Switching from equities to futures

Discussion in 'Professional Trading' started by xxxskier, Nov 16, 2005.

  1. xxxskier

    xxxskier Guest

    I'm thinking about switching from swing trading stocks to day trading the S&P e-mini.

    Some background: I've been swing trading stocks for about 3 years. First year I broke even, the second year I increased my account equity by 24%, so far in 2005 I'm basically flat. I have a 100k account.

    Fortunately, my wife has a high paying job so we don't have to worry about income to cover the bills. I've reduced my hours at my "other job" to the point where I'm now working only about 15 hours a week as a consultant (not stock market hours). My wife is very supportive of me becoming a full-time trader. The goal is for me to quit the consulting entirely and just trade.

    I've done a lot of research, read well over a dozen books on trading, and am prepared to continue this life-long education.....I'm very passionate about it.

    I probably put in about 50-60 hours a week trading and doing research. That doesn't really bother me as I like to study (I have a Ph.D.) But I am now reaching the point where I wish I was in all cash every night. I'm getting tired of all the shenanigans in the equities market with morning gaps and all the other games.

    I'd like to be to able to start each day fresh. It also seems like it might be a little less taxing to continually watch one market, i.e. e-mini, versus many stock positions at once.

    I did one of those free "live interactive trading educatiion seminars" with Traders International last week and was intrigued although it did bring up a lot of questions.

    Please correct me if I'm wrong.....it seems that besides excellent entry and exit discipline and placing stop loss orders immediately, the primary risk in day trading e-minis would be slippage. I would probably start out using a hit and run strategy with a target of 2 points per trade. So slippage could be a problem. For you futures traders, is a 2 point hit and run strategy profitable?

    I'd appreciate any feedback from experienced traders who made the switch.
     
  2. Take a shot at it, but if you have no particular reason to get into daytrading an index other than not wanting to hold overnights or hassle of multiple positions, you will have a long road ahead of you. Just remember that it's alot easier to pick up money sitting in the corner when no one else is looking, versus when the whole world is watching and waiting to do the same thing.
     
  3. I think it unlikely you will be able to get away from the games even in ES.

    The main issues I found was that I was not used to the greater degree of elasticity and whipsaws in futures. For me equities was about patterns rather than ranges and elasticity which characterises my take on futures.

    Patterns that work in daily stocks are traps in intraday futures. I found my self overtrading and I think you have to allow time to unlearn your mental maps and reactions based on daily stocks vs intraday futures bars.

    I am increasingly of the view that my original stock traders approach of looking for high probablity trades across markets rather than focussing on one product may have been correct but am hampered in applyingb this by limited choices in Asian hours (note you do have to know the products and how they trade and their ranges).

    Stocks are great in bull markets but doing all that aftermarket work for a much reduced reward was getting to me. Effortless shorting also is a futures plus.
     
  4. ozzy

    ozzy

    Welcome to the jungle.
     
  5. xxxskier

    xxxskier Guest

    I hadn't thought about what mokwit wrote:

    "Patterns that work in daily stocks are traps in intraday futures. I found my self overtrading and I think you have to allow time to unlearn your mental maps and reactions based on daily stocks vs intraday futures bars."

    I turned the corner in swing trading when I learned candlestick signals last year. I was under the impression that candles work in all markets and all time frames. Maybe not.....

    The Traders International live trading seminar used a "Times strategy", which is basically hit and run for a 2 point target with a 2 point stop loss. Using a 1 minute chart, enter with the first green candle after a double bottom if the moving average and stoch both show a higher low. Sell at a 2 point target or at the first red candle after a double top and the moving average and stoch making a lower high.

    The 2 point target and 2 point stop loss doesn't sound like a good risk/reward ratio, at least its not how I swing trade. But the Traders Intl guy claims that it works with proper discipline. My concern is that slippage will be the big enemy.

    Are there any consistently profitable e-mini daytraders out there?
     
  6. I have said this before and will say it again
    forget your having a decent sized acct for starters
    if you must trade stock index futures ... try
    smaller size in the ETF's at first ... get comfortable
    confident trading SMALL SIZE !
    ( i.e. 100-200 SPY maybe if you must then
    go up to 500 in full position size )
    your "educational expenses " will be lower while
    learning the basics ... about indicators that
    sometimes work here , about how program trading
    can affect the stock index futures, even the relationship between different markets and different stock index futures as reflected by their ETF's ... yada yada yada

    good luck

    :)
     
  7. if you want to trade the ES the only way to go imo is to learn "market profile" --- then you can intra-day trade at first and then add swing trading in the future as you learn the methodology.
     
  8. I use MP but perhaps not in the classical ay, more of a another way of looking at volume and likely S/R and where we are in a short term cycle. Read Mind over Markets (which deals with MP) for how markets move/auction, CBOT hand book also.

    This (originally posted on ET by Cutten) is about the only meaningful thing of length (other than 1 or 2 sentence gems) I have ever read on trading futures. Everything else i.e most books on the subject seems to have been copied from something written on wheat 100 years ago or something for the Oats market in the '70's. Apologies to Cutten for any underlinings/changes added by me.

    "I think I have an idea what you may be doing wrong. I'll try to give some concrete trading techniques I think will at least get you to breakeven, and then hopefully you can move on from there.

    Firstly, by hitting bids and offers, rather than putting limit orders and waiting to get filled, you are giving up quite a bit of edge. When you hit a bid or offer, there are three possibilities:

    i) it goes bid on size - you are now at a scratch, but with a good chance of making a tick
    ii) it goes slightly bid, then trades back - you are down half a tick at least
    iii) it doesn't go bid at all - you are down at least 1 tick.

    So your payoff is 0 or better, -0.5 or worse, and -1 or worse. You are losing 0.5 or more on each trade. So you need to have 0.5 of directional edge just to breakeven, include commissions and you need 0.6 to breakeven.

    Compare to waiting to get filled:

    i) your offer gets lifted and it goes bid on size - you now have a good chance of making a 1 tick loss, but will sometimes scratch
    ii) your offer gets lifted, it goes weak bid - the chance of losing a tick is moderate, chances of scratching if you want are good, chance of a tick profit is moderate (probably similar to chance of a tick loss)
    iii) you get filled, and it doesn't even go bid at all, or goes bid and immediately gets offered again - chance of losing a tick is low, chance of making a tick is pretty good, and it's easy to scratch.

    So your payoff is a likely 1 tick loss or scratch, a tossup, and a likely scratch or 1 tick profit. After commissions you may need about 0.1 in directional edge to breakeven. Compare a 0.1 transaction cost to a 0.6 cost. A trader who makes 5 trades at 0.1 cost and clears 2 ticks profit per contract per day would be a net loser with a 0.6 cost.

    So, buy into selling, and sell into buying. Only enter using limit orders, letting bids trade out to fill you, not lifting the offer or whacking the bid to enter. On exits, if your stop is hit, obviously you do have to whack bids and offers. But try not to do it on entry.

    Now, there are *rare* occasions where whacking is right. This is mainly when a trend or meaningful move is taking place. I don't mean a 4 tick move, I mean something that you have a strong belief could result in 6, 7, preferably 10+ ticks move. Then, giving up 0.5+ ticks is worth it in order to participate. But in general, it is better to let the market fill you.

    Second - stop using the US contract as a leading indicator. The US going bid is just as likely to be a fakeout as the Bund going bid. Even if it is a *slight* leading indicator, this is not enough of an edge to offset the -0.6 cost of lifting offers and whacking bids. So forget trying to scalp a tick by following the US.

    Third - bad entries. One of the greatest causes of losses in ultra-liquid competitive markets is jumping on moves when they are already overextended. Ask yourself how many times you have sold the Bund when it has just sold off 3-4 ticks, or bought it when it's just rallied that much? The guys making money scalping are the ones who are *fading* those trades. For example, one of my rules with normal scalps is to exit at least half my scalp on a 3 tick bounce from the lows or drop from the highs. If the low was 30, I am always offering half at 33, and usually the rest at 34-35 (obviously I don't always get in at the low - maybe I bought 32 and 31, or maybe even 34 and 33). I need a damn good reason to hold on longer. So you need to stop chasing the market. Do not enter on a move after 3-4 ticks unless you have a damn good reason (e.g. if it is a strong momentum market, such as last friday after the payroll report).

    Fourth - stops. The Bund, like most liquid markets (e.g. ES), is very efficient at hunting out close stops. You need to place stops not in relation to your entry price, but in relation to where it will be difficult for the market to hit your stop, without that demonstrating that you are almost certainly wrong. You absolutely *must* avoid situations where it is easy for the market to stop you out, and yet you then turn out to be right. This goes with point 3 above - if you sell after a 3-4 tick selloff, then it is very easy for the market to take out a 4 tick stop. If you enter when the market is overextended, and has just risen into resistance, then it is actually quite hard for it to go another 4 ticks without getting some serious selling pressure. If it does go that 4 ticks, chances are you are wrong. Usually if you mistimed your entry a bit, it will go 1-3 ticks, then come back and let you out for a scratch or even small profit.

    Fifth - getting a proper entry technique. In normal markets (i.e. non-trending, non-momentum), you want to be buying oversold, and selling overbought. Luckily there is a simple objective method to decide this. Get up some Bollinger bands on a 5 minute chart, use a 10 period moving average, and set the band width to 1.75 standard deviations. Look for buys at or below the lower band, and sells at or above the upper band. Then, look to exit on either a 3-4 tick bounce from the lows, or a move back to the 10 period moving average. You can't do this blindly - a trend will always be overbought or oversold for some time on the bands. But you can adjust for this, given some experience and trial & error. In an uptrend I will wait for it to go 1-3 ticks *above* the band, and exit once it comes back and hits the band or goes a tick or two below. It is very rare for a continual trend which never comes back below the band until you are massively offside. In any case, I have a 4-5 tick worst case stop on these fade trades - it gets hit maybe 10-20% of the time.

    This indicator is also good for avoiding crap entries - do not enter in the direction of momentum when the market is at or beyond the bands, unless you have a damn good reason, as the odds are generally against you. If you are short and the lower band gets hit, start thinking seriously about why you are not covering. Generally I always cover at least half when it hits the lower band (and vice versa for longs on the upper band).
    Next point - trends, volatility breakouts, and momentum markets. You know the type - the days when the market just keeps going, or is moving wildly. Forget oversold/overbought here, you need momentum techniques. A very simple one - wait for the direction of momentum to become clear, then with faster markets enter on breakouts, and with slower trends, enter on 40-60% pullbacks, preferably to previous intraday support/resistance. Place a stop below the low of the most recent 5 minute bar in slower trends, and in busy markets, use a shorter timeframe e.g. 1-2 minute bars. This method can often capture very nice moves, when you get on them. The idea is to lose 4-5 ticks when wrong, and make 10+ when right. Look at the action on friday after the payrolls, to get an idea how well this method can work - after the initial couple of minutes wild action, the market dipped to 112.26-27, then started a powerful rally (you could see the momentum much better on the day, using market depth, than you can now from the 1 minute chart). I bought 84s and 85s on the break of the previous 1 minute bar high at 82, and sold at 91 and 92 (near the previous high - too early, I admit). I was then thinking ok, where do I get short? Rather than try to top-pick, I waited for the 1 minute bar low to get broken - I shorted at 00 and 99, then covered for a scratch as it broke above the previous 1 min bar high. I then reshorted at 99, 98 and 96 as it broke back below the 1 minute low, giving the same signal. Using a trailing stop of the previous 1 minute bar's high, I was able to run the position quite some way. As it happens, I covered at 84, using discretion as I felt it was at a give-up point for longs with that big down bar, but 87-88 would have been the "system" exit. Obviously I had losing trades that day too, but overall I was up a reasonable amount and did ok.

    Next step - levels. Odds are improved when you use support and resistance levels. These are clear - previous day's high, low, and close. Major highs and lows from the daily chart. And, to a lesser extent, areas of intraday support and resistance. The ideal setup is an overextended market, at or above the upper Bollinger band (or vice versa for downmoves), also running into a resistance level. Go short, average in once at 1-2 ticks higher, use a 3-4 tick stop from your 2nd entry price. Cover half at 3-4 ticks back from the high, move stop to a tick above the high on the rest, exit the rest on a return to the 10 period moving average (or earlier if it looks like it's not going down). That's my bread and butter trade, where I have a good (60-70%) win rate, and often make profits equal to my stop and sometimes more.

    cont.......
     
  9. Chagi

    Chagi

    I'm still very new to trading (been at this a little over a year now), and I share your interest in index futures, partly because a risk management class I'm taking this semester has provided me with a greater depth of understanding regarding how the futures markets work.

    One suggestion I have given your account size is that you might want to consider moving a sizeable portion of those funds into guaranteed investments while you learn how to trade index futures.
     
  10. Cuttens post continued

    Further points - bigger moves. If you are the type to not scalp, but rather go for 10+ tick moves, then you still need to be aware of scalping considerations. No point catching a 15 tick swing if you give up 4 ticks on entry and exit, and lose 8 ticks when you're wrong. The two considerations are effective entry and exit. With entry, the key is to not enter overextended conditions (as mentioned above, see BB bands, 3-4 tick straight moves etc). Rather, you should be entering a medium term upmove during a short-term retracement, and vice versa for shorts. If the Bund is going from 92 to 70, it does not go straight down. Rather, it might do 92 to 86, then up to 88/89, then to 82, then back to 86 etc. Most such moves have at least 3-4 tick retracements - try to enter on those. As a rule, buying new highs or selling new lows in the Bund is a poor trade, or at least a risky one. The exception is if there is strong momentum, or it is at the beginning of a possible volatility breakout move (i.e. a strong breakout from consolidation, or after a major buy signal such as a hammer after a failed attempt to break a level).

    With the Bund, it is important to always be asking yourself before entry "Is this really going to be the best price I can enter at? Am I really going to get no chance to enter at a better price than this at any point?" Even if you think it's going down 20 ticks, you should cover if you think it's more likely to bounce 3-4 ticks than to go down 3-4 ticks. Do not stay short when it's oversold and due for a bounce, even if you think it's eventually going lower. Cover, then reshort higher!

    For exits, get out of at least half once it hits the Bollinger Bands, unless you have a really good reason not to (e.g. v strong momentum). At the very least, whenever the market is at or beyond the bollinger bands, bring up a close stop. If the move is really going strongly in your favour, then you can use a trailing stop on some of the position. But generally, in the Bund, overextended conditions are the best time to book profits.

    Ok, there is more stuff to tell, but this is a long post already and the Nikkei closed ages ago so I should be off to bed. Let me know if you found this stuff useful. I recommend just getting the B Bands up, marking the high/low/close levels from the previous day, bearing in mind the stop positioning and size, letting the market come to you, and other points I mentioned, and then watching the market a week or two and see if these points make any sense. Obviously I have an overlay of discretion and my own experience over this stuff, so it may not work as well or be clear for you. Personally this is stuff that I learned from my own experience, and which has helped me go from loser to breakeven to reasonably consistent profits in the Bund and ES. I hope you find it useful, but bear in mind that trading has to be learned for the most part through personal exprience.

    The nearest thing to a "Holy Grail" I have found in the markets is realising that prices have a tendency to seek out the common "uncle point" of most traders. The most profitable technique I have is learning to recognise that point, and then enter there when it "feels uncomfortable" and others are reaching the point of pain where they simply *have* to dump their positions. This is doubly so if you have already entered at the "logical" position, and the market has moved further to test you. Every common garden loser exits at the point where the market puts on the squeeze - does anyone really think that copying them is the right move? No, fade the buggers!

    A related point is that, when you have a stop which you can just *feel* is going to get hit, and then it doesn't get hit but instead reverses in your favour, then you just KNOW you've made a great entry. So double up on your winner and really press it, because that's a sign the uncle point was reached and the high was made. Even though you planned it perfectly, you still were forced to doubt your position as a result of the market test, but then it worked out. That's a sign to go to town.

    That is how you pick highs and lows. You don't think, rather you just feel in your gut where the market is going to reach the point of maximum pain, then take the other side, hold onto your nuts, and 75% of the time you are going to come out smiling. Just make sure you don't average more than once, and do have an ultimate stop, to avoid the rare cases where it keeps on going.

    Use a trailing stop. Once your position has moved a meaningful amount in your favour (i.e. more than just random noise), bring up a stop to your breakeven price. As profits mount, raise the stop further, so you are now guaranteed a certain amount of profit from entry and can let the position ride without worrying about having a loser on the trade. Do not exit the position until your stop is hit, or you see a clear-cut topping signal - even then, sell only half your position, and wait to get stopped out on the rest.

    Using this method, you are guaranteed to eventually have a very large winner.
    Never use a price target on your entire position. Instead, once your price target is reached, place a fairly close stop. This way, if you are right and the price target is the end of the move, you only lose a bit more by using the stop. Whereas if you are wrong and the market is going to continue moving strongly, your stop allows you to play the extended move with moderate risk.

    This assumes of course that your price targets are based on meaningful likely support and resistance levels. If you are choosing price targets based on anything other than S/R (e.g. a multiple of your stop), then I would suggest ditching that first and moving to a S/R or at least some kind of average % move to generate price targets."
     
    #10     Nov 16, 2005