Archive for July, 2010

Day Trading and Mechanical Automation

I got an interesting e-mail today asking me about a particular futures trading system. The writer wanted to know if the system was fully mechanical and automated. I should point out that there are automated or “black box” trading systems employed by large hedge funds and other large trading groups, but I have never come across a fully automated trading system suitable for individual traders seeking to day trade the futures markets.

Of course, there are a slew of Forex robots on the market today, and the results from these robots have been mixed, at best. In my opinion, this type of question regarding futures day trading is the result of a spillover effect from the Forex trading cabal. But I think that this request reflects an even deeper question being considered by new traders that are entering the futures markets.

What sort of question do you think I am considering?

It’s the old goose that lays the golden egg story. In my opinion, the great attraction of Forex robots is the lack of accountability the trader is forced to shoulder. After all, if you have a machine that simply works day and night to create money, why wouldn’t everyone own one?

The answer to this question is fairly simple, there are no geese that lay golden eggs and there are no Forex robots that consistently churn out fantastic profits. It would be a wonderful thing if there were trading machines that could consistently make profitable trades, just as it would be a great thing to own a goose that lays golden eggs. Unfortunately, day trading doesn’t work that way because the market moves in a variety of methods that makes low-cost trading robots impractical to produce.

Nor are there any strictly mechanical methodologies that will consistently churn out an endless stream of profitable trades. No matter what methodology you employ in your trading, you will always be faced with subjective choices as to the merit of any trade under your consideration. At this point in our technological progress, we simply don’t have a level of artificial intelligence capable of adjusting to the varying conditions that exist in the futures markets.

And I am glad we don’t.

I have always considered trading a combination of interpreting formulaic indicators and personal judgment. Some call this form of trading and art, but I look at it more in terms of a learned skill. I am an avid reader of technology and scientific journals and we are years away from developing the level of artificial intelligence needed to effectively day trade markets. We have one of the most marvelous computing devices ever designed sitting atop our shoulders. Though I wonder if some individuals care to employ this marvelous device we refer to as our brain.

A combination of advanced technical indicators that have been developed in recent years and the power of our own brain is what has, in the past, and will continue to be in the future the most effective trading devices available. Of course, developing this trading machine will take some traders a good deal of training to refine it to the point where it is an effective trading machine. There is nothing wrong with this process, in my opinion.

The idea of artificial intelligence machines picking every trade perfectly is something from Aldous Huxley’s “Brave New World”, and not something I would relish. Imperfection and improper trading technique are part and parcel of the trading process, especially for traders in the early part of their career. It is the way we learn to trade. If we developed the technology capable of picking all trades as winners, the markets as we know them would cease to function. In every trade, there has to be a winner and loser. It is the very nature of trading. If every trade were a winner, there would be no need to trade.

It’s not a trading world in which I would choose to live.

New Happenings at Learn to Trade and Invest

I am happy to announce that the Day Trading Mentoring Program has become one of the most popular options in our lineup of e-mini training products. I have to admit I am probably the most surprised at this turn of events, though I think mentoring is one of the best ways to hone your trading skills and vastly improve your trading outcomes.

So far, I have been able to personally handle all the mentoring responsibilities, which has allowed me to get to know several of our traders personally. This aspect of my job has been most enjoyable, as the individuals I have worked with have progressed nicely in their trading styles and subsequent results. I take great pleasure in watching traders improve. It is also a real pleasure getting to know, at a personal level, the members of our trading community.

The program is relatively inexpensive compared to comparable programs of a similar nature. Most of the mentoring programs that I have seen advertised cost between $5,000 and $10,000. Personally, I think that is a phenomenal amount of money for a mentoring program. We are currently charging $1,200, which seems in line with what most beginning traders can afford.

Finally, we have received some wonderfully positive feedback from the individuals who have been involved in the mentoring program, and for me the kind words are very fulfilling and heartwarming. It’s great to hear that we are having a positive effect on people’s lives.


As you may have noticed in last night’s video, I am recommending using the Infinity Futures trading platform along with the Ensign charting software package. I have looked at a number of different combinations of both platforms and charting packages with an eye for the best feature set at an affordable price. After trading the last week with Infinity and Ensign I feel very comfortable in recommending these two products as both affordable and very capable of performing the functions that we require.

I think it’s important to know that I do not have a financial relationship with either firm, and chose these two programs based upon the merits of the product and no financial considerations. It is against most regulations for an educator to accept financial remuneration for product recommendations.

I highly recommend contacting Josh Alexander at Infinity, as he is probably one of the most helpful brokers I have come across. I have known Josh for several years and he has, without fail, always been most helpful and is willing to go the extra mile for his clients. With Ensign, I have found their technical support of the highest quality and they are one of the few charting companies that provide telephone-based technical support.

Day Trading: Price Volatility and Your Trading

The last couple of summers have ushered in tremendous price volatility when day trading the ES e-mini contract. There were times when the market volatility was so extreme that normal backing and filling operations (market noise) could easily stop you out of your trade. In fact, if you chose to trade during these volatile periods, you would need nothing short of 20 tick stop loss point. For me, such wide stops increased my risk tolerance to a point where many days were too volatile for me to trade. On the other hand, if you were lucky the market moved in the direction of your trade and you could realize fantastic profits. The key in the last sentence is “luck,” and luck is no way to day trade. So many days I was relegated to watching the market and hoping the market volatility would settle down some, and some days it did and there were good trades to initiate.

In recent weeks the markets have not been very volatile and we have experienced exactly the opposite phenomena as the previous two summers. So market volatility plays a major part in your ability to trade and to select trades. There is, in essence, there is a “sweet spot” in price volatility where traders can prosper. It is important to be able to recognize just where that sweet spot resides, and how to trade an optimal market volatility conditions.

For me, I like to use the Average True Range to get an idea of the market volatility that I can expect on a given trade. Like most things, the Average True Range is not a foolproof system for gauging market volatility, but it gives me a good idea as to what the market volatility has been and buying any unusual trading circumstances what I can expect based upon the last sequence of bars under measurement. I usually use a setting of 14 for the Average True Range.

A rating all about 2 1/2 or 3 seems to give day traders an optimal chance to earn sizable profits while minimizing the amount of risk tolerance a trader must endure. In my trading, as the Average True Range exceeds 4.5 or 5, I generally find myself on the trading sideline past this level of volatility presents too much risk for my appetite.

But there are other measures of market volatility that are worth a look, too.

The VIX is an indicator distributed and calculated by the Chicago Board Options Exchange. The VIX is a weighted basket of option prices based upon the S&P 500 index. While the VIX is directly related to options and option prices it can still be very useful for most traders because it indicates the implied market volatility of the S&P 500 index over the next month. It is often referred to as the “fear index” as it does not indicate a bearish or bullish bias. Rather, it implies in percentage points the amount of potential movement and the S&P 500 index over the next 30 days. As you might guess, this is a very closely watched index and is even traded as such. In my trading, I don’t have any strict interpretations for using the VIX in my intraday trades, but I am mindful of what the VIX numbers are and the potential for movement they may or may not represent. Obviously, a high reading on the VIX, say 20, implies a potential for sharp movement of 20%, either up or down, in the next 30 days. In essence, a VIX reading of 20 warns the intraday trader that there are indications of pending market volatility. That in itself is something that is good to know.

So if talk a little bit about actual volatility and how to much volatility can make trading very difficult and a very stagnant market, with low market volatility can make trading profitably just as difficult. We have talked about a “sweet spot” in the Average True Range readings that seem to be optimal for trading, at least for my style of scalping, or intraday trading. We also discussed the VIX, which is not directly related to chart trading but can be very helpful as an advisory indicator. We have concluded that sometimes the market can be too volatile to trade effectively and by the same token, it can be not volatile enough to be an effective trader. In short, market volatility is a variable that must be considered carefully and compensated for in a day trader’s daily endeavor.