Emini Trading Blog

Archive for the ‘ES’ Category

One common characteristic of ineffective day traders is the execution of too many trades throughout the course of a ES emini trading session..  There are many causes for this phenomena, but if you are making 15 trades a day you are probably guilty of this offense.  In my world, there are not 15 excellent trade set ups on the average trading day.

Over trading during a trading session will eat away at your profits or enhance your losses.  On the other hand, your futures broker will love you because his commission account will soar, but I don’t think your futures account will withstand the commission shock.

As I see the market begin to form a good set-up, I start an argument with myself.  I usually look for reasons not to take the trade.  Is the set up really a good one?  Do some of the oscillators or price action appear to be pointing to avoiding the trade?  Am I trading on intellect and not emotion?  These are all questions I ask myself as I prepare to enter a trade.

I think the cause for over trading has its roots in emotion, specifically greed.  After all, every trade has a binary outcome and the possibility to make money, and making money is the reason most of us trade the ES emini contract.  You make money on high probability trades, though, not trades with shaky set up probabilities.  I like to fish, for example, and the only way to catch a fish is to have your line in the water.  You won’t catch that nice fat walleye if your line is in the boat.  I think this analogy is a good one for trading, too.   Many people feel the like they need to maintain active positions in the market in order to catch the next “big move.”

One clarification here:  I am a scalper, which is a technique for carving out 2-3 potential points per trade during the normal market action I observe.   Which is to say I look to make 4-6 trades a day to achieve my profit target.  My average trade lasts 5 to 10 minutes and then I take my profit, or cut my loss.  Now there are times when the market gets into a nice trend and I may sit in a trade for quite some time, but that is not the rule, rather it is the exception. (a very pleasing exception, at that)

My point is a simple one, don’t over trade.  Usually you are “chasing the market” when you trade to often.  You have to tell yourself that there are times when you will miss a potential trade and err on the side of safety.  This is especially true of countertrend trades, which are the bane of my existence.  Countertrend trades must be scrutinized with the greatest of care because they can account for many losses. The market might well head into opposite the direction for a bar or two, only to resume the direction of the trend.  Years of heartache and cursing have hardened me against countertrend trades and I scrutinize them very closely.  You should too, the trend is your friend, and poorly thought out countertrend trading will make you old before your time.

One last note: Highly volatile markets will appear to produce many nice setups that can’t be trusted. You will be tempted to take many trades.  When trading the ES emini contract, you should note the Average True Range, and if it is swinging in the 8 point range and looks like a seismograph in a 6.5 earthquake, you are likely to get blown out of most of your trades  by simple market noise, at those times a profitable trade is more a function of luck than skill.  Volatile markets, with the long bars and long flags which are typical of this phenomena, are good days to to err on the side of caution, as trading may be risky proposition.  You will see many nice setups, then suddenly the market may change course: it’s like surfing in 30 foot waves, your chance to get crushed are very high.  Wait for calmer waters and trade in a market where your skill level can earn you safer returns.  Best of luck trading.

Any trade in the futures market has essentially a binary outcome, the market either goes up or the market goes down. Of course, I am aware of the fact that you might well argue that the market stays the same and claim an anti-binary bias, but the fact of the matter is the market seldom, if ever, stays the same. Price movement is constant, especially in the scalping style of trading.

The problem arises with oscillators, which essentially measure market momentum. We are all aware that the price can easily, and often does, decline during a period of time that momentum oscillators show postive momentum. This is a constant problem traders face when trading with momentum based oscillators. We all want to trade with the trend, and I have a personal trading style that precludes any counter-trend trades. My psche simply can’t endure the relative success/failure rate on counter-trend trades. I will also freely admit that counter-trend trades can often be among the most profitable trades you can make. The problem arises when you take into consideration the relative failure rate, and/or false indications in the change of the trend. That being said, I usually strike an 89 period simple average line on my trading charts and ignore all trades above or below this line. It is a simple way to stay with the trend. It is a bit primitive, though.

As a general rule, I like to trade 233 tick charts, which, I realize, is a bit faster moving than some individuals prefer to proceed, but I have grown quite accustomed to idiosyncrasies of this chart configuration and usually profit handsomely for the information gleaned from tick charts. You can get a great idea as to the current volume in the market by how fast the bars fill. So I generally don’t chart volume, but glean the velocity of the market by the pace at which the bars fill. Incidently, I am a candlestick guy, for no particular reason other than I have always traded candlesticks.

But let us return to the inherent flaws in momentum oscillators in discerning price movement. Again, I reiterate that momentum in the market can appear to be positive, whiile the price is actually falling. This is a situation that often results in losing trades, and endless frustration for the trader. After all, one reasons that if the market is in an upward swing, how in the heck does the price action suddently veer to the negative?

The realization is a simple one: Price momentum and price action do not always have a positive correlation. Now this is a difficult, often impossible, concept for some traders to conceptualize.  My answer to the problem is a fairly simple one. I use dual time frame oscillators to chart my trades? On the one hand, I use a longer time frame oscillator to get a feel for the overall momentum of the market, and a shorter term oscillator to determine the the actual price action in the market. I have experimented for years with different settings to achieve optimal results, and for scalping I have become comfortable with a 60 period look back on the longer term oscillator and a 15 period look back on the shorter term oscillator. In effect, I get a good guage on both the momentum of the market and the price action in the market,

One quick note: I can notice when the momentum is falling and the price is falling and find it easier to pick up on trend reversals. While the system is not foolproof, it gives the trader an accurate picture of what is actually occuring in the market, and good information if he or she decides that taking that all-to-risky counter-trend trade has a decent probability for success. Myself, I usually wait until the trend has really changed before I jump into a trade, but great money, some of the best money, can be made for those who are not of the faint-of-heart and can bring themselves to trade against the trend.

The keep point of this discussion is simple: Momentum oscillators are essentially flawed because they are not great indicators of price action. Trade in a dual time frame setting and increase your chances for success in trend reversals.