Anatomy of a Day in the ES

Magna: “Without giving away any proprietary secrets, would you please discuss your style a bit more.”

I think candletrader’s statement below comes about as close as possible to idea behind my style of trading, except that I’m looking for what I'd call “daily base hits”.

candletrader: “I am playing for home runs, but I manage my trades to at least eke out scalp profits, if the home runs don't work out.”

As long as I feel the environment is appropriate, I manage a position so that I have the opportunity to profit from a large daily extension. This type of management will often end up leaving a fair amount of my “in trade” profits on the table when a significant move fails to materialize. The results are a series of trades that are often characterized by small advances coupled with less regular large gains. Although the core idea behind this style of trade management is well known, I believe the particular tools and methods with which I have chosen to manage my positions are unique and effective for me.

I attempt to refine my entry to the degree that I risk very little initially, but as the trade progresses I use a system that allows the stop to widen in proportion to the extent of the move and other considerations. As the trade approaches historical extremes, the same trailing stop will tighten it’s parameters in relation to the probability of further extension.

What I get is a trailing stop that initially is quite tight and then begins to widen shortly after the move extends, reaches its maximum risk or “give-back” at the mid-point of the trade, and finally begins to shorten the distance as the trade nears it’s suspected probable end. I will, at times, override a specific value in favor of placing the stop behind a nearby area of S/R if I feel that that is prudent.

Sound familiar?

I qualified my initial statement above with a reference to my determination of the market environment and bias. I have a set of tools and rules based on these tools that allow me to characterize the market at any given time. The result of my determination allows me to alter the type of trade management I use. For example, I will favor conservative targets or I may simply choose to unload more of my position than normal at a target during a suspected consolidating market. I believe that having a concrete method of fairly accurately determining the environment and bias goes along way toward survival and success.

For those of you who are reading this and thinking “no shit, but how?”, well, I am intentionally not discussing my particular method. That’s probably a good thing because it’s the concept that is most important. How a trader implements this idea is the most difficult and most rewarding, IMHO.

Maybe if I stepped through yesterday’s trades then everyone can see the where and the when. I won’t discuss much of the how but it’ll give other traders some idea of what I do. I’m not sure how useful it’ll be for the vets out there, though.

1) Good indication of a sell off. I’m always ready in the morning and especially when we’ve gapped. Looking to ride the drop to unchanged.

2) Breaks support and I add to my position.

3) Yesterday’s close was my first target and I unloaded half of my position.

4) Historically overextended move and I covered a 1/4 of my position on a break above the previous bar’s high. Left the remainder on “just in case”.

5) And I’m stopped out on what’s left.

6) What can I say? I really wanted to go for it but my system wasn’t confirming it. Just had to sit this one out. Hindsight being what it is, it would have been opportune to greatly reduce my size and “test the waters” if you will. Later, I might have added to the position when it moved solidly into my favor.

7) I’m not proud of this trade. I had a reason to believe we were approaching a bottom but I was jumping in a bit too early. I also allowed a little too much room for risk on this one. Upon reflection, I should have let it go.

8) Closed half of the position just before the market reached the morning low that we had just broken. I figured that the low might act as resistance.

9) Wasn’t taking any chances so I scaled out when we dropped below support.

10) Took another stab at the bottom. I was still jumping the gun as I technically was looking to go long once we passed 1084.50. The NQ was limit down at this point.

11) Can you say: “pissed”? My software hiccupped and few seconds later I got filled well below my stop.

12) I can spot a quick Wash and Rinse. I was in position and everything lined up.

13) Closed a quarter of the position just before the market reached the morning low again.

14) What the hell was that? I later heard one of the dealers was offering too much by mistake.

15) Got a signal to short.

16) Notice the low and then a higher low and then it breaks resistance. I closed out half of the position.

17) SEBL makes an announcement and the boys in the pit decided to collect me in classic fake out fashion before taking it lower. Happy guys? Decided not to re-enter.

Not some of my proudest moments, as I feel I over-traded a bit and I failed to properly handle an initially conflicting but ultimately rewarding setup. I think, though, that it gives everyone some idea of how I see things.

For the record, I don’t generally initiate longs during such an obvious down day unless certain criteria are met. In circumstances such as those on 10/17, I will reduce my size on counter-trend trades and my trade management will alter in accordance with my reduced expectations.

 

Second chart:

 

Great post tymjr.

Thanks.

 

tymjr,

Your post was so well narrated I did not need a chart as I could see it in my minds eye so I did just that. However as I started to glance at my actual S & P chart I became very confused. I was looking at the date of your post-the 19th-and noted you said "yesterday's trades" so was looking at the 18th (no gap up etc). I finally figured out you must be talking about the 17th. After all that, the last thing I did was click on your attached screencap.....only to see 10/17/01 on the chart. What an idiot. Thanks from me as well for an insightful post.

 

nice post. more of these.

I wish I could post some, but my setups are automated, not much to comment.

tntneo

 

tymjr, I was envious when I read your excellent post. I desperately need to introduce some formal methodology and discipline into my trading - it has become way too discretionary. I follow similar principles to those you outline yet I'm certain that the lack of formalization has cost me plenty.

 

tntneo: “…my setups are automated…”

Don’t get me wrong; a lot of my method is automatic in the sense that I rely on a set of concrete rules based on indicator readings and relationships. I use “indicator” in the broadest sense of the word so that it encompasses anything a trader might feel gives him “indications” of the market’s probable future behavior.

I exercise some discretion, in that I assign value or weight to my indicators, but I’d be the first to admit that there are times when this is profitable and times when I would be better off simply trading the more basic systems I’ve developed. As I’ve mentioned in the past, my sensitivity to different indicators can be a double-edged sword. I like to think that both trading styles compliment each other. At least, that’s what I keep telling myself.

For those interested traders, I’ve included a 5-minute chart of my 10/17 trades, with some relevant S/R areas, as an overview so that one might gain a wider and comparative perspective.

 

tyjmr,

You sound like someone who knows his way around trading eminis. If it is not too much to ask I will now try to outline one possible S&P emini trading strategy and if you could give me an opinion about it. I am trying to base my trading style on "probability trading" similar to what Mark Douglas described in his book "Trading in the Zone". Before 830 am I draw the lines on 1minute candlestick chart . (Yesterday's high, yesterday close, yesterday's low, PP (H+L+C)/3, and most obvious support and resistance lines from last 3 hours of yesterday's trading). All together 6 lines. I also open 5 minute candlestick chart to have clerarer bigger picture as well as Time and Sales Window. At the same time I have real time sound coming from S&P futures pit. I also have MIRC s&p chatrom open and CNBC. Those two I use to be aware of any unexpected news. I forgot to mention Volume but that is understood. ( I don't use any other TA indicators such as EMA, Bollinger, MACD etc., at the moment, if you could recommend some I would appreciate it). If there is movement through any of the six lines described above on increased volume I get in. Also if there is bounce of any of those lines (here I am not sure if the volume should be incerasing or decreasing) I get in.
Another thing: with bad news coming from every corner I prefer to play short at this time because bad news is more likely to happen than good news and therefore is better to be caught while being short. If the trade is going in my direction I use trailing stops and once one point is made that trade should never become losing trade. At least break even.
However my main problem is that I'm not sure if this entry strategy has positive expectation in the long run ("an edge") and I don't know how to test it.
Any input is appreciated.
Thanks.

 

tymjr,

Thanks for the great posts. I, like the others, appreciate your candid thoughts.

michaelday,

While tymjr will probably have a reply for you, I just wanted to jump in on the testing of ideas. The concepts you are looking at could be tested using a program like TradeStation if you were so inclined. It takes work to learn, but the benefits are enormous. It may not be something you want to undertake, but in the long run it can save you many hours of manual backtesting. It makes it much easier to weed out the bad ideas before you invest too much time into them. There are also several online backtesting sites I've seen mentioned, although I personally use TradeStation so I can't comment on those.

Best of luck,

Kirk