I’m finding solid trades during the lunch hour, here’s how
I could spend endless hours typing countless
words covering trade entry setups, signals, indicators, etc, etc. We could pour
over dozens, hundreds and even thousands of charts all drawn up with lines,
arrows and pointers showing right where to enter trades, exit trades, etc. Do
you think that might help you with current trading results? Perhaps.
Mental Case
That type of stuff is usually garners the most interest, majority of
page views and holds most readers from beginning to end. When we talk about the
mental ~ emotional side of our profession, I can almost see eyes glaze over and
index fingers twitching mouse keys for the “back” button to exit post-haste.
I also know that the X-Y-ZÂ trade entry /
exit stuff can be purchased from hundreds of vendors for a mere pittance, while
experience in the trenches as I’m about to share with you cannot be purchased at
any price. More than that, learning these lessons on your own will cost far,
far, big-time more than any enter here – exit there type of talk.
Ready for a lesson that challenges one part of
common mantra out there? Here we go!
Thursday’s Delight
Friday’s session would mark the end-month and end-quarter event for mutual &
hedge funds. On Thursday we expected big-money players to “paint the tape” and
“dress the windows” in rally fashion. I believe Larry Connors did a scientific
study on this period showing very positive performance if we buy the last of a
month and sell into first few days accordingly. Doesn’t always work, but more
often than not.
The S&P 500 spent first two hours of
Thursday’s session chopping sideways in bearish fashion. Matter of fact, they
even posted a lower-low near 11:00am EST just to wash out stubborn longs and
trap momentum shorts before what was brewing next.
Inside fifteen minutes of a single candle, the
ES ramped from below 1220 to above 1226+ price levels. Heck, there have been
many sessions this year where that equaled or exceeded the entire range. That
move also came right near the noontime hour… midday period where we’ve been
warned countless times to avoid trading or at most tread lightly due to low
volume and volatility.
I’ve noticed that the stock indexes have been
staging more and more solid trade signals during the lunchtime lull this year.
Maybe I’m just imagining things, but we’ve seen a lot of very viable trade
signals between noon and 1:00pm EST. In Thursday’s case, the ES pulled back into
its daily pivot and several other layers of support before pinging right off
that mark to plow 11+ index points at session highs.
Russell 2000 made the same choppy little
W-shaped pattern before posting a higher-low than earlier extreme, then steam
rolled shorts in two-step fashion thru its 13 point total range. The morning
surge pulled back perfectly at 12:30pm EST and fired higher for big profit
potential during the worst possible period of trading. Or so we’ve all been told
it is the worst period to trade.
Those trade entry signals for both indexes were
right there in pure clarity. After early morning chop and midday “lull” set to
begin, those old voices warning to avoid that part of the session were
chattering in my ear. In my own personal case, I sat out those long trade
signals off the pivot point during lunch. Why? Several reasons:
#1: For pure intraday trading, we are building
a public track record from 10/01 onward for managed accounts. With that project
literally getting off the ground right now, I played Thursday from a stance of
“not to lose” instead of my motto “Trade To Win”. There is a difference between
the two, and results can be remarkable.
Within said public trading account, we had been
short – short – long – long each index and scratched my way to slightly
profitable by noon. We caught the initial upside in ER but missed long signals
at 1219 and 1221 for 1/2 and 1/2 position entries as the surge candles blew thru
before confirmation for entry. Had we filled those ES orders as expected, they
would have covered all-out at 1225 for sizeable gains by noon, just before pull
back longs were signaled.
That didn’t happen, and I did not want to be
chopped sideways thru lunch before the “real move” began (assumedly) later on.
Had I instead caught the initial ES lurch upward and booked +5pts on the full
position, it would have encouraged me to be more aggressive on the lunchtime
pullback. Changes the mindset to a position of positive expectancy instead of
frustration and trepidation of further surge & chop from what was experienced.
#2: The past two end-quarter events not
including Christmas Eve 2004 or June 2005’s FOMC event showed obvious window
dressing in the latter part of each afternoon. The early dips popped above the
pivots, then price action bobbed around before finally staging the expected &
profitable moves.
Times Change
We all know that absolutely anything can happen at any time inside
financial markets. It is a literal sea of randomness of which certain patterns
and setups of favorable edge exist. One of those prior patterns had been poor
trading conditions in the middle of a day. That does remain true to a certain
extent, but perhaps less valid than years before. The rise in program-trade
volume intraday has been incredible. Is it reasonable to assume some of the
logic included with those strategies pertains to pushing price action around
when volume is light and retail trader expectations lighter yet?
In addition to that, most major market makers
have moved off-floor from the pits and continue this exodus each month. Floor
traders who used to break for lunch are now at their desks… which may smooth
the dip in midday volume as we go along in time.
All financial markets are becoming much more
interconnected and globalized each year. The midday lull here corresponds to
end-day action in Europe and/or Asia. Perhaps traders in those markets position
themselves in ours for hedging or speculation more than before. What had been a
vacant time period for U.S. markets before may attract new players in the very
same way many of us now play the DAX during off-hours in the U.S.
In my years of active trading there have been
literally unbelievable swings in market action and behavior. Anyone who has been
around since 1998 – 2000 thru now understands that completely. One example does
not make any hard & fast rules, but it appears quite possible that midday
trading in the U.S. markets are evolving towards more blended action rather than
first part / last part and unprofitable in the middle. Time will tell, and we
will see.
Reality Of Returns
The second part of this conversation deals with reasonable
expectation of trading performance & profit returns.
Registered CTAs in our profession consider high
performance to be +40% ~ +50% annual returns on managed fund’s balance. Heck…
most of them would be thrilled just to have profitable performance, period! It
amazes me how many professional CTA money-managers remain in the red, i.e.
net-loss performance for years at a time. How do they keep their millions $$
under management AND attract more along the way?
I have a modest number of stock, commodity and
FX brokers who have become close friends thru the years. To a person, they have
always told me most of their clients lose money (big surprise) and never draw
out a single check from trading profits. By far the majority of trading accounts
(in any financial market) are little more than one-way holes that cash gets
thrown into and is never seen again.
When it comes to their minority of clients who
are profitable, the very best ones tend to average roughly +100% annual returns
on account, sometimes +200% on account. We have seen better than this via live
trading contests, but one wonders if that action is really an accurate
reflection of “normal” long-term trading performance. Trading contests are fun,
and I intend to play with some in the future myself. However, I believe the best
reflection of what is possible or probable as top performance in our profession
would be registered CTA results as public information and then private
conversations with numerous different brokers.
Unrealistic
Expectations
It also occurs to me that many (if not most) retail traders judge
trading results in a different way. I have seen too many individual fixate on
how many index points they can wrest from each trading session. The short-term
expectations are skewed. One good day might yield +20pts, two bad days that
follow might yield -5pts and -5pts each. What does that tell us? Nothing much.
In most retail trader’s minds lies some degree
inner belief that out there resides a number of individuals who are secretly
killing the markets. Somewhere, somehow, someone has the secret to market
success. Someone is silently racking up untold numbers of index points day after
day after day. These super-performers are out there, and they might just offer
up their magic potion inside a $195.00 video package or chat-room that discloses
all in A-B-C fashion.
No doubt… there are individual traders
privately achieving several hundred percent returns inside their trading
account(s) for this year, and possibly several years. I know this to be true,
because I’ve seen it myself before. However, that is not the average or norm for
our profession. The majority of traders will never achieve such returns, for a
myriad of reasons. Does that mean someone is a failure who averages +50%, +30%
or even +20% on their account? Trade $1 million and net +$200,000 profits next
year while feeling like you failed? Not many people would. Trade $10,000 and
wind up with $12,000 by year’s end would probably feel a whole lot worse, but
statistically it is the exact-same thing.
Without question there are far more traders who
will begin next year trading $10,000 and wind up with $2,000 (or less) than
those who will begin trading $10,000 and wind up with $12,000 by Christmas 2006.
Right or right? Pure probability statistics at work, absolute indisputable fact.
Summation
I’ve said it before a few dozen times in here, and have a few more
left to go: trading with success is much more involved than trying to figure out
where the next ideal entry, exit and stop-loss targets are in a chart. That is
what most traders fixate on because the process seems simple and doesn’t require
much beyond superficial thought. Eventually, we all come to realize that making
our own trade decisions OR making trade decisions to follow a mechanical
approach thru good times and bad is not so cut & dried.
Back in 1991 I purchased Larry William’s “Money
Tree” video package for $199 to learn how he turned $10,000 into $1.1 million
real time trading in the WorldCup contest of 1987. It’s been a long time since
those videos turned to dust and I only remember bits & pieces from the whole
package. I’d say the most profound recollection was Larry saying something about
how a trader can never be right, but still make a lot of money. Any trader will
buy too soon or too late, sell too soon or too late, miss winning trades and
fail to miss losers, etc. In the end, keeping mistakes small and letting good
decisions take over from there is basically the path to profitable success.
Trading is a constant study and evolution in
progress. No one ever honestly said successful trading would be easy, but this
long journey sure is worth it in the end!
Trade To Win
Austin P
(free pivot point calculator, much more inside)
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options and commodity markets.
Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.