Archive for ‘YM’

YM E-Mini Stop Loss, Risk/Reward Ratios

By , 27 October, 2010, No Comment

You hear a lot of talk about risk/reward ratios in trading, and as an individual who enjoys math I find myself baffled at the methodology many employ to arrive at their risk/reward conclusions. For example, some traders firmly believe in keeping their stop loss and profit targets roughly equal. After all, they say, it is important to keep your risk on the upside the same as the risk on the downside. Is all risk the same?

For example, let’s assume an example where a trader establishes a 30 tick stop loss and a 20 tick profit target. Many would assume that this trader is letting his losses run and his or her profit targets stay finite. It’s an interesting argument, but I don’t necessarily agree with it.

Why?

Well, in this argument you have to assume that it is equi-probable that the market will rise or the market will fall. With so many variables under consideration, I don’t believe that the probability for an YM e-mini to rise or fall is equal. Further, what is the probability that the YM e-mini will rise 20 points versus it falling 30 points? In most trading situations, long or short, small measured moves in the market are far more likely than large sweeping moves. In short, the market is far more prone to equilibrium or movement contained to movement one or two standard deviations from the mean. Which is not to say that large moves in the market do not occur, they do. The important question to ask yourself is, how often does the market move in dramatic fashion versus how many times does the market move at a very measured pace?

This attitude allows trades to develop and gives a trader the time to allow them to develop. Further, because a trader sets his or her stops to 30 does not necessarily mean that he or she is required to allow the price action to plow into the stop loss. At any time during a trade it is the trader’s prerogative to shorten his or her stops. (As a quick aside, I would also point out that it is essential to only shorten your stops, it is never a good idea or sound trading practice to expand your stop loss). However, if the fundamentals of a trade change during the execution of the trade, there is no problem with making a hasty exit. It only makes sense to limit your losses, especially if the dynamics of your trade change.

In the last 10 years, it is far more likely for the market to move 10 points than 30 points. A quick back test of this assumption showed that 10 point moves are 32% more common than 30 point moves. Interesting. In this respect, it is difficult to apply traditional calculus probability theory to trading. In short, there is a dependent relationship, especially from a probability standpoint, in calculating the likelihood of a given market move; the market is far more likely to move in smaller moves than larger moves. This is an important concept to understand and can help a trader reassess his or her approach to managing risk. Standard understanding of binary outcomes in assessing risk do not necessarily apply in trading the YM e-mini.

As you might expect, I am a proponent of running wider stop losses than many. In doing this I allow my trade time to develop and understand that the variable most responsible for winning trades is time. You must allow yourself ample time for the trade to develop and running tight stop losses will generally deprive most traders of the time required to trade effectively. Market noise and related factors seem to knock many traders out of their trades before they can realize a profit.

In summary, I have made an argument for running longer stop losses and explaining my criteria for doing so. I base my beliefs on a simple maxim; the market is far more likely to move in small steps than it is in large steps. Further, I can employ this strategy in formulating my approach to trading and run the wider stops to let my trades develop. My enemy in trading is not the price action but the amount of time I give my trades to develop; if I limit my trading by employing tight stops I deprived myself of the time needed for the market move I expect. Market noise can knock me out of the trade prematurely and I will realize losses. I want time in my trading and I am willing to buy time by expanding my stop loss.

Related Blogs

YM Emini Day Trading: Detailed Trading Chart for Tues

By , 17 November, 2009, No Comment

Chart courtesy of AMP Trading, get a free demo account and paper trade.

YM Day trading chart with trades for the day.

YM Day trading chart with trades for the day.

Wow, I will sleep well tonight.  Though the trading on the YM emini day trading was choppy today, I managed to eek out with a small gain.  You can see that on three occasions today I found myself on the wrong side of the trade.  I was moving my stops up to one point.   If I was on the wrong side of the futures trade, I wanted to get out fast and look for something a little better.  Just the same, my style of trading was not suited to the market today, and my stubborn nature prevented me from just stopping when I saw the tough conditions for day trading.

I considered moving the CCI up to a 16 period setting, but I don’t think that would have helped much.  In non trending markets, it is tough to follow with my “trending oriented” trading style.  There really was not discernible trend from a scalping viewpoint.  Whipshaws were the name of the game.

Emini Day Trading: Why Trade Just the ES and YM

By , 13 November, 2009, No Comment

There several emini contracts out there to day trade, and I have been deluged with mail asking me why I just trade these two indexes.  How about the other emini contracts?

It is a fair question.

In some of the postings on this blog you will see an important admonition:  Day trade  one contract with consistent success before you start trading with real money.  I think that is an important consideration when learning the emini contracts.

I am intimately familiar with these two stock market indexes, as they have been an important part of my life for quite a while, and I am very comfortable with the price action in these two contracts.  I might add, as an aside, that the NQ contract is a wonderful contract to learn.

That being said,  I feel most comfortable with the ES and YM contracts because I am familiar with them.  The ES in particular, because of the heavy volume (which results in wonderful liquidity) is a favorite of mine.

I have yet to experience slippage in the YM, though, when trading less than ten contracts and I feel confident in saying the YM is an easier contract to trade than the ES.  I’ve had numerous novice traders tackle the ES from the onset and had less-than-satisfactory results.   But when they switched to the YM, their luck changed along with the results.  I just think the YM is far better starting point than the ES.

There are all sorts of anecdotal theories on why the YM is easier to trade, and none are definitive.  Suffice it say it is simply easier and less subject to unusual movement at the odd moment, which is not to say that you don’t have to trade a YM chart, you had best pay close attention.  But once you have found your groove on the YM, it will produce.

YM Emini Trading 09-28-09

By , 28 September, 2009, No Comment

The market stayed well above the 89 period SMA today, so I restricted myself to long trades. There was one beautiful trade that started around R1 and blasted through R2, and that was really it for the day. I took a couple of long trades hoping the market might break out some, but nothing really materialized, and I exited the trade with small gains.

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ES Emini Trading Chart for 9-2-09

By , 2 September, 2009, No Comment

A nice day of trading though there were some very choppy periods. No big gainers until the end of the day…most of it was 10 point stuff, especially later as the range narrowed. Had a couple of losers on trades that didn’t really develop.

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YM emini Chart for 9-1-09

By , 1 September, 2009, No Comment

I traded the YM contract today, for no particular reason other than I felt like trading something different. Only two trades and the market flattened out. The second trade was a good fade trade though I, as usual, bailed out at 40 points, and left some money on the chart.

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Daily Pivots

By , 21 August, 2009, No Comment
ESU9
For 08/21/2009
How To Use
Symbol R1 R2 Pivot S1 S2
ESU9 1010.25 1015.75 1002.25 996.75 988.75

William Dudley Speaks
8:00 AM ET

Ben Bernanke Speaks
10:00 AM ET

Stock futures rose moderately Friday, pointing to a higher open on Wall Street as investors await a speech from Federal Reserve Chairman Ben Bernanke.

Traders will be looking to Bernanke's speech for insight into a potential economic rebound.

During an annual Fed conference in Jackson Hole, Wyoming, Bernanke is expected to talk about the past year's financial crisis and could provide clues about how the Fed will eventually withdraw trillions of dollars in aid used to support the economy.

Withdrawing that support too soon could hinder any recovery. But, waiting too long could lead to rapid inflation.

A report on existing home sales could also provide direction for investors. Sales have shown signs of life in recent months, raising hopes for a recovery for the overall economy. The National Association of Realtors is expected to report existing home sales rose for the fourth consecutive month in July.

July's sales are forecast to rise 2.2 percent to a seasonally adjusted annual rate of 5 million, from 4.89 million in June, according to economists polled by Thomson Reuters.

The report is due out at 10 a.m. EDT (1400 GMT)

Paper Trading versus Real Money Trading

By , 15 August, 2009, No Comment

Anyone who has read very much of this blog knows that I recommend extensive paper trading on a demo account before you trade a live account.  As a matter of fact, my exact advise is to be able to put together 5 days of consistent profits before you even consider tinkering with real money.  I think this is a realistic strategy for learning trading.

You will also find that I recommend some serious reading of some of the classic authors of investment techniques and theory.   I think it is important to understand the underpinnings of trading and have a well thought out philosophy on how the market functions.   On a humorous note, there are so many different perspectives on market theory that you are bound to find one that resonates with your own particular thinking.

I am a chaos theory guy.   You don’t have to be a chaos theory guy to be successful in your trading endeavor, but you ought have some philosophical underpinning to your actual trading style.

Which brings me to the point of this post, and that is the transition from paper trading a demo account to trading an account with real money.  You would think it would be the same…ah, erm…it is the same, at least the technique should stay the same.

But, it doesn’t.

Perfectly normal, intelligent people go absolutely brain dead when real money is involved.  I cannot explain this phenomena, I can’t even describe why it happens…but it does happen in an alarming number of cases and sometimes in a highly catastrophic manner.

Is it greed?

Is it fear?

Does real money make people trade different?    The answer, at least in many cases and in the early part of a traders career, is unequivocally YES.   I warn people of this and they vehemently deny that THEY could succumb to this sort of silly stupidity.    A very good friend, who I personally helped in his emini training and was absolutely gifted when we traded together, (he on paper, me with a real account) started trading and promptly lost 25,000 dollars in two days.  I had instructed, and he had always followed, the strategy of trading one of two contracts, and to use tight stops, when traded.  Boom, 25 grand disappeared as if we had never spoken.

When I asked him what went wrong, he was unable to explain his dilemma.  “I lost my mind”, he said.

And I have seem it happen so many times I felt it necessary to forewarn new traders, the transition from paper to cash is a quantum leap.  Be extra conservative, if anything.  Use the technique you perfected on paper and don’t overtrade or mismanage your money.

Okay, ‘nuf said…but don’t say I did not warn you.

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