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Pivot Points in E-mini Day Trading

September 9th, 2010 | Author: admin

Pivot points are areas to be aware of and respect. They are both dangerous and positions of opportunity.

Knowing those points can help an e-mini day trader to identify potential entry points and/or stop loss levelsst of the trading during any given day is done by market makers and specialists. Markets, no matter in what they deal, exist to facilitate trade and prices continually fluctuate between supply and demand to enhance the exchange process.

The market cannot exist in a state of paralysis so traders will constantly adjust bid and ask prices to keep the exchange going. This process is a combination of a traditional auction to seek top prices and a Dutch auction to explore price bottoms.

Prices continually rotate enhancing trading. Therefore, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels.

Prices are moving up and as soon as they hit some imaginary resistance line they turn around and start falling until they hit the level of support.

Pivot Points are those price levels that are most likely to act as levels of support and resistance on any given trading day and you can calculate them with the following formula:

H = Previous Day’s High
L = Previous Day’s Low
C = Previous Day’s Close
Pivot Point PP = (H + L + C)/3
First Area of Resistance = R1 = 2PP – L
First Area of Support = S1 = 2PP – H
Second Area of Resistance = R2 = PP + H – L
Second Area of Support = S2 = PP – H + L

When the prices move through any known pivot points (PP, S1, S2, R1, R2) on increased volume, they are most likely to continue the current trend, and if the prices hit the known pivot point but are unable to move through, then they are most likely to reverse the current trend.


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    A Fractal View on E-mini Day Trading Prognostications

    September 8th, 2010 | Author: admin

    On a given day it possible to read any number of current predictions, analyst recommendations on just where the futures and stock markets are headed. To be sure, you can usually find an analyst predicting an oncoming upward move in the market, and look somewhere else and find another analyst who predicts impending disaster. This is the nature of the financial business, and for most of my life I have had many good chuckles at the ranting and raving of this group of financial gurus.

    I think it would be expedient to point out at this point, that market predictions, including the futures markets, are essentially predictions with a binary outcome. The futures market either goes up or the futures market goes down. Since the market rarely stays exactly the same, we will rule out this outcome as spurious. From the onset then, futures market prognosticators have a 50% potential to be right.

    Nearly every market establishes some “hot” market gurus, whether it’s Robert Prechter, Granville, Gazarelli….they all have their fifteen minutes of fame and then fall into discredit when they fail to maintain the accurate predictions that catapult them into fame.

    And I read many of the analysts every day, more for entertainment than anything else. Why? I think it helps to understand what is going on and the wide variety of interpretations of current financial events. Do I give the analyst any weight in my trading? Absolutely none.

    I am a scalper, which means I am only interested in small movements in my futures trading style. I don’t care if the market is moving up or down, or even sideways. All I am interested in is entries into the market that can earn me a potential of at least two points, whether that is a short or long position is irrelevant to me. I am, in essence, a bottom feeder who waits for the crumbs to fall.

    That being said, I also am a chaos theory believer. I have observed market predictions over and over fall to the side of the road….whether the predictor is a fundamentalist or technical trader. Quite simply, the market doesn’t listen to what people say…it is a psychological beast that acts, at time, as irrational as any human being you might imagine. You will hear all kinds of predictions today about this being a “dead cat bounce” and other claiming the worst is behind us, and still others predicting dire times…who is right? I have no idea, and neither do the predictors. As I have mentioned, since the outcome of any prediction is binary in nature, about half will be right and about half will be wrong. I find it odd, as much of my college and graduate degree course was in physics that we understand many of the intricacies of the atom, and how quantum mechanics works (which is truly one of the truly bizarre discoveries of our time)….but no one has found a working system in predicting the market, despite the fact that we have poured an inordinate amount of money and time into trying to understand the market.

    I realize that my view is an unpopular one, and the screaming idiots who now enjoy tremendous popularity on market predictions (on MSNBC) would call me a heretic, but the overwhelming amount of scientific study, academic study, points to the absolute accuracy of chaos and fractal theory as the only valid trading viewpoint.


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      Some E-mini Day Trading Rules . . .

      September 6th, 2010 | Author: admin


      I am a scalper, so I am not terribly interested in long term trends, Elliot Wave theory or any e-mini day trading technique that requires me to think ahead much more than one half day. That is to say that I am trying to carve out 2 pts. or more out of intraday  directional movement. I truly believe that the e-mini market is random, so when I use the word “trend” I am not using in the sense that a technical trader would. The truth is, I use the “trend” for lack of a better word to describe intraday directional movement.
      Since the market moves in many random ways, my day trading method only seeks to take advantage of a tendency for people “hop on the bandwagon”. People will generally watch the market and jump into a trade when they see it heading one way or the other, and they generally stay in the trade too long. People tend develop strong emotional ties to a trade they make. They get into the mindset that the market “ought” to do something based upon some information they have gleaned, or some event that has occurred or is occurring. From the onset, let me say that the market does not “have” to do anything and freeing yourself from this mindset will greatly improve your e-mini day trading. The markets are not rational, and you will drive yourself crazy trying to rationalize the movement you see unfolding on your chart.
      Since I believe that the market moves randomly via fractals, or fractal movement, I do not believe that identifiable patterns form. This always gets my technically oriented friends in a ruffle, and I am often cursed for this belief. An overwhelming amount of evidence has been collected by academics to prove that the market is random that it is difficult for me to fathom that some people trade with chart patterns. By chart patterns I am talking about the species of technical formations typified by “head and shoulders patterns, pennants, double tops, double bottoms, etc” In short, I do not use any chart patterns in my day trading.
      On the other end of the spectrum, I do not have any use for fundamental trading either. For scalping, it should be self evident that we do not use fundamental principles. If they actually worked, most fundamentals take at an intermediate period of time to develop. My trades are anywhere from 1 minute to 30 minutes….I have been in very few e-mini trades longer than thirty minutes. But I’ll go a step further on this topic and offend all the disciples of Ben Graham and Modern Portfolio Theory….I think it’s about as valid to use as chart formations. Note to self: Is the screaming and yelling I am hearing from the back of the room? Are they throwing things at me yet?
      My thesis for rejecting Modern Portfolio Theory is really simple: just because a company is well run, has products of high quality, and a healthy cash flow does not mean that the stock price will go up… There was a company that was doing everything right but the stock price stayed pegged at around $20 for years, and there are countless examples of this being true. So I don’t use P/E ratios, beta coefficients, alpha coefficients and all the other investment terms that go hand in hand with this style of investing.
      No, what I like are little spurts of unpredictable momentum. Other than fractal theory, there is no viable explanation for the gentle (and sometimes violent) rocking pattern that is part of every chart. Of course, the problem has always been ascertaining when these little bursts of momentum take place. How can you time your entry and exit points to take advantage of rocking (or swaying) that is on every chart? How do you know which sway is going to be 5 pts and which one will be a sideways move?
      I have taken the liberty of drawing a dark line so you can see the swaying action in the market, and you will notice that some market moves are very short and some are very long. How do we get into the market for the long moves, and stay out of the short moves?
      So…..now that I have offended every modern day investment theory out there…lets talk some about what I DO…INSTEAD OF DWELLING ON WHAT I DON’T DO.
      There are many things I keep in mind when I day trade, but I have 4 rules that I never deviate from. Some of these rules were hammered into my head by my mentor nearly 20 years ago, others were learned the hard way- through experience.
      1. Never e-mini day trade without stops in place. I can’t imagine a day trader trading without a stop order in place, and am amazed when I talk with other traders at how many trade without placing stops. I suppose you might try to justify trading without stops by saying that you are sitting right there at the computer and will be able to trade out of any position before you can get in trouble. This is not true….without stops you have no way to account for the lightening fast moves that can come about from catastrophic news…The ES contract moved 71 pts in one 1 minute bar after one of the last rate cut announcements. Granted, you can have a move gap through one of your stops, but this is so rare as to have only happened to me once. Even on the 71 point move I was able to exit with a stop executed. Without stops you are taking excessive risk. Also, the stop is also a mental stop. As I have said, traders can become emotionally attached to their positions and the stop serves to remind them that they are getting out of the market whether they like it or not.
      2. Never let a winning e-mini trade become a losing e-mini trade…this is one of the most difficult things to learn. When do you pull the trigger to exit? Of course, there are many oscillators that can give you a pretty good idea when the trade is over….but I have watched trader after trader get 3 points up and become convinced that market is going through the roof. It seldom does, and what generally happens is the trader rides the trade right back down to breakeven or a losing position. We will talk at length about how to avoid this….but exit strategy is seldom easy. And for those of you wondering, I can’t stand trailing stops.
      3. Avoid e-mini day trading against the trend…but if you must, cut the number of contracts you normally trade in half. I chant “the
      trend is my friend” twenty times before going to bed every night. And I still make bad trades, almost always against the trend. How do you know what the intermediate and short term trends are? I make it easy, I chart an 89 period Simple Moving Average and when the price is above the moving average I concentrate on long trades, and conversely, when it is below the 89 period average I concentrate on short trades…this silly little rule will save you money.
      4. Be on the right side of the e-mini trade…have you ever done this? You have considered a trade carefully after watching it set up exactly the way you dream of. Everything is perfect, except the trade skitters sharply the wrong way when you execute. Most traders will watch the price crash into their stops and chalk it up to experience. You don’t have to be stopped out on every losing trade. If the darn thing looks like a dog out of the gate, and your oscillators even confirm this, get out….I’ll say it again, you don’t have to ride every e-mini trade into your stops. It takes a tremendous amount of ego reduction to do this….you have to admit to yourself that you were dead wrong from the onset and take a smaller loss than hitting your stops. It not as easy as it sounds.


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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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      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?
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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.


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      How Much Money Can You Make Trading E-Mini’s?

      August 14th, 2010 | Author: admin

      People are always curious, especially non-traders, about how much money you can actually make day trading e-mini contracts. This is not an easy question to answer. Every potential e-mini day trader has a given skill set, with strengths and deficiencies that will contribute to his or her success. So I will compose this article directed at an average individual who is considering learning to trade the e-mini contracts.

      An extraordinarily large number of potential traders try to trade without sound training and mentorship programs and find themselves in trouble from the onset. Even seasoned traders have deplorable days trading the market, but a lack of experience and training is the recipe for financial catastrophe. Anyone who is pondering learning to trade the e-mini contracts should either find a great mentor or enroll in a quality training course and practice extensively on a demo account. I would point out that trading the e-mini contracts is no simple task and entails a considerable amount of learning and time.

      But the rewards can be very lucrative…

      In order to prosper in the day trading business, every trader needs to learn a quality money management practices in addition to trading. There is a tendency for new traders to over trade or trade more contracts than is advisable for their account size. E-mini money management is the key to sustaining a career in trading. I suggest that a trader never risk more than 7% of his account balance on a given trade, and even less if possible. If the novice trader is taking more than 10 trades in a given day, he or she is probably over trading their futures trading account. There simply are not that many good trades on a daily basis. I generally make 3 to 5 trades on an average day, although those numbers could be higher or lower depending upon the market action during the course of a given trading session.

      Since I try not to trade a large number of contracts, my daily earnings may be lower than others who trade large numbers of contracts. First of all, let me say that any day I am profitable I am happy. On an average day, a good trader should be able to make between $300 and $700, and on a bad day should be able to limit his losses to significantly less than those target profit numbers. If you are not trading well during a trading session, the best idea is to simply stop and wait for a day that is better suited to your trading style or a day when your emotional state is in better shape to trade. There are days when everything goes perfectly, and there are days when nothing goes right. I can’t explain these phenomena, but have certainly experienced it.

      In summary, with practice and mentorship you can earn a great living trading the e-mini contracts on the Chicago Mercantile exchange. It’s something I think many people would enjoy and profit greatly from learning. We think you can learn all of these techniques right here at the E-mini Professor Trading System.

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      How to Use Stops When Day Trading the ES E-mini Futures

      June 22nd, 2010 | Author: admin

      I think it is important for e-mini day traders to use specific targets that address their loss tolerance and profit targets. There is a temptation to ride losses too long in hopes that the market will come back to a break even. This can be a tragic strategy and result in unacceptable losses when trading the e-mini futures contracts.

      Why would people ride their losses?

      Emotional involvement in trades is generally the culprit in any kind of trading, and especially for e-mini scalpers, as the markets swings in intraday trading, sometimes violently. It’s is this emotional involvement in a trade that accounts for a tremendous number of trading losses. It’s more than difficult to accept a trade as a loser and move on. Say, for example, you get what you consider to be a perfect e-mini setup and take a trade, and most perfect e-mini setups (whatever they may be) have resulted in handsome profits. The assumption, then, is that every trade where that setup is utilized will result in a winner, sooner or later. Bad strategy. There is no foolproof trade, and every trade (no matter how nice the setup) results in a loss.

      It’s difficult for me, and most traders, to accept that a certain trade has resulted in a loss. After all, the 5 identical e-mini day trades before it produced sizable gains. Learning to cut your losses and move on to another trade is one of the most difficult exercises a trader must execute. Set your loss tolerance and if you blow out of a trade, move on.

      This is much easier said and done, and even with stops in place there is a temptation to drag a stop a couple of points lower to salvage a trade that is not working out. I’ve been there, I’ve done it, and I’ll probably do it again. It is always wrong to do, though. My experience has taught me that I enter bad trades when I try to pick a counter trend trade. These trades can be very tempting, but price exhaustion is one of the most difficult trades to execute successfully. For that reason, I like to strike an 89 point SMA and when the market is significantly below the 89 point SMA I stick with short trades, and visa versa for price action above the SMA. This should keep you nicely in the trend. It also weeds out those disasterous countertrend trades.

      In volatile markets I detest trailing stops, and I generally don’t use them. I am not against moving a stop loss up, but the normal market action often gets you out of a good trade before completion. Be careful using trailing stops, while they sound great in theory, they often have to be very wide to be of any real value. For myself, I prefer to bracket trade, using 3 point (12 tick) stops for my loss and profit targets. I have found this to be fairly flexible for trading in normal markets, and in volatile markets, which we saw early this year, I allow 4 point stops (16 ticks). These numbers are for trading the ES contract. For the YM contract, I like to use 25 points bracketing long and short positions.

      But remember, don’t attempt any trade without preset stop loss and profit targets established. Good luck trading and come back.

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      Slippage is Your Enemy

      June 21st, 2010 | Author: admin

      Seems to me it was centuries ago when open outcry was mode of floor trading, and the highly efficient modes of trading we employ today were the stuff of dreams. Online trading has greatly improved the quality and quantity of trading and executing trades. But some of the problems of the old trading days still can be prevalent in today’s trading, namely, slippage.

      From Wikipedia:

      “With regards to futures contracts as well as other financial instruments, slippage is the difference between estimated transaction costs and the amount actually paid.”

      You can find a wide range of definitions of slippage on the internet, some more esoteric than others, some downright problematic, but I think slippage is every bit the problem we experienced in the old open outcry days. Slippage occurs when you sell or buy at a specified price and your actual execution price is higher or lower than your expected transaction was planned. Even more likely, slippage can occur when you have a stop price specified and the executed stock price is higher or lower than you intended stop.

      Slippage can occur for a number of reasons:

      1. You are trading in a thinly traded market and there are simply not enough traders to fill orders in a timely manner.

      2. You may need a different trading platform if your trades are not being executed at your named price level. Or you may need a new broker.

      Whatever the reason, slippage can drain your profits if you don’t pay close attention to your execution prices and order prices.

      Very thinly traded markets, say copper, often don’t have the liquidity to handle large market orders. If you intend to trade thin markets, you need to plan for some of the liquidity problems that inevitably occur. On the other hand, the ES Emini is heavily traded, and liquidity problems are not an issue, at least from a volume of contracts traded standpoint.

      Markets that have a high degree of liquidity are excellent for avoiding slippage. The ES contract, for example, is one of the largest futures contracts, and slippage can generally be attributed to either human error or a systematic failure in your brokerage . More than a million contracts, some times even higher, are traded daily on this exchange and you will have little trouble getting your trades executed and filled in a timely manner. I have traded up to 100 contracts without any slippage issues. (Note: I am going to pass over any broker related issues, as there is no way to control those short of finding a new broker.(

      Pay close attention to the manner in which your broker’s software fills a trade. Sometimes slippage can occur because the firms software is not “up to snuff” in the digital age and cannot keep pace with the fast moving, highly liquid markets like the ES.

      For whatever reason, slippage is a real cost in your trading operation and you should do what it takes to make sure you trades are executed and filled at your specified parameters. The failure to do so will result in real costs to your trading account, which is an undesirable outcome.

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      Simple Moving Average vs. Exponential Moving Average

      June 18th, 2010 | Author: admin

      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.

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