Setting up an ES trading plan

[Georgii]

Hello all,

I'm currently planning to tackle the TopStepTrader combine and wanted to get some advice from experienced ES traders on how to best put together my trading plan.

I spent a lot of time breaking my head at trading FX intraday, but I found ES and CL to be a much better read for me personally. I'm definitely a short term trader, I like being active and being in cash by the end of the day. 5 minute charts seem to be my optimal zone, though I find tick charts very helpful around news time.

Right now I'm pinning down my strategic approach, working on basic price action based technical themes (flags, reversal patterns, etc) and money management ideas.

A couple of questions for those kind enough to answer:

1. I'm trying to get an idea of what a realistic intra-day range is for the ES and how many points I should expect to play for. It appears anything under 2 points is uneconomical unless you lease a seat and play a negative risk/reward game. Lately we've been seeing some big ranges but I've also seen days where the ES is just 3 points wide. What's the best way to identify those days and stay away from them? Any time of year where they happen more? Any time of year where the ES tends to be trendier?

2. I've seen some people say that 2-3 intraday setups is optimal. Others go on to do up to 9 trades a day or even more (I've heard of up to 20). I'm not counting those who are doing market maker type of stuff, of course. I'm just trying to get a realistic read on this so I'm not overtrading or on the other end, not pushing myself far enough.

3. Unlike the FX market, the ES market doesn't seem to do that much during Globex with a few exceptions. Those of you who trade Globex (we're excluding the 8:30 am news release times), I imagine the main technical themes are probably more range bound?

4. There are some ES traders who 'trade the open'. I notice that its hard for me to really understand what the heck is going on during that time and its always best to wait at least 15-30 minutes to get some price architecture going (many ES traders I've seen hide Globex once the market opens). I'm curious to see if there are people who dive in on the first bar and what ideas they work off of, and whether they hide the Globex when doing so or not.

5. Some people swear by DOM, others are fine with chart patterns. The problem is I simply have no idea how to read DOM and am wondering if its worth bothering at all given the learning curve.

I know its a lot of questions but any and all advice is appreciated!

 

[austinp]

Without knowing the specifics of your personal trading approach, no one can really nail down details on exactly what you should do. But I'll try to give some general advice to help

CL has abruptly gone from being the most dynamic popular trading symbol to the persistently deadest of all, in the shortest span of time I've ever seen happen.

Compare Friday's pit-session ranges of CL to ES: CL was pinned totally flat in a no-range wedge all day long, while ES (and all other emini index symbols) rolled thru several oscillations offering solid profits.

So my first suggestion would be to nix the CL completely, and enough said about that.

ES daily ranges had been hovering near the 10pt span much of last year, but as many veterans predicted they have opened up to more historical norms of 15 - 20+ point daily ranges of late. We should expect to see more of that (and wider) going forward than those tight-range 10pt sessions past.

Right now there is opportunity for several ES +4pt or greater profit trades per session... but that doesn't mean anyone should target all of them. Only the rookies and action junkies believe they must trade all-day every day and night while markets are open. Veteran traders eventually realize this is a profession of give & take... and you want to place yourself on the consistently take side of things.

Anyone & everyone who tries to trade all day & night will wear themselves out mentally and emotionally. The process of constant give & take will surely cause them to break discipline and fight the market sooner or later. You can witness that process for yourself over and over and over again in the past and present ES Trading thread right here. Cash or sim mode, same behavioral process unfolds over time because that is basic human nature expressed.

On the other hand, if you set for yourself a reasonable objective such as targeting +4pts ~ +5pts ES more days than not, you will find yourself reaching that goal (assuming you have a solid trading approach) most of the time. That in turn gives you positive mental ~ emotional self-reinforcement to remain disciplined and avoid breakdowns.

More days than not, if you reach your personal goals, you win. More days than not you win = you create consistent results for yourself. More days than not you win, the greater profits you capture AND keep AND withdraw into your personal checking account from trading account.

So that is some veteran advice. Hope it helps. Good luck, trade well and best wishes for success

 

[Georgii]

Thank you Austinp!

I totally see what you're saying about crude, I have gotten murdered trading it lately while beforehand I was making a killing (in demo mode) trading countertrend moves off of it. I guess everything goes through its cycles, I remember how un-tradable the EUR/USD was last August on a short term timeframe, it was just murder. Earlier that May it was amazing.

My trading approach is price action based, looking at 5 minute charts, going for trades that usually last under half an hour. That sort of approach is psychologically comfortable for me. I seem to trade reversals pretty decently, as well as trend continuation. Breakout is a bit tough on me mentally. The problem though is that many trends I see in ES don't stop to give you room to get on board!

I totally see what you're saying re: overtrading, and one of my goals is to really get down some realistic targets so I know if I'm doing my job well. The hard part is finding the days when you just have to sit on your hands versus when you need to be blowing at it full steam ahead.

I've often heard of traders say that they stop trading when they make X amount per day. From the standpoint of probability that bothers me a bit because what if on a given day you have several great opportunities and you'll miss some of them because you reached your profit target?

 

[austinp]

Quote from Georgii:

I've often heard of traders say that they stop trading when they make X amount per day. From the standpoint of probability that bothers me a bit because what if on a given day you have several great opportunities and you'll miss some of them because you reached your profit target?

yup... that is the common misconception. Now here is reality in the trenches. If you take +/- 250 trading sessions per calendar year and blend results, it will look something like this...

33% of days you will end the session near equity peak
33% of days you will end the session in middle of equity peak and low
33% of days you will end the session at equity lows

Now, some of those 66+% days where you do not finish at equity peak for the day, a bunch of those were modestly to highly profitable early and eroded from there. That's due to a number of factors you cannot control.

Sometimes price action was favorable early and sucked all day long to the end.

Sometimes random fate happens. Your best trade of the day got stopped out to the tick for loss instead of big win to finish at highs.

Sometimes tech issues happen like internet outage, computer failure, dog gets stung by bees and needs medical attention, a logging truck crashes in front of your house, unexpected emergency calls demand you leave to respond immediately. I've had all that happen (and more) in the past.

Sometimes you are focused early and generally distracted later due to illness, lack of sleep, personal distractions such as new babies or children home from school or dealing with divorce issues, etc.

There are endless reasons why traders fail to finish at peak equity highs every day, some reasons are market related and some are unrelated. But that's how it goes, regardless.

So in the case of trade all day & night, you will be statistically rewarded 1/3 of the time and mentally "punished" 2/3 of the time. Anyone who tells you to just shrug off being up $2,000 early and ending up +$400 or down -$2,500 after many further trades is giving you empty advice. Do that enough times and you'll start to break discipline in attempts to reach your subconscious goal of ending at peak equity high every day.

**

Theoretically, trading all day & night seems most lucrative. Realistically, trading for consistent results is the most lucrative when applied in real time with real money by real people.

 

[Rationalize]

Take a look at the guys who punt outright deltas, then check out the spread traders. Maybe report back on the differences.

 

[Georgii]

Quote from austinp:



33% of days you will end the session near equity peak
33% of days you will end the session in middle of equity peak and low
33% of days you will end the session at equity lows

Yes, I've seen that happen already

To my way of thinking a statistically valid setup should always be traded even if that means you can end up down at the end of the day. The idea here is that long run you should end up more up if you take those setups.

It appears the main challenge here is to stay focused, and since I'm not a computer I'm going to be susceptible to making errors in judgement if my focus is off. And it really sucks when you've had a good morning and you've given it all back, which can mess with you. So I totally understand how it feels and how it can affect you, and why people have such cut-offs. On top of the things you've mentioned of course, which all come down to focus and emotions.

An approach I've begun experimenting with is that I take the first setup or two with size, and regardless of whether it goes well or not, I ratchet down my size, unless I see something that I really, really believe in. That way I feel I'm protecting myself from doing something silly and overtrading.

One of the challenges I've sometimes had is increasing my size again. Sometimes I get too comfortable with smaller size but I'm not making progress.

 

[austinp]

Quote from Georgii:

To my way of thinking a statistically valid setup should always be traded even if that means you can end up down at the end of the day. The idea here is that long run you should end up more up if you take those setups.

It appears the main challenge here is to stay focused, and since I'm not a computer I'm going to be susceptible to making errors in judgement if my focus is off. And it really sucks when you've had a good morning and you've given it all back, which can mess with you. So I totally understand how it feels and how it can affect you, and why people have such cut-offs. On top of the things you've mentioned of course, which all come down to focus and emotions.

That of course is the "systematic" way of thinking... which is fine, and you already pointed out the mental pitfalls.

A different way of thinking is this...

Out of all 250 sessions traded per year, you come to find out that your cumulative daily average is +2pts ES. You finished the year with +500 ES however that all unfolded, some months great, some good and some poor.

Anyways, to get there you had a few days greater than +10pts, a couple of them +15 to +20pts, few days of say -10pts and the vast bulk somewhere between -4pts and +6pts.

So now you have a bell-curve with the few outliers on each end of 10+ and -10 which pretty much wash themselves out, and a bulk of -4 to +6 days in the body of your performance curve.

Had you merely targeted +4pts or better daily gains and shut it down, you would have arrived at the same end result with a lot less stress, angst and time wasted in front of screens instead of living life.

If you approach the trading day with goal of accumulating AND KEEPING +4pts or better, some days you'll go -1pt, +1pt and +5pts to make +5 cumulative. Then you can take the next trade with 1/2 size, use a -2pt stop and if hit you still kept +4pts for that day. And you ended the day successfully, positively.

Now on the other hand if your mental approach is to capture max % of the day's range every day, you are going to eventually try and micro-manage each and every single trade to its utmost possible performance. And you will anguish over this one taken off too soon and that one left too long with too wide a stop.

In other words, you will find yourself always wrong on just about every trade. Meanwhile, target shooting for a long-term mean has you cashed out, profitable, all done and out of the office, living your life

 

[NoDoji]

Quote from Georgii:

To my way of thinking a statistically valid setup should always be traded even if that means you can end up down at the end of the day. The idea here is that long run you should end up more up if you take those setups.

My experience backs this up, no doubt.

Quote from Georgii:

It appears the main challenge here is to stay focused, and since I'm not a computer I'm going to be susceptible to making errors in judgement if my focus is off.

A couple ideas that helped me:

When price is consolidating or is choppy, it can reach a point where it's sooo tempting to say, "Screw this", take a break, find that you missed a fantastic move, then put on a trade without a valid signal in an attempt to somehow capture what you missed. So as soon as you have the thought of taking a break because it's been ugly for so long, tell yourself to focus 100% for just 20 more minutes and then set a timer. Most of the time you'll be present for a very tradeable move.

Take a brief active break to stretch or jog right after closing out a trade.

Quote from Georgii:

An approach I've begun experimenting with is that I take the first setup or two with size, and regardless of whether it goes well or not, I ratchet down my size, unless I see something that I really, really believe in.

What do you mean by "really, really believe in"? That seems problematic to me. You should really, really believe in any setup/context situation that your statistical analyses have proven is net profitable after commission and slippage. Anything else is irrelevant and should be discarded. That's just my opinion.

I frequently really, really believe price is going to do something despite there being no setup/signal whatsoever that meets my trading plan criteria. When that happens it's generally an awesome fade.

Quote from Georgii:

Breakout is a bit tough on me mentally. The problem though is that many trends I see in ES don't stop to give you room to get on board!

These is the "easy money" price action environment and it's one I really, really believe in. It's my primary setup.

As a 5-min trader, if you carefully study a 1-min chart, you'll see how to get on board. Price doesn't run in a straight unbroken line; it pauses, drawing in counter-trend traders, and you'll be able to identify specific patterns in the small time frame for entering a strong trend (or a strong trending move).

Study the 1-min price action immediately following three kinds of breakouts: 1) a breakout with conviction from narrow range consolidation (flag or triangle formation), 2) a break through a previous swing high/low in a well-defined trend, and 3) a weak/failed breakout where price then makes a 2nd attempt after a shallow reaction (Al Brooks would call this a "failed failure" and although most of the ET community makes fun of this concept, it's well worth studying).

Quote from austinp:

Now on the other hand if your mental approach is to capture max % of the day's range every day, you are going to eventually try and micro-manage each and every single trade to its utmost possible performance. And you will anguish over this one taken off too soon and that one left too long with too wide a stop.

In other words, you will find yourself always wrong on just about every trade. Meanwhile, target shooting for a long-term mean has you cashed out, profitable, all done and out of the office, living your life

+++

 

[Georgii]

Anyways, to get there you had a few days greater than +10pts, a couple of them +15 to +20pts, few days of say -10pts and the vast bulk somewhere between -4pts and +6pts.

So now you have a bell-curve with the few outliers on each end of 10+ and -10 which pretty much wash themselves out, and a bulk of -4 to +6 days in the body of your performance curve.

Had you merely targeted +4pts or better daily gains and shut it down, you would have arrived at the same end result with a lot less stress, angst and time wasted in front of screens instead of living life.

Hm. You've given me something to think about, I didn't consider the outlier factor as carefully and the fact that they can wash themselves out.

My initial target was to eek out 1 pt for a long term average daily expected value, and get that up to 2 pts once I get good at the game. Consistency is definitely better than trying to carve up the entire turkey every day.

What I'm aiming for is to get good at a handful of setups, say flags/pennants, range reversals, trend reversals, and have that in my playbook, then just be selective of how I use them. This way I'm prepared for different market environments and won't feel deprived of an opportunity. I'm aiming for an average of 2.5 solid size setups per day, aiming for 2 to 4 points on average for each setup, no less and no more.

I think a good plan might be to be aggressive from the open to 11:30, then get light during lunch, permitting only 1/4 size position if I see something interesting, and then holding out for a move to be traded with size after 1:30 or so if I haven't already made a good day. Otherwise, I'd just be at 1/4 or 1/2 size.

One of the toughest tasks I have ahead is to set a stop loss for the day. For example, sometimes you can get knocked out of a trade and then have to reenter. I'm a bit amiss on some solid risk management ideas here.

Thanks again for your feedback!

 

[Georgii]

What do you mean by "really, really believe in"? That seems problematic to me. You should really, really believe in any setup/context situation that your statistical analyses have proven is net profitable after commission and slippage. Anything else is irrelevant and should be discarded. That's just my opinion.

I'm familiar with statistical analysis techniques but the problem is that I'm finding it pretty difficult to accurately back-test the ideas that I trade off of since they are based on pure price action (no indicators or easily programmable stuff).

Any ideas on how to optimally accomplish this would be great, I would love to quantify my setups as much as I can.

These is the "easy money" price action environment and it's one I really, really believe in. It's my primary setup.

As a 5-min trader, if you carefully study a 1-min chart, you'll see how to get on board. Price doesn't run in a straight unbroken line; it pauses, drawing in counter-trend traders, and you'll be able to identify specific patterns in the small time frame for entering a strong trend (or a strong trending move).

Study the 1-min price action immediately following three kinds of breakouts: 1) a breakout with conviction from narrow range consolidation (flag or triangle formation), 2) a break through a previous swing high/low in a well-defined trend, and 3) a weak/failed breakout where price then makes a 2nd attempt after a shallow reaction (Al Brooks would call this a "failed failure" and although most of the ET community makes fun of this concept, it's well worth studying).

I'm glad you mentioned Al Brooks because I've been using a lot of his ideas. My biggest problem is that he doesn't really give great specifics on trading breakouts, unlike with his other setups. His general idea is 'get in for any reason' (thanks ). Basically it comes down to doing a 1:1 risk reward continuation measured move. He advises putting the stop underneath the breakout bar. The problem is that without any visible retracement, you don't have a way to define a measured move (you're just entering the trend blind), and it leaves you wide open for a nasty consolidation which he doesn't really give you solid ideas on how to manage (I guess he has a good discretionary approach for how to do it which he can't really get across).

The biggest issue here is the if=> then problem of managing a weakening trend. Whenever something blasts off, and you play for a tight continuation move, and you get stopped out, you can really get into dangerous territory because you're either tempted to see it as a reversal or a much deeper retracement.