Steve's Simple System #2

[steve46 12]

Here's another very simple idea that traders might find useful as a starting point for building a systematic approach to trading the S&P Futures

 

The basic idea is to limit oneself to using longer time frame charts and trading tests of the previous range (RTH) open high & close or well established areas of support/resistance.

 

The rule set is also very simple as follows

 

1. Starting with the Weekly, Daily and 130 minute charts, ask yourself whether price is trending or range bound

2. If the answer is "Trending" the next challenge is to identify "preferred" trade direction. In other words, the trader will determine in advance whether to "prefer" long or short entries

3. If the answer is "range bound" then the trader's next job is to identify Support and/or Resistance

 

The attached charts are the basis for the system and they include the weekly, daily, 130 min and 30 min

 

I'll talk more about it as time permits. Still testing it, but so far it seems promising...its simple in design and straightforward to implement, and because the trader works from longer time frame charts, they will tend to be taking trades at the extremes, which places the trader in better alignment with commercials and speculators who have the money to move markets, thus increasing the odds of success.

Edited February 18, 2013 by steve46

[domer03 10]

Hi Steve,

 

The system sounds promising. A few initial questions to probe:

 

If there is a trending market, one would assume that a trading entry would occur on a retrace. What would be the method used? (i.e. 20 MA, Fib retrace, etc.)

 

If there is a range bound market, what would be the preferred time that would classify price action as such? In other words, a daily chart could be trending up but the intraday 15 minute chart would be bouncing between support and resistance levels.

 

Looking forward to hearing more about the strategy!

[steve46 12]

Sir or Madam

 

I've decided to stop posting at this point. Please direct your questions to the site owner/administrator...I am sure he will be able to help you out..

 

Best of luck to you

 

Steve

[steve46 12]

I noticed that quite a few people have looked at this thread....frankly I was surprised.....I don't have a class going on at this time and right now I am simply managing a position....so I will jump in here and post a couple of ideas that might help folks who are having difficulties

 

First in the chart below, notice that I have two time frames...on the far left 30 minutes and on the right 3 minutes.....from my point of view what matters is 1) whether you can get a sense of "trend" (on an intraday basis)....and 2) can you obtain sufficient data to make a good trade selection (point of entry)....If the charts you use aren't providing that kind of help....you need to re-think what you are doing...

 

Referring again to the chart, I use lines (to represent the open, high & low of previous sessions and rectangles to provide visual reference to the IB (initial balance)...In the past I use a lot of lines and rectangle and I discovered that students found them confusing....now I have simplified my display and I think it provides a solid reference without too much complexity.....a good thing for new and struggling traders.

 

on the lower pane I show aggregate volume over time...this is adapted from an indicator I used years ago....while I can't say much more about it, I am testing other publicly available indicators and I'm confident that I will find one that works just as good as this...for me the primary concept is that volume leads price...so I use volume and volatility to provide the springboard I need to confirm trade selection and to manage once I am in a trade...the advantage of using volume and volatility this way is that I never worry about leaving money on the table....I enter based on volume NOT price, and I exit based on volume NOT price....for me price is just a way to keep score of points.....at the end of the day.

 

For those interested I show these trades as they develop on my blog (google BlogSpot)....I have already posted the URL elsewhere...

 

For those interested in the "score" I had three (3) wins, one (1) loss

 

Best of luck

Steve

 

PS. silly of me...I am flat, as the long hit my primary target at the top of the rectangle....so that's why I say I had three wins/one loser...I'm done...

Edited June 27, 2013 by steve46

[steve46 12]

So I am already getting comments and questions asking about the use of the "IB"....look this is basic stuff....basic to Market Profile....check it out (Google it)

 

As can be seen in the chart below, there's a reason why I use it.....it provides a nice framework around which to operate....I do use additional data, but clearly there are other participants out there using it too...

[steve46 12]

Another example of how a bracketed market works with my display....

 

I also call this a "run/pause" model in deference to Don Jones over at Cisco Futures

 

He is one of the very few public figures who have developed their own version of Market Profile....similar to mine, the primary difference is in how one defines value....

 

The prime difference is that I also rely on market microstructure to tell me when other professionals are likely to act....for example in all my charts I monitor the close of Euro Cash Markets....why? because at that point in time, a significant group of market participants worldwide are obliged to manage their positions...understanding how they decide whether to buy or sell is in part MY edge

[Enigmatics 10]

Steve .....

 

What is your opinion of when it comes to trading futures or equities/options? Which instrument do you find more reliable and why?

[steve46 12]

Steve .....

 

What is your opinion of when it comes to trading futures or equities/options? Which instrument do you find more reliable and why?

 

I started out in options at Gelderman (before it was ED &F Man) spending several years on the floor and off the floor in an office. Its a different game and requires different skills...

 

I have no idea what you mean by reliable....again it depends on your training and experience. I remember trying to "sell to close" 200 options on Doublclick and having the floor tell me that there was "nothing done"....that won't happen with equities or futures, but other than that....its very nearly the same.

 

As with all things in the financial industry, your education and experience are critical to your success.

 

Good luck

[Enigmatics 10]

I started out in options at Gelderman (before it was ED &F Man) spending several years on the floor and off the floor in an office. Its a different game and requires different skills...

 

I have no idea what you mean by reliable....again it depends on your training and experience. I remember trying to "sell to close" 200 options on Doublclick and having the floor tell me that there was "nothing done"....that won't happen with equities or futures, but other than that....its very nearly the same.

 

As with all things in the financial industry, your education and experience are critical to your success.

 

Good luck

 

I day trade SPY options quite a bit, always next week's chain at the money. My preferred trade is more or less reversion to VWAP or the intraday volume POC once an "extreme" has been reached (I recently created a thread about it on here). I find that it gets extremely difficult trying to day trade in tight windows ..... i.e. most trades on lower intervals (especially on narrow range days).... or basically less than 40 ticks on the underlying. The spreads can often times complicate my exit when my limit sell is not hit. Then I have to scramble to market order which again is most likely going to be 2-3 cents under the ask.

 

I often wonder if scalping the /ES would be more beneficial as I wouldn't be dealing with time decay and spread issues.

[SIUYA 11]

without derailing Steves thread....

remember most options traders are busy spreading their trades and hence orders on close are unlikely to get done, and spreads will blow out when the market makers cant spread, hedge or be bothered on the close....in that case futures which have a tighter spread, and is made of a larger collection of traders would be considered more reliable. This is on top of the vagaries of theoretically pricing the options in the first place.

Goes back to when the best times to trade are, and considering what the other person willing to take the opposite side is wanting to do....without compromising too much on price.

 

enigmatics - are you predominately trading long or short vol - trading gamma??? then maybe your best bet is to hedge yourself in the underlying?

[Enigmatics 10]

without derailing Steves thread....

remember most options traders are busy spreading their trades and hence orders on close are unlikely to get done, and spreads will blow out when the market makers cant spread, hedge or be bothered on the close....in that case futures which have a tighter spread, and is made of a larger collection of traders would be considered more reliable. This is on top of the vagaries of theoretically pricing the options in the first place.

Goes back to when the best times to trade are, and considering what the other person willing to take the opposite side is wanting to do....without compromising too much on price.

 

enigmatics - are you predominately trading long or short vol - trading gamma??? then maybe your best bet is to hedge yourself in the underlying?

 

I trade both long and short using these options.

 

The more people I talk to, the more I get the impression that trading futures would be more reliable than options (particularly if I'm trading small pockets). Those "vaguaries" in the theoretical pricing models definitely makes things so much more complicated. Now normally I trade right at the money and the delta is around .50 .... so I know that all I need to do count how many ticks on the underlying I'm targeting. Then I divide that in half and add that to the entry price on my options. If the move is quick, generally speaking the limit sell order will get hit. The longer it takes, the more complicated it gets because of time decay ..... which then makes life miserable for trying to set the appropriate stops.

 

I think I'm answering my own question.

[steve46 12]

Here are today's trades.....I took the first but not the second as I had prior obligations today

 

By now folks following this should see that the system provides a nice framework for entries....in my experience one of the problems that retail traders have is that they don't take time to understand the relationships between Asia, Europe and US markets....our charts always show the close of Euro Cash Markets and today, (if you look closely) you can see that the reversal (short at the top of the IB) was a very nice profitable trade....

 

I will be stopping my posts on Friday, as my next class is scheduled to start shortly thereafter...for those who expressed interest I will get in touch later this week....for those who expressed an interest by did not get into the class my apologies....I hope I made it clear why I thought I was not the right person for you....and I hope my suggestions for alternative resources helps you to reach your goals...

 

Good luck

Edited July 1, 2013 by steve46

[steve46 12]

Posted this to our blog today

 

We don't have time to do much more except to note that the uppermost horizontal line is the close of Euro Cash....and to point out the relationship between the bond and futures...price and yield changes affect futures & equities pricing...if you don't understand the relationship you really shouldn't be in the game on a day like today...for those interested, ask yourself what group of folks would be interested in buying a bond paying 2.5%, holding it for 10 years....?

 

If we get a move above that point, it could turn into an excellent payday...if not that could be it for today....

 

Good luck

Edited July 3, 2013 by steve46

[steve46 12]

Once again we are pressed for time and have to exit this trade...happily we are close to our target (of 10 ES points)

[Enigmatics 10]

Once again we are pressed for time and have to exit this trade...happily we are close to our target (of 10 ES points)

 

Looks to me like divergence of volume and price at similar lows. That is your thesis for the long correct?

[steve46 12]

Honestly there are a lot of things one might claim to use after the fact....for me it is a combination of data and experience.....for example

 

I know that institutions and commercial interests are adjusting inventories to reflect re-pricing of both risk and debt assets. They also look at the broader landscape (whether we are "risk on" or "risk off") and finally in this environment while we wait for Friday's employment report, I expect informed participants to pre-position now and through the overnight market....the bond tells me whether I am correct....and I use it because those folks are primarily professionals, who do not make many mistakes in terms of valuation..as mentioned in my previous post I watch bond pricing and yield.....as they move all markets then react...

 

I get it that most folks have to start with simple technical analysis....that's fine....but understand that the folks who have the horsepower to move these markets use a different approach (more in line with what I have just stated)....once you can get your mind around that, you get to where you use technical data to lean on (if you need it) and to confirm what you thought was going to happen...

 

The attached chart shows the bond confirming the ES move as it takes out the IB to the downside....

[Enigmatics 10]

Honestly there are a lot of things one might claim to use after the fact....for me it is a combination of data and experience.....for example

 

I know that institutions and commercial interests are adjusting inventories to reflect re-pricing of both risk and debt assets. They also look at the broader landscape (whether we are "risk on" or "risk off") and finally in this environment while we wait for Friday's employment report, I expect informed participants to pre-position now and through the overnight market....the bond tells me whether I am correct....and I use it because those folks are primarily professionals, who do not make many mistakes in terms of valuation..as mentioned in my previous post I watch bond pricing and yield.....as they move all markets then react...

 

I get it that most folks have to start with simple technical analysis....that's fine....but understand that the folks who have the horsepower to move these markets use a different approach (more in line with what I have just stated)....once you can get your mind around that, you get to where you use technical data to lean on (if you need it) and to confirm what you thought was going to happen...

 

The attached chart shows the bond confirming the ES move as it takes out the IB to the downside....

 

Oh yeah no doubt. I never assumed the big boys are sitting there looking at volume profile and divergent+ volume patterns. All that stuff is just a reflection of what those guys are doing.

 

Aside from knowing big money is who really move markets, I've always looked at this as a game of supply/demand. Naturally if I see something strike a similar low on reduced volume, that violates the "Which direction is it going and how good of a job is it doing getting there?" Hence, if it's not going to go down, it's likely to go up (especially if we're unable to break the low of the previous day's low in RTH). I then wait to see if demand returns in the form of buy volume to confirm upside and the divergence. The higher the time frame this occurs on, the stronger the reaction.

 

I have to admit I've been fairly lazy at looking at the bond. It's something I need to work on because of all of the reasons you previously stated.

[Enigmatics 10]

Paired up the bonds with my analysis of the SPX today. Worked nicely.

[steve46 12]

I'm glad to hear it.....

 

Attached a chart showing today's action....this is the last one before my classes start

 

Notice how price on the S&P futures correlates with the 10 yr note .....Most retail traders can't handle this because institutional participants in this market don't trade price action....instead they look at technical issues associated with bank inventory loans, delivery (quality, swap, timing or wild card) and expectations for future interest rates and inflation....

 

Unless the trader (generically) understands how interest rates and debt yields affect markets domestically, it can be difficult to make use of this kind of data (other than in a broadly conceptual way). When I teach a class I use several correlated markets (chart on the left) and I TRY to eventually move the 10 year into that space....sometimes people get it, often however they do not and end up using a substitute like the DAX, YM, or currency pair). This is one example of the limitations I run into when people don't have an adequate background to draw from (after all, I can only do so much in a couple of months)....usually if they are making money, they don't want to do the additional work to learn the backstory for using the 10 year...and who am I to insist...recently I noticed that the attitude changes if they see me using the 10 year note, and making decisions that they could/would not using different data..

 

Probably won't be checking in again while markets are in session, but those who have my email and blog can PM me if they want to....

 

Good luck folks

Edited July 5, 2013 by steve46

[steve46 12]

I was going to post this over at Humble's thread but decided it would be better not to..

 

Copy & paste to this thread (where it should be)

---------------------------------------------------------------------------

 

"Gotta say something about this foolishness.....my god...

 

Look at any time series you wish....by all means....and yes when you (eventually) find the time frame that provides the right type of granularity that "speaks" to you....then yes you will have the right tool for your purpose....in the meantime....apparently people fail to understand what MOTIVATES participants to buy or sell....its called opportunity....and yes it can be seen on the chart, but has nothing to do with supply & demand lines.....sorry....

 

People seem to forget....markets represent a dynamic process that is occurring every day, AND every night around the world as institutions make decisions about what to do with capital..

 

ONCE you understand how they make those decisions, you can go into the open with a very good idea of where price is headed.....

 

Check back to some of my posts....especially the last one where I suggest we are going to see a bracketed market.....how did I know that early in the session...?

 

By all means folks continue as you were but for those few who want to learn something other than lets draw lines and trade them....ask yourself "how's that working out for you".....

--------------------------------------------------------------------

 

With respect to the attached chart.....again I am using both the 10 year note and the front month ES market.....what you can't see here is the preparation I do the night before....looking the schedule of economic report releases......looking at way that the bond is trending.....checking out the longer term reference charts.....scoping out the overnight market price activity to see if there is any opportunity there for an easy pre-position entry that I can hold throughout the evening....look, people make a LOT of money doing this IF they know how to prepare and WHERE (in terms of time AND price) to act.....once you understand that its just ONE market worldwide (that's what its become)....and you see it that way as one continuous process (like a merry go round)....you simply wait for your entry point....then (if you are right) you hold that position until its time to get off the ride.....

Edited July 8, 2013 by steve46

[steve46 12]

Here is a "close to close" look at my chart

 

Trading on a close to close basis provides the skilled trader with so many options and significantly more opportunity than just looking at the US RTH open to close session...

 

Notice how price moves up in the overnight market on low volume....then as the London market opens, volatility picks up and European institutions decide whether to play or to wait for Mario Draghi to speak....sometimes, in fact quite often, you will see that there are participants who are willing for many reasons to commit capital to buy or sell the market and that is easily recognized....

 

Notice the landmarks that I use including standard deviations (1st SD)... previous US & Euro session opens, highs and lows...We use these data points because other institutional traders are making decisions based on those "lines in the sand" and it is at those points that we put our volume based entry frames in place....when we see participants act to buy or sell, it cannot be disguised....

[steve46 12]

This is a stripped down version of today's primary chart showing the different world markets and how they impact the US

 

As some of you may see, if you start to look at the markets as one entity moving through time from one part of the world to the next, you can see opportunities exist (at specific times)

 

I have marked Midnight PST as the start of significant volatility (produced by additional volume as the DAX starts to open for business)....later at 1am PST....when London (and the rest of Europe) opens, we see active participation related to the schedule of economic events for the day....

[max333666 10]

Hello Steve,

 

This is a fantastic thread. May you recommend a reading list for someone to start gaining an the background that has guided your trading methodology, market context, intermarket relationships. Any books, courses, publications and direction you point into would be greatly appreciated.

 

Thank you:missy: