Approach to trading the ES contract

StevenBruce · May 16, 2009

Okay so I have a couple of comments and then I may fold my tent depending on the reception

First, clearly a trader has to have a systematic approach that provides some confidence. The emotional aspect of trading is very important. New traders have no confidence therefore they need to see (to observe) how it works, what it feels like to do this job in a variety of conditions. New traders also need to know how to manage a trade once they are filled.....how to hold through the heat (drawdown)......how to manage their emotions.

I like Market profile as a basic system approach. One could start by reading the literature and taking a few classes from the exchanges. The software is not hard to learn but it does take some screen time.

Developing a sense of how to act when a postion is filled....how to manage a trade....how to manage emotions and how to manage an account takes time. I think the best way is to find employment in a professional office. Unfortunately that is very difficult to obtain, so as an alternative I guess the only thing left is to try to find a good room. Some of the folks affiliated with the exchanges are possible choices. I like Dan Gramza for instance and there are several others.

Decent software is available from Investor RT, Esignal, and WindoTrader, and there are plenty of others.

StevenBruce · May 16, 2009

As mentioned previously I prefer to take signals that occur when more than one system fires off at the same time. This is called "confluence". Examples of confluence are when price hits a Market Profile number AND a pivot, or when price hits a Market Profile number and we get a confirmation from a MACD indicator (as seen in some of my charts). I have also used Bill Blau's Ergodic indicator (I have my own system for that as well). Finally I have used the Dow Cash with support and resistance lines in place for additional signals.

Simply put I figure that if a signal occurs "in confluence" with another system or systems it provides better odds of success. Why? because it is likely that more traders are involved AND depending on the type(s) of indicator(s) used, size players may be involved thus providing additional momentum.

austinp · May 16, 2009

Quote from stevesbg:

Okay so I have a couple of comments and then I may fold my tent depending on the reception

First, clearly a trader has to have a systematic approach that provides some confidence. The emotional aspect of trading is very important. New traders have no confidence therefore they need to see (to observe) how it works, what it feels like to do this job in a variety of conditions. New traders also need to know how to manage a trade once they are filled.....how to hold through the heat (drawdown)......how to manage their emotions.

Developing a sense of how to act when a postion is filled....how to manage a trade....how to manage emotions and how to manage an account takes time.

Spoken like a true veteran of this profession. Some things can be taught... most things must be learned. There is a big, big difference between the two.

Aspiring traders blindly searching for a "system" that they can backtest with two-bit retailer's software to find an edge are so far lost down the wrong path, they'll never find their way out of the proverbial woods.

The ONLY way to consistent success is learning a simple overall approach (not some "system") and then learning how to manage all aspects of its general management. By the time we figure that out, we've arrived at the intended destination.

Now is Now · May 16, 2009

Quote from stevesbg:

Now for today's action

First we have option expiry. That means that the first and last hour will display most of the volatility. So we know that in order to make money we HAVE TO get on the right side early. We can't miss an entry. So with that in mind we start with the pre market

The overnight market moved down first on weak economic news from Europe. Then just prior to the open, the Globex moved back up to open at 889.

The previous day's value area high & low are

VAH = 894
VAL = 886.50

1. So we opened "in value"
2. We look for price to test one or the other extreme
3. Because of options expiry we expect to see what professionals call a "gamer's day" or a "pinball day" meaning we expect price to swing back & forth early and to chop around at midday.

As can be seen from the chart price opened in value and tested down to VAL at 6:41:50. Price hits the VAL exactly "to the tick" and reverses. The trade runs north to a high of 892.50 for 6 pts

At 7:13 price retraces down to touch 886.50 again. Our policy is to take the second touch long with smaller position size. This one takes only one tick heat down to 886.25. This one moved north to a high of 895.50 for 9 pts.

At the VAH the reversal trade occurred and took 1.5 pts heat. That trade moved south to a low of 876.75

As always, the management protocol is to establish the trade and scale out at 2, 3, 5, 7 and 10....we leave bullets to run to end of day if necessary.

Let's talk about the one area that I shun from in my trading....fading....

Right or wrong, I take that to mean that the trader increases a "wrong trade" by increasing the exposure by the level as described above and then if it is still "wrong" the trader then increases the exposure further at a given point and so forth.

To get me straight, and a lot of others, who may have similar concerns, could you provide some guidance using the above VAL as if it went throught the 886.00 mark and down to the close, taking into account the LOD?

Rarely will I add on an exposure if I am in the "wrong"...I do,but it was predetermined and usually because I initially traded a half lot to open the exposure.

Incidently, I caught 1 1/2 pinballs, but the QQQQ spooked me to cover @ 4 ..needless to say it was wrong, but still a good profit.

Your contribution has been articulate and while there have not been that many responses, I am inclined to think that there are a few have been taking "notes".

Ideally, I would like to see a day when things don't go "right" and you can provide an explanation to your trading technique, not so much in numbers (although useful), but in your response and attitude to the result; and your response the next day.

Newbies will then understand that it is not "all beer and skittles".

Thankyou again,

NiN

Ronin08 · May 16, 2009

Quote from stevesbg:

Going into todays open we have the following data

Value Area High = 894
Value Area Low = 886.50

Reports scheduled for release include

Core CPI at 5:30am PST
Empire Manufacturing at 5:30am PST
Long Term TIC at 6:00 PST
Capacity Utilization at 6:15 PST
Industrial Production at 6:15 PST
Michigan Sentiment at 6:55 PST

If you look at the economic calendar using either Briefing.com or Forex Factory.com you can see that the Europeans release their information before we do. One can expect that the information they release will reflect continued weakness (as will ours)

At the open of the German (DAX) market we entered a short position on the Globex and will try to hold until the US market opens

As was pointed out previously, we also expect increased volatility due to options expiry. One can look at the Open Interest for QQQQ May Calls & Puts to determine where the battle lines will be for today. Speculators (and institutions) having bought or sold premium will want to move the markets in the direction of some of those strike prices.

Was curious to know more about you decision to hold the short position until the 9:30am est Open , when there was a Report at 8:30am est( 5:30 pst ) and since one of the confluences that you use is an Econ. Report : #6. â Eventsâ âWhere two or more of these "line up" in close proximity, we call that "confluence" and assign that setup higher odds of success.â

Were you expecting the 8:30am â Event â to have confluence ?

StevenBruce · May 16, 2009

Quote from Now is Now:

Let's talk about the one area that I shun from in my trading....fading....

Right or wrong, I take that to mean that the trader increases a "wrong trade" by increasing the exposure by the level as described above and then if it is still "wrong" the trader then increases the exposure further at a given point and so forth.

To get me straight, and a lot of others, who may have similar concerns, could you provide some guidance using the above VAL as if it went throught the 886.00 mark and down to the close, taking into account the LOD?

Rarely will I add on an exposure if I am in the "wrong"...I do,but it was predetermined and usually because I initially traded a half lot to open the exposure.

Incidently, I caught 1 1/2 pinballs, but the QQQQ spooked me to cover @ 4 ..needless to say it was wrong, but still a good profit.

Your contribution has been articulate and while there have not been that many responses, I am inclined to think that there are a few have been taking "notes".

Ideally, I would like to see a day when things don't go "right" and you can provide an explanation to your trading technique, not so much in numbers (although useful), but in your response and attitude to the result; and your response the next day.

Newbies will then understand that it is not "all beer and skittles".

Thankyou again,

NiN

Alright, I think I understand your comment and questions

I have asigned a value to what I call "wiggle room"..Lets say for example, that I will hold a position while it oscillates up and down for about 2 points, depending on what lines up above or below my entry. This "wiggle room" is based on an estimate of local volatility.

ENTERING IN INCREMENTS INSTEAD OF "ALL IN"

The way you enter can affect your ability to stay in a trade as it "wiggles around". For instance, in times of increasing volatility a trader COULD enter in increments (depending on the position size). For instance, if you normally put on a position of 12 contracts all at once, in times of increasing volatility you might instead put on only 3 contracts initially. If your wiggle room was 2 points, you might wait and add 6 more if the position went against you (up to your 2 point stop). One of two possibilities will happen at that point. Either the position moves in your favor, in which case you would scale out your initial 3 contracts, or the position would continue against you resulting in a stopped out trade

If the position moves in your favor, you have established a position slightly smaller than normal but at slightly "better prices"

If the position continues to move against you to your stop out point, you take a loss, however the loss is smaller than normal because your position is slightly smaller AND a portion of that position was established at "better" prices.

Modifying your method of entry is one way of managing changes in local volatility.

FRAMING MARKET ACTION

I watch the markets reaction to events including economic reports. If the market reacts favorably to negative events I take notice. Conversely if the market reacts negatively to events that normally one would see as positive, I take notice. The way the market reacts informs me of a bias. I look to trade that bias or tendency.

When the market opens "in value" despite potentially negative economic news it tells me that the market is discounting that news. If this view is correct, confirmation of that bias will come when the market tests the previous day's value area low and bounces off it to the upside. If my opinion was incorrect, I would have taken a loss on my first trade and reset my strategy looking for an appropriate place to get short.

StevenBruce · May 16, 2009

Quote from Ronin08:

Was curious to know more about you decision to hold the short position until the 9:30am est Open , when there was a Report at 8:30am est( 5:30 pst ) and since one of the confluences that you use is an Econ. Report : #6. â Eventsâ âWhere two or more of these "line up" in close proximity, we call that "confluence" and assign that setup higher odds of success.â

Were you expecting the 8:30am â Event â to have confluence ?

I had a signal to short the market earlier in the evening.

I took that signal and found I had an "unrealized" profit. I intended to hold because I thought the market would react negatively to news, thus providing additional momentum into the open of the US market. My opinion as to the way the market would react to news was incorrect. Also I should have taken partial profit (as I normally do). I made two mistakes in this instance. The result was that instead of making a profit, I had to scratch the trade.

trendy · May 16, 2009

Quote from stevesbg:

...in times of increasing volatility a trader COULD enter in increments (depending on the position size). For instance, if you normally put on a position of 12 contracts all at once, in times of increasing volatility you might instead put on only 3 contracts initially. If your wiggle room was 2 points, you might wait and add 6 more if the position went against you (up to your 2 point stop). One of two possibilities will happen at that point. Either the position moves in your favor, in which case you would scale out your initial 3 contracts, or the position would continue against you resulting in a stopped out trade

Sorry, but that doesn't sound like a very robust methodology to me. If the initial trade moves in your favor, you will cash on only 3 contracts. However, if the trade is a loser, you will be exposed on 9 contracts.

operator · May 16, 2009

Quote from trendy:

Sorry, but that doesn't sound like a very robust methodology to me. If the initial trade moves in your favor, you will cash on only 3 contracts. However, if the trade is a loser, you will be exposed on 9 contracts.

I agree. You should have your biggest position size on when you are right and your smallest position size on when you are wrong.

Unfortunately most traders have it the other way around.....

StevenBruce · May 16, 2009

Quote from operator:

I agree. You should have your biggest position size on when you are right and your smallest position size on when you are wrong.

Unfortunately most traders have it the other way around.....

Clearly it is not the strategy for you...Feel free to post your own "more robust" alternative by all means.