Setup

I got an E-Mail asking this:

A question if you have time to answer...Do you always use the same setup 30 min, 2 min & 10T chart or trading on all instruments? ... Do you trade ES.?..it moves so slow I wonder whether it will adapt to these settings ?

Yes I use the same setup for all my charts. As I said numerous times...MAKE IT SIMPLE...so don't mess around with your charts, don't mess around with your trading software...get used to what you know works 80% of the time. If you have a string of losers, so be it, it's part of the plan. One thing you need to be sure of as discretionary trader: You need to know that you have an edge. And you can only prove that convincingly to yourself, if you have the statistics to back you. So have a trading journal, where you see right away how you doing. Below I have attached a copy of my trading journal for the last month, this is just an excel sheet, but I use it now for 4 years and that amount of data can tell you a lot about yourself.
  

A rising account balance is not all, you need to set yourself goals, you need to have rules, which protect you, which keep yourself safe even when you in a losing trade. In trading there is no room for panic. When you are driving your car and suddenly something unexpected happens, you react, if you panic you crash. You rely on your instincts to keep you safe. You know, that your instincts will let you do everything which is necessary to avoid the crash if humanly possible. The same must be true in trading.

Unfortunately as a trader we need to train our instincts first, before we can rely on them. Without training we will panic and usually do the wrong thing. (But isn’t it the same with driving? When your kid starts driving, you can only pray he/she will master the first 2 or 3 years without serious accident, then they most likely will have learned enough to master most basic situations)

You stick to ES because it’s not as volatile as ER2. As a trader you embrace volatility, you don’t fear it, because volatility is profit, is security for your account.

There are 2 ways to trade: With stops and without stops.

If you trade with stops you might endanger your account by bleeding it to death by taking a 1000nd stops. Taking too many stops is difficult, as it sure gets on your psyche.

If you trade without stops, you trade swings, you know that all instruments swing, that every price will be revisited eventually and that you only need to bring your average price within the next swing area to close the trade at a profit. But the risks for this kind of trading are a lot higher as you may not have the margin to bring your trade within the next swing area, you add to a losing trade and prices might still go against you, just that now the hole is twice the size it was before. This kind of trading can freeze you, it can leave you drained emotionally and it can really damage your account, as you might not be able to act, when it is time to act, because you fear doing the wrong thing again. (My highest losses came from that kind of trading)

Here are 2 30min charts: One is the Euro, one is CL (oil)

Yesterday you could have traded Oil successfully without stops, while trading Euro without stops often ends in disaster. Why? Oil has a higher volatility than the Euro, that is one reason. And Euro as all currencies has a tendency to trend stronger than oil. Oil swings a lot more compared to currencies. Currencies after a strong trend move tend to consolidate in a small range and reverse the next day part of the trend move. Oil often reverses up to 50% of any move into the close. No rule without exception of course!

Still you need something which tells you when to hold it and when to fold it.

I use this Excel-Spreadsheet, I’ve written about here: ib-excel-adapter to tell me that. If the Euro has gone 200 ticks since yesterday’s close, I trade it countertrend on a setup which presents itself. If it goes against me I add to the trade. If oil has gone 200 ticks, I trade it without stop. I might reconsider that number after yesterday, where I had a bit of a problem getting out of such a trade (but actually I made the error of looking at the move from the top instead of from yesterday’s close. Had I seen it as a US trader has seen oil, it would have been clear that there was more downside to come in oil)

And as you can see in the chart above, I messed up the final exit, leaving a potential huge profit on the table. But as I said, trading without Stops drains you emotionally, and I was not willing after seeing the trade finally in the green to let it go against me again.

Oh yes, I consider yesterdays trade as a lucky one.

I messed with my rules, none the less it was a good experience to trade it and to monitor my emotions within the trade which took a few hours to complete.

The  basic rule is: If a contract is at extremes from my knowledge of watching and trading a certain contract, then I go countertrend (unless there is a strong reason why the contract is at extremes of course). If it is not at extremes I trade trend moves and stop if necessary.

I don’t trade the ES, I use the ES as a guidance for market direction. (I do the same with the EuroStoxx50 in the morning btw) There are a lot of vehicles available which move faster and stronger than the ES, but still take their direction from the ES. I trade these, but that is my style, that is where I feel myself comfortable and where my statistics tell me I have an edge.

I have feared volatility, but trading slower contracts is not my style...water torture must be the same. The trade goes tick by tick by tick against you without hitting your stop. After 2h you are still in the trade, the stop is about to get hit and you move it and it goes again tick by tick by tick against you…Done that, been there…

No a fast move in my stop, I can accept that, I was wrong, but a relentless force driving a contract slowly against me without any meaningful retracement … Sorry that’s nothing for me.

You need to find what works for you. Where you can be in sync with the market. It can be an arcane contract like Silver, Soybeans or Natural Gas (low volume, very high volatility) or something from the mainstream like ES or ZB or ER2. It doesn’t matter what you trade, you need to know the contract, you need to know what drives it, how it trades, what is a normal swing, what is an extreme range, where does it tend to reverse a swing. It’s always the same. There are big traders in any contract, they are human (or if they are computer programs, then they have been programmed by humans) and humans tend to repeat themselves. They repeat what works for them. If you have followed a market for some time, you know where to expect support or resistance. If it works 80% of the time, you have an edge and that's all you need!