Stalking the Best E-Mini Trades
Remaining patient while waiting for the right trade setups to come along is not an easy task when those setups occur only 1-3 times per day. But that’s exactly what independent trader John Paul does extremely well. As an S&P E-mini trader, John talks with Tim Bourquin about the time frames he works on to find those trades and the “special” number he’s watching for during the trading day. I also ask him what his “perfect setup” looks like on a chart and how he sets his profit targets and stop losses. I was floored when he first mentioned where he sets his stop losses!
Tim Bourquin: John, tell us how you became involved in trading in the first place.
John: Well, about 10 years ago, I was studying medicine at Seton Hall University, New Jersey and decided not to pursue that route. I realized it wasn’t for me and I didn’t want to go 12 years of schooling. A friend of mine introduced me to a Larry Williams’ course on how to trade futures and commodities. So without having any experience in trading, I went through all the videos and all the courses and I thought to myself, “Why this is pretty easy, I can do this. The money is great.” I opened a $10,000 account and proceeded to lose the entire amount.
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Tim Bourquin: That was an expensive first lesson!
John: It was. But it was also then that I embarked on a journey to really learn how these markets worked and reinvented the whole way I was thinking about how to trade. I decided not to follow any one person specifically and devised my own approach that didn’t include any special indicators. Instead I focused specifically on price action.
Tim Bourquin: Why did you decide that indicators weren’t for you and the type of trading you were doing?
John: For me, I thought everything that was available was very general and basic. The indicators I saw many traders using were older and weren’t focused on today’s market conditions. I just didn’t see that they worked well for what was occurring at the present time in the market.
Tim Bourquin: So you went on this journey to find out what did work. What kinds of things did you look through to get there?
John: Well as a trader, we all go through these cycles and we first start off learning to trade and seeing all these beautiful indicator including moving averages and MACD and stochastics. We put them all on a chart and try to figure out which ones will work with which parameters and sometimes it does work and sometimes they don’t. Nothing was ever consistent. In learning about all these different indicators and ways to apply them I realized everything was fundamentally about one thing – price. So I began to study price action and found that trading strategies based simply on price gave me a much better picture of the market and a clearer view of potential price changes ahead.
Tim Bourquin: Many traders also combine price action with volume. Do you consider rising or falling volume in your strategy as well?
John: No, I just watch the price. I don’t incorporate any volume or any multiple time frames for that matter. I just stick to one chart and one time frame and I don’t monitor anything else.
Tim Bourquin: And what time frame is that?
John: Personally, I like the five-minute chart on the S&P E-Mini, which is what I trade almost exclusively. I think the 10-minute time frame is very good, if you want to avoid some of the false break outs that can get you into trouble, but the five-minute is really what I trade.
Tim Bourquin: How many trades a day are you putting on?
John: Actually, I only trade once, twice, and possibly three times a day now, and that’s it. Back in the day when I started trading, it was a free-for all. It was 10, 15, or 50 trades very quickly and I traded as much as possible just trying to make money each time, but it wasn’t consistent – I wasn’t consistent. So I decided to just keep it simple and with 1-3 trades a day I’ve become much more consistent and confident in my trading abilities.
Tim Bourquin: So how did you develop the patience to wait for that one or two great trades a day? That’s got to be tough to sit there at your computer the whole time and wait for those opportunities to come through.
John: That’s right. And I actually think that the problem with a lot of traders who aren’t consistent tend to be impulsive – they just want to pull the trigger. It’s so easy now in electronic trading to just press that market order button and go with it. I actually learned the hard way, losing money and trying lots of different things in my trading. In the end, I decided that I didn’t want to be a trader that lived and died by each tick on the screen. I wanted to be a trader that enjoyed a day trading lifestyle, but not the frenetic type of trading hundreds of times a day. Instead, I realized that if I waited for the right trades to come my way and had patience, I could still make a great living as a trader, shut off the computer, and enjoy the rest of the day. Don’t get me wrong – there have been many times when I wake up early in the morning and the market opens and I stare at the screen watching each tick, but then I remind myself that I’m not here to make my broker rich and forcing multiple trades. If I’m sticking to my mission, I only trade really in the morning and I want to be done by noon, eastern standard time. If I can just trade in the morning and make a little bit of money, a couple of points and be done, that’s really the lifestyle that I’m after.
Tim Bourquin: I was talking to another trader the other day who says that when he’s losing or he’s just not “feeling it”, he forces himself to say, “I’m not trading today. I’m going to sit there and I’m going to watch the markets go by, but I’m not going to trade.” He said that just by saying that to himself it takes that pressure off of him to try and find something to trade.
John: I agree with that. And it’s not all the time that I would say that. Because when I do have a losing trade, which obviously happens (nothing is 100%), I go back to the market with the rules of my trades and I recover slowly. There are times when the volatility is just crazy. And I think that there are times when, even with great volatility, you just need to stay out of the market until you have a better feeling about where your opportunities are. Some guys love those wild swings. I just know that, for myself, it’s not my style.
Tim Bourquin: Let’s talk about what a “good setup” looks like to you. Can you describe, if you would, the “perfect trade”? I know it never exists but humor me.
John: Sure. I start of the day when looking for an exact number or entry price that the market will tell me, “This is the number where I need to begin. I’ll wait until it gets there.” I don’t chase the trade and even when the market opens and it rallies a couple of points I’m not going to get baited into executing early. If I did, it’s guaranteed that the market will reverse and I’ll get hurt. The “number” may be based on overnight data or a previous day’s high or low that I want to see it break away from. It will be a level that substantiates the market direction. The perfect price is whatever you think it is for you personally. I’ll place my trade at that number and I won’t move it – period . I wait to be filled then I already have automatic profit targets and stop losses placed immediately thereafter. If it never makes it to the price level I have decided to wait for – that’s too bad – I don’t really mind. I’ll wait until the next trading opportunity comes along.
Tim Bourquin: And then how about these stops and the profit targets? How are you setting and calculating those?
John: Very good question. I’m a true believer that if you put tight stops on any of your trades it works against you. A lot of traders would say they believe that they could trade the E-Mini with one or two-point stops. And I really think that’s the wrong way to trade, and I’ll tell you why. The E-Mini market has been, and it continues to be more volatile. And one or two points in the E-Mini occurs in seconds, and if you believe that you’re correct on the trade that you put on, in the direction that you want the market to go, the market may need to “breathe” or “adjust itself” before continuing in that direction. I think that you need to have a larger stop in order to account for that volatility and to give yourself time to be right. I personally employ a five-point stop all the time. Lots of traders might say that’s a lot – that they can’t deal with that much of a drawdown. But if you think about it rationally, if you get stopped out on one or two points ten times, it’s going to add up to a lot more losses. But if you’re correct on the trade, and you need the market to breathe a little bit to go to three or four points before continuing your direction and you’re only stopped out on a monthly basis, it may one, two or three times – it is a much more accurate way of trading. And remember, since I’m only trading one to three times a day, I can afford to wait for more ideal prices at which to enter.
Tim Bourquin: How often do you find yourself getting stopped out down to that five points?
John: I would say on a monthly basis probably three to five times per month.
Tim Bourquin: So you’re able to ride your winners enough that it makes up for those bigger losses?
John: Sure. And not only that, as soon as I do get stopped out, I have a recovery process that I use to get right back into the market, with smaller size perhaps. So within a trade or two trades, or even within that same day, I am working to get back to break-even.
Tim Bourquin: Now how about those profit targets? Where and how are you setting those?
John: I like to set my profit targets between two and four points. And the reason why I like that range is because they occur quickly I can scale out. I take half of my position off at two points of profit. If I’m trading 20 contracts, I’ll take 10 contracts off and then leave the other 10 until I achieve another two points of profit and then I’ll take another half off. What I’m left with is five contracts, that I can use to run even further. It allows me to lock in some profits and still take advantage of further moves in the right direction. I’m flat every night and I don’t like to hold on after the close. So if it hasn’t hit my targets by closing time, I exit the position completely.
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