Posts tagged ‘trading’

E-mini Trading Professor: Sunday Night Briefing (12-4-11)

By , 4 December, 2011, No Comment

The television “talking heads” are all over the map in their discussions as to what the coming week holds for our economy.  The usual discussions concerning the job market (improving), federal budget (weakening), and consumer sentiment (improving) have dominated the prognosticators predictions.

Here is a synopsis of what to expect for next week:

DATE REPORT CONSENSUS PREVIOUS
Dec. 5 ISM Services 53.9% 52.9%
Dec. 5 Factory Orders -0.3% 0.3%
Dec. 8 Jobless Claims 395,000 402,000
Dec. 9 Trade Balance -$42.2 B -$43.1 B
Dec. 9 Consumer Sentiment 66.0 64.1

On the hand, I suspect the market will continue to focus, to some degree, on the evolving debt crisis rippling through the southern tier of countries on the European continent. Yes, I realize the Central Banks, in a concerted effort, have opened the spigot of cheap money for the European banking system, but the systemic problems in the troubled European economies have not changed since last week.  I have a hard time believing that the average institutional investor will consider the problem solved.  To be sure, I don’t think anyone who is seriously involved with the European economic woes sees the latest round of “cheap money” as anything more than a band-aid on an ever deepening problem.

In short, I think that even the short memories of traders will completely dismiss the European situation.  Then again, I never underestimate the neurosis of the trading community.

On the domestic front, I think the number to watch might well be the ubiquitous trade balance number.  According to John Lonski, chief economist at Moody’s Analytic’s capital markets, “The positive is the trade gap has been narrowing, but make no doubt about it, one of the reasons we have lost so many manufacturing jobs is because of the heightened competition from overseas.”

From January to September, the U.S. imported $552 billion more worth of goods than it exported, with roughly 40% of that gap coming from China; and the imbalance has long been a source of tension between the two countries.

Anyone who has spent any amount of time in the trade room has been forced to listen to my rants about China’s monetary policy and failure to let their currency float, like the rest of the world’s major economic powers.  They have consistently used their “non-floating” currency position to their advantage, and put an awful lot of money in their treasury.  Falling interest rates and troubled economies have now made their economic policy the catalyst for major losses in their currency trading.  I, for one, won’t be shedding a tear for them.

Finally, the market has been very reactive to the news, and it is difficult to predict what sort of new economic issues may rear their head.  I would count on the unexpected, as the world is currently in a state of flux.

Real Live Trading Doesn’t Lie. Spend 3 days with me, a long time institutional investor, in my trading room, and see if you are one of the many that can profit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.

E-mini Trading: Why do Clients Enroll in a New Course and Put Forth Little Effort?

By , 15 October, 2011, No Comment

One of the most unusual and disturbing phenomena I observe on a daily basis is the abysmal effort put forth by a small group of new e-mini traders in learning to trade. It is not unusual to have students enroll and then come to the trading room and try to share the dynamics of the previous course they had taken and blown out a futures trading account.

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3 Important Things New E-mini Traders Can do to Succeed

By , 27 September, 2011, 1 Comment

The failure rate of new e-mini traders is disturbing.  According to various sources, 90% of all new traders are out of the market within 3 months, their trading account balances exhausted. There can be little doubt that e-mini trading presents a challenging skill set to learn and execute, but there are a number of factors that are well within the a new e-mini trader’s reach that he or she can control.

In my experience, a good deal of failure centers around three important factors that directly impact every new trader’s career. They are:

•    System
•    Communication
•    Experience

There are a wide variety of trading systems out there from which traders can choose.  Some of the programs are very large, some are famous.  There is no correlation, in my thinking and experience, between popular systems that can run more than $7-10000 and widely advertized and other systems which are based on sound trading methodology.  I’ve already written several articles on finding a good trading system, so I will not burden this article with that lengthy topic.

1.     Learn the System-  If there is one thing I see over and over is new e-mini traders trading real money and have, at best, developed a very limited skill level with the material and system he or she has paid for with their hard earned money.   I don’t just don’t get that thinking, but it is a rare student who starts simulator trading with me one on one that has properly prepared themselves to trade by learning the basic information of the system they are about to trade. They know some trades. They may know some of the interesting parts of a trading system, but they seldom know the details; and success in trading is in the details.  The end result of this thinking is that I end up spending a good amount of time explaining how charts and bars work when trading, when we could have been working on the business of learning to trade, not wasting time trying to hammer out the lingo and teaching the student material that is well documented in the written and video sections of a quality course.  Poor preparation is industry wide, and I read in the forums about systems I know well, and can trade effectively on my own, being bashed by individuals who “just couldn’t seem to get it” right and the concluded the system is undesirable.  I generally know what really happened.  Don’t study the material half-hearted and expect to learn the “meat and potato’s” of the system in the trading room.  Be over prepared.
2.    Communication- I have scads of new traders and potential traders come into the room and not ask a question, just sit and listen.  The most successful traders I have mentored were individuals who were fully engaged in the trading process and when the didn’t understand something, or some trade, they promptly asked why I am doing this and what did I see on the chart.  My preference is for small trade rooms that allow the room to interact.  Again, I have written an article on  this subject, but when all members of the room can speak to each other, there is a mutual learning process goes on, and their interaction, in my opinion, is often more helpful than the information I may impart.  In short, when you ask questions  you let people see where you need help and may get some suggestions how to remedy this or that.  Communicating creates a synergy in the room that allows everyone to learn.
3.    Experience-  When a new student first starts in the trading room, they generally lack any meaningful e-mini trading experience.  Simulators are great places to gain trading experience under the right conditions.  In order for a simulator to be an effective trading tool, the new e-mini trader must trade the simulator exactly as he or she plans to trade their real money.  Invariably, I notice traders trading 300 contracts on a trade, just to see how it would work.  You will probably not trade 300 contracts in your life, probably not even 100 contracts; but these playful dalliances with non-reality are very damaging to the discipline and emotional control a consistently profitable e-mini trader most employ.  In short, simulated trading programs are great if you trade with them exactly as you plan to trade with real money, but deviation from your specific trading mindset and methodology on the simulation is highly counterproductive.

In summary, I have stated the three most common mistakes new e-mini traders make.  Some spend their money on a course, then never bother to develop some mastery of the information.  Many traders sit and try to learn as “mutes,” and never get the benefit of room wide interaction.  And finally, it is very important to use your simulator in the proper fashion.  When you are consistent on the simulator, you are ready to go to the market.

E-Mini Trading: Channel Trading, Bollinger Bands, and Reversion to the Mean Theory

By , 30 July, 2011, No Comment

As I mentioned in earlier articles, I am an enthusiastic channel trader, which flies in the face of what most e-mini traders consider prudent trading. Most e-mini traders avoid trading in channels because they can be unpredictable and unprofitable. Reversion to the Mean Theory has certainly had its abuse over the years by purveyors of stocks and bonds. It is not uncommon for unscrupulous stockbrokers to tell a potential client that a stock is overpriced because it is trading over its yearly mean price. There is no correlation between eminent price movement in a stock and its distance from the mean price. This use of the Reversion to the Mean Theory is a misrepresentation of how stock prices fluctuate.

On the other hand, the theory holds great value for trading in the short term, especially when used in conjunction with Bollinger bands. I generally set by Bollinger bands at 2 standard deviations from the mean and use a setting of 10 time periods. There are other settings, which may be 14 or 18, that give satisfactory results under unusual market conditions; but I find 10 to be the most dependable setting for my personal e-mini trading.

John Bollinger, in his article, “Bollinger Bands-The Basic Rules,” states that closes outside the Bollinger bands are continuation signals not reversal signals. In nearly all cases, closes outside the Bollinger bands tend to be continuation patterns, with certain exceptions.

In reasonably symmetrical continuation channels the Bollinger bands tend to define the highs and lows of the channel. As a quick aside, symmetrical continuation channels refer to channels where the price action is ricocheting off the top line of the Bollinger band and moving in a direct line, with little retracement, to the mean line or the bottom Bollinger band line. These channels are a delight to trade as they are usually very low volume formations and occur during the stand down period (from 11 AM CST to 12:30 PM CST with some daily variations). During the stand down period the market is often dominated by smaller traders. This is especially true on the YM e-mini contract. In a typical trade, the smaller traders will try to push the price action outside the Bollinger band and typically fail. It is at this time that I fade the failed breakout back into the channel.

With very few exceptions, the price action in the above-described scenario will revert to the mean average at the center of the Bollinger bands. I have used this technique for several years and can assure you that continuation channels seldom breakout or breakdown. A more likely scenario for this price action is a reversion to the mean centerline of the Bollinger bands or a move to the lower Bollinger band. (Or an exactly the opposite, depending on the direction of your trade.) The tendency for continuation patterns to revert to the mean defies many investment theorists judgment, but it is true, just the same.

It is important to understand that this principle I have outlined works only in continuation channels and is a disastrous principle to implement in a trending market, or even a choppy market. Its sole use is in a flat continuation channel. It’s also important to use a fairly tight stop should the market action choose to actually breakout or breakdown.

In summary, I have described a unique scenario in e-mini trading where Bollinger bands and Reversion to the Mean Theory can be utilized to initiate frequent and profitable trades. It takes some time and experience to learn as technique, but continuation channels tend to revert to the mean.

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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    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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      What is the Market Going to do Today?

      By , 3 December, 2010, No Comment

      I am invariably asked this question as I begin each day in the trading room.  Will the market go up?  Will the market go down?  There is a gap up…does that mean the market is going to fill the gap immediately or maybe wait until later in the day?  I almost always disappoint the individual asking the question by answering, “I really don’t know.”

      Even worse, I really do not know.

      Predicting which direction the market will move can be one of the most embarrassing propositions for any trader to undertake.  Of course, you have at least a 50% chance of being right, which is some consolation. Generally speaking, though, I don’t have the slightest idea which way the market will move, and many find this disturbing.  As a trader, many think you ought to have some general idea as to which direction will move.  But I am a scalper, and I don’t concern myself with predicting which way the market will move.

      I am looking to catch areas of momentum and ride that momentum until it subsides.  Instead of knowing which way the market is going to move, I am simply hitchhiking a ride as the market moves in one direction or the other. I am quite comfortable reacting to the market as oppose to predicting what the market might do.

      Scalpers use a number of techniques to identify areas of potential momentum.  First and foremost, most useful information is contained in the actual price action in the market.  Oddly enough, price movement is often ignored in favor of a variety of oscillators, rate of change indicators and a number of exotic charting systems.  I am not interested in many of the popular predictive systems like Elliot Wave analysis, Gann Lines, or systems of a similar ilk, but I want to make sure I point out that my opinion does not imply these systems do not work.  My point is a simple one, these systems do not work for me and I do not use them.

      No, I am far more interesting in support and resistance, trend lines and momentum.  I have an important maxim: Trade primarily with the trend. I allow myself one countertrend trade per day, and that is usually one too many; but there are many very enticing set ups that occur countertrend and learning to lay off these trades is a challenging job.  Most traders find that countertrend trading is an unprofitable method in which to trade.  Further, the empirical scientific evidence bears out one indisputable fact; trading against the trend is far less profitable than trading with the trend.  For a scalper, trading with the trend the majority of the time is imperative.

      I also employ, in varying degrees, forms of Fibonacci analysis.  I have never been convinced that the underlying principle of Fibonacci is valid; that is, the market moves in natural cycles that can be predicted using the Fibonacci sequence.  One thing I know for sure is that enough people trade using Fibonacci analysis that the system works.  Whether Fibonacci works because so many people use it or it is intrinsically valid is of little consequence to me; I don’t care why it works, I only care that it does work and therefore employ some tenets of the system in my trading.

      In summary, I am a scalper and I am interested in momentum in the direction of the trend.  I don’t use predictive trading systems; I rely upon price action, support and resistance, trend lines, and some limited use of Fibonacci analysis.  I keep it simple and try not to overload my methodology with extraneous charts and unnecessary information.  Scalping is not for everyone, but it is a very effective method in which to trade.

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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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      Do You Keep a Trading Diary?

      By , 10 February, 2010, 1 Comment

      The point of keeping a trading diary is to remind me that I’ve must remain a student of trading at all times. Regardless of whether I’ve traded 25 years, or 25 months, or 25 minutes it is important to keep the student mentality. In my opinion, this is where many traders fall down. Learning to trade is an ongoing process, and the market has many moods and unique price action. Sometimes it can be months or years before similar situations arise, and it’s handy and useful to note these anomalies so that you might be better prepared the next time they occur.

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