Emini Trading Blog

Archive for the ‘Volatility’ Category

We started with an approximate 13 point gap to the upside. Without a hint of selling pressure, price traded higher highs and higher lows the entire day. For some, including myself, today was difficult to “get a hold of”. In terms of volatility, today was right at its daily 20 period ATR of roughly 20 points. There is quite a bit we can earn with that kind of swing, at least it would seem. This naturally raises the question: How can I tell when to enter more aggressively?

In real-time I noted the context surrounding today’s price behavior. Clear buying strength through much of Tuesday. Overnight, price rose sharply and held. Large opening gap up, followed by minimal selling. An opening range structure that was decisively traded above, only adds to the bullish reality of today’s market. Yes, the context surrounding any price development in question is pertinent and can be highly valuable to us in our decision-making. You may be wondering, “if context is so helpful, why are you not telling us about all of your buy-entry’s?”

My answer ties back to context. I paused because the voice I have come to trust over years of trading, was asking: “How far is too far?” Yes, when a market trades vertically for a period of days, the probability of continuation decreases. In view of this, I waited for a favorable buy-entry price. But, as you know, such a price was nowhere to be found in today’s ES!

In a less graduated market scenario the context would make today much more trade-able. Today’s highly favorable price structure in terms of trend-likelihood would likely have been of much greater value had less buying preceded it. As it is, I stayed on the sidelines today as market context had me asking, Where Are the Sellers?

Many keep close watch on the up-to-the-minute news services. In order to prevent getting “blind-sided”, some feel the news is an indispensable aid to their trading. Undoubtedly, knowing pertinent information can lead to greater earnings and minimized losses. Note, the operative word is CAN.

Without a solid framework upon which to trade, however, trading the news can be very costly. After today’s better-than-expected unemployment numbers were released, I thought of the news-dependent traders I just mentioned. Now, let’s take a look at today. As you know, I trade a well defined trade-plan. This means the news often does serve to enhance my results. I urge you to build a solid trading foundation based on a viable plan and harmonious, consistent execution. Help is available.

TODAY WE SAW: An opening gap up as the overnight broke to the upside early in the European day-session (around 6am, EST). At the 923.75 high, selling capped off that rally and support at the 906-911 price was first to be tested. It held and after the majority of the day was sideways, range extension around 3 pm EST has kept buying the trade-du-jour for Monday.

BUY-SIDE OPPORTUNITY:

The lows at 909.75 were well within the support Trading Concepts members were looking to buy off of. The bullish price pattern at or near 11 am, EST gave still another signal to buy in this vicinity. RESULT: +6 tic profit objective was easily traded.

SELL-SIDE OPPORTUNITY:

Today, there were only higher risk sell-side entries. None taken.

LOOKING FORWARD:

If you trade the news, perhaps you were guessing today. After all, the unemployment news was that 539,000 jobs were eliminated. Clearly negative. So, prices should go down, right? No. Not when the bad news is better than expected, as was the case today. I hope you were clear of fighting the upward drift in today’s price activity. If you were and would like to learn how to better react to what the market is doing, contact Trading Concepts or me personally. After today’s late day rally, it looks like seller weakness could persist.

Well, what to say after all of this? A cordial welcome to the cellar of stock values is in order, no doubt. Yesterday’s late day sell-off followed by a gap down started the day. How were you affected? As you may know if you have read my posts, I always encourage you to base your choices on whatever the market has communicated. Which, became loud and clear rather early on today. After the gap remained unfilled due to a feeble rise and new lows ensued, the weakness was obviously strong. Awareness of this can prove to be very profitable.

How so?

Since the market gave proof that a strong move to the downside was likely, we can increase our profitability by endeavoring to hold our positions as long as reasonable. One way to do this is to increase the size of your profit targets. Simultaneously you can wait for resistance to form that you can place your stop beyond thus keeping it one step further from price than normal. Remember please, to be comfortable with the location of your stop. If it’s distance from you entry makes you uncomfortable, PASS on the trade.

Whether you adjusted for the apparent bearish strength or not, a couple of today’s short entries per Trading Concepts E-mini S&P 500 daytrading course were easy to spot and either positive or very positive. How easy? Some of the new (less than three weeks) course members I am currently assisting to apply correctly what Todd teaches e-mailed me regarding these sell opportunities that were around 1:15 and 3:15 p.m., EST. I am so proud of how they have already begun to feel instep with what price has said. That they are anticipating what to do and executing well once specific criteria is met, well that amazes me!

Coming into tomorrow, since optimism is virtually absent, beware of an exaggerated reaction to the non-farm payrolls employment figures to be announced before the open. If sustained weakness seems to be sure, by remembering today’s tips, perhaps your earnings will be increased. If you want more consistency from your trading, click the link above and request your free video demonstration of the methods taught by Todd Mitchell. Perhaps we will be working together soon.

For some of us, we can’t wait for the next trade! Opportunity seems to teem, and going after it is automatic, instinctual. Then, as if our eagerness needed an additional spark, the day begins with a large gap. Like replacing your alarm clock with a stick of dynamite, an opening gap and the volatility that usually follows can overpower our reasonableness. It quickly becomes a showdown between our ability and willingness to exercise patience and the markets ability to race in search of agreed value. Which was precisely the situation from the word go last Friday.

On a scale of 1-10, how well do you fare in this predicament?

After gapping down over 2%, the March, 2009 e-mini S&P 500 contract rose sharply. Shortly thereafter, it reached resistance. In the course of the entire day, according to Trading Concepts, multiple short-selling opportunities came along. However, those viable and advisable trades were available around noon; 1:30 and 2:00 EST, respectively.

On a scale of 1-10, how well could you execute that plan?

When there are large, fast moves what is your most common reaction? If you are proud of your trades in these conditions, I (and most of this community) would love to hear about it! Please share. If you are still searching for a way to quiet the noise, see through the hype and trade profitably without letting over-enthusiasm rob you of your earnings, I am here to help. Leave your comment(s) and I will respond. One response per post may suffice, we’ll see.

You are right, your chart is teeming with opportunity. The goal though is to hear the market, not ourselves. So that from now on, when the market calls for patience, we listen.

Today, we can explore a couple of beneficial applications of volatility awareness! But, before we begin, if you see ways to make use of this baseline, will you share what you have found?

First lets address the problem of having losing trades even though the market goes in our direction, a.k.a., “getting tagged out”. To start, what was the ATR during your time of profitability? Now, note what the ATR is today. Same market, same number of periods in the measurement. If the ATR’s are different, here is what you can do to compensate for the change.

To adapt your stop-loss 1) divide todays ATR reading by the ATR during your winning period. For example, say the new ATR is 3.8 and the ATR during your winning period was 2.1. Divide 3.8 by 2.1 which equals 1.81. 2) now, multiply your initial stop size by 1.81. For example, if you trade the E-mini S&P 500 contract, say your initial stop size was 10 ticks. After multiplying by 1.81 your new (rounded) size of initial stop is 18 ticks. This is how to make a key area of your trading operation more flexible. Now, the likelihood of getting stopped out takes into account current volatility.

WHAT ABOUT QUANTITY SIZE?

Here is how to keep your risk in check. Divide your initial ATR by todays ATR. In this example, 2.1 divided by 3.8 equals .55. Now multiply the quantity you used during your winning period by .55 which equals the quantity you can trade today without increasing your risk. This can help prevent getting needlessly stopped out or trading too much size. Which makes earning more money a little easier.

Many non-traders are under the impression we earn too much pay for too little effort. As traders we know differently. Alone, the cost of building trading skill to a professional level, can easily cost more than a four-year degree. Other costs such as computer hardware, software, data and commisions, to name a few, only add to our monthly overhead. So, while we get little to no sympathy for this reality, earning more is priority number one, yes?

For us to earn more, we must obey price first. No doubt, you are intelligent enough to realize that a market price’s volatility level fluctuates. This will always be the case. Naturally, change challenges us. But, there is a perk. Embedded in every challenge is reward. Within market price dynamics awaits reward for you and I, if we apply ourselves.

Change in volatility level means that our trading operation must be flexible. Therefore, base the key elements of your trading on the markets volatility. How can you start doing this easily? Begin by finding a period of time when you had numerous winning trades and few losses that were smaller than your average win. Next, measure the markets Average True Range (ATR). A period input you could use is 20.

Now, we will create a baseline. To do this requires the following answers:
1) the ATR during that winning period of time
2) the size of your initial stop
3) the distance the market moved when you managed your stop
4) the size of your exit targets.

Start there. This Friday, I look forward to sharing exciting ways this baseline can help you to stop having losing trades even though the market went your way, to know when to increase your quantities without increasing your risk and more! Till then, lets keep growing.

We have all heard it: “trade the news”. And, in a sense we all do. We seek to earn money from sensible (to us) trade set-ups. Since we base our decisions on price structure, which at times rests largely on fear or greed, in that sense we are trading the news.

When surveying today’s market, the flag that I see has false hope on it and is waving rather rapidly due to a strong headwind carrying in a bleak economic reality. A gripping combination of unemployment, chapped banks and tattered productivity, in my opinion, is at present too formidable for the bulls.

Therefore, as we execute our trades if opportunities merit, I offer this reminder: Beware of the overconfidence that can easily enter after a few (or one big) profitable trade(s). As you are likely aware, a similar brand of confidence is present in general here in the US, in view of the highly regarded new President, Barrack Obama.

In time, he may lead this country to relatively positive change. Today, however, the markets we trade are up against powerfully negative realities. So, do all you can to keep hopeful, optimistic and positive. But remember, in order to keep your account that way also, positively trade your chart rather than false hopes.