The E-mini Trading Professor

Archive for May, 2010

Day trading is a tricky business. I can think of few other professions where your emotions can make or break you so quickly. Fear can sabotage your profits, and at worst, take you out of the game completely.

“Nobody calls me chicken, Needles. Nobody!”
- Marty McFly, Back To The Future 

Are you afraid to trade? Or shall I say, are you TOO afraid to trade? Some fear is normal and healthy, but too much fear can paralyze you, and prevent you from making clear trading decisions. You can end up throwing your trading rules out the window. You may exit trades too early and not maximize your profits. You may be hesitant to pull the trigger on new trades for fear of losing even more. When a trade moves against you, you may keep moving your protective stops, and convince yourself that “the market will turn around any minute.”

One of the most difficult aspects of trading is to take losses. Why is this so hard? Think about this for a moment. When you follow your trading rules like you should, and take a loss, you are simply admitting you were wrong about the trade. Your trading account announces this to the world when your stop loss is hit. Very few of us are naturally inclined to admit we are wrong about anything. To take it a step even further, if you take a loss on a trade, you may think that YOU are a loser. Of course, this can’t be farther from the truth. Nonetheless, your emotions love to play tricks and say all kinds of mean things about you. The truth is that losing is integral part of trading. It’s a job requirement. You must feel comfortable taking losses.

The key to overcoming your fears is not to deny them, but to admit them to yourself. Then you speak to them and say, “Well, I am may be a bit afraid, but I trust my trading system. The probabilities are on my side. I am prepared so I am going for it. I know I may take a loss, but I will learn from it, and keep moving forward toward my goal of becoming a successful trader. Fear, you are coming with me!”

Of course, in the heat of the moment when you are down, this is easier said than done. But if you focus on sticking to your trading rules and execute good trades rather than focus on your fluctuating trading account, you will conquer your fear.

I hope this helps!

I get a chance to talk with a lot of day traders on a daily basis and they often times find myself confused as to what these traders are actually looking for. My goal, as a trading educator and full time trader, is to teach people to trade in the style I think will most benefit them. I am still a full-time day trader, but I do not run a live trading room as I was under the assumption that most people want to learn how to day trade. But there is a group of people who would prefer to sit in on a trading room and have the leader of the room call the trades for them.

I don’t suppose there is anything wrong with having a third-party call your trades, but I think it would be a mistake to call yourself a day trader when, in fact, you are simply following the lead of a room trader. This is very confusing to me, and I can’t say I fully understand the thinking behind the room concept.

This is not to say that I am against trading rooms, because they are a perfect place to perfect your trading style if the room leader trades according to the style you are learning. On the other hand, if you are using a room to time your trades, what is the use in learning a specific day trading system?

I spent a portion of this weekend looking at various day trading programs and live trading rooms and it would seem the trend is leaning towards live trading rooms. If you found a room with a very capable leader, I would have to believe that a live trading room would be a profitable endeavor. However, many of the reviews of live trading rooms were less than flattering, and the lifespan of a typical live trading room, especially one not associated with a trading program, would seem to be rather short. After all, in the absence of learning to trade you are completely dependent upon the judgment of the trading room leader.

In my world though, I would want to know how to day trade. There is no reason for me to be dependent upon another individual to make a living. I prefer to make a living using the skills and knowledge I have developed over a lifetime of trading. This feeling gives me a sense of independence. I am not beholding to another trader to earn my living, and if that particular trader moves on to other employment opportunities, I am still in a good position to earn a great living.

I had to ask myself though, why are people gravitating to trading rooms instead of actually taking the time and effort to learn how to daytrade effectively? I can only surmise that many people are unwilling or unable to devote the time and effort it takes to become a competent trader and take the easier route of following an already confident trader. This begs the question though, how will a novice trader ever become a full-time trader when he or she is dependent upon the trading calls of a third-party trader? My opinion is that their career would come to a screeching halt. As a matter of fact, there were a whole slew of traders who depended upon a very charismatic trading room leader who, for unknown reasons, seem to experience a sort of meltdown in his trading style. This trader, who was popular in the early 2000’s, begin a series of unusual and bizarre actions that cost many traders a large amount of money.

But here is my question; had these traders known how to trade on their own they could have continued trading very profitably without their trader guru at the helm.   Apparently in this particular situation millions of dollars were lost, and in my estimation it seems rather unnecessary.

The purpose of this article is not to bash trading rooms, but to use trading rooms to enhance your own trading abilities. I believe it is imperative that anyone who is actively trading have a time-tested system they utilize. Without a system, and without plenty of experience with that system, you are literally at the hands of another individual who you may not know and may not fully understand the methodology he or she is trading. I recommend learning how to trade, then utilizing a trading room if you feel it is necessary. I doubt you can learn a system by starting out with a trading room, you must have a foundation to begin with.

I’d like to take a few minutes to review the differences between these two popular futures contracts.

Here are some ways the two futures contracts are related:

• A one-point move in the E-mini S&P 500 (ES) = About ten points in the Mini-Sized Dow (YM)
• One point in the E-mini S&P 500 = $50
• Ten points on the mini-sized Dow = $50

E-mini S&P 500 (ES)

• One point in the E-mini S&P 500 = $50
• Moves in four quarter-point increments of $12.50 each

Mini-Sized Dow (YM)

• One point in the YM = $5
• Moves in ten one-point increments of $5 each

In a nutshell, the YM has better spreads than the E-mini S&P since the YM moves in 10 increments while the ES moves only in 4 increments. This is a 60% difference in spread. When you trade the YM, you essentially have more opportunities / levels to take profits and exit trades with smaller losses as compared to the ES contract.

This is not to say that the ES is a bad contract to trade. It has huge volume on a daily basis with great liquidity. However, know that the best professional traders in the world trade the E-mini S&P 500 (ES). If you are beginning trader, why go against these people? Consider trading the YM first and then move to the ES once you become more advanced.

The power of the NYSE TICK indicator can’t be overestimated when it comes to trading the e-minis. Take a look at this brief video:

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One of the most difficult concepts for new traders to assimilate is the relationship between trend continuation and trend reversal. Simply stated, the market is far more likely to continue a trend in than it is to reverse a trend. In my experience, I have seen more money lost when traders attempt to buck the trend and lose.

I’ve never fully understood exactly why traders, who are fully aware of trend analysis, take risky trades against the trend. My best guess is that there is a certain high that traders experience when they take a trade against the trend and win.  I suppose it is like catching a trophy fish, they are rare and it is difficult to catch one. Trend reversals are probably more common than trophy fish, but they do not occur at an extremely high rate.

It is difficult to hold off trading against the trend when your indicators show a very attractive set up in the opposite direction of the trend. It’s tempting, and very difficult to convince yourself not to take the trade. It is wise not to take the trade, but many traders simply cannot lay off a nice set up, even if it is against the trend. The results are surprisingly uniform, the market heads in the direction of the trade for a few points and then resumes in the direction of the original trend.

In my trading, I am always very aware of the current trend. I generally use an 89 period Simple Moving Average (SMA) and know where the current price action is relative to the SMA. If the price action is significantly below the 89 period SMA, I concentrate on short trades. If the price action is significantly above the 89 period SMA, I concentrate on long trades. This is an excellent method to keep track of where you are trading relative to the trend. Notice one word I used in the above sentences though, significantly. I don’t have a specific definition for this word in relation to trading with the trend, but if the price action is one or two points above or below the 89 period SMA, I do not consider it significant. Several students have misinterpreted this definition and have considered any price action below the 89 period SMA grounds for determining the trend. This is not correct. We are looking for a significant price action, and a few points here or there is really just spurious action.

You can also examine the peaks or troughs on the Stochastic indicator and get a good idea of the strength and direction of a trend. Obviously, it is the peaks are getting progressively higher you are in a strong uptrend, and if the peaks are getting progressively lower the opposite is true.

Generally speaking, I trade three minute charts. However, is that trend is not clear I will sometimes trades to 10 minute charts, or even longer period charts to get a clear picture of trend and the intensity of the trend. Why go to all this trouble?

As I mentioned in the title of this article, trend continuation is more likely than trend reversal. I think this is one of the most important points in my personal trading. In a trending market, you are always in good shape when you trade with the trend, not against the trend.