Archive for ‘trading’

E-mini Trading Professor: Sunday Night Briefing (12-4-11)

By , 4 December, 2011, No Comment

The television “talking heads” are all over the map in their discussions as to what the coming week holds for our economy.  The usual discussions concerning the job market (improving), federal budget (weakening), and consumer sentiment (improving) have dominated the prognosticators predictions.

Here is a synopsis of what to expect for next week:

DATE REPORT CONSENSUS PREVIOUS
Dec. 5 ISM Services 53.9% 52.9%
Dec. 5 Factory Orders -0.3% 0.3%
Dec. 8 Jobless Claims 395,000 402,000
Dec. 9 Trade Balance -$42.2 B -$43.1 B
Dec. 9 Consumer Sentiment 66.0 64.1

On the hand, I suspect the market will continue to focus, to some degree, on the evolving debt crisis rippling through the southern tier of countries on the European continent. Yes, I realize the Central Banks, in a concerted effort, have opened the spigot of cheap money for the European banking system, but the systemic problems in the troubled European economies have not changed since last week.  I have a hard time believing that the average institutional investor will consider the problem solved.  To be sure, I don’t think anyone who is seriously involved with the European economic woes sees the latest round of “cheap money” as anything more than a band-aid on an ever deepening problem.

In short, I think that even the short memories of traders will completely dismiss the European situation.  Then again, I never underestimate the neurosis of the trading community.

On the domestic front, I think the number to watch might well be the ubiquitous trade balance number.  According to John Lonski, chief economist at Moody’s Analytic’s capital markets, “The positive is the trade gap has been narrowing, but make no doubt about it, one of the reasons we have lost so many manufacturing jobs is because of the heightened competition from overseas.”

From January to September, the U.S. imported $552 billion more worth of goods than it exported, with roughly 40% of that gap coming from China; and the imbalance has long been a source of tension between the two countries.

Anyone who has spent any amount of time in the trade room has been forced to listen to my rants about China’s monetary policy and failure to let their currency float, like the rest of the world’s major economic powers.  They have consistently used their “non-floating” currency position to their advantage, and put an awful lot of money in their treasury.  Falling interest rates and troubled economies have now made their economic policy the catalyst for major losses in their currency trading.  I, for one, won’t be shedding a tear for them.

Finally, the market has been very reactive to the news, and it is difficult to predict what sort of new economic issues may rear their head.  I would count on the unexpected, as the world is currently in a state of flux.

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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 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: Channel Trading, Bollinger Bands, and Reversion to the Mean Theory

By , 30 July, 2011, No Comment

As I mentioned in earlier articles, I am an enthusiastic channel trader, which flies in the face of what most e-mini traders consider prudent trading. Most e-mini traders avoid trading in channels because they can be unpredictable and unprofitable. Reversion to the Mean Theory has certainly had its abuse over the years by purveyors of stocks and bonds. It is not uncommon for unscrupulous stockbrokers to tell a potential client that a stock is overpriced because it is trading over its yearly mean price. There is no correlation between eminent price movement in a stock and its distance from the mean price. This use of the Reversion to the Mean Theory is a misrepresentation of how stock prices fluctuate.

On the other hand, the theory holds great value for trading in the short term, especially when used in conjunction with Bollinger bands. I generally set by Bollinger bands at 2 standard deviations from the mean and use a setting of 10 time periods. There are other settings, which may be 14 or 18, that give satisfactory results under unusual market conditions; but I find 10 to be the most dependable setting for my personal e-mini trading.

John Bollinger, in his article, “Bollinger Bands-The Basic Rules,” states that closes outside the Bollinger bands are continuation signals not reversal signals. In nearly all cases, closes outside the Bollinger bands tend to be continuation patterns, with certain exceptions.

In reasonably symmetrical continuation channels the Bollinger bands tend to define the highs and lows of the channel. As a quick aside, symmetrical continuation channels refer to channels where the price action is ricocheting off the top line of the Bollinger band and moving in a direct line, with little retracement, to the mean line or the bottom Bollinger band line. These channels are a delight to trade as they are usually very low volume formations and occur during the stand down period (from 11 AM CST to 12:30 PM CST with some daily variations). During the stand down period the market is often dominated by smaller traders. This is especially true on the YM e-mini contract. In a typical trade, the smaller traders will try to push the price action outside the Bollinger band and typically fail. It is at this time that I fade the failed breakout back into the channel.

With very few exceptions, the price action in the above-described scenario will revert to the mean average at the center of the Bollinger bands. I have used this technique for several years and can assure you that continuation channels seldom breakout or breakdown. A more likely scenario for this price action is a reversion to the mean centerline of the Bollinger bands or a move to the lower Bollinger band. (Or an exactly the opposite, depending on the direction of your trade.) The tendency for continuation patterns to revert to the mean defies many investment theorists judgment, but it is true, just the same.

It is important to understand that this principle I have outlined works only in continuation channels and is a disastrous principle to implement in a trending market, or even a choppy market. Its sole use is in a flat continuation channel. It’s also important to use a fairly tight stop should the market action choose to actually breakout or breakdown.

In summary, I have described a unique scenario in e-mini trading where Bollinger bands and Reversion to the Mean Theory can be utilized to initiate frequent and profitable trades. It takes some time and experience to learn as technique, but continuation channels tend to revert to the mean.

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    E-Mini Trading: Finding High Probability Setups

    By , 15 July, 2011, No Comment

    A quick scan of any of the popular online bookstores will produce a plethora of writers who claim to have a distinct set of high probability e-mini trading setups. For these traders, these setups are probably very successful and profitable. Unfortunately, any of these e-mini trading setups require a sizable software purchase or intricate analysis of candlestick formations. Whether all of these e-mini trading setups are profitable is beyond the scope of this article, but I am interested in presenting some generic setups that have been successful for a wide range of traders.

    I emphasize trading with the trend and rely upon momentum for most of my profitable trades. I find when I trade against the trend, except in a few specific trades, I end up with a marginally profitable or unprofitable e-mini trade. For that reason, I’m going to recommend learning 2 “with the trend” trades and one countertrend trade that I have found to be reliable in my personal trading.

    These traits include:

    • Breakout and breakdown trades in and around areas of support/resistance
    • Entering a trade in the trend after a retracement
    • The Ambush Trade

    Breakdown Trades in and around Areas of Support/Resistance

    I probably don’t trade is often as some e-mini traders because I don’t feel there aren’t that many high probability setups available each day. But one of my favorite setups is at the open of the session and there is a support/resistance line in the proximity of the direction of the markets initial move. I will generally set a buy stop or sell stop 4 or 5 ticks above or below the resistance or support and wait for the price to come to my entry. I pay special attention to volume in this trade and like to see increasing volume is the price nears the support resistance line. Sheer momentum will often carry a price action 10 to 12 ticks past my entry for a nice stop. Often times, there is a great deal of institutional and professional trading volume in these moves and they are very successful.

    Entering a Trade in the Trend after a Retracement

    During the course of a trend it is common, almost probable, that the trending action will take a short break and retrace some of the ground it has gained. This makes sense, as at some point e-mini traders will begin to take profits and the trend will take a temporary sideways or downward break. Depending upon which author you care to read, the trend resumes about 70% or 80% of the time. So, as the retracement in a trend begins to wane, it is an ideal time to reenter the market in the direction of the trend and ride the second leg of the trend for a profit. I would say that this is probably the most common trade I take on a daily basis and it has a high degree of success.

    The Ambush Trade

    The ambush trade is one of the few countertrend e-mini trades that I truly have a high degree of confidence in initiating. With this trade the e-mini trader can draw a Fibonacci continuum on graph and wait until the countertrend retracement reaches between 50% and 62%. There is a high probability in this zone, commonly referred to as the ambush zone that the market will once again resume in the direction of the trend. This is a trade I take routinely when the price action has reached 55% of the entire length of the trend as measured by the Fibonacci retracement path.

    A quick note here about probability is in order; because there is no such thing in will trading is a guaranteed trade. Every trade has a higher or lower probability of succeeding or failing. (Though it is hard to measure empirically) Even the best setups can fail miserably and disappoint. This does not, however, deter me from taking the same trade should I see it set up again. I understand probability, and even the best setups have a certain component of failure and their probability.

    In summary, we have looked at two “with the trend” trades and identified the conditions that need to be present for them to have the highest potential for success. We have also looked at one “against the trend” trade that has a high potential for success. Since trading is based on probability, we know that even the best setups have the potential for failure and except that is a part of and e-mini trader’s mentality.

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