E-Mini Q&A

• August 23, 2002
• Raghee Horner

Here
are a
few questions I received recently (from fellow TM members) about my past articles:

Q:

“Raghee, you mark the opening bar’s high, low, open or close on your
charts sometimes. Why?
—Thanks.”

A:
Understanding the two paradigms of price change:
Most
of us have CNBC on during the day…if nothing more than for a little
entertainment or a bit of company (for us hermit traders).
When most folks look at whether a stock or particular market is up or
down, they look at what I refer to as the “investor’s close.”
This is simply the close at 4 p.m.
When a trader
looks at a stock or particular market as “up or down” we often look at
the opening price, the 9:30 a.m. open. I
refer to this as the “trader’s close.”

Each
has its place in measuring the performance of a market. 
When a market goes positive or negative on the day, it does elicit a
particular reaction in a group of market participants, usually traders.
This is a small but active group. The
larger reaction comes from what is most widely followed:
going positive or negative on the close. This
is what most periodicals and CNBC tracks.

Q:

“Do you trade the based on any reversal times? 
Do you trade the afternoon?”

A:
Understanding time: 
Like
I mentioned earlier, a daytrader thrives from 9:30 a.m. to 4 p.m. EST. 
But within this time there are many time slots we look to both profit
from and be cautious.
There are reversal times that a trader must contend with.
These are (EST) 9:50 a.m. -10 a.m., 10:15 a.m. – 10:30 a.m. We are also very careful
during the lunch hours of 11:30 a.m. -1:30 p.m. because of typically low volume during
these hours.
Lunch is usually wrapping up between 1:30 p.m. – 2 p.m..
At 3:00 p.m., the Bonds close and this is another reversal time.
And also 3:25 p.m. -3:30 p.m., as we come into the 4:00 p.m. close. 

Watch
the volume during the times and also see the volume groupings between 9:30-10:30
a.m. and 3:00-4:00 p.m. Volume is safety. 
That’s why you’ll find most traders will track liquid stocks and
markets.  Liquidity alone is not
enough to have a “tradeable” market but it is a start. 
Without volume it can be tough to get fills when you really need
them…like when you want to get out with a profit or need to get out with your
stop-loss.

Liquidity/volume has
much to do with trade timing too.  How
often have you ridden a nice trend only to give half of it back on a “bad
execution”?  The fact of the
matter is that many times a “bad execution” is a lack of understanding about
liquidity.  Let me explain:

There are price
levels and times that will be more liquid than others (I will go into more
detail in the Psychological Price Levels below). 
It is at these levels that many buyers and sellers are waiting to get
their fills or will be sending in orders to get fills.

While a trend is in
progress we will have multiple levels at which we will be ready to get out with
either a profit or loss.  These
levels can take the form of trendlines, support, resistance, whole numbers, and
even time.  One of these levels will
finally get us out of the trade, that’s why you will hear many traders refer
to these as “hurdles” because that precisely what they are. 
Picture a hurdler running down the track. 
They are sprinting from hurdle to hurdle and at each one of these hurdles
they will need an extra effort to get over it — price action moves just like
this.

So if a trader waits
too long (gets greedy) and misses an opportunity to get out at a liquid level or
time, then they may end up trying to get out with all the other traders in the
market.  This mad dash is like a
room full of people trying to head out the same small door — not everyone will
get out when they want to.

I
prefer to trade the mornings, and plan my swing/positions trades in the
afternoon.

Q:
“Could
you explain the “psychological price” levels you mark on your charts?

A:
Psychological
Price Levels:
Ever
hear an experienced trader explain to you be “be odd” when you place an
order? 
There’s a reason for that. 
Society moves in predictable ways. 
Picture your bank at noon or traffic at the 8 o’clock rush hour. 
Ask a friend what time they would like to meet for dinner and the answer
will be something line “How about 7:00 p.m.?” 
You want to get a haircut, you’ll probably ask for “a 2:30 p.m. appointment.” 

What I am showing
here is it is our nature to move in whole and half numbers. 
A trader or investor want to place an order and they will usually do so
at common numbers: “Buy at 40”
or “Sell at 25”, “Short at 42”.

There
are a few series of these common numbers:

 

100,
200, 1100, 1500, … (“century numbers”)

10, 20, 30, 50,…  (“decade
numbers”)

5, 10, 15, 20, 25, … (“fives”)

2, 4, 6, 8, … (“evens”)

1, 2, 3, 4, 5, … (“whole numbers”)

21.50, 22.50, … (“halves”)

These numbers are
usually liquid (higher volume) and can act as support and resistance levels. 
You can actually watch as price leap frog from one of these levels to the
next.  So the next time a market
takes off or reverses for no particular reason — check and see if it
was a “psychological price level”!

Q:
“Raghee,
It looks like you prefer to breakout trade with your “AM” pivots. 
Do you play momentum as well or scalp?”

A:
Trading Style:
It is my observation that every trader tends to gravitate towards a
particular style. 
Some traders love a nice predictable chop while others tend to be
trending day/breakout traders. 
The best way to trade is to understand both styles. 
This way a trader can either handle both types of markets (the ideal) or
stay flat when the environment does not suit their style of trading.

The
flip side of this is the “weakness” of both styles. I want to mention this because we may recognize ourselves in either one.  
Most of my past articles have focused on breakout trading but I do play
momo and scalp if the environment is right. 

A
choppy market trader always thinks the market will “turn around”. 
I find this type of trader takes profits too soon and will hold a loss
longer. 
This type of trader often overtrades.

A
trend trader or breakout trader will expect the market to follow a set trend
(usually the one they are already in…) and will have a hard time taking a
profit off the table because they will rationalize that this “is a pullback or
a retracement, etc.”. 
This type of trader will often miss the initial entry, and is usually
trigger shy. 
And when they miss this initial trend they will often guess at bottoms or
tops waiting for the reversal (the next trend).

So
you see, both have their pros and cons and recognizing the bad habits in both
can further you along in breaking the pattern. 
Some traders will have characteristics of both: 
Bad trading is usually not that original: 
We all make the same mistakes. Some of us just tend to make them over and over again.
Amateurs
practice ’til they get it right.
PROFESSIONALS
practice ’til they can’t get it wrong…

Q:
“You
seem to watch MSFT a lot. 
Do you trade it often?”

A:
I
do trade
(
MSFT |
Quote |
Chart |
News |
PowerRating) intraday, it’s a great mover with typically good, clean setups.
I also like
(
KLAC |
Quote |
Chart |
News |
PowerRating) and
(
QLGC |
Quote |
Chart |
News |
PowerRating). The
reason though that I watch MSFT so closely is because of it’s weighting in my
two favorite markets:  the ES and
NQ!


MSFT
is weighted heavily in the S&P 500 as well as the Nasdaq 100, so it is in my
best interest to mark MSFT for breakout and breakdown levels.
The benefit is that I can trade it as well…as I can refer back to the
E-Minis for confirmation. 
It is a great hand-in-glove fit.

Have
a great weekend.

Raghee