Emini Trading Blog

Posts Tagged ‘how to trade eminis’

E-Mini says “stop”? Active traders tend to be a dynamic group of individuals. They tend to hear the word “stop” as a negative. Stop (or slowdown) is not normally a part of their vocabulary. Nevertheless active traders would do well to become familiar with this mechanism. In our business stops are one of the most important tools we have. Stop-loss orders help us avoid the number one obstacle to consistent trading success: emotional trading. By planning our stops in advance we effectively eliminate the all-too-human instinct to “wing-it”. An overview of stop orders is a good first step in understanding and using them consistently in our day-to-day trading.

Stops are a form of insurance. Remember, all traders suffer losses – it’s the nature of the business. Our goal is to limit our financial exposure to acceptable levels and more importantly, to avoid emotional turmoil when we do experience losses. Trading emotionally is like letting an intoxicated friend drive your vehicle. As a refresher – some definitions and things to keep in mind.

A stop order is an order placed with a brokerage that specifies that when a predetermined price is reached, a market order to sell that security is issued. Thus, if you determine that you want to limit your loss exposure to 10% you would enter a stop-loss order at 10% below your entry price, effectively limiting the amount you may lose to 10% should the market turn against you. Depending on what type of order it is, you can specify sell price, buy price or both. Stop loss orders are also called protective stops for obvious reasons. It’s a little like putting a collar and chain on your dog so when he takes off after a passing bus he gets so far and the length of chain runs out and he suddenly…stops!

Stop-loss orders are great forms of insurance – there is no cost to place a stop and it sits there waiting patiently until the target price is hit. The stop loss then becomes a market order and the desired transaction takes place. Some things to keep in mind regarding stop loss orders:

1 – Just because a target price is reached and your stop-loss becomes a market order, doesn’t mean you will get that price. In fast moving, volatile markets as the e-minis often are, a security may fall quickly below your target price. This is a potent argument for actively monitoring your trades.

2 – One of the essential times to use stop-loss orders is when you go on vacation or business trips and your ability to monitor your trades is limited. Swing traders and long-term investors would do well to become familiar with this mechanism in these instances.

3 – A “Good-’til-Cancelled” (GTC) order is an order that allows you to cancel the order at a future date (although most brokerages limit a GTC order to a maximum of 90 days.).

4 – A “Day” order is an order without an expiration date. If, at the end of the trading day, the target price is not reached, the day order expires. You will have to re-enter the order the next trading day.

5 – Be aware that market orders and limit orders serve different objectives. When you enter a market order you want to enter the market right away at the prevailing bid/ask price. A limit order specifies a price that you want to buy or sell at. Limit orders typically have higher transaction costs than market orders.

6 – Don’t use mental stops when you trade - they invariably move!

7 – When determining where your stops will be, consider your total equity capital. Any single stop calculation must take into account how much this potential loss will affect your total investment capital. Many experienced traders recommend that you set a percentage of total trading capital that you can afford to lose in a month (2 – 3% is a common figure). Avoid setting stop-loss orders at a percentage that would result in your total trading capital going below your goal.

8 – Be careful not to place your stop so that normal market movements trigger the stop prematurely. A good tool for determining placement of the stop is the security’s beta factor. A beta of one or two suggests less volatility and a tight, relatively close (to purchase price) stop is appropriate. A beta of up to three indicates increased volatility and the need for a “looser” stop.

9 – Leave your stop alone unless you have a paper profit. At that point you are ready to use “trailing stops” to protect and “lock-in” your profits. Note that many brokerages do not support trailing stops so check with your brokerage to be sure.

I’m sure every reader can remember the grade school game, “Simon Says”. Let’s update that to “E-Mini Says”. When E-Mini says “stop” that is our signal to trade the E-mini’s rationally in a disciplined, professional manner. The profits will flow to the extent that we consistently use the tools available – including stops. Now, E-Mini says “Go”…

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.

As many professional traders have suggested, 90% of successful trading is psychological. Use the checklist below for your own trading and investing preparation and implementation.

These traits are very important for you to understand – and we suggest you try to adhere to them in order to truly become a successful trader. These traits coupled with the proper psychology can make a difference in your overall trading/investing performance.

• The ability to act on your decisions.
• The ability to accept responsibility for your actions.
• You must have emotional detachment from the markets.
• The ability to accept risk and take losses (you’ll never be right 100% of the time).
• The ability for independent & creative thinking.
• The ability to develop insight & proper course of action in various market situations.
• The ability to have self-control.
• The ability to adapt quickly to changing market conditions – being flexible.
• Accept your inability to control the market’s movements (the market is always right).
• The ability to function in both structured & unstructured environments (up, down & sideways markets)
• You must have a commitment & focus on the task at hand.

You MUST effectively manage your stress in order to strive & survive in this business.

Other critical traits:

• Self-Discipline
• Knowledge
• Decisiveness
• Positive Mental Attitude
• Consistency
• Self-Control
• Concentration
• Persistence
• Patience

All these traits have to do with your psychological make-up. You must overcome any and all psychological pitfalls if you want to achieve both profits and attain longevity in the markets. It is the psychology of traders that moves the markets and that’s why your thoughts and feelings are important. Remember, whether you’re a day trader or long-term trader, your thinking and emotions will affect your trading.

Your thoughts control how you feel. Thus, feeling “Positive” gives you a greater chance of being successful in the markets. Here’s a quote that conveys this statement:

“When you are feeling gloomy, everything seems to go wrong; when you’re feeling cheerful, everything seems right.”

Remember, you are totally responsible for your actions 100% of the time. Never blame anybody else. This is very important in trading/investing. Here’s another quote:

“A fool is quick tempered; the wise man stays cool in the face of insult or adversity.”