Apr 162010

No trades today.  RG could not trade this morning and no setups were available.  Price did move down back into the 1201.50/1202 area and was setting up nicely for a potential double bottom long trade, however it was just too close to the 9:55am EST Consumer Sentiment report.  Once the report hit, the market became very volatile and trampled both the 1201.50 long fade level and the 1201 short break-out level.  I waited for price to move back up into the 07.50 area for a short fade setup, but it never made it that far.  It elected instead to use the overnight POC and VPOC at 1206 as resistance.  The market will sometimes use the POC or VPOC as a rejection area, however we prefer low volume rejection areas trading rather than the middle of high volume areas.  Price just moves easier in low volume areas than high volume acceptance areas.

Whoaaa, something just happened as I’m writing this; the market just took a nose dive.  Let’s see, Goldman Sachs just announced they misstated some facts and the SEC is charging them with fraud.  This is one of those events that happens occasionally that’s just a fact of trading.  If you were in a trade, you had a 50/50 chance of being on the right side; a good reason to mind your risk to reward ratio for each trade.

Have a great weekend!

NJ UPDATE: In the rare times that we have run away markets like this, you just have to trade with the trend; pullbacks or breakouts do not matter.  I missed most of the move down but I was able to take the pullback at 11:17am EST for a quick 2 points.

RG UPDATE: I was sick this morning which worked out well as I had no interest in 1201/1200 in either direction. If not for the news I might have sold under 1200 into 99 or 98 but the 10AM news timing was off. But the nice surprise was the Goldman news. I scalped long in the selloff just now at key rejection areas 94.50, 89.75, 89.25 and picked up three ticks after all. I wish this happened every day. Contrarian scalpers dream market…

 Posted by at 10:56 am

  12 Responses to “4/16/2010 Post Trading Analysis”

  1. Could you provide a clue to why you only took three ticks out and two points of the market? To me the risk to reward for 3 ticks is hard to want to even enter the market? Could you explain your set up and how many contracts you traded and if you scale out or are you all in all out type of person?


    • Actually it was alot more than a two point move. It is a specialty trade fading exhaustion bursts in run away markets. Scalping is a very small part of what we do. I’m risking one to two ticks to make one on purpose. Buying bids and selling offers and vice versa. Scalping isn’t something we are going to really get into here though. I just show them for those who are already scalpers or have interest in running playback and studying how to time them well. Historically, my win rate with scalping is in the mid 90s. All in all out with a lot of contracts. Plenty of liquidity in the ES. I’m not going to get in to our size but you can tick scalp well over a thousand in high volume areas if you know what you are doing.

      As for our non-scalp trades, we didn’t happen to have any today. We trade price, not news and only in the first hour generally due to liquidity concerns. The GS move happend after we were done for the day. Also, we are generally contrarian traders. We fade big moves usually, not trend trade them – at least with the largest portion of our capital. We don’t generally scale out and never scale in. The best thing to do is check out the non-scalp trades each day and run some kind of market playback and you will get the feel of what we trade and where and why. Hope that helps clarify.

  2. Net I did poorly today overall. Overnight I was in great shape as I caught the move down from 6.75 and got net 4 points. After that I was only down 2 ticks for the week. I proceeded to trade poorly and got chopped up during the open. I was short when the goldman news hit so that helped. At the end I was still down 18 ticks for the week. I certainly over traded, and it showed.

    • If I can offer one piece of advice to anyone here that will change your life it is to stop looking for infinite trade opportunities and decide what and where you want to trade ahead of time – and how many times a day max. We have a collective experience of over 100 years professionally in our team and even in the prop accounts we still don’t trade much more than 2 times a day and only in the first hour. I am actually the exception. If I make the rule I get to break it. lol. But seriously, I am trading just one key price in one direction every day except if there are exhaustive conditions good for scalps in which case I will trade for ticks on those a few times around a key price. But for the “real” trades, generally just once.

      Think about it this way: If you identify one key price a day to trade and you flip a coin, long or short with a 1:1 risk (which is our minimum or we pass on the trade) you will win 50% of the time. Try it sometime. So you are going to automatically win 10 trades each month and lose 10 when you know ahead of time you will have a max of 20 trades for the month. The market isn’t trying to beat you and with all your analysis and skill you KNOW over time you are at least going to perform at coin flip speed. Here is where it gets interesting and why we trade 20 trades max a month in the “serious” accounts: At 100 contracts all in/out per 1M equity and a round turn cost of roughly $1.00 our fixed cost is $2000/mo per 1M account size. Given the coin flip scenario, black swans aside, this is our maximum likely risk. In other words if we totally suck and have ZERO edge all of a sudden, we should still be right half the time. Trading is binary. You pick a level and you decide whether to fade it or break out of it. PERIOD. People that complicate it more than that won’t make money. Your edge is to what degree you can consistently beat the coin flip over time, but without limiting your trading to an exact number or close to it you will never know what your cost for being wrong is and the likely downside. Now for the reality of our edge…Our modest goal is to capture just 3 ES points net gross (before costs) each week on the 5 trades. I can’t remember the last time we missed that. Our average trade is just 1.5-2 handles with lots of .75 and 1 handles as well. So our monthly goal is 12 points minimum. So with 12 points a month we earn $60,000 per 1M account size on a cost of $2,000 for a net net of $58,000 per million per month/$696,000 annually per million = 70% net ROC. Now lets handicap it and you will see it all come together. If we agree that most everyone reading this blog is skilled enough at 1:1 risk/reward or better to at least operate at a coin flip 50% win rate or better (including you my brother), then that is the real downside risk (again,swans aside). In other words, if I have a terrible, terrible month, that is about the worst I figure to do, with my cost structure I’m out 2 grand per million account size. But what is most likely is that I’m going to win 58 grand or more. So in Vegas terms I’m betting $2,000 every month to win $58,000. 29:1 odds. This is what you are missing by trying to trade around the clock and never knowing how many trades you are going to take. Use our levels (or yours if you like), pick your spot, and trade once a day. I bet you make money for the rest of your days if you stick with it. Before anyone says something about trade costs, even if you pay $4 a rt cost is still only $8K per million so you would be getting 6.5:1. not as high as 29:1, but any gambler would still kill to get those odds every day. You have all heard it said that trading is about risk and money management and the pros have a “secret”? There it is. Chew on that for a while and then ask yourself why you would handle your money any other way than fixing your monthly trade frequency…

      • RG thanks…it makes a ton of sense the way you put it. I need a much better framework for my trading business if I am going to survive…I hope you dont mind if I use what you wrote.

        • Have at it. That is what this blog is all about. No matter what we share, there will always be a steady stream of weak traders to profit from. We won’t make a dent but will hopefully accomlish our goal of giving back and helping make some retail traders sincere about improving their craft better at what they do.

          The numbers don’t lie and what I wrote isn’t opinion. It is fact. It is all about confidence in the coin flip and holding risk/reward to 1:1 or better on any trade you take. It will help you see the strength of your edge and how repeatable it is. The worst case scenario is you will discover you don’t have much of an edge but it won’t matter because you won’t lose money developing one. I know you can get them half right by guessing and you know it in your heart too. You just have to learn to listen to your heart. When I scalped 89.25 today long I didn’t care if I was right, but it was a strong rejection level and my risk was right. There is nothing more to say about it. By defining and limiting your trades you will stop caring about the right and wrong and it will be more of a fun game you play to see how often you can beat the coin flip. Because you know the coin flip result isn’t going to cost you anything. That example I gave about 2K vs 58K is where I get my confidence to trade big size. I wish the ES traded 6M contracts a day or more so I could trade many times the size we do now. Why? That 29:1 ratio holds no matter what. Lets say you are trading 3 lots at $4 rt. You are working with exactly the same math as me, just less zeros. 3 lots once a day is $240 a month in commish. If you trade to our goal of 12 points a month that is $1800. So you are betting $240 to win $1800 – great odds. When you are tight like this it increases confidence to trade with more leverage as well once you build confidence. There is no way you can trade more than 1 contract per 10K equity IMO with unlimited trading and no rigid risk model. But with hard limits I see no problem going to twice that once you know your edge. But the confidence in the coin flip principle is where you get the confidence to know that using a model like ours will make it nearly impossible to blow yourself up.

          One last thing I want you all to try starting Monday. At anytime after the open each day I want you to pick any level whether ours or yours – whatever, and once price gets there take a hypothetical trade in your mind. Either fade off it or break through it using all your analysis and imagine a 1:1 stop and target. Write down whether you are right or wrong then after 20 trading days see how you did. Do it every month for a while. It will blow your mind and build a confidence you never had.

          • Great! Really enjoyed that write up. Getting a better idea of how you see trading.


    • Forgive me for asking Caljr – and I swear ‘m not trying to be overly critical, but why would you trade off the open as there were no key levels right there and even more importantly, why did you have a position on at all going into an important news number – especially in such an undecided market? Obviously you got away with it this time but that is just a really bad idea in general. I’m the first to say all news is pretty much worthless and previously priced in except sentiment and Fed stuff these days, but the vol still gets wild at least temporarily which will stop you out even if you are right nine times out of ten. In any event I hope you will start trading only key levels once a day. Are you following along with us every day and getting a sense of the key levels we are trading and why? If not, start using the sheet to get the hang of it at least until the webinar as we will be posting it pre-market until then. Are you reading order flow on entry? How are you setting up? Are you using Market Delta and/or trading volume and price?

      • Thanks for asking RG I appreciate the feedback.

        First off I agree about the levels, there were none off the open.

        I made way too many trades yesterday. Many were reactive, and if there was one thing I managed to do almost perfectly it was sell lows and buy highs. I did that a couple of times. I wasnt trading levels before the market opened, I was trading what I thought would happen. Overnight I was correct, after that I was not correct. I didnt get away with being long when the sentiment number came out, I got stopped out of my long with my stop perfectly placed at the bottom of that spike down at 9:55 et. By then the damage was done….the saving grace for the day was the GS news, I was short when it hit, and managed to claw my way back through the day, but still ended up considerably down.

        I use investorRT, almost the same thing as market delta, just no footprint charts. I try to trade off the volume and order flow using the volume breakdown and moving averages to get a direction.

        I do follow your levels and try to get a sense of why you are choosing them, but dont fully understand why they are where they are sometimes. I look forward to those posts.

        I havent traded futures for very long (haha it shows I know). I traded stocks for a few years, and frankly didnt do well. My problem with trading stocks is I could never figure out whether I should focus on trading 1 stock, or trade many stocks with 1 strategy, or some combination. I made a decision to change to futures, and just trade the emini s&p, and that is it, one market only.

        I am trying to learn how to use market profile as a guide to what is going on. I also see pivots might have some use but I am trying to see how simple I can keep this. It is that neverending question of what is it that I am looking at that actually matters, and what doesnt. The more variables, the harder it is to tell.

        I am going to try what you said. Pick a level. Apply some analysis to choose fade or break, put on the trade while reading the order flow off the level, and manage the risk to at most 1:1 or better.

        Once a day.

        Anyhow I hope I answered your questions, thanks for asking them and have a great weekend.

        • Make sure to download my chart definition for the 30M profile charts we use for trade identification ahead of the day – or build your own using the profile indicator (same in R/T) as I have it set to plot volume at price regardless of chart timeframe. http://www.charthub.com/images/2010/03/29/ES_DayNight_Profiles_2.png

          We use market internals, feel and instinct to handicap the levels for strength and direction, but the core determination of potential trade entries before we apply these filters and narrow them down comes from recent low and high volume prices. Price almost always rejects initially at previous low volume prices and either fades off or breaks through. The only fights (trades) you should ever get into are at these prices. Once price moves away from a low volume area it wants to go to the next major high volume area as those are well established for value. We use low volume prices for entries and high volume prices for targets from previous sessions of course – usually very recent sessions. You don’t trade all of them but even if you did and traded them blind on instinct I’m sure you would do fine. Market Profile can become like anything else. Don’t try to systematize it as it is worthless. Also, use volume profiles not time based profiles (TPOs). Remember that those were invented and useful in the pit days when we didn’t have accurate volume info and were running tickets. Everything was lagging and time was the best way to measure where the heavy and light prices were. No need any more as we have volume right down to the tick level immediately. Market structure is always something you see after the fact. This is why we are only interested in auction theory and not trying to read TPOs to see the market. KISS method. When price gets to a previously unfair value (which we know was unfair as buyers and sellers refused to get together and trade with each other there), it reacts. That is always the pivotal point. Buyers or sellers are going to “win” and something is going to happen there. Imagine a real estate market – a neighborhood where houses have been trading for 500K. You decide you want to see where the line is and list your house for 750k. When a buyer who knows what houses have been trading at knocks on your door in response to your yard sign and you say you are selling for 750k what do you think he will do? He is going to “fade” your house. He will turn and walk away. And where will he walk to? A house he knows is selling for fair value and when he gets there he is going to ask if he can trade at say, 400K. Then the 500k seller will probably initially reject his offer and then someone will win there. Get it? Forget market profile. Forget price action – just another lagging indicator. Forget using MAs to try to determine market direction or “trade with the trend”. There is no such thing. Only price. If the market is “trending” intraday it doesn’t mean it is going to keep going in that direction. Nonsense. Look for rejection or acceptance and catch a piece of the rotation for determination of value. Now THAT the market must do. Probing for value between previously rejected or accepted prices. It isn’t about trading or the ES. ALL markets do this. Think about it. If you want to sell your car do you just make up a price? No. You go to see the absolute highest price like cars have traded at recently which you know will be immediately rejected by potential buyers and so you try to price it just under enough to entice a buyer to get the deal done. That is how you should understand trading. That is all that is happening all day long. Same thing. Just trade common sense. These are the levels that matter and what pros like us are interested in. Binary. Somebody wins, somebody loses. This is why limiting trades and managing risk is paramount. With unfair price trading only, once a day, 1:1 or better, and adjusting # of contracts up or down based on how far stop is away from entry to hit a target max equity % risk on each trade and you will be doing all you can. From there you don’t have to think about anything as you will at least break even and you can then focus on trying to use better and better discretion and piecing things together to be right about who wins those levels more often. Retail traders always try to mechanize entry and exit and not use any discretion. They think that is discipline but it is just bad trading. Pros keep entry and exit discretionary yet hypothesized ahead of time based on market structure and instead only mechanize risk and money management to a science. Everything you need to know to be a world class trader is in this paragraph. School’s out as it is just this simple. The easiest path to failure is making more out of trading than it is. Retail think the pros win because we have some secret. We win because we don’t have a secret. We just use common sense and listen to the facts and not the noise or patterns or lagging information.

          • RG I loaded up the profile charts and am working on trying to digest everything you wrote, it is quite eye opening for me. Thanks for taking the time.

          • You will do fine Caljr. A note on the chart: That is my main trade identification chart. Like I said discretion is paramount and I pour 20 years of experience into choosing which levels I want to trade and in what direction but everything you need is on that chart. I also recommend you upgrade to MarketDelta once you digest the profile part as I will be doing a webinar on how I read order flow off the footprint chart at those key price areas to run retail stops with the market makers. I only fade the levels where weak retail traders get trapped chasing a breakout but don’t have the whole marlet with them, then they panic and bail and those trades push the market to my profit.

            More on that later, but you will note on the profile chart there are buttons set to change the timeframe. The profiles of course won’t change but if you want to you can drill down and see smaller charts. I hardly ever leave the 30M as I don’t trade any candle patterns ever. I only use the chart for profiles. The pivots are set to plot only on day session. If you are using a 24 hour session you will need to set up a V#1 and V#2 in a quote page. In the pivot indicator they are all set up so all you have to do is in the morning enter yesterdays day session high and low in the 1 and 2 slots respectively. The pivot indicator will then calculate on those values. Not that they matter much. We only use pivots as a congruence filter. In other words if we are already fading a level and see that it also happens to be an r1/s1/r2/s2 it is all the more powerful. We are also handicapping potential level strength on the pre-market sheet as well so study those. Focus on low volume and high volume areas from the overnight and yesterday sessions along with any levels you see that have been hit multiple times as long as a week ago. Note how I have the chart compressed in the image. You want to be able to see the big picture. FYI the grey line in each profile is the VPOC and the white lines are one standard deviation from the VPOC. Again, we don’t really use these other than for congruence. Like if a low voluem area overnight is also one tick above the VPOC from yesterday and a pivot and the edge of the one SD value area of volume from 2 days ago and a round number like 1200 and, and….in other words the level is REALLY important. See? Study the profiles every day then compare what you see with the levels on our sheet and most importantly, READ the commentary. All the “secrets” of what we think about the strength of the levels, where we think the trouble spots are to be careful with, etc. is right there in the commentary.

            You might also want to download our daily chart which has a composite volume profile plotted. This is really important too as it shows us when high or low volume areas in the composite sense over a long time are happening to be lining up with important levels on the day. The composite profiles are set to plot not by time but all the trading between the last major swing high which was October 2007 through the major swing low which was late 2008, to present. Study and have fun. Above all, run your playback in R/T and notice how (besides when there is news overlapping like happend Friday for instance) the low volume levels historically reject price on the first hit and after subsequent hits price breaks through and notice with either how price moves to the nearest high volume area like clockwork and will pull back and capotulate around those levels. It will blow your mind how accurate this is. Auctions cannot lie. You are trading the market’s pure reason for existence that is why. The ES (or anything else) only exists to facilitate trade. That is it.

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