Booking Dow E-mini Profits with a Mechanical/Discretionary Approach

David S. Goodboy (marketsurfer) has been trading professionally for over 14 years. Mr. Goodboy trades ETF’s, stocks, index futures, energy futures and options. His primary focus is a unique multi-time frame index trading system based on a combination of time/price cyclical studies and statistical models. David was a trader/partner with Biltmore Capital, traded with an option arbitrage firm, and is currently in the launch stages of IntrendX, a global multi-strategy fund.

Most traders believe one can either be a mechanical system trader or a purely discretionary one when trading the Dow E-mini (YMH8) product or anything for that matter. Mechanical trading, in this context, refers to a set of fixed rules for trade entry and exit that remain the same throughout various market conditions. These rules can generally be programmed and used to create automated systems that require no human intervention.

On the other side of the trading spectrum lies purely discretionary trading. The discretionary trader relies on the ability to constantly adapt to the dynamic market by using intuition, price reading, experience and information, such as market conditions or news to make decisions. The discretionary trader attempts to flow with the market in a fluid manner and is normally adverse to any fixed system. Due to the inherent volatility found within the E-mini market, both of these broad concepts have their hard core adherents.

I have spoken to many people on both sides, discovering that it is primarily personality and background that influences what school of thought one adheres to. Those with programming, math or engineering backgrounds tend to prefer the mechanical methods, while those with artistic, literary or liberal arts education normally lien strongly toward discretionary trading.

It’s almost the old right brain/left brain idea. Where right brainers insist on reason and facts but left brainers make decisions on feelings and intuition. Of course, very few are 100% one way or the other, unless you are Mr. Spock or Andy Warhol. Due to the fact that the human brain contains both sides, it seemed apparent that discretionary and mechanical trading systems should be combined into a unified whole.

I have developed a trading strategy that combines both of these seemingly contradictory schools of philosophy into a complete and profitable system for trading the Dow E-mini. Remember the life cycle of each trade– an entry, a holding period, and an exit. It has been my experience that each of these segments should be approached with a different philosophy. Multiple years of screen time and research supports this contention.

This article will provide a step by step method of applying my mechanical/discretionary ideas immediately to improve your results while trading the Dow E-mini instrument. It is a very simple, yet highly effective method that will provide the trader with a framework by which to apply these ideas in real time. In this methodology, trade entries are mechanical, holding periods and exits are both mechanical and discretionary depending on price movement after entry. In other words, there is a predetermined mechanical method to enter, but after the trade is commenced, depending on how the market reacts, either a discretionary or mechanical exit is implemented.

STEP 1- designing the structure:

One way to build your trading environment is to pull up a 15 minute chart of the Dow E-mini contract going back 3 days. Mark the high and the low of the chart during this time frame. Find the numbers with either a 3 or a 7 ending digit above the high and below the low- for example, a high of 12400, the number would be 12403. A low of 12225 would result in a lower figure of 12223. There are several additional more complex and detailed methods of determining these lines which will be discussed entirely in subsequent articles, but for the purpose of this article, this simple method is sufficient and works uncannily well. These are the channel figures.

STEP 2- the set up:

Pull up a 3 minute chart going back far just far enough to contain both the higher and lower figure, in this example 12403 and 12225. Draw horizontal lines on the chart at these figures. This creates what I refer to as the death channel. No trades are made within the death channel.

STEP 3- the entry:

Wait for price to break out of the death channel by a full 3 minute bar- this is one variation on the mechanical entry method, there are others that will be discussed in future articles. Patience is critical here- it is of utmost importance that one does not jump the gun and enter early. This is the strictly and purely mechanical part of this trading method. If price breaks through the upper line by a full 3 minute bar, a long entry is initiated. If price breaks the lower channel line by a full 3 minute bar, a short entry is initiated.

STEP 4- the exit:

If the entry doesn’t immediately result in profits, the exit is mechanical, once price drops or rises back into the death channel, the trade is closed and the next channel break out is anticipated for subsequent entries. There are different variations on the mechanical exit depending on ones personal loss criteria. For example, some traders of this method wait a full 3 minutes to exit regardless of where price goes during the adverse move back into the channel. Others are more comfortable immediately exiting upon channel re-entry. This is a personal choice. If the trade is profitable, I implement a discretionary trailing stop to attempt to lock in maximum profits. There are numerous factors that come into play in the decision to close a profitable trade. I will discuss these factors in detail in additional articles. I allow each channel four entry tries to develop daily profits. If after four entry attempts with no success, I use another method to determine the channel for that trading period. In my experience, profits are created within the four attempts.

Combining Mr. Spock mechanical entries and Andy Warhol discretionary type exits will provide you with a framework on which to develop your own personal strategy that works across a variety of markets. Stay tuned for exact applications for various markets.

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