Archive for the ‘Trading Psychology’ Category

How to Make (and keep) Money E-mini Day Trading

As you continue to learn the e-mini day trading system I am outlining you will begin to realize that making money, at least in the pure sense, is not so terribly difficult. I have a few basic rules to follow, a little common sense, some chart reading and before long you should be able to make money e-mini day trading from home.

But there is a little problem:


The fact of the matter is that there is nothing more intoxicating than cold hard cash. Time and time again I have watched successful e-mini day traders earn money and then fall flat on their faces because they could not manage the psychological aspects of making money and managing risk. Martin Pring has written an excellent book about investment psychology, and goes to great length to explain that most investors are very able to trade effectively. However, the problem with most e-mini day traders lies in the intoxicating effects of earning money trading.

Typically, investors begin to take on too much risk, or make e-mini trades that fall outside the parameters of our discussion here, or tackle markets that our principles do not apply to. What I am trying to say is quite simple, really….the psychological aspect and the control of your own greed is, by far, the most challenging aspect of trading. Over trading, taking on too much risk by trading to many contracts, entering marginal trades, developing emotional attachments to trades…these are all the sign of impending disaster and I cannot stress enough that the psychological aspect in managing your e-mini day trading life is far more challenging than the technical aspect of trading.

I know, I know…I can hear you all muttering….”that may be true of the other guy, but I am a very disciplined individual and this will never happen to me……”

It will happen to you, but how you learn to deal with the intoxicating effects of your cash earnings from e-mini trading will determine how well you succeed in the business. I can teach anyone to make the right day trades, but I can’t get most people to make the right trades at the right times. There are no patterns in the markets, there are only spurts of momentum, or directional movement….and no matter how sure you are that something MUST happen, it probably won’t. I think it’s a Murphy’s law thing..or at least it seems to be.

Your ability to act in a completely rational manner and consistenly execute trades day in and day out will determine how successful you will be. I cannot harp on this topic enough…and I do, believe me. Investment psychology is the demise of 7 out of 10 e-mini day traders. Don’t be one of the seven that fail, be one of the three that succeed.

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    A Fractal View on E-mini Day Trading Prognostications

    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 . . .

      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… 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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      The Market is Right, You are Wrong

      If there were ever a tougher concept to assimilate than this little tidbit, I’d like to know what it would be. Common sense is a fine thing to possess, but it is of very little use when learning to trade ES Emini futures contracts. And here is the rub, the e-mini day trading market does not always move in a logical manner.

      You tell yourself, “But earnings are up, the market has to go up, too.”


      The e-mini day trading market often moves in a manner that is contrary to common sense. Recently, the market has taken a particular liking to rising unemployment numbers. Of course, the traditional logic explains this phenomena by quoting the inverse relationship between unemployment and inflation. Common sense tells us that higher unemployment means less money to spend and lower earnings, and hence, lower stock prices. This has not been the case, though.

      In some of my previous articles you may have heard me harp on the adage, “trade the market, not the economy or the news.” Since we are regularly inundated with all sorts of news this feat is easier said than done. My solution is simple, when I trade I do not listen to the radio, watch television or check any of the financial websites. I only trade the chart in front of me and draw my own conclusions from the information I glean from that particular chart.

      It is difficult, at best, to “turn you brain off to the world” when you trade, but you must trade only what the market is actually doing. Time and time again the market has befuddled the experts by moving in a manner that is inexplicable. I have heard thousands of traders say they were in the perfect fundamental setup and the market had to do this or that, and it didn’t. Their conclusion is that the e-mini day trading market isn’t a reflection of reality, which may or may not be true. But this is true, when trading with actual dollars all that matters is whether you trade is profitable or a loser.

      No matter the reason, if you are on the losing side of the trade, “the market was right, and you were wrong.” If you don’t believe me, take a look at your account balance in this situation…it will have less money. What better proof is there?

      So, you ask, “you are asking me to through common sense out the window?” And the answer is… kind of. Often times, the e-mini day trading market moves in a very orderly and logical manner. Things that ought to happen occur right on cue. On the other hand, there are countless times the market misbehaves and moves in a direction that is contrary to common sense logic and you will have to learn to watch your indicators and price action to pick up on these illogical moves before they become a disaster. As I have said, it is easier said than done, yet it is one of the most important concepts to understanding day trading.

      The Market is always right.

      Emotions and E-mini Day Trading

      I am sure that you have seen a news report or two that claims that 70% of all day traders “bust out” and lose all of their money. Further, the report usually depicts some poor fellow who has spent the family savings and is in the process of bankruptcy or losing his home.

      Is it true?

      It is not necessarily true, but I want to qualify my answer.  As a long-time trader, I have seen more than my share of day traders lose all of their money and been forced to leave the profession. Sometimes these individuals have left high paying jobs to day trade full time and are forced to re-enter the workforce under-employed, or at least at jobs that pay considerably less than the jobs they left to day trade.


      There are many reasons individuals fail day trading, and it’s not because the day traders are less-than-intelligent people. There have been several articles written in recent years concerning the failure rate of day traders, and most point to the emotional aspect of maintaining a proper trading perspective. All to often traders abandon great systems of trading and take unacceptable amounts of risk in hopes of hitting “the big one.” Trading on emotion is the recipe of certain failure in day trading.

      Why do rational day traders sometimes act irrationally?

      One of the toughest tenets of day trading to accept is that certain trades are going to be losers. No trading system or methodology can assure that every trade is going to attain success. The market just doesn’t work that way. My personal philosophy is to never risk more than 5% of my money on any given trade and have target profit limits set and stops loss orders in place in case my trade goes sour. I never ride a trade down in hopes of it turning around. I never “double down”. Quite simply, if a trade doesn’t work the way I expected, I cut my losses and move on to look for another trade set up that looks appealing.

      Failure is an unpleasant aspect of day trading, yet every trader fails in one trade, or more, throughout the course of the trading day. Further, it is common to see traders increase their lot size if they are having a bad day in an effort to “catch up” to their trading expectations.

      These are all part of the undisciplined traders emotional make up and are symptoms that doom a day trader to failure. There are days when I make two or three clunker trades and decide to turn the computer off. Either the market is acting in a way that is not conducive to my style of trading or I am trading poorly, I never try to over analyze the reasons for my failure. I only know that on a given day my results are unsatisfactory and the best thing I can do is go golfing.

      The emotional side of trading is the least studied and most poorly understood aspect of trading. Many traders spend thousands of dollars learning trading technique and complicated systems of trading, yet fail to conquer the emotional side of trade. The emotional side of trading is fairly simple, albeit very difficult to master, and is to simply not allow emotions to enter into your trading psychology. Sounds easy, doesn’t it?

      It’s far from easy, and I can tell you that I have fallen victim to my own emotions on numerous trades. I know that any time I feel like I know what the market is going to do and become convinced that a trade “must” work…I am in deep trouble because the maxim “the market is always right” is important to understand. The only variable that can be wrong when you trade is YOU.

      The chaotic nature of markets causes many inefficiencies in market pricing that can come into play at random times. If you are in a trade when these market inefficiencies come into play, you lose. It is really that simple and a smart trader exits his trade, takes his losses and moves on.

      The study of emotions in trading is fairly new and several books have been written on the topic, I recommend “The Psychology of Trading”, by Laura Sether and Russell Wasendorf. (Note: I have no financial relationship with the authors) as a good starting point. A Google search will also turn up hundred of articles on this topic.

      Learn to control your emotions and execute the your trading system and you will have great results.

      Are You a Serious Trader or Just Piddling Around?

      The the ES E-mini Day Trading Contract requires a high level of concentration and training to trade with the kind of success to assure a predictable, full-time income, and with failure rate for novice traders in the high 70% range, I have to assume that something is terribly wrong with the method we, as traders, are educating new traders to participate in market.

      This statistic has been bothering me for quite a while, and it does not speak well for the trading education community. I have often wondered, “what’s the solution to this problem?”

      As an aside, I am periodically asked to sit in on trading rooms and find myself, at times, aghast at what I see. The self-discipline in some of these trading rooms, not all, is non-existent. I have often felt like I was watching a black jack game in Las Vegas, which is great fun, but I would hate to try and make a living playing black jack. Incidentally, I am a very mediocre black jack player and would starve if forced to make a living at this card game.

      As a serious trader, I do the following things:

      1. I trade in an office and do not allow interruptions.

      2. I don’t answer the phone while I am trading, nor do I answer e-mails.

      3. I trade a very well defined system, and seldom deviate from the principles of my system.

      4. I am looking for a certain kind of trade set-up, and don’t deviate from my set-up parameters.

      5. I trade from 6:30am until 11:00, every day. It is my job. I don’t schedule impromptu golf matches or any other activity that would interfere with my job.

      6. And finally, and mostly, I AM A TRADER, IT IS MY PROFESSION.

      And I don’t feel my regimen is anything more than I would expect from myself if I had a regular 9 to 5 job. I am proud of what I do, and proud of my competence at performing my job.

      Let me ask you a serious question: Are you really a trader or are you just piddling around with the futures market?

      If you are content piddling around with the market and making small talk at parties about your trading exploits, I am probably not the guy you want to talk to. But if you are the kind of person who is ready take a serious attempt at learning how to trade effectively, profitably, then I would love to hear from you. I certainly cannot guarantee you will be the next George Soros, or even a successful trader, but you can be equipped with all the tools to trade successfully and have a great chance at succeeding. Ultimately, anyone’s trading success is dependent upon the amount of effort, dedication and self-discipline they can muster to become successful.

      I am an eternal optimist, and believe that most people, with proper training and hard work can conquer anything they set their minds to accomplishing. My question for you is a simple one, “are you ready to accomplish something in the trading world, or are you content to accumulate articles and pamphlets about what COULD be?”

      Is Fear Killing Your E-mini Day Trading?

      Day trading is a tricky business. I can think of few other professions where your emotions can make or break you so quickly. Fear can sabotage your profits, and at worst, take you out of the game completely.

      “Nobody calls me chicken, Needles. Nobody!”
      - Marty McFly, Back To The Future 

      Are you afraid to trade? Or shall I say, are you TOO afraid to trade? Some fear is normal and healthy, but too much fear can paralyze you, and prevent you from making clear trading decisions. You can end up throwing your trading rules out the window. You may exit trades too early and not maximize your profits. You may be hesitant to pull the trigger on new trades for fear of losing even more. When a trade moves against you, you may keep moving your protective stops, and convince yourself that “the market will turn around any minute.”

      One of the most difficult aspects of trading is to take losses. Why is this so hard? Think about this for a moment. When you follow your trading rules like you should, and take a loss, you are simply admitting you were wrong about the trade. Your trading account announces this to the world when your stop loss is hit. Very few of us are naturally inclined to admit we are wrong about anything. To take it a step even further, if you take a loss on a trade, you may think that YOU are a loser. Of course, this can’t be farther from the truth. Nonetheless, your emotions love to play tricks and say all kinds of mean things about you. The truth is that losing is integral part of trading. It’s a job requirement. You must feel comfortable taking losses.

      The key to overcoming your fears is not to deny them, but to admit them to yourself. Then you speak to them and say, “Well, I am may be a bit afraid, but I trust my trading system. The probabilities are on my side. I am prepared so I am going for it. I know I may take a loss, but I will learn from it, and keep moving forward toward my goal of becoming a successful trader. Fear, you are coming with me!”

      Of course, in the heat of the moment when you are down, this is easier said than done. But if you focus on sticking to your trading rules and execute good trades rather than focus on your fluctuating trading account, you will conquer your fear.

      I hope this helps!