Abe Smith YM 7-20-07

[AbeSmith 10]

Hello. Here is the log for today. I know I said I would not trade for a while, but the forces telling me to trade are too powerful. So, um, here it is. All trades were YM, 1 contract per trade. All charts and times are central time. All except the first chart are 4hr charts, 3 minute candles:

 

Today I turned on CNBC before the open and they said that Caterpillar and Google reported lower earning and that the Caterpillar would have a big impact on the Dow. Since I was planning on trading the YM today I looked for shorting opportunities. The Dow was already down before the open and I considered shorting before the open to get a head start. Turned out to be a short term mistake. I shorted 1 YM contract at 8:27 C.T. at 13998, because I was paying attention to the chart for a price drop before the open and at around that time there was a big sell momentum and lots of negative outlooks coming from CNBC about Caterpillar and Google so I thought it was a sell off so I though I will short. But right after I shorted the price jumped up and you can see that that same candle is now a green candle. Then right after the open there was a huge rise in price, so I panicked a little seeing the P&L drop. But I decided to stay in and get my money back on the dip. At this point I didn’t think there was going to be a huge sell off today because of that price jump at the open. So I waited and the price dropped and I bought my short at 8:57 CT at 13987 for an 11 point profit. I bought my short at 13987 because of the green pivot near, so I was afraid that it might be a support area. Also, that initial price surge scared me because I wasn’t sure what it was. The trend was clearly down from yesterday’s close and the Caterpillar and Google reports should have caused the price to drop not rise. Now I think that the initial price surge was mostly longer term investors or traders who had an automatic order that was planned to go in at the open. Is that right? So I missed the big move. Should have held on to the short, but the initial price rise scared me and so I decided to be cautious. Also, I didn’t know how how strong the CAT and GOOG effect on the market would be. So I stayed out. Here is the chart for that trade:

 

 

But at 11:30 CT I got the trading bug again and did a couple of short trades for 2 points and 2 points. The latter short was at S3, which was approaching a pivot point just bellow 13950. So I decided to short at S3 at 13943 at 13:08 CT because I thought the pivot would be a resistance. But it broke the pivot. So I waited for it to pull back so I can get my money back. I did manage to pick up a couple of points on that short by buying my short at B3, 13941. But the trend was positive now because the highs were going higher and the lows higher as well, and the pivot was now significantly broken. So I decided to look for longs. Here is the chart for that trade (S3,B3) and the remaining trades for the day are also here:

 

 

So since the trend was clearly up and the pivot was not proving to be a strong resistance point I decided to go long at B4, 13:32CT, at 13945. Sold at S4, 13:59CT, 13961, for a 16 point gain.

 

Then decided to buy again on a dip, around the pivot, which was also a good buy point according to a trend line I had drawn, so bought at B5, 14:08CT, 13950. But then I saw that the price dropped below the pivot and bellow the trend line where I expected it to bounce from. When it dropped below the previous dip’s low I realized that it was a bearish sign and possible trend reversal, so I decided to hold on at least until I get my money back on a pull back. Then it went up all the way to 13960 and I though to sell it but decided to hold on a bit more for more profit, but it did not go higher but dropped down and this time I decided to cut my losses because the trend was clearly down due to the lower low and lower high. So I sold at S5, 14:24CT, 13953 for a 3 point gain.

 

In total I had 34 point gain, 10 total trades, 5 roundtrips. Total profit today minus commission was $148.

 

Some of the things I learned today:

 

1. Have a higher risk tolerance. Before I was too jittery and a $27 loss on my P&L would scare me too much and cause me to sell based on that and not on more objective analysis, and so I would lose some good opportunities because I was not risk tolerant and expected to make a perfect entry and exit.

2. Today’s sell off was not based on a major economic problem but rather caused by two big companies who had lower earning, and not necessarily due to major problems in their company but due to things like spending too much or not enough sales in North America. But nothing that would say that the economy is not good per se. So there was some panic sell off which is probably normal, but then in the afternoon it seemed that the big players and traders combined were moving their money from GOOG and CAT, if they had any in there, and other stocks that they may have sold due to the sell off, and they were moving this to other stocks buying them cheap, and causing a price rise. So, a weak non-economic sell off like today could have good buy opportunities in the afternoon.

 

Anyways, just though I should share my experience and see what other people think.

[tony1d 10]

hi Abe, i'll give you my thoughts and its just my opinion. I am not a fan of trading the YM premarket, just for me not enough liquidity which means very choppy price action. good you are trading 1 contract and learning while you do it. Much different from the SIm as the mental aspect comes into play. You need to learn a little about market profile. I saw we were opening below yesterdays value area which told me the other timeframe participants were in control and the market was out of balance. It was also options expiration day and friday in the middle of the summer so i expected big price swings and it might be a tough trading day. Following the open we pushed through S1 but i didnt plan to trade the first 1/2 hour as i wasnt believing the buying would last plus I expected sellers to show up around 10 am or so. Once i saw the rejection below s1 and internals weakening (huge divergence between the ADD and trin) i was looking for a short and after a retest of S1 we broke down about 50 YM points. I basically looked for shorts the rest of the morning until we broke through s3 and buyers came back in around 1 pm. I had a few good setups but always use price action and tape reading as a confirmation, if it was there i took the trade, if not i didn.t. I alternated between the YM and ES but found the ES better later in the day. Its good to listen to the news but you dont trade news, you trade market reaction to the news so dont over rationalize how you think the markets should react, that bias will lead to mistakes. Understand and use the cash market major indicators, ADD, TRIN, TICK, P/C ratio as they all have an effect and can direct you to how the market is behaving. As far as stops, i have my own thinking, i will not let a position go against me and sit on it hoping it reverses before hitting my stops. I trade high probability setups and momentum, if it stalls and reverses, i was wrong and will get out of the trade minus a few ticks. I dont care that letting it chop around may eventually lead to a winning trade. I just wait for the next one. My trading journal confirmed that for me this was a much better process than the latter. You made money today, good for you, thats the botom line. KEep at it..... tony

[brownsfan019 17]

Abe - I have a question - you mentioned holding a losing position until you got your money back... does that mean you had no protective stop in place or was it just not hit?

[AbeSmith 10]

hi Abe, i'll give you my thoughts and its just my opinion. I am not a fan of trading the YM premarket, just for me not enough liquidity which means very choppy price action. good you are trading 1 contract and learning while you do it. Much different from the SIm as the mental aspect comes into play. You need to learn a little about market profile. I saw we were opening below yesterdays value area which told me the other timeframe participants were in control and the market was out of balance. It was also options expiration day and friday in the middle of the summer so i expected big price swings and it might be a tough trading day. Following the open we pushed through S1 but i didnt plan to trade the first 1/2 hour as i wasnt believing the buying would last plus I expected sellers to show up around 10 am or so. Once i saw the rejection below s1 and internals weakening (huge divergence between the ADD and trin) i was looking for a short and after a retest of S1 we broke down about 50 YM points. I basically looked for shorts the rest of the morning until we broke through s3 and buyers came back in around 1 pm. I had a few good setups but always use price action and tape reading as a confirmation, if it was there i took the trade, if not i didn.t. I alternated between the YM and ES but found the ES better later in the day. Its good to listen to the news but you dont trade news, you trade market reaction to the news so dont over rationalize how you think the markets should react, that bias will lead to mistakes. Understand and use the cash market major indicators, ADD, TRIN, TICK, P/C ratio as they all have an effect and can direct you to how the market is behaving. As far as stops, i have my own thinking, i will not let a position go against me and sit on it hoping it reverses before hitting my stops. I trade high probability setups and momentum, if it stalls and reverses, i was wrong and will get out of the trade minus a few ticks. I dont care that letting it chop around may eventually lead to a winning trade. I just wait for the next one. My trading journal confirmed that for me this was a much better process than the latter. You made money today, good for you, thats the botom line. KEep at it..... tony

 

Thanks Tony. That was very helpful.

[AbeSmith 10]

Abe - I have a question - you mentioned holding a losing position until you got your money back... does that mean you had no protective stop in place or was it just not hit?

 

I had a mental stop in place. I had bad experience with firm stops before. I would place the stop firmly, only to see my stop hit and the price later pull back, but I could not take advantage of the pull back because the firm stop got triggered. So my current strategy is designed to take advantage of those pull backs in the hopes of losing less, evening out, or profiting from a imperfect entry.

 

I place the initial mental stop or alert, in an area where if the price hits it means that my plan is not going the way I imagined, an imperfect entry but perhpas still it is a correct read on the overall trend, or the second possibility is that it was a completely wrong read on the market. In the first situation the entry was imperfect, but the price move against me is short term and the overall markt is still going in the direction I imagined. So that is not a problem and I can still profit if I hold on. In the second scenario, the market is going in a different overall direction and my read was completely off, so that means to get out, but even in this case, often it will not go straigh up but swing back significantly, unless the move is based on major news, then in those cases it will move against me quickly and with very minor pull backs. But if you're paying attention to the news and know when certain important reports are supposed to be released then you have a better chance of identifying those moves earlier. But in non-news based moves against my position I can more often at least reduce my losses significantly on the pull backs. But a firm stop can't take advantage of the pull backs.

 

So my understanding is that even on clearly wrong reads, the price often pulls back, unless ofcourse it's based on some major news, then it might go straight in one direction with insignificant pull backs. The way I see it this strategy works better if used on non-news price moves, because those moves are less affirmative and more likely to pull back. If it is a news-based move against you then all you can do is pay close attention to the news and when economic data is to be released, and if you don't catch that then when the price goes to zone 2 very quickly then you know something is wrong and you will get out. But still, the way I see it there are alot of things that have to go against you for you not to be able to take advantage of the pull back.

 

The firm stop is based on one factor and one factor alone, price move. It does not take into account other factors, like how is the price moving. Specifrically how fast is it moving, and is it news related or not? If it is not news related and relatively slow move then it is more likely that it will have significant pull back.

[AbeSmith 10]

Hey. Sorry if I'm making alot of incorrect conclusions. As you know I'm very new to this and don't want you or anyone to think that I'm making recommendations or pretending to be an expert. I'm only stating how I'm perceiving the maket and why I'm not using firm stops in my trading.

[tony1d 10]

Abe, when you enter a trade, you should have a profit target. You should also have a stop loss in place. the ratio between the two should be an expected overall profit. Ex. your profit target is 10 YM points, your stop loss is 5 YM points. that 2/1 is your ratio. If your stop is 10YM points thats a 1/1 ratio and with slippage and commissions, you will be out of money shortly if you get the point. You shouldn't be trading news, you should be flat into news and if you want to get in wait for the market reaction once the volatility settles down, they'll be plenty left on the move for you to profit from it. Try to keep things simple, not too many indicators, dont be led by whats going on on CNBC. Pay attention to price action and where the market is trying to go and how well its accomplishing it. Trading off a 55t chart is full of noise and you're scalping which is a very tough way to trade. I only use a 55t chart for timing my entrys along with the tape. I find i trade better when i keep things very simple and only trade a few setups depending on the type of market we're in. Sometimes i sit on my hands most of the day and thats ok too. I'll sit out most of August, its always been my toughest month. Good luck

[brownsfan019 17]

Abe - I wish you luck with your mental stops. Your plan worked this past week; however, if you get caught in a trending day waiting for your pullback, you may be waiting all day. And all it takes is ONE trending day to wipe your account out.

 

You don't want to hear that now, so keep us posted and I'll be interested to see how you hold up on a strong trending day.

[brownsfan019 17]

The firm stop is based on one factor and one factor alone, price move. It does not take into account other factors, like how is the price moving. Specifrically how fast is it moving, and is it news related or not? If it is not news related and relatively slow move then it is more likely that it will have significant pull back.

 

One last question tonight - is your analysis here based on the casual flipping through books at Barnes and Noble or have you done/purchased statistical analysis to back this up?

[AbeSmith 10]

Abe, when you enter a trade, you should have a profit target. You should also have a stop loss in place. the ratio between the two should be an expected overall profit. Ex. your profit target is 10 YM points, your stop loss is 5 YM points. that 2/1 is your ratio. If your stop is 10YM points thats a 1/1 ratio and with slippage and commissions, you will be out of money shortly if you get the point. You shouldn't be trading news, you should be flat into news and if you want to get in wait for the market reaction once the volatility settles down, they'll be plenty left on the move for you to profit from it. Try to keep things simple, not too many indicators, dont be led by whats going on on CNBC. Pay attention to price action and where the market is trying to go and how well its accomplishing it. Trading off a 55t chart is full of noise and you're scalping which is a very tough way to trade. I only use a 55t chart for timing my entrys along with the tape. I find i trade better when i keep things very simple and only trade a few setups depending on the type of market we're in. Sometimes i sit on my hands most of the day and thats ok too. I'll sit out most of August, its always been my toughest month. Good luck

 

Thanks Tony. What you say makes good sense, especially the 2/1 ratio. So I need to look for high probability setups with 2/1 ratios and over time it should be profitable.

[AbeSmith 10]

Abe - I wish you luck with your mental stops. Your plan worked this past week; however, if you get caught in a trending day waiting for your pullback, you may be waiting all day. And all it takes is ONE trending day to wipe your account out.

 

You don't want to hear that now, so keep us posted and I'll be interested to see how you hold up on a strong trending day.

 

Brownsfan, you're probably right. I'm still trying to learn my style and mental stops seemed right at the time, but I'm probably wrong about that and the pull back strategy is probably wrong. So I will try to adjust my strategy by placing stops with a 2/1 ratio and try to do quality setups rather than the risky and less promising setups I've been doing. But I will keep everyone posted about my trades because it helps me to record the even and also get excellent feedback from knowledgable people like yourself.

 

One last question tonight - is your analysis here based on the casual flipping through books at Barnes and Noble or have you done/purchased statistical analysis to back this up?

 

My analysis is based on my limited trading experience. So I was only stating what was going through my mind to see what other people think about it who have been studying and trading the market longer than I have.

[brownsfan019 17]

abe - my suggestion is simple - always have a "I am wrong when price reaches here" level. And while you are in fact correct in that many trades can eventually become a profitable trade if you just hang on long enough, it only takes one solid trending day for you to be on the wrong side waiting and hoping. And then wondering where your trading account just went.... I know you have not seen that day yet, but they happen approx 20% of the time. That means, every day you trade has a 20% chance of being your last if you do not have a hard stop placed and willing to accept that.

 

This process of placing a stop really comes down to how you are trading. What I mean is, if you find the majority of your setups are going into the red before any chance of making money, then something is wrong. You should have plenty of trades that go positive and go positive quickly.

 

Side note - if you find the majority of your trades go negative quickly... then... perhaps you are simply playing the wrong side of the trade.

[AbeSmith 10]

abe - my suggestion is simple - always have a "I am wrong when price reaches here" level. And while you are in fact correct in that many trades can eventually become a profitable trade if you just hang on long enough, it only takes one solid trending day for you to be on the wrong side waiting and hoping. And then wondering where your trading account just went.... I know you have not seen that day yet, but they happen approx 20% of the time. That means, every day you trade has a 20% chance of being your last if you do not have a hard stop placed and willing to accept that.

 

This process of placing a stop really comes down to how you are trading. What I mean is, if you find the majority of your setups are going into the red before any chance of making money, then something is wrong. You should have plenty of trades that go positive and go positive quickly.

 

Side note - if you find the majority of your trades go negative quickly... then... perhaps you are simply playing the wrong side of the trade.

 

Thanks Brownsfan. You are absolutely right. Thanks for the great help.

[Nick1984 10]

One quick question: you said that you were taking only 2 point trades in/out so what commissions are you paying for a round trip cause you're taking only $10 per contract on those trades?

[AbeSmith 10]

One quick question: you said that you were taking only 2 point trades in/out so what commissions are you paying for a round trip cause you're taking only $10 per contract on those trades?

 

Yo Nick, the commission is 2.13 per trade, 4.26 per round trip.

[Nick1984 10]

hehe nice, then at least you're still coming out with a 5.74 profit on those trades.

[tony1d 10]

Abe, are you sure you're only paying 2.13 per contract/per side? sounds cheap. Make sure that includes exchange fees and i dont see how it can. check your statement.

 

tony

[Guest cooter]

Brownsfan, you're probably right. I'm still trying to learn my style and mental stops seemed right at the time, but I'm probably wrong about that and the pull back strategy is probably wrong. So I will try to adjust my strategy by placing stops with a 2/1 ratio and try to do quality setups rather than the risky and less promising setups I've been doing.

 

MENTAL STOPS ARE FOR

MENTAL TRADERS! :mad:

 

[Guest cooter]

Abe, are you sure you're only paying 2.13 per contract/per side? sounds cheap. Make sure that includes exchange fees and i dont see how it can. check your statement.

 

tony

 

4.26 r/t all-in to trade the YM is NOT cheap these days, Tony. Better check your sources and look for a better deal too.

 

LOL....

[AbeSmith 10]

Abe, are you sure you're only paying 2.13 per contract/per side? sounds cheap. Make sure that includes exchange fees and i dont see how it can. check your statement.

 

tony

 

Hey Tony. I checked my statement and it seems to me that 2.13 is the cost for 1 contract/per side.

[AbeSmith 10]

Hey Tony. I checked my statement and it seems to me that 2.13 is the cost for 1 contract/per side.

 

And I didn't notice any other fees.