Emini Trading Blog

Archive for the ‘E-mini Trading’ Category

As we have seen, there are numerous skills needed to day trade for a living. Proficiency in such areas as entries, position management, exits and self-discipline will profoundly affect our level of success. While advancement in these areas impacts our profitability, without a deposit of real money in a brokerage account, no trades will take place since access to any market will not be granted.

Part III: Money needed

1) For emini futures trading, many brokerages require $5,000 to open an account. Regardless of the minimum to open, margin must be met. The lowest e-mini S&P margin claim for day traders I have seen is $500.

2) To be a day trader with a stock equities firm, a minimum deposit of $25,000 is typical.

3) Access is by far easiest in the retail foreign exchange (FOREX) markets since deposits of as little as $250 will enable entry. However, the extreme leverage used to facilitate these accounts means that even a small move, relative to the market’s volatility, can blow-out your account. While greater regulatory oversight seems to be imminent, at this time aspects of these markets are significantly less standardized than futures and equities.

One way to be sure your account is preserved is to set a limit for the maximum dollar amount you will risk on any one trade. Professional fund managers rarely risk greater than 2% and routinely put 0.5-1% of the money they are in charge of at risk. Perhaps you will allow a greater percentage. If so, consider using the following formula. It has been designed to allow you to earn the most amount of money possible while keeping an empty account at “arm’s length”.

In terms of dollars, add up the difference between entry and exit and multiply that number by 20. Next, add to that the commission costs. If the final product is less than your account’s value, the risk amount is acceptable. However, if the total is greater than what is in your account, the risk is too much. In such a case, reduce your risk by modifying your entry or stop. If neither seems advisable, implement the ultimate risk-reducer: Pass on the trade!

Well, it is now time for you to present your closing arguments. Pull together your answers from your review of time, skills and money needed to day-trade for a living. If you are deficient in any area, determine what it will take to make up the difference. Remember, becoming a master trader is a process that requires many consistent small steps.

If you meet or exceed these recommended minimums, congratulations! Your positive answers show that your current level of trading time, skill, and money available makes success in trading a real possibility for you. If you decide to proceed, remember to be positive and realistic. Obey the rules of sound trading and obtain expert guidance when needed. Since the judge in this case is impartial, know that the market will not single you out. In trading, unlike any judicial system, whether the result is outstanding or dismal, it is always because of you. May all your trades be successful!

Part Two – Key Daily Trade Metrics

Each pilot knew the weather conditions were the same from deck to ceiling. Yet, their choice in routes differed. Due to an acute knowledge of the planes conditional fuel consumption characteristics, the first chose to muscle through the bumpy air atop safe flat terrain. The second, having been expertly trained in avionics, sought to fly over unfamiliar peaks. Although their routes varied, each arrived safely and in good time. As we trade the e-mini S&P, each of us face the same conditions, yet the routes by which we seek to capture profits vary greatly, don’t they? Regarding the route we’ve chosen or more specifically, trades we’ve placed in the last week, month, and year, are there unknown strengths and weaknesses that have until now prevented our “arrival” as expert traders? 

Emini Trading Chart - February 17, 2010

In consideration of Key Daily Trade-Metrics, we will use three metrics to uncover personalized strong and weak points and the impact these can have on our success. By tabulating them daily and tracking them over time we can clearly see where our success occurs, our current level of awareness toward opportune conditions, and our propensity to adapt to shifts in market behavior. These three metrics reveal the impact our habits have on our trading and show us viable solutions!

KNOW WHERE YOUR PROFIT OCCURS
The metric inputs are: Compare profitable trades and their quantity to their direction. Most likely, the answer is not 50/50. Thus, knowing profits occur, i.e. predominantly when entering long, we could correct our course by doing two things. First, when trading in a confirmed uptrend, increasing quantity could produce greater gains. Secondly, we could pursue improving our ability to recognize and profit from market weakness.

HOW TO SPOT YOUR OPPORTUNE TRADE CONDITIONS
Each day, compare the total number of entries and each entries quantity to the number of valid trade opportunities per your strategy. Does your frequency and size match the ever changing frequency of opportunities present? If you find that your trade frequency is static, likely you are both missing quality entries when these are more present and forcing trades despite diminished opportunity.

RECOGNIZE CHANGES IN MARKET BEHAVIOR
How well we perform in this area can be gauged by tracking the length of time over which we maintain profitability or the lack thereof. For example, investigating a stretch of unprofitable trading will undoubtedly reveal numerous missed cues on our part. Clearly, identifying these missed cues is the first step in preventing a repeat.

 Use these key trade metrics daily and tracking their results over time wil help you improve your trading and to become a professional emini trader.

“Know thy self.”

As emini traders, it can feel as if there is simply too much to be aware of in order to live up to those words. We see the wisdom in doing so; however making beneficial application is complex. Some may reason that, “the money is in capturing big market moves, not applying some old adage”. Now, while quickly rebuffing with “the money is in the moves not some adage” may seem sound, would a more tangible type of confidence better foster expertise? A confidence borne from knowledge of our real-time, real-dollar choices and their outcomes, rather than the false confidence that can result from reflex answers? To come to know the value of trade-metrics, first we will consider their composition and preview their many uses.
 
Trade-Metric Composition: Like a math problem where inputs are needed in order to produce an answer, so it is with trade-metrics. Here, one or more input is measured against another. Some metrics call for measuring data vs. data, while others measure data vs. market condition. The answers to these varied inputs are usually averaged over time.

Examples of trade-data inputs are: Did I buy or sell? What was my trade frequency and contract quantity per trade? How long did I hold the trade? Was it profitable, flat, or a loss? While answering these questions can in a broad sense, heighten awareness of our trading selves, it is the measuring of this data against specific trade-condition inputs that can bring our strengths and weaknesses sharply into focus. An example of a trade-condition input is: Were my trades placed in an up or down-trending market?

Use of Trade-Metrics: For instance, by tabulating both our long and short entries, including their quantities, against the back-drop of up-trending sessions we can make use of a penetrating trade-metric. Will the answer give us something tangible upon which we can build lasting confidence and expertise? At a glance, it shows what our bias was within the period measured. It shows how well we adapted to what the market communicated. Additionally, by noting our quantities on both the buy and sell-side, we are able to see if we are maximizing our profitability per market conditions or if our preference for either the buy or sell-side is being placed ahead of trading in accordance with market conditions, which is inherently problematic.

Has the use of this tool helped us “know thy self”? Yes! By using just one trade-metric, our dominant tendencies, as well as, advisable times to trade bigger, smaller or sit out altogether became forcefully evident nearly simultaneously! “Which ones are most helpful?” and much more will be answered next time in Part Two entitled: Key Daily Trade Metrics.

E-Mini says “stop”? Active traders tend to be a dynamic group of individuals. They tend to hear the word “stop” as a negative. Stop (or slowdown) is not normally a part of their vocabulary. Nevertheless active traders would do well to become familiar with this mechanism. In our business stops are one of the most important tools we have. Stop-loss orders help us avoid the number one obstacle to consistent trading success: emotional trading. By planning our stops in advance we effectively eliminate the all-too-human instinct to “wing-it”. An overview of stop orders is a good first step in understanding and using them consistently in our day-to-day trading.

Stops are a form of insurance. Remember, all traders suffer losses – it’s the nature of the business. Our goal is to limit our financial exposure to acceptable levels and more importantly, to avoid emotional turmoil when we do experience losses. Trading emotionally is like letting an intoxicated friend drive your vehicle. As a refresher – some definitions and things to keep in mind.

A stop order is an order placed with a brokerage that specifies that when a predetermined price is reached, a market order to sell that security is issued. Thus, if you determine that you want to limit your loss exposure to 10% you would enter a stop-loss order at 10% below your entry price, effectively limiting the amount you may lose to 10% should the market turn against you. Depending on what type of order it is, you can specify sell price, buy price or both. Stop loss orders are also called protective stops for obvious reasons. It’s a little like putting a collar and chain on your dog so when he takes off after a passing bus he gets so far and the length of chain runs out and he suddenly…stops!

Stop-loss orders are great forms of insurance – there is no cost to place a stop and it sits there waiting patiently until the target price is hit. The stop loss then becomes a market order and the desired transaction takes place. Some things to keep in mind regarding stop loss orders:

1 – Just because a target price is reached and your stop-loss becomes a market order, doesn’t mean you will get that price. In fast moving, volatile markets as the e-minis often are, a security may fall quickly below your target price. This is a potent argument for actively monitoring your trades.

2 – One of the essential times to use stop-loss orders is when you go on vacation or business trips and your ability to monitor your trades is limited. Swing traders and long-term investors would do well to become familiar with this mechanism in these instances.

3 – A “Good-’til-Cancelled” (GTC) order is an order that allows you to cancel the order at a future date (although most brokerages limit a GTC order to a maximum of 90 days.).

4 – A “Day” order is an order without an expiration date. If, at the end of the trading day, the target price is not reached, the day order expires. You will have to re-enter the order the next trading day.

5 – Be aware that market orders and limit orders serve different objectives. When you enter a market order you want to enter the market right away at the prevailing bid/ask price. A limit order specifies a price that you want to buy or sell at. Limit orders typically have higher transaction costs than market orders.

6 – Don’t use mental stops when you trade - they invariably move!

7 – When determining where your stops will be, consider your total equity capital. Any single stop calculation must take into account how much this potential loss will affect your total investment capital. Many experienced traders recommend that you set a percentage of total trading capital that you can afford to lose in a month (2 – 3% is a common figure). Avoid setting stop-loss orders at a percentage that would result in your total trading capital going below your goal.

8 – Be careful not to place your stop so that normal market movements trigger the stop prematurely. A good tool for determining placement of the stop is the security’s beta factor. A beta of one or two suggests less volatility and a tight, relatively close (to purchase price) stop is appropriate. A beta of up to three indicates increased volatility and the need for a “looser” stop.

9 – Leave your stop alone unless you have a paper profit. At that point you are ready to use “trailing stops” to protect and “lock-in” your profits. Note that many brokerages do not support trailing stops so check with your brokerage to be sure.

I’m sure every reader can remember the grade school game, “Simon Says”. Let’s update that to “E-Mini Says”. When E-Mini says “stop” that is our signal to trade the E-mini’s rationally in a disciplined, professional manner. The profits will flow to the extent that we consistently use the tools available – including stops. Now, E-Mini says “Go”…

You’re a new emini trader. You’re excited. You’re enthusiastic. You’re driven by the possibilities. You also have no clue where to start! “Overwhelmed” is an understatement. The emini trading gurus and S&P futures market fakes circle overhead, squawking about holy grail courses and products and systems and sure things. What’s a newbie emini trader to do except withdraw into her/his shell and breathe a sigh of relief?

Then you remember – you saw it on www.haveitallwithoutriskingadime.net: Rule #1: Always start out by paper trading the eminis. Yes, a first step – a safe foray into the wild world of emini trading.

WHAT IS PAPER TRADING?

Paper trading is basically trading without real money. Ideally you want to find a broker who allows you to trade the real, live market – not on old data on some server stored in the janoritorial closet.

So what do you do? Where do you start? Well I’m here to help with no-nonsense, common-sense advice and guidance. Paper trade? Here’s how you do it. Google the phrase paper trade or paper trading, pick the site that feels right, click the link, fill out the online information fields and start trading! Don’t make this complicated – the services are all very similar. They vary only in the breadth of assistance they provide: Real time or delayed information; simple charts or the whole enchilada of indicators, oscillators and “personal” advice; fee or free.

Many emini futures brokers offer free, high-quality paper trading accounts using real-time data. Take a look at www.globalfutures.com or www.ampfutures.com.

Small concerns really. Just get started! Come back here later and I will fill you in on some additional aspects of paper trading including why it may not be the best thing for the new trader. What? You want to read about that now? Okay. I’m going to give you some guidance on why paper trading is not always the best course of action for a beginner, contrarian advice to be sure but hear me out.

WHAT PAPER TRADING THE EMINIS CAN’T DO FOR YOU

First of all paper trading is a “risk-neutral” activity. Do not underestimate the profound influence of fear and greed over market behavior. All trading activity, regardless of which investment vehicle, is the result of human interaction – buyers and sellers. When precious and scarce resources are involved (i.e. cold hard cash) we humans are often prone to throwing rationality out the nearest window and taking the wild ride on the emotional roller coaster. Given this aspect of day-to-day trading activity, it is important to experience this in all its glory. And often that means staring at the emotional beast as it stares back at you from your computer screen.

Risk, reward, timing, insight are all distorted through the carnival lens of fear and greed. Paper trading fails to convey the emotional impact of trading with your own money.

The second point I want to make about paper trading is that it often fosters procrastination. When you trade without risking your own money, your trades have no compelling impact. Your trades resulted in a gain? Great, but so what?! Your actions resulted in a loss? Great, but so what?! There is always one more time period to test. There is always one more indicator you want to play with. When does it end? Trading in real-time with real money makes this a moot point. The lessons and consequences of your activity are burned into your mind. That kind of learning can never be accomplished by paper trading.

So, paper trade if you must, but be vigilant. Paper trading to learn the basics is a good use of your time. But you must be aware that you may be indulging your comfort zone. Emini trading is a serious business, and a clear, focused eye on the brutal reality of trading with real money will only help you and your career as a trader. Don’t avoid reality, use your own money – a modest amount to start, but learn the market the fastest and most mememorable way: by taking yoru lumps and surviving with insight, experience and knowledge. And then open a paper trading account for you daughter or son: an excellent way for a teenager to learn the rules of the game!

One of the most effective and reliable of the technical indicators for trading e-minis can be the Average Directional Indicator or ADX. Used correctly the ADX can be a stunningly accurate gauge of market trend strength or weakness and coupled with a complementary indicator, can be very effective in setting up trades using the e-minis.

The ADX was created by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems. Interestingly Wilder, an engineer, is also credited with creating two other well-known technical indicators, the Relative Strength Indicator (RSI) and the Parabolic SAR which are standard indicators in most charting software packages today.

The ADX is made up of three components, the ADX and +DI/-DI. +DI is the positive directional movement indicator while -DI is the negative directional movement indicator. These two indicators are often plotted separately from the ADX to minimize visual clutter. They are designed to indicate the upward or downward (strength/weakness) of trends.

The directional indicators are capable of generating buy and sell signals when they cross. Basically, a buy signal is present when the +DI moves above the -DI and a sell signal is present when the -DI moves above the +DI. However, in volatile market conditions or when issues are in trading ranges, these signals can reverse rapidly resulting in whipsaws. It’s generally accepted that the directional indicators alone are not reliable buy/sell indicators.

The third component of Wilder’s indicator is the ADX. The ADX is an oscillator plotted on a 0-100 scale. The ADX itself is the moving average of the difference between the +DI and the -DI. Readings above 60 are rare, while a reading above 30 indicates a strong trend. Readings below 20 indicate a weak trend or an issue in a trading range. Keep in mind that the ADX is “trend neutral”; its reading can apply to bull or bear trends – the ADX merely indicates the strength of the trend. Generally speaking, when the ADX begins to rise above 20, a trend may be in its early stages. Conversely, when the ADX begins to fall below 40, the current strong trend may be weakening.

Wilder himself in his book advises that the ADX is best used in more volatile market conditions. He also advocates use of what he calls the “extreme point rule” when implementing trades. For use in the E-Mini issues the ADX provides excellent results when used with a complementary indicator such as moving averages. The ADX is also a useful tool for setting up scans for issues in the beginning stages of trends and to avoid issues mired in trading ranges.

Many emini traders, believe it or not, aren’t aware of what we’re about to discuss here. Most absolute beginner emini traders try to catch tops and bottoms in the futures market, not even trying to trade the TRENDS. We, like many other traders first starting attempted to do the same thing. We know this from not only our own personal experiences, but by teaching and talking to tens of thousands of traders that they tend to do the same thing.

Many (if not most) emini traders feel that by trying to catch a market top or bottom is where the real money is. We on the other hand disagree completely. Catching just a little piece of a trend (and sometimes much larger than a little piece) adds up, not to mention easier (higher percentages) to do than trying to catch a top or bottom in the market. So, we thought by including this topic; Trend Trading vs. Counter-Trend Trading would be very helpful to you. We know this will give you more insight into both of these types of trades.

Let us first start out by saying that at least 80% of your trades should be those trading with the TREND (as taught in this Course – ‘Trend Determination’, etc.). The other remaining 20% or so can constitute COUNTER TREND (CT) trades. We would highly suggest concentrating more (at least in the beginning) on the TREND trades as opposed to trying to pick tops and bottoms (CT trades). By not only teaching, but by speaking with students, especially beginners, we find that most traders simply just try to pick tops and bottoms as opposed to trying to enter the market with the (overall) TREND.

We’ll go as far as to say you probably will not become a successful emini trader by trying to pick tops and bottoms when you first start off trading. Counter-Trend (CT) trading takes a lot more experience. Believe us when we say that you’ll not only find emini trading less stressful, but much more rewarding and profitable if you simply stick to trading with a markets (overall) TREND. Look to make consistent profits utilizing the profit objectives (PO’s) taught in this Course — and of course you’ll occasionally catch the bigger move (by utilizing the ‘Trailing Stop’ methods taught in this Course).

Of the 20% or so of trades that may become COUNTER TREND (CT) trades, 80% of those trades should be BUYS. Why Buys? Simply put, because we’ve found that BOTTOMS are much easier to pick than tops. If you think about it, the psychology of most traders are more biased to buying the market as opposed to selling the market as a whole. Traders in general seem to be more optimistic rather than pessimistic on the overall market. We’ve spoken to thousands of traders that have expressed to us that they feel more comfortable buying the market as opposed to selling it. We know that sounds ridiculous, and we agree, but many (if not most) traders, believe it or not, feel this way. That’s one of the reasons why bottoms seem to be easier to pick than tops – traders are more prone to Buy than they are to Sell.

Think about it, how many stock traders do you know that actually sell a stock short? Not many, most stock traders buy stocks in anticipation of higher prices. When the market gets extremely oversold and drops to levels where the big money comes in to Buy the market (oftentimes at a 5%, 10% & 15% overall market corrections), you’ll oftentimes see the market move higher (spike up) and continue the markets (stocks) overall UPTREND .

When the market is in a DOWNTREND, the market not only drops three times quicker than it rises (making it much more volatile), but bottoms are put in place much quicker. This is evident in any chart you look at. On the other hand, when the market is trending up, the market generally moves much slower and much more gradual in nature. Therefore, trying to find market tops are much more difficult to do, at least that’s been our personal experience.

So, when attempting to BUY on a Retest of a Low (important), the market is generally in a Downtrend, and when attempting to SELL on a Retest of a High (important), the market is generally in an Uptrend. By knowing these two simple rules will help make Counter-Trend trading much more predictable in nature, rather than trying to BUY when the market is in a free-fall, or trying to SELL when the market is going to the moon. At most, these rules will help prevent you from jumping in front of a freight train.

Therefore, I suggest waiting for a RETEST OF A HIGH before looking to go Sell Short. Conversely, wait for a RETEST OF A LOW before looking to go Long. Remember, Counter-Trend trades should only constitute roughly 20% or so of your trades. As mentioned before, CT trades are definitely more difficult than trading with the markets overall TREND.

A General Rule Of Thumb: When the emini market is Trending Up, the market tends to be a lot less volatile than when a market is Trending Down. Therefore, generally speaking a Down Trending market is much more volatile than when a market is trending up. A market falls roughly three times quicker than it rises.

( 1) Know the difference between trading and investing. We are e-mini futures traders, NOT investors. Discipline is doing the right thing at the right time…every time! Survival in this business is dependant on the right decisions.

(2) Don’t let losers run! Always use stops (i.e. Initial Stop Losses [ISL's]). Have an absolute limit – like a maximum of 8% of the stock value (taught in the ‘PSTS’ course). Risk management is very, very important in your trading. Don’t be stubborn in holding a position/opinion. Remember, while you may not be wrong often, The Market Is Always Right. The best traders are the first to admit (to themselves and the market) that they made a mistake.

(3) Trade only price pattern set-ups (taught in the Trading Concepts ‘PSTS’ Course).

(4) Trade for skill, NOT the money. If you’re focused on the money aspect of trading…you’re not focused on the ‘trade’. And SCARED MONEY NEVER WINS!

(5) Concentrate on 2 to 4 stocks at a time (if that’s you comfort level). Remember that stocks have personalities, habits and friends…get to know them all.

(6) Focus on your executions. Remember, every execution is a trade. Money is valuable…don’t leave it on the table.

(7) Model Yourself After Successful and Experiences Traders. You will be all you can be…but you need to start somewhere. That’s where the Trading Concepts ‘PSTS’ becomes invaluable to you as a trader.

(8) Be Teachable. Learn something new everyday (or at least every week). The ‘Losing’ and ‘Winning’ trades can teach you a whole lot.

(9) Remember that even the best of the best traders lose money. Learn to accept your losses and move on to the next trade. That’s just part of the business – you will NEVER win 100% of the time.

(10) Use relatively small share size…at least at the beginning. Large wins at the beginning generally means large exposure.

(11) When in Doubt, Get Out (or Stay Out)!! Deal with reality, if it (the stock) doesn’t behave like you expected, Get Out Of The Market Immediately!

(12) Learn the difference between gambling and trading: (1) Don’t trade a stock just because it’s irrationally high or low, (2) no new positions before the market opens, (3) no positions before major market announcements, (4) always use a protective stops (ISL), and (5) always have a high probability trade set-up before putting on a trade (a ‘PSTS’ for example).

(13) Never, ever add to losing trades.

(14) Don’t’ overtrade. Trade more only as you get more experience and only if you’re Winning. Not the Opposite.

(15) Be Logical, NOT Emotional. Emotions can help destroy you as a trader – be very logical and follow your trading rules.

(16) Exercise Patience. Do not force trades when there are none.

(17) Exercise Diligence. Do your homework and preparation before each and every trade. Be willing to let time do its work. Hard work is required in this business.

(18) Anticipate, identify and take full advantage of momentum in the market. (for example, the ‘Extreme Upside & Downside Running Patterns’ as taught in this Course).

(19) Always select realistic entry and exit points and write them down. This goes hand in hand with doing your homework and preparation before each and every trade.

(20) Maintain a list of your current open stock trades, monitor them closely, and try to limit them to 2-4 LONG trades and 2-4 SHORT trades.

Below is a video is an analysis of a typical intraday emini futures (ES) chart using fibonacci retracements, keltner bands and moving averages.

As many professional traders have suggested, 90% of successful trading is psychological. Use the checklist below for your own trading and investing preparation and implementation.

These traits are very important for you to understand – and we suggest you try to adhere to them in order to truly become a successful trader. These traits coupled with the proper psychology can make a difference in your overall trading/investing performance.

• The ability to act on your decisions.
• The ability to accept responsibility for your actions.
• You must have emotional detachment from the markets.
• The ability to accept risk and take losses (you’ll never be right 100% of the time).
• The ability for independent & creative thinking.
• The ability to develop insight & proper course of action in various market situations.
• The ability to have self-control.
• The ability to adapt quickly to changing market conditions – being flexible.
• Accept your inability to control the market’s movements (the market is always right).
• The ability to function in both structured & unstructured environments (up, down & sideways markets)
• You must have a commitment & focus on the task at hand.

You MUST effectively manage your stress in order to strive & survive in this business.

Other critical traits:

• Self-Discipline
• Knowledge
• Decisiveness
• Positive Mental Attitude
• Consistency
• Self-Control
• Concentration
• Persistence
• Patience

All these traits have to do with your psychological make-up. You must overcome any and all psychological pitfalls if you want to achieve both profits and attain longevity in the markets. It is the psychology of traders that moves the markets and that’s why your thoughts and feelings are important. Remember, whether you’re a day trader or long-term trader, your thinking and emotions will affect your trading.

Your thoughts control how you feel. Thus, feeling “Positive” gives you a greater chance of being successful in the markets. Here’s a quote that conveys this statement:

“When you are feeling gloomy, everything seems to go wrong; when you’re feeling cheerful, everything seems right.”

Remember, you are totally responsible for your actions 100% of the time. Never blame anybody else. This is very important in trading/investing. Here’s another quote:

“A fool is quick tempered; the wise man stays cool in the face of insult or adversity.”