The E-mini Trading Professor

Live E-mini Day Trading Signals & Education From a 20-Year Veteran Floor Trader

Archive for September, 2010

Day Trading: It’s the Price Action

September 5th, 2010 |

Author: admin

Countless numbers of day traders spend their time and money searching for that magic indicator that will unlock the secret of trading profits. To be sure, I have seen aspiring traders purchase trading program after trading program in search of the new indicator that will send their their trading profits soaring. Unfortunately, no such indicator exist and it is unlikely that a magical indicator will be developed that can revolutionize profits for the e-mini day trader.

On the other hand, thousands of e-mini day traders successfully trade every day without any wondrous and magical indicator. Of course, it would be much more convenient to have an indicator that unlocks the secrets of e-mini trading. To date though, we are far from developing any such trading tool. So that leaves us with the trading tools we have at hand, and there certainly is no shortage of indicators for the e-mini trader to utilize. The question remains, though, which indicators are the best ones to utilize?

While some indicators claim to be leading indicators, that is to say that they have a predictive quality in their results, the evidence suggests that this predictive quality is sketchy, at best. Most indicators are lagging indicators and indicate the status of current trends based upon recent history. As any good trader knows, recent history can be helpful, but the market contains a random element that can easily deviate from past history. We are left with indicators that give us, at best, an educated guess as to the path the market price action will take in the near term future. In short, short-term trading can be a rather inexact science, at best.

One important aspect of trading is often overlooked by traders who depend solely upon indicators and oscillators to time their trades. In my world, price action is the driving force in my trade selection. While I do employ oscillators and indicators, their purpose is primarily to confirm potential trades I spot by observing price action. I pay careful attention to support and resistance, volume, and price movement in choosing my trades. Obviously taking trades into known resistance or support it is risky business, at best. Unfortunately, strict oscillator and indicator traders do not have a handle on where or support and resistance may lie and often blindly take indicator or oscillator indicated trades into these danger zones.

Further, price movement and price analysis can give a trader a unique view in which the market functions. Specifically, I analyze each bar and note whether the bars make higher highs and higher lows. Conversely, I am also interested in the opposite price action, and that is whether the bars are making lower highs and lower lows. Each of these price formations can be indicative of potential market moves in their respective directions. From there, I can have a good look at my oscillators and indicators to determine the strength and velocity of these potential moves and decide whether or not the trade is a high probability or low probability trade.

Price action, along with support and resistance and volume, are often overlooked in trade selection. But learning to actually read price action will give any trader a much better understanding of what is actually happening in the market and provide the trader with insight into high probability trades and conversely, help him or her avoid low probability trades. Very few traders are excited about entering low probability trades and seek to avoid them at all costs. It is my contention that ignoring price action and relying strictly upon oscillators and indicators will often lead traders into low probability trades.

A second common mistake made by oscillator traders is the failure to recognize the trend in the market. Regardless of whether the oscillator or indicator being used indicates a nice trade, if it is against the trend you will often find yourself on the losing side of the trade. From a statistical standpoint, a trend is likely to resume (after a short retracement) 80% of the time. Obviously, trading with the trend is a habit all traders should cultivate. The only way to truly ascertain whether or not the market is trending is by observing the price action and subsequent retracements.

In summary, we have stressed the importance of observing price action and the benefits price action has to offer traders. Trends, retracements, and then market noise can all be identified very easily by observing price action. We have also noted that strict oscillator trading can often lead a trader into low probability trades, which should be avoided. Watch the price action and you’re trading will improve immeasurably.

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Posted in Day Trading, oscillators indicators, price action, trading, Uncategorized |

Tags: Day Trading, price action, trading |

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Day Trading: Learning to Ignore the News

September 5th, 2010 |

Author: admin

Anyone who watches daytime television is well aware of several news networks that broadcast nonstop financial news. Generally speaking, these networks parade a variety of experts in front of the camera who spout all sorts of interesting and apparently insightful information about market conditions during the day. Early in my career, many years ago, I faithfully listened to all the rumors and innuendo the financial news network’s reported. At some point in my career, I learned to turn the television off and simply trade the chart in front of me.

This is not to say that day traders should not be aware of the daily economic announcements the government and government subsidiaries publish. These are very important announcements and should warrant your attention. However, the never-ending stream of talking heads that grace your television screen are not worthy of your attention. Often times they spread information that is unsubstantiated and rumor, which can affect your trading strategy and trading timing in an adverse way. Let’s face it, the really successful traders do not appear on television and divulge their trades for the rest of the world to duplicate.

Aside from the misinformation, there is an even more important dynamic to consider when watching the Financial News Networks. The announcers and individuals being interviewed can have a decided effect upon your psychological outlook on the market movement during the days session. It is important to keep a tight rein on your emotions when trading, as an outside stimulus, like spurious news reporting, can often cause your trading to become biased. This bias can have very unfortunate and costly ramifications and you’re trading. For that reason alone, I generally listen to music while I trade. In short, I make an earnest attempt to avoid any outside influences on how I view the market and reserve my judgments for the information I glean from the trading chart.

This may seem a little nitpicky at first glance, but a steady diet of news that amounts to speculation and innuendo can cause you to take trades or establish positions that may not concur with the information on your chart. Yet because you have heard certain information on the television you may feel comfortable in taking these contrarian positions based upon the conclusions of the television personalities. To be truthful, there have been several occasions where I have found myself in this exact position and made unwise trading decisions based upon recommendations and conclusions television personalities have expressed during the course of the day. To my disappointment, none of these prognostications became reality and I was the unfortunate recipient of a losing trade. About 10 years ago, I learned to turn the television off and my trading improved. The television is one distraction that is simply not necessary. Using proper support and resistance along with sound trading methodology is all that is required to be a successful trader. The talking heads on television certainly are not an asset to your trading experience.

Oddly enough, I seem to enjoy listening to the television personality’s blather on about various happenings in the market for entertainment. Unfortunately, I learned that at a subconscious level I was gathering information and incorporating it into my trading decisions, despite the fact that I was well aware that the information was of minimal value. My point is a simple one; use trading methodology and the chart in front of you, along with the daily government and government agency announcements to formulate your trades throughout the course of the day. There is no reason bias your thinking by exposing ourselves to the random meanderings the financial television personalities spew forth.

In summary, I think it’s important to trade based upon the price action and trading methodology you have learned and see little value in the rumor and speculation the financial networks disseminate throughout the course of the day. To be sure, once you have established a sound methodology you can depend on that methodology to trade without the input of your television.

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Posted in Day Trading, Day Trading: Learning to Ignore the News, trading |

Tags: Day Trading, trading emotions |

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NAR Reports and E-mini Day Trading

September 5th, 2010 |

Author: admin

I generally e-mini day trade from 6:30 a.m. until about noon, but if I feel like I am losing my mental edge on the market then I will stop at 11:00 a.m. I usually trade the ES contract pre-open, and then switch to the NQ contract once the markets are open and settle down some.

As an e-mini day trader I am not particularly concerned about data in the NAR report, only what kind of impact the news will have on the markets or, more importantly, how the other e-mini day traders will react to the news in the report. It is not unusual for the market to receive news and react instantly then take a moment to digest the information and turn the other way. This phenomena is especially true on the reports released before the opening, usually at 7:30 a.m. Of course, it’s important to keep abreast of when these reports and announcements will be released and tread very lightly as they become public. Since it is not unusual for the markets to gap up or down as the information becomes available, stops are of little value. I prefer to not to be in the market when the news is about to be released…..but I will have OCO orders bracketing a position to take advantage of the exaggerated movement in the market, if there are any.

I run my stops in the 12 tick range and set multiple profit targets so I can take advantage of any exaggerated movement that may occur unexpectedly. Like most day traders, I want my trades to run, if possible….of course, I am usually looking for the fractal-type configurations to formulate my exit strategies. I also calculate pivot points, but use a logarithmic methodology to avoid the straight line mentality you will hear me rail about. I will calculate the Fibonacci retracement levels in a run, but use them with guarded reliance, as they are irrelevant on many days. On the other hand, especially days that are low volume and traded very technically, the market may follow the Fibonacci levels to the tee. Of course, I am always drawing support and resistance levels as they become obvious…..add some Bollinger bands, CCI and mathematically altered MACD oscillators and I am set. I do not use trend lines, or any other linear type calculation.

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Posted in E-mini Day Trading, price volatility, Trend |

Tags: E-mini Day Trading, price volatility, Trading From Home |

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E-mini Day Trading Chaos

September 4th, 2010 |

Author: admin

Fundamental e-mini day traders have no extra time for the technical traders, and technical traders battle with the Efficient Market rabble, who constitute the vast majority of market theoreticians, for coherent interpretation of the unruly and unpredictable beast we refer to as “the market”. Of course, reams of academically-sound market studies proclaim the inherent correctness of the Efficient Market Theory. Why…no less than the eminent Dr. Burton Malkiel trumpets the sheer futility in considering anything short of Efficient Market Theory. No, one cannot argue with facts laid bare in slick PowerPoint presentations with glossy charts and multi-colored tables, that’s for sure, and yet there is something missing, something so essentially important that no theorist dare utter the words…equity market theory seldom translates into profitable trading.

And that’s a real problem for me. If an e-mini stock market theory is irrefutably true on paper it ought to have some phenomenal performance in practice. Of course, this is seldom the case.

For those who might have missed it, we’ve put a team of astronauts on the moon. We have unravelled the the vagaries of the quantum mechanics with startling accuracy, and teased the destructive power of atomic structure to produce enough nuclear weapons to obliterate ourselves tenfold. Why, we have even sequenced the double helix structure of of our own DNA

molecule. We are talking about the very building block upon which life is based, a structure so complex that literally billions, not millions, but billions of gene strands comprise it’s makeup.

But we have failed miserably at predicting where the market is going to move at a given point in time.

Yet we argue on as to who is right and who is wrong. It seems to me that I learned in my college Argumentation class that something true at face value, and provide proofs to that end, before you can argue your point. So it would seem a bit imprudent to argue about which theory holds true when we have proven to ourselves, over and over, that no theory has predicted, with any accuracy, where the market is going to be at a given point in time.

My one-watt brain cell demands that a FACT has to hold up time after time to be true. One cannot argue the untrue into truth. For example, these are facts:

1+1=2 (unless you’ve digested Liebnitz’s arguments)

The moon revolves around the earth in a given arc and is not made out of cheese.

We will all die.

I think you get my point here. It is impossible to argue untruth into truth through a sheer volume of words. So I’ve managed in 21 years of trading at the institutional and retail level to establish only one irrefutable FACT:

We have an incomplete knowledge base about the market and there is not a method to predict, with 100% accuracy, what the market is going to be valued at a given point in time.

Which leaves me out there with the lunatic fringe scratching my head in bewilderment. Yet I am a consistently profitable trader. I live in the very uncertain world of fractals, strange attractors and chaos theory. Yes, you heard me say it….CHAOS THEORY.

The real problem with all market theories, in my opinion. is that they are linear in nature. Of course, even a cursory observation of any equity chart exposes the distinct non-linear pattern typical of the equity markets. It is not possible to predict even from bar to bar where he market is headed. No, a binary outcome is after each bar is the best you can hope for. That is to say there is a probability from bar to bar whether the market will go up or down or stay the same. And when trading, probabilities are the best we can hope for…and careful observation of market fractal mini-structures can be teased from the charts. Which is not to say that fractal structures are the Holy Grail in trading, but they are reliable predictors in non-dynamic markets….that is, markets unaffected by catastrophic or peculiar outside occurrences.

Of course, this type of thinking turns the world inside out….after all, we linear thinkers and are programmed to see patterns in the world and formulate patterns based upon observation. I am 5’7″ and weight 210 pounds and have gray hair. My boss is also 5’7″ and weighs 210 pounds, and yes…he has gray hair. So it stands to reason that 5’7″ and 210 pound men must all have gray hair. Of course, that is a simplistic view of our linear thinking process, but it serves it’s purpose well enough…and that is correlating variables of an infinite set is, at best, a dicey endeavor.

No, I’ve learned that the secret to the market lies in thinking in a non-linear fashion, and blocking out what seem to be obvious correlations. There are no obvious correlations in a non linear world….only fractals. Are you with me?

Posted in E-mini Day Trading, Stock Market |

Tags: E-mini Day Trading, Trading From Home, Trading Psychology |

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Bulls, Bears, E-minis, and Other Stock Market Nonsense

September 3rd, 2010 |

Author: admin

There is a tendency to believe, even among investment professionals, that once the e-mini market starts to go up the “good times” have arrived and the market is going to go up forever. Conversely, the is also a tendency to believe, even among investment professionals, that once the market starts to go down, or correct, “the sky is falling” and the market will continue fall ad infinity. Like members of a devoted political parties the “up” crowd, or “bulls” feel comfortable when the market is going up and they are in control. I think it is also important to note that since or economy is almost universally expanding because our population is increasing, which in turn causes of GDP to increase.

But our markets tend to over expand, and the over expansion is followed by corresponding contraction…and this contraction is when the “sky is falling crowd.” the “bears” have their day in the sun. Many investors tend to be either bulls or bears, and strongly identify with the market either going up or the market going down.

Of course, an e-mini day trader doesn’t affiliate himself with any “political investing party.” Bulls, bears….these are wonderful basketball and football teams but are of little consequence for a trader. We are happy to go long or short at the appropriate times without conscience or investing preference. Like most traders chaotic investment philosophy goes to where the money is…long or short and where the money is.

I started out as a stock and bond man….but concentrate entirely on index futures contracts now. Of course, my trainers and the media in general portrayed the futures and options markets as “voo-doo” markets and not to be taken seriously. No, I was trained to believe that the only investing occurred on the NYSE and NASDAQ. (and the NASDAQ was barely respectable back then) I did trade some TED Spreads (Treasury-Eurodollar) but nothing like the scalping style I employ now.

The reason for my conversion is much the same as the reasons other traders….we have nano-second access to any market through home computers, and as home computers have proliferated so has the number of firms that cater to home traders or small office traders. While I hate to admit it, my investing career has taken me all the way back to Quotron.

My early investing career was very much influenced by the writings of Benjamin Graham, and Graham and Dodds writings were very much the gold standard by which other authors were judged. Value investing, as was Grahams preference, along with detailed study of balance sheets and cash flow statements were the rage, along with neighborhood investment clubs. The world has certainly changed.

Posted in E-mini Day Trading, Stock Market |

Tags: E-mini Day Trading, E-mini Trading for a Living |

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Day Trading & Surfing – A Metaphor…

September 2nd, 2010 |

Author: admin

Eric here. I almost died when I was 16 years old. I was surfing in the winter at a deserted beach with two friends. I caught a wave too close to shore and wiped out in the shore break. The board flew back, smashed my neck, and gave me an instant tracheotomy. The doctor said that if the wound had been half an inch deeper my carotid artery would have been severed. End of story. And if I had been in deeper water I would have drowned.

That event humbled me. As I reflect back I realize there a number of lessons from surfing that can also be applied to day trading the eminis.

Checking the Surf – Market Analysis
Before going into the water, I always sit on the beach for at least a few minutes to evaluate the ocean environment. What is the water temperature? Are there any rip currents? Any beach warnings about jellyfish, or worse, sharks? Which direction is the swell coming from? How big are the waves? How long between sets? I don’t spend too much time though because I don’t want to over think it.

You want to do the same thing as a day trader. Before you enter a trade, here are some questions to consider. Are there any big news announcements coming up that might affect my trade? Is Bernanke speaking? Is the President speaking? Which direction is the trend? How big have the previous bars been? What seems to be the day’s trading range? Are there any warning signs like lots of bars with long tails?

Surf Gear – Trading Equipment
If I am surfing in the summertime, I might wear just my swim suit or a rash guard. In wintertime, however, it’s a full wetsuit and possibly booties (wetsuit shoes). If the waves are small a short board suffices. But if the waves are big, a longer board with a longer leash is necessary so I can paddle more easily. A longer board offers more stability when riding waves.

Do you have the right equipment as a day trader? A fast computer with plenty of memory? A reliable Internet connection? A large enough monitor or multiple monitors so you can clearly analyze charts and place your trades easily? Is your day trading account large enough for the instrument you wish to trade? You can’t day trade futures with $100. Do you have a reliable trading system you can trust? An affordable broker you can call? If you aren’t equipped, don’t trade!

A Healthy Body – The Trader’s Mind
When I am deciding whether to surf or not, one of the biggest questions I ask now that I am older is: Can my body really handle this? Do I have any injuries that might get worse? Can I deal with cold water? Huge waves pounding my body? Wipe outs? Other surfers?

Day trading is no different. No doubt you’ve heard it a thousand times: Your emotional and psychological health is perhaps the most critical aspect of day trading. Some questions: How do you feel? Hungry? Angry? Lonely? Tired? Distracted? Afraid? Greedy? Or rested? Calm? Peaceful? Confident? Content? A clear evaluation of your state of mind can make the difference between a great trading day and a miserable one.

Catching A Wave – Placing A Trade
If you’ve never surfed before, catching and riding an ocean wave is almost indescribable. Here a just a few thoughts that race through my mind as the entire process unfolds. Am I in the right spot to takeoff? How many other surfers are turning around to paddle for the same wave? Is this wave too big for me? Am I out of breath? Do my arms and legs feel strong as I paddle? What obstacles are in front of me as I paddle? Other surfers? Rocks? Sharp reef? Clumps of sea weed? Playful mermaids? Just making sure you’re still with me. Once I catch the wave I am completely focused on the wave’s contours, my position on the face of the wave, how the next part of the wave is forming up ahead, and a thousand other thoughts.

When you are close to placing a trade, you want to make sure all systems are go. Is the trade coming to you, or are you trying to force it? How are your emotions? Afraid? Greedy? Desperate? Is the trade lining up well, or do too many things seem off? Are your indicators really telling you it’s time to enter a trade? Once you are in the trade, flow with it as it unfolds. The market is unpredictable just like the ocean. Trust your equipment and your day trading system.

Exiting A Wave – Closing A Trade
Sometimes a wave will “close out.” A large section of wave will break all at once and prevent me from riding any further along the wave’s face. I either straighten out toward the beach, or kick out the back of the wave. Sometimes no matter how good the wave looked when I caught it, it just doesn’t pan out. I need to get out. Other times a good wave just keeps going and going, and I ride it until it’s spent its energy near the shore.

Good day traders do the same thing with each day trade. When they are in a trade that isn’t going their way, they don’t let the wave crash over them. They get out with a small loss. And good day traders stay in winning trades, and let profits run.

Keep Surfing? Keep Trading?
After I’ve been out surfing for a while a curious thing happens. Even though I may want to keep surfing, my body starts to complain that it’s tired. Or I may feel angry because I haven’t caught enough waves. I determine that I am going to stay in the water no matter how long it takes! Or I may keep wiping out, and beat myself up. In desperation, I keep surfing, hoping to redeem the time I’ve lost. On the flipside, I decide I’ve caught a number of decent waves. Satisfied, I decide to head for the beach.

Sound familiar? The trading day is half over, and you’ve traded well. Do you keep trading, or call it a day? Or you’ve had a string of losers, and you’re angry with yourself and the market. You must make the market pay you back! Or you are afraid you’ve lost your edge, but you keep trading anyway and ignore your own day trading rules? Be careful! You are in dangerous territory. It’s best to call it a day. The markets will be there tomorrow.

Leaving the Water – Ending the Trading Day
After a satisfying surf session my body is tired all over. My eyes sting a little from the salt water, and my arms are weary from paddling. As I walk up to my spot on the beach, I think back over the waves I rode. Some good. Some bad. I think about how I could have improved. I think about why I wiped out on certain waves, or didn’t catch others. I rehearse the good rides in my mind’s eye reinforcing my moves so I can repeat them again next time.

After the markets close, it’s a great idea to spend a few minutes evaluating your day trades. Many professional day traders keep a daily journal of all their trades – the good and bad. Write down what you did well and review your mistakes. Close the day by saying to yourself, ‘Tomorrow I will trade even better!”

I hope these ideas help you in your trading journey.

Posted in Day Trading |

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