Archive for the ‘trading’ Category

An E-Mini Trade When the Market Doesn’t Breakout or Breakdown

My favorite e-mini trades (and my most profitable e-mini trades) are breakouts and breakdowns. These trades tend to perform reliably and are prone to run for very nice gains. Unfortunately, there are days when the market is consolidated into a 20 or 30 point range and every breakout/breakdown fails. After the first few attempts at trading the breakout and breakdown patterns and watching them fail, you quickly realize that a change in strategy is necessary.


It is important to understand that consolidating patterns (or channels) are the most difficult patterns to trade and should be only traded with great care. The quality setups in consolidating patterns are less frequent and many enticing set up patterns form. However, the majority of those enticing setups in a channel can be disastrous. So a trader is left with two choices; one is to simply not trade and make an early exit to the golf course; the other is to carefully weed out all false setups and take advantage of the few good setups that will arise. As any experienced trader will tell you, trading consolidated patterns is tedious. There are many days when I feel trading in these patterns is not worth the trouble.


However, I consider trading breakouts and breakdowns to be trading “outside” the channel and trading in a consolidating market to be trading “inside” the channel. Generally speaking, I refuse to take a trade as the price action ping-pongs between support and resistance in a channel. This type of price action is very unpredictable and you can find yourself sitting in a trade for an extended period of time with negligible results. Even worse, you can find yourself sitting in one of these trades and the market unexpectedly takes off in the opposite direction. Quite simply, the risk is not worth the reward, at least to my way of thinking.


On the other hand, a false breakout or breakdown can present a very intriguing trading possibility. Usually when a breakout or breakdown fails, there is considerable selling or buying in the opposite direction and the momentum from the selling or buying will drive the price back through the original support or resistance and carry the price another 10 points or so. So, in essence, when I see a breakout/breakdown fail, it presents a chance to trade outside the initial support/resistance back into the channel for quite some distance. Believe it or not, this is a fairly reliable trade, though I have seen very little written about it. In executing this trade, you are essentially trading from the outside of the channel back into the inside of the channel.


There are times when the price will pause for a period of time on the support/resistance line just pierced, my experience is that the price action will continue and return to the middle of the channel. I suppose this trading is very similar to a technique called reversion to the mean, though I learned the trade without reversion to the mean in mind. When I see this trade developing now, I will slap some Bollinger bands on my chart and can get a good feel for the length the might travel back inside the channel by gauging where the middle line, or mean, sits relative to the two standard deviations most Bollinger bands utilize.


In summary, we have described a trade that is the exact opposite and a breakout/breakdown and done just the opposite by trading toward the channel instead of trading away from the channel. We have noted that this trade does not occur with the frequency of some trades, but it is fairly reliable. Finally, I cautioned against trading inside the channel as trades in this area are very unpredictable and random.


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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.

Why?

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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