Got a great question from Mitch yesterday which I'd like to answer in this article. But first a quick update on Thursday's Emini action.
Yesterday the Emini closed down 17.25 points on below average volume and range – showing a lack of selling pressure. Today the Emini closed down just 4.25 points but on higher volume. A large amount of volume came in at the end of the day, around 1,328, and the Better Volume indicator shows High Churn. My short swing trade has worked out well but it's time to take profits and watch for an upside break.
Now here's Mitch's question:
"I live on the East coast and only have 1 hour in the morning and 1 hour before the close to trade. I have always over-traded but now want to take no more than 1 trade per day. I prefer to look at just 1 time frame but I can handle 2 charts if needed.
I use TradeStation and have a $10,000 account. Even aggressive money management would suggest that I risk not more than $1,000 per trade. So my maximum trade size using a 4 point stop would be 5 contracts. I'd actually prefer to only start trading with 2 contracts, which would allow for more forgiving stops and bigger targets.
I'm looking for straightforward entry rules with targets and stops based on your indicators. Although it may seem like I am seeking a magic bullet, I really am just trying to find a good combination of time frame(s), indicator(s) and trading plan to identify 3-5 trades per week."
This question raises a number of points.
It's definitely possible to be a day trader and only trade for a couple of hours a day. You need to pick your hours though. Personally, I like to look for trade setups a couple of hours after the European markets have opened. Then 30 minutes after the US markets open. Lastly about an hour before the US markets close.
There are also times I avoid. The first 20 minutes of the day can be tricky with a lot of positioning before a decent trend move (6 to 10 points) develops. Volume also dries up in the middle of the day (lunchtime) and whipsaw trades are more frequent. I also never open a new trade in the last 20 minutes of the day session. Lastly, I avoid the overnight session until after the European markets have been open for a while.
I use these windows of opportunity to start looking for setups. But the worst thing is to feel pressure to take a trade because you have a job or an appointment to get to – and the window of opportunity is about to close. You start to force trades, instead of letting the setups develop. You'll also exit winners sooner and end up reducing your average trade profit.
Of course if you're scalping for a 0.25 or 0.50 point these guidelines probably don't apply, but they make sense for me when I'm looking for 4+ point trades.
I strongly believe in using multiple time frames but the minimum number of trading indicators. My day trading screen has 3 tick charts side-by-side. The time frames I use are 233 tick, 699 tick and 2,097 tick. Having the charts side-by-side allows me to see price and volume patterns developing in different time frames. It also gives me enough back history to see previous important support and resistance levels.
However, on each chart I only have my Hilbert Sine Wave and Volume indicator. These are non-correlated indicators and so I am getting the maximum information about price and volume with the minimum number of indicators (and information overload).
On a second screen I also have my Trend Line indicators on the same 3 tick charts side-by-side. I use these charts to see if my trades break any significant trend lines, indicating that I might have got on board a "runner" and the profit target can be increased to 6 or 8 points.
Stop Loss & Position Sizing
With a $10,000 account I would only ever trade 1 Emini contract. You should never be in a hurry to make money – always focus on trading well and reducing mistakes. It's too easy to blow an account with too large a position.
You can easily have 3 losing trades in a row. With a 4 point stop that's $600 per contract. If you were trading 4 contracts your account would be down 25%. Once you're down that much you start saying to yourself "I'm not going to let the next trade be a loser". Once you've started down that dark path you start ignoring stops, cutting profits short, saying to yourself that this trade will work out in the end and treating it like a swing trade rather than a day trade.
We've all been there. The answer is – don't put yourself under the pressure. Just trade the 1 contract and focus on reducing mistakes.
I don't use fancy scaling in or scaling out of a trade. I'm either all in or I'm out. I find the volatility in the Emini too high to justify trailing stops – I'm more likely to make more getting taken out at a stretch target than trailing a stop and being taken out prematurely. This is a personal thing I suppose, but it's another reason why you don't need to use multiple contracts with a small account.
So should you be using a day trading or swing trading methodology (remember swing trading is holding more than a day, my definition at least). My swing trades are mostly system based with average trade drawdown of $600 and a maximum of $3,000 (trading 1 contract). This is too much risk to take on with a small account.
Instead I would focus on day trading and shooting for 4 points. Once you've made your 4 points then you're out until tomorrow. You could even start with just shooting for 2 points until you become more confident. Even consistently making 2 points generates plenty of opportunity to build up an account and then trading multiple contracts.
A good friend of mine says "Don't get greedy – Get out!" And he's right – be patient, wait for the right set up, take your profit and then walk away – then come back and do it again tomorrow.
You can read more about my particular Emini day trading methodology here. I'll be posting another couple of videos soon – one walks through a recent day trading example, the other goes into more detail about the Better Volume indicator (which is free). Remember you need to develop your own methodology.
A rambling post I know and no charts! But just my thoughts on trading psychology. Good luck with your Emini trading.