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.

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Click here to learn about the future of the Nasdaq

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.

Step 1.

Decide what you want to trade.   I try to trade the most highly leveraged investments I can find because it maximizes my return.  For me, that would be index futures contracts.  They are liquid, accessible and trade very much like equities.  They are also highly leveraged, which gives the trader great potential for profit, and  conversely, great potential for loss.

Step 2

Start with the YM contract, I believe it is easier to trade than the ES contract.   Don’t start trading with real money, use a demo account and paper trade.   You will need to learn a system to trade, and I have made some videos that hint at my trading technique but plan a launch of my entire system in the near future.

Step 3

Once you can trade on paper for consistent profits, it’s time to trade with real money.  It is different with real money, and I can’t explain why, it just is.  The hallmarks of a good trader are excellent technique and unfaltering discipline.  Never take a trade on a hunch.  You have a system, use it.

Check this amazing FREE trend anlysis report on any issue you trade, especially the eminis:

Step 4

Money Management is of prime importance in trading.  Never risk more than 5-10% of your capital on a given trade.   You should open an account with a minimum of $5000 and only trade 1 contract until you have raised your account balance substantially.  Remember, 1 contract.

I have all sorts of recommendations for brokers, margins…etc, but that will come in time.  For now, realize that leverage is a disciplined day traders friend.

You owe it to yourself to investigate the eye opening features of this program. It’s money in your pocket.

I am scalper, that’s why. I am looking for very short fluctuations in the markets to exploit and earn 12 ticks, or three points. It’s my only goal in trading. I don’t care if the market it going up or down as I am as comfortable being long as I am being short the ES Emini contract. All I seek is movement and the ability to ascertain which way the market may move for the next ten minutes.

I don’t let any trades go overnight, ever.

I don’t let a winning trade turn into a losing trade. (This is sometimes easier said than done)

I have a system, and I never “guess” what the market might be going to do. The variables in my system must meet certain criteria before I trade.

If I don’t feel good about a potential trade, I don’t take it.

I use an 89 period SMA and if the price action is significantly above the average, I only take long trades and, conversely, if the price action is significantly below the average I take only short trades.

I avoid counter-trend trades like the plague, yet I find myself taking the occasional counter-trend trade.   Don’t ask me why, I do not know why.

I use the MACD, CCI, Average True Range, DecisonBar and Stochastic indicators in combination to select my trade.

The entry points for the CCI and Stochastic indicators must be in agreement for me to take a trade.

I never break my entry rules.

I pay close attention to pivot points, and Fibonacci Retracement levels.  I use these tools as background information, not primary indicators.

I recommend most people start with the YM contract, and then only after a month or so of paper trading where the trader can consistently profit on a daily basis.

There are no born traders, there are well trained, intuitive traders.

My mother thinks trading is for idiots.  (I hope she is wrong, on this one)

On the CCI, pay careful attention to the +100 and -100 levels, they are your entry points.

On the stochastic indicator, pay careful attention to long and short crosses.

Never trade without stops, ever.  Never trade without stops, ever.

Have a target profit point, too.

I sometimes let trades run, but you often risk giving back all your gains when you implement this strategy.  Pigs get fat, hogs get slaughtered.

Decision Bar has kept me out of more terrible trades than I care to think of.

A change in the direction of the divergence line on the MACD might be a good reason to consider exiting a trade.

I never double down on a losing trade.

I’ve never been able to make head or tail of chart formations, as they make no sense to me.  They may work for some people, I ignore them.  To me, Head and Shoulders is shampoo, not a potential entry point.

While you should profit most days, there will be days when you don’t.   That’s okay.

Day Trading on the YM contract

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.

You might notice there were a few short trades that would have been profitable, but I was in no mood to attempt a counter trend trade given the significant distance the price action stayed away from the 89 period SMA.

You can get a demo account, using Ninja Trader and practice to your hearts content at the above referenced link. You should be able to consistently, say five days in a row, post profits before you start trading a live account. Read some of the archives for my particular trading style, or apply a style you have studied to perfect your trading before you go live.