Posts tagged ‘day 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: 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.

Real Live Trading Doesn’t Lie. Spend several days in my trading room and see if you can benefit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.

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    Day Trading: Knowing When to Exit a Losing Trade

    By , 1 January, 2011, No Comment

    In summary, I have noted that removing your emotions from trading is basically wishful thinking. On the other hand, we can learn to develop a realistic view of how the market is moving and trade accordingly. It’s no easy task, but with practice reality can become your primary viewpoint, not your wishes.

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    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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    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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    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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    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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    Beginning Traders Can Learn to Day Trade Effectively

    By , 28 June, 2010, 3 Comments

    There is a general feeling among experienced day traders that beginning traders cannot trade profitably for several years. As a trading educator, however, I have found that properly trained beginning day traders can trade effectively from the start. However, the trader must be motivated and well versed in the material presented, and have the self discipline to adhere to the parameters of the trading system being taught. This is, of course, no small task. Just the same, the financial rewards far outweigh the time and effort expended to develop the skills necessary to trade.

    In my program, The E-mini Trading Professor System, we have found that beginning day traders can be a profitable within several months of starting our system. It is important that the trader sticks with the rigid guidelines established for proper trade setups and maintain that discipline throughout the course of an average trading session.

    Once a beginning trader learns to day trade only with the trend, which is one of the most important aspects of our trading system, trade selection becomes very far easier process than trying countertrend trading techniques. Learning to trade with the trend is no small feat, either. There are many countertrend trades that, at first glance, appear enticing and a sure bet to earn money. Unfortunately, countertrend trades are generally just retracements in a broader trend and must be avoided in order for the beginning trader to profit.

    Much of what we teach in day trading centers around the psychological/emotional approach that is necessary to trade successfully. Many trading educators do not devote much time or effort in stressing the importance of psychological/emotional considerations. We consider these issues to be among the most important and toughest skills to master in the day trading process and devote several modules in the course that consider psychological/emotional considerations at length. If you can control your mind, you can control your day trading and make sound, rational decisions about selecting the proper trade set up.

    While every day trader may not be ready at two months to trade profitably, many are. It’s important to understand that every beginning day trader assimilates information at a different rate and in a different manner. That being said, some traders are ready to trade earlier than others. On the other hand, I have not found a correlation between how soon a trader is ready to trade and the ultimate success they achieve. Simply said, some traders are ready to trade earlier than others, but once the trading methodology is assimilated there is no appreciable difference in the actual performance. I encourage beginning day traders to take their time and learn the information at a rate they are comfortable. This approach assures the proper retention of the information.

    Bottom line; beginning traders can trade profitably sooner than it was once thought. I say this was one caveat though, the traders who have learned the information and practice the most on a demo account are the ones who enjoy the greatest success. Jumping into trading a live account with real money involved is not encouraged; on the contrary, it is far preferable to hone the beginning trader’s skills on a demo account so that they understand, in a real sense, the material presented in the course and can apply it.

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