Hey, it’s Bill from PowerEmini.com – I have a great presentation for you today and it’s titled:
“The Best Trade Setup Ever Invented in the History of the World”
It Doesn’t Exist!
Bet you weren’t expecting that.
I’m going to share some strategies and tactics here that will help you become a better Futures Day Trader. This is some good educational stuff.
It’s not your typical fluff blog post or AI generated junk we see so much of these days. It’s a carefully-crafted presentation that I wrote as an outline for a video presentation I’ll be recording.
No matter what your level of experience trading the Futures market is, I think you will pick up some great ideas in the following material.
Keep in mind that all our “education” is provided at no charge to our software users and to you right now since you’re reading this.
This is probably some of the best Futures Day Trading education you’ll see anywhere and you’ll get some take-aways you can start using right away.
So let’s dive right in.
Basically, what I want to talk about is “moving beyond the trade setup”.
Over all the years I’ve been involved in the markets and developing systems, so many Traders (especially newer Traders) and even veterans like myself are primarily focused on “trade setups”.
We’re always looking for that perfect trade setup that’s going to work every time.
It’s kind of the end all be all. Traders jump around from strategy to strategy, indicator to indicator, completely focused on finding the best trade setups. – assuming there’s a setup that’s going to work like magic every market session and in every environment.
(By the way, this presentation is based around trading intraday ES / MES Futures I just want to mention that as we get started). But most of these concepts are actually relevant no matter what instruments you’re trading or what timeframe you might be working with.
So here is the gist of what I’ll be discussing.
There are TONS of Futures Trading setups that we can experiment with and learn. There are an infinite number of indicators and combinations of indicators we can use and experiment with.
We’ve all spent countless hours looking for the best indicators and chart patterns and combinations of indicators in hopes we can find that perfect trade setup.
But here’s the dilemma. We immediately run into a problem because the same trading setup based on different time frames can give conflicting signals.
The market could be in a downtrend on one time frame and an uptrend on the other. So now you have to decide which of these time frames you are going to trade and which appears to be more valid. Maybe we look for all our indicators to line up on multiple timeframes and think that will solve the problem.
Long story short, the kind of confusion that goes along with finding the perfect trade setups using indicators leads a lot of people to just jump from one setup to the next and never really make any progress.
Once they think they’ve found the perfect Candlestick pattern and it works a few times, the market environment changes and it doesn’t work as well. Experimenting with indicators is worse. We always think “well if I added another indicator to this idea it would have kept me out of that trade where I got stopped out.
I’ve seen traders get so wrapped up in technical analysis they put so many indicators on the chart and draw so many lines that you can barely even see the price itself.
So what I’m here to tell you is that the trade setup itself is just the tip of the iceberg when it comes to the trading process.
What we can do to help create a Winning Edge is by first finding a good trade setup – but then focusing on all the other components of trading – namely what comes after we take our trade entry.
So I’m going to talk about position sizing and money management, stops and trailing stops and profit targets. All that good stuff that we can work with and optimize that doesn’t actually involve the trade setup itself.
Hopefully you already have a good repertoire of trading setups to use but I’m sure most of you know – and especially those of you who’ve been doing this for a long time – know that all trade setups have a failure rate.
So what we’re looking to do is gain an edge by refining and optimizing all the other components of the trade.
Whether you’re new to trading futures or an experienced trader, there are certain key aspects involved with Futures Day Trading.
While most people start off focused entirely on the Trade Setup, it’s important to take the other components into consideration and see what we can do to improve our results.
Key Components for Successful Futures Day Trading:
– the trade setup
– the trade trigger
– stops and trailing stops
– price targets
– getting to breakeven
– using a trade plan
– money management
– trading with risk capital
– adjusting to market conditions
– knowing when NOT to trade
– trading with a system
Before we proceed, Let me repeat myself “all trade setups have a failure rate”
I’m sure most of you know that we can indeed find high win-rate trade setups. Maybe you’ve taken some trading courses or learned about candlestick patterns from a book or on the Internet. Maybe you’ve experimented with a variety of indicators and found some pretty good technical setups already.
But you’ve probably already realized they don’t work all the time – every time. That’s just the nature of the business. That’s what stops are for.
Imagine a trade setup with a super high win rate, but it only occurs once in a blue moon. That doesn’t help us much with intraday trading. We don’t want to stare at the charts for a week hoping that setup will materialize.
Perhaps we’ve found some great setups in a technical analysis book that occur frequently intraday. Chances are the failure rate on those will be higher than we thought.
Say you look to buy support and sell resistance. Or perhaps you look to short when the market gets overbought or you look to buy breakouts.
All these types of things will work in certain market conditions and in certain environments but then suddenly the price action changes. The market behavior shifts and things start to get tough. You start getting market sessions where the price just doesn’t respect what you were taught in the technical analysis books. Support doesn’t hold.
Analysis Paralysis
We can load our charts with indicators, draw trendlines and identify candlestick patterns. We can use market profile or order flow, Heikin-Ashi charts or Ichimoku clouds. We can look for Fibonacci levels or Elliott Waves and the list goes on and on.
Eventually we encounter what’s called “analysis paralysis” and as soon as we think we’ve found the best trade setup in the world, the market starts making random moves that invalidates the setup.
So we go back to the drawing board and buy another course or watch some YouTube videos about some “indicator that works every time”. (I’ll save you a click – it doesn’t).
So eventually what you learn is that there’s no one Holy Grail day trading setup that works all the time every time in all market conditions.
I have a Candlestick book that’s about 3 inches thick and I pulled it out recently because I remember way back when I originally got this book I was thinking “let’s see what the best Candlestick patterns are. I can probably find a few can’t-lose patterns in here and just trade those and make a fortune”.
In the book they’ve tested every single Candlestick pattern known to mankind over thousands of trading days and summarized all the statistics on all the different patterns.
Guess what? I was blown away to find out that the success rate on the majority of the “best candlestick patterns” is like 50 to 60%.
I was expecting more. I have to say I was a little dismayed by that hard truth because I assumed some would be practically fool-proof. I wanted to discover the magical candlestick pattern that worked all the time.
Needless to say I felt let down when I discovered it didn’t exist. What I learned was that even the best candlestick patterns have just a “decent win rate”. (Not that there’s anything wrong with that).
Now I’m not knocking candlesticks or patterns or indicators or great trade setups at all. Everyone realizes the entry setups we’re trading are an extremely integral part of the process.
But all these different setups, all these different technical indicators, all the different patterns – no matter what you do, eventually you’re going to learn that every single trade setup is going to experience certain market conditions where it just doesn’t work so well.
It just doesn’t follow through and you get stopped out over and over.
(I hate it when price patterns don’t respect the laws of technical analysis).
There’s nothing worse than when the price action “thwarts” a perfect setup. (It’s ok to blame it on the algos).
I often suspect that the trading algos are deliberately programmed to screw the most market participants as possible.
So what we are going to explore here is “moving beyond the trade setup” and see what we can do to improve our Edge by tweaking the other components and parameters of the trade.
But first, let’s see some examples of how perfectly reasonable trade setups can fail, just to drive home the point.
Here’s a failed Breakout out trade.
Here’s a here’s a nifty little set of Candlestick buy and sell patterns. I love Candlestick patterns and I’ve always advocated using them. I can tell a lot by Candlestick patterns but guess what?
Sometimes this is how it starts – and then this is how it goes.
How it started…
How it’s going…
Candlestick patterns are great – sometimes they even work!
There was one pattern in my candlestick book that had like a 70% win rate but we come to find out it’s extremely rare to see and only happens once every so often. Which means not very often at all.
You could sit around staring at your charts for weeks and not get this particular Candlestick pattern. So there’s a bit of a trade-off right there.
By the way, trading is all about trade-offs. Set your stops too tight and they just get hit over and over. But we’ll get into that more in a little bit.
Just for fun, I want to show you a super high win rate Candlestick pattern.
But as you see, there’s always a drawback. The trade-off here is that to achieve the high win rate you have to take profits at 1-tick.
As I said, we know nothing’s perfect and even this is still not going to have a 100% win rate but if you ever see this exact setup jump on it! It typically only happens once every other Blue Moon.
Take your one-tick profit and call it a win. (This is joke of course).
So anyway, here we go. Here comes the good stuff.
- We’ve determined that no trade setup will work every time and all trade setups have a failure rate.
- You can’t figure out the market. You can only attempt to exploit it.
- Every session is different. There is no magical mathematical symmetry.
- There is no secret price pattern that wins in all market conditions and through all market environments.
The price action in the market itself is to blame.
You can have a great trading session one day and then the next day the ES just bounces around in a six point range all day and goes sideways.
Your trade setup either doesn’t fire off or it doesn’t work.
So even if we have the best trade setup ever invented with the highest win rate imaginable, as soon as we get filled on that trade – at that very moment we’re exposed to all sorts of different things that are not governed by the rules of technical analysis.
Say some news hits the wires or a big sell order comes in or any number of things that can cause price to turn on a dime. Maybe a tweet comes out or an institution decides to place a large order that causes one of those seemingly random price moves out of nowhere.
The point is that we can only perfect our trade setup so much. Once we’re in a trade we are essentially at the mercy of the market. We’re exposed to the subsequent price movement and sometimes it’s just random. Random price moves happen all the time for no reason at all, which you’re fully aware of if you’ve been trading long enough.
So what we want to do is refine our Edge by focusing on the other components of the trading process. The things that don’t revolve around the setup.
We can focus our attention on aspects other than the trade setup, such as trade management, money management, and account management.
What I mean by trade management is things like the Entry Trigger, initial stops and trailing stops, targets and so on.
Even though the entry trigger is basically part of the trade setup, it’s a small aspect we can work on in an effort to gain an edge. We can optimize and refine our entry trigger – how we actually take the entry on our great trade setup.
As intraday Futures Traders we are obviously going to use stops – another crucial aspect of trade management.
What comes after we take an entry is setting our initial stop, managing trailing stops and setting profit targets.
I’m also going to mention break-even trades and scaling contracts.
These are just some of the things that we can do “beyond the trade setup” to increase our odds and give us an edge.
Of course we know that money management and position sizing are additional important aspects of the process.
One thing I’ll talk about is sizing positions based on current market conditions, using intraday ATR’s and ranges in the market.
I have a cool little technique I’ll show you that involves scaling the number of Contracts you’re trading based on performance.
I’ll show you another strategy I recommend that goes a long way towards improving our mental approach. It’s probably the best risk-management approach you’ll see anywhere.
Let’s Begin with the Entry Trigger.
So to get an edge in our Futures Trading (beyond the trade setup) we can start by focusing on our entry points and our entry trigger.
Just because you have a trade setup or see a certain pattern on the chart doesn’t mean you just jump right in a trade. Typically there’s a “trigger” or “confirmation” that validates the setup.
If you draw a trendline and it gets violated by 1-tick do you just jump right in? I’d say it makes sense to somehow “validate” a trade before pulling the trigger.
That’s where the Trade Trigger or Entry Trigger comes in.
Generally speaking, and especially with regards to Candlestick patterns, there’s typically a “confirmation” that’s required before we actually enter a trade. In other words, when we get a certain candle pattern we have to wait for the price to move past a certain level in order to “confirm” the setup.
That’s just one example and that’s typically how trading candlestick patterns work.
No matter what sort of setup we’re using, when we’re getting ready to pull the trigger on any trade, we’re looking to confirm the entry by either a move past one of the prior highs or lows of a price bar / candle or a close past a prior high or low.
It makes a difference and is worth testing. In theory a CLOSE past a certain level holds more weight than just a 1-tick move past that level, because it indicates the buyers or sellers are more in control than if price just briefly pokes through a certain level.
Even with a Candlestick pattern that has confirmation it’s possible to use additional indicators to help confirm an entry.
Basically the gist is that a good system should actually have a “trade entry trigger” so you know when to take the entry based on your setup – and when NOT to take the entry.
There are a lot of potential variations on incorporating a Trade Trigger and confirming an entry, but the one we’ve tested and seems to work best is a CLOSE past a certain level.
Our software uses a one-minute close past the Trade Level to confirm an entry. That helps prevent us from pulling the trigger on a false move. Sometimes price just pokes though a level for an instant, but there’s no follow-through and price starts moving in the other direction.
So in order to get triggered into trade, we’re looking for a one minute price bar to actually close past what we call the “trade price barrier” level. A close past a level holds more weight than a split-second poke through it.
Frequently we’ll see price start to make a move say higher – we have our trade entry price level – and we’ll see the price bars or candles just poke up, poke up, poke through that level multiple times, but it doesn’t actually close above it. It’s not uncommon to then see price reverse and move in the other direction. We avoided taking the entry because there was no “confirmation”.
So to help avoid getting sucked into a false move we look for the one minute price bar that actually closes above our trigger line.
That should make sense because a closing price bar or candle holds more weight and helps confirm the market participants have the strength to close the price past our “potential trade” level. It’s quite common to use closing prices for confirmation.
After all, you don’t know what a candle will look like until it actually closes, right?
Now let’s move on to Stop Loss Orders.
I’m sure you already know placing a stop loss order on every trade is mandatory when day trading Futures.
Why? Because… All Trade Setups Have a Failure Rate.
There are different ways to think about stop losses and different ideas that can be experimented with but obviously it goes without saying that you have to place a stop-loss order once you’ve entered a trade.
There are actually two types of stops that I recommend:
1) The initial stop-loss
2) A subsequent Trailing Stop
Since we know that the initial stop-loss comes first, let’s start with that.
By the way, if you’re not using stops see me after class.
I actually talked to someone that said that they didn’t use stops and I scratched my head. I wasn’t going to start a debate with the gentleman but I’ll tell you what…
Using stops is like Rule #1 in Futures trading. In our educational material the first thing that we recommend is that the moment you enter a trade, you immediately place a protective stop to prevent a catastrophic loss. I’ve personally seen ES move 30 points in one minute.
I’ve seen plenty of price moves that could wipe out an account in the blink of an eye. If you’ve been trading for long enough you know what I’m taking about.
So the big dilemma that comes with setting the initial stop loss is this:
If your stops are too tight, they’re just going to get hit repeatedly – over and over. Death by a thousand small cuts.
And if your stops are too wide then you’re going to take big hits. Stabbed by the market with a butcher knife.
So good stop loss placement in my opinion should be based on ATR’s and the current market ranges of the timeframe you’re trading.
Since the market changes from day to day, session to session, it makes sense to have your stops adapt.
I’ve also talked to people that have little strategies where they say “I always use a six tick stop” which makes me wonder how that works out in periods of high volatility.
Certain things like that can work for certain people at certain times if they if they’ve got a good system and strategy. Personally, I don’t think a fixed stop like that makes sense.
I never knock what anyone else is doing. I’m always looking for a better mouse trap and always looking to improve my system, but when I’m trading ES I frequently see 6-tick moves up and down in a matter of seconds that is just normal everyday random price behavior.
Random price moves out of nowhere and for no reason occur frequently intraday
I see it all the time. Price can move 6-ticks in the time it takes to open your eyes right after a sneeze.
So in my opinion it makes much more sense to base your stops and targets on what the current price action is doing, taking the ranges and volatility happening right now into account.
As traders, we have to adapt to what the market is giving us today. Its personality is different every day. Every market session manifests slightly differently. And the environment is constantly shifting. Dull markets eventually get volatile.
So initial stop losses are commonly placed relative to a recent high or low or support or resistance levels, or maybe prior pivots on the chart. Or they could be based on ATR’s or some other indicator like a break past a moving average or a trendline.
But ideally the initial stop should be placed relative to current price action and some current level that’s displayed on the chart. Even if it’s the high or low a few bars back.
So saying something like “I always use a six tick stop” is not taking the current price action or current levels into consideration. One size doesn’t fit all when it comes to trading.
I’ll go out on a limb and suggest if you use a 6-tick stop and it gets hit eight out of ten times, you’ll be tempted to adjust your strategy. Especially after seeing the price make a big move in the direction you wanted right after your stop got hit.
It goes without saying that you don’t want to get your stops hit repeatedly so you want your stops to be “calibrated” properly and based on what you see on the charts right now.
From my experience most traders tend to gravitate to the tightest stops possible because that’s what they’ve read and been taught. But the trade-off is that setting stops too tight will result in a low win rate. Ideally stops should allow the price enough wiggle-room so that you don’t get stopped out by normal price fluctuation.
I gravitate to the idea of using wider stops to give price plenty of breathing room for normal fluctuation because statistically speaking, it quants-out better. ATR stops make the most sense in my opinion.
Next up we want to focus on Trailing Stops and Profit Targets.
Profit targets are important to me. I know some people use targets and some don’t, but part of our strategy is we use profit targets so that we can get our trades to break-even.
In order to get a trade to break-even you want to take partial profits and then move your stop. That’s where the trailing stop comes in.
So price targets allow you to scale out of a trade. I’m a real big proponent of break-even stop moves. My number one goal is to get a trade to break-even as quickly as possible. (That’s what our system is designed to do).
Also trailing stops can keep you in a big trend move for an extended run is what I call “a runner”. I prefer to shoot for bigger targets because it’s a proven fact the market makes big moves.
I know a lot of new traders gravitate towards scalping and taking small gains and losses, but my style is to shoot for the big gains. That’s a whole ‘nother conversation but my experience is that eventually scalpers realize they could have just held on and made more points in one trade than they would have by jumping in and out over and over, scalping for peanuts. Not to mention the savings on commissions and how much less work it is to trade the larger moves.
Trailing stops combined with taking partial profits is a winning strategy. Getting trades to break-even and then holding for extended moves is a winning strategy.
Let’s focus more on the concept of getting a trade to breakeven.
Break-even trades are something that everybody should think about introducing into their trading strategy.
Most people think of a trade as either a win or a lose. So it’s a binary event. You either lost money or you made money on that trade.
So here’s something interesting. When we introduce the break-even trade now only one-third of the outcomes lose money. It’s just math.
You have a winning trade, you have a break-even trade and you have a losing trade. Well guess what? Only 33% of the potential outcomes are bad now.
Think about that for a minute.
When a trade is at break-even you’ve eliminated the risk of loss but still have unlimited upside potential.
Once a trade is at break-even, if the market starts making an extended move you can just sit back let the trade play out without worrying about the possibility a loss.
It reduces the stress dramatically.
So that’s basically what we’re looking to do. We’re looking to get the break-even first and then we can manage the trade going forward. Without the fear of taking a loss.
Here’s a little takeaway trick that my cohort Jeffrey actually came up with a while back but it’s a real simple strategy. After you take your entry, as soon as you get three price bars with three consecutive lows that are higher than your entry, you just move your stop loss to break-even. This tends to work well with scalping.
There are a few other strategies we can use to get a trade to breakeven. But first I want to make a distinction.
When I say break-even most traders think of that as moving their initial stop to the entry.
But that requires the price has already made a significant move and is far enough away from the entry so when you ratchet the stop it won’t just get immediately hit.
Typically if you get a few points of movement in your favor, if you just trail the stop to your entry it’s just going to get hit quickly. You didn’t give it enough breathing-room.
Our strategy is what we call “virtual breakeven”.
It still means you can’t lose money on the trade, but it’s a far superior strategy to just trying to move your stop to the entry in my opinion.
Here’s how Virtual Breakeven works.
What we do is set a price target to take partial profits – call it Target 1.
When the price hits Target 1 you sell HALF the position and move the stop an equal distance away from where you just took profits.
Let’s say Target 1 is 4 points on a Long trade and you’re trading two contracts. Price moves up 4 points above your entry – you sell 1 contract – and then you move your initial stop 4 points below your entry – and guess what?
You’re at virtual break-even. See this post for a more in-depth look at getting a trade to breakeven.
And at that moment you have 8 points of “wiggle room” so that your trailed-up stop is less likely to get hit. You locked-in 4 points of gain and your trailing stop is 8 points away. And even if it gets hit, it’s just a wash. Virtual Breakeven.
You didn’t lose any money and you didn’t make any money. You just paid a commission.
Let’s talk about ATR stops for a minute.
ATR stops are something you might consider exploring. They take the current market conditions into account which helps your strategy adapt to an ever-changing environment.
So again, to me a fixed stop doesn’t make sense since the market environment changes from day to day as far as the volatility, ranges and the ATR’s. Heck the ATR’s can be different in the morning than at lunch time and the afternoon session.
I firmly believe basing both stops and targets on the current ATR’s and ranges that are happening in the market right now – at this moment – today – is the best approach.
That way your trading strategy is fluid and adapts over time.
The best way to trade what the market is serving up today is by using today’s ATR’s for whatever time frame you’re trading, because it’s using current market conditions.
The current “market conditions” are a function of the ranges of the current price bars or candles. The ATR’s are narrow when the market is dull and they can get crazy wide when the market is experiencing “volatility”.
So people talk about volatility a lot without really using the term in the proper context. On CNBC they often use the term “volatility” as a substitute for “the market went down”.
When the ATR’s get wider, I prefer to call it “range expansion”.
I use the term “volatility” when some stupid algo drops the price 6 points in a split-second for no reason at all and causes my stop to get it.
If ES is bouncing around in a four, five or six point range for an hour at lunchtime that’s a lot different than say 2:00 on a Fed Day when you’re seeing 10, 15, 20+ point ranges on the five minute chart.
So it makes sense to adapt your trading to the current sessions ATR’s and ranges right?
As an example, you don’t trade the same way on a lazy Friday in July as you would when Powell is doing his press conference after a Fed Announcement. The market just isn’t behaving the same way. On Fed announcement days you typically get serious range expansion where price moves up and down and up and down all over the place in crazy wide ranges. It’s very risky to try and trade in those conditions, but it’s just an extreme example of the point I’m trying to make.
Adapting to the current market conditions is a concept that you should strive to work with because that will improve your results over the longer run.
One size doesn’t fit all when it comes to trading.
Let’s move on and discuss why Market Conditions are so important.
I’m going to be honest with you – there’s good market conditions and there’s crappy market conditions. I hate to say it but sometimes the market conditions are just not conducive to trading.
A good trader is going to adapt and they’re going to be able to spot whether the trading session unfolding right now as we’re looking at it is a decent trading session or not.
Experienced traders can tell whether we’re getting trending movement and good price action or whether the market is just randomly chopping around sideways.
Taking the current market conditions into account seems so obvious but you’d be surprised at how many people think they can just approach the market and trade the same way every session.
I think a reasonable strategy is to trade more aggressively when the market has lots of momentum and trending price action and trade more conservatively in suboptimal conditions.
Some days the ES moves like a thinly traded Penny stock. That’s what I mean by suboptimal conditions. Every trader should strive to be able to assess the market conditions and that’s not really something that’s easy to quantify.
For instance during “the dog days of summer” there can be periods of time where there’s practically no price movement. A couple points up, a few points down. A couple more points down then a few points up – choppy sideways price action with low volume and low participation. Suboptimal market conditions.
It might make sense to just avoid trading at certain times or on certain days, but if you are going to attempt to trade in those conditions then you want to trade small and be conservative.
The same goes for extreme volatility, when the market is swinging up and down with huge ranges. There are times when the high to low range on the 5-minute ES is averaging 10-15 points or more and that introduces a different sort of risk.
If you’re going to trade in extremely volatile conditions, you probably want to use smaller position sizes. And tight stops are just going to get hit over and over so it makes sense to adjust. Some of the toughest market conditions to trade are when the price moves 15 points up then 12 points down, then 12 points up and 15 points down every 5-minutes.
(try using a 6-tick stop for that right?)
Learn to read and stay in tune with the current market conditions
Using a Trade Plan
We developed a simple trade plan for our software users. We recommend using this approach when starting off trading a new system or strategy.
It’s amazingly simple.
The first thing I recommend is to trade on Sim for a period of time just to get the hang of a new system or strategy and get the mechanics down pat. Spend a week or so learning the system and figuring out your triggers and the mechanics of what you’re doing so you don’t make order entry mistakes.
Once you’ve decided to go live with real money you want to start off at the smallest level. Start off trading with 2 MES contracts. You’re essentially starting off trading lunch money.
The reason I say the smallest level is 2 MES Contracts rather than 1 is because you’ll want to use the break-even strategy I described and that requires taking partial profits at an “easy to hit” Target 1.
So trading 2 Micro Contracts is a great way to start trading real conservatively.
Then the actual strategy is to scale the number of contracts at a certain interval – say every week – based on whether the prior week was profitable or not. (You could choose to adjust every two weeks).
So you start with two MES micro contracts and if you just had a profitable week you add a third contract and you trade at that size for the next week.
Maybe that turns out to be a losing week and so then you back it down to two contracts.
After that maybe you have a couple of winning weeks, and you added a contract on each week.
What this will do is act as a self-regulating mechanism. It will help you automatically adjust your position sizes to both performance and market conditions.
Because more times than not, poor performance and drawdowns are a direct result of poor market conditions – rather than your trade setup or strategy not working.
When the market conditions are not as conducive to trading you’re going to be trading more conservatively and when conditions are good, you’ll be trading more size.
Makes sense right?
Over time as you build up your account, you’re essentially pulling yourself up from your own bootstraps as they say. When you’re having some winning weeks you’ve scaled-up and you’re trading more contracts.
During drawdown periods, it’s quite likely it’s not your trade setup that’s failing. Instead, it’s that the market conditions aren’t all that great. So using this strategy you’re going to automatically scale up and be trading bigger size when the market conditions are good.
We’ve discussed trade management and how you can adjust your aggressiveness based on the current market conditions. We talked about the intraday ATR’s and ranges and the idea of scaling your number of contracts based on your prior week’s performance.
This next section is about Account Management
Here’s a great Account Management strategy you can employ to keep a level head and avoid the biggest mistake most new traders make – Blowing up your account.
Trading With Risk Capital
You’ve heard this before – “only trade with money you can afford to lose”. It seems like a good cautionary phrase, but it doesn’t do much in the way of helping you in any specific way.
I alluded to this strategy earlier, but now I want to explain the nuts and bolts of this unique approach to trading only with risk capital and avoiding the possibility of blowing up your account.
Here’s how it works:
You open your trading account with say five grand to start.
You make a promise to yourself (and your wife) that you’re never going to let that account go below five grand – EVER. No exceptions.
No matter what happens, come hell or high water – that account will always have 5k or more in it.
Get the account opened and get ready to trade on Sim to start out.
Then what you want to do is wait a week – and then send in the additional “risk capital”. Say 1k.
Once you start trading live. if by chance you burn through that thousand bucks of Risk Capital you stop trading and you have to send in more money as Risk capital.
Your Risk Capital is only the 1k you add to the account – which can never go below the original 5k.
(Remember, you’ve made a promise to yourself and your wife that you’re never going to let that account go below five grand).
Take a magic marker and write “I promise to never let my trading account go below $5,000” and sign it and hang it on the wall if you need to.
This strategy is a mental sort of thing and keeps you in the right frame of mind. We don’t want to get too far into Market psychology and trading mentality here, but this is a neat little technique that will do a lot for your mindset.
It starts you off with the right approach mindset wise. It forces you to use discipline, which is a requirement to be a successful trader.
Knowing that you are only risking a thousand bucks at a time and you will always have that 5k “locked away in the vault” will help give you confidence. Worst case scenario, you hit a rough patch when you first start trading and burn through that first batch of Risk capital and have to send in more. You can consider it the cost of an education.
Honestly if you follow the strategy of starting with 2 MES Contracts I talked about earlier, the first batch of Risk capital might be enough. Even if you do have to send in another batch or two, the main thing is that you will never blow up your account like the majority of traders do when they first start out.
Almost every successful trader I’ve read about started off blowing an account. If you prefer that route, feel free. I think the little “mind trick” I described is a much better approach because it will save a lot of mental anguish.
And as I mentioned earlier, the idea here is that you want to trade “lunch money” as you start out and pull yourself up by your own bootstraps. Until you can successfully trade 2-4 Micro Contracts there is no reason to risk any more than that.
Check out this video for a deep-dive into the concept of Trading With Risk Capital
The last thing I want to talk about here and touch on again is how traders are essentially at the mercy of market conditions and price movement.
I just want to expand a little bit on what I mentioned earlier.
As hard as it is to admit, we have no control over how the market acts from day to day and how the price action manifests after we take a trade.
Ideally every day would be a great trading day but it just doesn’t work that way. To stay in the game for the long-term and be successful, you have to learn to read the market conditions and know when NOT to participate.
Just because the market is open and the price is moving doesn’t mean you have trade.
If you can learn to be patient and wait for the best conditions you’ll avoid one of the most common pitfalls – overtrading. A baseball player doesn’t swing at every pitch and you don’t want to try to trade every wiggle on the chart.
New Traders have a hard time sitting on their hands waiting for the right setup to come along. New traders want “action”.
Be content with inactivity. The perfect setups don’t always come right after the market opens and they don’t necessarily come every day. If you desperately seek action, you put yourself at a disadvantage. Good traders are patient. They know when to stay out of the market. Don’t be short-sighted and impulsive. Don’t desperately seek action even when the conditions aren’t right.
Summary:
If you’ve spent tons of time and money searching for the best trade setup ever invented in the history of the world – guess what? It doesn’t exist.
I hope you can use some of these ideas to help give you an edge beyond just focusing on the trade setup itself. As I pointed out, there’s a lot more to being a successful Futures day Trader than just finding good trade setups. There are all these additional components and things to consider and we haven’t even scratched the surface when it comes to trading psychology. But that’s for another post.
Let me finish by saying that the Power Emini Momentum System incorporates and utilizes everything I described above.
The software gives you the EXACT entry, initial stop, trailing stops and Targets. It gets trades to Breakeven quickly and takes advantage of “Runners” when the market trends.
It uses the current Ranges and ATR’s in the market for the Trade Alerts so it adapts to any type of market conditions and any market environment.
The Power Emini Software not an indicator – it’s a full-blown Futures Trading System that’s been on the market almost 8-years. It’s one of the Best Futures Day Trading Systems you’ll ever find. Many of our software users have been trading this system for years.
You Won’t Find An Easier To Use Trading System Anywhere
The Power Emini Alert Software gives you an easy to follow – highly accurate trading system.
Entry Price – Trailing Stops – Dynamic Targets
– Stand-Alone Windows Desktop Software
– You place trades on your own platform with your own broker
– No big up-front cost and no commitment
– No Upsells, Everything is Included in the price
– Takes less than 2-minutes to install
I hope you found some value in this post and maybe it gave you some good ideas. I have another good post titled “How To Find the Best Futures Trading System” that you might also find interesting – and it’s not nearly as long.
PowerEmini Alert Software For Futures Day Traders