Hybrid trading techniques

February 11, 2009 06:00 PM

Day-trading stock index futures is challenging and rewarding. There is a great sense of accomplishment in dueling successfully with the sharp knife that is the electronic futures market. Electronic futures day-trading offers the possibility of low-risk, regular income with minimal account margin investment.

Because it is such a competitive market, trading participants must be equipped with the latest tools and techniques. Over the last several years, online tools that augment basic real-time charting and indicator software have become available. Trade management tools on the retail trader’s desktop put him on a par with market professionals. In short, if the party on the other side of a trade is using these tools and techniques, then you would be wise to use them as well.

A natural path of increasingly sophisticated discretionary online trading begins with a rich charting and indicator desktop, then adds automated signal generation for initiating trades, and is completed with automation that manages trade stop-loss and target-profit execution. Trade management software frees the trader to focus on getting trade entry correct, by automatically executing fast exit profit targets and providing support for staying in trades with winning runners. Continuously protecting a position with automated stop-loss execution is another critical element.

A hybrid trading approach, one that offers automation for mechanical tasks while the user retains control of major trade decisions, may be the preferred system for the retail day-trader. It also can be described as a gray-box system, somewhere between a fully automated black-box trading strategy and one that is entirely transparent in its execution. A number of software tools are designed to make this approach easier to execute. These gray-box tools are formatted by the trader to perform specific trade management actions, while the user is hidden from the actual implementations.


E-mini day-trading strategies cover a spectrum of technical analysis, time-of-day studies, price level guidelines, use of market internals, economic report release timing, market-depth data and volume strategies, to mention a few. Determining entry, long or short, is a complex and multi-faceted exercise and part of the science and art of becoming a successful day-trader. Perhaps a more generic question that the day-trader must answer is how to manage a trade position once in the market.

One approach is to add strategy automation software to the desktop that assists the trader in managing profit-target and stop-loss execution. Both Tradestation and NinjaTrader offer automated order execution software.

In the case of NinjaTrader, trade strategy parameters are easily specified, even as their real-time execution can be complicated. “Bonsai trading” (above) demonstrates a trade management strategy on the CME Group E-mini S&P 500 (ES) contract that opens with two contracts and uses a fast exit profit target of four ticks for one contract and a 10-tick stop-loss on all open contracts. If the fast-exit winning contract is realized, then the stop-loss contract order is automatically adjusted.

The strategy has been named “ES Basic 1x2.” When the position is opened, it will become the stop-loss and target-profit strategy automatically executed for the trade. This is shown in “Bonsai trading” (above), where a short position from 839.50 is automatically bracketed by the 10-tick 842.00 stop-loss order and the 838.50 profit-target buy order.

All orders for this trade were executed when a one-click entry limit order sold short the market from 839.50. NinjaTrader automatically sent limit orders and then monitored the market for stop-loss prices to execute. More elaborate strategies are easily specified with the user interface.


One of the more frustrating aspects to day-trading E-mini stock index futures is determining how to retain some number of contracts in-place to realize a successful winning runner. Without some automation, it’s too easy to exit a successful trade with early profits. However, if trade execution tools are added to the trade setups along with the automatic profit-target and stop-loss execution just described, it is possible to enforce a discipline on the discretionary day-trader and realize winning runners. Realizing winning runners can be the difference between breakeven trading and profitable trading.

Invivo Analytics Stops is an example of an indicator added to the Tradestation desktop that provides mechanical stop-loss to an open position. The Invivo Stops are not used to determine a trade entry, nor are they used to determine a fast, initial profit-target (see the ES Basic 1x2 example, above), but they are used for trailing stops if a first profit-target is realized and other conditions point to a possible winning runner.

In this case, the NinjaTrader stop-loss orders are easily updated with one click to follow the Invivo Stops. The trailing stops can be used for a final exit or, if other indicators show signs that the market may reverse, such as a reversal in a moving average convergence-divergence (MACD) overbought/oversold condition, then the trade can be exited with a new profit-target limit order.

“Short timer” shows an initial short entry with the CME Nasdaq 100 (NQ) contract as a result of a MACD price divergence. After the initial signal, the market is entered on a retracement to the 20-period exponential moving average (EMA) at 1169.00. A fast exit of an initial set of contracts is made, as described in the previous example, at 1166.50, for the NQ contract. Then a winning-runner trailing stop is maintained using the Invivo Stops. In this case, the final exit was made when the Invivo Stop was hit at 1160.00.

The retail trade desktop continues to evolve and offers traders the opportunity to automate trading with sophisticated tools. Tools that augment basic charting, indicator and signaling software can play a key role in making the retail trader more competitive. These tools are inexpensive, typically costing far less than the subscription price of the basic desktop trading software. They can be used to create a powerful hybrid trading desktop, where key trade entry decisions remain under the direction of the individual trader, but mechanical aspects of a trade are automated.

These tasks must be executed with precision to succeed in day-trading, especially in the volatile E-mini stock index futures market. While many traders perceive trade entry to be the most crucial aspect of successful trading, a well-conceived hybrid trading strategy is needed to stay on top of the day-trading endeavor.

Michael Gutmann is a registered CTA with National Futures Association. E-mail him at mike@vgxcapital.com.

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