ToTheTick Support and Resistance Blog

Note to self – when you trade less, you make more.  Remember that.  Write it down.  Again.  Sticky note on your main screen.  Maybe a tatoo on your forehead so you will see it everytime you look in the mirror(just kidding, don’t do this). 

Actually, I’m pretty good at it now.  Net is, on the non-trending days, which is the vast majority of days(80%+), support/resistance levels are excellent ways to find good entries.  On the other days, the trend days, it’s tougher.  When a large buyer or seller is in the market, they don’t really care about S/R levels, they just have to move a lot of contracts.  Yesterday it was trend down, then trend up.  Tougher to make money, but i caught the low with our zones, which turned out to be a 16 point move up.  Today, 3 TurningPoint signals, 3 winners.  But the first didn’t occur until 9:43am central, which tried my patience.

Trending days(if you are a support/resistance trader) are the days that you need to fight the urge to trade outside of your rules.  Don’t let your mind convince you that a signal exists where it really doesn’t.  That’s how you lose money.  It’s OK not to take a trade.  It’s OK not to take any trades in a day.  Or two days.  Or more.  Think of it this way: 1 point per day in the ES, $5,000 margin per contract, gives you a 20% per month return before commissions.  How many of your friends and family would give you every investment dollar they had if you told them you could make 20% per month.

Remember, not being in a position is a position.  You have made the decision that the best position to be in at the moment is flat.  And there is a very good chance that this decision is saving you money.

Trade less, look for set ups that have a higher profit potential than risk, and manage your trades well.    Do this, and you will see success.

Regards,

Greg

www.tothetick.com

Very nice day for our support/resistance zones and the Turning Point system today, and this week!  Trading ES with a straight 1.5 point profit/1.5 point stop, we have 14 trades, 11 winners, 4 losers.  Net 10.5 points per contract before commissions.  Obviously disclaimers apply, and you have to actually execute the trades, but they are so straightforward, it’s hard not to!

I’m done for the week, enjoying some free time, running a half marathon this weekend.  Have a good weekend, we’ll talk next week.  Be ready for the QE2 effect on the market, might see some strong trend days next week.

Greg

Quick blog entry – reminder to self – take every valid entry.  Nothing worse than a perfect signal that fits all of your criteria and you don’t take it.  Would rather take it and have a loser than not take it.  Excellent signals last 3 days across all markets.  Today is a tougher trading day.  1st loser since last week.  But it happens.  And the day isn’t over yet…:)

The TurningPoint System continues to perform well.  Take at look at the ES today, on a frankly very boring day, in spite of the fact that it was Non Farm Payroll day.  Just one valid TP signal today, but it was a nice 2.5 point winner in the ES, with only 2 ticks MAE(maximum adverse exposure - otherwise known as heat:)).  Signal came at 11:31 central on the 1 minute chart.  Take a look at the screenshot below.

Actually, a very good day for the Euro zones and TP signals in that market today as well.  Look at the 1st valid signal short at 8:47 central.  Signal was to go short close of that bar, at 1.4111. 1 Tick MAE, 94 ticks Best Out.  Doesn’t get any better than that!

That’s it for now.  Hope that you all stayed away from trading FOMC yesterday, it’s a good day to blow out your account.  Ping me if you have any questions on the new TurningPoint System!

Announcements

We conducted a webinar sponsored by Mirus Futures on June 9^th.  We had a great turnout and lots of good questions.  Thanks to Mirus for sponsoring us! A recording of the webinar is available on our website www.tothetick.com.

We are going to be offering a new platform that can be used with the Zones. We should be ready to make a formal announcement in a week or two.  I think you all will be very excited about the platform, charting package etc.  Please stay tuned for details!

Trading Environment

The volatility and volume have subsided from the high levels of the past few weeks.  We had a hard uptrend day on Tuesday and a “rally at the close” day on Thursday…but in general nothing earth shaking.  The cash S&P index was up about 20 points for the week.

Tip of the Week: Handling Almost Stop Outs

The following trade issue happened to me this week, I am sure similar things have happened to you.  How I handled the trade is a clue to my view of the Markets:

I was in a Long trade for 2 contracts.  Pretty much immediately after entry the trade was against me and moving down rapidly.  That sinking feeling of “I’m gonna get whacked” set in, but I stuck with it because the signal I was using was valid.  The price got to where the Bid was at my stop-market price, but amazingly nothing traded there…not one contract.  Yep, right to my stop and the price rebounded.

Bids and offers kept rising, and pretty soon I had gone from a 2 point loss/contract to a 1 point gain/contract.  My target was originally +3 points/contract.  I immediately upped my stop to break-even plus one tic, and reduced my target down to +1.5 points.  I was filled on the target a few seconds later.

What was my thinking? The trade was a loser, and I was lucky to have survived without a stop out.  I view the Markets as generally unforgiving. When the Market decides to give me a “gift” of being wrong and still making money or getting out at break even, I am going to immediately adjust my expectations on the trade and take the gift.  I have to watch it with this type of emotion or I would start trading scared and trying to exit every trade that I was taking a little heat on.  But sometimes, it’s obvious you were wrong in a trade and you should be grateful for the chance to exit gracefully.

Announcements

Remember that rollover for the ES and TF contracts is June 10^th, 2010.  We will be rolling to the September contracts on that day.

The 6E and CL free zones continue to be popular with customers. Just a note that we will be discontinuing the Dow (YM) free zones shortly due to a relative lack of customer interest.  You can still get the Euro and Crude Oil zones for free for a limited time by visiting our website at www.tothetick.com.  Also we have a webinar scheduled with Mirus Futures on June 9^th at 4:30 EST. The signup link for the webinar is here is here.

Trading Environment:

The Euro/USD continues to hit new lows, but the ES market held up fairly well until Friday.  It’s choppy volatile trading.  The market volume started to wane a little this week as compared to last, but price volatility continues.  It’s not particularly easy trading if you are a trader who relies on support/resistance zones (like me), and getting whip-sawed out of trades is no fun but part of the price to pay for the increased opportunities the volatility brings.

Tip of the Week: Ideas to Handle the Recent Volatility

The markets are a lot jumpier now, whip-saw price action and higher volume.  This makes for a lot more opportunities but it is riskier also.  I will admit that this is tougher for me now because I got used to much slower action.  I had to change some things in my trading to adjust.  Here are some ideas that you could consider:

Widen your Stops and Targets – there is nothing worse than getting a good trade signal that ended up being right, but getting stopped out because of a little higher volatility. Increasing your stop loss keeps you in the trade a little longer but obviously increases your risk.  To compensate for the increased risk you are taking, widen your profit goals too.  Remember, I never take a trade with less than a 1:1 profit/stop loss ratio and I prefer 1.3:1 or higher.

Consider Trailing Stops – I had said before that I wasn’t a big fan of trailing stops for intra-day trading. But, the increased volatility makes a trailing stop strategy a better bet.  Think about a strategy where if your trade gets to a “decent” profit (but not yet to your target) trailing the stop up to break-even or a small profit.  At least that way you won’t go through the mental anguish of watching a good trade turn in to a full stop-loss in seconds.

Be Quick and Decisive – no time for thinking or waffling in this market.  You have to see your signal and take it.  A few seconds hesitation and its gone.  This is a reflex thing, and just takes practice.

Tighten up your Trade Setups – if you are using indicators such as EMA’s etc…consider slowing them down a little by increasing the EMA periods. This will filter out the volatility noise a little and possibly give you a better read on the market. The danger here is that it could make your setup so slow that you miss opportunities.    Also, if you use 3-4 different setups to take trades, maybe pick the best one or two for right now.  Multiple trade setups in a volatile quick market can lead to too many trades and confusion.

These are just some ideas based on what I went through. As I have said many times, trading is somewhat of a personalized thing and some or all of these might not work with your particular style or strategy.  However, regardless of your trading style I believe there are positive and concrete things you can do to improve your results and reduce your stress when the markets get very volatile.

Announcements

We are getting some very good feedback that our new 6E and CL zones are really working well.  Check them out for free for a limited time at www.tothetick.com/free.  Also we have a webinar scheduled with Mirus Futures on June 9^th at 4:30 EST.  We will post a link for webinar signup in a week or two.

Trading Environment:

Now we are talking some real trading action!  30 point ES ranges, great volatility, and good volume!  Both downside and upside trade signals can work.  It has taken me a little practice to shake the rust off and trade it, after dealing with pathetic ranges and volume for so long I think my reflexes went downhill on me.  The Euro Zone mess is still dominating the action, as I will explain in the Tip of the Week below.  For the time being, I highly recommend putting up a EuroDollar futures or Forex pair chart go to along with trading the S&P Futures.

Tip of the Week: Using Ancillary Markets for Trading

Sometimes the S&P Futures actually follow normal things like earnings, profit growth, economic numbers at home etc.  Most times I find this market is always looking at “something else”.  First it was oil prices, the CL contract went up and the S&P Futures went down in lockstep.  Then it was Treasury Futures, the market was in lockstep with those for several months.  Now, it is the EuroDollar futures as a direct relationship.  As an example, look at the screenshot below:

Notice the direct relationship between the two.  You can also use a US Dollar Index chart and see a direct inverse relationship.  I am watching the EuroDollar Futures (6E) chart like a hawk during my ES trading.  On given days, usually before the European Market Close at about 11:30 EST,  there is about a 5 to 10 second lag between a move in the 6E and a move in the ES…with the 6E leading the way.  If you watch the 6E closely during this time period it can help you with your ES trading.  After Europe closes, the direct correlation continues but the lag sometimes is not present or less pronounced. I have also realized that around the closing of the European Markets wild swings tend to happen, so be careful of that time period.

I don’t know how long this relationship will last, or what the next “thing” will be that we all focus on, but for the moment if you are trading the ES contract you would be well served to watch the EuroDollar in tandem.

Announcements

If you haven’t taken advantage of the new Free Zone Markets from ToTheTick, now is the time!.  The new markets are the Dow, the Euro Futures/Currency Pair, and Crude Oil.  All you need is an email address to get these free products.  Click here for more details.

Trading Environment:

Well, I have seen many things since I have been trading, but I have NEVER seen anything like Thursday.  I have been complaining about slow steady low-volume markets, so I guess I got what was coming to me.  I would expect some knee-jerk reactions from the SEC and CFTC to regulate the massive selloff that happened, because it was obvious by watching the DOM that the system just flat-out “broke”.  The problem is they will probably try to fix something that was not the root cause of Thursday’s system breakdown.  I’m just thankful I was not in a trade, because I know several people who got stuck in positions or got really lousy stop/target fills because the electronic market was not really working.

In general, the Euro-Zone Panic is spreading to all markets.  I have a chart of the Euro and the Dollar Index up now when I am trading the ES, because the Currency Markets are what is driving the trading action.  It’s very tough to use Support/Resistance levels at the moment, but things will return to normal soon enough.  It is usually best to stand-aside for awhile when things like this happen.

Tip of the Week: Looking at “The Tape” to Guide Your Trading

Many people talk about watching “The Tape” when they are trading.  There are some differing opinions on what The Tape really is for any given market.  My interpretation is shown in the picture below using a specialized TradeStation Indicator:

Each column of numbers represents one minute of time, it’s a one min bar chart with buys/and sells listed at each price level.  This example is for the ES market.  The two numbers at each price level in the column represent the number of contracts sold on the bid vs. the number of contracts bought on the offer.  The 5:12 am bar where the cursor is located shows a number of 97×16 at a price of 1169.25.  This means that 97 contracts were sold on the bid and 16 contracts were bought on the offer.  Since there was light net selling at that price, the color is a light pink.

The more selling there is the deeper the color red.  The more buying, the deeper the color green.  The number at the bottom of the column (for the 5:12 am bar that number is a negative 1732) represents the net contracts bought or sold during the one-minute column.  The very bottom of the screenshot is just a simple Total Volume histogram chart.  The buy/sell numbers may not be exact, but they are close enough for what I use it for.

What do I do with this information?  I basically use it as a visual indicator during a trade.  Three are several tricks I use to help me that would be too long to explain fully in this Newsletter.  One example would be if I happen to be in a long, and I see more and more deep red colors with very little price movement downward, it may give me more confidence that buyers will come in and stick it to the sellers for a nice upswing (See the 5:01 am to 5:11 am bars).  I also use different visual clues to give me a feel for the ebb and flow of the market and how total volume and net buy/sell volume are interacting.  Also, seeing something like the 5:12 am bar means there is news in the market due to the number of price points penetrated and the volume spike.

I find this chart and indicator to be very helpful for me to get a visual feel for the market as the trading progresses.  A regular candlestick, range, or bar chart tells you some things but this make me feel like I have a better handle on price/volume, net buyers and sellers, and the flow of the market.

Announcements

ToTheTick is now offering 3 new Zone Markets for FREE for a limited time.  The new markets are the Dow, the Euro Futures/Currency Pair, and Crude Oil.  All you need is an email address to get these free products.  Click here for more details.

Trading Environment:

It has been several weeks since I wrote the last newsletter.  Since that time the Euro-Zone countries have been in a panic, we are at the tail end of earnings announcements for the Quarter, and Goldman Sachs executives are getting BBQ’d on live TV by our Congress.  The past week has shown decent volatility and volume, but it seems to take big news events to get us to move.  The market sold off some this week, with the Cash S&P Index opening the week at about 1218, and closing at 1186.  There were some large range days both to the upside and the downside, but remember as Support/Resistance traders, we do better with choppy markets or trending markets with pullbacks….not runaway up or down markets intraday.

Tip of the Week: Spotting a Trending Day in the First Hour

As I mentioned before, trading using Support/Resistance Zones does not work well on a one-way intraday market….if there is a strong trend developing it would be foolish to just arbitrarily short the next Resistance Zone overhead or the next Support Zone underneath.  But, the big question is how can you better spot (early) a trending or one-way market so you know what to avoid?

One method I have been using is a First Hour Trendline Angle. For the S&P Futures, I simply take a 1-min candlestick chart and plot a trendline from the open thru the first hour…60 bars,  The trendline is plotted thru the bottoms of the relevant candlestick bodies for an uptrending market, and through the tops of the relevant candlesticks for a downtrending market.  I then look at the total rise/fall (in points) for the market, and calculate the trendline angle as follows:

Angle (in degrees) = Arctan(Point Difference/60)

If that angle is more than about +5.5 degrees or less than -5.5 degrees, I will not trade against the first-hour trendline until it has been significantly broken.  To me, significantly broken is 3 one-minute bars that have closed greater than 2 points below (in an uptrending market) or above (downtrending market) the first hour trendline.  For the less mathematically inclined…if the trendline rise/fall is about 6 points in the first hour, this would equate to about a 5.5 degree angle and I stay with that trend until broken as explained above.

This method is of course not perfect, and open for improvement.  I simply use it as a “no go” as far as taking countertrend trades. If the method helps to keep me out of a hard-trending day where I keep trying to short overhead resistance zones in an uptrend, or buy support zones in a downtrend, it’s worth it to me to continue to use it.  You may want to experiment with a filter using a first-hour trendline in order to help keep you on the right side of trades in a trending market.

Announcements

Our ToTheTick Webinar with DTI is scheduled for Monday March 29^th at 2:30 EST.  Click HERE link for signup and a description of the Webinar.  We also have a webinar scheduled with Ninja Trader on Wednesday March 31^st at 4:15 EST.  The link for the Ninja Trader signup will be available in our next Newsletter on March 27^th.

Trading Environment:

This was another in a seemingly endless series of slow weeks, with the market mostly managing to creep upwards or end flat no matter what the news was.  Friday was a little more active, but mainly because of Quadruple Witching Options Expiry.  The Cash S&P Index started the week at 1147, and ended at 1159.  Most days this week could be characterized by slow, upward-bias, low volume, and just downright boring.  My personal trading has been severely curtailed as I just do not see a lot of entry possibilities, and I need a lot of confirmation if the entry signal is to the short side.

Tip of the Week: Critical Elements of a Written Trading Plan

I have mentioned in a couple of Newsletters about consulting my Written Trading Plan.  A few people have asked me in the past what I put in my Plan, and what do I do with it.  Here is a summary of a format:

Objective: What is you monetary objective and time commitment to trading?  Is it going to be your sole source of income, or a side-business?  What daily/weekly profit goal are you going to expect?  Don’t forget to account for taxes and business expenses (trading is a business).

Instruments:  What markets are you going to trade and under what timeframes?  An example here might be “Trade the ES contract only, and only during U.S. Open Outcry hours”.  Don’t foray into new markets that you don’t understand until you have had time to test your methods and understand the market.

Initial Capitalization:  How much money do you have to trade with, and how long can you sustain a drawdown period?  Be honest here.  Don’t include money that you need to live on in the immediate future, just include Trading Capital.  Compare this Capitalization amount with the amount you hope to earn daily/weekly on average in your Objectives section.  If you have a $5,000 trading account and you are hoping to average $500/day, it may not be realistic…that’s a 50% weekly return.

Trade Execution Plan and Money Management:  Here is where the rubber hits the road.  Detail out each trade setup you are going to take, how many contracts, and for what market.  Be specific about your setups.  This is also the place you will put certain Rules that you set for yourself.  Here is an example:

• Trade emini S&P 500 contracts exclusively until consistent average profitability of $X/day is attained
• No trading in individual equities, only futures contracts
• After-hours trading will not be performed; only open outcry sessions
• Trading during the last 30 minutes of the trading day will be avoided unless exiting a position
• No holding of overnight positions
• Do not trade 10 min. before or 10 min. after scheduled Economic News Events; do not trade the afternoon of FOMC Interest Rate Announcements
• Use XYZ Strategy – 2 ES Contracts per trade, and AAA Strategy – 1 contract/trade (detail these strategies in your Plan somewhere, including methods, stops/targets, and signals)
• Maximum lot size of 2 contracts until (DATE), then increment by X contract per month until a maximum of Y contracts is reached.  (MENTOR)  will provide input on incrementing contracts/trade based on overall trading success.
• Trades will be logged in a notebook or electronic format for review, include the Strategy used, notes on mistakes/distractions/market events that happened during the trade
• Maximum stop-loss per contract will be X points/ticks; and a stop loss will always be set on every trade
• Maximum loss per day will be $XXX.  Once daily loss limit is hit, no more trades will be placed that day
• Maximum loss per week will be $XXX.  Once the weekly loss limit is hit, no more trades will be placed that week
• If daily gains total more than 2X daily profit goal, no more trades will be placed that day
• If weekly gains total more than 2X weekly profit goal, no more trades will be placed that week
• If available drawdown of Trading Capital Account exceeds XX%, then the viability of this trading plan will be re-evaluated with (MENTOR) for Corrective Action.
• Trading Plan will be reviewed by trader every X weeks for adjustments.  Adjustments to the Trading Plan will not be made during the trading day, or after a large loss day or week.

You may have noticed some very interesting things in the above example.  The first is the idea of a Mentor.  Reviewing your Trading Plan yourself is a little difficult to do objectively, and you need someone you trust in trading who can tell you honestly what they see as faults, especially during the tough times.  The second thing is the idea of setting a daily win amount at which you will stop trading. It is tough to take your pile of chips and quit when you are doing really well for the day/week, but I feel it is something that I have to do in my trading.  The last important thing I want to emphasize is that your plan needs to be reviewed regularly, but only when your mind is calm.  That means not reviewing the Plan after a really bad day of trading, or not changing it in mid-stream during the trading day.   It is ok to change your Trading Plan; actually it is necessary (mine has gone thru several revisions). Just do it systematically and during calm, rational times.