Emini Trading Blog

Posts Tagged ‘ES’

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!

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.

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.

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.

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.

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?