Posts tagged ‘daytrading’

Day Trading the ES Emini: Contract Considerations

By , 16 January, 2010, No Comment

Contract Considerations for Day Trading the ES Emini

It garners more trading volume than any emini contract on the Chicago Mercantile Exchange, and has run away (in trading volume) from any other futures contract currently traded.  It the pint sized version of the S and P contract that traders have flocked to in recent years.  Better yet, it is specifically designed and priced for the individual trader.  What’s not to like?

I spend a decent amount of time in trade rooms, helping novice day traders develop their trading style.  One thing I have noticed, especially among the novice day traders, is their lack of awareness of exactly what they are trading.  So I thought I would write an article that gives the very basics of the ES contract.

What is the S and P 500?  You would be surprised at how many traders can’t definitively answer this question.  The S and P 500 is a capitalization-weighted index of the 500 largest, publicly traded, large-cap stocks in the United States.  The index has been around since 1957.  The index is calculated and published by Standard and Poor’s, hence the S and P in the title.  Incidentally, the index reached it’s highest point in March, 2000 at 1552.87.  In 2010, it was trading in the 1100 range, a far cry from it’s apex.

The ES emini contract was established on Sept. 9, 1997, and has grown steadily since that date.  Some specifics on the contract are:

1.  The contract months for the ES are
a.  March         =H
b.  June            =M
c.  September  = U
d.  December   = Z

Notice the contract months are designated by letters, and the contract designation is calculated by combining the letters with the ES designation, the month, and finally the last number of the year.  For example, ESM0= the ES contract for June in 2010.  Once you trade the ES for a period of time this nomenclature becomes second nature.

Many have been confused by the pricing model used for the ES contract.  It is fairly simple.  The ES emini is one fifth the value of the traditional S and P contract, so each point is worth $50 dollars, as oppose to $250 per point on the big contract.  Each point is divided into ticks or one fourth point, or $12.50 per tick.  So, 4 ticks at $12.50= $50.

The contract expires at 8:30 a.m. on the third Friday of contract month. (March, June, Sept. Dec.)  It is fairly normal for traders to have abandoned trading the contract about two weeks before the expiration.  Most futures brokerages  announce the date of switch over to their clients, so there is generally not the confusion that you might expect at contract expiration.  If you are a day trader, it is imperative that you switch to the new contract prior (preferably the above mentioned two weeks) and not trade the ES emini right up to expiration.  Most of the volume evaporates from the contract on the switch date, and you could run into having make good delivery of the full delivery requirement of the contract.

The clear advantage of the ES emini contract is the tremendous liquidity, and thus you should never see slippage as a result of the contract trading thin.  More than a million contracts are traded on an average day, which is astounding volume when taken against some of the thinner emini contracts offered.

The ES emini contract on the Chicago Mercantile Exchange, which has been a true innovator in the emini arena.  The CME Globex is the actual home of the contract, and it trades during regular trading hours, takes a short break, and then trades all night until the opening of the next days cycle.  The actual hours of trading are:

Monday-Thurs  5:00 p.m.-3:15 p.m. & 3:30 p.m.-4:30 p.m.
Sunday              5:00 p.m.-3:15 p.m.

Margins requirements vary by firm and whether you are trading intraday or holding contracts overnight.  For inraday traders, you can find margin requirements as low as $400/contract and as high as $3000/contract.  Of course, the lower contract margin requirement may tempt some traders into over trading their futures account, and this can be a real problem.  In any event, the contract margin requirements vary greatly.

As you can see, the ES emini contract is a versatile and popular equity trading instrument.  We have reviewed the monetary basis for the contract, as well as the calender specifics for trading.  We have pointed out the margin requirements and trading hours, now all that is left is for you to perfect your trading style and enjoy trading this flat-out-fun trading instrument.

Your Emotional Day Trading Outlook Can Be Terminal

By , 15 January, 2010, No Comment

In summary, we have looked at the effects emotions have upon trading futures. Many traders tend to become emotionally involved in the positions fail to adjust to the trading situation. They have an intense need to be right. Other traders become confident, which is a great attribute to have if you are in a sporting contest with another opponent. On the other hand, the market is inanimate and overconfidence is poorly deployed in the trading environment. Your ability to recognize the emotional demands of trading will, more or less, be a major contributor to your success.

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Learn to Control Your Emotions When Day Trading

By , 14 January, 2010, No Comment

Most traders suffer from the mistaken notion that if your learn a good day trading system you will make big money day trading.  Of course, nothing could be farther from the truth.  One of the few topics that most day traders are reluctant to talk about is market psychology and trading psychology.  Yet, when I sit down and trade with a new day trader, I can usually ascertain the emotional issues he will encounter after the first hour.

Some day traders believe that good traders have some sort of intuition into the functioning of the futures market.  Here is the rub, when you are trading; your ability to control your emotions while you trade will, in large part, determine your success.  Can you simply turn your emotions off and continue to trade on just the facts?

The overwhelming response I receive when this question is posed is “of course I can!”  Most day traders do not want to see themselves as weak or deficient, yet when they trade these deficiencies are nearly always present.  Your emotions betray you when you trade, and the secret to trading is to have firm control over how you think at the emotional level.  It is easier said than done, too.  While confidence in trading is important, over confidence is an account-buster.  The markets will humble you before you get a handle on what went wrong.  Taking a respectful approach to the markets and the risks involved in trading will service you far better.  I tell myself several times a day “the market is right, you are wrong.”

When I trade, my goal is to trade what I see on the chart.  I don’t trade the news, I don’t trade on rumors.  I don’t trade the economy.  No, I have a specific methodology for trading the chart on the screen and it does not include outside influences.  I am not interested in what market pundits have to say about trading on a given day.  For many traders, that is a tough pill to swallow.

Here are some of the measures I use to control my exposure to emotional roadblocks.

1.  I don’t watch television when I trade.  Most of the networks have an agenda in their announcing style that is not objective.  Some networks are eternal optimists in the face of contrary facts, and other networks are overly pessimistic in the outlook.  I depend on my own analytical skills in reading charts and arriving at my conclusions.

2.  I generally play classical music when I trade, as I find this music emotion neutral.  Some rock n roll affects me at the emotional level, which is to say the music is psychologically stimulating and I have found I am too aggressive in my trading.  As you can see, I have thought some about this issue.

3.  I never look at a chat room in my trading, and usually don’t frequent chat rooms at all.  Why?  Most chat room posters are doomsday types.  The sky is not falling, and I am not chicken little, and I do not want my trading influenced by spurious information.

4.  I sometimes listen to a radio station when I trade, but it is usually a talk sports station and nothing more than banter.  This does not seem to effect my trading unless they talk about the Chicago Cubs, then I am usually irritated and turn the radio off. (yes, I am a long suffering Cubs fan)

So outside influences can, in fact, be an issue; but there are even tougher influences to conquer, and that is the psychological point of view within yourself.

Your own outlook on the world can influence your judgment, regardless of the outside influences to which you expose yourself.  Emotional considerations like greed can cause you to trade recklessly and outside the parameters of your trading system.  Greed?  Yes, there have been several books written in the last 2 years that compare the hormone levels after a very successful trade to pre-trade hormone levels, and found your body’s physiological response was to release large amounts of endorphin, resulting in temporary euphoria. (See “It’s Not What You Think, It’s How You Think,” Larry Pesavento, author)  Temporary euphoria is not a good state to trade, and may result in terrible losses.

In summary, there is good evidence to suggest that your state of emotions is the determining factor in day trading success.  Anecdotal and scientific research has brought this consideration to the forefront in recent years.  It is important to realize the detrimental effect your emotions can have upon your trading and take action to minimize outside influences, especially those involving greed, euphoria and overconfidence.  And finally, trading psychology is one of the least understood facets of trading and will likely stay that way, because of traders aversion to talking about their feelings in the trading environment.

I know for me it’s simple; anytime I think I know what the market is going to do, I need to remind myself…I don’t know what the market is going to do, and I need to simply trade the chart in front of me without bias.  It’s easier said than done.

Trades around the Pivot Point, R1 R2 S1 S2

By , 13 January, 2010, No Comment

I think the most important fact, yes I said fact, regarding pivots points is they are a prediction of future support and resistance levels.  The key word in the previous sentence is “prediction” and traders should keep that in mind when trading pivot point systems.  I have always been conflicted as to why pivot points (PP) become important throughout the course of the day.  Most traders begin their day by plotting pivot points onto their chart.  With so many people using similar formulas to plot PP it is little surprise that the market stops at the calculated support and resistance levels.  Do the support levels and resistance levels occur because everyone is using a similar system or are they part of the natural function of the market?

It doesn’t matter.

As a trader I am only interested in what the market does, not why it exhibits certain tendencies.  I realize that is a bit of an obtuse answer, but it is one I have learned to live with comfortably.  Of course, it is often discussed among traders and each day trader has his opinion, but to trade the markets it is not necessarily important why this phenomena occurs.

On the other hand, some days the market pays absolutely no attention to pivot points and goes along its merry way without stopping at any particular point on the chart.  More often than not, though, the market will stop at the pivot points, or pause , or reverse right at the plotted lines.  My point is a simple one; pivots are very useful, except when they are not useful.  Whether the market will adhere to the predicted support and resistance is something that you must glean from watching the price action for a bit.  I typically don’t initiate my first trade of the day based on pivot points.

The formula for calculating the days support, resistance, and pivot point is as follows:

R2 = P + (H – L) = P + (R1 – S1)
R1 = (P x 2) – L
P = (H + L + C) / 3
S1 = (P x 2) – H
S2 = P – (H – L) = P – (R1 – S1)

S=support levels
R=resistance levels
H=hi
L=low
C=close

As you might have surmised, the formula plots five lines on your trading chart.  These lines are commonly referred to as S1, S2, PP, R1, and R2.  S1 and R1 are the first lines of potential support/resistance on your chart.  The pivot point is the primary line of support and/or resistance.

Most traders have their own set-up to trade pivots, and I have three that are favorites of mine.  One is a break out through a resistance/support level.

Break outs often time occur when the market is in a consolidating mode and forms a horizontal channel, with the price banging off the top and bottom of the channel, especially if the channel is on a support/resistance line, as is often the case..  After this price action continues for two, maybe three cycles, I will set a sell a point below the channel and a buy a point above the channel. (I am referring to the ES contract here)  Generally the price action will break out of the channel and continue in the direction of the break out and you pick up the trade as it blasts through the channel parameters.  This is a pretty good strategy and can be very profitable.

Breakdowns are also a great way to use your pivots.  This trade is especially good if the market has been hitting a support/resistance line and stopping.  As the price action approaches the support/resistance line, I will set a buy one point below the line in hopes of picking up the trade as it pierces the line.  This trade can be a bit dodgy, especially if the market has been bouncing off the lines all day because the earlier bounces were usually followed a move in the other direction.  Your hope is that the move does not go through the line a bit (as it often does), pick up your trade and change directions.  Again, here you can set your order lower, maybe 1.5 points below the line if you are uncomfortable.

Finally, you trade the pullbacks from R and S.  Let’s say the market pierces S1 and heads straight to S2 and stops and reverses.  Often times the change in direction will go straight to S1 again, retracing it’s move down in the opposite direction.  Once it reaches S1 I will set a trade 1 point below S1.  More often than not, the trade will hit S1 and reverse field to the short side, and if it continues upward you stayed out of the trade by virtue of setting your sell 1 point below S1.  This probably my favorite pivot point trade, and comes with a higher degree of safety than most.  Of course, no specific trade works every time.  If I am stopped out twice on a pivot point trade, I forget pivot points for the rest of the day.

In summary, we learned that pivot points are predictors of future activity.  Further, as predictors they may or may not be effective on a given day of trading.  Your power of observation is key to understanding the effectiveness of a pivot point every trading day.  We reviewed three basic trades that I use; the breakout, breakdown and pullback.  If you learn to combine your trades with an oscillator or a tick chart, you will develop and even higher degree of activity in your trading.  Remember to check yourself when trading pivot points, never trade without stop-loss orders in place.

ES Emini Day Trading: Scaling out of a Trade

By , 13 January, 2010, No Comment

My observation is that most day traders buy and sell with market orders.  This strategy tells your broker or platform to buy when you execute an order as soon as you hit the enter button on your computer and buy immediately at whatever price the market is trading.   I want to qualify this before getting too far down the road, I trade in a scalping style and run reasonably tight stops and try to let my winners run.  Of course, who does not try to let their winners run?  Many people, believe it or not, especially if they are to heavy on the number of contracts they are day trading relative to their futures account balance, trade not to lose, as oppose to maximizing their profit potential.  They are fearful, and trade defensively.  It’s not unusual to see a fearful day trader trade the ES contract and bail at one point, even though the market is signaling there is good potential for the trade to continue in the direction of the trade.  They just want out before something bad happens.  Needless to say, day trading in a fearful condition is not an enjoyable experience and makes for a long day.

Let’s take a moment and talk a little about a strategy for entering trades.  We will assume you have identified a potential trade to the short side and are ready to take that trade.  Instead of putting a straight market order in place and buy at whatever the market is trading at when your order is filled, why not set your short entry several ticks above the current market price and let the market come to you?  Granted, you run the risk of missing out on the trade if the price dive bombs straight down, but that is a rare occurrence.  Even in a trending market, the price tends to bounce around and you are likely to get filled at your buy order above the market price.  You just saved yourself a half point.  You can look at your Average True Range Indicator to see how the range of the market has been and base your entry, to a certain degree, in a manner within the range.  In dead flat markets, though, this may not be such a good strategy.  Then again, I am not very excited about day trading flat and choppy markets anyway.

Now let’s talk a bit about scaling out of a trade.  If you have read any of my articles you know that I usually have a specific profit target in mind and a specific stop loss point.  In this example I am going to trade 3 contracts and my profit target 15 ticks on the ES Emini contract.  On a day trade like this one I will generally scale out of the trade.  A good trading platform will allow you to set specific strategies for selling at different prices.  I use Ninja trader, and I can preset my exit strategy as follows:  I am going to sell 2 of the contracts at 10 ticks profit and 1 contract at the 15 tick profit target I had in mind.  You can use any variation of selling strategies you feel comfortable with and most good day trading platforms allow up to 3, sometimes 4, separate levels to scale out of your trade.  You can preset these strategies and name them in a manner which will allow you to choose which one you are going to use simply by clicking on the strategy you will employ.  For example, this strategy on my platform I named 3x10x15.  It’s my own nomenclature, but I know this means 3 contract with exits at 10 and 15 ticks.  I generally exit a larger portion of my contract on the first exit to lock in a nice profit and let the last contract run.  I can even move the stop on the single contract if I see a market start a sharp move in the direction I am trading.

One of the maxims I live by is to never let a winning day trade become a losing trade, and scaling out of a contract is an excellent way to assure you lock in a nice profit while allowing yourself the latitude to let a contract run.  Needless to say. there are an endless number of potential scaled exits you may employ.  In my trading, and I cannot fully explain why, I tend to trade an odd number of contracts and lock in the majority of my contracts at the first exit point, then manage the remainder of the contracts as the trade develops.

Entering a trade in the proper fashion and scaling out of the trade is an idea you may wish to employ in your trading, especially if you are trading out of fear.  (on the other hand, if you are trading overly fearful, it might be wise to take a break from trading and regroup)

On single contract trades I generally just bracket trade, as no scaling is possible with a single contract.  Try buying at the price you want with the method above and scaling out of a trade and see if it doesn’t prove to be a profitable strategy for you to employ.  It does give you a bit more control of the trade, and incrementally lowers the risk in the trade.

The Truth About Trading

By , 6 January, 2010, No Comment

The stock market is possibly the greatest competition in existence. Every dollar is in a contest where there is always a winner and always a loser. A giant game with trillions in currency floating as zeros and ones staged in a virtual playground filled with some of the most calculating, intelligent minds in the world.

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ES Emini Day Trading: Pivot-Fed Announcements

By , 28 December, 2009, No Comment
ESH0
For 12/25/2009
How To Use
Symbol R1 R2 Pivot S1 S2
ESH0 1124.25 1126.50 1120.25 1118.00 1114.00

Fed and Fed Agency Announcements

Money Supply
[Bullet4:30 PM ET

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ES Emini Day Trading: Pivot-Fed Announcements-Commentary

By , 24 December, 2009, No Comment
ESH0
For 12/24/2009
How To Use
Symbol R1 R2 Pivot S1 S2
ESH0 1119.92 1124.33 1115.58 1111.17 1106.83

Fed and Fed Agency Announcements

Most of the CME Markets close at noon today for the Christmas Break, expect trading this morning to be light as many traders take the entire day off.

Jobless Claims
[Report][djStar]8:30 AM ET

NYSE Early Close – 1:00 ET

SIFMA Rec. Early Close 2:00 ET

Money Supply
[Bullet4:30 PM ET

Relevant Consensus Analysis

Durable Goods Orders
Released on 12/24/2009 8:30:00 AM For November, 2009
Prior Consensus Consensus Range Actual
New Orders – M/M change -0.6 % 0.5 % -1.0 % to 1.5 % 0.2 %
New Orders – Yr/Yr Change -11.9 % -7.8 %
Ex-transportation – M/M -1.3 % 2.0 %
Ex-transportation – Yr/Yr -11.3 % -6.9 %

Highlights
Boeing orders slipped in November but the rest of durables orders look good. New orders for durable goods in November rebounded 0.2 percent after a 0.6 percent decline in October. The boost in November came in below the consensus forecast for a 0.5 percent increase. Excluding the transportation component, new durables orders posted a 2.0 percent gain, following a 0.7 percent drop in October. The weakness in transportation was a huge drop in civilian aircraft orders.

The November rebound in new orders was broad-based outside of transportation. Sizeable gains were seen in communication equipment, up 4.0 percent, computers & electronics, up 3.7 percent; machinery, up 3.5 percent; and electrical equipment, up 3.2 percent. Also posting gains were primary metals and fabricated metals.

Transportation fell 5.5 percent after slipping 0.2 percent in October. Within transportation, nondefense aircraft dropped 32.6 percent in November; defense aircraft fell 3.2 percent; and motor vehicles slipped 0.2 percent.

The outlook for capital goods spending is improving at the core level-although it may be foreign spending more than domestic investment. However, headline new orders for nondefense capital goods fell 1.9 percent in November after an increase of 0.8 percent the previous month. The weakness was in the volatile aircraft component. Excluding aircraft, new orders for nondefense capital goods rebounded 2.9 percent after a 2.0 percent dip in October. These numbers reflect orders from both foreign and U.S. businesses.

Year-on-year, overall new orders for durable goods improved to minus 7.8 percent in November from minus 11.7 percent the month before. Excluding transportation, new durables orders increased to minus 6.9 percent from down 10.5 percent in October.

Overall, today’s durables report shows manufacturing still on a gradual uptrend. Growth in this sector is leading the economy but at a moderate pace.

Equities might be disappointed in the shortfall from expectation other than jobless claims fell more sharply than projected. Equities will likely rise on that report. However, Treasury yields were marginally lower on the two releases.

Jobless Claims
Released on 12/24/2009 8:30:00 AM For wk12/19, 2009
Prior Consensus Consensus Range Actual
New Claims – Level 480 K 470 K 450 K to 475 K 452 K

Highlights
The brightest spot on the economic calendar continues to be initial jobless claims which fell a very substantial 28,000 in the Dec. 19 week to 452,000 — a dip that the Labor Department describes as a part of “long-term trend” of improvement. The four-week average continues to come down, now at 465,250 for a 2,750 decrease. Continuing claims also continue to come down, 127,000 lower in the Dec. 12 week to 5.076 million. Trends for both initial and continuing claims show sizable improvement from November in what will raise talk of a possible gain for December payrolls.

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