July 31, 2010
- in Uncategorized by schooloftrade
Day Trading Futures Techniques and Strategies for any market
The term ‘day trader’ can be used to describe a LOT of different trading styles.
Many people think day traders are all the same…
– Lots of action
– Lots of stress
– Lots of risk
– White-knuckles
– High Pressure
– Go! Go! Go! “Money Never Sleeps”
Slow down ‘Gordon Gecko’ (Wallstreet)….this isn’t the movies….real day traders have a completely different attitudes that you may find very interesting.
One of the most profitable ways to trade the futures markets is as a day trader, so let’s get to know this class of traders a little more accurately.
Personality:
– New Traders Start here first
New traders should always begin as a day trader for a few basic reasons:
– It’s the easiest to learn because of the fewer variables involved
– The best Risk/Reward Ratio among trading styles
– Can be used with any sized account, big or small
– Can be used to trade any market, illiquid or not
– Can be applied to any asset class, Futures, Forex, Stocks, Commodities, options, the list goes on
– Provides enough action to keep you busy, but not too much like a scalper would encounter.
– Not too slow like a swing trader, and not as much risk involved
– Keep in Simple
One of the reasons I always point new traders in the direction of learning to day trade is because of the speed of the market price action.
The markets move very fast sometimes, and as a day trader our goal is to be able to have enough ‘action’ to keep us occupied, but not too much to overwhelm our learning process, and not too slow to bore us to sleep.
This is an important balancing act and all traders should consider this important aspect when deciding why type of trader they wish to be.
Scalpers will deal with excessive action, lots of movement and lots to do at all times…but on the opposite side of that spectrum are swing traders, who will wait for days, possibly weeks for their trades to set up…so where do day traders fit into this?
Day traders are going to be a good mix of both; enough action to keep us busy, but nothing too slow to put us asleep.
Day traders get their name simply because we take our trades within the same ‘day’, never holding positions overnight.
The goal of a day trader is to keep it simple:
– Only trade during specific times during the day (the times we know best)
– Only take trades that occur on the markets we know best
– Only take trades that fit inside a very specific set of entry rules
– Use simple trade management to maximize profits and minimize the risk on each trade
– Close our positions and take our money out of the market when the market closes each day
– Start it all over again the following day.
So does this work well?
You tell me…look at how the big buy and hold strategies have done over the past 10 years…they have done horribly.
Day traders have made all the money the past 3 years, with everyone else still wondering what happened to all their account equity.
What happened? why didn’t my account keep going up?
While the mass majority of people in the market were buying buying and more buying the last 10 years, day traders were busy busying low and selling high, never committing to any one position, and when the market tumbled, day traders were on the SHORT side making millions all the way down.
Being a day trader is quite simple, but we make it more difficult with our emotions, and our personalities, so keep reading!
Day Trading Psychology will be a very important factor to consider….
Common Mistakes for Day Traders:
– Risk/Reward Ratio (targets/stops)
Day traders need to keep a very close eye on their risk/reward ratio. Risk/Reward ratio determines how much risk you are taking compared to how much profit you are hoping to make.
Day traders need to keep a close eye on this because we will be taking profit on our trades at various places during each trade, and we need to make sure that our trade management will yield positive results in the long term.
Simply put, if we are risking too much, to make too little we won’t make money in the long run.
Think about it…..if I risk 10 points ( 10 point stop loss) to make 2 points (2 point profit target) I will only make 2 points for a winner, but I will lose 10 points for a loss.
In this example 1 loss will erase 5 winning trades…this is NOT a very good long term approach.
The best trade management for a day trader will be 1:1 or 1.5:1
– Over-trading / Lack of Discipline / Lack of Confidence
Day traders, like most traders, need to have a strong command over a simple set of entry rules.
Unlike scalpers, day traders have plenty of time to follow rules between each trade we take, and unlike Swing Traders, day traders don’t have to wait for hours on end to see a good pattern.
Day trading gives us a good ‘pace of trading’ throughout the day to keep us engaged in the market and follow our rules, another reason I recommend new traders begin here.
Learn your entry rules as a day trader, keep them simple, and focus on being confident when you enter the market. Take your time, and remember you don’t need to take every trade, just focus on YOUR trade, and I look forward to showing you how to find YOUR trade in our live trade room and live training sessions.
Suggested Reading: Discipline Cycle Workshop / Day Trading Psychology
Trading an illiquid market
As always, the market we chose to trade needs to fit the personality of both the trader and the type of trading we are trying to do.
As a day trader I want to focus on markets that I know well, that give me a good combination of patterns, volume, and volatility.
My favorite markets to day trade are:
– Crude Oil Futures (CL) (3am-6am & 8am-12pm EST)
– Gold Futures (GC) (3am-6am & 8am-12pm EST)
– Euro Futures (6E) (3am-6am & 8am-12pm EST)
– Aussie Futures (6A) (3am-6am & 8am-12pm EST)
– CAD Futures (6C)(8am-12pm EST)
– Mini Russell Futures (TF)(930am-12pm EST)
– E-mini S&P (ES)(930am-12pm EST)
– Dax Futures (FDAX) (3am-6am & 8am-11am EST)
– Eurostoxx Futures (FESX) (3am-6am & 8am-11am EST)
– US 30-Year Bonds (ZB) (3am-6am & 8am-11am EST)
– Wheat Futures (ZW) (10:15am-12pm EST)
– Corn Futures (ZC) (10:15am-12pm EST)
– Soybeans Futures (ZS) (10:15am-12pm EST)
Suggested Reading: Contract Specifications for Futures Markets
We also want to include our own personality in the decision to trade different markets.
For example…
Traders looking for a LOT of action as a day trader would focus on these futures markets:
– Crude Oil Futures (CL) (3am-6am & 8am-12pm EST)
– Gold Futures (GC) (3am-6am & 8am-12pm EST)
– Euro Futures (6E) (3am-6am & 8am-12pm EST)
– Aussie Futures (6A) (3am-6am & 8am-12pm EST)
– Wheat Futures (ZW) (10:15am-12pm EST)
– Corn Futures (ZC) (10:15am-12pm EST)
– Soybeans Futures (ZS) (10:15am-12pm EST)
– Mini Russell Futures (TF)(930am-12pm EST)
– Dax Futures (FDAX) (3am-6am & 8am-11am EST)
And if you are looking for a slower pace of trading throughout the day, look at these futures markets:
– Eurostoxx Futures (FESX) (3am-6am & 8am-11am EST)
– US 30-Year Bonds (ZB) ( 8am-11am EST)
– US T-Notes (ZN) ( 8am-11am EST)
– E-mini S&P (ES)(930am-12pm EST)
Day traders must have a command over tape reading, and the ability to determine market sentiment based on the size and the speed of the orders coming into the market.
The invention of the Pace of Tape indicator is an effective resource for day traders to define the speed of the market, and therefore, should be considered when learning to day trade the futures markets.
Tape Reading in general is vital to day trader’s success because it is the purest form of price action, and our goal as a day trader is to find small moves in the market and take advantage of those moves with limited risk.
Reading tape tells me when to enter, when to avoid the trade, where to take profit, and when to call a trade dead in the water.
Tape reading is a skill that is more empowering to a day trader than being able to read the minds of other traders in the pit, but it can be hard to learn without the time committed to watching the time & sales window along with price action on your charts to see the battle between the bulls and bears develop right in front of you.
– Too much with too little
Don’t make the same mistake that I did when learning to become a day trader; try to make too much, too fast, with too little.
I have to remind myself sometimes that I spent 10 years learning this process, and I spend less than 2 weeks with a client and they are making money J If I only knew then…what I know now. J
It’s a beautiful thing to be given this great opportunity to learn and earn QUICKLY, but reading the tape has NO SHORTCUT, you need to listen to the market, and don’t be afraid to ask me questions.
Tools we use:
– Liquid Market
In order to be an effective day trader you need a market that has a combination of liquidity and volatility. I want enough volume to fill my rapid entry orders, but I don’t want too much volume to slow down the pace of the market.
The 30-year Bonds and E-Mini S&P are examples of futures markets that have a little too much volatility. Crude Oil futures, gold and the Euro are great examples of markets we look for when day trading.
o
– Smaller trade accounts
One of the most common misconceptions among new day traders is that day trading requires a large trade account. This may have been true in the past decades, but improvements in technology and having more options for futures brokers has driven down the cost of doing business and made small trade accounts a possibility.
Larger accounts will always be preferred by your brokers so they don’t have as much risk on your trading, but many brokers are very open to smaller accounts these days.
Most of the futures markets we watch each day can be traded with as little as $500usd per contract, and most of our day trading techniques and day trading strategies can be started with only 1 contract.
Suggested Reading: Fast Track Day Trading Method
This low account threshold makes it possible for almost every new trader to get involved with trading futures. For a very long time only FOREX traders could use small accounts because of the lack of CFTC Regulation for FOREX brokers, but now this flexibility from Futures brokers are giving people the opportunity to trade Futures, a much better opportunity than FOREX in my humble opinion.
– Fast connection
One of the most important aspects of day trading is your data connection; it’s your lifeline to the market and you need this to be fast and consistent.
As a member of our community you will be provided with the fast data connection you need to be a day trader, one of the most common mistakes I see is a trader using filtered tick data for their charts.
Filtered tick data or level 2 data will not give you the most recent price information from the exchange, which is vital to a day trader.
– Stable Charting Package
Have you ever missed a trading day because your charts wouldn’t load? We all have, and you cant be a trader without consistent charts and trading DOM.
Day trading requires the very best charting software you can find, and we provide it with membership to our trading community as well.
Easy access to live news data is one of the most significant advantages to day traders in the last decade, and I rely on a accurate news information to show me trading opportunities as a day trader.
Charts to watch:
– 8-Range
– 13-Range
– 89-tick
– 144-tick
– 1-min
– 2-min
– 3-Min
Suggested reading: Different Chart Types for Day Traders
Day traders need to have a very precise and fully-automated trade management strategy ready to be used with every trade because the markets we look for move quite quickly at times.
Our trading DOM we use in our live trade room, and included with membership, has automated trade management strategies that are set-up ahead of our trading to precisely what our profit targets, stops, and trade management will be.
Its important to remove the emotions of trading as a day trader because your emotions will cause you to make poor trading decisions, so automating your trade management is something we do first.
The key to quality trade management for day trading is to understand how the market really moves. In my opinion the market moves in 3 phases:
1. Initial Noise
2. Follow-Thru
3. Exhaustion
If we understand how the market moves, we can plan our trade management accordingly.
As a day trader, my trade management strategy will be set up ahead of time, but I will need to know my final profit target, assuming I am using a 3-target approach, which is most common among traders.
We have standard techniques and strategies for determining the final profit target as a day trader, which include support and resistance levels we have determined ahead of time.
My goal as a day trader is to get into a trade before the move begins, look for a quick profit target to earn some money, and at the same time I want to remove the risk on my trade so that I can lock that profit up tight in case the market reverses.
I’m going to move my stop loss to my point of entry when I fill my first profit target, which will be within 20 ticks of my entry point in most situations.
With my first target filled, and my stop at entry I’m now in a great position; I have no risk, and I am in the trade before the market really takes off.
This technique of managing a day trade is highly effective at allowing a trader to avoid losing money on winning trades, which preserves trading CONFIDENCE, which is one of the most valuable commodities a trader can posses.
Every trader wants to take large winning trades, and this management strategy gets me into day trade trades confidently, removes my risk quickly, and gets me into a trade so that I can capitalize on the larger move of the day.
– 8/16/Runner
o Take ½ off at first profit target and move your stop to entry point
– 10/20/Runner
o Take ½ off at first profit target and move your stop to entry point
The best way to make money Day trading Futures:
I really like to show my clients how they can use these techniques to make money. This isn’t for having fun, or impressing friends of your futures information…this is for PROFIT, so lets get down to business on how we make money with these day trading strategies.
Here’s what I’m looking for when day trading the futures markets I trade….
– Check the time of the day, we cannot trade around the news events.
o I use a live news feed, and I can give you info if you email me.
– Identify the pattern on the slower timeframes
o I’m watching 30-min, 34-range charts to see the BIG PICTURE patterns
– Zoom in and use a faster timeframe for a more precise entry
o When I see a pattern on the slow timeframes I find the location of the entry trigger, and then look for a precise entry pattern on a 3-min, 5-min, 89-tick, 144-tick chart, 8-Range, 13range chart
– Check your entry rules for this pattern
o Now that I can plan my entry on my fast timeframe, I scan my specific entry rules for this trade, making sure that I check them all.
– Plan your final target, your first 2 targets and your stop will be standardized
o Assuming my entry rules are ok, I then plan my trade management ahead of time so I am prepared for battle
o My final profit target will be a little wider than I would use as a scalper. Look at the highs and lows of the day, the edges of a wedge pattern, or double-tops and bottoms to be excellent targets for day traders.
o Once the trade is about to trigger, I’m paying close attention to the SIZE and the SPEED of the orders coming into the market
o Day traders will look for a little more confirmation than scalpers because we need to make sure this move is REALLY happening, not just a flurry of movement like a scalper looks for.
– Speed is the most important factor for day trading
o I check the Pace of Tape indicator and make sure the speed is rising, not falling.
o I also watch the speed of the market while I am in the trade to make sure the move is still working, and I will look for clues within the speed to help me manage my position while I try and maximize my final portion of a position in the market as a day trader.
– Look for momentum to confirm
o I check momentum on the fast timeframe AND the slower timeframe to trigger your entry.
o In trending markets I only need 1 timeframe to confirm, but in slower sideways markets like we see during the summer or the end of the first quarter each year we should look for additional confirmation from a second time frame.
o Scalpers can get away with only 1 timeframe to confirm, but day traders should rely on more confirmation to get into a trade because we are looking for more movement on these trades.
– Time is not on your side,
o I need to see the move happen quickly. The longer it takes the more risk on this trade.
§ Good rule of thumb for day traders is less than 15 minutes from when the pattern forms and when the pattern actually triggers.
§ The longer it takes we have to wonder.. “what’s missing?”
– Be confident in your entries, and be confident in your exits if you make a mistake.
o This comes with experience, and experience comes from consistency
o You will get confidence when you consistently trade according to your day trading rules of entry.
o Keep it simple, focus on YOUR pattern, and don’t get distracted by things around you.
– Record Your Data
o After each trade I complete my analysis of the day trade
o Did I lose money? Why?
o Did I miss a profit target? Why?
o Its important to clear our minds of these types of questions for the following trading day, but more important to understand the answers first.
o Very important NOT to over trade and lose track of the trades you have taken, especially while you are learning.
o Learning from losses is the most efficient way of developing your skills, so take the time to finish your day with the proper recap of your trading day.
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