The E-mini Trading Professor

Archive for the ‘Day Trading’ Category

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.

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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.

My average trade doesn’t last more than 15 minutes, and by then I have usually exited, hopefully with a profit. This style trading is a version of scalping. I thought I’d talk a little today about why I utilize this style of trading. For the record, I don’t hold any trades overnight, and when I go to bed all my money is in cash.

Predicting the market is a dicey business, at best. You need only look at the record of economists, mutual fund managers, and hedge fund managers to realize that long-term prediction of the market is not particularly accurate. There are many reasons for this, because of the large number of variables that effect the price of a given stock or index. Of course, some variables can be accounted for; like economic trends, cyclical developments, but there is a huge number of non-controllable variables that go into asset pricing. Uncontrollable variables like natural disasters, wars, and a host of unusual economic occurrences. My point is a simple one, long-term prediction of the market is not something you can readily rely upon.

So I don’t.

Short-term market prediction is a bit easier, especially when using some specialized oscillators, moving averages, and price action, and rate of change indicators. It is far easier to look ahead five minutes than it is five months. I also believe that there is a level of randomness in the market which makes long-term prediction even more difficult. The market is a fickle creature.

So I’m a scalper.

My goal is to carve out small gains in short-term trends and exit with a profit. Generally speaking, I do not try to trade against the trend, nor do I try to predict market tops or bottoms. Further, I use my indicators to ascertain when the market is engaged in normal backing and filling operations, commonly referred to as market noise. Some people trade market noise effectively, I don’t. I am primarily interested in market breakouts in breakdowns.

I seek to minimize risk.

By choosing to trade only in short-term trends, and is minimizing my losses through reasonably tight stop loss measures I am able to control drawdowns and any devastating trades. I am not averse to letting a trade run on the profit side, but refuse to move my stop loss down under any conditions. I never add contracts to a losing trade either. Once I’m in a winning trade and up two points (assuming I am trading the ES contract), I will move my stop loss up to a two tick gain and allow the trade to run. I never let a winning trade become a losing trade.

Another nice benefit of scalping is lack of emotional involvement in my trading. I never try to predict what the market is going to do, I simply react to it is doing. So I am not in the game of predicting market moves, I simply seek to take what the market offers.

As you can see, risk management is a goal of mine. I use strict money management techniques and then never risk more than 5-7% of my futures account balance on a single trade. I am into trading for the long run, which is nearly 25 years now,

I am just finishing up an affordable course on my scalping style, and think that it is a quality product that would benefit many traders. I wrote the core specifically for beginning traders, and intermediate traders who are not having the kind of results they expected when they began trading. In the near future, I will announce the opening of this offering.

Low cost of entry. Great earning potential. No selling. Work from your home… in your PJ’s if you want. Sound like a great job? There is little argument that day trading can be one of the best jobs on he planet. But you have to learn to trade and up until ten years ago the only real traders were parked behind massive computers at investment banks or worked directly on the floor of the exchanges.

But that has all changed, and now day trading the ES Emini is within the reach of anyone with a computer. In the last 10 years, the exchanges have started developing products called “emini” contracts that are inexpensive and efficient for the small day trader to trade. With some training, it is possible to earn an impressive living trading from your home. This has created a veritable stampede of individual day traders into the markets, with mixed results.

Mixed results? I’ve been a trader in a professional capacity for a good portion of my life and have traded at both the retail and institutional level. The markets take some specific training to master, and common sense is not a quality I would use to describe market price action. At times, the market seems to move in ways that defy logic. That is why you need specific training to learn to stay away from bad trades.

There are many times that simply looking at the market and the price action occurring would lead you to a conclusion a certain outcome is inevitable. However, there are momentum oscillators and rate-of-change indicators that would show you that the move you are observing is simply “market noise” and not a good trading opportunity at all. You learn to look for specific set-ups that consistently produce profitable results. This skill is developed through training and experience. Still, many novice traders open a futures trading account and start trading without the proper education and the results are disastrous. It doesn’t have to be that way. You can be a very successful trader.

Learning to trade takes a steady hand and the ability to control your emotions. That, in itself, is no small feat, but emotions (specifically greed) are one of the toughest obstacles every trader must master. We are trained to look for specific set-ups, and taking trades that do not match the criterion we are looking for spell a losing trade. It also takes a good bit of time to acclimate yourself to the constant movement in the market as traders buy and sell.

The ES Emini contract trades well over a million contracts a day. That is a lot of traders buying and selling. Not all market price movement is indicative of a suitable entry to profit-you learn to discipline yourself to spot those specific instances when the market is primed to move in one direction and take a trade in that direction.

What has become very interesting is the wide range of individuals who now day trade for a living. I know housewives, lawyers, a doctor… a wide range of people have found this vocation resonates with their sense of work. And it has it’s advantages, too.

Day trading allow you to get your life back from the 9-5 grind of a regular job. I get to spend more time with my family and children, along with having time for some of the leisure pursuits I have always dreamed of doing. Trading is for everyone, but most people can be taught to trade with profitable results, and you only improve as you gain more and more experience. It doesn’t take a college degree or PHD in physics to trade, just a willingness to learn and follow specific directions. And really, is that so hard