The E-mini Trading Professor

Archive for the ‘Emini Trading’ Category

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.

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.

It is not uncommon to hear trading educators describe e mini trading as part art and part science.  In my opinion, nothing could be farther from the truth.  Trading is about probability and consistency in thought.  That’s a difficult pill for many to swallow; but it is, nonetheless, the essence of e mini trading.

Great traders take high probability trades consistently and pass on low probability trades.  The Hollywood notion of the high-stakes trader taking big-time risks and consistently winning is a folly.  Traders who consistently risk too much usually end up broke.  For this reason, novice traders should not buy into the notion that trading is a get rich quick proposition.  It isn’t.  Yet late-night infomercials trumpet the million dollar a year potential that exists in day trading.

The name of the game is low risk, high probability trading day in and day out.  This is only possible when a trader has complete control of his trading from a psychological point of view.  Quite simply, good traders trade only the chart in front of them.  They do not trade the economic news, the talking heads on the financial news networks, or rumors that are found daily on the Internet chat boards.

How does a trader become consistent?

It is not uncommon for inexperienced traders to have several losing trades in succession.  The natural result of this experience is to worry about the amount of money in their futures trading account, and this is precisely when the problems begin because the trader tends to lose sight of sound trading technique and risk management in order to get his account back to where he started the day.  No one likes to lose money.  But there are two ways to approach this problem:

1. An experienced trader continues to trade with sound technique no matter what his trading results may be.  He or she knows that there are no 100% guaranteed trades out there and even though he or she has chosen high probability trades, he or she has come out on the wrong side of the probability equation.
2. And inexperienced trader often times makes adjustments in his trading style in an attempt to get caught up to his opening balance.  These adjustments may include trading at a higher number of contracts or taking lower probability trades hoping they will “work out.”  This is, of course, the recipe for account meltdown.  Over trading and taking a higher risk trades is not the answer to the problem.  Yet it is precisely what I have observed over many years of watching novice traders who fall behind.

The ability to maintain self-discipline under duress is a trait all good traders possess.  I suppose some people are born with this self-discipline, but I suspect that most good traders learn this trade through experience.  There is no need to panic after a sequence of unsuccessful trades.  If the trader took good trades, high probability trades, and losses he or she must understand that this is part of trading.  Even the best setups have a probability component that includes losing.

What is the answer to this problem?

As hard as it may seem to swallow, the answer to a sequence of losing trades is to continue doing what you’re doing; that is to say the trader must continue trading a reasonable number of contracts on high probability trades.  Changing your trading style to accommodate the balance in your futures trading account is not the answer.  Yet, even among experienced traders I see this phenomena.

The exact opposite of the above situation can be true also.  Imagine a trader who puts together several very profitable trades.  In this situation, there are two possible outcomes:

1. An experienced trader continues to trade with the same methodology as usual.  He or she realizes that stringing together a few good trades means nothing except he or she has taken high probability trades and the probability of the trades has been true.
2. And inexperienced trader may suffer from the delusion that he or she is having a “hot” day and trade more contracts or take lower probability trades with the thought that he or she is on a winning streak.  There are no winning streaks and e mini trading.

The point here is a simple one; you have to trade the chart in front of you consistently regardless of the outcome of your trades.  If you are taking high probability trades and losing, that is an integral part of the trading game.  Of course, losing several trades in succession can affect your trading account balance; we do not trade our account balance; we trade the chart in front of us.