Manuel Ochoa

During the day I watch the major indexes. But, I heard that watching how the S&P futures are trading indicates which direction the markets are heading. Is that a good indicator and do you use it much? Thanks!

Manuel Ochoa:

S&P Futures are an early indicator for moves in the market because of the following: When large traders want to go long or short, the cheapest and fastest way to do it is through S&P futures. The cheapest, because commissions are much lower for futures than stocks. The fastest, because a large amount of stock can be bought or sold instantaneously.

Submitted by Moderator:

Welcome to the tradingmarkets.COM Live Forum, featuring Manuel Ochoa.

Submitted by trtucker:

Do you reverse your position if a breakout fails and hits your stop loss?

Manuel Ochoa:

Usually not, because failed breakouts usually signify continued trading range price movement. Trading range price movement is more difficult to trade because of the increased random price movement. Therefore, I usually go to the sidelines and wait for the clean breakouts.

Submitted by yankee93:

As an S&P futures daytrader, I find it imperative to block out all outside influences (news announcements, CNBC opinions, WSJ articles etc.) since they usually are (1) wrong (2) irrelevent, and (3)-bias me in a certain direction that may be contrary to my technical analysis of the minute-by-minute situation. Would you say the same thing applies to daytrading stocks?

Manuel Ochoa:

To some extent, yes. S&P futures are dominated by large traders such as program traders and floor traders, more than any individual stock may be. Therefore, it is more imperative that you focus your discipline on your S&P trading. For example, on any given day S&P futures may have large orders coming in from arbitrage traders which can greatly move the price, as opposed to individual stocks where this is much less frequent on any given day.

Submitted by kxsstone:

With the yield on Treasuries climbing, do you think the market is now anticipating a 50 basis point increase next week? Isn’t it harder to day trade prior to the FOMC meeting?

Manuel Ochoa:

The market is putting a 50% probability on a 25 basis point hike on the Fed meeting after the one next week. Day trading prior to a FOMC meeting usually doesn’t provide great opportunities as volume is very light because of traders on the sidelines.

Submitted by Jason R Purvis:

What is you favorite style of trading? Day, position??

Manuel Ochoa:

I don’t have a favorite. I use both styles as they complement each other. Complementing styles and combining them is a key to superior performance.

Submitted by kat:

We’ve only got about $2,000 saved up to trade with, which gives us $4,000 in buying power. Everything I’ve read said to start with $15,000 or even more.. So my question is should we wait until we save more or is that much money really needed to succeed in the long run?

Manuel Ochoa:

I would recommend that you start with at least $10,000. Under capitalization is a series problem for long-term success. The most successful traders are the ones that are properly capitalized. With $10,000, I would suggest that you use an online broker so that commissions will not eat up your profits.

Submitted by Moderator:

Manuel, what do you think are some of the most import advantages and disadvantages of day trading?

Manuel Ochoa:

Some of the most important advantages are that daytrading offers are the following:

Submitted by art:

Hi,

Manuel Ochoa:

I would recommend a combination of both. You will be more successful if you diversify your tactics. You will make money with one strategy when your other strategies are losing. The trick is to be consistent in your appropach.

Submitted by godon1:

Do you have a best time of day i.e., open, 9:45am, 1pm or close? Thanks and I enjoy your s&p updates.

Manuel Ochoa:

Thank you. I like to trade S&Ps during the last hour of the day. That is usually the time that the market makes its best moves for me to trade against.

Submitted by Everett:

I’ve been told paying attention to the S&P futures just prior to the market’s opening is a good method of predicting the day’s early movement, yet I have seen rather pronounced positive or negative futures figures just prior to the opening of the markets only to see the markets move in the opposite direction at the opening. Do you believe the S&P futures are useful, and if so, how?

Manuel Ochoa:

S&P after hours futures are very lightly traded as opposed to the regular pit session. As a result, the after hours movements are less significant because there is less money being traded. S&P futures are useful if you examine the premium or discount to the cash index.

Submitted by Moderator:

Can you explain how a potential day trader might select the best stocks to trade?

Manuel Ochoa:

Yes.

Submitted by dfreeman:

Will you tell us what indicators you prefer to use?

Manuel Ochoa:

Sure. Here are two of the indicators I like to use:

Submitted by Everett:

Which “indicators’ do you suggest one uses to isolate stocks that are seeing increased action?

Manuel Ochoa:

An increased rate of change on a 5-day volatility is one of my favorite indicators. For example, if you see today’s volatility increased by 50% compared to the average volatility over the last five days, you will usually see the start of significant price moves.

Submitted by steve_g:

If you are trading a volatile stock, say in the $40 price range, a 1,000 shares at at time, what would you consider a resonable profit per trade. I think I have been trying to hit home runs and should maybe settle for smaller, quicker gains. Comments?

Manuel Ochoa:

Let the market be your guide. If you buy a $40 stock, and the high 3 days ago was $42, you should consider taking a partial profit at $42 and let the rest of the position, (i.e. 500 shares) work in case the stock has begun a major move up. In summary, you should try to hit singles and home runs at the same time.

Submitted by philrock:

In a recent article, you wrote about trading stocks that are breaking out of trading ranges. Do you think you should take these signals as position trades based on the daily chart), or do you think such stocks represent good opportunities for day trader? If they’re appropriate for day trading, can you explain why?

Manuel Ochoa:

The answer to your question is that breakouts are appropriate for both styles. Stocks that are breaking out of trading ranges provide enough price movement for daytraders as well as position traders to profit. Furthermore, daytraders would do better focusing only on stocks that are breaking out of trading ranges because of the significant price movement that usually follows.

Submitted by bolek:

I have noticed a daily pattern that starts off with stocks going up then a dip (not all stocks) then a shallow dive and zoom upwards. The internets sem to do this frequently. Am I imagining a tremendous opportunity here or is this a trap.

Manuel Ochoa:

Stocks tend to go through stages of repeating patterns for certain periods of time, but then start new patterns. I recommend that you fo some quantitative pattern testing on some testing software over many stocks covering many years. Then you will be able to gauge the probability of your patterns with much more significance.

Submitted by conrad:

Manuel, Can you touch upon the fact that you are are buying into weakness and shorting into strength. If the volatility is extreme, do you adjust your position size and how does it affect your stops?

Manuel Ochoa:

With S&P futures, I frequently buy into weakness and sell into strength because of the inherent nature of volatility to drift back to its normal reading. USUALLY, a return to normal levels results in a reversal of price. Position size is reduced when volatility is extreme and stop distance is increased as well.

Submitted by johnalv:

Manuel: Is it necessary to have to real-time (or delayed intra-day) data to day trade, or are there setups on daily charts you can take advantage of?

Manuel Ochoa:

You can day trade using daily data with good success. I prefer to look at daily data for day trading as the random price movement is less of a factor than in intraday charts.

Submitted by Trial User:

Can and how do you use news events to daytrade the stock market?

Manuel Ochoa:

You can use news events in many ways. For example, if a bullish report comes out on the economy, and stocks start heading down, this is a good set-up to go short the stock market, (i.e. short S&P futures or short individual stocks). News events and price action give you a snapshot on the mood of the market in a very clear manner.

Submitted by rshow:

Do you enter and exit 100% of your position with one trade or do you scale in and out ?

Manuel Ochoa:

I scale in and out of most of my trades. Keep in mind that I trade multiple contracts at a time and thousands of shares at a time. Quantity is important when scaling in and out, as you must be able to use multiple strategies.

Submitted by Moderator:

tradingmarkets has lists on both the Futures Traders (low volatility lists) and Stock Traders (Where The Action Is List) pages that identify markets with exceptionally low volatility that have a high probability of making large moves.

Submitted by dgates:

Are stochastics the best method for entry timing?

Manuel Ochoa:

Stochastics are derived from bar charts. If you compare a stochastic and a bar chart, you will see that you are really looking at the same thing. I don’t use stochastics because they don’t broaden my trading tools. You are better off using unrelated indicators.

Submitted by wgrocho498:

What trading patterrns or indicators do you use to trade the S&P’s, Bonds, and Franc for the tradingmarkets.com advisory How do you set the targets and stops?

Manuel Ochoa:

Targets are set according to recent price highs and lows and stops are set based upon recent volatility readings. I use the market as a road map of where it’s been.

Submitted by gjq177:

Please give your thoughts on day trading equity options as opposed to the stocks themselves.

Manuel Ochoa:

Day trading options is harder than day trading stocks because of increased transaction costs; specifically, the bid-offer spread is much more significant on an option versus a stock. Furthermore, commission costs are a much larger percentage of the value of the option versus the value of an average stock. These two factors make day trading options less likely to be profitable. For example, an option that has a bid at 2 1/2 and an offer at 2 3/4 has a 25-cent spread. That 25-cent spread is 9% of the value of the option based on the offer price of $2.75. Compare that to a stock that has a bid of $49.75 and an offer of $50.00, which represents a spread equal to one-half of a percent of the value of that stock.

Submitted by mikelmcint:

What are the significant risks to short selling?

Manuel Ochoa:

The first risk is execution risk. Sometimes a brokerage house cannot find you stock to short. Another risk is occasional short squeezes, large traders sometimes intentionally buy stocks to cause panic for the short sellers. Most professional short sellers do not disclose their positions because of this.

Submitted by wink55:

I have just recently started day trading. I have used the “10 most stocks up” at the opening bell and traded the 2 most up and sold before 10:30 a.m. What is your opinion on this tactic? Thank you.

Manuel Ochoa:

This is a momentum tactic. Its success is probably highly correlated to days when the S&P 500 is up on the day. Be careful when the S&P goes into a down trend.

Submitted by Everett:

Manuel,

Manuel Ochoa:

Both. Usually in the last hour of the day traders that have been on the wrong side of the market start to capitulate and get out of their positions. The public also has a tendency to become buyers in the last hour of the day when stock prices are rising because, as each hour passes during the day, they become convinced that the market is going higher.

Submitted by Jason R Purvis:

When day trading, how close do you trail your stops???

Manuel Ochoa:

Stop placement is based on current volatility. For example, when you are day trading AOL and the stock has had a 3 point range in the last hour, you have to use a stop somewhere around 3 points from your entry price. Compare that to day trading GE, whose range in the last hour has been one point. With GE, you can use a much closer stop, (i.e. approximately one point); otherwise you risk getting stopped out of your position by random price movement.

Submitted by Moderator:

Submitted by Moderator:

“Cash” in this context refers to actual S&P 500 stock index, which represents the movement of its 500 component stocks and is quoted throughout the day (on CNBC, for example) along with other indexes like the Dow and NASDAQ.

Submitted by robtonya:

How can we use program trading to compliment our Dow futures trading? Is it the S&P premium that is what the programs key off of?

Manuel Ochoa:

Dow and S&P futures are highly correlated. S&P premiums are carefully watched by program traders for their buy-sell positions.

Submitted by jimmythomas:

I am relatively new to futures trading but it seems like that on Friday the market is more unpredictable with less movement. Do you have a comment on this?

Manuel Ochoa:

Fridays are usually less trendy, with the exception of economic reports being released, than other weekdays because traders have a tendency to leave earlier during Friday. That’s simply it.

Submitted by art:

Hi, In your most recent column, you showed a day trading method using avgerage true range for longs. Can it be used for shorts also with the right changes, and can you use the numbers while a stock is already rising, for an entry spot?

Manuel Ochoa:

ATR can be used for shorts as well, and you can use the numbers when a stock has begun moving, but it is better to use it before.

Submitted by monwei:

How you handle Gap down or gap up when market open ?

Manuel Ochoa:

I handle it by assuming already that this situation will occur and reducing my position size to reflect this.

Submitted by NDXTraders:

How do you determine position size? Especially in leveraged markets such as futures.

Manuel Ochoa:

Firstly, you have to determine the dollar amount you are controlling. For example, S&P futures are leveraged by $250. Once you determine the dollar value of your position, then you can see the percentage that the contract has fluctuated over the last three days and calculate that dollar amount. Then, you divide that dollar amount by your capital base to determine the percentage. From there, you can gauge what percentage of your account is at risk.

Submitted by Moderator:

This concludes our Live Forum. Thanks for all your questions, and thanks to Manuel Ochoa. Come back Wednesday, June 30, for our first live audio forum with Kevin Haggerty, Jeff Cooper and Larry Connors.