By David Marsh
Day trading the Emini S&P Futures really is a great way to make a living! I hear and read a lot of articles, newspaper ads, and even one or two ezine's that claim day trading is a sure fire way to lose all your money. I totally disagree. On the contrary, it is an incredible way to work a few hours a day and make a very nice 6 figure income.
No doubt, a lot of new day traders find themselves in peril and ultimately lose their money day trading. This bothers me when I read about it. It gives the successful day traders, such as myself - a bad name. I know quite a few day traders who have been succeeding at this for many years. What I learned is that success leaves clues! Meaning, the successful day traders seem to all be doing the same thing while the unsuccessful day traders are also doing the same thing - which, to no surprise is opposite of what the successful traders do!
We need to look at the root of the real problem, which is: Why are most day traders losing all their money? I think thats a real simple question to answer. Usually it is a lack of discipline and a solid set of day trading rules. Sometimes it is under capitalization and fear. Fear in itself is probably the biggest of the day trader "killers".
You may purchase books, seminars, and perhaps create your own strategies to day trade. All this is great, but if you can not follow the rules to the letter - you simply will not be a successful day trader. Discipline to follow the rules is a tough thing to acquire! I admit when I first started I had a hard time because I was always changing up my rules. That cost me tens of thousands of dollars.
Finally, I learned that the key to successful day trading was trading for income. I do not trade for a target price. I know how much money I need to make every day and I go out and make it, once I achieve my daily profit objective, I simply quit for the day.
My trading methods are very simple and easy to learn. They require discipline! You must under every circumstance follow the rules. My methods generate at least 1 point daily trading the S&P 500 eminis. I back that by a double money back guarantee!
I post my real trading results on my blog every day
http://www.eminitradingstrategies.com/emini-trading-blog/ I do not post "hypothetical" trades. I post real trades with real fills! Some of my trades are winners and some are losers. Either way I put them up there for the world to see. I urge you to look at them. Every now and then I take a day off, on those days I DO post hypothetical results and I make it clear I did not trade that day! However, even with my hypothetical trades, they are very realistic trades that would have been filled on limit orders!
Please when people tell you day trading doesn't work, don't believe it. You can earn a very nice living day trading. It's my opinion that the people who bad mouth it are simply the "wannabes" that didn't make it. Instead of complaining about it, find out why it did not work for you! Did you really follow every rule? Did you maintain discipline all the time? Whatever you do, please do not berate the people that really do it! And do it successfully everyday.
Monday, September 7, 2009
Monday, August 31, 2009
Emini Trading Signals - 3 Simple Indicators Used by Successful Index Futures Traders
By Doug Fisher
Participants in the financial markets all have their favorite indicators used to alert them when the possibility exist for trade entry. In this article, three indicators will be outlined that are utilized by successful traders to provide emini trading signals for market entry and exit.
Pivot Points
Pivot points are a common tool used by many emini index traders. Some traders use pivot points exclusively relying on pivot points in conjunction with only a time and sales screen, forgoing the use of charting software. While others will employ pivot points incorporating them in with their trading platforms to alert them when conditions are favorable for trade exit and entry. Because pivot points show areas of both strong and weak support and resistance, they are a popular choice among successful emini traders.
Relative Strength Indicator
The Relative Strength Indicator or RSI is a graph which usually resides on the lower part of charting software. Used mostly to determine both oversold and overbought conditions, this widely used indicator displays a reading between zero and one hundred with a line moving between these two numbers. As the line moves up toward the 100 mark, the RSI indicates the market could be moving into overbought territory and the possibility exist that a pull back or market reversal could be at hand. When the line approaches the zero level, indications are favorable that oversold conditions exist and the market could be about to change to the upside as short sellers begin to take profits.
Stochastic
The Stochastic is another indicator similar to the RSI which is a popular choice among emini trading futures market players. It is also a graph that usually resides in the lower section of charting software. Like the Relative Strength Indicator, both lagging indicators, the Stochastic also has a range of between zero and one hundred. With this tool, conditions are generally believed to be approaching overbought conditions when the Stochastic line crosses 70. In contrast, oversold conditions are said to exist when the Stochastic breaks below 30 and sellers begin to cover short positions.
Emini contracts are an excellent choice for obtaining short term profits in the futures markets. The above emini signals are just some of the tools used by successful traders to make short term profits with index futures contracts.
Participants in the financial markets all have their favorite indicators used to alert them when the possibility exist for trade entry. In this article, three indicators will be outlined that are utilized by successful traders to provide emini trading signals for market entry and exit.
Pivot Points
Pivot points are a common tool used by many emini index traders. Some traders use pivot points exclusively relying on pivot points in conjunction with only a time and sales screen, forgoing the use of charting software. While others will employ pivot points incorporating them in with their trading platforms to alert them when conditions are favorable for trade exit and entry. Because pivot points show areas of both strong and weak support and resistance, they are a popular choice among successful emini traders.
Relative Strength Indicator
The Relative Strength Indicator or RSI is a graph which usually resides on the lower part of charting software. Used mostly to determine both oversold and overbought conditions, this widely used indicator displays a reading between zero and one hundred with a line moving between these two numbers. As the line moves up toward the 100 mark, the RSI indicates the market could be moving into overbought territory and the possibility exist that a pull back or market reversal could be at hand. When the line approaches the zero level, indications are favorable that oversold conditions exist and the market could be about to change to the upside as short sellers begin to take profits.
Stochastic
The Stochastic is another indicator similar to the RSI which is a popular choice among emini trading futures market players. It is also a graph that usually resides in the lower section of charting software. Like the Relative Strength Indicator, both lagging indicators, the Stochastic also has a range of between zero and one hundred. With this tool, conditions are generally believed to be approaching overbought conditions when the Stochastic line crosses 70. In contrast, oversold conditions are said to exist when the Stochastic breaks below 30 and sellers begin to cover short positions.
Emini contracts are an excellent choice for obtaining short term profits in the futures markets. The above emini signals are just some of the tools used by successful traders to make short term profits with index futures contracts.
Thursday, August 13, 2009
Do You Over-Trade Your Emini Account
By David S. Adams
One characteristic of novice traders and ineffective traders is to make too many trades every day. There are many causes for this phenomena, but if you are making 15 trades a day you are probably guilty of this offense. In my world, there are not 15 good trade set ups on the average trading day. I don't think I have made more than 10 trades on a given day, and I was probably guilty of overtrading on that day.
Trading too much during a trading session can eat away at your profits. On the other hand, your futures broker will love you because his commission account will soar, but I don't think your account will withstand the commission shock.
As I see the market begin to form a good set-up, I start an argument with myself. I usually look for reasons not to take the trade. Is the set up really a good one? Do some of the oscillators or price action appear to be pointing to avoiding the trade? Am I trading on intellect and not emotion? These are all questions to ask yourself as you prepare to enter a trade.
I think the root cause for over trading has its roots in emotion, specifically greed. After all, every trade has the possibility to make money, and making money is the reason most of us trade the emini contract. I like to fish, for example, and the only way to catch a fish is to have your line in the water. You won't catch that nice fat walleye if your line is in the boat. I think this analogy is a good one for trading, too. Many people feel the like they need to have active positions in the market in order to catch the next "big move."
One clarification here: I am a scalper, which is a technique for carving out 2-3 potential points in the market during the normal market action I observe. A scalper is a gunslinger, of sorts. Which is to say I look to make 5-8 trades a day that achieve my profit target. My average trade last 5 to 10 minutes and then I take my profit, or cut my loss. Now there are times when the market gets into a nice trend and I may sit in a trade for quite some time, but that is not the rule, rather it is the exception. (a very pleasing exception, at that)
My point is a simple one, don't make too many trades. Usually you are "chasing the market" when you trade to often. You have to tell yourself that there are times when you will miss a potential trade and err on the side of safety. This is especially true of counter trend trades, which are the bane of my existence. Counter trend trades must be scrutinized with the greatest of care because they account for many losses. The market might well head into opposite the direction for a bar or two, only to resume the direction of the trend. Years of heartache and cursing have hardened me against counter trend trades and I try to avoid them. You should too, the trend is your friend, and counter trend trading will make you old before your time and devastate your trading account.
One last note: Highly volatile markets will appear to produce many nice setups that can't be trusted. You will be tempted to take many trades. When trading the ES contract, you should note the Average True Range, and if it is swing in the 8 point range and looks like a seismograph in a 6.5 earthquake, you are likely to get blown out of most of your trades, and a profitable trade is more a function of luck than skill. Volatile markets, with the long bars and flags which are typical of this phenomena are good days to golf, as trading is a risky proposition. You will see many nice setups but it's like surfing in 30 foot waves, your chance to get crushed are very high. Wait for calmer waters and trade in a market where your skill level can earn you safer returns. Best of luck trading.
One characteristic of novice traders and ineffective traders is to make too many trades every day. There are many causes for this phenomena, but if you are making 15 trades a day you are probably guilty of this offense. In my world, there are not 15 good trade set ups on the average trading day. I don't think I have made more than 10 trades on a given day, and I was probably guilty of overtrading on that day.
Trading too much during a trading session can eat away at your profits. On the other hand, your futures broker will love you because his commission account will soar, but I don't think your account will withstand the commission shock.
As I see the market begin to form a good set-up, I start an argument with myself. I usually look for reasons not to take the trade. Is the set up really a good one? Do some of the oscillators or price action appear to be pointing to avoiding the trade? Am I trading on intellect and not emotion? These are all questions to ask yourself as you prepare to enter a trade.
I think the root cause for over trading has its roots in emotion, specifically greed. After all, every trade has the possibility to make money, and making money is the reason most of us trade the emini contract. I like to fish, for example, and the only way to catch a fish is to have your line in the water. You won't catch that nice fat walleye if your line is in the boat. I think this analogy is a good one for trading, too. Many people feel the like they need to have active positions in the market in order to catch the next "big move."
One clarification here: I am a scalper, which is a technique for carving out 2-3 potential points in the market during the normal market action I observe. A scalper is a gunslinger, of sorts. Which is to say I look to make 5-8 trades a day that achieve my profit target. My average trade last 5 to 10 minutes and then I take my profit, or cut my loss. Now there are times when the market gets into a nice trend and I may sit in a trade for quite some time, but that is not the rule, rather it is the exception. (a very pleasing exception, at that)
My point is a simple one, don't make too many trades. Usually you are "chasing the market" when you trade to often. You have to tell yourself that there are times when you will miss a potential trade and err on the side of safety. This is especially true of counter trend trades, which are the bane of my existence. Counter trend trades must be scrutinized with the greatest of care because they account for many losses. The market might well head into opposite the direction for a bar or two, only to resume the direction of the trend. Years of heartache and cursing have hardened me against counter trend trades and I try to avoid them. You should too, the trend is your friend, and counter trend trading will make you old before your time and devastate your trading account.
One last note: Highly volatile markets will appear to produce many nice setups that can't be trusted. You will be tempted to take many trades. When trading the ES contract, you should note the Average True Range, and if it is swing in the 8 point range and looks like a seismograph in a 6.5 earthquake, you are likely to get blown out of most of your trades, and a profitable trade is more a function of luck than skill. Volatile markets, with the long bars and flags which are typical of this phenomena are good days to golf, as trading is a risky proposition. You will see many nice setups but it's like surfing in 30 foot waves, your chance to get crushed are very high. Wait for calmer waters and trade in a market where your skill level can earn you safer returns. Best of luck trading.
Wednesday, August 5, 2009
Emini Day Trading Course - How to Use Indicators For Your Trading?
By Waldemar Puszkarz
You can trade emini futures using indicators. You can also trade eminis without them, meaning by relying only on the price action and, perhaps, some simple tools like straight lines. Some of these lines can be horizontal lines, they indicate support and resistance areas, or they can be trend lines showing the support in the trending market. The breakout of the trend line suggests that the trend is about to change, and may even reverse depending on its strength.
While relying on the price action and simple tools mentioned above can be good in some situations, you can improve your trading decisions by incorporating indicators.
The simplest example of such indicators are moving averages of various kinds ranging from simple moving averages through exponential moving averages to a host of other, more sophisticated ones, although not necessarily better. Moving average lines play the same role as trend lines. Using more than one moving average, of a slower period and a faster one, can give us the idea of change in trend. This is usually noted by the crossing of such moving averages.
Other commonly used indicators are oscillators. They are more complex if only because they tend to be derivatives of moving averages. As such they are suitable to indicate the change in the market momentum. That's one of their particularly useful applications. They can also indicate situations when the market is oversold or overbought and thus likely to rebound from such extreme conditions. Unfortunately and ironically enough, since the overbought and oversold conditions are also indicative of strong upward and downward momentum, the market may as well continue its trend. Indicators of this kind include stochastics, RSI, and CCI.
Indicators can be used in two major ways. One was already mentioned, that is, to indicate certain market conditions, like a strong momentum. Another way is to time entries. That's how stochastics can be used, for instance. The crossing of stochastics lines, the faster with the slower one, can be employed to time the entry or the exit. Very often, the timing like that is of rather poor quality and that usually has to do with low market volatility, which leads to rather erratic price movement. High volatility is not so common, but when it appears, using indicators for timing the entries or exits can be about as good as using the price action, although the intelligent trader always tries to combine both, meaning the indicators and the price action patterns.
You can trade emini futures using indicators. You can also trade eminis without them, meaning by relying only on the price action and, perhaps, some simple tools like straight lines. Some of these lines can be horizontal lines, they indicate support and resistance areas, or they can be trend lines showing the support in the trending market. The breakout of the trend line suggests that the trend is about to change, and may even reverse depending on its strength.
While relying on the price action and simple tools mentioned above can be good in some situations, you can improve your trading decisions by incorporating indicators.
The simplest example of such indicators are moving averages of various kinds ranging from simple moving averages through exponential moving averages to a host of other, more sophisticated ones, although not necessarily better. Moving average lines play the same role as trend lines. Using more than one moving average, of a slower period and a faster one, can give us the idea of change in trend. This is usually noted by the crossing of such moving averages.
Other commonly used indicators are oscillators. They are more complex if only because they tend to be derivatives of moving averages. As such they are suitable to indicate the change in the market momentum. That's one of their particularly useful applications. They can also indicate situations when the market is oversold or overbought and thus likely to rebound from such extreme conditions. Unfortunately and ironically enough, since the overbought and oversold conditions are also indicative of strong upward and downward momentum, the market may as well continue its trend. Indicators of this kind include stochastics, RSI, and CCI.
Indicators can be used in two major ways. One was already mentioned, that is, to indicate certain market conditions, like a strong momentum. Another way is to time entries. That's how stochastics can be used, for instance. The crossing of stochastics lines, the faster with the slower one, can be employed to time the entry or the exit. Very often, the timing like that is of rather poor quality and that usually has to do with low market volatility, which leads to rather erratic price movement. High volatility is not so common, but when it appears, using indicators for timing the entries or exits can be about as good as using the price action, although the intelligent trader always tries to combine both, meaning the indicators and the price action patterns.
Sunday, July 12, 2009
Do You Trade the Emini Using Stops?
By David S. Adams
I think it is important for 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 emini contracts.
Why would people ride their losses?
Emotional involvement in trades is generally the culprit in any kind of trading, and especially for 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 setup and take a trade, and most perfect 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 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.
Why would anyone give up on a career at Wall Street and embark on marketing on the internet? Well, I did. But not without months of struggles and disappointments. And did I mention aggravation? I stunk at the beginning. But success came to me in time, and then more success, and it came in unexpected ways and with unexpected products. Needless to say, I ended up marketing products I evolved in to... I always thought I would teach the world to trade futures, after all, that is my area of expertise... but my business now has nothing to do with trading the markets, though it is still a goal of mine...no, I think to be successful on the internet, you have to learn to be successful on the internet...if that makes any sense? So I found myself drawn to web programs that are easy to understand and market, and I shied away from programs that promised millions...
I think it is important for 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 emini contracts.
Why would people ride their losses?
Emotional involvement in trades is generally the culprit in any kind of trading, and especially for 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 setup and take a trade, and most perfect 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 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.
Why would anyone give up on a career at Wall Street and embark on marketing on the internet? Well, I did. But not without months of struggles and disappointments. And did I mention aggravation? I stunk at the beginning. But success came to me in time, and then more success, and it came in unexpected ways and with unexpected products. Needless to say, I ended up marketing products I evolved in to... I always thought I would teach the world to trade futures, after all, that is my area of expertise... but my business now has nothing to do with trading the markets, though it is still a goal of mine...no, I think to be successful on the internet, you have to learn to be successful on the internet...if that makes any sense? So I found myself drawn to web programs that are easy to understand and market, and I shied away from programs that promised millions...
Thursday, June 18, 2009
Emini Trading - What Exactly is Emini Day Trading?
By Waldemar Puszkarz
Emini futures, or simply eminis, are smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."
The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.
Scores of emini traders trade these highly popular trading vehicles every day, sometimes several times a day. Day trading emini futures does not require you to have a large capital to risk. Some emini brokers can open an account for you with only $3,000 if not slightly less, so no wonder that many try their luck at this game that can be quite lucrative to those who have mastered it.
But what exactly is day trading?
Some people may think that this is self-explanatory, but this may not necessarily be so. If you think that day trading means trading every day, then this is really not the thing. Even though, it is true that many daytraders take more than one trade virtually every day if not every day, day trading really means a form of trading that assumes that you close your position the same day you opened it, that is, by the end of the daily trading session, which spans approximately the same period as the regular stock trading session. In other words, daytraders want to be out of their positions by four oclock PM EST, or more precisely by 4:15 EST (or even 5:00 EST if you happen to trade YM) as that's the end of the daily trading session of most electronically traded US stock index futures.
There are some good reasons why you would like to be out of your position by then. First of all, once the overnight session starts, which happens shortly after the close of the daily session, the overnight emini margins kick in. Since they can be several times bigger than those allowed for daytrading, what this means is that if your account is small, you may even be unable to hold your position overnight and so you are simply forced to close it. Second of all, holding your position overnight is a more risky proposition than holding it during a day as it remains exposed to worldwide events, often unpredictable and turbulent that are likely to produce wild fluctuations in futures markets. And who would really want to lose their sleep over that? Certainly, not so many.
So while it is true that many day traders trade several times a day, daytrading is hardly about frequent trading. It is simply about closing your position before the end of daily trading session. That's how daytrading differs from other forms of trading such as swing trading where you keep your position open for a few days to a few weeks and from position trading where you keep your position open for months.
Emini futures, or simply eminis, are smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."
The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.
Scores of emini traders trade these highly popular trading vehicles every day, sometimes several times a day. Day trading emini futures does not require you to have a large capital to risk. Some emini brokers can open an account for you with only $3,000 if not slightly less, so no wonder that many try their luck at this game that can be quite lucrative to those who have mastered it.
But what exactly is day trading?
Some people may think that this is self-explanatory, but this may not necessarily be so. If you think that day trading means trading every day, then this is really not the thing. Even though, it is true that many daytraders take more than one trade virtually every day if not every day, day trading really means a form of trading that assumes that you close your position the same day you opened it, that is, by the end of the daily trading session, which spans approximately the same period as the regular stock trading session. In other words, daytraders want to be out of their positions by four oclock PM EST, or more precisely by 4:15 EST (or even 5:00 EST if you happen to trade YM) as that's the end of the daily trading session of most electronically traded US stock index futures.
There are some good reasons why you would like to be out of your position by then. First of all, once the overnight session starts, which happens shortly after the close of the daily session, the overnight emini margins kick in. Since they can be several times bigger than those allowed for daytrading, what this means is that if your account is small, you may even be unable to hold your position overnight and so you are simply forced to close it. Second of all, holding your position overnight is a more risky proposition than holding it during a day as it remains exposed to worldwide events, often unpredictable and turbulent that are likely to produce wild fluctuations in futures markets. And who would really want to lose their sleep over that? Certainly, not so many.
So while it is true that many day traders trade several times a day, daytrading is hardly about frequent trading. It is simply about closing your position before the end of daily trading session. That's how daytrading differs from other forms of trading such as swing trading where you keep your position open for a few days to a few weeks and from position trading where you keep your position open for months.
Sunday, May 17, 2009
Emini Systems - The Logic Behind Emini Trading Systems
I could equally well call this article "Emini systems - the lack of logic behind emini trading systems" as, in fact, sometimes such lack illustrates better what the proper logic should be. And that's what this article will focus on, hoping that by exposing the lack of logic behind emini trading systems, we should be able to come up with the right logic, the logic needed to produce good, robust emini systems.
But, first things first. Let's start from what eminis are for as opposed to stocks, this is hardly a household term. While a large percentage of American households do maintain some position in stocks, the overwhelming majority of them have never dabbled in something as esoteric as eminis. Emini futures, to be more specific.
Emini futures are simply smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."
The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.
One of the best ways to approach trading eminis is through mechanical trading systems. A system like that consists of a set of objective rules that determine how to open a position in the emini futures market and then how to close it.
It is possible to make money trading eminis in a purely mechanical fashion. This author has designed several successful and relatively simple, robust emini systems so this opinion is grounded in his considerable experience.
However, not all trading systems are born equal.
This applies also to mechanical emini trading systems. One category of such systems consists of day trading systems. These are systems that open and close their positions the same day, thus allowing traders to use the intraday margin, which is much lower than the overnight margin. For this reason, emini day trading systems appeal particularly to retail traders, those market participants whose budgets (and so also trading accounts) tend to be smaller. Because of smaller intraday margins, those traders can trade with more contracts and thus can stand a better chance to make more money.
Since more and more traders enter the thrilling arena of day trading emini futures, more emini day trading systems are being made available to them by people who specialize in designing such systems, usually referred to as vendors. We could, in principle, also call them experts, although calling someone that way does not necessarily make him or her a true expert. Judging by the quality of what is available out there, the field of vendors is hardly crowded with experts.
One way to judge the quality of a trading system, whether it is an emini trading system or not, is by examining its logic. Systems with a poor logic, that upon a closer inspection can even be found self-contradictory, are usually poor performers or have parameters that are rather unappealing to serious traders who know their stuff.
A good example of a faulty logic is that of many simple (or rather simplistic) breakout systems that try to capitalize on catching a strong trend in the market. In other words, they attempt to identify periods of wide range expansion. From the logical point of view, the problem with such systems is that they usually take position on 50-60% of trading days, while such expansion periods, or strong trends, occur only about 30% of the time. There is a clear inconsistency in what the systems do compared to what they were really designed to do. As a result of this, many simple breakout systems overtrade, which reduces their performance. In the long run, this performance can become too poor to make such systems good enough for trading.
The reason why overtrading reduces the profits here is quite simple. On the days when the strong trend does not materialize, but the system is active, three trading outcomes are possible: a small profit, a small loss, and a big loss. The small profits are likely to be offset by small losses and what we are left with are only big losses. While these big losses may not be frequent, in some systems they can be as big as the big profits from strong trends that the systems like that try to catch, which is clearly bound to affect their performance.
The way to prevent the system from overtrading (and thus the degradation of its performance) is to ensure that it trades only (in practice, mainly) on the days the strong trends really occur. Can such a system be designed? The answer is: yes, it can be, but you cannot do this with simplistic ideas.
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