April 29, 2010
8-Phases of the E-Mini Markets We Trade
Every market you trade will have a different personality, or way in which the price action moves, which is a direct result of the market participants that make this all happen.
Now the S&P is one of the most widely traded indexes in the world so there are lots of factors playing into the trading day, and we’ll cover them for you here today.
Remember, what makes our members so successful is how they understand the way in which the participants in these markets can make certain times more profitable than others, and visa versa.
Obviously, as a member you will get all the fine details, most importantly, as a member you will be told how to USE this knowledge to make profit, but this should give you some very useful information for you to apply to your trading today as a demonstration of the intimate knowledge we have of the markets we trade.
Understanding these different phases of the market will prove to be a vital tool for you to eliminate the riskier trading opportunities during the day, and most importantly, it will really show you what’s happening that makes price move the way it does!
Here we have a 3 minute chart of the S&P, and to the naked eye, there is just a bunch of price bars moving back and forth, until of course you look a little closer at this…
Phase 1 is our pre-market, 7am – 930am est
At this time we’re preparing mentally for the day ahead, and we want to remind ourselves of this very simple solution to a common problem among all traders… and that is there emotional standpoint in the market.
I repeat this a few times in my head to get me ready….
“My job today is to protect capital while positioning myself to be ready and able to participate in the opportunities the market gives me.”
8:30 am:
Prepare your notepad for the following information
News events today (http://fidweek.econoday.com)
Support & Resistance levels
Notes on market personality
Questions to ask during the lunch hour or during training
Set your Clock timer for 5-minutes prior to the news or 11:15am for a heads up on lunch session, whichever comes first.
Mark the following on all of your charts:
Overnight highs & lows
Value Area High (VAH) and Value Area Low (VAL) Levels for the past 30 days
Untouched Point of Control levels (Naked POC) within striking distance of today’s anticipated trading range.
Yesterday’s High of Day (HOD), Low of Day (LOD) and Close.
Today’s Opening price, HOD & LOD
9:00 am:
Review the market:
30-minute chart to see a broad view of the market
6-minute & 13-minute chart(s)
Review your day from yesterday:
Break up the day into 30-minute increments and look for WHERE & WHEN the moves occurred. Make note of when these moves occurred and look for them today.
Where did you take your trades yesterday?
Your trades from yesterday
Your notes from yesterday
Set-up your trading DOME:
You should have the following options on your trading DOM:
Bracketed trading, meaning that your targets and stops will be automatically set and moved for you as you have defined in your trade-management strategy.
Multiple Strategies that will allow you to move from large to small sizes, or more/less aggressive stops & targets.
The ability to toggle back and forth between simulated trading and live trading for periods where you need to stay out of the market.
You should have three (3) pre-defined strategies to manage the trade:
Full sized: to be used during high volume times of the day (9:30, 10:30, 1:30, 2:30)
Partial sized: used primarily when you have a lead on the day, or if you are taking trades with a high level of risk such as counter-trend, light volume, or outside of the normal trading hours.
Small Sized (Protection): Use this when you are trying to dig out of a hole, when you have hit your daily goal, or when you feel as if the trading is too risky to work with anything more than a minimum size.
9:15 am:
Review the potential day ahead of you:
“Where are we, where were we, where are we headed?”
What did the pre-market show us? Did we test any levels before the open?
Prepare for the first level of support & resistance if we open UP or DOWN, get ready to think quickly.
9:20 am:
Get ready for the open:
RELAX. You have all day to earn your living, and the market isn’t going anywhere so take your time.
Turn everything off that may distract you and cause you to make poor decisions such as cell phone, email, instant messenger. It may not seem like much, but neither does a full stop loss. L
It’s the trades you DON’T TAKE that will make you profitable today.
GO HOME GREEN.
REVIEW YOUR RULES ONE MORE TIME!
Phase 2 is our opening drive, from 930 to 1030am EST
9:30 am: Opening Drive
ROOKIE’s: WAIT AND WATCH: The open brings you great opportunity to get your day off to the wrong start.
At the open you are watching for the initial VOLUME to step in before you can start taking trades.
You will see low volume and choppy price action while…
LOCALS buy up the inventory they will use to make money trading to the PAPER on the floor today
Now is the time to make note of your market internals and set your reminder to check internals every 20 mins to watch them improve/decline to give you more information on what type of day this is.
9:33 am: Check your internals now that the 1st bar of the day has closed. Make note to show relative changes to the market sentiment as the day progresses.
9:45 am: Your job is to try to get involved with the first small move of the day, which will be strictly taken off price action. There isn’t enough time for a pattern to set up at this point, so look to read the tape and get involved in agreement with the momentum on the tape.
Its important at this time that we keep our mind open to new direction…right now all we know if where we opened, so don’t assume or give yourself a false bias on the direction of the market…and for gosh sake….turn off the CNBC! Hehe….we need to trade what we see…not what we THINK.
Most news happens in the morning at 10:00 and 10:30, remember to stay on the sidelines or protect your position/prepare to profit from a move up or down because of the reaction.
I set my alarm for 10-minutes prior to the time the news is scheduled to be released, and I do not enter the market within those 10 minutes b/c sometimes the news is leaked early, which will take you out of a good trade in a heartbeat.
First half hour of the day is mostly local trade, meaning that it will be driven by locals (those guys jumping up and down in the pit on TV) trying to jockey for position ahead of what is likely to happen after 10am news and 10:30 moves ahead.
At this time, the locals simply want to get into a position to be able to use their new inventory to make a profit, and you will see this on your charts in the form of fast price action in little pieces, such as 10 lots and 20 lots…not to be confused with the PAPER traders that are yet to show up to trade..
WATCH FOR, ‘OKIE-DOKE’ before 10am
The opening drive will move in one direction or the other, we are looking for initiating activity to drive the price up or down on its course of the morning.
Frequently you will see price come down, search for sellers, pop back up, and then take off to the upside simply on lack of selling pressure.
We call this okie-doke b/c it can be very misleading and usually catches quite a few retail traders off guard because price will move quickly in one direction, which gets everyone excited, and then it reverses b/c the price action was based on NO VOLUME, just local traders playing back and forth.
A good tool to use is your shortest time frames to watch price action for patterns that develop for you to get involved with.
Be patient during this time. You will have 3-4 set-ups before lunch time, WAIT FOR THEM to come to you
ALWAYS SCANNING THE MARKET:
AM I prepared to take the next set up?
At what level am I ready to take this set up?
Scan all the time frames to see other levels standing in your way, and be ready to take them when they set up.
10:00 am: News events are most likely scheduled for this time slot
Market should be breaking out at this point after the initial open, watch out for indecision prior to any news events.
The market has a tendency to bid up the price prior to the more important news events.
You will know the news has been released when you see the added volume hit the tape and your indicators.
We look for a few specific trade set-ups during this phase, and we Keep your eyes peeled for the perfect set up to take form just after 10:00am.
Why do you think we wait for 10am to see a pattern develop?
Do we have any fund managers in the room today? Anyone who trades Market Profile on a TPO chart?
Well if you were, you would be trading off a 30-minute chart, not a 3-minute chart like a day trader would use.
With that said, if you use a 30-minute chart than your first candle is closing at 10am, which will most likely be your first opportunity to take a position in the market.
So if the big traders, the PAPER, are getting into the market around 10am….we should be looking for that and ready to get involved in the direction that THEY want this thing to go.
Picture a tug of war match between a 100lbs person and a 500-lb person….who would win? Exactly…the heavier person…well those are the big fund managers, institutional traders, or what we call PAPER, and they are the initiating activity that you need to see to convince us of the direction of the morning, so waiting for them to show up and make a trade will ensure that we can trade along with them, rather than against them.
So at 10am we start to see volume increase, but we more importantly will see the activity of the larger trades come into play.
10:15 am: Market Check:
Are we trending today?
Are we making new highs/lows?
Are the buyers being absorbed by the sellers?
Is this a 2-sided day? Lacking conviction of a move up or down?
WHO HAS CONTROL?
This time of the day should have allowed you 1-2 trades off opening volume, now is the time to decrease your position size if you are in the green to protect profits, or to protect against digging yourself a hole into lunch if the pre-lunch chop gets you.
Phase 3 is from 1030 – 11:15am, and is characterized by the 10:30 reversal
10:30 am: News events are most likely scheduled for this time slot
10:30 reversal is likely at this time. Locals will be taking profits at 10:30, so take profits as well!
Paper buyers & sellers have likely already shown up, so be aware of the potential reversal of whatever trend the market has been trading.
Be prepared for initiative buying or selling, that is, other-time frame participants MAY start trying to push this market in the direction they see fit.
Remember, we don’t predict, so forget your feelings and trade what the tape tells you.
Always SCANNING THE MARKET:
AM I prepared to take the next set up?
At what level am I ready to take this set up?
Scan all the time frames to see other levels standing in your way, and be ready to take them when they set up.
Look to take morning profits between 10:30 am to 11:30 am, which is the continuation of the 10:00 am move.
Think like a floor trader…. They have been trading since the open, jockeying for position, scalping single ticks out of their positions, and now they too need to take profits, so be on the lookout for a change in direction ahead of lunch.
This taking of profits and the final PAPER traders getting involved will ultimately result in what we call the 10:30 reversal, which is seen consistently across the E-Mini’s
11:00 am:
The market is likely to transition between the opening drive and the lunch time chop somewhere around 11am to 12-noon.
It is important to watch for subtle changes to the time in which this change occurs. We have seen markets that will shows signs of chop early, and then the big moves happen right before lunch, and we have seen the market go into chop very late and present us with numerous opportunities before lunch. You need to pay close attention to this so you don’t GIVE BACK the profits of a good trade after getting into a trade that was taken on low volume around 11am that you could have seen coming BEFORE you entered the market.
You want to Pay close attention to the following: at 11am to catch the traders leaving early for lunch:
Speed of the tape
Size of the contract SIZE on the tape (is paper still buying/selling?)
Volume of trades (# of trades executed all together in the market big and small in size)(lack of volume will give you a heads up of an early lunch session, which brings added risk)
Usually by 11:15 or 11:30 you will have seen the lunchtime crowd hit the doors and you’ll then have the lunch session set in rather quickly.
Its vital that you are ready for this, and prepared to skip a trade set-up if it appears its happening on low volume.
Our members are given specific instructions on what to pay attention to and how to play this situation.
11:30 am: Lunch time (typically) lasts from 11:30 until 2:00pm EST, but you will be educated on what to look for to see when the lunch session is over with
11:30-1:30 is not the place to take trades, its nothing but locals playing with the retail traders.
Look for increased volume to take trades as price can be VERY slippery as larger market participants are not in the pit, making strong moves unlikely.
Take a moment to stand up, walk around, go grab lunch, and take some time to focus on something else besides your computer screen so that you can return fresh to the market in the afternoon.
DURING LUNCH: review your morning session:
Where were your trades and why did you trade them?
Did you see something today that you didn’t understand?
Did you miss a level today?
Did you experience technical issues today?
Were you prepared to trade today? Were there distractions?
Did you over-trade? Fail to take trades?
What was the ‘tone’ of the day today?
How can you make small changes to your plan of attack to make sure you don’t make the same mistakes tomorrow?
1:30 pm: Open your charts and get ready for the afternoon action.
YOU ARE NOT TRADING UNTIL 2pm, you are just watching.
Locals come back from lunch, they review the parked orders in the form of stops in the market, and they formulate how to attack those stops and shake this market up for the afternoon session.
1:30 Fake Out, Break Out: this describes the act of running the stops (forcing price 1 tick below the lows which kicks most of the rookie stops out of the market, making price jump thus kick-starting the rally in the OPPOSITE direction.
Looking for the afternoon session (which can be completely different than the AM session) to begin.
We aren’t taking trades right away, but merely trying to get a read on the market coming BACK to life with more volume and larger orders on the tape.
Once the locals finish running the smaller stops, the larger participants will then step in and take this market until around 3:30pm, we want to be WITH them on this strong move in either direction, and be prepared to hold this trade into the 3:30 pm period.
BEWARE: there is ONE technical indicator that we do NOT use until the afternoon session. I wont even pay attention to it in the morning…only the afternoon session does it provide trading set-ups.
Right now You are looking for lunch to end…
increased volume, look for more than 1000 trades more often
speed of tape
Position size to see the larger players come back from lunch, which will signal your ability to participate without the added risk.
Be patient. You will see 2-3 more set-ups. WAIT FOR THEM. The afternoon will bring plenty of opportunity.
Phase 5 is the afternoon session transition, and again, we are pay close attention to the technicals to tell us when the afternoon session is finally here to trade.
2:00 pm: Waiting for volume to return to the tape …
Now we want to mentally prepare for the afternoon…
Where is the market headed for the afternoon?
What is the tone of the early afternoon session?
Have ONLY the buyers come back from lunch?
Do you see changes or consistencies from the morning trade?
Remember, just like you, we do different things over lunch, which may involve re-thinking your
Remember that the locals will try to push this market in the opposite direction of where the larger participants will most likely take the price around 2:30pm.
Don’t get anxious to trade b/c you haven’t traded in a while…remember that you need to discipline yourself to the point that you can open your charts at 1:30, wait for volume to show up, and then wait for the set-up to form and the BIG $ to trigger the trade.
PATIENCE….remember you have the final drive to look forward to, so sit on your hands and be patient.
2:30 pm: WATCH the VOLUME come to the table right NOW!
We expect to see SOMETHING start to move around this time.
If we don’t see the larger players step in and grab this market, we need to be careful because the locals will chop the market up and take your account equity with it.
Potential for a reversal around this time due to the larger players stepping back in with initiative buying/selling.
Be sure to protect any positions during this time with appropriate stops to protect against losses or to lock in profits.
“Where are we, where were we, where are we headed?”
Phase 7 is from 230 – 400pm and will be where the majority of the afternoon opportunities occur, and we will rarely want to trade after 330pm altogether.
3:00 pm: Bonds and Currencies Close
We should see the big afternoon move occur around this time.
Volume should come back very strong with other markets closing over the next 30 mins.
Ultimately, as other markets close for the day, these traders mosey on over to the other pits and get involved, which shows a significant impact on price around this time, so be ready for it.
Look for increased speed of tape and a defined trend developing into the afternoon.
“Where are we, where were we, where are we headed?”
Remember, we cannot predict where the market will go based on the AM session. We must only react to what the afternoon participants are telling us. It will not be any more likely to take place simply b/c it occurred in the AM session.
3:30 pm:
330 means we need to expect the day to start showing signs of the end….
MARKET CHECK:
Is the market up/down by a large amount?
If so, look for short-coverings on a down-day (opposite on an up-day of course) which will cause the market to ‘bounce’ off its LOD simply because of the shorts that are now BUYING back in order to flatten their position.
Don’t forget to limit risk by trading with fewer contracts!
IS the market flat? If so, STOP TRADING at this time.
Risk increases around this time, as volume decreases (many people don’t trade after this time) with more people leaving the pit to go home, and frantic traders placing desperation trades, covering shorts, or dumping their longs prior to getting stuck overnight.
Look to fade the Developing Value Area levels.
Watch closely for
Decreased volume to tip you off to an early end of the afternoon session.
Lack of Paper participation, ie, local-only, ie, only SMALL contracts which means price will become ‘slippery’ very quickly.
A heads up those large buys/sells may be coming by listening to the pit and watching the dome for sporadic activity on the dome.
If you decide to trade the late afternoon, be prepared to significantly lower your contract size in order to protect profits or protect capital if you are trying to dig out of a hole.
4:00 pm: Close of the Cash Market
4:15 pm: Close of Electronic Trading on the CME Group (applies to the ES E-Mini)
Review your day.
Prepare questions for the next training
Where were your trades and why did you trade them?
Did you see something today that you didn’t understand?
Did you miss a level today?
Moving Averages
Value Area Levels
HOD / LOD
Did you experience technical issues today?
Were you prepared to trade today? Were there distractions?
Did you over-trade? Fail to take trades? How many did you take? Not take?
What was the ‘tone’ of the day today?
How can you make small changes to your plan of attack to make sure you don’t make the same mistakes tomorrow?
So why does all this matter to you as a trader?
Well, human beings are creatures of habit, and we made the markets we trade, so those same habits carry over into these markets
The traders show up to work each day in the same car, take the same route, use the same parking lot, the same path to the pit, etc…they love routine.
Ask a baseball player if they like routine…enough said!
We see patterns as traders
We use these predictable patterns to anticipate movements before they happen, and then we WAIT for the technical’s to line up according to our rules to take the trades.
For example..
We know the reversal is coming at 10:30 b/c we understand the market participants…
b/c of this we are ready to take advantage of it, and we use our rules to get us into the market at that time with the most high percentage set-ups and the lowest risk possible.
Once we are in the trade according to our rules, we then manage our trades correctly with our simple and efficient methods of doing so, which is all covered in the course materials of course.
