Archive for ‘e-mini’

Completion of the Trendline Article Series

By , 1 January, 2012, No Comment

First and foremost, I would like to wish everyone a happy and prosperous New Year.  This is a time when many people, including traders, re-dedicate themselves to the passions in their lives.  For me, it has always been trading and I look forward to a New Year and trading e-mini contracts.

To a certain degree, your personal dedication to trading will, more or less, determine the kind of success you will enjoy.  While my job is to teach e-mini trading, it is ultimately your dedication and continuing education that will make you a profitable trader.  I remember the very best teachers and mentors that have taken an interest in my career throughout the years, and I learned something from each of them.  But the most important mentor I ever had, lit the fire of becoming a student of trading and consuming, voraciously, all I could find on the topic.

These days there is much more written about trading than in the old days.  The old trading masters were loath to share their secrets with the younger generation.  But with the proliferation of online trading, a slew of books have emerged on e-mini trading.  Some are very good, others are merely infomercials for proprietary software the author is trying to sell, and others are just plain awful.  I try to read a book a week on trading, and this causes me to encounter all sorts of authors.  I guess you take the good with the bad.

Over the last couple of weeks I have been writing articles in a “series” format, and have completed all I want to write about trend lines.  I am including links to all of the articles below and hope that you may find at least one useful idea in the entire lot.  If you do, my mission has been accomplished.  Like trading, I truly enjoy writing about trading in an unbiased and non-commercial way.

Here are the links to the recent trend line series:

As I mentioned earlier, these are articles are packed with information, facts, and my personal observations.  That being said, my real goal would be spur your interest in further interest in the diminutive trendline.

Again, have a Happy New Year…but it’s back to trading tomorrow.

E-mini Trading Always Provides a Painful Dose of Humility

By , 7 November, 2011, 1 Comment

I have been on a relatively hot streak in my e-mini trading the last couple of months and my returns have been impressive by any standard.  Frankly, I have been feeling pretty good about my trading ability and consistently.  I was pretty cocky about my trading results, perhaps verging on arrogant.

I had let a few trades run a bit too far in the red, and delighted in watching the market double back my way and allow me to turn a lousy trade into an impressive winner.  I doubled down on some of these trades when I was deep in red, which further enhanced my gains and ego.  Doubling down has always been forbidden in my trading, but since it worked so well I decided that I had been foolish to adhere to my long held trading taboo of adding contracts to a losing trade.

Let’s face it, I thought, after several decades in this business, I could trade any market, any trading environment, and I had gained enough skill that the money management skills I had worked hard to maintain were no longer necessary for my success.  I felt I had the Midas touch.  I thought I could turn lead into gold, I felt I had mastered the art of the e-mini, which is always a dangerous mindset.  I had a stretch where I went 26 for 28 with my new, somewhat reckless, style of trading.

Then last week rolled around and I received a heavy dose of humility and respect for the market.

The first two days went well, and then self-inflicted disaster set in.  After several days of 4-digit losses my confidence was shaken.  I was a rank amateur again, flailing away at the market and chasing after low probability trades with fervor and hopes of regaining my past trading glory.  I broke my trading rules, I ignored long-ingrained personal money management guidelines, and I felt like it was my first day of live trading.  Worse yet, by abandoning my long standing, written in stone trading guidelines that are the basis for successful trading I lost a substantial amount of money and shattered my self-confidence.

A couple of losing days will affect your whole outlook on trading.  Worse yet, my trading and money management techniques are the core concepts of what I teach and relentlessly drill into a new trader’s mindset.  Since I trade with my DOM on the screen for the entire room to view, my embarrassment was compounded by the deafening silence as my audience watched me flail away at the market and break the very set of rules I harp on throughout the course of every day. 

It was a complete meltdown by an experienced and successful trader, and the only variable that changed was the fact that I was initiating substandard, low probability trades trying to salvage the day’s losses.

In summary, it not unusual to read about the fantastic returns trading educators feature on their websites and performance reports, but even the most experienced traders can fall into unprofitable trading patterns if you fail to stay vigilant and true to the trading principles designed to minimize losses and maximize returns.  The lessons I relearned restored a much needed dose of humility to this traders psyche and reminded me that complacency has no place in any traders thought process; and that complacency shows no respect for how long a trader has spent trading.  Great traders are always vigilant and respectful of the rules that keep us in the business and last week I missed the mark.

 

 

 

 

 

 

 

 

 

E-mini Trading: Why do Clients Enroll in a New Course and Put Forth Little Effort?

By , 15 October, 2011, No Comment

One of the most unusual and disturbing phenomena I observe on a daily basis is the abysmal effort put forth by a small group of new e-mini traders in learning to trade. It is not unusual to have students enroll and then come to the trading room and try to share the dynamics of the previous course they had taken and blown out a futures trading account.

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3 Important Things New E-mini Traders Can do to Succeed

By , 27 September, 2011, 1 Comment

The failure rate of new e-mini traders is disturbing.  According to various sources, 90% of all new traders are out of the market within 3 months, their trading account balances exhausted. There can be little doubt that e-mini trading presents a challenging skill set to learn and execute, but there are a number of factors that are well within the a new e-mini trader’s reach that he or she can control.

In my experience, a good deal of failure centers around three important factors that directly impact every new trader’s career. They are:

•    System
•    Communication
•    Experience

There are a wide variety of trading systems out there from which traders can choose.  Some of the programs are very large, some are famous.  There is no correlation, in my thinking and experience, between popular systems that can run more than $7-10000 and widely advertized and other systems which are based on sound trading methodology.  I’ve already written several articles on finding a good trading system, so I will not burden this article with that lengthy topic.

1.     Learn the System-  If there is one thing I see over and over is new e-mini traders trading real money and have, at best, developed a very limited skill level with the material and system he or she has paid for with their hard earned money.   I don’t just don’t get that thinking, but it is a rare student who starts simulator trading with me one on one that has properly prepared themselves to trade by learning the basic information of the system they are about to trade. They know some trades. They may know some of the interesting parts of a trading system, but they seldom know the details; and success in trading is in the details.  The end result of this thinking is that I end up spending a good amount of time explaining how charts and bars work when trading, when we could have been working on the business of learning to trade, not wasting time trying to hammer out the lingo and teaching the student material that is well documented in the written and video sections of a quality course.  Poor preparation is industry wide, and I read in the forums about systems I know well, and can trade effectively on my own, being bashed by individuals who “just couldn’t seem to get it” right and the concluded the system is undesirable.  I generally know what really happened.  Don’t study the material half-hearted and expect to learn the “meat and potato’s” of the system in the trading room.  Be over prepared.
2.    Communication- I have scads of new traders and potential traders come into the room and not ask a question, just sit and listen.  The most successful traders I have mentored were individuals who were fully engaged in the trading process and when the didn’t understand something, or some trade, they promptly asked why I am doing this and what did I see on the chart.  My preference is for small trade rooms that allow the room to interact.  Again, I have written an article on  this subject, but when all members of the room can speak to each other, there is a mutual learning process goes on, and their interaction, in my opinion, is often more helpful than the information I may impart.  In short, when you ask questions  you let people see where you need help and may get some suggestions how to remedy this or that.  Communicating creates a synergy in the room that allows everyone to learn.
3.    Experience-  When a new student first starts in the trading room, they generally lack any meaningful e-mini trading experience.  Simulators are great places to gain trading experience under the right conditions.  In order for a simulator to be an effective trading tool, the new e-mini trader must trade the simulator exactly as he or she plans to trade their real money.  Invariably, I notice traders trading 300 contracts on a trade, just to see how it would work.  You will probably not trade 300 contracts in your life, probably not even 100 contracts; but these playful dalliances with non-reality are very damaging to the discipline and emotional control a consistently profitable e-mini trader most employ.  In short, simulated trading programs are great if you trade with them exactly as you plan to trade with real money, but deviation from your specific trading mindset and methodology on the simulation is highly counterproductive.

In summary, I have stated the three most common mistakes new e-mini traders make.  Some spend their money on a course, then never bother to develop some mastery of the information.  Many traders sit and try to learn as “mutes,” and never get the benefit of room wide interaction.  And finally, it is very important to use your simulator in the proper fashion.  When you are consistent on the simulator, you are ready to go to the market.

E-Mini Trading: Do Your Stop/Loss Points Get You in Over Your Head?

By , 16 September, 2011, 1 Comment

There is a tendency among traders, both new and experienced, to overestimate their predictive abilities as they relate to e-mini futures contracts. Over trading and trading too many contracts are common characteristics of the hard charging e-mini trader; but their exuberance might be put to better use if they held off a few years and gained some valuable experience to match their aggressive trading style.

In any event, it is imperative to always trade with your stop/loss limit defined and in place. I have known many e-mini traders who managed their stops mentally, without even an emergency stop, and eventually they encounter a disastrous result via a spike in the price action.  Always trade with stops in place; enough said.

But how do we set stops that are wide enough to allow a trade to develop, but narrow enough to fall within individual risk parameters.  If you run your stops too tight, you will find yourself stopped out of trades by ordinary market noise.  Too wide, and your losses can be staggering.  There are other factors when considering your stop losses targets, too:

•    Individual appetite for risk, ranging from aggressive to conservative (I recommend a conservative approach to trading.)
•    Market conditions at time of trading
•    Price positioning at time of e-mini trading decision
•    Size of traders account can sometimes dictate a certain trading style

I find myself favoring the use of the Average True Range (ATR) when considering the length of my stop/loss points.  Depending upon which author/system to which you subscribe, the suggested stop/loss is expressed as a % on the ATR; and the percentages range from 50% to 150% of the current ATR.  Though the numeric value of the ATR is an average of a pre-selected time period, they mustn’t be construed as predictive in the sense that they have an incredible sense of accuracy.  What we can glean from the ATR is that over the last, say, 14 time periods the market has average x and if things stay roughly the same, this is the kind of price range you can expect on a 3 minute bar, or whatever time period you have chosen.

So, we have learned that the ATR can give us an idea of what kind of price range/bar we have been experiencing, and barring any knowledge to the contrary, we base our stops on the ATR.
I like to use at least a 1:1 ratio on my ATR-set stops, and that may be a bit wide for some tastes, but I am a vocal proponent of using wide stops, as opposed to tight stops.  With our ATR number in mind, we now have a general idea where the price may move in the next 3-4 bars.  It’s a great technique, but don’t forget to keep an eye on support/resistance lines, fibgrid lines, and important Fibonacci lines when eyeing a trade.  Can you safely execute your trade while staying within the general parameters of support/resistance?

In summary, I have tried to make the point that stop/loss targets should be given consideration.  Too tight, and you find yourself stopped out of a trade on simple market noise; too wide and you expose yourself to excessive risk.  The key is to find that happy medium each day where you can handle a retracement without getting stopped out, and let your trade run when possible.  Great luck trading.

E-mini Trading Question from Individual: Understanding Risk in Day Trading

By , 10 September, 2011, No Comment

Hi David,

Hello, hope your well, quick questions on your ES trading, may I ask how big are your stops? And are your targets? do you use range bars? what times do you trade? what is your max loss ofr a single day?All this will help me determine if it fits my risk profile:) thanks!!

Paul  (spelling and sentence construction unchanged)

I wrote back this portion regarding the risk and stop placement in my response:

Hello Paul,

I have been an institutional trader, in various capacities, for nearly 30 years, most on the NYSE, the latter years in trading rooms for a the same investment bank.  Were it me, I avoid trading the ES at all costs.  I think there are much more profitable contracts to trade than the ES where there is less professional, institutional, and computerized trading activity. I am fond of the YM, 6E, NQ, and the ten year treasury.

Stops are sometimes calculated on the ES (or any contract) by using the Average True Range, obviously if the average true range is 12+ (which it has on most days of the week), it means that the previous bars have a range of 12 ticks, it really doesn’t make any sense to enter a trade with a 5 point stop, or an 8 point stop.  Random noise in each bar (or the level of random noise) will increase your losing percentage/trade.

But let’s talk about that silly notion of risk as it relates to trading, as it is very difficult to quantify in futures trades.  For example, assuming your favorite trade profits more than it loses; risk is usually defined as stop-loss/profit target.  So the average guy would tack a 10 tick profit target with a 10 tick stop loss and think he has flattened his risk some.

On the other hand, I set an 8 point profit and 25 point stop/loss, very unbalanced and carrying a higher degree of risk than your trade.  Right?  Let’s assume an average true range of 10; mathematically I have a 30% better chance of succeeding than you.  I had a student challenge me on this, so for one week I trade the 8-25 and he traded the 10-10.  We both traded 6-8 trades a day for 5 YM contracts.  By Thurs of the week, I was up more than a $1000 he asked to be excused from the trade, which I did.

The point is simple matter of mathematics; there are too many variables in every trade to fully understand the probability, in the exact sense, of the market doing this or that.  However, when you try to control just one variable you can increase you probability significantly.  In the above example, which is a more likely event?  Will I hit my profit target of 8 or stop loss of 25?  In pure mathematical terms I have a 79% chance of hitting the 8 tick stop and a 21% chance of hitting my 25 tick stop loss.  I initially chose 10 as your profit target and 8 as my profit target, because there is a significant difference in the probability of moving 8 ticks and 10 ticks.  Just think about the math behind what I am describing and quite possibly you will rethink your understanding of risk.  Risk, in a pure sense, is based on probability and probability in, in most ways, a non-linear component.  You might refer to some of Murphy’s books, as he has done some nice work in this area, though I disagree with him in a host of other areas.

Of course, there are many other factors you could try to control.  For example, supply/demand in the actual contracts offered is an interesting area of study.  Zero sum games can have convoluted outcomes in trading when a move to the long side simply runs out of supply, in other words, there are no sellers left to supply the buyers.

In short, I usually place emergency stops at 25,  and logical exit within my own loss parameters will be my mental stop.  Don’t ever trade without a stop-loss and contract count potential loss that is more than, say, 5% of your account.  But for sake of argument, maybe I could get your to rethink your understanding of risk as a function of probability rather than a straight 1:1 linear relationship, which has always been the traditional line of thinking.

Finally, I think that you may have a certain risk profile…but when you enter the market, our risk becomes the same.  So the game comes down to picking the right set-ups, at the right time (usually with the trend), and style. Those are the variables you can control, along with some lesser variables.  I held your view of risk for many years, on a much larger scale, of course, and have only started to consider risk in the last ten years.  Come visit my room and watch me trade.  I win a lot, and work hard at managing the downside on my trades.

E-Mini Trading Consolidation Patterns and Channels

By , 18 August, 2011, No Comment

Trading in a channel means various things in e-mini trading because trading channels come in a variety of shapes, characteristics, and size. It’s important to clear up semantic jargon when reviewing channels or consolidation patterns. What one trader may classify as a retracement is frequently classified as a flag, in technical trading jargon. Just the same, it’s a consolidation. There are also narrow channel periods when the market takes a break before restarting a trend. And finally, there are lengthier periods of range bound channels which present some difficult trading issues.

As an e-mini trader, it is imperative to understand which type of pattern you may be entering. Has there been an uptrend or downtrend in the market or has the price action has started to move sideways? Has the trend taken a short break and moved upwards or downwards (depending on whether the price action is bullish or bear) and there are indications that it may resume its initial trend? Or, has the trading range stayed narrow and readily identified for several hours?

The message in this short article is to talk about the last type of consolidation channel. Short sideways movement and retracement patterns are all very easily traded and will be the subject of other articles;there are long explanations required to understand these patterns. Long, range bound channels will be the focus of our attention today. My theory on these lengthy range bound channels will be simple; they are a danger point that will gladly vacuum money from your pocket.

Lonthy periods of price action in a definable channel should be an tip-off to most e-mini traders that the market is at near equilibrium. It is also common to notice the volume in these extended channels is often light. Yet I watch traders on a daily basis pound away at these narrow channels hoping the market will break out to the upside or to the downside. It rarely does. As a matter of fact, though trading channels often have a plethora of small breakouts, which sends the retail traders into a near buying or selling frenzy, they usually and casually retrace back into the original channel , leaving the retail trader with a loss or, at least, in a very unfavorable position relative to their breakeven point.

Trading action inside these channels sometimes appears logical and rhythmic, following what seems to be a predictable serpentine pattern bouncing off the resistance and support that are the channel parameters. Again, these patterns entice many inexperienced traders and to entering trades inside the channel. Most of the action inside a trading channel, or range bound consolidation pattern is random in nature. Traders who enter a trade inside the channel often learn a harsh lesson in the randomness of channel trading. In short, I avoid trading inside a channel and wait for better opportunities, trades with higher probability for success.

There are a large number of articles I read before writing this article. Most were published by trading educators extolling the virtues of channel trading, so I must assume that my position on channel trading is a minority opinion. On the other hand, I have been fortunate enough to trade with some of the best traders in the world and they avoid trading in channels at all costs. Quite simply, the risk reward ratio is not particularly favorable and at some point the price action will break out of the channel. If you are on the right side of the breakout or breakdown, you will have a wonderful day. On the other hand, if you’re on the wrong side of the breakout or breakdown, your day will be less than wonderful.

In summary, we have pointed out there are various types of channels and some are very tradable, while the extended sideways consolidation-type pattern offers little for most traders. Further, I have stated that trading in extended channels is a low probability proposition and I avoid trading these patterns.

E-Mini Trading: Let’s Start at the Beginning with No Hype

By , 16 August, 2011, No Comment

It’s not unusual for me to peruse prominent (and some not so prominent) e-mini trading education sites and see what’s being promoted and how it’s being promoted. Often times, I find the promises and guarantees espoused on these sites appalling. On the other hand, there are a handful of training educators who seem honest and realistic in the manner in which they portray e-mini trading. That being said, many of the sites promote e-mini trading as something akin to the California gold rush. It is not uncommon to see e-mini trading portrayed as a method to “get rich quick” with a minimal amount of effort.

For the record: E-mini trading is not a get rich quick scheme and takes a considerable amount of effort and time to become proficient and profitable. Further, if an individual believes he or she can read an e-book or two and then slay the markets they are hopelessly mistaken. In this article, I would like to present an accurate portrayal of what e-mini trading “is,” and what e-mini trading “is not.” Some may find my description of the path to e-mini trading success daunting and be terribly disappointed. That’s okay with me because every potential new trader should have a clear idea of this high competition arena they are considering for a career.

Let’s start with a clear idea of what e-mini trading is not:

• E-mini trading is not a “get rich quick” profession. The stark truth is that the majority of people who embark on a career in trading lose some or all of their money.
• There are very few individuals who are “natural” traders. The vast majority of new traders will find many of the concepts in e-mini trading unnatural and confusing. It takes time and experience to become a consistently profitable e-mini trader.
• Most trading books or manuals present a specific system for a new trader to study. The system approach to trading is fraught with danger. These systems may work very well under certain market conditions, but the market is a creature of many moods and very few systems work well in all market situations. The vast majority of mechanical e-mini trading systems fail miserably in non-trending or consolidating markets.
• Most consistently profitable traders are highly disciplined in their approach to the market and have developed their trading style and discipline through years of study and experience.

One common characteristic I see on many trading sites is a quote that suggests that you should be able to double your account value on a monthly basis. Some sites even suggest that you may earn even more than double your account value on a monthly basis. It’s not unusual to see headlines on these sites claim returns ranging from 300% to infinity.

It is highly improbable that you are going to double your account on a monthly basis. It’s improbable that I am going to double my account on a monthly basis. Granted, I have had some exceptional months in my trading career, but the notion that I can consistently double my account each month is preposterous.

Fact: In the first several months of your e-mini trading career you will be lucky to break even. Even more to the point, most new traders lose considerable sums of money during the early stages of their trading career. The statistics suggest that 50% of all new traders lose their entire trading account balance.

Many sites lay claim to have discovered a revolutionary new approach to trading that virtually assures profits. While the methodology of trading has evolved rapidly over the last several years, I am unaware of any revolutionary new approaches to trading that will ensure a new trader will stumble into a highly profitable trading career from day one of their trading experience. To be sure, rates of return for traders and investors have remained fairly consistent for the last 20 years despite billions of dollars of ongoing market research by large institutional trading organizations. In short, most of the “revolutionary” new techniques are recycled version of current oscillators of older trading techniques

Fact: Profitable trading still lies in the domain of highly skilled and experienced traders. I am unaware of any revolutionary new trading techniques that have dramatically improved the rate of success in trading, including the most recent wrinkle in trading marketing: the trading robot. The automated trading on Wall Street is generally performed by computers in the “Cray Supercomputer” class of computer. It takes very little analytical skill to reason that a trading robot that retails for $279 will fill your pockets with hundreds of thousands of dollars. Trading robots are just another example of the “next best” innovation. The algorithms that I have been able to analyze on several trading robots rely upon simple moving averages and well-known oscillators. This is hardly the stuff of any new revolutionary approach. They are quite profitable for the individuals who are selling these machines, but the empirical evidence has shown that they typically performed poorly.

Finally, many of the trading courses offered confine themselves to a strict systems approach to trading. I will spare the reader an extended discussion on the shortcomings of systems-based trading, but will comment that systems-based trading is generally effective during trending markets. Further, depending upon which source you care to quote, the market typically trends 30% to 40% of the time. During consolidation periods, commonly referred to as range bound trading, systems based trading often struggles mightily. Further, markets often undergo periods of very random trading and systems-based trading is poorly suited for this type of trading. In short, most system-based trading approaches work well under well-defined conditions. I would also point out that few traders require any special trading system to trade a trending market, as these markets are where the majority of trading profits occur and are relatively easy to spot and from which to profit.

Fact: It is my experience that successful and consistent traders learn to read and interpret charts, as opposed to confine their learning experience to the tight parameters of system trading. This is not a blanket indictment of all systems-based trading, but a generalization from my experience with systems based trading. Most profitable traders are proficient in a wide range of market conditions and to understand the trading style required to trade those market conditions ease efficiently. Further, learning to trade in a wide variety of trading conditions is generally accomplished through the experience gained by trading with another experienced and profitable trader, or through a mentorship program with a qualified and experience trader.

In summary, I have tried to emphasize that trading programs offered may not be a good choice for new traders. Specifically, I have warned against utilizing trading systems that offer inflated profit rates. Finally, I would encourage all traders to find an experienced trader who may be a friend, or hiring an experienced trader through a mentoring program. I have no doubt that there are trading courses that cover some of the deficiencies we have outlined in this article but as yet not been able to locate such a program. I encourage new traders to give some of the above points careful thought, because trading education is often an expensive proposition, but under the right conditions most individuals can learn to trade profitably and with consistency.

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