Emini Trading Blog

Posts Tagged ‘E-mini Trading’

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.

I think it is important for emini traders to use specific targets that address their loss tolerance and profit targets. There is a temptation to ride losses too long in hopes that the market will come back to a break even. This can be a tragic strategy and result in unacceptable losses when trading the emini futures contracts.

Why would people ride their losses?

Emotional involvement in trades is generally the culprit in any kind of trading, and especially for emini scalpers, as the markets swings in intraday trading, sometimes violently. It’s is this emotional involvement in a trade that accounts for a tremendous number of trading losses. It’s more than difficult to accept a trade as a loser and move on. Say, for example, you get what you consider to be a perfect emini setup and take a trade, and most perfect emini setups (whatever they may be) have resulted in handsome profits. The assumption, then, is that every trade where that setup is utilized will result in a winner, sooner or later. Bad strategy. There is no foolproof trade, and every trade (no matter how nice the setup) results in a loss.

It’s difficult for me, and most traders, to accept that a certain trade has resulted in a loss. After all, the 5 identical emini trades before it produced sizable gains. Learning to cut your losses and move on to another trade is one of the most difficult exercises a trader must execute. Set your loss tolerance and if you blow out of a trade, move on.

This is much easier said and done, and even with stops in place there is a temptation to drag a stop a couple of points lower to salvage a trade that is not working out. I’ve been there, I’ve done it, and I’ll probably do it again. It is always wrong to do, though. My experience has taught me that I enter bad trades when I try to pick a counter trend trade. These trades can be very tempting, but price exhaustion is one of the most difficult trades to execute successfully. For that reason, I like to strike an 89 point SMA and when the market is significantly below the 89 point SMA I stick with short trades, and visa versa for price action above the SMA. This should keep you nicely in the trend. It also weeds out those disasterous countertrend trades.

In volatile markets I detest trailing stops, and I generally don’t use them. I am not against moving a stop loss up, but the normal market action often gets you out of a good trade before completion. Be careful using trailing stops, while they sound great in theory, they often have to be very wide to be of any real value. For myself, I prefer to bracket trade, using 3 point (12 tick) stops for my loss and profit targets. I have found this to be fairly flexible for trading in normal markets, and in volatile markets, which we saw early this year, I allow 4 point stops (16 ticks). These numbers are for trading the ES contract. For the YM contract, I like to use 25 points bracketing long and short positions.

But remember, don’t attempt any trade without preset stop loss and profit targets established. Good luck trading and come back.

The newspaper have for years written enumerable article about stocks busts, market crashes and the economic calamities that face stock investors.  It makes good news, and adds to the negative image of investing in equities and the market in general.

But those calamities are problems that face long term investors.  You know, the buy and hold guys.   For years, the general line of thinking was to buy a stock and hold onto for years and reap the rewards in your retirement years.  Of course, the dynamic nature of the stock has, to a certain extent, changed that line of thinking.

Of course, there are still the hordes of mutual fund holders who have invested untold billions in these investment vehicles.  I have a low opinion of mutual funds, as an investor cannot exit a fund until the end of the day.  Additionally, very few fund managers even come close to matching the indexes they are supposed to be imitating.  Why pay exorbitant fees for substandard performance?  I will never understand it, but there are trillions of dollars still invested in these investment vehicles.

However, recent changes in investment structuring from the Chicago Mercantile Exchange has made investment for primary income a very attainable goal.  Several product lines are aimed directly at the consumer market and priced well within the average budget.   The are called e-mini’s and are investments that are traded during the day, and seldom held overnight.  No worrying about the stock market here, you are in complete control of your investment future.

I don’t want to give you the impression that day trading is like an ATM machine that simply spits out money all day, but with proper training and practice a day trader can easily earn $500 a day or more and not hold any positions over night.  Of course, most individuals have never given serious consideration to investing in the markets, which many consider relegated to Wall Street experts.  But nothing could be farther from the truth.

There are many courses, some home study, that are reasonably priced that will give you more than the pre-requisite knowledge you need to be an effective day trader.  Thousands of people, from housewives to businessman, have turned to day trading and greatly increased their income and improved their lifestyle.

The secret is training.  It is very important that a day trader spends time learning the slightly illogical movements of the market.  Again, with proper knowledge this illogical movement becomes second nature to understand.

The benefits to trading for a living are many fold:

1.  More time with your family and children.
2.  No more boss, your self-discipline is the key to success.
3.  Time for leisure activities and enjoying the fine things in life.
4.  You control your income.  You have the skill to make money, and nobody can take that away from you, fire you, or change your job.  More than anything, once you learn to trade, you can become completely in control of your lifestyle.

So, I propose that you consider exploring the benefits of trading and see if it suits you.  It’s not for everyone, but it’s wonderful for a lot more people, especially if they have the knowledge of what is possible in trading right from your home.  You are your own boss, and master of you own lifestyle.  No more corporate mentality to deal with.

Many years ago, early in my trading career, I began to gravitate from the straight support/resistance/volume trading systems and become interested in oscillators and other “exotic” indicators, as they were referred to at the time.  Of course, Welles Wilder’s ‘New Concepts in Technical Trading Systems” was often discussed.  The book was written in 1978.

I had not yet read the book.

So I went to the library to hunt down this book by arguably  the greatest technical analyst of our time.  I was, of course, expecting a large book with lavish charts and difficult to decipher language.  But I was determined to read the book and learn a little about this area of study that Wilder was making wildly popular, much to the chagrin of the old guard and Dow theorists.  Imagine my surprise when the librarian directed me to the book and it was a thinnish sort of thing, not much in the way of writing or explanation, and pretty heavy on mathematic formulae.

But what a book!  And Wilder’s insightful mind and thoughtful mathematic approach to trading is still resonating with traders today.  The book has six individual trading systems that Wilder proposed and briefly explained the rationale behind, which, at first glance, seemed less than impressive to me at the time.  You might recognize several of the names now, because they are just as relevant today as they ever were.

Wilder himself was an engineer, then a real estate broker, and finally found his groove in what then was the fairly new field of technical analysis.   Yes, this thin little book I got at the library contained some of the seminal work in technical analysis because in it, he explained the theory behind his indicators which include the Relative Strength Index (RSI), Directional Movement Indicator (DMI), Average True Range (ATR), Average Directional Index (ADX), and the often misunderstood Parabolic Stop and Reverse.  Many technicians consider these indicators to be the core of current technical analysis.

Thirty years later many traders have continued to use these indicators in their daily work and their popularity continues unabated, and traders have combined and cultivated the use of the indicators in ways Wilder never would have dreamed.  Even more impressive, these indicators are included in every software charting package I have ever used, which is a testament to their enduring popularity and accuracy.   Wilder wrote and imagined these concepts prior to the time of the truly versatile computer, which makes his achievement more impressive than ever.

With the quantification of market movement Wilder exposed the fundamental relationship between price action and the indicators ability to discern the subtle movement in prices.  By implication, he was able to quantify the emotions of fear and greed and the effect they had on price action.  These factors are still not fully understood, but are recognized as prime movers in the daily price action we all observe.

I would be remiss if I did not mention Wilder’s later work, which in my opinion, bordered on either the greatest fraud of all time or sheer lunacy.  He and Jim Sloman developed a theory of market behavior of a distinctly different flavor than his earlier work called the Delta Phenomenon.  Wilder tried, with some success, to convince his admirers that the markets were actually controlled by lunar-solar-earth cycles.  Based upon his past work, many individuals invested $35,000 a piece and he became (at least it is rumored) very wealthy.  There are still several websites proclaiming the Delta Phenomena as a ground breaking theory for investing.  Of course, Mr. Wilder and I would part ways on trading the markets based upon astrological observation.  To many technical traders, the Delta Phenomena dimmed the great intellectual light of Wilder’s work.  The Delta Phenomena is truly some unusual stuff.

Wilder’s early work is the stuff of brilliance, and I would recommend that every trader read the book, then learn the book, as a requisite to understanding modern day trading systems.  Of course, my enthusiasm for his Delta Phenomena is not quite as warm.  However, I feel to get a fair assessment of the man it is important, at least in summary form, to look at the body of work he produced, both good and high debatable.

A General Rule of Thumb is that a Market will persist in a Trend typically 3 to 5 Rotations.  After 3 to 5 Rotations the Pattern typically changes.  Take a look at the Daily Bar Chart of the E-Mini S&P 500 (Figure 1). From early July 2009 the market has been in an Up Trend continuously making New Highs (NH) and Higher Lows (ALs).  Notice this last New High put in on December 4, 2009.  This New High was put in with “Little Conviction.”  The previous New High was only taken out by just under 7 points.  The Market is working on it’s Sixth (6^th) rotation.  Unless the Market can take out the Highs at 1114.00 plus or minus with some type of “Move with Conviction” we are due for a Larger Retracement to somewhere around the 1025.00 area (Re-test of AL4 and AL3).

Figure 1.  Daily Bar Chart of the E-Mini S&P 500

The 30 Minute Chart of the E-Mini S&P 500 (Figure 2) is in a Sideways Trend and possibility in STAGE 3 of the Market Cycle (see my article posted on Dec 7, 2009 at http://blog.tradingconceptsinc.com/technical-analysis/the-market-cycle/) further indicating that the Market may pullback further than it has the last few days.  In any case, continue to trade the Intra-Day Trends per the Trading Concepts Methodology and be aware of the potential that the Market may be topping out here… and may require a larger pullback or retracement to continue with the current Daily Up Trend.

Figure 2.  30 Minute Chart of the E-Mini S&P 500

Economic Calendar

 No significant Economic News today!

 FYI…

Wednesday, December 16, 2009 at 2:15pm ET is the FOMC (Federal Open Market Committee) Rate Decision.  This is the primary tool the FOMC uses to communicate with investors about monetary policy.  It contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes.  Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes.  It has a Very High Impact on the Market.  The Market typical becomes very volatile immediately following the announcement and may remain volatile for about 45 to 60 minutes.

High Probability Trading, in my opinion, is defined as those Trades that are Low Risk with a Very Good Chance of working out. In other words, making Trades with the Odds in your Favor.

For the most part, High Probability Trading is trading in the direction of the major Trend. There are numerous ways to define a Trend. For example, Moving Average crossovers, MACD, ADX/DMI, and other Indicators. One of the most simple ways to define a trend, yet often overlooked, is by using Price Action itself. The Market does not go straight up and/or straight down, it moves in a series of Waves, Higher Lows and Higher Highs or Lower Highs and Lower Lows. When a pattern of Higher Lows and Higher Highs or Lower Highs and Lower Lows changes, the Market may be providing a warning sign that a potential Trend Reversal is imminent.

A Technical Approach to define an Up Trend, Down Trend, and Sideways Trend by using Price Action itself is to apply the Market Cycle Model. The Market Cycle Model suggests that a Market has to be in one of four Market Stages.

The Four Stages of the Market Cycle, as illustrated in Figure 1, are a Basing Sideways Trend (Stage 1) with predominantly equal Lows and equal Highs, an Up Trend (Stage 2) with Higher Lows and Higher Highs, a Topping Sideways Trend (Stage 3) with predominantly equal Highs and equal Lows, and a Down Trend (Stage 4) with Lower Highs and Lower Lows.

Figure 1. The Four Stages of the Market Cycle.

Stage 1 (or Basing Sideways Trend) is where the Market is in a state of Equilibrium. During this stage, there will usually be several swings between Support at the bottom of the Sideways Trading Range and Resistance at the top of the Sideways Trading Range. This is the point where many Traders try to Enter LONG into the Market and catch the bottom price, however, it doesn’t do much good to initiate LONG positions yet until the beginning of Stage 2.

Stage 2 (or Up Trend) is where the Market is Advancing. This is the ideal time to initiate LONG positions, ideally on a Correction or when the Market pulls back to re-test the breakout from Stage 1. Initiating a LONG position here is a Low Risk, High Probability, and potentially High Return Trade. See Figure 2. This situation is Optimal for a LONG Entry as each successive High becomes Higher than the previous. The less the Market pulls back, the stronger the Market.

Stage 3 (or Topping Sideways Trend) is where the Market is in another state of Equilibrium. The Up Trend loses momentum and starts to Trend Sideways. During this stage, there will usually be several swings between Resistance at the top of the Sideways Trading Range and Support at the bottom of the Sideways Trading Range. This is the point where many Traders try to Enter SHORT into the Market and catch the top price, however, it doesn’t do much good to initiate SHORT positions yet until the beginning of Stage 4.

Stage 4 (or Down Trend) is where the Market is Declining. This is the ideal time to initiate SHORT positions, ideally on a Correction or when the Market rallies to re-test the breakout from Stage 3. Initiating a SHORT position here is a Low Risk, High Probability, and potentially High Return Trade. See Figure 2. This situation is Optimal for a SHORT Entry as each successive Low becomes Lower than the previous. The less the Market rallies, the weaker the Market.

Figure 2. Low Risk, High Probability, and potentially High Return Trade.

The key to successfully trading a Market is to:
(1) know how to Identify what Stage of the Market Cycle the Market is in,
(2) know what Direction you need to be Focusing your Trades on (determined by (1) above),
(3) know when a Favorable Opportunity presents itself to Enter the Market, and
(4) know how to Manage your Trades.

Figure 3.  A 15 Minute Chart of the E-Mini S&P500 Futures Contract (Oct through Nov 2008) clearly showing the Market Cycle.

In the Trading Concepts E-Mini Trading Course you will learn the Market Flow Analysis Method that will change the way you analyze charts altogether. This will help eliminate any confusion that you may have about the Markets and make your analysis more objective. Once you grasp this approach, trading the Market will become much easier for you… and more Profitable!