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.

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The Fed and the Market

By , 11 October, 2010, No Comment

Anyway, we will spend a good amount of time tomorrow anxiously waiting for the Fed chairman to say what we already know he will say, and then we will all cheer and go into a stock buying frenzy. All for no apparent reason… I just don’t get it.

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Day Trading: Focus on the Price Action

By , 9 October, 2010, No Comment

From the onset, let me explain that I use momentum oscillators and a number of moving averages in my ES e-mini trading. On the other hand, momentum oscillators and rate of change indicators are not my primary focus in trade selection. There are several reasons for this, but my best explanation lies in the fact that most oscillators and indicators are lagging indicators. In short, these tools often lead you into late trade entries and tardy trade exits.

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Why All the Doom and Gloom?

By , 3 October, 2010, No Comment

Like most things in life, there is a way to make money out of practically any situation. And, recession is no exception. Having been fortunate enough, or unfortunate enough, to have been day trading through several recessions, the doom-birds come to roost every time the economy takes a serious downturn. While there may be some individuals in the doomsday movement that are seriously concerned about the state of our economy, I am convinced that the vast majority are simply capitalizing on the fears and insecurities of the American public.

And they have a wide variety of doomsday cures to proffer. Buy gold, silver, you name it… and they have some sort of “fix it” product that is guaranteed to ameliorate any potential problems with the upcoming “end times.” This is not to say that there are not rough times ahead. Our country faces many serious problems and it will take innovative and creative solutions to steer clear of potentially serious economic situations. Personally, I have serious doubts that our current set of economists and politicians have the intestinal fortitude to tackle the serious issues that lay before us. But that issue is not the topic of this article.

No, what concerns me is the opportunist who is working overtime to exacerbate the public’s perception of our current economic woes. Our country has shown time and time again to be resilient and steadfast in its resolution and approach to crisis situations. Granted, many of our past presidents have shown little restraint in financing our public debt. This trend needs to stop. No country or individual can spend in excess of their earnings for any extended period of time. You need not be an economist to understand this simple principle. On the other hand, many of the citizens of our country have grown accustomed to the government solving even the smallest of economic hardships they face. Of course, this is not a government that our forefathers, our founding fathers, envisioned for the populace.

In short, we as a country will need to be more innovative in our approach to government spending. We must learn to do more with less money. In my opinion, this will be a bitter pill for many to swallow, but it is, nonetheless, an essential remedy for our current situation.

On the other hand, the chorus of the doomsday cabal grows louder every day; and richer every day. They would have you believe that we have found ourselves in an intractable situation; nothing is farther from the truth. While our debt load has increased in recent years, it is far from unmanageable. It is also true that the dollar has fallen against other currencies in recent years; some of this is intentional and some devaluation is the result of our current recession.

My point is a simple one; don’t buy into the notion that our country is lost. We are a powerful and influential force in the world. Our universities, contrary to what many may say, still produce great technological minds that will lead us in the coming century. We are still a country of great wealth and influence.

In short, don’t buy into the notion that all is lost, as many would have you believe. Every recession that I have experienced has brought forth a group of the doomsday cabal. They hawk their newsletters and negativity to a public unaware of the underlying strength of our country. They also make a tidy sum on spreading this negativity to anyone who’ll listen. Like all recessions, this one will come to an end and productivity and profitability will once again be the norm.

Needless to say, we will have to make some changes in the way Wall Street does business, and we have made some strides in that area. Personally, I was disappointed that the Republican leadership blocked the reinstatement of the Glass-Steagall Act which prevents Wall Street investment banks from the effectively securitizing mortgage loans. This was a great mistake, and one that may come back to roost yet again. It is my belief, however, that this oversight will be corrected in time and Wall Street investment banks will return to their proper function. We have a long way to emerge from our current economic woes, but we will emerge a better and more reliable economy than ever, and the doomsday cabal will once again sink into obscurity, that is, until we experience another recession.

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Day Trading: High Probability versus Low Probability Trading

By , 11 September, 2010, 2 Comments

In summary, we have looked at trading against the trend and concluded that countertrend trading results in low probability trades, on the other hand trading with the trend results in higher probability trades. We have also noted that known support and resistance are prime movers in determining the feasibility and potential profitability of any trade. Price action is the name of the game, and learning to read and interpret what price action is telling a day trader is the real secret to trading success. If you can master reading price action, it is highly likely you can become a successful day trader.

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E-mini Professor Trading System announced FREE trial in Live ES Trading Room

By , 4 September, 2010, No Comment

The E-Mini Professor Trading system has added a no cost live trading room as an added benefit to active members. This live trading room is absolutely free for all active members of our program. Additionally, the founder and longtime trader of the system will conduct each trading session which lasts from 8 AM to 11 AM. Essentially, we will be covering the morning session of both the YM and ES contracts.

This is your chance to see this dynamic system in action and give you a chance to implement the principles of the system into your personal trading style. As is the case throughout the trading course, special emphasis will be placed upon the psychological aspects of trading and how they affect each traders trade selection.

Currently we are offering a free week in the trading room so that traders can determine their comfort level with the trading room environment and see if this particular trading style is in line with their current trading principles. Most of the trading techniques are within the mainstream of current trading thought, though there are many tweaks and angles in a that allow a trader to surpass previous trading goals. I encourage everybody to sign up for the free week and see if the E-mini Trading Professor System that is an asset to your trading arsenal. There is, of course, no obligation on your part to participate in the weeklong trial.

As always, I cannot promise that you’ll become an overnight millionaire was strongly believe that you will become a better and more fundamentally sound trader.

If you would like to attend this trading room send an email with you name and email address to:  dave@learn-to-trade-and-invest.com

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How Do I Start to Day Trade E-Mini Contracts?

By , 16 August, 2010, No Comment

Learning to day trade e-mini contracts has become one of the hottest professions on the Internet. Unfortunately, many people enter the e-mini day trading arena with little or no experience and are disappointed in the resulting lack of success. I need to point out that e-mini day trading is a learned skill and not an innate ability. So it is important to engage in some preparation before attempting to day trade e-mini contracts.

First and foremost, a new e-mini day trader should research and choose a quality day trading system. This is not necessarily an easy job, because there are a wide range of trading systems and some are priced exorbitantly high. Spending time on some of the trading chat boards and asking questions about the quality of various trading systems is a great way to get some feedback on which course is considered successful. Even then, you may need to examine each recommended course and interview the owner of the course. Some great questions to ask might be:

1. What are the owners credentials and trading experience that qualify him or her to advise others on trading methodology?

2. What is the overall success rate for past students of his or her of course?

3. What is the cost of the course and are there ongoing charges to remain an active member?

4. Does the course require the student to purchase proprietary software to trade with the particular system being sold?

5. How long does it take from the start of the course until a trader can safely trade e-mini contracts?

While some trading educators debate the use of demo accounts, I highly recommend them. The problem most people have with e-mini day trading demo accounts is that they tend to not follow the trading system they have learned. They tend to over trade or experiment with ideas they have that are not based upon sound methodology. This can lead to bad habits which may carry over to trading with real money. The answer to this problem is a simple one; you must trade your demo account exactly as you trade your live account, that is, the account you plan to trade with real money.

Sound methodology and a good deal of successful practice time on a demo account is an excellent way to prepare a potential e-mini day trader to trade successfully and profitably. It is important to have a plan before you begin to trade. As I said at the beginning of this article, day trading e-mini contracts without any preparation will generally lead to failure and loss of your capital.

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The Fed Speaks: Didn’t He Say the Same Thing Last Month?

By , 9 August, 2010, No Comment

Day trading today was like watching a nail rust. I find that amazing, too. The Fed has been saying the same thing for the last three months and there have been no substantive changes in the economy. They can’t lower rates, as the Fed Funds rate is already zero. So that rules out any earthshaking rate changes, and they can’t raise rates because the economy continues to, at best, stagger like a drunken sailor.

Just the same, the market waited with eager anticipation to hear what Mr. Bernanke would say. Imagine my astonishment when he said, well, he said the same things he has been saying for the last three months. The fed is going to continue quantitative easing (which is the latest phrase in a long list of Fed Speak anachronisms) and they may or may not buy some bonds to accomplish this goal. The Fed chairman did not see any immediate relief from the recession-like conditions we are experiencing. I am certainly glad we are out of the recession, and now just experiencing recession-like conditions. I would appreciate it if somebody would clarify the difference between a recession and recession-like conditions.

But the most interesting consequence of all this Federal Reserve nonsense is in the pall that falls over the stock market as it waits in eager anticipation for the utterances of the Fed chairman. Did they think he was going to say something new? To be sure, the Fed is nearly out of options for managing our monetary system. They can’t move interest rates because they have run out of room: they have a big gun, but no bullets.

And that’s what has me scratching my head. Why all this trepidation every time the Fed meets? They are, essentially, out of options to manage the economy and it’s not like you can count on them to spell out, in real terms, how damaged our economy has become. No, that would have people running to the bank’s like lemmings in a desperate attempt to withdraw whatever money they could get their hands on. So we listen to our Fed chairman spew nearly indecipherable musings of on the esoteric economic theories and machinations the Fed is currently employing to make everything “all better.”

So the market went sideways for a good portion of the day as we waited for the Fed chairman’s proclamations: and when the earthshaking proclamations were issued the market resumed its normal activity. And you know what is really crazy? We will do the same thing next time the Fed meets. Even worse, nothing will be changed and we will ask ourselves, “didn’t he say that last month?”

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