The E-mini Trading Professor

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First and foremost, I would like to wish everyone a happy and prosperous New Year.  This is a time when many people, including traders, re-dedicate themselves to the passions in their lives.  For me, it has always been trading and I look forward to a New Year and trading e-mini contracts.

To a certain degree, your personal dedication to trading will, more or less, determine the kind of success you will enjoy.  While my job is to teach e-mini trading, it is ultimately your dedication and continuing education that will make you a profitable trader.  I remember the very best teachers and mentors that have taken an interest in my career throughout the years, and I learned something from each of them.  But the most important mentor I ever had, lit the fire of becoming a student of trading and consuming, voraciously, all I could find on the topic.

These days there is much more written about trading than in the old days.  The old trading masters were loath to share their secrets with the younger generation.  But with the proliferation of online trading, a slew of books have emerged on e-mini trading.  Some are very good, others are merely infomercials for proprietary software the author is trying to sell, and others are just plain awful.  I try to read a book a week on trading, and this causes me to encounter all sorts of authors.  I guess you take the good with the bad.

Over the last couple of weeks I have been writing articles in a “series” format, and have completed all I want to write about trend lines.  I am including links to all of the articles below and hope that you may find at least one useful idea in the entire lot.  If you do, my mission has been accomplished.  Like trading, I truly enjoy writing about trading in an unbiased and non-commercial way.

Here are the links to the recent trend line series:

As I mentioned earlier, these are articles are packed with information, facts, and my personal observations.  That being said, my real goal would be spur your interest in further interest in the diminutive trendline.

Again, have a Happy New Year…but it’s back to trading tomorrow.

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Forex trading has gained a large following in recent years as a popular day trading vehicle.  It’s not unusual to observe a barrage of Forex firms touting their services on just about any financial news publication.  As a longtime institutional stock trader and commodities trader I am often shocked at some of the outrageous claims and advertising techniques this industry utilizes.  This type of advertising and verbiage is simply not allowed by the SEC or the CFTC.  The Forex industry, on the other hand, is lightly regulated and offers no centralized exchanges like the securities industry in the United States and has virtually no regulation on advertising technique and claims.

From the onset I want to point out that the United States stock and futures exchanges have their share of hucksters and fraudulent activity.  You need only peruse the current SEC and CFTC enforcement actions to get an idea of the amount of illegal activities that occur in our highly regulated exchange based trading structure.

On the other hand, the lightly regulated Forex industry has been in recent years the target of both the SEC and the CFTC, with good reason.  Exchange traded securities provide potential traders with a high level of transparency and information in regards to the equity product or series they intend to trade.  Variables like a leverage, registration of broker-dealers, and capital adequacy requirements are just a few necessary requirements that would go a long way toward establishing much-needed transparency in the Forex industry.  Further, and from a personal standpoint, I believe a centralized exchange for Forex trading would be optimal for the industry.

By means of comparison, the futures industry and stock trading exchanges have rigid leverage, registration and capital adequacy requirements.  In addition, e-mini trading is all conducted through well-regulated and orderly exchanges that feature reliable data feeds that provide real-time information on volume, trading entities, and pricing to all participants.  This transparency in the futures industry is a sharp contrast to the murky Forex industry which is dominated by individual banking interests.  Quite simply, there is a shocking lack of transparency in the Forex industry.  In an orderly market, all participants ought to have access to accurate real-time information and standardized trading contracts.

Another concern of the SEC and CFTC is the leverage requirements in the Forex industry.  The current United States industry standard for leverage and a Forex industry is 100:1.  The most recent regulation proposes lowering the leverage standard to 10:1, which is a departure from the current leverage standard that is a quantum leap in scope.  For a variety of reasons, Forex traders have been, by and large, fiercely critical of these regulations.  Since the CFTC can only regulate firms in the United States, offshore firms would still be able to offer the absurdly high leverage requirements the Forex industry has enjoyed.  The obvious result of this new regulation would be a mass migration of Forex traders from United States based firms to offshore firms that would not fall under the proposed US Forex reforms.  There is, however, regulation under consideration that is very similar to offshore betting operations; in short, it is unlawful for US citizens to patronize offshore betting firms in order to circumvent current US law regarding betting.  The proposed regulation for patronizing offshore Forex trading operations is very similar to the limitations of US citizens circumventing United States Forex regulation.  In short, Forex traders based in the United States would be required to trade through domestic Forex trading operations.

In short, I don’t trade Forex because of the lack of transparency and a centralized exchange.  In my opinion, there is simply too much potential for manipulation of bid/ask quotes, front running, and outright fraud.  Currently the Forex industry leads security related scams by a wide margin, even though it is a small portion of the total day trading aggregate.

To summarize, the Forex industry has great potential to become a legitimate and profitable day trading option.  In my opinion, the industry must institute strict regulation before its legitimacy can be truly realized.  I think that in time all of the above addressed the problems will be rectified, but until there is true transparency in the Forex industry I believe I will abstain from participating.  We have identified problems like over leverage, lack of registration, and the absence of a centralized exchange as problem areas in the Forex industry.  Until these problems are addressed, I don’t think the Forex industry will reach its full potential.

Real Live Trading Doesn’t Lie. Spend several days in my trading room and see if you can benefit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by <a target=”_new” href=”http://www.learn-to-trade-and-invest.com”>clicking here</a>.

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This is our weekly video summarizing the results of this week live trading room.  The week was success and profitable, though the trading was often erratic.  The volume this week was relatively low.

Make sure you take the opportunity to sign up for a FREE WEEK in our trading room and see for yourself the kind of results we post on a regular basis.  If  you are a new trader or a trader struggling to become consistently profitable…our room has some thing that will be helpful for you.
httpv://www.youtube.com/watch?v=XJmsSMB8Zes

Again, sign up for the free week.  There is no obligation, and we won’t pester you to unnecessarily.  I look forward to seeing you there.

It’s not unusual to see traders using support and resistance to set up potential trades. The most common trade I see among novice investors is a set up that envisions the price action “bouncing” off an existing support or resistance lines. There are many versions of this particular trade, and it is not unusual to see small investors implement this trade over and over. To be sure, using support and resistance lines as potential setups is very common.

Unlike the trade I described above, where the small traders are looking for a bounce off a support or resistance line, I am looking for a continuation through a support/resistance line. This makes sense at several levels. First and foremost, I’m a trend oriented trader and dislike trading against the trend. By definition, any bounce off a support or resistance line would entail a move against an existing trend, which is something I avoid, especially in a strong trend. Secondly, in order for the price action to move through a support or resistance line it takes a medium, at the least, and usually a strong push to pierce the line. Inevitably, this strong push creates excess momentum which is carried through for 10 or 15 additional ticks, and those additional ticks are the prize I am seeking to capture. This set up usually results in a very violent and short trade, as the momentum pushes the price upward or downward at a high rate of speed. It is an exciting trade to watch and even more exciting to initiate.

When setting this particular trade up, I generally look for a strong support/resistance line that will intersect an established trend line. As an aside, I tend to prefer to take this trade to the short side as the market tends to move faster when heading downward. This can be attributed to panic selling, or long traders bailing out of short positions as the price action moves against them. In any event, I position my entry three or four points below the support/resistance line and wait for the price to come to me. Needless to say, it is never a good idea to chase the price action and it is rare for me to initiate a market order. I want to enter a trade at a point of my own choosing where I think I have the best chance of profiting.

Once you become accustomed to spotting the set up, you’ll find it occurs two to three times daily. The trade is relatively reliable if it occurs in a trending market, and the trend does not necessarily have to be a strong one. On the other hand, I would avoid taking this trade when the market is in a well defined channel. Breakouts or breakdowns out of channel formations are generally unreliable and typically fail. False breakouts from a channel formation look very enticing from the onset, but after moving three or four ticks in your favor they tend to retreat back into the channel. Once in the channel, it is anyone’s guess where the price action may go as movement inside the channel is random, at best.

In summary, we have looked at a trade using support/resistance lines. Instead of looking for a bounce off these lines, we have outlined a straight that entails a continuation of a trend through known support/resistance. We have noted that this trade is reliable when used in conjunction with a trending market, further we have cautioned against taking a straight out of very well-established channel.

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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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I am guilty of it; you are guilty of it; the very best traders are guilty of it-sometimes it is very difficult to know when to fold.  There are a plethora of explanations to the irrational desire to hang on to a losing position in the misguided hope that your trade is going to make a dramatic turnaround.  It rarely happens, and most traders end up riding the trade too long and smashing into their stop loss.  The loss is always painful, and most of us (if we can be honest with ourselves) can usually identify a point in the trade where we should have exited with a minor loss.  Yet, we often fail to take advantage of this early exit and incur a substantial loss.

Why?

A great deal time and research have been spent on trading, especially the emotional and psychological aspects in trading decisions.  As a group, people have a strong need, and desire, to be right; and in the opposite sense, people have a strong aversion to being wrong.  Bailing out of a potentially disastrous trade is an admission that you, as a trader, have made a bad trading decision.  In short, you were wrong.  No one wants to be wrong. To be sure, I don’t want to be wrong.  Yet, as day traders there is usually a point in a trade were we would be well advised to admit we are wrong and save a bundle of money.  Most day traders seldom avail themselves of the early exit option.

When a trade is obviously going the wrong way it would seem obvious that a wise trader would be anxious to minimize his or her loses.  I have looked at some of my worst trades and been able to accurately pinpoint several exit points that were obvious.  Unfortunately, hindsight is 20/20.  Our emotions control much of our thinking in relation to trading, and once I (or any other trader) is convinced the trade is a good one it is no small task to change your mind quickly and accept that the trade is a terrible one.  As I said earlier, we like to be right; we dislike being wrong, and admitting we are wrong on the selection of a trade often leads to disastrous results.

Many texts and noted authors claim that leaving your emotions on the sideline is absolutely essential for successful trading. I don’t know about you, but my emotions are an integral part of my personality and the notion that I can carte blanch abandon them is wishful thinking, at best.  On the other hand, I do think we, as traders, can learn to minimize our emotions in the trade selection and trade management process.

What is the secret?  There is no secret; but developing the ability to see things as they are rather than as we hope is a skill to be developed.  The market is an emotionless, mechanical device and does not take your emotions into consideration in its day to day operations.  What we, as traders, think is completely irrelevant.  The skill that I work on constantly is seeing the market from a realistic point of view; not my point of view, but what is really going on in the market price action.  Reality can be a very painful teacher, especially when you are on the wrong side of a trade.  But it is reality that we have to work with, and traders must learn to trade from the perspective of what is really occurring in the market, not what we wish the market to do, or how we think the market should move.

In summary, I have noted that removing your emotions from trading is basically wishful thinking.  On the other hand, we can learn to develop a realistic view of how the market is moving and trade accordingly.  It’s no easy task, but with practice reality can become your primary viewpoint, not your wishes.

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Years of trading experience has reinforced a single, indisputable fact; prices tend to stop and start along common lines.  The reason for these phenomena is poorly understood, as is the position of the exact point these lines utilize for their stopping and starting points.  This observation is not an extraordinary revelation for anyone who has spent any length of time in front of a trading chart.   Often called support and resistance lines, these stopping and starting points are evident when observing the price action on any futures or stock chart.

The world of Efficient Market Theory would have us believe that these areas of support and resistance are the result of random market movement where supply and demand are in equilibrium.  In an academic sense, this explanation makes good sense, as there does not seem to be a discernible pattern in either the lines of support or lines of resistance.  It might also be useful to note that once a line of resistance is passed through by the price action, it often becomes a line of support, and vice versa when considering support lines.  In short, it is common for most lines to be, at one point or another, both support and resistance; it all depends upon the time period under analysis and the movement of the underlying assets price action.

There have been a wide variety of attempts to quantify the location, or predicted location, of these support/resistance lines.  Floor traders pivot points have been a popular support/resistance predictive device for quite some time, and can be very useful.  On the other hand, pivots points can often be far off the mark and, on some days, completely irrelevant. There is no reliable way to determine on which days the market will honor floor traders pivots and which day they ignore them.  That, of course, creates a problem for traders and pivot points…it is difficult to discern which day to use pivot points and which day to ignore them.

FibGrid on the other hand, has added much needed clarification to the support/resistance equation. As anyone who has consistently read this blog can attest, I have been a long time critic of the vast array of technical trading tools that have come to market.  Everything from goofy robots, to elaborate charting programs have all been tested and found wanting.  But this darn FibGrid actually works, and I have been forced to retract my iron clad condemnation of technical trading programs.  It is most embarrassing.

David Starr describes the program most eloquently:

“The tendency of financial market movements to be proportional to other movements in ratios that have Fibonacci proportions is well documented. For example, many know that prices often retrace 38. %, 50%, or 61.8% of a move. Others know of some of the common projection ratios and we use many of these in our analysis. Less known is the FibGrid technique that projects a series of possible support and resistance levels based on projections from the beginning stages of the last bull market of significant degree.

The amazing thing is how prices tend to find these support and resistance levels that were projected from prices years earlier (sometimes even decades earlier) and those projections provide levels that are meaningful in almost all timeframes, including short day-trading timeframes. This 2584 share chart of the emini Dow futures shows how price obeys FibGrid levels on intraday movements. The key values for the projection of these levels were set back in 2002 and the support/resistance levels shown today have not moved since then. Prices still find them.”

I use FibGrid in my trading room and wouldn’t consider trading without the program running.  There are many lines that appear in the FibGrid program that might normally be ignored by the average trader, yet time after time I notice price action stopping on these less than obvious lines, sometimes right to the exact tick.

It would be difficult to calculate how many point I have made or been prevented from losing using the FibGrid program, so my endorsement is primarily anecdotal; but I am often astonished at the accuracy of this program in identifying support and resistance.

I would like to point out that FibGrid, in and of itself, is not a complete trading system.  This program will only make you existing trading system far more effective and profitable.

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