Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations: PART 3

“The side which gives you the least opportunity to get in is usually correct.”

It’s funny how this works. An extreme example would be a one-way bull day when the e-mini futures corrections are running just two points. The market stair-steps and keeps finding support on the previous highs and then goes higher. The shorts continue to bid the price up to get out.

On these days many traders are stuck short and think the big correction will come at any time. These are the days when you often get sharp up-moves in the last 30 minutes of the session when the frustrated bears throw in the towel and cover. Looking at the market in hindsight, you can see how difficult it was to buy a dip. The dips are often too shallow to be convincing.

Another version of this is a creeping, struggling e-mini up-market. The dips are also small, but so are the rallies. The selling keeps coming in, holding the rallies down. The price action looks bearish, but somehow it keeps working itself higher all day until the climax panic at day’s end. There have been times when I’ve been fooled and got caught in these moves on the wrong side. I now have a rule to never sell a creeping futures market. It’s a classic Gann rule.

The way to tell the difference between a bullish creeper and an anemic bear rally is the creeper’s price action looks bearish – it’s a fooler. In contrast, a real bear rally can be strong and sharp, looking like a new bull move and many times follows a perfect bullish trendline – it’s also a fooler. What tricksters, huh?

But sometimes there is no real way to tell and you need other indications to put the whole e-mini market in context. Where has price been recently? A real bullish creeper will come off a big bottom. Whereas, a bear rally will come after a previous climax top and secondary top try. But sometimes the real answer is to stand aside and just let the e-mini futures market lead the way.

No position is sometimes a great position. It can make you smile when you sit it out and then look back at the last two hours. Everyone’s slugged it out while the market is where it was from the start. Another Jaws V chop day with lots of blood in the pit and on the computer mice.

Part Four of Five Parts – Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations: PART 2

“The one minute e-mini futures chart will sometimes magically touch or spike the outer band channel.”

When you set up a pair of moving upper and lower price bands to contain e-mini price action, set them so the price breaks out of the band only on climax tops or bottoms. It’s amazing how well this signal works. It appears that when an e-mini climax takes place, all the cycles are in synchronization and burn themselves out at the same time. This united power spikes out of the normal band boundaries. Since most of the cycles are rolling over after the climax, this backing off can be quick for a few bars and leaves the spike area isolated like an island top.

Next, the e-mini futures market may erode slowly down like a normal bull correction, fooling the majority. This is a situation when a quiet decline is NOT bullish, but bearish. Know the difference. Price may anemically try for the top again, but usually fails. This is where the real decline starts. As usual, selling the first and exact high is a mistake. Wait for the secondary try while you are looking at other indications of failure.

This is one of the few times the e-mini futures market is kind. It actually rewards you for getting in later than the traders who have the nerve to sell the first panic high. But if you are a big gun, the first panic gives you the liquidity needed to put on a big line. The contract volume at these spikes can sometimes be tremendous.

Observation:

“If trading against the A-D line, have good reasons and always take quick profits. This will usually occur on the downside, only.”

Over time, e-mini futures trades against the A-D line are losers when viewed with long-term probability eyes. The time it works is when the e-mini market makes a daily reversal. These reversals occur maybe every 3-5 days. So, if you are always looking for them, you will make only about one out of twenty trades with the trend.

These are poor odds, for sure. Even if you catch a big reversal, the chances that you will hold on for the big move are slim. This is because big e-mini moves require lots of time to put in a top or bottom, sometimes even spiking the first panic pivot point a few times. The market doesn’t pin medals on the heroes who catch the exact top.

I’m not sure why so many of us get lured into selling a day that is a one-way up market and buying big bear days. I think we want to outsmart the market and be proud if we catch a “major” top. But, to be more humble and simply buy dips and sell rallies with the main trend is the way to make money over the long haul. It appears that if you MUST trade against the A-D line, then do it on the short side because of the fast corrective declines in a normal e-mini bull market.

Buying when anticipating a bear rally can be quick affair too. But when the market turns back down, the move is usually fast and it’s easy to give back what little profit you made scalping.

Part Three of Five Parts – Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Not all conventional commodity trading folklore is correct. Some is and some isn’t. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling “comfortable” is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations:

“When the e-mini futures price trend matches the A-D line, (advance-decline line) always wait to liquidate a position into a climax with big volume.”The e-mini futures market has the strongest move (impulse wave) with the main trend. Watching the A-D line bias can usually identify the main trend. The e-mini futures market has a tendency to make higher highs and higher bottoms in this same direction.

The key here is to expect the move to end in fireworks with the same magnitude as the clean-out before. In other words, if a previous move down was slow and sluggish with a single bottom, don’t expect too much for the climax move up. But what if the previous sell off took out a weekly low with a big panic sell off, and formed a triple bottom that took all-day to build? In this case, you have good reason to expect the following up move to end with a bang.

It’s a matter of keeping the context of the move in mind. You can be in a choppy e-mini futures market for a day that goes nowhere, but maybe the previous day had a huge clean-out. So somewhere along the line expect an up move that continues. It’s all about keeping in mind what previous top or bottom the e-mini market is working against and what kind of move it can support.

Always be ready to bail out if your scenario does not work out. But there’s a danger in bailing out too quickly. Looking back at some of my S&P 500 futures trading notes from the mid-90′s makes me laugh. The theme throughout is, “If I only held my original position!” “Stopped out again at the exact low because I moved the stop up too soon.”

“Over-managing” a good trade is a symptom of fear. Some fear is healthy to keep us out of serious trouble. But when an e-mini trade is working out, by moving stops up too quickly, or simply starting out with too close a stop is a big mistake. We think we are smart because we can trade with such close stops and small risks, but this is a false sense of security that massages our ego.

To prove this to myself, I once did an e-mini futures contract computer study on averaging down four times. You would buy every spike that went one full point lower, until you had four lots. Then you liquidated everything if the e-mini went two more points after that. The worst scenario loss was six full points from the start. The win/loss ratio was very high, like in the 80% area. It almost seemed workable until I modeled a few one-way days. Then the method got slammed. If we could side-step those days by using say, a 2:1 or greater A-D line filter, then it might be a workable method.

By the way, the e-mini trading exits were a scale out affair too, similar to the entries. I eventually tossed out the idea after coming to the conclusion that I could not handle the pressure of adding to a loser more than once, plus I thought more highly of my ability to call a turn on the first or second try.

My e-mini futures trading method has evolved to averaging down only once during exceptional set ups and that is it. In fact, if it breaks the second low, the move is probably evolving into a “snuff” and all hell is about to break loose, so why hang around? (“Snuffs” are covered in this series of articles.

Part Two of Five Parts – Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.