Archive for January, 2010

Your Emotional Day Trading Outlook Can Be Terminal

By , 15 January, 2010, No Comment

In summary, we have looked at the effects emotions have upon trading futures. Many traders tend to become emotionally involved in the positions fail to adjust to the trading situation. They have an intense need to be right. Other traders become confident, which is a great attribute to have if you are in a sporting contest with another opponent. On the other hand, the market is inanimate and overconfidence is poorly deployed in the trading environment. Your ability to recognize the emotional demands of trading will, more or less, be a major contributor to your success.

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Learn to Control Your Emotions When Day Trading

By , 14 January, 2010, No Comment

Most traders suffer from the mistaken notion that if your learn a good day trading system you will make big money day trading.  Of course, nothing could be farther from the truth.  One of the few topics that most day traders are reluctant to talk about is market psychology and trading psychology.  Yet, when I sit down and trade with a new day trader, I can usually ascertain the emotional issues he will encounter after the first hour.

Some day traders believe that good traders have some sort of intuition into the functioning of the futures market.  Here is the rub, when you are trading; your ability to control your emotions while you trade will, in large part, determine your success.  Can you simply turn your emotions off and continue to trade on just the facts?

The overwhelming response I receive when this question is posed is “of course I can!”  Most day traders do not want to see themselves as weak or deficient, yet when they trade these deficiencies are nearly always present.  Your emotions betray you when you trade, and the secret to trading is to have firm control over how you think at the emotional level.  It is easier said than done, too.  While confidence in trading is important, over confidence is an account-buster.  The markets will humble you before you get a handle on what went wrong.  Taking a respectful approach to the markets and the risks involved in trading will service you far better.  I tell myself several times a day “the market is right, you are wrong.”

When I trade, my goal is to trade what I see on the chart.  I don’t trade the news, I don’t trade on rumors.  I don’t trade the economy.  No, I have a specific methodology for trading the chart on the screen and it does not include outside influences.  I am not interested in what market pundits have to say about trading on a given day.  For many traders, that is a tough pill to swallow.

Here are some of the measures I use to control my exposure to emotional roadblocks.

1.  I don’t watch television when I trade.  Most of the networks have an agenda in their announcing style that is not objective.  Some networks are eternal optimists in the face of contrary facts, and other networks are overly pessimistic in the outlook.  I depend on my own analytical skills in reading charts and arriving at my conclusions.

2.  I generally play classical music when I trade, as I find this music emotion neutral.  Some rock n roll affects me at the emotional level, which is to say the music is psychologically stimulating and I have found I am too aggressive in my trading.  As you can see, I have thought some about this issue.

3.  I never look at a chat room in my trading, and usually don’t frequent chat rooms at all.  Why?  Most chat room posters are doomsday types.  The sky is not falling, and I am not chicken little, and I do not want my trading influenced by spurious information.

4.  I sometimes listen to a radio station when I trade, but it is usually a talk sports station and nothing more than banter.  This does not seem to effect my trading unless they talk about the Chicago Cubs, then I am usually irritated and turn the radio off. (yes, I am a long suffering Cubs fan)

So outside influences can, in fact, be an issue; but there are even tougher influences to conquer, and that is the psychological point of view within yourself.

Your own outlook on the world can influence your judgment, regardless of the outside influences to which you expose yourself.  Emotional considerations like greed can cause you to trade recklessly and outside the parameters of your trading system.  Greed?  Yes, there have been several books written in the last 2 years that compare the hormone levels after a very successful trade to pre-trade hormone levels, and found your body’s physiological response was to release large amounts of endorphin, resulting in temporary euphoria. (See “It’s Not What You Think, It’s How You Think,” Larry Pesavento, author)  Temporary euphoria is not a good state to trade, and may result in terrible losses.

In summary, there is good evidence to suggest that your state of emotions is the determining factor in day trading success.  Anecdotal and scientific research has brought this consideration to the forefront in recent years.  It is important to realize the detrimental effect your emotions can have upon your trading and take action to minimize outside influences, especially those involving greed, euphoria and overconfidence.  And finally, trading psychology is one of the least understood facets of trading and will likely stay that way, because of traders aversion to talking about their feelings in the trading environment.

I know for me it’s simple; anytime I think I know what the market is going to do, I need to remind myself…I don’t know what the market is going to do, and I need to simply trade the chart in front of me without bias.  It’s easier said than done.

As the Dow Goes, So Goes the Country

By , 13 January, 2010, No Comment

The Dow has managed to claw back 50% of the losses that occurred in 2007 and 2008. The question now is, what’s ahead?

In my new video I share with you some of the ideas that I’m looking at for this Dow Industgrial. I believe we are at a very important crossroads and would not be surprised to see the Dow Industrial lose ground in the next 3 to 6 months. In the video I also show you exactly what I’m looking at that will confirm a major top for the Dow.

As always our videos are free to watch and there is no need to register.

Click here to see this stock market video

Trades around the Pivot Point, R1 R2 S1 S2

By , 13 January, 2010, No Comment

I think the most important fact, yes I said fact, regarding pivots points is they are a prediction of future support and resistance levels.  The key word in the previous sentence is “prediction” and traders should keep that in mind when trading pivot point systems.  I have always been conflicted as to why pivot points (PP) become important throughout the course of the day.  Most traders begin their day by plotting pivot points onto their chart.  With so many people using similar formulas to plot PP it is little surprise that the market stops at the calculated support and resistance levels.  Do the support levels and resistance levels occur because everyone is using a similar system or are they part of the natural function of the market?

It doesn’t matter.

As a trader I am only interested in what the market does, not why it exhibits certain tendencies.  I realize that is a bit of an obtuse answer, but it is one I have learned to live with comfortably.  Of course, it is often discussed among traders and each day trader has his opinion, but to trade the markets it is not necessarily important why this phenomena occurs.

On the other hand, some days the market pays absolutely no attention to pivot points and goes along its merry way without stopping at any particular point on the chart.  More often than not, though, the market will stop at the pivot points, or pause , or reverse right at the plotted lines.  My point is a simple one; pivots are very useful, except when they are not useful.  Whether the market will adhere to the predicted support and resistance is something that you must glean from watching the price action for a bit.  I typically don’t initiate my first trade of the day based on pivot points.

The formula for calculating the days support, resistance, and pivot point is as follows:

R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

S=support levels
R=resistance levels
H=hi
L=low
C=close

As you might have surmised, the formula plots five lines on your trading chart.  These lines are commonly referred to as S1, S2, PP, R1, and R2.  S1 and R1 are the first lines of potential support/resistance on your chart.  The pivot point is the primary line of support and/or resistance.

Most traders have their own set-up to trade pivots, and I have three that are favorites of mine.  One is a break out through a resistance/support level.

Break outs often time occur when the market is in a consolidating mode and forms a horizontal channel, with the price banging off the top and bottom of the channel, especially if the channel is on a support/resistance line, as is often the case..  After this price action continues for two, maybe three cycles, I will set a sell a point below the channel and a buy a point above the channel. (I am referring to the ES contract here)  Generally the price action will break out of the channel and continue in the direction of the break out and you pick up the trade as it blasts through the channel parameters.  This is a pretty good strategy and can be very profitable.

Breakdowns are also a great way to use your pivots.  This trade is especially good if the market has been hitting a support/resistance line and stopping.  As the price action approaches the support/resistance line, I will set a buy one point below the line in hopes of picking up the trade as it pierces the line.  This trade can be a bit dodgy, especially if the market has been bouncing off the lines all day because the earlier bounces were usually followed a move in the other direction.  Your hope is that the move does not go through the line a bit (as it often does), pick up your trade and change directions.  Again, here you can set your order lower, maybe 1.5 points below the line if you are uncomfortable.

Finally, you trade the pullbacks from R and S.  Let’s say the market pierces S1 and heads straight to S2 and stops and reverses.  Often times the change in direction will go straight to S1 again, retracing it’s move down in the opposite direction.  Once it reaches S1 I will set a trade 1 point below S1.  More often than not, the trade will hit S1 and reverse field to the short side, and if it continues upward you stayed out of the trade by virtue of setting your sell 1 point below S1.  This probably my favorite pivot point trade, and comes with a higher degree of safety than most.  Of course, no specific trade works every time.  If I am stopped out twice on a pivot point trade, I forget pivot points for the rest of the day.

In summary, we learned that pivot points are predictors of future activity.  Further, as predictors they may or may not be effective on a given day of trading.  Your power of observation is key to understanding the effectiveness of a pivot point every trading day.  We reviewed three basic trades that I use; the breakout, breakdown and pullback.  If you learn to combine your trades with an oscillator or a tick chart, you will develop and even higher degree of activity in your trading.  Remember to check yourself when trading pivot points, never trade without stop-loss orders in place.

ES Emini Day Trading: Scaling out of a Trade

By , 13 January, 2010, No Comment

My observation is that most day traders buy and sell with market orders.  This strategy tells your broker or platform to buy when you execute an order as soon as you hit the enter button on your computer and buy immediately at whatever price the market is trading.   I want to qualify this before getting too far down the road, I trade in a scalping style and run reasonably tight stops and try to let my winners run.  Of course, who does not try to let their winners run?  Many people, believe it or not, especially if they are to heavy on the number of contracts they are day trading relative to their futures account balance, trade not to lose, as oppose to maximizing their profit potential.  They are fearful, and trade defensively.  It’s not unusual to see a fearful day trader trade the ES contract and bail at one point, even though the market is signaling there is good potential for the trade to continue in the direction of the trade.  They just want out before something bad happens.  Needless to say, day trading in a fearful condition is not an enjoyable experience and makes for a long day.

Let’s take a moment and talk a little about a strategy for entering trades.  We will assume you have identified a potential trade to the short side and are ready to take that trade.  Instead of putting a straight market order in place and buy at whatever the market is trading at when your order is filled, why not set your short entry several ticks above the current market price and let the market come to you?  Granted, you run the risk of missing out on the trade if the price dive bombs straight down, but that is a rare occurrence.  Even in a trending market, the price tends to bounce around and you are likely to get filled at your buy order above the market price.  You just saved yourself a half point.  You can look at your Average True Range Indicator to see how the range of the market has been and base your entry, to a certain degree, in a manner within the range.  In dead flat markets, though, this may not be such a good strategy.  Then again, I am not very excited about day trading flat and choppy markets anyway.

Now let’s talk a bit about scaling out of a trade.  If you have read any of my articles you know that I usually have a specific profit target in mind and a specific stop loss point.  In this example I am going to trade 3 contracts and my profit target 15 ticks on the ES Emini contract.  On a day trade like this one I will generally scale out of the trade.  A good trading platform will allow you to set specific strategies for selling at different prices.  I use Ninja trader, and I can preset my exit strategy as follows:  I am going to sell 2 of the contracts at 10 ticks profit and 1 contract at the 15 tick profit target I had in mind.  You can use any variation of selling strategies you feel comfortable with and most good day trading platforms allow up to 3, sometimes 4, separate levels to scale out of your trade.  You can preset these strategies and name them in a manner which will allow you to choose which one you are going to use simply by clicking on the strategy you will employ.  For example, this strategy on my platform I named 3x10x15.  It’s my own nomenclature, but I know this means 3 contract with exits at 10 and 15 ticks.  I generally exit a larger portion of my contract on the first exit to lock in a nice profit and let the last contract run.  I can even move the stop on the single contract if I see a market start a sharp move in the direction I am trading.

One of the maxims I live by is to never let a winning day trade become a losing trade, and scaling out of a contract is an excellent way to assure you lock in a nice profit while allowing yourself the latitude to let a contract run.  Needless to say. there are an endless number of potential scaled exits you may employ.  In my trading, and I cannot fully explain why, I tend to trade an odd number of contracts and lock in the majority of my contracts at the first exit point, then manage the remainder of the contracts as the trade develops.

Entering a trade in the proper fashion and scaling out of the trade is an idea you may wish to employ in your trading, especially if you are trading out of fear.  (on the other hand, if you are trading overly fearful, it might be wise to take a break from trading and regroup)

On single contract trades I generally just bracket trade, as no scaling is possible with a single contract.  Try buying at the price you want with the method above and scaling out of a trade and see if it doesn’t prove to be a profitable strategy for you to employ.  It does give you a bit more control of the trade, and incrementally lowers the risk in the trade.

How to Scalp the ES Emini: A Day Traders Delight

By , 12 January, 2010, No Comment

There are a variety of day trading styles that traders employ, some with great success, others with less than satisfactory results.  My style of day trading, scalping, is a direct reflection of my personality, experience and emotional disposition. ES Emini day traders who scalp typically stay in trades for five minutes or less, or longer, if need be.

My views on the way the market functions precludes me from making long term commitments to a given market direction.   Market prognostication is an inexact science, at best, and most economists and day traders have a miserable track record of predicting the future direction of market movement.  So, I don’t even try.  I suspect I would be as poor at predicting futures market direction as the experts.

As a adherent to portions of chaos theory, I believe there is a level of randomness to the market, which makes it less than predictable in the long term.  I do believe that certain means can be employed, and probabilities analyzed, that will allow a day trader to get an idea of what the market may do in the next ten minutes, though.  Chaos theory is about small patterns, called fractals, that exist in a far larger random pattern.  I take advantage of those smaller patterns and try to pull two or three points (on both the long or short side of a position), and then exit with my small prize.  Of course, if I find myself in a continuing trend, I may push my profit limits higher to take advantage of the trend.   By and large, though, I am looking for two or three points.

A casual glance at any intraday chart will show an undulating wave pattern that is the basis for scalping.  I try to identify the starting point of a wave and exit the trade when the little spurt of momentum stops.  Of course, there are days when the market trends in one direction, not often, and on those days I may take a position and hold until my comfort level erodes and I am ready to take a profit.

When you are in a winning day trade, you never lose money by exiting the trade.  Sure, maybe the trade angled upwards another two points and you did not participate in that price action, but I am still content with my three points.

Never let a winning trade become a losing trade.  Take that to the bank because it is a common mistake by a legion of traders.

On the ES Emini contact I set my stops fairly tight, usually a 12 tick bracket and never adjust my stop lower to accommodate a lousy trade.  If I am wrong, I am wrong.  My goal is to find another trade that is profitable.

I don’t hold trades overnight, and I don’t set up trades and walk away.  The scalping style requires constant attention to the day trade at hand, and this requirement makes it an unpopular choice for traders who don’t care to spend a lot of time at the computer.  You will be spending time watching charts looking for trades, and once you are in a trade it is important to monitor the trade.

In baseball terms, scalpers are singles hitters.  Nothing more.   We may hit an occasional home run, but the is the exception, not the rule.  The goal of a scalper is to extra small chunks 5-8 times a day from the market.

NYSE Ticks: How to Trade this Key Indicator

By , 11 January, 2010, No Comment

Pure oscillator traders are missing out on one of the most interesting and useful tool on the market.  The NYSE Ticks can show you a world of information about the number of stocks that are increasing vs stocks that are declining.  If you understand how to use this valuable information you may feel like you have hit the mother lode of trading information.  The NYSE Ticks (TradeStation symbol $TICK) are a compilation of the if the markets buying and selling activity, but you must develop some useful filters for sorting out this information and applying it to your trading style.

If you have read any of the articles I have written, you know that I working very hard at staying out of trades that originate in a loose term called “market noise.”  I like to trade break-outs and break-downs, and avoid initiating trades in the market noise, which is generally the normal backing and filling action the market offers.  To be sure, market noise dominates the daily market, nearly 70% of the price action is market noise, and it takes patience and self-discipline to stay out of the market noise.

For me, any action that occurs between +450 and -450 on the $TICK is market noise and does not warrant my attention.  I should point out the the NYSE Ticks are not dissimilar from an oscillator to read, that is to say there are threshold points at which the market breaks out of the market noise, and I start paying close attention.  Most traders who are not familiar with the $TICK charts should have little problem interpreting the information, but have to have a handle on the information before we can truly trade.  At what levels should I enter a trade?  At what levels should I exit a trade?

If you are in a trade and the $TICK starts to turn against you some, say up to +250 on a short trade, are you going to be ready to bail?  Remember what I said in paragraph 3?  Anything between +450 and -450 is market noise, and a +250 reading on the NYSE Ticks is just that, market noise.  Even in a breakdown, there is going to be backing and filling and these two factors are a simple part of trading.

On the other hand, if the NYSE Ticks hit +600, I am going to notice and prepare a plan of action.  The $TICK is one of two indicators I have an alarm set, and that alarm will sound when the market bashes into +600 or -600.  The $TICK is one of the few indicators I have absolute rules that are not debated in my mind.  That is to say, when the market pierces the +800 or -800 and I am in a trade in the opposite direction, I exit immediately.  No thinking.  No rationalizing, I get out.  Period.  Why?  Readings of +800 or -800 are extreme, and if the action hasn’t been reflected in the price action, it will be soon.  Exit now.  Isn’t that a handy way to exit a trade that isn’t working properly?

I really like to fade heavy movement in one direction.  What does that mean?  If the ticks reach +1000 or -1000 I am looking to take a trade in the opposite direction.  I have a set of criterion I use to enter the trade which are fairly complicated and a little advanced for the scope of this article, but suffice it to say that when the market gets hit with the heavy buying/selling pressure it takes to reach these levels, you can look for the market to consider reversing field.

While many traders confine themselves to the realm of oscillators the NYSE Tick is some real time information that is not reinterpreted through a mathematical formula, or hypothetical like pivots or the Fibonacci sequence.  This is real data that will give you a glimpse into the markets, and few traders avail themselves the opportunity to do so.  The NYSE Ticks are always a part of my trading, and sometimes the most reliable.  Remember how to interpret the data displayed and you can profit from $TICK, and not rely upon a perennially lagging indicator to make your trading decisions.  The NYSE Tick will give you an understanding of you chart that may have been lacking.

In summary, the $TICK provide a wealth of knowledge about the aggregate stocks rising vs the aggregate stocks falling, and we have to interpret that readings of the indicator to make sense of them.  Market price action between +450 and -450 is noise, and should be ignored, regardless of the implications you think you might see.  If I am in a trade and the market reaches +800 or -800 and I am in a trade opposite those numbers, I immediately exit.  No thinking about it.  Anytime the ticks registers +1000 or -1000 the market is ripe to change direction, as this kind of buying/selling pressure is unlikely to continue.  And finally, NYSE Ticks indicator is unfiltered market information, no formulas like the oscillators, no hypotheticals like pivots or the Fibonacci sequence, the NYSE Ticks is the market as it is, and you can profit by learning this indicator.

The Truth About Trading

By , 6 January, 2010, No Comment

The stock market is possibly the greatest competition in existence. Every dollar is in a contest where there is always a winner and always a loser. A giant game with trillions in currency floating as zeros and ones staged in a virtual playground filled with some of the most calculating, intelligent minds in the world.

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