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Our Goal Today
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2010’s most painful day trade?
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Missing a Big Move
• I had SPY puts in a big way. I scaled out and moved my stop to break even.
I had 1,000 puts left.
• Market tanked – 7 figure trade.
• But – would I have been able to get out? Trades were broken, etc. I don’t
know.
• When I went long, I went into the futures market and caught 30 points on
the upside.
• I remember this day well as I was moderating the trading room and calling
out the trades.
• Remember – if you don’t catch the big “break” move – be ready to catch
the reversal, as it always comes.
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Which Futures And What Goals?
• There are lots of futures contracts, probably more than you
ever imagined.
• Though I tend to trade the bigger, liquid contracts – it is
important to know that there is a lot going on out there.
• Also – are our goals weekly cash flow? Longer term gains? Or
just being able to take advantage of opportunities and
hedging?
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Approaching The Day
• The key with futures is price, price and price.
• Other tools are good to help us create awareness – but in
futures price is king.
• Each day, we want to understand the structure of the main
markets we trade from a top down approach.
• I love doing this with the S&P 500 since it also influences with
my stock and option trading. Let’s take a look.
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In Terms of a Top Down Approach
• I like to start off with the major fibs of the last major swing.
• These levels are important to “not forget” as they do hang out
and influence many buyers and sellers, especially the algos.
• I look at them on both the cash and the futures.
• They are often similar, but it is always good to check.
• Some algos key off the cash, others the futures, so both are
important.
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Because of Globex, Have to use ES and SPX
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Why Key Big Fibs?
• This is where clusters of decisions are made.
• And where clusters of decisions are made—patterns form.
• Patterns let us know when market participants are pausing and
shifting gears.
• And this is what creates the next swing move.
• We can either get in early, or, if we aren’t paying attention, it
hits us like a freight train.
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Keep Those Big Swing Levels on the 30 Minute
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Patterns
• Note the patterns that formed around the key fib levels.
• In futures, with globex price action, head and shoulders are
more common.
• In the cash, wedges are more common.
• Ascending and Descending wedges are the most common
patterns for reversal in the cash indexes.
• (These start off wide and then narrow)
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Now • Let’s take those same thirty minute charts, and add a few of the
tools we are using here today.
• First, let’s start off with the LOHP and HOLP bars.
• This is a concept from my book, Mastering the Trade, with a few
modifications.
• First, it is based on the idea that a strong up trend will continue to
make higher highs and higher lows – so a break of the trend is
signaled by a break of the LOW of the highest bar in that trend.
• To avoid chop and back and forth, this tool also has a filter that
WAITS for a new 21 bar high or low to be made. If a HOLP or LOHP
happens and this condition has not been met, the signal is ignored.
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Next, Let’s Add Darvas:
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And the Grab Waves
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Last But Not Least • Squeeze – because it’s the squeeze.
• 21 period ATR – so you know where you need to put your stop
loss initially.
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Safe Trade Checklist
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For Day Trading I primarily use tick charts that
Are part of the Fibonacci Sequence.
1
2
3
5
8
13
21
34
55
89
144
233
377
610
987
1597
2584
4181
6765
10946
17711
28657
144 to 987 are best for day trading
Beyond that we are into swing trades
Before that is scalping
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Internals
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1. The markets started the day with strong selling, with the markets down 30
S&P points early in the session, and the $TICK hitting -1336, an extreme
reading.
2. The markets try to bounce. The tick readings test the +500 level, with the 5period simple moving average staying below zero. This is bearish, showing a
lack of enthusiasm on the buy side.
3. Here the $TICK makes new lows on the day, but this time it hangs out at
these levels, which means the selling pressure is intensifying. Note that the
5-period moving average makes new lows and even gets to -1000, which is
rare. The markets continue to sell off, with the S&Ps now down nearly 60
points on the day.
4. While the markets are making new lows, something interesting takes place
at points #4. While the S&P is making a lower low, the $TICK is making a
higher low. This is a huge bullish divergence, and a heads up that the market
may be getting ready to turn around.
5. I added a vertical line on the chart to mark the key turning point. At point #5,
the VIX rolls over and starts to fall, while the $TICK makes new highs on the
day, tagging the +1000 levels. Is it a quick flash in the pan? Each time the
$TICK tests the zero line, it pops back up to new highs. This only happens
when there is huge, sustained buying pressure. This is what scares shorts.
6. At point #6 the ADD, which had been dropping all day, starts to turn and
push higher.
7. The PCVA (combined equity and index put/call ratio) at point #7 has been
well over 1.0 all day, setting the stage for a short-covering rally.
8. The VOLSPD, similar to the ADD, also starts to push higher in a big way.
9. The TRIN starts to drop rapidly.
10.The SPY rallies hard, catches its breath, then pushes new highs into the close.
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5-Period SMA on the 5-Minute $TICK Chart
• The moving average on the 5-minute chart is a 5-period simple moving average. I don’t always use it,
but it can be helpful for newer traders as well as on days where the action is fast and furious. This
helps to provide a visual of where the tick is “hanging out.”
• There is a big difference between a quick spike up to over +1000 ticks vs. staying up around these
levels. It is rare for this moving average to cross the +500 or -500 levels. When it does, it means there
is sustained pressure in the markets.
• For example, at point #2, the ticks spike up to +600, but the moving average stays below zero.
Whereas to the right of the vertical line, the moving average crosses +500 and stays there for 30
minutes. This is a very rare occurrence and shows incredible conviction on the buy side, most of it in
the form of panic from shorts scrambling to get out of their positions.
• To the left of the vertical line, the sell side conviction was high, and the moving average spent plenty
of time below the -500 level.
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Reading the Internals
• These are the moments that define a trader’s job, which I equate
to, “Sitting under a tree with a fully loaded gun, waiting for your
next meal to walk by.” When we chase mediocre opportunities out
of boredom, we squander our bullets—both our real and
psychological capital—and by the time our prey comes walking past
the tree, we are out of ammunition and miss the opportunity.
• Meaning we are out of money to trade, or, more likely, we are
mentally spent and unfocused, so we miss the signs and miss the
move.
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1. This chart has all the classic elements of a panic day. First, it’s a Monday, a favorite day for
out of the blue moves. Second, the markets fell apart on Friday, with the S&Ps closing
down 65 points, breaking multiple key support levels. This left a lot of traders nervous
over the weekend. The day kicked off with a large gap down, as seen at point #1, with the
S&Ps down 25 points.
2. The markets quickly recovered, actually filling their gaps, providing a head fake for people
who held short over the weekend. (Remember, the markets are an equal opportunity
dream killer.) However, the $TICK quickly lost steam. Not only could it not get above +500
to indicate real buying, it gradually rolled over, hitting -1000 levels at point #2. Although
the ticks pushed back up to +500 quickly, the 5-period moving average couldn’t get above
zero, and the next rollover revealed intense selling pressure. Note here how the ticks
hung out at these lower levels, with the 5-period SMA hitting new lows on the day.
3. At point #3, the ticks tried one more time, pushing past +500 again, but the markets
languished.
4. When there is real panic in the market, the VIX moves first as traders buy these contracts
to hedge. At point #4, the VIX futures make new highs on the day. This is a huge red flag
that all is not well in candy land. When I saw this, I cut the rest of my longs loose and
focused on the short side.
5. With the VIX making new highs, the markets roll over, making new lows on the day. There
are no bullish divergences between the tick readings and the SPY prices.
6. Shortly thereafter, at point #6, the ticks made new lows . . . and stayed there. The only
time I’ve seen the TICK hang out around -1250 and push to -1500 for an extended length
of time is when a panic or crash is about to hit the market. I say “about” because note
that the markets were already down a considerable amount by that point, but the real
selling hadn’t even started yet. This is why, on days like this, you never buy the dip.
7. Panic is starting to set in here and the VIX pops higher. The markets experience a mini
flash-crash, flashing down, then whipping higher before rolling over into the close.
8. The selling pressure in the TICK and spike in the VIX leads to a mini-flash type crash in the
markets, where, in a matter of minutes, we saw AMZN drop $80, and many other stocks
had similar percentage plunges. The markets closed near their lows of the day and
experienced a large gap down the next morning.
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Weekly Cash Flow
• The key is to start with risk control – the big picture and the state of the
world DOES NOT MATTER.
• Only you and your account balance matters.
• This will be different for everyone. I’ll tell you what I do.
• I’m willing to risk 5% of my equity each week on trades.
• This means that if none of my trades work and I have a crappy trading
week – I don’t want to lose more than 5% of my account’s value.
• For this to happen on Monday, I would have to have 5 to 15 losing trades in
a row, depending on whether I am going in full size, or scaling in.
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Weekly Cash Flow
•
•
•
•
•
•
$50,000 account?
Great. 5% is $2500.
If I have a horrible trading week, then my balance will be $47,500.
The key here is it WON’T BE $20,000.
i.e., no blow ups. Live to fight another day.
Find the number that is right for you and stick with it. Remember if
you don’t have a plan, then the markets will abuse you.
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Weekly Cash Flow
• NEXT –
• Question:
• $50,000 account. At $47,500 I have to stop trading for the
week. Happily, my first three trades of the week are winners
and my account balance is now $52,500 by Wednesday.
• Based on my 5% stop loss rule, at what account balance would
I have to STOP TRADING should I have losing trades on
Thursday and Friday?
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Weekly Cash Flow
Trailing Equity Stop
Balance
5% Trailing Equity Stop Loss
Start 50,000
47,500 (2500)
M: Trade 1: 49,500 (-500 losing trade)
47,500 (2500)
T: Trade 2: 50,000 (+500 winner)
47,500 (2500)
W: Trade 3: 51,250 (+1250 winner)
48,687.50 (2562.50)
W: Trade 4: 52,500 (+1250 winner)
49,875 (2625)
F: Balance: $57,000
54,150 (2850) - Don’t lose your ass on a Friday (TLP)
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Weekly Cash Flow
• So, first thing is, you have to treat this like a business and not
screw around.
• This means managing your downside in a way that is designed
to take you to your chosen path - which is to wire profits out of
your trading account on a regular basis.
• (And even if you aren’t looking to wire funds out – this is a
great way to manage your equity)
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Weekly Cash Flow
• Why do it this way?
• Most people make money in the morning and give it away in
the afternoon.
• Most people make money at the beginning of the week and
lose it on Friday.
• Not only do they lose their profits, they dig a huge hole and
have to spend the weekend beating themselves up.
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Weekly Cash Flow
• This strategy, WHEN FOLLOWED, automatically kicks in good habits.
• First, since you are focused on cash flow, and not on dopamine, there is no
need to overtrade.
• “Remember, your goal is to trade well (and make cash), NOT OFTEN.
• In the table on a previous slide, there were only 4 trades that week.
• No need to trade 10 times a day if your goal is cash flow.
• If your goal is dopamine, then by all means trade 10 times a day and stay
on that emotional roller coaster.
• When you get tired of that bullshit, then adopt this system of managing
your funds ☺
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Weekly Cash Flow
• Why do it this way?
• Most people make money in the morning and give it away in
the afternoon.
• Most people make money at the beginning of the week and
lose it on Friday.
• Most people make money the first two weeks of the month,
and lose it the last week of the month.
• Not only do they lose their profits, they dig a huge hole and
have to spend the weekend beating themselves up.
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Weekly Cash Flow
• Next, stop losses.
• As a rule, it is better to trade smaller size and have wider stops.
This will keep you “in trades” even in the noise.
• TIP – the setups I will show you will often signal that it is time to
GET OUT before the stop is hit.
• If you are newer, YOU HAVE TO HAVE A PHYSICAL STOP IN PLACE.
This will keep you from going “deer in headlights” which could
destroy your trading account.
• Much harder to do this with options – one of the many advantages
of futures.
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Weekly Cash Flow
• For stops, the general rule of thumb is “stay outside the noise
but don’t take on more risk than is allowed in your trading
plan.”
• Going back to the $50,000 account example and the 5% of
equity risk per week, which is $2,500.
• So – do you risk $500 on each trade? Or $2,500?
• We’ll get to that. First let’s take a step back and look at some
charts and setups.
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Weekly Cash Flow
• Average True Range –
• If you are ever in doubt on what kind of stop to use, this is a very
simple tool.
• Take the 21 period average true range of the market and time
frame you are trading.
• Your stop HAS TO BE outside that value. It’s ok if it is 1 tick outside
that value. But the further the better. Let’s take a look. By default,
on a 30 min chart of the ES, 2X the 30 minute ATR will give you a
solid stop and let you know what position size you can use.
• Remember – this is your hard “oh crap” stop. If the squeeze fires
short, etc you are getting out well before it is hit.
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For Your Business?
• I’d rather see you grab two well thought out, well planned 30
minute ES trades in a week vs. 12 dopamine inducing yet
ultimately not constructive 5 minute chart trades.
• Better for your bottom line and your sanity.
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Weekly Cash Flow
• When placing a trade, the first thing you do is look at the ATR
on the time frame you are trading. This will determine your
minimum stop loss.
• Then you calculate how much that is per contract.
• If it is $250 per contract, and you don’t want to risk more than
$500, THEN YOU CAN ONLY TRADE 2 CONTRACTS ON THIS
TRADE.
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Weekly Cash Flow
• The number of contracts will often change on every trade,
depending on the ATR and the time frame you are trading.
• Remember, this is a money management tool only. It is proven
that “big size and small stops” absolutely DOES NOT WORK.
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Other Tools
• A few other tools I like to use -
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The MTFA (multi time frame analysis) tool from
our scanner helps me to see, at a glance, whether
the various key futures markets are trending
higher, lower or neutral on various time frames,
and whether a squeeze is forming or has fired.
Bright green = strong uptrend
Dull green = medium uptrend
Faded light green = weak uptrend
Gray = Neutral trend
Faded red = weak downtrend
Pink = medium downtrend
Bright red = strong downtrend
Play Button = squeeze developing
Play button with two arrows = squeeze fired
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http://tos.mx/gllmd8
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Options on Futures
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Options Futures 101
• Options on futures are treated like futures – they aren’t subject
to the pattern day trader rule.
• Monthly income from futures options
• 1 futures option = 1 futures contract
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Basic Tips
• Make sure the option you are trading is on the futures contract
month you are trading. This is important during rollover – you
don’t want to be looking at quotes on ES options on the
“March futures contract” when in fact you are looking at the
“June futures contract.”
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No Risk Trade
•
•
•
•
I just bought a 2050 ES call option for 2.50.
At what level do I need to short the ES in order to set up a NO RISK trade?
Answer: strike price plus price paid for that strike. 2050 + 2.50 = 2052.50.
So I need to short ES at 2052.50 to have perfect hedge trade. If I short
higher than that I lock in a guaranteed profit. That is, if I short at 2054.50
then I’ve locked in $100 per contract. And I can go to the movies and let
this cash settle.
• In this case, if the ES rallies 20 points, I’m perfectly hedged, but if it falls 20
points I make all of that profit, less the 2.50 (2 ½ ES points, or $125) I paid
for the option.
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No Risk Trade
• If the ES goes to 1580 – we lose no money, only the
commission. Why? Because the money we lose on the short
ES contract is being offset by the call option. It’s a wash.
• But, if it goes to 1530, we make 22.50 points on the ES short
(i.e., short at 1552.50) and lose the 2.50 we paid for the
option. In other words, we made 20 ES points on that play.
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What can happen that’s bad?
• The worst case scenario is we don’t get filled on the ES short at
1552.50 and the market sells off hard.
• In this case, we lose, assuming we let it expire worthless, the
2.50 (remember all futures options are quoted in points, not
dollars, so 2.50 = 2 ½ ES points = $50 per point x 2.5 = $125)
we paid for the call option.
• So we would be out $125 per contract in that scenario.
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What if we can’t get 1552.50?
• It’s ok to “short the next rally”
• Let’s say we see the market rolling over and decide to get short
on the next rally to 1548.50.
• In this case, we don’t have a “no risk trade” but we do have a
locked “low risk trade” in place, as our max loss is now 1552.50
– 1548.50 which is 4 points or $200 per contract.
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Why add options leg first?
•
•
•
•
What about adding the futures contract first?
Main problem?
We add the ES short – and now we want to add calls on a rally.
If you don’t have a stop on the ES short, and the market takes
off, and you have a hard time getting a fill on your call option
(hedge) you are at risk.
• Starting with the option means you start with a very limited
risk position that you don’t have to worry about stops, etc.
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Best Stop Ever
• Why utilize this approach by buying an option and then getting
into a futures contract?
• Because with this strategy you have eliminated the need for a
fixed stop at a fixed level. This is why most people get stopped
out – because they have decided on a fixed risk. That is, if it
goes “2 points against me” I’m out!
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ES Spreads?
• Normal way to do a spread is to, for example, sell a 1545 ES
put, and then buy the ES 1540 put as protection.
• With futures, because the margin on futures is low (unlike
stocks) you can also place offsetting orders in the futures
markets to hedge your short option.
• In this case, I sold the 1545 ES put, then placed a sell stop
order at 1540 on the ES.
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Directional Trade Rules
•
•
•
•
I just bought 10 1500 call options on Soybeans.
Soybeans are currently trading at 1476
First, why did I go out of the money?
Second, how much money did I just risk?
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Beans
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Beans
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Soybean Trade
• If I’m willing to risk 10 points on 10 contracts on beans (i.e.,
$10,000) then I want to set up a situation where my total risk is
the same OR LOWER to be in the options.
• Since I’m going out of the money, I want my overall risk to be
lower.
• In this case, my max is fixed – EVEN IN THE EVENT OF A GAP
DOWN AGAINST ME.
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