Approach to trading the ES contract

Discussion in 'Index Futures' started by stevesbg, May 11, 2009.

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  1. I thought I would do this to provide an orientation for new traders

    I prefer no outside comments

    Trolls and flamers not welcome and please do not post

    I will ask that the moderator remove all such posts.

    I will post a general orientation first using the $DJX (Dow Jones Cash)

    I will post charts on several times frames and try to tie it all together so that an observer could see a reasonable method of trading the ES contract.

    I will being using "pieces and parts" from several threads here at ET. I will try to show how these concepts can be combined to make a systematic approach that actually makes money.

    Profitable systems have to include risk management, trade management and position sizing rules. I will add comments about these issues so that a person can see the big picture.
  2. Okay then this is to be an approach to trading the ES contract intraday

    We start by orienting ourselves to the longer term using Dow Cash Charts

    As can be seen on this first chart, we have been in an uptrend since March
  3. On a 60 minute time frame, I have added support and resistance lines.

    As you can imagine this is a less objective but no less important part of the system. In my opinion, a trader has to learn to accurately identify support and resistance for themselves.
  4. And here we zero in a bit closer to the intraday action where we can see consolidation happening on the 15 minute timeframe
  5. Finally we look a little bit closer using 5 minute candles. Here we can see price consolidating intraday.

    This chart could be used to make decisions for entry and exit
  6. Once you orient yourself to the market on the longer term, you assume that the odds favor one side more than the other.

    In this case we believe that the odds favor the long side. Although we take trades on both sides we may size our long positions bigger and we may give them more wiggle room (bigger stops).

    One method that works consistently well is to combine signals from several methods to find an entry. When two or more of these signals occur in close physical relationship to each other we believe that the chances of success are increased, because there are likely to be more traders on the trade.

    We look for signals using the following sources

    1. Market Profile numbers
    2. Pivots
    3. EMAs
    4. Ergodic Indicator
    5. MACD indicator
    6. Events

    Where two or more of these "line up" in close proximity, we call that "confluence" and assign that setup higher odds of success.
  7. Translating price action from the Dow Cash ($DJX) chart to the ES contract is not particularly difficult. The operative concept is to watch for "tests" of specfic price points.

    We will start by using Market Profile numbers as an example

    The night before, make a spreadsheet that contains the important numbers for Market Profile traders. In our experience the most important numbers are the

    Value Area High 926.25
    Value Area Low 916.25

    As can be seen in this intraday chart, the market opened at 912.25. Our orientation is to look for price to test the VAL early in the session.

    As it happened, price tested up to a early high of 913.50.

    If you scan to the left, (following the horizontal line) you can see that price failed to take out that point. At 6:35 (second candle) price tested that point again and failed again, indicating a possible short entry. Because of the proximity of the pivot point at 910 we might still take the trade but with smaller size and tighter stop (1 to 1.5 point max).

    The attached chart shows the possible entries
  8. On that same chart price hit an intraday low at 6:50am PST

    If you were running both this and the Dow Cash chart side by side you would see the cash test one of our support/resistance lines

    Here we show the Dow Cash on a 3 minute chart to emphasize the test. On that chart we can see the dow test our line at 6:45 and again at 6:48 and the subsequent failure at 6:51

    What we have so far, is a MACD entry, and an entry suggested by test and failure of our support & resistance lines. In our opinion this would be enough of a confluence to interest us in a long position. In addition because we are in a longer term uptrend we could trade bigger size.
  9. For this chart we show the intraday low at 905.75

    and the test low at 906 (next candle)

    Followed by an up candle and a retest down

    When that retest fails it confirms (in our opinion) the reversal

    and so we suggest entry long at 908.50

    We look at this entry as favorable because one can see pretty quickly whether price is going to display enough momentum to break through the pivot lines. If it doesn't, you will see weakness right away and can stop the trade out minimizing the loss or possibly scratching the trade.

    Although we view each individual trade as random, we can see that this particular trade moved right on up to 915 before pulling back. If one had held or possibly scaled out along the way, you could have realized profit up to the high of 916.50.
  10. Our final comment for today is about managing the trade(s)

    One nice feature about using the Dow Cash is that you can monitor the movement and get "early warning" for possible exit points.

    In addition one can also get early warning about a possible range or consolidation day. In this instance, look at the way that price continued to test support. Using this method you get a possible warning that we are in for a choppy market within the first hour.
    #10     May 12, 2009
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