Fools without rules

Education, Our View, S&P 500, The Opening Print, Trading Rules

The S&P did its usual thing yesterday after the Fed released its announcement; it sold off a little and then went the other way. You can have all the cool indicators in the world, but if you don’t have the proper trading rules and risk parameters it really won’t matter because you will be out of the game.

The S&Ps did pretty much like we expected it to do; they rallied. Sure there will be times when the S&P will sell off and keep going, but overall if you stick with the idea that the S&P has to go down before it goes back up, it will not only make your life easier, it will also keep you on the right side of the trend.ES 06-14 (5 Min)  5_1_2014

Today’s View will not be based on all of the S&P’s ups and down but will be centered on trading rules and how that can help you be more profitable and how to get out of losing positions before they turn worse.

Trading Rules

In order to work, the trading rules must fit your personality and your financing. Obviously if your funds are small you may have tighter risk parameters. And if you have  deep pockets you’re able to hold longer and risk more. That means you should have pre-set ratios.

An example would be if you risk 2 points you should make 6 points on your trade, a 1:3 risk-reward ratio. Decide on this ratio before you enter the trade and then stick to it. If you abandon your stop and take a deeper drawdown and then get lucky and have it come back in your favor, do not then decide to hang on for a big win to justify the big risk. The trade has already violated your parameters. It is not the trade you planned for. So get out safely and make a new plan.

Another great way for traders to reduce risk is trailing stops and taking profits on part of the position and letting the rest of the position ride. While it may not happen all the time, the great part is that you’re now trading with the market’s money.

Other rules we use and benefit from in the MrTopStep Trading Room include:

  • Turnaround Tuesday: Just as Mondays tend to be down days for the S&P, Tuesdays, more often than not, see an upswing. The rule has been particularly consistent in 2014.
  • The 10-handle Rule: This is the one we remind you of at the end of every morning’s View. Big moves tend to happen in roughly 10-point increments, usually in between sideways price consolidation at high-volume price levels. The stair-step rise to the contract high of 1892 happened this way. The big moves of the last several days, both up and down, have been about 10 points, plus a little wiggle room for the algos.
    Keep an eye on where the next 10 handle move is likely to take place and make sure you are with the trend when it happens.
  • The Late Friday Rip: For a variety of reasons, we often see one last dramatic move late on Friday. It is a good time to be on guard. You can either profit from being with that rip, or get caught and lose big. Sometimes, the rule is helpful just to know when to stand aside and get started on the weekend.

You can read more about MrTopStep’s Trading Rules, the product of 35 years of floor trading experience, in our free ebook.

Bad Habits

Like anything in life, kicking a habit is never easy. Unlike some habits, bad trading habits are one of the easiest ways to lose money. It’s very important to have trading rules but that also includes bad trading habits that constantly help traders lose money.

Below are a few mistakes traders should avoid:

  • Trading to trade: Meaning you’re looking to trade without having a reason to buy or sell.
  • Getting out too soon: Trading is not easy, but when you pick the right level the worst thing you can do is take a small profit or get out too soon.
  • Fighting the trend: The old adage about “the trend being your friend” is one of the most important rules. Swimming against the tide or trying to pick highs and lows can be profitable, but going with the trend will always be where the big money is made.
  • Overtrading: Knowing your size is important. If you have on too many contracts your losses will be big. It’s extremely important to find a comfort level when it comes to position size. Once you’re comfortable, increasing your size will not be hard. What will be hard is making back the profits from overtrading.
  • Unprepared trading: Many traders just turn on their screen and CNBC to catch up with what’s going on in the markets. One of the easiest ways to lose money is not doing your homework.

The last rule is one of the most important rules of all:

  • Admitting when you’re wrong: Don’t let your ego destroy your trading account. Some of the smartest traders in the world fall prey to the idea that the know more than the markets. After 37 years on the floor and working for Marty “The Pit Bull” Schwartz I know that the best trades are not the winners; they are the ones when you decisively got out of the losers.

Conclusion: In the high flying world of electronic trading it’s all about self-preservation. It’s about shuffling your feet and not letting losses pile up. Remember, get in and get out. Don’t fall in love with your position.

The Asian markets closed mostly higher overnight and in Europe 8 out of 12 markets are modestly higher. Today’s economic calendar includes 11 economic releases and Federal Reserve Chair Janet Yellen’s speech to the Independent Community Bankers of America, in Washington. The day starts with the Motor Vehicle Sales number, Challenger Job-Cut Report, Gallup US Payroll to Population, Jobless Claims, Personal Income and Outlays, Janet Yellen speaks, PMI Manufacturing Index, ISM Mfg Index, Construction Spending, EIA Natural Gas Report, 3 and 6 month T-bill Announcements, Fed Balance Sheet and Money supply and earnings from ConocoPhillips (COP: NYSE), Exxon Mobil ( XOM: NYSE), Mastercard (MA: NYSE), Kellogg (K : NYSE) , Viacom (VIAB ;NASDAQ), T-Mobile US (TMUS :NYSE), Merck (MRK:NYSE).

2014: The Year of the False Start

Sometimes you’re hot, sometimes you’re not. Lately it’s been the first part for us. Trading futures is not easy but if you’re patient and understand your risk going into the trade your results will be much better. Right now the money trade is the long side, but how long will that last?

As of yesterday the ESM14 has been up 10 out of the last 12 sessions and up 4 out of the last 5. Clearly the end of the month saw new buying. Now the question is, what do the mutual funds do on the first 3 days of the new month? According to the Stock Trader’s Almanac the first trading day of May has the Dow up 13 of the last 14 occasions and it’s our guess there is more to come.

Our view is the S&P is on a march to 1900.00 or higher. Our call earlier this week was a test of 1890 and if the S&P gets above 1893 it will be a clear shot to 1910. Remember, if the S&P is going up, it will be from a selloff or pullback. You can take it from there.

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 6 of 11 markets closed lower: Shanghai Comp. +0.30% , Hang Seng -1.42%, Nikkei +1.27%.
  • In Europe, 8 of 12 markets are trading higher: DAX +0.20%, FTSE +0.25%
  • Morning headline:“Stocks at or near record highs on upbeat Fed taper comments”
  • S&P Fair Value: S&P -5.68 , Nasdaq -8.31 , Dow -67.22
  • Total volume: 1.49 mil ESM and 4.4K SPM traded
  • Economic calendar: Motor Vehicle Sales, Challenger Job-Cut Report, Gallup US Payroll to Population, Jobless Claims, Personal Income and Outlays, Janet Yellen speaks, PMI Manufacturing Index, ISM Mfg Index, Construction Spending, EIA Natural Gas Report, 3 and 6 month T-bill Announcements, Fed Balance Sheet and Money supply.
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