From the August 01, 2009 issue of Futures Magazine • Subscribe!

For safe profits, trade narrow intraday channels

SIGHT AS SOUND

On your trading screen, you may display a watch list that shows the E-mini S&P 500, along with other numeric-based indicators. If so, you may be working too hard. Knowing how to read numeric-based indicators is a skill requiring a high degree of concentration. Following a chart-based indicator, such as an intraday price channel, takes less skill and a lower degree of concentration. You can read a price channel at a glance. Considering the daily demands on your decision-making stamina, anything that makes your job easier is good.

An electronically displayed intraday price channel is a stand-in for the human sounds of traders in the S&P futures pit. When a day’s action turns sloppy, the intraday channel will go wide. Sloppy action can reverse abruptly and frequently. Imagine the sounds of the S&P futures pit when trading turns sloppy. When a day’s action turns fast, the intraday price channel will go narrow. The faster the action, (capitulation on either side) the narrower the channel will become. Imagine the sounds of the S&P pit when trading turns fast.

The place to start looking for a narrow intraday price channel is not on a five-or 15-minute chart of the E-mini S&P 500 covering one or two days. The place you want to start is on a daily chart encompassing six months.

THINK MACRO, ACT MICRO

We want to trade the E-mini S&P the way an eagle hunts: start with a wide-angle view then swoop in for a pin-point attack. Keep a six month chart of the S&P open on your trading screen. On this chart, look for conditions that might produce a sharp run higher or lower on a given day. Be market neutral: be just as ready to go long as short.

“Start here” is a daily chart covering six months of trading in the June 2009 E-mini S&P 500 futures contract. The action covers the sharp trend lower during January and February 2009 and the sharp trend higher during March and April 2009. Notice the succession of high and low daily closes during both the January/February downtrend and the March/April uptrend. Notice, too, the way price oscillated between lower daily highs and lows during the downtrend and between higher daily highs and lows during the uptrend. A six-month chart gives you a macro view of this oscillation. If you know where a daily high or low might fall into place you can day-trade on that insight.

While a chart encompassing six months helps you think macro, an intraday chart helps you act micro. Next to the six-month chart, keep a one day chart of the active S&P 500 futures contract set to New York Stock Exchange (NYSE) regular trading hours: 9:30 a.m. to 4 p.m., Eastern time.

The time frame is important because it represents cash orders. Cash trading can affect futures trading and vice versa. When you’ve seen the direction of the active S&P 500 futures contract reverse abruptly on the 9:30 a.m. opening bell, you’re seeing the effects of this. As you trade, keep one eye on your macro view and one eye on your micro view.

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