig myself out of it. So in those cases, I don't. I tend not to do that unless I have done something really, really stupid or something mega like a flash crash or something catches you the wrong way around.

Tim: If you had to go back and start over again, one of my favorite questions is always, what did you do that you think really took your trading to the next level? I guess these are two separate questions. What would you do differently if you had to start over again today? And then was there anything you did do that you thought that really helped? Knowing that and understanding that or l earning this process really took my trading to the next level.

Tom Barton:Well, the first thing that I would do is I would learn from somebody. I think I have the height of arrogance to believe I could just start trading. The very, very first trade I made when I think I was 18 or 19 years old, I was in Australia. I was at a university and I bought a stock in a company called, I think it was Brooker, Inc. and they made boats. I think I bought 100 or 200 shares and I made 15% on the trade, and I thought I was the king of the world. And that was really a bad thing for me because I thought it was really easy and it isn't. So I think it's like anything else. You need to learn how to do it and you need to find somebody to teach you. So that's the first thing that I would do differently. I wouldn't burn my own money to learn. And what is the second part of your question?

Tim: The second part was, was there anything you did do that really worked well that when you learned it or you added this to your strategy it really helped and took you to the next level and made you money?

Tom Barton:Yeah. I think going down on the floor was the thing that did it for me. I think that was really the big electric light because I got a deeper understanding really of order flow and really how the markets worked. And I think that the people -- as the floors disappear, people won't have that, I guess if you've never had it and you start understanding how order flow works just from an electronic market, then maybe you'll get a different view. But I think what you need -- people need to understand is how does this market work? What makes the market and why does a trade that is identical to the one you made money on, why will it be a loser today? And to understand things like that. And once you understand that then you can make money.

Tim: All right. We'll finish up with these two questions. Do you have a recent trade even today or yesterday or last week or even last month that you can describe that was a winner, one that worked out, and why you think it worked out and then maybe one that didn't work out and how that went? Maybe we could start with the good news first, the winner. Do you have one that you can kind of describe for us, how to set up and everything?

Tom Barton:Yeah. The one I spoke about a little earlier is the real-time E-Mini opened up. There was a gap between the opening price and yesterday's close. The market opened right around 13, 14 area which was right at the bottom of yesterday's value area low in the market profile. So I was ready to buy the market. On my range bar chart was just sitting in between the two moving averages. It pulled back down right onto the value area and bounced off it, and the moment it started doing that I went long. The market rallied up. It got to the point it's controlled on the market profile at about 16 1/2 where I exited half the position, and I wrote it up to the top of the value of yesterday to 18 1/4 where I got out of the rest. Normally, on a trade like that I would have scaled out more but I was also very, very confident that the market was going to go high because the tone was very, very bullish. And as I said, the vision that I try and create in myself is very important and my vision was that the market would be stronger. I didn't think it was going to be as strong as it turned out to be but then I didn't know Mr. Mubarak was going to quit. But the tone was there all along today. So that was the winning trade. Losing trade, I think there was something in the Euro today. Today, I traded pretty well. I'm just trying to think -- normally, what the types of losing trades I have are more trades where the set-up is very, very good. It looks exactly the same as every set-up I have had. And then what happens? Somebody who is a big hand comes along and takes the opposite position. That's really all you need. It only needs the day to come along and do the opposite of what you are doing and that's exactly the same trade set-up that looks so terrific and it was so perfect yesterday just won't work, and that's how you have losing trades. So for me the important thing is to put the trades on or have the computer put them on for me and be there for the trade. If I've done that and even if it's elusive, then I'm still being successful because I have been disciplined. The bad thing is to start trying to cherry pick a trade because if you've got a trade that works a percentage of the time, you don't know which ones are going to be winners and losers. I haven't got a clue where that market is going to go when I put my trade on. That's where I scaled out. So the important thing is to get the trade on. One of the few things the Peter Steidlmayer taught me that really stuck in my brain back since the '80s is just put the trade on and then manage it. That was very, very important advice for me.

Tim: Peter's last name again, repeat that for me. What is it?

Tom Barton:Steidlmayer

Tim: Steidlmayer

Tom Barton:He's the -- yes, S-T-E-I-D-L-M-A-Y-E-R. He's the guy that invented market profile.

Tim: Got it.

Tom Barton:He made a gift of it to the Chicago Board of Trade and it's a completely different way of looking at the market. And suddenly it's got resurgence now and everybody is beginning to get interested in it again which is a great thing.

Tim: Tom, you've been very patient with my questions. I really appreciate that. You've got a website called ElectronicLocal.com. What do you do there?

Tom Barton:Well, I chronicle the -- I started teaching my daughter how to trade and that's how the website came in to being. And then so many people started watching it and then wanting to learn that I started teaching them and keeping it going for that purpose. And we've got a reasonable number of people who come and visit every day, and I try and post trades and let people learn. The feedback I've gotten from lots of the people, it has been working for them so that's great.

Tim: That's excellent. We will link to that in the transcripts of today's episode. Tom, thanks very much for taking the time to talk to us today about your strategies and what you use in your charts and being very specific about that. I really appreciate that, and you've been generous with your time too. So thanks and best of luck.

Tom Barton:Great. Thank you very much, Tim.