8 Rules That Simplify Futures Trading

  • May 9, 2013
  • Danny Riley
8 Rules That Simplify Futures Trading

A Simpler Approach

In order to keep up futures trades have also had to evolve. Things that we depended on for years no longer work. In the new world trading order traders are employing new systems and techniques to stay ahead of the game. Sometimes this complicates the game more than it helps. It adds cost and not all the changes make money in the end. This is exactly what we do not want to see. I have been on the floor for 37 years and only over the last 6 have I felt a need to go back to the basics. Get out your chart, start drawing lines and employ your knowledge along with some practical advice from an old floor trader. The first part is the single most important rule of all and it’s called patience, expand your levels, have a more forward look. Pay attention to basic things like economic calendars, don’t get run over because you were not paying attention to the latest economic report but most of all build some of your own daily trading rules. Write them down on a card and put them where you can see them all day. This is not the old open outcry pits, this is your money. Protect it.

Trading Rules 101

Many years ago I started to notice certain patterns that would show up in the S&P and sometimes in other markets. Most of the trading rules are basic in nature but if you follow them you will see how the patterns fit. This is not something that will happen overnight but some of the rules will come to fruition. There are 18 Rules in total that have served me well over the years. Here are 8 of them.

  1. THE NUMBER ONE RULE: is not to trade in a closet. Find a trading buddy, share ideas and most of all; be patient. While our trading rule E-book may not cover everything we do think it’s a good beginning of a new way to look at the markets. While algorithmic and program trading make up over 75% of the trading volume we feel the more tools you have the better off you are.
  2. MUTUAL FUND MONDAY: Over many years of watching, we have concluded that the Mutual Funds use Mondays as a favored day for the portfolio managers to buy stock. Part of the theory is traders look to buy on Friday and hold into Monday/Tuesday’s open.
  3. TURN AROUND TUESDAY: Tuesdays are also part of the early week strength. The thought process is that the markets tend to rally early in the day and early in the week. This especially applies during a bear markets. Following Mutual Fund Monday’s performance there is a tendency for morning strength.
  4. ACTIVE MONTHS: The BEST 6-month performance period for the stock market begins in November and lasts through April.
  5. 10 HANDLE RULE: Over many years of watching the S&P, we believe that the index often moves in ten handle increments. For example, the S&P opens unchanged at 1194, trades up and down before trading either 1204 area or 1184 area. That is when the ten handle rule (market tendency) goes into effect. Often times, the index will reach an inflection point and reverse after trading approximately ten (maybe 12) handles as a bit of exhaustion takes place on the first test, at least briefly.How many ten handle increments play out depends on the market volatility, but with each 10 handle move there tends to be a short-term high or low made. We look for this to work in either upside or downside price action. Also, during midday trade the same ten handle price action tends to apply. 1215 last trade, up 20 handles on the day and could be the midday high, we would then look for 1205 or 1225 area to trade.
  6. COUNTER TREND FRIDAY: Over the years this trade works best on unemployment Friday when the S&P futures gap way up or gap down on oversized, pre-market GLOBEX volumes of 400k to 600k ES traded before the 8:30 open. This is a fade, the ‘bus too full trade’. Example: The S&P is down 6 handles at 6:00CT and then down another 8 or more handles after the jobs number is released. Now, the S&P is down 14 handles or more on the 8:30CT open. With 400k+ minis traded before the “OPEN” this tells us that traders have already voted.Depending on the price action the idea is to buy a sharply lower open or allow for another 2-5 handle drop just after the open. The idea behind this is that with that many minis traded and it being a Friday and knowing most traders can’t hold the futures over the weekend they put in buy stops. With all the selling used up pre-open the ES will start to short cover into the buy stops that lift the offer side of a buy program.
  7. THE THURSDAY/ FRIDAY LOW THE WEEK BEFORE EXPIRATION: This is a ‘PIT BULL’ trading rule. The S&P tends to make a low on the Thursday or Friday the week before the expiration (more so on the quartiles). The rule is to look to buy weakness on that Thursday or Friday looking for a low to hold into Monday or even into the expiration itself. Generally, the trade is to buy on Friday and hold into Monday.
  8. THE 5-MINUTE RULE: This requires a pivot to be settled / converted above or below on a 5 minute basis to avoid the whipsaw of being stopped out only to have been correct regarding the market direction. It is just a filter to avoid that humbling situation of being out, but right.

I think it’s fair to say that the only things that make money every day in the futures markets are your brokers and the kid down the streets’ algo. There is no magic carpet. Only by employing the proper trade management and working a daily trade plan can you survive.