The E-mini Trading Professor

Archive for the ‘Trend’ Category

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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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.

One of the most difficult concepts for new traders to assimilate is the relationship between trend continuation and trend reversal. Simply stated, the market is far more likely to continue a trend in than it is to reverse a trend. In my experience, I have seen more money lost when traders attempt to buck the trend and lose.

I’ve never fully understood exactly why traders, who are fully aware of trend analysis, take risky trades against the trend. My best guess is that there is a certain high that traders experience when they take a trade against the trend and win.  I suppose it is like catching a trophy fish, they are rare and it is difficult to catch one. Trend reversals are probably more common than trophy fish, but they do not occur at an extremely high rate.

It is difficult to hold off trading against the trend when your indicators show a very attractive set up in the opposite direction of the trend. It’s tempting, and very difficult to convince yourself not to take the trade. It is wise not to take the trade, but many traders simply cannot lay off a nice set up, even if it is against the trend. The results are surprisingly uniform, the market heads in the direction of the trade for a few points and then resumes in the direction of the original trend.

In my trading, I am always very aware of the current trend. I generally use an 89 period Simple Moving Average (SMA) and know where the current price action is relative to the SMA. If the price action is significantly below the 89 period SMA, I concentrate on short trades. If the price action is significantly above the 89 period SMA, I concentrate on long trades. This is an excellent method to keep track of where you are trading relative to the trend. Notice one word I used in the above sentences though, significantly. I don’t have a specific definition for this word in relation to trading with the trend, but if the price action is one or two points above or below the 89 period SMA, I do not consider it significant. Several students have misinterpreted this definition and have considered any price action below the 89 period SMA grounds for determining the trend. This is not correct. We are looking for a significant price action, and a few points here or there is really just spurious action.

You can also examine the peaks or troughs on the Stochastic indicator and get a good idea of the strength and direction of a trend. Obviously, it is the peaks are getting progressively higher you are in a strong uptrend, and if the peaks are getting progressively lower the opposite is true.

Generally speaking, I trade three minute charts. However, is that trend is not clear I will sometimes trades to 10 minute charts, or even longer period charts to get a clear picture of trend and the intensity of the trend. Why go to all this trouble?

As I mentioned in the title of this article, trend continuation is more likely than trend reversal. I think this is one of the most important points in my personal trading. In a trending market, you are always in good shape when you trade with the trend, not against the trend.