Johnny Rotten, Americanized

About a month ago, a breakout/trend-trading strategy for index futures was posted here and generated quite a bit of interest. The link for the original thread follows:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=18626

I've modified this for American markets only, though the "editorial" changes I've made below do not include all the modifications I've made. I post it here because I think it has something to offer those who would like to trend-trade the futures rather than scalp them.

The original thread - link above - included both American and European markets. Since I've modified it to focus on American markets, a lot of it has been cut. The modifications I've made are in brackets []. Everything else is in the original author's words.

Daytrading Breakouts in the [ES/NQ/YM]

The actual trading method is described in the next post. But first, you need to get set up properly. Here is the chart/screen setup required:

[NQ 5 min chart]

ES 5 min chart

[YM 5 min chart]

The following two indicators/settings are put on all charts:

Bollinger Bands: Length 10, Standard Deviation 1.8 both sides. The middle line is turned off.

Adaptive Moving Average: Length 10. If you don’t have an AMA in your software, use an Exponential Moving Average. It’s not that important what moving average you use. What’s most important is it’s overall direction. It is just a visual aid.

Use a bar width setting so that no more than about 30 bars can be displayed on each chart.

Delete all other timeframe charts from your software (including daily charts). This style of trading is about hitting quick momentum moves not picking overall direction for the day. The ability to ‘focus’ is extremely important otherwise you start second guessing yourself. KISS = Keep it simple, stupid.

The Method

This is not a mechanical system: it is discretionary, with guidelines/rules. The objective is to trade only once or maximum twice a day and to make a decent profit. The less time in the market, the better. People who try and scalp 20 times a day with 2 tick stop-losses are idiots. Boring is best.

RULE NUMBER ONE: Times of day

Trade only once between 09:40 – 11:30 EST and/or once between 14:00 – 16:15 EST

Will you miss some big moves by avoiding the other time periods? Yes you will. But more often than not, the middle of the day is shit with people scrapping over relatively minor price movement. Stay in the time periods where the institutions are more likely to come in and drive the market your way. The goal is not to be a clever dick catching every turn – it is just to make some money.

PROFIT OBJECTIVE:

ES: 4 points is $200.00 (one point is $50, one tick is 0.25 i.e $12.50). [You can figure out the comparable moves in the YM and NQ]

STOP-LOSSES:

Trail behind a recent pivot low when long, OR a recent strong up bar (open at bottom, close at top, range good), OR $200. Move it behind each strong up bar. Stop-loss placement is quite discretionary. But never initially risk more than you aim for. On occasion you may decide to exit early if you get a strong key reversal bar..

ENTRY CRITERIA WHEN BUYING (rules reversed for selling short):

Wait until a pivot high occurs within the correct time period. This is defined as a bar whose high sticks up over the top Bollinger line. Then wait for a lower high bar to occur, and a lower low bar …which can be the same or different bars. In other words, you must wait for a minimum of one bar after the pivot high. I like to see at least two bars but that’s discretionary. Now buy one tick above the pivot high on a breakout. BUT, you must make sure of the following:

No more than 15 bars should have gone by since the pivot high formed. The fewer pullback bars the better. 2-6 bars since the pivot, appears optimal

You cannot reference anything other than the most recent pivot high

The moving average line should be in a 45 degree upwards direction during the pullback.

The breakout must be such that it’s bar would also be pushing through the upper Bollinger line. If you have the Bollinger Band lines set to ‘update every tick’ then this is easy to eyeball.

The breakout cannot be coming off of a new intraday low.

Check the other [2] symbols for agreement or disagreement.

If this criteria is met in one symbol, you can choose to ‘execute’ the signal in another market that may not have technically met the criteria, at your discretion. Example: if the [ES] has a valid pivot spike at 09:55 EST but the [NQ] does not, i.e. the [NQ] bar did not exceed the upper Bollinger line (but is still a spiky pivot), then you can buy the [NQ] above it’s own 09:55 EST bar. Again, discretion is advised. This point emphasizes the importance of visually lining up all [three] symbols symmetrically.

The above bullet points are a non-scientific way of saying the market must be strong. The stronger the better. The whole idea is to buy high and sell higher. Most people are preoccupied with buying low. This is the opposite philosophy. If it’s all lined up ‘right’, you will NOT see a pullback from one of these breakouts. So if you think you can wait for the breakout and catch the pullback: forget it. The last point about checking the other [two] symbols is extremely important. You must look at all [three] markets and see what their action is.

So there it is. Lots of nuances and discretion are involved but it’s a good starter on deciding which breakouts to trade. The profit objectives are always fixed [though this is easily adapted to trend trading with an indefinite profit objective]. Get used to “settle” with them and don’t sweat it when the market goes on to make a $1000 move after you cashed in at $200. There’s always tomorrow. And anyway, if you want to make more money, trade more contracts not more signals. The objective is just to make decent money, not to be a clever dick. I know this advice will be ignored by most people who will break all the above rules no matter what I say, which is how I know it’s safe for me to post it! Successful trading is SIMPLE not complicated. That is not to say it is “easy”, but if you think you need to study complex mathematics just to trade well, then you’re either a Guru or a Groupie - but that’s another subject!

And finally:

ORDER TYPES THAT SHOULD BE USED:

[YM/ES/NQ]: Enter on a stop-limit one tick above the pivot high (same limit price as stop price). Never use a plain stop because it isn’t native on Globex. Profit objective is a Limit order. Stop-loss is a stop-limit order with at least a 5 point spread between the stop and limit prices. Never use plain stops because they are not native and you can get screwed with them.

 

Thanks for sharing.

I have been playing with a similar idea, but for pullbacks, using Kelts instead of Bolls. The idea was suggested to me by some ET member that I have recently befriended.

BTW, could someone who uses this idea post some pictures to illustrate it?

 

I tried Kelts, but like the BBs better. It's a option, tho.

 

I made two trades today with this system. Pivots are labeled, when broken, I entered.

 

I can see where your coming from, if I focus on trading for my livelihood I want get the most bang for my buck. The SPX has a normal range of 10 to 15 points a day. Why only look for small opportunities, go for the big game. Today is a perfect example, if your were open to taking what the market gives you (day trading) there was a lot of points to be had. I suggest you re-evaluate your strategy, go for the Big game. WD Gann, Charles Dow, Edson Gould all could forecast price and time of the markets.
They all Observed the same thing, the markets are in essence fractal most of the time, random in others.

Good Luck

Wavetrader

 

Yep. Easy money.

 

This is by far my favorite setup, so when it comes I will trade 2 contracts on it.(A lot for me). It is nice to have a few more trades up your sleave though, because you can miss some very big moves if you only trade this way.

 

Agreed. And this is not all I trade. But until traders return to the market, this is about as close to bread-and-butter as you can get.

 

So how does one decide which entries are "good" and which are "bad"?

This is the fatal flaw that I've found with all methodologies including "mechanical" systems.

Even so called mechanical traders will eventually admit that their systems won't always make money if you press them enough, which leads to having to decide which "system" to trade and when to trade it based on what the market is doing.

EVERY mentor I've ever worked with, when I've eventually confronted them with my inability to make money by strictly following their method for a period of time (months) has finally had to admit that "You just have to know which ones to take" or "You have to know when to give a trade a little more time or bail out quickly" even if the trade conforms to the rules.

 

Experience is the key. Aristotle said it is the deciding factor in all things....."Experience is always needed, in every sphere of activity, for judging rightly the results attained;"...and..."At the same time we have to confess that experience does seem to contribute largely to success...There is thus some reason for saying that those who aim at mastering the art...heed experience as well [as study]."

Bruce