Emini Trading Blog

Posts Tagged ‘emini futures’

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!

Perhaps due to curiosity, ambition, or even necessity you are considering day trading as a means to produce monthly cash flow. While the potential earnings, lifestyle and personal satisfaction are what appeal to most, the following three-part series focuses instead on what it really takes to start out on the right foot.
 
Part I: TIME NEEDED

This consideration of the amount of time needed to successfully day trade for a living has been divided into three areas:

1. Education
2. Daily routine
3. Business management, preceded by a word of caution.

Ironically, in a business as technical, highly leveraged and ever-changing as trading is, those pursuing it need to be reminded that there is no substitute for sound education! A string of previous trading successes, your ability to memorize stock symbols and see macro-economic scenarios will ultimately fail to sustain you in the long run.

It takes time to find, consume and absorb quality day trading education. You must learn how to gauge a market’s strength or weakness, how to ascertain entry areas with favorable probabilities, how to manage wisely your open positions and advisable. Since learning rates are subjective, how much time you need to spend each week studying the markets is up to you. Two hours, eight hours, thirteen hours? Write your answer down on a piece of paper, and do it!

“A good trader is a lifetime student of the markets.”

A day trader’s daily routine revolves around market hours. Thanks to streamlined exchanges and access to currency trading, the number of available markets is now unprecedented. Therefore, active trading occurs practically around the clock! Follow a consistent routine to build good habits. Write down your trade routine, step-by-step, so you don’t miss anything.

Managing your day trading business starts with comparing your goals for the day with your performance. If the trade-platform you use records your trades (like TIVO does for TV), you can re-play your good and bad trades and learn from them. Repeating our good moves and not repeating our mistakes is a must, so take the time to note these in a trade diary. Before closing out your trade review, be sure pertinent trade-metrics have been logged. To give this effort it’s proper due, figure one to two hours.

Join us next time for part two of the series, as we examine the skills needed to day trade for a living.

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.

( 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.

“It feels impossible to be in this spot. With so much effort and so many excellent choices how could this have happened?” continually echoes within what is a now seriously deflated notion of trading acumen and success with a catastrophic loss. Yes, losing 25% or more of one’s trading account value is a tough challenge to overcome. While losses of such magnitude occur in an array of markets and conditions, these stem from relatively few root pitfalls. To add what may be much needed stability and the pluses it fosters to our trading, let’s look closely at two common pitfalls: 1) failure to expand our skill and 2) size we are not in a spot to handle. Rather than racing for the exits cursing the markets as a brutal, luck-laden enticement in which losses are only for the “small guy”, perhaps by knowing these precursors to catastrophic loss, the foundation upon which we seek to grow can be made sure. 

Appropriately, it’s been said that closing a profitable trade is the ‘toughest way to make an simple dough’. Hence, to accomplish this day after day requires specialized knowledge of a variety of aspects to trading. We can question ourselves, how skilled am I in the areas of intra-day market structure, trade context, the right use of Fibonacci ratios and any chosen indicators, pattern recollection, and price-action analysis? If these areas enable or complement our trade strategy, are we as informed as possible? If not, perhaps we did not know the pertinence of each of the aforementioned specialties. Or, has a question for profiting from our “comfort zone” clouded the reality that consistent profitability, or the lack thereof, is a mirror suggestion of no one else’s but our own level of expertise? By honing our skill level in every area that impacts our particular strategy, we can minimize the risk of catastrophic loss.

Small facilitates this type of loss as readily as the size with which we choose to trade. To maintain the overall balance needed to trade profitably, we must trade in size best suited to us at the present time. Therefore, when in the beginning phase of our use of a trade strategy it is wise to channel our enthusiasm into one single contract. Only when we accumulate sound trades and the profits that eventually follow should we increase our quantities, expanding our total risk per trade to no more than five-percent of our account value. While this approach seems to keep so-called “real cash” from entering our account, it is exactly the opposite! Every trader’s skill is born in time, and then rewarded in size.

We must be mindful that the adage, “here are ancient traders and here are bold traders, but no ancient bold traders” is 100% right. Therefore, may we avoid the pitfalls that lead to catastrophic loss by resisting the tendency to want more than we have earned by refusing to increase our skill level, trading with size disproportionate to our skill level, or both. Doing so may be just what prevents us from having to question: “How could this have happened?”

Although mired in controversy as to his alleged use of performance enhancing substances, MLB’s retired ace pitcher Roger Clemens had tremendous success. While his strength, stamina and ability to heal between performances may have been unnaturally manufactured, undoubtedly he has pitching habits that are integral to his well documented proficiency. In fact, in what has been termed a defiant response to questions at a press conference, what stood out to me is that he said that in the past 20+ years he has “worked his butt off to be the best pitcher he could be”. Evidently stressing that his successes ought to be attributed to the diligence and effort he expended toward adhering to what makes fantastic pitching possible (essentially the sound habits he has formed) rather than some foreign substance.

Regarding habits as a trader, what is your view? Do you reckon the trading habits you’ve formed or a foreign substance such as luck has gotten you where you are to this point? Since habits originate in the choices we make, realizing whether or not what we are choosing will lead to fantastic trading is worthwhile. In order for you in person to unveil the resolution to Trading Skill or Profit – Which Are You Choosing? I urge you to write down your responses as we consider typical choices we face previous to entry, once filled and when exiting.

Pre-Entry Trade
The choices we make depend largely on what we see. So, prior to your entries, where is your focus? To find out, question yourself if it is 1) the upshot of your last trade whether a gain or loss 2) the ease with which the market seems to give up points in either direction 3) the mood you feel the market has 4) the trend 5) the presence of multiple confirmations 6) the entry price available allowing for a favorable risk to reward ratio?

Once Your Trade Is Filled
As you are liable aware, the market seldom moves in one direction once we are filled. Rather, it’s movement, which can feel much more pronounced when carrying a spot, confronts us with choices as to where and when to place and replace our stops and exits (assuming you use these) or austerely, when to get out, either at a gain or loss. To see if you are choosing trading skill or profits once filled, question yourself 7) do I stick with the price at which I originally chose to cut my losses do I use profit targets 9) do I take up again to observe what the market communicates 10) do I use specific conditions to alert me to changes in market conditions 11) do I take decisive action once these conditions, positive or negative occur 12) do I readily care for my spot prior to my profit target being reached?

When Exiting Your Trade
Much like a pitcher’s release plays a huge role in his ability to win, whether at a loss or profit, exiting is for us a skill we must master. Proficiency in this area largely depends on if we 13) use pre-determined price-targets 14) use pre-determined trade-carry time limits 15) readily exit at a profit once your target price is achieved 16) quickly exit at a small loss, break-even or a small gain if conditions merit 17) feel excellent about your exit even when the market trades beyond your profit target 18) feel excellent about decisively exiting at a loss, break-even or a small gain according to your specific conditions even if the market eventually trades at or beyond your profit target?

In Summary
Really, the summary lies in your responses to the 20 questions posed. If you are convinced that your trading habits determine your results, answered no to questions 1-3 and yes to 4-18 you are on the right track. If not, note the areas your answers differ. Rather than searching for why they differ, austerely change your scale and see for yourself if the stress you feel decreases and your successes increase. Avoid compelling foolish chances which produce artificially manufactured results. Instead, trade with balance, trade wisely and be content with what you can accomplish. It appears Mr. Clemens has cost himself a fantastic deal by doing both.

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.