Online Futures Trading

Online Futures Trading

Professionalism and Profits as a State of Mind

By John Carter, Trade The Markets, Inc.

Trading the markets is the greatest job in the world, yet many people never seem to get into a consistently profitable groove. The key to staying profitable is to stay on the path of least resistance. This means pushing aside your prejudices about the market and focusing on the current supply and demand situation. Markets rise because current demand exceeds current supply. It doesn't matter if the demand is new buying or nervous shorts getting whacked. Demand is demand and that is what drives markets higher, and the inverse is equally true. Although "supply and demand" can be more difficult to measure with a single stock, it is very easy to measure with a popular index such as the Dow online futures trading. This is why I feel strongly that one of the best contracts out there to trade for both beginning and professional traders is the CBOT® mini-sized DowSM online futures trading (we call it the d-mini). The specific reasons are as follows:

1. For stocks, you need a $25,000 account to day trade. To day trade the CBOT mini-sized Dow, you only need to open a $5,000 futures account (minimum amounts can vary by broker).
2. For disciplined traders who use live stops, the leverage in trading mini-sized Dow futures over stocks is a huge plus.
3. You can watch the 30 stocks in the Dow to get a very good idea of how the index is acting or is going to act. Getting a feel for all 500 stocks in the S&P 500 at a glance is impossible.
4. The mini-sized Dow online futures trading has the same specifications as the popular S&P emini contract
   1. Professional day traders focus on limiting risk and protecting capital. Amateur day traders focus on how much money they can make on each trade. Professionals always take money away from amateurs.
   2. Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, "They are just shaking out weak hands here," or "The market makers are just dropping the bid here," then you are embracing your opinion. This is called "being an amateur" and will lead you to financial ruin. Don't hang onto a loser, whether you are short or long. You can always get back in.
   3. Amateur traders turn into professional traders when they stop looking for the "next great trading software" and start controlling their risk on each trade.
   4. You are trading other day traders, not the actual stock or index. You have to be aware of the psychology and emotions behind trading.
   5. Professional traders actively take small losses, and they do so because they know their most important job is to protect their capital. Amateurs resort to hope to save their trade. In life, hope is a powerful and positive thing. In trading, hope is the ultimate enemy and will destroy your account.
   1. Recently when the CME® crashed, I was stuck short in the emini s&p futures. I immediately went long an equivalent number of mini-sized Dow online futures trading contracts on the CBOT exchange, and I was hedged through the next morning. When it became evident that the market was going to "kill the shorts" who were stuck, I continued to add to my mini-sized Dow trade. Not only did I completely hedge my losses in the emini S&P, I made nice profits on every long mini-sized Dow I owned over my hedge amount. By the time the CME opened, the s&p had rallied over 15 points. Many traders were stuck short this day. The floor traders knew this and went after them "like a vampire on a baby." When the CME finally did reopen the next morning, traders who were stuck ended up having to swallow a huge loss. It is important to be aware of these options. A trader should never be dependent on one exchange for their livelihood, especially while online futures trading.
   2. I recently had a large number of puts on IBM. Getting out of an option that is going against you is an unpleasant experience. The market makers can smell blood and if you are trying to get out of a large position, they will drop the bid out from under you. In this instance, I bought 1 mini-sized Dow for each 10-lot of IBM puts that I owned. This created a great hedge and allowed me to get out of my put position at my leisure.
   3. There are many times when there will be a great buy setup on online futures trading, say, a 60-minute chart, but the 5, 15 and 30 minute charts are starting to rollover. In this instance I will play the 60-minute chart independent of the other charts. For example, I may be long the mini-sized Dow on my 60-minute play, then utilize the emini S&Ps for 15 minute short setups. This way you catch the bigger 60-minute move, but are also able to play the smaller 15-minute moves against your long position, without canceling out your other position. This is really the best of both worlds in online futures trading.
   1. Market Wizards by Jack Schwager
   2. Reminiscences of a Stock Operator by Edwin Lefevre
   3. Trading For A Living by Alexander Elder
   1. Why did you choose the 9/16 day moving average?
   2. Is the 9/16 day moving average good for commodities also?
< ol> But you will get picked off on stop runs less frequently if you use the CBOT mini-sized Dow. Why is this? The emini S&P moves 1 point in 4 quarter point increments. The mini-sized Dow will move an equivalent 10 points in 10 1-point increments, giving you 6 extra places to put your stop or your target. This is a huge advantage over trading the emini S&P and will save a trader a lot of money. By trading the mini-sized Dow, you are essentially cutting the spread by 60%. That money goes straight into your pocket.

If you are trading a single stock, you can have all kinds of outside influences move the price. Maybe insiders are selling or buying? Maybe an analyst has just issued an upgrade while their trading department is dumping the stock? Who knows? But when investors in general want to sell stocks, the Dow plummets. When investors in general want to buy stocks, the Dow rallies. This includes individual investors, hedge funds, program traders, arbitrage traders and everybody's favorite buy and sell programs. The Dow stocks will participate in all of these instances. Supply and demand at its finest, and this is what makes the mini-sized Dow online futures trading contract such a beautiful instrument to trade.

Before we look at a very easy and very profitable strategy to trade the CBOT mini-sized Dow online futures trading, let's take a look at what it takes to be a professional online futures trader. This is like the chicken and the egg theory. Without an egg, there is no chicken. Without a professional state of mind, there is no future for you as a trader. Being a professional is all about a state of mind, and you are never going to make consistent money until you achieve that state of mind. We have what we call our "Online Trading: 40 bits of Wisdom" that summarize our philosophy of the mindset of a professional day trader. Here are 5 of those "bits" to help get you in the right frame of mind:

There is a saying in trading circles that goes something like this. "First you lose money. Then you learn how not to lose. Then you make money." After trading for 15 years and watching many other day traders along the way, I can say with utmost certainty that the key to making money in this business can be summed up in our " Online Trading: 40 bits of Wisdom" The difference between being a professional day trader and an amateur day trader in this business is 100% state of mind. Believe me, I have seen plenty of people with 20+ years of experience who continue to blow out their accounts because they cannot let go of their "amateur" mindset. Yet I have also seen people who start trading and they make money right away and continue to do so because they picked up on this professional mindset and stuck to it. That said, let's take a look at a very simple and profitable strategy for trading the CBOT mini-sized Dow online futures trading.

The finely tuned art of technical analysis involves a process similar to a jury weighing the presented evidence during a trial, and then deciding upon an outcome. By the same token, my final online futures trading decisions must be back by evidence, not by emotion. In online futures trading, the market does not care what you think or hope. The stronger the evidence, the stronger the likelihood that a specific price action may occur. Based on this, I use a very simple system to day trade the CBOT mini-sized Dow online futures trading. I have 3 online futures trading accounts. One is a long term account where I set up plays to last a few months or even longer - basically as long as the trend is moving. I have a second account where I hold positions for a few days to a few weeks. Finally, my third account is my scalping account, and this is where I make my daily profits. In this account, I focus on setting up trades off of the 1 and 5 minute charts using a simple crossover moving average buy/sell and short/cover system. I do utilize additional methods to plot longer term resistance and support, but in general they are more important for my other two accounts. In my scalping account, I have stripped away all indicators and focus solely on current supply and demand. Let's take a look at the 1-minute chart below:

Online Futures Trading

In the chart above, I have a 1 minute chart of the CBOT mini-sized Dow with a minimum of trading software and noise. We have a simple candlestick chart (it works fine with a bar chart as well), and a set of two moving averages. The white dotted line is a simple 9-period moving average, and the blue solid line is a simple 16-period moving average. My scalping method is very simple. When the white dotted line crosses above the blue solid line, I cover my short position and go long. (Demand is exceeding supply, so the market is heading higher). When the white-dotted line crossed below the blue solid line, I sell my long and go short. (Supply is exceeding demand, so the markets are pushing lower). You can glance at the chart and see immediately how simple and profitable this system is. This is the easiest way to flow with the current supply and demand of the market. As you play around with this, you will find ways to maximize your profits by using the 16-period moving average as your stop, or by trailing a two to three bar stop on your trades. The point is, by following the direction of the moving averages, you are also following the direction of supply and demand and you will be on the path of least resistance most of the time. If a 1-minute chart generates too many trades for you, then bump it up to a 5-minute chart. Let's take a look at this below:

Online Futures Trading

As you can see, the 5-minute chart will keep you in intraday trends longer than a 1-minute chart, but while online futures trading you should use fewer contracts as the swings will be a little wider. Also, one tip on using this system is as follows: Let's say your normal lot size is 10 contracts. When you initiate your first trade for 10 contracts, then set your default to 20 contracts. Let's say you are long. Then, when you initiate the next trade, you will be selling your 10 longs and also adding 10 short at the same time. Then when you cover, you will be covering your 10 short and adding 10 long at the same time. This saves a step and keeps you "in line" with the system.

In addition to being a great online futures trading instrument, the mini-sized Dow also makes a great hedging and multiple time frame trading vehicle. Instances where I have used the mini-sized Dow in this fashion include:

There are many trading software out there and it is very easy to get swamped with 10 different trading software waiting for the "perfect" moment that never comes. This simple system will keep you from second guessing yourself, will keep you on the right side of the trend, and will keep your losses small while allowing your winners a chance to run. And that's about all you need to make a living at this greatest business in the world.

Here is a list of questions that have been submitted regarding the above article:

Q: I have never traded before, so much of the explanation that was given was somewhat "over my head", although I did understand some. My question is where could I learn to trade and learn how to read and understand the candlestick charts using this strategy? Or for that matter any strategy.

A: The easiest way to get started in this business is to first get a basic grasp of the concepts you will be using (i.e., candlestick charts), and then pattern yourself after successful traders this helps to eliminate the mistakes all beginners tend to make.
Some of my favorite books on trading to start out are:

For Candlesticks, a good book to get is Candlestick Charting Explained by Gergory L. Morris. We have a bookstore on our site where you can get all of these at a discount, or you can get them from places like amazon.com or your local Barnes & Noble.

Once you get a good foundation, it is then very helpful to work with other traders to learn the different styles of trading. You can ask your broker if they have any good traders you can work with, or you can use an educational site like ours where we sit there in a live "trading room" setting and call out our plays in real time and explain why we are doing them.

Q: I just read your article and I like the way you make things easy. So, I have a two questions:

A: We chose the 9/16 moving average after back testing different combinations. The 13/20 also works well. Getting too low (like 4/8) gave too many false signals. We also found these work on all time frames, from 1 minute to weekly.
For commodities, the 9/16 also works well. Most of our trades in wheat, soybeans, currencies, etc also take into account where we are on the daily chart - if its rolling over, we will ignore the buy setups on the 5 or 15 minute charts and focus only on the sell setups, etc.

Q: I would like to know if Mr. Carter trades every signal his system provides or does he day trade only certain signals based on experience or some other indicator that shows that this will likely be a profitable trade? The reason I ask this is because it seems to me that when the market is in a choppy sideways pattern the signals is unreliable. For instance, looking at two charts, one a 1-min chart and the other a 5-min chart with Mr. Kirkfield's two moving averages. Both are for May 21, 2003. To illustrate what I am saying I want to provide an example on the charts. If you traded the 1-min chart on the 21st you would have made money in the first couple of hours since the market moved sharply up and down in that period. However, towards the end of the day the market became choppy with sideways action and the system gave a lot of "false" signals.

If you used the 5-min chart on the same day, the first few hours that were profitable on the 1-min is now choppy and sideways.

So I repeat my question: How does one sidestep this problem?

A: First, I rarely initiate trades between 12:00PM and 2:15 PM Eastern time. This is generally the most choppy part of the day with the lowest volume. 9 days out of 10 I do nothing intraday during this time frame. The days that I do it is because I am already in a position and am still managing it by trailing up my stops, etc. This will eliminate a large part of the choppiness and false signals.

Second, one of the indicators I follow closely during the day is the CBOE put/call ratio (combined number for both equities and indexes). If this goes above 1.0, I do not initiate any shorts. If this falls below 0.60, I do not initiate any longs.

Third, I look to see how the 60 minute Stochastic and MACDs are acting. I want to be trading in the direction of these oscillators. If both the MACD and Stochastic are in a nice strong buy, I will ignore the short signals, and vice versa.

Q: What broker do you recommend for trading futures?

A: My partners and trading acquaintances all use the same broker.