By David S. Adams
Author's warning: This is a controversial topic
I am a fairly opinionated person and thus far on this EzineArticles site I have intentionally strayed away from controversial topics and written some fairly vanilla "how to" articles on investing topics. But I just read an article that made my blood boil: the article concerned Penny Stocks.
As a 25 year veteran of trading on both Wall Street and the CME there are very few areas of investing that are infested with more vice, scammers and downright cheating than the penny stock market.
I know, that is a very bold statement to make....but I will back up my statement with hard facts and experience, and not all Penny Stocks are scams...but the vast majority of Penny Stocks are simply fronts for companies that may/or may not exist.
Here is how the life of a Penny Stock transpires. As you may have noticed, most penny stocks are promoted through newsletters and advertising. There is a very good reason for this, as the penny stock companies usually promise the newsletter advertisers a block of stock in exchange for getting the stock price to rise. The newsletter usually touts the "potential" for the stock to rise based upon certain factors occurring and usually elaborates on the unbelievable potential the stock has should these "certain" factors occur.
I usually recommend that potential investors in penny stocks contact the stock itself and ask about capitalization and and revenues. Without exception, these stocks usually are severely undercapitalized and have to revenue to speak of. More often than not, an investor questioning the company will be sent to an answering machine or the newsletter promoting the penny stock. The SEC has estimated that the majority of penny stocks fall into the "pump and dump" category. And with good reason.
A normal stock, traded on an exchange, usually has a firm designated as a market maker in that stock, along with a floor specialist who facilitates the trading of that stock. This system allows transparency in the trading of any stock and allows an investor to see the exact and verifiable volume and price movement of the security.
This transparent system is absent in the Penny Stock market, and the penny stock issues are usually without a true market maker. All to often, the market maker in a penny stock scheme is the very company itself. The fox is in the hen house, so to speak. What this means is that the Penny Stock company is setting both the bid and ask prices on its own stock. Further, most Penny stocks are traded on the 'Pink Sheets" which puts it into the category of trading in the wild west.
Many experts have estimated that 9 out 10 Penny Stocks fail within the first year of their offering. I have heard numbers as low as 7 out of 10 bandied about, but the point is simple. When you are trading Penny Stocks you are playing in a non-transparent, non-exchanged oriented market, and this is the recipe for disaster. It is usually just a matter of time.
For the record, I am not saying that all penny stocks are bad or dangerous, just the majority of them, and odds do not favor long term success. Heed my warning and prosper, there are simply too many exchange traded stocks that will earn you ample money than risking sums of your hard earned money in the Penny Stock Market.
Wednesday, September 2, 2009
Tuesday, August 25, 2009
Emini Trading - Is Discretionary Emini Day Trading Right For You?
By Waldemar Puszkarz
Emini futures, often referred to as just eminis, are very popular trading instruments, particularly among day traders. They are simply smaller-sized contracts of "full-grown" futures contracts that have been around for much longer. The "mini" part of their name has to do with their size, which is several times smaller than the size of their older brethren. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes literally anywhere in the world. That's what the "e" in their name stands for, namely "electronic."
There are two distinct styles to trade emini futures. One is purely mechanical, the other is purely discretionary. It's possible to use a hybrid approach, but in reality, this is often not that advisable as you simply end up with what is just more complex mechanical emini trading. Some people prefer a mechanical style, others feel better with the discretionary approach to emini trading. Both are fine, but one is clearly better than the other, especially for retail traders. It is the discretionary trading style.
Yes, the discretionary trading style is definitely better than the other one, yet many people, most perhaps, tend to go after mechanical trading. Which is a very good confirmation of what I just said, namely that discretionary trading is better. How so? Well, simply because the majority of people tend to be wrong.
It is easy to understand though why so many people prefer mechanical trading. For once, it is so much easier to master it. It may take just a few days even in the case of the most complex mechanical emini trading systems out there. Plus, some of the mechanical systems can easily be automated and so you can get your computer do all the work for you, while you simply collect the profits.
It is this allure of simplicity, limited effort, and relatively easy implementation that makes mechanical trading so widely followed. But unfortunately, this also means that many people never master the art of trading, but merely the art of operating trading systems. Their trading careers start and end at reading system manuals, which is certainly not enough to become a consummate trader.
To master the art of trading at its finest, you need to learn how to read the market well. That's the basis of discretionary trading. Once you have done so, and this may take months if not years, although a good mentor or a trading course can shorten your learning curve to only a few weeks, you will never consider mechanical trading a serious option. The reasons for this are quite simple.
Mechanical trading systems, and emini trading systems in particular, tend to go through relatively deep drawdowns and flat periods during which the system loses money or makes no new profits. "Relatively" here means compared to the discretionary approach where this problem is not as severe because of the discretionary trading style much greater efficiency. To ensure steady profits that could amount to a decent living when you rely on mechanical trading systems, you often need to trade more than one system and diversify across a few markets. Plus, you also need a bigger size when trading in a discretionary way.
For many small retail traders, the purely mechanical approach is out of the question if they want to make a steady living. They can however do quite well, trading in a discretionary fashion, trading with just a few contracts and only one market.
Is discretionary trading approach right for everyone? Yes, definitely so, although some people may at first be less likely to succeed with it than others. The more flexible you are and the better your market reading skills are, the more likely you are to enjoy a good start. Sometimes a very good start.
But I believe that everyone can master the art of discretionary trading. The main reason why some people may be convinced this is not the right thing for them has to do with the fact they have not spent enough time to master this approach being lured by the much easier mechanical trading style. If you are not willing to spend enough time on something more challenging, yet also much more rewarding, you are not likely to appreciate it.
Dedicate more time to it and you may as well see that this is indeed the totally right thing for you. Don't dismiss it too soon and don't fall into the trap of thinking that you are not predisposed to discretionary trading. There so no such thing as being predisposed to a given occupation. No one is born a fireman, a pilot, or a teacher. You simply get trained to become one, just like you get trained to become a discretionary trader. And, what's more, you can even train yourself.
Emini futures, often referred to as just eminis, are very popular trading instruments, particularly among day traders. They are simply smaller-sized contracts of "full-grown" futures contracts that have been around for much longer. The "mini" part of their name has to do with their size, which is several times smaller than the size of their older brethren. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes literally anywhere in the world. That's what the "e" in their name stands for, namely "electronic."
There are two distinct styles to trade emini futures. One is purely mechanical, the other is purely discretionary. It's possible to use a hybrid approach, but in reality, this is often not that advisable as you simply end up with what is just more complex mechanical emini trading. Some people prefer a mechanical style, others feel better with the discretionary approach to emini trading. Both are fine, but one is clearly better than the other, especially for retail traders. It is the discretionary trading style.
Yes, the discretionary trading style is definitely better than the other one, yet many people, most perhaps, tend to go after mechanical trading. Which is a very good confirmation of what I just said, namely that discretionary trading is better. How so? Well, simply because the majority of people tend to be wrong.
It is easy to understand though why so many people prefer mechanical trading. For once, it is so much easier to master it. It may take just a few days even in the case of the most complex mechanical emini trading systems out there. Plus, some of the mechanical systems can easily be automated and so you can get your computer do all the work for you, while you simply collect the profits.
It is this allure of simplicity, limited effort, and relatively easy implementation that makes mechanical trading so widely followed. But unfortunately, this also means that many people never master the art of trading, but merely the art of operating trading systems. Their trading careers start and end at reading system manuals, which is certainly not enough to become a consummate trader.
To master the art of trading at its finest, you need to learn how to read the market well. That's the basis of discretionary trading. Once you have done so, and this may take months if not years, although a good mentor or a trading course can shorten your learning curve to only a few weeks, you will never consider mechanical trading a serious option. The reasons for this are quite simple.
Mechanical trading systems, and emini trading systems in particular, tend to go through relatively deep drawdowns and flat periods during which the system loses money or makes no new profits. "Relatively" here means compared to the discretionary approach where this problem is not as severe because of the discretionary trading style much greater efficiency. To ensure steady profits that could amount to a decent living when you rely on mechanical trading systems, you often need to trade more than one system and diversify across a few markets. Plus, you also need a bigger size when trading in a discretionary way.
For many small retail traders, the purely mechanical approach is out of the question if they want to make a steady living. They can however do quite well, trading in a discretionary fashion, trading with just a few contracts and only one market.
Is discretionary trading approach right for everyone? Yes, definitely so, although some people may at first be less likely to succeed with it than others. The more flexible you are and the better your market reading skills are, the more likely you are to enjoy a good start. Sometimes a very good start.
But I believe that everyone can master the art of discretionary trading. The main reason why some people may be convinced this is not the right thing for them has to do with the fact they have not spent enough time to master this approach being lured by the much easier mechanical trading style. If you are not willing to spend enough time on something more challenging, yet also much more rewarding, you are not likely to appreciate it.
Dedicate more time to it and you may as well see that this is indeed the totally right thing for you. Don't dismiss it too soon and don't fall into the trap of thinking that you are not predisposed to discretionary trading. There so no such thing as being predisposed to a given occupation. No one is born a fireman, a pilot, or a teacher. You simply get trained to become one, just like you get trained to become a discretionary trader. And, what's more, you can even train yourself.
Monday, August 10, 2009
Emini Trading - Do You Have Investing Style?
By David S. Adams
I think before anyone embarks upon the serious study of trading, or trying to make a living at trading, he/she ought to consider the style of trading that best fits their personality. Unfortunately, the term "trader" means a lot of things and encompasses a wide range of trading styles and methodologies. My personal style of trading reflects my personality, I like immediate gratification and results, so I am a scalper.
So what is a scalper?
Most scalpers, especially the scalpers who trade the eminis, seek to exploit the natural rhythm of the market and carve out small gains on each trade. My goal is often 12 ticks, though that can change depending upon the mood of the market and an indicator I used (and have written a post about) called the Average True Range. My trades seldom last more than 10 or 15 minutes and I exit. I never carry positions overnight. My account is trade free at the end of the trading session, or at least, the period of time I am trading.
I scalp because it suits my personality. I like the fast paced action and the lack of dependence on intermediate term prognostications on the direction of the market. Some scalpers, seek to exploit the big/ask disparities in the market, though that is never my goal. Scalpers need to implement strict money management guidelines in their trading, and never risk more than 5% of their capital on a given trade. There are a host of traits scalpers use, and those traits even vary from scalp trader to scalp trader. The important thing to remember in scalping is that I am looking for very short term moves in the market to exploit, and I do not attempt to predict any overall direction of the market as a whole. I am interested in certain moves in very specific contracts. The market as a whole does not interest me and, generally speaking, I don't pay much attention to overall market conditions. I trade the chart I am looking at, not the news, not the economy, just the chart before me.
Swing traders are a different matter, though.
Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit. The important difference between a swing trader and a scalper are basic: A swing trader has a notion or idea which way the market is going to move, or which way an individual stock is going to move, and invests based upon his belief. Swing traders usually identify a specific characteristic or event in the market and trade based upon this theory. I should point out that though many swing traders are interested in market and stock fundamentals, there is also a field of swing trading that invest based solely on technical trading. Oscillators, Gann lines, Dow theory....there are scads of theories that swing trader may implement to ascertain the timing and direction of the trades they choose to execute.
Technical Traders, Fundamental Traders and Efficient Market Traders.
There is scant space in this post to cover the myriad of styles these three titles cover. I should also point out that there is often very little agreement upon methodology by the three trading camps. Each lays claim to correctness, though I incorporate parts of all three trading styles into my personal trading style. I will devote some posts in the future to contrasting the mindset of each of these trading theories.
The point here is a basic one, a trader ought to decide who and what he is and what style he will implement in his trading activities. This decision is usually gained through extensive reading and trading experience. There are some great books written on each of these trading styles, and all traders out to consider spending some time reading about the great theorists of trading and the style and rationale they employed to reach the conclusions they write about.
I think before anyone embarks upon the serious study of trading, or trying to make a living at trading, he/she ought to consider the style of trading that best fits their personality. Unfortunately, the term "trader" means a lot of things and encompasses a wide range of trading styles and methodologies. My personal style of trading reflects my personality, I like immediate gratification and results, so I am a scalper.
So what is a scalper?
Most scalpers, especially the scalpers who trade the eminis, seek to exploit the natural rhythm of the market and carve out small gains on each trade. My goal is often 12 ticks, though that can change depending upon the mood of the market and an indicator I used (and have written a post about) called the Average True Range. My trades seldom last more than 10 or 15 minutes and I exit. I never carry positions overnight. My account is trade free at the end of the trading session, or at least, the period of time I am trading.
I scalp because it suits my personality. I like the fast paced action and the lack of dependence on intermediate term prognostications on the direction of the market. Some scalpers, seek to exploit the big/ask disparities in the market, though that is never my goal. Scalpers need to implement strict money management guidelines in their trading, and never risk more than 5% of their capital on a given trade. There are a host of traits scalpers use, and those traits even vary from scalp trader to scalp trader. The important thing to remember in scalping is that I am looking for very short term moves in the market to exploit, and I do not attempt to predict any overall direction of the market as a whole. I am interested in certain moves in very specific contracts. The market as a whole does not interest me and, generally speaking, I don't pay much attention to overall market conditions. I trade the chart I am looking at, not the news, not the economy, just the chart before me.
Swing traders are a different matter, though.
Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit. The important difference between a swing trader and a scalper are basic: A swing trader has a notion or idea which way the market is going to move, or which way an individual stock is going to move, and invests based upon his belief. Swing traders usually identify a specific characteristic or event in the market and trade based upon this theory. I should point out that though many swing traders are interested in market and stock fundamentals, there is also a field of swing trading that invest based solely on technical trading. Oscillators, Gann lines, Dow theory....there are scads of theories that swing trader may implement to ascertain the timing and direction of the trades they choose to execute.
Technical Traders, Fundamental Traders and Efficient Market Traders.
There is scant space in this post to cover the myriad of styles these three titles cover. I should also point out that there is often very little agreement upon methodology by the three trading camps. Each lays claim to correctness, though I incorporate parts of all three trading styles into my personal trading style. I will devote some posts in the future to contrasting the mindset of each of these trading theories.
The point here is a basic one, a trader ought to decide who and what he is and what style he will implement in his trading activities. This decision is usually gained through extensive reading and trading experience. There are some great books written on each of these trading styles, and all traders out to consider spending some time reading about the great theorists of trading and the style and rationale they employed to reach the conclusions they write about.
Monday, August 3, 2009
Emini Trading Signals - 3 Simple Indicators Used by Successful Index Futures Traders
By Doug Fisher
Participants in the financial markets all have their favorite indicators used to alert them when the possibility exist for trade entry. In this article, three indicators will be outlined that are utilized by successful traders to provide emini trading signals for market entry and exit.
Pivot Points
Pivot points are a common tool used by many emini index traders. Some traders use pivot points exclusively relying on pivot points in conjunction with only a time and sales screen, forgoing the use of charting software. While others will employ pivot points incorporating them in with their trading platforms to alert them when conditions are favorable for trade exit and entry. Because pivot points show areas of both strong and weak support and resistance, they are a popular choice among successful emini traders.
Relative Strength Indicator
The Relative Strength Indicator or RSI is a graph which usually resides on the lower part of charting software. Used mostly to determine both oversold and overbought conditions, this widely used indicator displays a reading between zero and one hundred with a line moving between these two numbers. As the line moves up toward the 100 mark, the RSI indicates the market could be moving into overbought territory and the possibility exist that a pull back or market reversal could be at hand. When the line approaches the zero level, indications are favorable that oversold conditions exist and the market could be about to change to the upside as short sellers begin to take profits.
Stochastic
The Stochastic is another indicator similar to the RSI which is a popular choice among emini trading futures market players. It is also a graph that usually resides in the lower section of charting software. Like the Relative Strength Indicator, both lagging indicators, the Stochastic also has a range of between zero and one hundred. With this tool, conditions are generally believed to be approaching overbought conditions when the Stochastic line crosses 70. In contrast, oversold conditions are said to exist when the Stochastic breaks below 30 and sellers begin to cover short positions.
Participants in the financial markets all have their favorite indicators used to alert them when the possibility exist for trade entry. In this article, three indicators will be outlined that are utilized by successful traders to provide emini trading signals for market entry and exit.
Pivot Points
Pivot points are a common tool used by many emini index traders. Some traders use pivot points exclusively relying on pivot points in conjunction with only a time and sales screen, forgoing the use of charting software. While others will employ pivot points incorporating them in with their trading platforms to alert them when conditions are favorable for trade exit and entry. Because pivot points show areas of both strong and weak support and resistance, they are a popular choice among successful emini traders.
Relative Strength Indicator
The Relative Strength Indicator or RSI is a graph which usually resides on the lower part of charting software. Used mostly to determine both oversold and overbought conditions, this widely used indicator displays a reading between zero and one hundred with a line moving between these two numbers. As the line moves up toward the 100 mark, the RSI indicates the market could be moving into overbought territory and the possibility exist that a pull back or market reversal could be at hand. When the line approaches the zero level, indications are favorable that oversold conditions exist and the market could be about to change to the upside as short sellers begin to take profits.
Stochastic
The Stochastic is another indicator similar to the RSI which is a popular choice among emini trading futures market players. It is also a graph that usually resides in the lower section of charting software. Like the Relative Strength Indicator, both lagging indicators, the Stochastic also has a range of between zero and one hundred. With this tool, conditions are generally believed to be approaching overbought conditions when the Stochastic line crosses 70. In contrast, oversold conditions are said to exist when the Stochastic breaks below 30 and sellers begin to cover short positions.
Thursday, June 18, 2009
Why You Need to Get E-mini Training Before Stepping Into the Market
By Michelle Rudge
Why would you need to get emini training before stepping onto the market? Well if you've done online day trading before you may not need to have further training in trading in eminis. BUT, if you are new to day trading then you would be crazy not to invest in your education first.
Now I'm not saying that you need to go and get a college degree or anything, but you really need to understand the market that you're going into and how to effectively and accurately trade eminis. Day trading eminis is fast-paced and intense in a market that trades huge volumes and can be very volatile. These are exactly the conditions (high volume and volatility) that makes trading the eminis so profitable and desirable. You have the ability to get in the market, reach your profit targets and exit the markets in a very short period of time. But it's also these conditions that can chew up the novice trader and spit them out with all their capital gone.
It's for these reasons that you need to get emini training; an education will help you master the skills of using a trading platform to enter your trades accurately and in a timely manner. In day trading you can miss a trade by mere seconds, or even hundredths of a second! Training will also help you to determine when is a good time to get into the market and at what levels to set your profit targets and stop losses. Good emini training will teach you how to overcome your emotions of greed and fear that can cause you to veer from your trading plan. And good emini training will teach you how to formulate your own personal trading plan in the first place!
Why would you need to get emini training before stepping onto the market? Well if you've done online day trading before you may not need to have further training in trading in eminis. BUT, if you are new to day trading then you would be crazy not to invest in your education first.
Now I'm not saying that you need to go and get a college degree or anything, but you really need to understand the market that you're going into and how to effectively and accurately trade eminis. Day trading eminis is fast-paced and intense in a market that trades huge volumes and can be very volatile. These are exactly the conditions (high volume and volatility) that makes trading the eminis so profitable and desirable. You have the ability to get in the market, reach your profit targets and exit the markets in a very short period of time. But it's also these conditions that can chew up the novice trader and spit them out with all their capital gone.
It's for these reasons that you need to get emini training; an education will help you master the skills of using a trading platform to enter your trades accurately and in a timely manner. In day trading you can miss a trade by mere seconds, or even hundredths of a second! Training will also help you to determine when is a good time to get into the market and at what levels to set your profit targets and stop losses. Good emini training will teach you how to overcome your emotions of greed and fear that can cause you to veer from your trading plan. And good emini training will teach you how to formulate your own personal trading plan in the first place!
Monday, May 18, 2009
Emini Systems - The Logic Behind Emini Trading Systems
By Waldemar Puszkarz
I could equally well call this article "Emini systems - the lack of logic behind emini trading systems" as, in fact, sometimes such lack illustrates better what the proper logic should be. And that's what this article will focus on, hoping that by exposing the lack of logic behind emini trading systems, we should be able to come up with the right logic, the logic needed to produce good, robust emini systems.
But, first things first. Let's start from what eminis are for as opposed to stocks, this is hardly a household term. While a large percentage of American households do maintain some position in stocks, the overwhelming majority of them have never dabbled in something as esoteric as eminis. Emini futures, to be more specific.
Emini futures are simply smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."
The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.
One of the best ways to approach trading eminis is through mechanical trading systems. A system like that consists of a set of objective rules that determine how to open a position in the emini futures market and then how to close it.
It is possible to make money trading eminis in a purely mechanical fashion. This author has designed several successful and relatively simple, robust emini systems so this opinion is grounded in his considerable experience.
However, not all trading systems are born equal.
This applies also to mechanical emini trading systems. One category of such systems consists of day trading systems. These are systems that open and close their positions the same day, thus allowing traders to use the intraday margin, which is much lower than the overnight margin. For this reason, emini day trading systems appeal particularly to retail traders, those market participants whose budgets (and so also trading accounts) tend to be smaller. Because of smaller intraday margins, those traders can trade with more contracts and thus can stand a better chance to make more money.
Since more and more traders enter the thrilling arena of day trading emini futures, more emini day trading systems are being made available to them by people who specialize in designing such systems, usually referred to as vendors. We could, in principle, also call them experts, although calling someone that way does not necessarily make him or her a true expert. Judging by the quality of what is available out there, the field of vendors is hardly crowded with experts.
One way to judge the quality of a trading system, whether it is an emini trading system or not, is by examining its logic. Systems with a poor logic, that upon a closer inspection can even be found self-contradictory, are usually poor performers or have parameters that are rather unappealing to serious traders who know their stuff.
A good example of a faulty logic is that of many simple (or rather simplistic) breakout systems that try to capitalize on catching a strong trend in the market. In other words, they attempt to identify periods of wide range expansion. From the logical point of view, the problem with such systems is that they usually take position on 50-60% of trading days, while such expansion periods, or strong trends, occur only about 30% of the time. There is a clear inconsistency in what the systems do compared to what they were really designed to do. As a result of this, many simple breakout systems overtrade, which reduces their performance. In the long run, this performance can become too poor to make such systems good enough for trading.
The reason why overtrading reduces the profits here is quite simple. On the days when the strong trend does not materialize, but the system is active, three trading outcomes are possible: a small profit, a small loss, and a big loss. The small profits are likely to be offset by small losses and what we are left with are only big losses. While these big losses may not be frequent, in some systems they can be as big as the big profits from strong trends that the systems like that try to catch, which is clearly bound to affect their performance.
The way to prevent the system from overtrading (and thus the degradation of its performance) is to ensure that it trades only (in practice, mainly) on the days the strong trends really occur. Can such a system be designed? The answer is: yes, it can be, but you cannot do this with simplistic ideas.
I could equally well call this article "Emini systems - the lack of logic behind emini trading systems" as, in fact, sometimes such lack illustrates better what the proper logic should be. And that's what this article will focus on, hoping that by exposing the lack of logic behind emini trading systems, we should be able to come up with the right logic, the logic needed to produce good, robust emini systems.
But, first things first. Let's start from what eminis are for as opposed to stocks, this is hardly a household term. While a large percentage of American households do maintain some position in stocks, the overwhelming majority of them have never dabbled in something as esoteric as eminis. Emini futures, to be more specific.
Emini futures are simply smaller-sized contracts of "full-grown" futures contracts that have been around for a few decades. Unlike the latter that have been traded on physical exchanges, eminis have always been traded electronically, allowing retail traders with access to the Internet to compete against institutional traders from the comfort of their homes or home based offices. That's what the "e" in their name stands for, namely "electronic."
The most popular such contracts include ES, YM, and ER2, that is the emini contracts of S&P 500 futures, the Dow futures and the Russell 2000 futures. In other words, these are eminis of stock index futures.
One of the best ways to approach trading eminis is through mechanical trading systems. A system like that consists of a set of objective rules that determine how to open a position in the emini futures market and then how to close it.
It is possible to make money trading eminis in a purely mechanical fashion. This author has designed several successful and relatively simple, robust emini systems so this opinion is grounded in his considerable experience.
However, not all trading systems are born equal.
This applies also to mechanical emini trading systems. One category of such systems consists of day trading systems. These are systems that open and close their positions the same day, thus allowing traders to use the intraday margin, which is much lower than the overnight margin. For this reason, emini day trading systems appeal particularly to retail traders, those market participants whose budgets (and so also trading accounts) tend to be smaller. Because of smaller intraday margins, those traders can trade with more contracts and thus can stand a better chance to make more money.
Since more and more traders enter the thrilling arena of day trading emini futures, more emini day trading systems are being made available to them by people who specialize in designing such systems, usually referred to as vendors. We could, in principle, also call them experts, although calling someone that way does not necessarily make him or her a true expert. Judging by the quality of what is available out there, the field of vendors is hardly crowded with experts.
One way to judge the quality of a trading system, whether it is an emini trading system or not, is by examining its logic. Systems with a poor logic, that upon a closer inspection can even be found self-contradictory, are usually poor performers or have parameters that are rather unappealing to serious traders who know their stuff.
A good example of a faulty logic is that of many simple (or rather simplistic) breakout systems that try to capitalize on catching a strong trend in the market. In other words, they attempt to identify periods of wide range expansion. From the logical point of view, the problem with such systems is that they usually take position on 50-60% of trading days, while such expansion periods, or strong trends, occur only about 30% of the time. There is a clear inconsistency in what the systems do compared to what they were really designed to do. As a result of this, many simple breakout systems overtrade, which reduces their performance. In the long run, this performance can become too poor to make such systems good enough for trading.
The reason why overtrading reduces the profits here is quite simple. On the days when the strong trend does not materialize, but the system is active, three trading outcomes are possible: a small profit, a small loss, and a big loss. The small profits are likely to be offset by small losses and what we are left with are only big losses. While these big losses may not be frequent, in some systems they can be as big as the big profits from strong trends that the systems like that try to catch, which is clearly bound to affect their performance.
The way to prevent the system from overtrading (and thus the degradation of its performance) is to ensure that it trades only (in practice, mainly) on the days the strong trends really occur. Can such a system be designed? The answer is: yes, it can be, but you cannot do this with simplistic ideas.
Saturday, May 16, 2009
Emini Future Trading Explained For Beginners
By Doug Fisher
Emini contracts have experienced a boom in new market participants since their introduction mainly because of their lower margin requirements which allows traders that don't have unlimited funds to participate in the index futures markets. Emini contracts are available to trade on all three major indexes including the S&P 500, NASDAQ and the DOW and are widely utilized by traders for both day trading and scalp trading.
The S&P emini contract is one-fifth the size of the large contract which makes it appealing to traders with smaller brokerage accounts. Because the emini futures market is fluid, volatility creates opportunities for traders to profit everyday. Stagnant and sideways markets that so often are a part of the stock market is virtually non-existent in the index futures market. The New York lunch hour is usually the only slow time during any given daily session since floor traders and other market participants break for lunch, with action quickly resuming once the lunch hour is over.
Some traders only trade the first hour to hour and half each day, taking their profit and doing whatever they wish for the rest of the day, while others will trade only during the first and last hours of the day. The opening and closing hours of the day often see the most volatility and market moves, although many opportunities to profit are available throughout the day.
One of the most exciting features of the index futures markets and what attracts traders is that market direction is not a concern. Traders can profit by executing trades both long or short and only care about being on the right side of the trade. Unlike stock trading, hours of research and chart scanning for potential stocks to trade is eliminated with emini index futures trading. Since the same contract will be traded each day, there is no need to look over hundreds of charts each night.
Emini future trading offers and opportunity for traders to profit on volatility within the market on a daily basis. Although the futures market is influenced by financial news reports and geo-political events, the emini trader can usually sit on the sidelines when financial reports are scheduled to be released. Almost all financial reports have specified release times which allow the trader to plan his strategy around these reports. There is no need to worry about stock analyst downgrades or unexpected news events that are so common on the stock exchanges, which can adversely affect a trader's positions.
Emini contracts have experienced a boom in new market participants since their introduction mainly because of their lower margin requirements which allows traders that don't have unlimited funds to participate in the index futures markets. Emini contracts are available to trade on all three major indexes including the S&P 500, NASDAQ and the DOW and are widely utilized by traders for both day trading and scalp trading.
The S&P emini contract is one-fifth the size of the large contract which makes it appealing to traders with smaller brokerage accounts. Because the emini futures market is fluid, volatility creates opportunities for traders to profit everyday. Stagnant and sideways markets that so often are a part of the stock market is virtually non-existent in the index futures market. The New York lunch hour is usually the only slow time during any given daily session since floor traders and other market participants break for lunch, with action quickly resuming once the lunch hour is over.
Some traders only trade the first hour to hour and half each day, taking their profit and doing whatever they wish for the rest of the day, while others will trade only during the first and last hours of the day. The opening and closing hours of the day often see the most volatility and market moves, although many opportunities to profit are available throughout the day.
One of the most exciting features of the index futures markets and what attracts traders is that market direction is not a concern. Traders can profit by executing trades both long or short and only care about being on the right side of the trade. Unlike stock trading, hours of research and chart scanning for potential stocks to trade is eliminated with emini index futures trading. Since the same contract will be traded each day, there is no need to look over hundreds of charts each night.
Emini future trading offers and opportunity for traders to profit on volatility within the market on a daily basis. Although the futures market is influenced by financial news reports and geo-political events, the emini trader can usually sit on the sidelines when financial reports are scheduled to be released. Almost all financial reports have specified release times which allow the trader to plan his strategy around these reports. There is no need to worry about stock analyst downgrades or unexpected news events that are so common on the stock exchanges, which can adversely affect a trader's positions.
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