Archive for the ‘Day Trading’ Category

What is the Market Going to do Today?

I am invariably asked this question as I begin each day in the trading room.  Will the market go up?  Will the market go down?  There is a gap up…does that mean the market is going to fill the gap immediately or maybe wait until later in the day?  I almost always disappoint the individual asking the question by answering, “I really don’t know.”

Even worse, I really do not know.

Predicting which direction the market will move can be one of the most embarrassing propositions for any trader to undertake.  Of course, you have at least a 50% chance of being right, which is some consolation. Generally speaking, though, I don’t have the slightest idea which way the market will move, and many find this disturbing.  As a trader, many think you ought to have some general idea as to which direction will move.  But I am a scalper, and I don’t concern myself with predicting which way the market will move.

I am looking to catch areas of momentum and ride that momentum until it subsides.  Instead of knowing which way the market is going to move, I am simply hitchhiking a ride as the market moves in one direction or the other. I am quite comfortable reacting to the market as oppose to predicting what the market might do.

Scalpers use a number of techniques to identify areas of potential momentum.  First and foremost, most useful information is contained in the actual price action in the market.  Oddly enough, price movement is often ignored in favor of a variety of oscillators, rate of change indicators and a number of exotic charting systems.  I am not interested in many of the popular predictive systems like Elliot Wave analysis, Gann Lines, or systems of a similar ilk, but I want to make sure I point out that my opinion does not imply these systems do not work.  My point is a simple one, these systems do not work for me and I do not use them.

No, I am far more interesting in support and resistance, trend lines and momentum.  I have an important maxim: Trade primarily with the trend. I allow myself one countertrend trade per day, and that is usually one too many; but there are many very enticing set ups that occur countertrend and learning to lay off these trades is a challenging job.  Most traders find that countertrend trading is an unprofitable method in which to trade.  Further, the empirical scientific evidence bears out one indisputable fact; trading against the trend is far less profitable than trading with the trend.  For a scalper, trading with the trend the majority of the time is imperative.

I also employ, in varying degrees, forms of Fibonacci analysis.  I have never been convinced that the underlying principle of Fibonacci is valid; that is, the market moves in natural cycles that can be predicted using the Fibonacci sequence.  One thing I know for sure is that enough people trade using Fibonacci analysis that the system works.  Whether Fibonacci works because so many people use it or it is intrinsically valid is of little consequence to me; I don’t care why it works, I only care that it does work and therefore employ some tenets of the system in my trading.

In summary, I am a scalper and I am interested in momentum in the direction of the trend.  I don’t use predictive trading systems; I rely upon price action, support and resistance, trend lines, and some limited use of Fibonacci analysis.  I keep it simple and try not to overload my methodology with extraneous charts and unnecessary information.  Scalping is not for everyone, but it is a very effective method in which to trade.

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Day Trading: We Are up, We Are down, Isn’t All Bad?

For swing investors and longer-term investors the markets haven’t had much to offer in recent months. We seem to be stuck in a narrow range, without any end in sight. So if you’re looking for long-term gains in the market, you’ve had a pretty rough go. And frankly, it is hard for me to see any compelling reasons to invest the long side of most stocks. There are, of course, exceptions to this statement; but the vast majority the market is mired in a lethargic semi-coma.

Of course, for us day traders it has been a wonderful ride. The market may start upward, the market may rocket downwards, then bob and weave throughout the course of the day and finally end up very near where we started. This roller coaster is a day traders dream, and we have certainly taken advantage of the sometimes unpredictable movement in the market. In fact, there are days when I have absolutely no idea why the market is moving up, or moving down. Not that it matters, I trade with the market offers and don’t you have any serious consideration to why the market is behaving in a certain manner; and considering the lunatics who are currently at the helm on Wall Street, is probably best to not give any serious consideration to what harebrained strategy the investment bankers are currently scheming. One thing is for sure, it will not be in the best interest of Wall Street, Main Street, or any street except for the likes of Goldman Sachs, Citicorp, and the rest of the companies of that ilk.

Which is not to say these fine American investment bankers are breaking the law. They are, in fact, under intense scrutiny by the ever diligent federal government. Okay, now that I think about it, it wouldn’t take a lot to pull the wool over the eyes of the average federal auditor. After all, Bernie bamboozled the same federal auditors into thinking he was in possession of $100 billion and they took his word for it. Call me crazy, but I would like to think I would ask for some audited statement by a reputable accounting firm to back up Old Bernie’s claims. I don’t think there are many federal auditors that would take my word for it that I claimed I had a  hundred billion I had invested and it was in good hands… and you can trust me on that.

But I digress… the point I am trying to make is a simple one, not extraordinary complicated, and that many of us day traders are having a heyday. Yes, you heard it right, day traders are making money. With all the negative publicity day traders receive it would be shocking to learn that a large number of day traders do quite well. We even do well in stagnant markets.


We don’t try to predict the market. We actually take what the market offers and bank it. There is a wealth of information and scientific studies that claim that market prediction is an impossibility; and judging from the prediction record of the Federal Reserve and many of our prominent economist as I don’t have too much trouble buying into the theory that market prediction is impossibility. The proof is in the pudding. Yet economists continue to prognosticate, and the Fed continues to print money; and both are quite sure that they are on firm ground when it comes to predicting the future economic events in our country. Such is the life of a carnival worker. To be sure, several of our recent administration economists might well seek employment as pastry chefs in lower class dining establishments. Larry Summers comes to mind. But that’s another story. I suppose a bit of a controversial tonight. Generally speaking, I write articles about the ins and outs of trading theory and chaos theory, but I was feeling a little spunky so I thought I’d have a rip at some of the geniuses behind our current economic dilemma.

Plus, I bought a nice new leather chair today. It’s throne-like with black leather upholstery and I have the illusion of landed gentry. And with that attitude, I will soon be joining a traveling carnival, too.

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Day trading for the week of September 25-29

Day trading for the week of September 25-29

I wouldn’t characterize this week as the most exciting week of trading in stock market, or futures market, history. As a day trader, I am not terribly concerned about the underlying fundamentals in the market. Here at the E-Mini Trading Professor we seek to scalp small portions in market directional movement. But this week was unique in that there were several protracted periods of little or no market directional movement.

It is no simple task to determine the underlying cause of the lack of movement in the market, as there are a wide variety of variables which determine the direction and velocity of the market. But several basic themes can be gleaned from this particular week. Quite simply, it took a reasonably nimble hand at trading to choose trades that were profitable and sound.

Of course, the futures market and the S&P 500 are directly related to the movement and the actual S&P 500, and it is my opinion that the vast majority of investors in the cash market were primarily speculators and not investors. This is not surprising because it is hard to make a case for investors to invest on the long side and any market index. There is a great deal of uncertainty as to the direction of the current market, and we are currently bouncing off several important resistance levels in the cash S&P market. It is my opinion that the general investor has been hesitant for quite some time to commit any substantial sums to longer-term investment in the stock market. Further, we are stuck at intermediate highs, and the continued upward movement of the market is certainly in question.

Of course, October has never been a particularly kind month for stock investors. Whether this phenomenon is self-perpetuating or a natural rhythm of the market is certainly subject to debate, but the fact remains that past Octobers have been unkind to the stock market investors. And investors know this, so it seems they have chosen to stay on the sidelines for a period of time.

From a technical standpoint, the market needs to decide whether to run up to the 1200 mark or retreat back to more manageable levels. As a scalper, I do not have any particular preference as to which direction the market finally decides to move, but it would be profitable if market moves away from the relative holding pattern that we are now experiencing. It is, to say the least, a difficult time to trade as it is typified by unpredictable movement, both to the upside or downside, which are difficult to discern.

In my trading in the trading room, I have chosen to shorten not my stops and profit targets to help ameliorate some of the inexplicable movement the market is now displaying. With speculators dominating the market, the movement is not particularly drastic but it is not unusual to see price movement that is opposite normal expectations.

While I trade primarily on price action, I generally use oscillators and indicators to filter trades for accuracy. On most occasions, my oscillators and indicators have been unreliable and difficult to interpret. On the other hand, using support and resistance has proven to be a reliable technique to chart potential move to the upside or downside. So, as might be expected, I have added importance to support and resistance in my trading.

In summary, the current market is not positioned for taking aggressive trades and most traders would be well served to trade with a conservative mindset and limit the number of trades they initiate to those trades they are very confident with. This takes more self-discipline than most traders are accustomed to exercising, but nonetheless it is essential to stay on the conservative side of his market.

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Day Trading: It’s the Price Action

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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Day Trading: Learning to Ignore the News

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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Day Trading & Surfing – A Metaphor…

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.

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.

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.

Simple Moving Average vs. Exponential Moving Average

I seldom trade a chart without either a Simple Moving Average (SMA) or an Exponential Moving Average (EMA) displayed. Both are exceptional tools in an e-mini day traders repertoire. Of course, there is no agreement as to exactly which type of moving average works best-and that is as it should be, because no two traders trade with same mind set and personality.

In the world of moving averages there are two contenders for consideration. The diminutive simple moving average (SMA) and the more complicated exponential moving average (EMA). Because the EMA has a more sophisticated method of calculation, many consider it to be the superior of the two averages, but that would be jumping to unfounded conclusions.

The SMA is a basic arithmetic mean: you add together the closing prices from the last 10 periods then divide the product by 10. As I said, the result is a simple arithmetic mean. Pretty simple? Too simple for some people, especially those who tend to associate complexity with efficiency.

Complexity does sometimes yield superior results, but that is not always the case.

EMA’s are really not that much more difficult to calculate. The formula is simply 2 (n+1), and the result is added to the prior days exponential calculation. With some simple deduction you will see that an EMA emphasizes the most recent days prices, or weights the most recent days prices more than prices early in the exponential sequence. Since any moving average uses historical data, or data that has already occurred to calculate the average, any moving average can be considered a lagging indicator. It should be obvious, then, that the purpose of the EMA is to “speed” up the lag factor that is inherent in all moving averages.

Do EMA’s really speed up the lag factor?

To a certain extent EMA make the lag factor in moving averages less distinct, but like all things, there is a cost. EMA’s are notorious for causing a raft of early buy and sell signals, as the last variables in the sequence overweight the average. For that reason alone, I am not a huge fan EMA’s and prefer SMA’s. Does that mean SMA’s are better than EMA’s? Not at all, all it means is that in my trading mentality I am far more comfortable with the results from an SMA than I am an EMA.

I always strike an 89 period SMA on my charts and watch the price action relative to the price action and the SMA. If the price action in more than 3 or 4 points below the SMA(on the ES contract) I immediately decide that long trades are out of the question until the price action moves closer to the SMA, and visa versa on price action about the 89 period SMA. I can also glean some nearly instant information regarding the trend of the market by looking at the slope of the 89 period SMA, and the sharper, or more pronounced the slope appears, the stronger the trend.

I also use a number of paired moving averages to back up some of my entry and exit points. I generally use Fibonacci numbers starting with 5 and up to form my two moving average lines. I find it best, on short term trading, to use to SMA’s that are within 15-20 points of each other. I will leave to you to discover which set of moving averages intersect at point which best suit your trading style.

So we’ve talked a bit about moving averages today, and seen some applications for the SMA. The EMA’s are also used by many traders and I would encourage you to explore the applications for this moving average.

E-mini Day Trading: Do You Find Yourself Falling in Love?

Once the novice trader has proven his or her competence in basic trading, he or she has started down the path to trading success. Day trading skills are important to assimilate in a timely manner and hone with a solid dose of demo account trading, followed by live trading on the contract they have chosen. In the day trading world though, chart reading skills and trading experience are only one part of the equation for success. The next component in a successful traders skill set is the ability to manage trades.

Have you ever taken a trade and been positive, absolutely sure, the trade was a winning trade?

I have. From time to time I still find myself absolutely sure that a particular set up will result in a winning trade. Unfortunately, this thinking is a cancer that must be set into remission. Above all, there are no absolutes in the world of trading. Nothing is guaranteed to happen. There is randomness in the market that precludes absolutes. Whichever pricing theory you subscribe to, there can be no argument that a certain random component is ever present in trading. This can be a tough pill to swallow, and can lead new traders to failure.

Since we know there is a random component of the market and there are no absolutes in pricing theory, a trader is forced into a difficult and vexing mindset.


It is important to understand how to trade, but it is even more important to understand how to trade consistently. You may be having a fine day trading, and one for trading decision can set your account back significantly. In trading, consistency is everything. I think it’s important to understand that consistency does not mean that every trade you take will be a winner. Probability dictates that there will be losing trades. Consistency should be construed to mean that you are consistent in the manner in which you make decisions about trades. Once you have settled upon any profitable trading system, there is no room for improvisation.

One of the toughest and most common mistakes traders make is to become convinced they are in a winning trade. Traders do unusual things when they become convinced they are right. Unfortunately, the market is always right. When a trader finds himself or herself on the losing side of a trade they are wrong, and the proof is clear; they lost money on the trade. I should point out that it’s okay to lose money on trades, its part of day trading. But when a trader starts altering their system to accommodate a position they have fallen in love with, they lose perspective on the market, on their system, and their trading account. The end result of an attachment to a certain trade or a certain set up is inconsistent trading. When you trading inconsistently you will lose money; that is certain.

You have to stick to your guns. Good traders insert stops based upon the amount of risk they are willing to take before they enter a trade. Moving stops downward or upward to accommodate a losing trade increases your risk exposure. Even worse, it just doesn’t make sense. Why would a competent trader, a rational trader, make a losing trade even worse? The answer is a simple one; they are convinced that they were right when they took the trade and are unable to accept the notion that the trade is not a good one. So they move their stops a little lower to give the trade “some breathing room.”This is always a bad idea, and has its roots in an attachment, an emotional attachment, to an idea that is not rooted in reality. No trader knows what the market will do, and the very notion that a trader is convinced that a trade will reverse and his or her direction is folly.

I had the even observed traders adding contracts to a losing position, they double down, because they are absolutely convinced they are right and adding contracts will greatly increase their profits. Even worse, once and a while the market does turn and the self-fulfilling prophecy of falling in love with the position is reinforced. When this behavior becomes habit, the trader will eventually succumb to the probability of the market, and the result will be a premature departure from the trading business.

You can’t fall in love with a position under any circumstances; take your losses at or before your preset risk tolerance. Never increase your risk tolerance by expanding your stop loss zone. Finally, never, never add contracts to a losing position.