| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
One of the most frustrating things for traders is dealing with a tight rangeOn April I, 2005, the only sectors up on the day, for the most part, were energy, housing, and gold. (See Fig, 5,12.) One of the worst sectors of the day was the semiconductors, and not far behind them were brokers and banks. 1 like knowing where these sectors are in the mix for three reasons: First, the giant money center banks represent the biggest (or almost biggest, depending on current prices) market capitalization sector in the market. The markets need participation from this index if they hope to make any headway. Second, brokers are a great market proxy. As go the brokers, so go the markets. Third, everyone participates in the semiconductor stocks. They have a strong following by both retail and institutional investors alike. If I see a decline with these three sectors leading the way lower I am confident that the decline is going to last. The reverse is also true. The other way I like to use this list is when the markets are quiet and choppy. Often there are stealth moves in the markets. This happens when the overall indexes are restricted in a tight range, but underneath the surface a couple of key sectors are deteriorating or firming. This often is not picked up in the index itself. This brings me to my next rule: During these quiet periods in the market, the more sectors that go red, tlie greater the odds are that, when the market finally does break, it will be to the downside. Conversely, the more sectors that go green, the greater the odds are that, when the market finally does break* it will be to the upside. Like a doctor's relationship to a patient's medical chart, the sector sorter list helps a trader gauge the overall health of the current market environment THIS IS HOW YOU KNOW ITS GOING TO BE A CHOPPY DAY One of the most frustrating things for traders is dealing with a tight range, choppy day in the stock indexes. Choppy days occur when the stocks indexes spend most of the day trading in a slow, narrow range, providing minimal volatility. Most traders don't realize that the trading is choppy until about halfway through the day. They can tell by looking at the chart, and they can tell by ihe amount of losing trades they have taken. In addition, there are specific trade setups that work great in choppy markets. If a trader relentlessly pursues a setup that works besc in trending markets, they are going to get killed. Two of my favorite choppy market strategies are described in Chapters 7 and 9 (pivots and tick fades). My goal is to identify what type of market it is going to be as early as possible in the trading day. To do this, 1 set up a five-minute chart of the E-mini S&P 500 futures, and the only indicator I place on this chart is volume. Once this is done, I place a horizontal line at the 10,000 level on the volume chart (or as close to 10,000 as I can place it). We can see that the trading during the first hour had the vast majority of volume bars going over 10.000. This means that over 10,000 contracts were traded every five minutes. The range on this day was wide, in the neighborhood of 14 points (or 140 Dow points)! In Figure 5.14 we can see that volume was at or under this 10,000 market right from the opening bell, with one spike higher that took place in response to a news report, The resulting range for most of the trading day was confined to between 1209.00 and 1206.00, a range of three points (or 30 Dow points). This brings me to my rule for watching this volume chart: If the first six bars on a five-minute ES chart have most of the volume at or well under 10,000 contracts, expect a choppy, tight range session. If the first six bars on a five-minute ES chart have most of the volume at or welt above 10,000 contracts, expect a more volatile session with better trends. This is a simple way to determine early on if the markets are going to be choppy or more volatile on the day. This allows traders to choose the setups that are more appropriate for these types of markets early in the day. PUTTING IT ALL TOGETHERSIZING UP THE TRADING DAY FROM THE OPENING BELL It is easy to get overwhelmed by too much data, and the key for reading all of these data is to do it in such a way that your brain can take in the information as quickly and as efficiently as possible. 1 do this by looking at this data in a certain order, in two columns, top to bottom, left to right. This shows how I tie all this information into a single screen. The trin and the trinq are in the upper left, and these are what 1 look at first. Then my eyes go below this to the PC ratio, which is what 1 look at second. After this 1 look at the ticks, which are at the bottom left of tile screen. From here my eyes jump to the upper right and to the sector sorter list. Finally. I look at the tiki. I don't even have to look at a chart to know that the market has been selling off steadily all day. This shows these key indicators against the backdrop of a strong market. At a glance 1 can see that the trin and trinq are trending lower, and that the PC ratio started off well at over 1.0 on the day. 1 can see that the licks are spending a lot of quality time above zero, and that most of the sectors are in positive territory. I can also see, with the tiki, thai there have been a lot more buy programs than sell programs. On this type of day, I want to focus on long setups and ignore short setups. In addition to being able to get a solid feeling for whether the market has upside or downside pressure, this will also help a trader understand when the markets are in chop mode. This will happen when these different indicators conflict with one another. For example, the trin is making new highs (bearish), but the ticks are spending all their time above zero (bullish). One of my favorite ways to see whether or not we have a choppy market is also the most simple. I look at the sector sorter list, and if about half the sectors are green and half the sectors are red, well, it can't get more neutral than that. I don't include the ES five-minute volume chart on this layout simply because there is not enough room. I watch this on another screen. I created this layout in TradeSiation, You can recreate it by looking at Figures 5.15 and 5.16 or by going to www.tradethemarkets.com and downloading a copy complete with all the audio alerts. There are feeds available from people who are standing just outside of the S&P futures pit at the Chicago Mercantile Exchange. They will sit there and call out the current bid/ask prices and make comments on the market action. 1 like to have this playing quietly in ihe background. One of my trading partners Hubert Senters, likes to play it loud as he pays attention to all the nuances coming out of the pit. Hubert introduced me to pii noise and the first few months I listened to it, the noise drove me crazy and I hated it. So I turned it off. After 3 days 1 realized I was struggling in figuring oui which way the market was going to goand 1 realized 1 had subconsciously taken in the pit noise. These days I won't day trade the stock index futures without it. Here is how it works and how 1 use it; First off, it's important to understand what the people in the pits are talking about. All day long a trader is going to hear the bid/ask being quoted, and it typically goes like this, six twenty by a half, six twenty by a half, and so on. This is a quote for the big S&P contract, which is quoted in tenths instead of quarters like the E-minis. This means that the current bid/ask is 1136.20 by 1136.50. The quotes just focus on the last few numbers instead of the entire price. The person doing the talking will frequently refer to paper versus local Paper coming into the market means it is a retail order and can be placed by brokers such as Goldman Sachs, Merrill Lynch, and so forth, l^ocal market means that the locals are trading among themselves; this happens when the action is slow and the volume is light. Hubert and I have listened to many pit broadcasters and by far the best one is Ben Liehtenstein with www.real-timefutures.com. He absolutely loves what he does and this comes across each day in his broadcasts. In July 2005, Hubert and 1 held a four-day seminar in Chicago at the Sears Tower. We had Ben come in for an hour and talk about how he reads the tape and what listeners should key in on. Then, the next day we took the group of 50 seminar attendees down to the CME so they could watch Ben in action calling out the pit noise live. They saw exactly what he was looking at and what he was calling out and why he was doing it. It was an amazing experience, and we received permission from the CME to bring in a film crew and capture the floor eventin addition to filming the entire seminar. This was amazing in and of itself because the CME is notorious for not allowing film crews on their floor, and I have thanked them profusely for letting us capture the event on film. Of course, the guys in the pit gave Ben hell because he led the floor toursand part of that was captured on tape as well. By the time this book reaches the shelves, there will be a DVD available of the entire seminar, and a separate DVD available that focuses on Ben, pit noise, and the visit to the CME. For people who attended the seminar, ii was the experience of their trading lives. We now work closely with Ben. Anyone who wants to sign up for his service, you can mention that you were referred by me and receive a 40 percent discount from the price listed on his website. I have no financial ties with Ben's subscription business. 1 just love his service and am more than happy to tell people about it. Let's look at more things to key in on when listening to pit noise. A 'Ihin top means that there are not a lot of bids at these levelslook for the market rally to fail. If Ben mentions a scale buyer or scale seller, I pay attention to what the seller is doing and at what levels. When Ben mentions a top tener this means one of the 10 biggest guys in the pit is doing something. Once in a while you will hear thai a top tener' is stuck short, and these provide great opportunities to jump in on a trade as they are forced to cover hundreds of the big S&P contracts to get out of their position. This is information you can't learn from watch-ing a chart. I also like to listen to the overall noise level. Is it quiet and slow, or loud and fast? If the noise explodes, it is almost like the ticks reaching the +1000 level. This level of activity is unsustainable, and the markets will reverse. If the sound is quiet and then it gradually gets louder, 1 will go in the direction of the market until the noise explodes and then I'll get out. My favorite way io use the noise from the pit is to listen and figure out if the noise is louder on the up moves or the down moves. If a market is rallying, and the pit noise is loud, and then the market pulls back and the pit noise is quietthis is a crystal clear signal that the momentum is higher and l will aggressively buy all pullbacks on these days. The reversal is also true. Once [ got used to this, I found it very hard to look at a chart without having this pit noise indicator in the background. There are many other ways to use pit noise. If someone is above or below ihe market with size and the locals fill it, go in the direction of that move. This means the locals are pushing the markets instead of fading the markets. If the pit moderator tells you what the low is and that low is below the lows of the day you see on your charts, the market is going lower and is about to make new lows on the day. If the pit moderator says look for a stop run at 1136, pay attention to that number if you are below it. The most important thing with pit noise is not to get caught up in the excitement. It is easy to think this is me Holy Grail when you first get it. But it's not. It's just another tool. Traders who get caught up in the excitement of the pit buy the highs and sell the lows, just like any other amateur. It will take about two months of solid listening to get used to it. After you gel used to it, it's hard to trade without it. We put together the DVD to shorten the learning curve, and on it we explain in a lot more detail about how to use this tool. Information on the DVD is available at www.tradethemarkets.com. It is important to realize that the markets spend the majority of the day consolidating and resting. Traders who wait for a move and then have to chase it will always be at a disadvantage with traders who get in before the move takes place. The way to do this is to watch these internals and look for clues as to the path of least resistance. When the markets are quiet, get positioned for the next move in this direction. Once the move takes place, the amateurs will chase it and you can sell your position to them. THE OPENING GAP: THE FIRST AND HIGHEST PROBABILITY PLAY OF THE DAY TRADING WITHOUT A SPECIFIC SETUP IN MIND IS LIKE HIKING IN THE AMAZON WITHOUT A COMPASS Before we jump into the first of the setups, the opening gap play, I want to quickly review one absolute truth about this business. That truth is as followswhen it comes to trading for a living, all investors fall into one of three categories: 1T Those who have a system they follow each and every day. 2* Those who are developing a system and are on the lookout for the Holy Grail. 3. Those who never believed in utilizing a specific system and trade just on instinct and are still explaining to their spouse how they lost all their trading capital. The point of this, of course, is to emphasize the importance of facing each trading day with a game plan and of establishing a trade setup from a three-pronged approach. In addition to the actual setup, there also needs to be a foundation from which to operate the setup. This foundation consists of the following: the trading methodology, the money management technique, and the knowledge of the best markets to trade for that particular setup. In other words, it's a lot more than just whatN the entry? Do traders scale into a trade or go all in? Do they scale out or go all out? Is it better to use a tight stop and bigger size, or a wider stop and smaller size? Does this trade work better on the mini-sized Dow or the euro? Each market is unique. Each setup is unique. Each timeframe is unique. Without these additional data, traders are destined to fail, and are only kidding themselves into thinking they can do this for a living. They may have a lot of fun for a few months or a year, and they may get an incredible high out of a great trade, but it won't last over the long haul. The idea is to create a situation that allows a person to do this for a livingeach and every day. This section focuses on a series of setups for the active trader, and is a collection of strategies that 1 currently use in my own trading. Specific markets are highlighted with exact entry, exit, and stop loss levels, focusing mostly on intraday setups. Swing trading setups are also discussed, and these are noted as such. In general, any setup that is used on the stock index futures can also be used on individual stocks. Exceptions to this guideline are noted. I like to use day-trading strategies in one account and swing-trading strategies in another account. This keeps everything separate and easy to track. I chose to show setups that had a successful resolution in order to demonstrate how to manage the exits on these setups. In instances where these setups get stopped out, and that does happen, that is an easy exit to managethe stop was hit. As a trader, it is important to realize that not every trade will work out. It is quite possible to get stopped out two or three times in a row before catching a successful move. This is a normal part of trading, and it is important that a trader not get frustrated. A typical scenario I've witnessed with traders is that they get stopped out of a setup, and then hesitate to take the nexl one, which of course turns out to be a winner Or they get stopped out of a setup, so the next time it occurs they take profits too fast. The point of this is that a trader needs to become like a machine and just do the setups. On any given day, I will take five intraday setups. One of these will get stopped out, two will be scratched, and two will be winners. On days where my first three trades are winners I will usually stop for the rest of the day and book my gains. 1 utilize a variety of specific setups in my daily trading routine. I started off trading stocks and stock options, so most of the setups focus on some aspect of the stock market, whether it's through individual stocks or the mini-stock index futures. There are also setups in other markets I discuss, particularly in the euro and bonds, as well as some forex setups. Some of these I developed myself, and some of these have been developed by other people whom i trade with. The purpose of this section is to give you specific setups that you can utilize the next trading day. It should also give you a blueprint for developing and tweaking your own setups. For me, the biggest difference in my trading occurred when I learned to ignore my brain and just focus on a handful of good setups. Once I learned the setups, the next challenge was to have the discipline to follow them the same way, each and every time, i did this by recording my trading activity for over a year and focusing on the results for each setup. If I deviated from the setup, if I tried to outthink it and got out too early or in too late, I noted this in my data and marked it as an impulse play. After a while I noticed that these impulse plays didn't make me any money. I saw the light, so to speak, and suddenly my trading focus took a dramatic shift, Instead of focusing on the potential gains of a trade or worrying about missing a move, I focused on executing a flawless setup. That is the key between a trader who can do this for a living and a trader who lives a life of quiet frustration. It is very hard to do. But it's the difference between life and death. |
|
|||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |