Look here's the problem with volatility. Volatility is like "the ocean". It can be quiet, and stay that way a long time. Then for "no reason" or (reasons unknown to us), a process similar to the aftershock after a big quake, comes along and "ripples" the markets. These ripples, are part of a process called "long memory process". We try to model these "ripples" and find some way of predicting how long the aftershocks will "rattle" the markets. This is the reason the exotic math is necessary.
That's what's so cool about the market. There are a million ways to interpret the data. You've got your math, I've got my left nut tugging into my stomach.
Yes, trading the open. Got it In a consolidating market, 90% of the action happens within the first hour to 90 minutes. So if you want to survive trading that market you have to find a way structure how you look at the open. Heres one way. Put a horizontal line through the first 5 min candle of the session Then apply some filters. What kind? Volume...Pattern recognition. Cash indexes.... these would work fine. Why no others, well the problem you have with indicators is lag. If you use other indicators by the time you have a signal you are past the open and you have no follow up. What do professionals do. They read the tape, they use the DDF line and they trade long above and short below. They go to tick charts, to 1 min and 3 min charts. and they become expert at reading patterns. What do I mean "reading patterns" Well it is really all about reading the pattern of the first 3 or 4 bars or candles. For example, if you see overlap between the first or opening candle and the next one, this indicates consolidation, check out the Mini Russell contract. You can see days where it opens up and immediatly consolidates only to breakout later. Then on other days, it runs right out of the gate. When it does you can see it, because the first two bars are stacked one "on top of the other", with little or no overlap. Are you feeling me on this? So you have to have some skills and the ability to think and act quick. You can watch the first bar, but then you have to be willing to put it on the line from the next bar until about the fourth bar. If you havent found an entry long or short by that time, chances are you have lost the opportunity (when volatility is low). Hey I am glad to answer questions if any of this is confusing. Steve
Here is a chart of the open today (Mini Russell) The overlap between the first two bars keeps me on the sidelines. But as the second bar ends, I am looking to get on board short. I know that the next bar could continue down. As long as I use a realistic stop, I can get filled short on the open of the third bar. In this instance, a trader could get a scalp profit of about a point and a half (which is better than just watching) Do you guys see what I am talking about here. Look at the second bar. If it were an "up bar" I would be looking to get filled long. It is a "down bar" so I am looking to get short on the open of the next bar. Trading the open requires that you plan your move, prepare to execute and then, point & click. You need a good front end and clear eyes. You have to be decisive.
Heres a chart of Wednesday's open (Mini Russell). Look at how similar the open bars are. The first three bars overlap. Bars two and three are "down bars" so I look to go short on the open of the next bar. I have a scalp profit if I want to take it or I can hold through the re-test of the DDF and the continuation down. Do you get the idea? If you don't get it or if it is unclear to you, come back to me on it. One final comment. It is hard to explain this to someone who is just starting to try it. The market is moving right along, and you have to be anticipating and thinking ahead. Most of the time, a newbie will not be able to make a decision quickly enough and you will either get in late, or possibly miss the trade altogether. Understand it first, look at examples, then either practice on a sim, or be willling to try it in realtime with small size. I often trade this with a minimum of three contracts. I take profits on the scalp and then hold, looking for the continuation. Again you have to have some experience to do it right.
Sorry I didn't give all the background "DDF" means Directional Day Finder.... This is a term coined by Dr. John Clayburg. It is also referred to by Josh Lukeman in his book "The Market Maker's Edge". Finally the DDF is a concept that is used by professional traders (has been used for years). It is a horizontal line that is put through the middle of the first 5 min bar or candle. In theory, the trader goes long above and short below the line. I use is the same way, except that I watch the first bar and limit my entries to "continuation" entries, as shown in the preceding charts. Steve Edit: I dont trade equities, but I am told (and Josh Lukeman states in his book) that the DDF line concept works for all markets. I think the important thing to understand is how to "think" about this. For a good professional, it isnt a matter of blindly trusting that the DDF will always work. Instead one puts the DDF in place and then observes, knowing that some days will work like a charm and some won't. When you see price "respect" (or bounce off of) the DDF line, you know you have something and you can probably continue to trade off it the rest of the day. Traders look at these things in terms of probabilities not absolutes.
So heres a last chart. Again just check out the way the DDF is respected by the bars (candles) that follow the opening candle. Here again I would be going short ASAP to try to get on board early. Getting on board early on this day (and holding) means you make about $1,000 per contract. Not bad
Hey I am really sorry, you wanted to know about the ES, and here I am giving you all these Mini Russell charts. Jeez I am sorry. I know the carry over is good for the concept but I havent been concentrating on the ES.
No apologies needed, in fact, i'm very THANKFUL! GREAT STUFF! I've been taking a look at the mini-russell lately, looks a lot better than what the ES/NQ have been doing. Although it's quite a bit jumpy when looking through 1-min charts. Since I'm not too much of a trading expert yet, I'm a bit hesitant to get into quite a fast market, though, i've been trying to figure out patterns and movements. One question on the russell, if you dont mind, Steve, I've noticed it trends pretty well, though sometimes fakes in one direction then goes the other way. What I'd like to know is given its trendiness, how do you stay on for the ride, since I've noticed that pullbacks/retracements are sometimes quite volatile. Is it better to use a trail stop for an exit or a volatility based one? Thanks again. Very much appreciated help.