Emini Trading Blog

Archive for the ‘trading’ Category

Seems to me it was centuries ago when open outcry was mode of floor trading, and the highly efficient modes of trading we employ today were the stuff of dreams. Online trading has greatly improved the quality and quantity of trading and executing trades. But some of the problems of the old trading days still can be prevalent in today’s trading, namely, slippage.

From Wikipedia:

“With regards to futures contracts as well as other financial instruments, slippage is the difference between estimated transaction costs and the amount actually paid.”

You can find a wide range of definitions of slippage on the internet, some more esoteric than others, some downright problematic, but I think slippage is every bit the problem we experienced in the old open outcry days. Slippage occurs when you sell or buy at a specified price and your actual execution price is higher or lower than your expected transaction was planned. Even more likely, slippage can occur when you have a stop price specified and the executed stock price is higher or lower than you intended stop.

Slippage can occur for a number of reasons:

1. You are trading in a thinly traded market and there are simply not enough traders to fill orders in a timely manner.

2. You may need a different trading platform if your trades are not being executed at your named price level. Or you may need a new broker.

Whatever the reason, slippage can drain your profits if you don’t pay close attention to your execution prices and order prices.

Very thinly traded markets, say copper, often don’t have the liquidity to handle large market orders. If you intend to trade thin markets, you need to plan for some of the liquidity problems that inevitably occur. On the other hand, the ES Emini is heavily traded, and liquidity problems are not an issue, at least from a volume of contracts traded standpoint.

Markets that have a high degree of liquidity are excellent for avoiding slippage. The ES contract, for example, is one of the largest futures contracts, and slippage can generally be attributed to either human error or a systematic failure in your brokerage . More than a million contracts, some times even higher, are traded daily on this exchange and you will have little trouble getting your trades executed and filled in a timely manner. I have traded up to 100 contracts without any slippage issues. (Note: I am going to pass over any broker related issues, as there is no way to control those short of finding a new broker.(

Pay close attention to the manner in which your broker’s software fills a trade. Sometimes slippage can occur because the firms software is not “up to snuff” in the digital age and cannot keep pace with the fast moving, highly liquid markets like the ES.

For whatever reason, slippage is a real cost in your trading operation and you should do what it takes to make sure you trades are executed and filled at your specified parameters. The failure to do so will result in real costs to your trading account, which is an undesirable outcome.

I seldom trade a chart without either a Simple Moving Average (SMA) or an Exponential Moving Average (EMA) displayed. Both are exceptional tools in a traders repertoire. Of course, there is no agreement as to exactly which type of moving average works best-and that is as it should be, because no two traders trade with same mind set and personality.

In the world of moving averages there are two contenders for consideration. The diminutive simple moving average (SMA) and the more complicated exponential moving average (EMA). Because the EMA has a more sophisticated method of calculation, many consider it to be the superior of the two averages, but that would be jumping to unfounded conclusions.

The SMA is a basic arithmetic mean: you add together the closing prices from the last 10 periods then divide the product by 10. As I said, the result is a simple arithmetic mean. Pretty simple? Too simple for some people, especially those who tend to associate complexity with efficiency.

Complexity does sometimes yield superior results, but that is not always the case.

EMA’s are really not that much more difficult to calculate. The formula is simply 2 (n+1), and the result is added to the prior days exponential calculation. With some simple deduction you will see that an EMA emphasizes the most recent days prices, or weights the most recent days prices more than prices early in the exponential sequence. Since any moving average uses historical data, or data that has already occurred to calculate the average, any moving average can be considered a lagging indicator. It should be obvious, then, that the purpose of the EMA is to “speed” up the lag factor that is inherent in all moving averages.

Do EMA’s really speed up the lag factor?

To a certain extent EMA make the lag factor in moving averages less distinct, but like all things, there is a cost. EMA’s are notorious for causing a raft of early buy and sell signals, as the last variables in the sequence overweight the average. For that reason alone, I am not a huge fan EMA’s and prefer SMA’s. Does that mean SMA’s are better than EMA’s? Not at all, all it means is that in my trading mentality I am far more comfortable with the results from an SMA than I am an EMA.

I always strike an 89 period SMA on my charts and watch the price action relative to the price action and the SMA. If the price action in more than 3 or 4 points below the SMA(on the ES contract) I immediately decide that long trades are out of the question until the price action moves closer to the SMA, and visa versa on price action about the 89 period SMA. I can also glean some nearly instant information regarding the trend of the market by looking at the slope of the 89 period SMA, and the sharper, or more pronounced the slope appears, the stronger the trend.

I also use a number of paired moving averages to back up some of my entry and exit points. I generally use Fibonacci numbers starting with 5 and up to form my two moving average lines. I find it best, on short term trading, to use to SMA’s that are within 15-20 points of each other. I will leave to you to discover which set of moving averages intersect at point which best suit your trading style.

So we’ve talked a bit about moving averages today, and seen some applications for the SMA. The EMA’s are also used by many traders and I would encourage you to explore the applications for this moving average.

I am sure that you have seen a news report or two that claims that 70% of all day traders “bust out” and lose all of their money. Further, the report usually depicts some poor fellow who has spent the family savings and is in the process of bankruptcy or losing his home.

Is it true?

It is not necessarily true, but I want to qualify my answer.  As a long-time trader, I have seen more than my share of day traders lose all of their money and been forced to leave the profession. Sometimes these individuals have left high paying jobs to day trade full time and are forced to re-enter the workforce under-employed, or at least at jobs that pay considerably less than the jobs they left to day trade.

Why?

There are many reasons individuals fail day trading, and it’s not because the day traders are less-than-intelligent people. There have been several articles written in recent years concerning the failure rate of day traders, and most point to the emotional aspect of maintaining a proper trading perspective. All to often traders abandon great systems of trading and take unacceptable amounts of risk in hopes of hitting “the big one.” Trading on emotion is the recipe of certain failure in day trading.

Why do rational day traders sometimes act irrationally?

One of the toughest tenets of day trading to accept is that certain trades are going to be losers. No trading system or methodology can assure that every trade is going to attain success. The market just doesn’t work that way. My personal philosophy is to never risk more than 5% of my money on any given trade and have target profit limits set and stops loss orders in place in case my trade goes sour. I never ride a trade down in hopes of it turning around. I never “double down”. Quite simply, if a trade doesn’t work the way I expected, I cut my losses and move on to look for another trade set up that looks appealing.

Failure is an unpleasant aspect of day trading, yet every trader fails in one trade, or more, throughout the course of the trading day. Further, it is common to see traders increase their lot size if they are having a bad day in an effort to “catch up” to their trading expectations.

These are all part of the undisciplined traders emotional make up and are symptoms that doom a day trader to failure. There are days when I make two or three clunker trades and decide to turn the computer off. Either the market is acting in a way that is not conducive to my style of trading or I am trading poorly, I never try to over analyze the reasons for my failure. I only know that on a given day my results are unsatisfactory and the best thing I can do is go golfing.

The emotional side of trading is the least studied and most poorly understood aspect of trading. Many traders spend thousands of dollars learning trading technique and complicated systems of trading, yet fail to conquer the emotional side of trade. The emotional side of trading is fairly simple, albeit very difficult to master, and is to simply not allow emotions to enter into your trading psychology. Sounds easy, doesn’t it?

It’s far from easy, and I can tell you that I have fallen victim to my own emotions on numerous trades. I know that any time I feel like I know what the market is going to do and become convinced that a trade “must” work…I am in deep trouble because the maxim “the market is always right” is important to understand. The only variable that can be wrong when you trade is YOU.

The chaotic nature of markets causes many inefficiencies in market pricing that can come into play at random times. If you are in a trade when these market inefficiencies come into play, you lose. It is really that simple and a smart trader exits his trade, takes his losses and moves on.

The study of emotions in trading is fairly new and several books have been written on the topic, I recommend “The Psychology of Trading”, by Laura Sether and Russell Wasendorf. (Note: I have no financial relationship with the authors) as a good starting point. A Google search will also turn up hundred of articles on this topic.

Learn to control your emotions and execute the your trading system and you will have great results.