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

Anatomy of a day-trade

DAY TYPE

We now add the second component to our trade setup: day type. Our goal is to make a call as to whether the day is a trend day or a rotational day. If a trend day, we will want to trade in the direction of the trend, perhaps entering using a local price retracement. If a rotational day, we will want to fade the market from a predetermined price extreme. To make a day type determination, we use exchange-wide tick data, referred to as ticks.

Ticks are not the up- and down-tick values of individual stocks, but a periodic count of the number of stocks that have traded up (the bid price moved up to the ask price to complete the last trade) minus the number of stocks that have traded down (the ask price moved down to the bid price to complete the last trade). For the NYSE, tick counts range between 1,000 and -1,000.

Ticks data are delivered continuously and periodically, up to a frequency of one reading per second. It is possible to estimate day type, even as a session is unfolding, by using ticks, not as an instantaneous value but by its accumulation. The accumulation of ticks is referred to as Cumulative Ticks (CT). Once again, a picture is worth a thousand words.

A CT indicator based on the NYSE ticks is shown from July 16, 2009, in the first chart in “A tick in time.” In the chart, one-minute averaged CTs are shown as a dotted line that overlays the one-minute E-mini S&P 500 price chart. We see a nearly flat line of CTs (enclosed by the rectangle). This indicates that, at least for the near-term, the market is not trending but exhibiting rotational behavior and can be faded. Contrast this with the second CT chart from the previous session, July 15, 2009. In this chart, a dark trendline has been drawn under the dotted CT graph. On July 15, the CTs were giving a clear indication of a trend day (see the second chart in “A tick in time”).

PRICE LEVEL

Because CTs indicate a rotational market, we want to fade it, long or short, from a well-defined price level.

In “Level headed” the E-mini contract is drawn with the typical key price levels: session open, previous day high/low, support level 1 and 2 and resistance level 1 and 2.

We compare these levels with the VAH and VAL and determine that the previous day’s high corresponds with the previous day’s VAH. This is a fortunate result. Because the CT reading indicates a rotational market and because the day’s open was within the VA, we determine that a short position from the previous day’s high makes for a
high-probability trade.

TRADE MANAGEMENT

Once we have identified an entry, the task of how to enter and exit the market becomes the focus. First, we will make use of a resting limit order that is two contract ticks off the reference price level (see “Rested and ready”). In this trade, the limit order price is 930.25 (930.75 - 0.50). The stop-loss can be quite conservative because the trade is based on an expected reversal at what is now a well-defined level, the previous day’s high and the previous day’s value area high. In this case, if we are filled, we automatically have a stop-loss entered for all open contracts at 1.5 points off the 930.25 entry price, or 931.75.

Once in the trade and with our initial stop-loss set, the question of how to exit with profits must be addressed. The technique used is a fast scale-out plus trailing stop strategy. Fast exits at one and one-and-one-half ES points from the entry price are used on the first and second thirds of the position, respectively. To this is added a trailing stop that follows price. This trailing stop is indicated by dots just above the market in the price chart. A final exit price of 925.75 is achieved from the trailing stops. The fast profit-target exits put the trader in a no-lose position quickly. The trailing stop logic helps keep the trader in the market for a relatively long winning runner — in this case, 4.75 points.

ANTICIPATION

Market Profile, day type, price level and trade management work in concert to define and execute a successful E-mini stock index futures day-trade. The market was anticipated with a limit order at a well-defined price level. The market was not chased with a market order. Use of automated stop-loss protects the trader, should the expected reversal not occur. Fast profit taking scale-out, while also retaining winning runner contracts, means the day-trader can participate in relatively long-term moves with little account risk.

There is no single technique that offers success in the difficult task of day-trading the E-mini futures market. But by bringing together a number of market views and strategies, high-probability trades can be identified and the market anticipated. Profitability is possible with this style of day-trading.

For 20 years Michael Gutmann was a software engineer and manager at Intel Corp. He trades his system daily and wrote “The Very Latest E-Mini Trading: Using Market Anticipation to Trade Electronic Futures.” He can be reached at mike@vgxcapital.com.

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