Risk Disclaimer

There is a very high degree of risk involved in trading. Past results are not indicative of future returns. SirIsaacPublishing.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information.

Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. By downloading this book your information may be shared with our educational partners. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of SirIsaacPublishing.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. 

Privacy Policy

Copyright © 2016 by Sir Isaac Publishing.  37 N Orange Ave STE 500 Orlando, FL 32801 http://SirIsaacPublishing.com All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Sir Isaac Publishing

Pat Barham, TradeTheSystem.com

The Two Minute Drill and Fast Moving Markets

As I am writing this article, the U.S. sports fan is in the overload portion of the year in which four major sports are in full swing.  Baseball is in the final days of the World Series, The National Football League, is grinding toward midseason, NCAA Football playoffs are beginning to take shape and the National Basketball Association is in liftoff mode for the season along with NCAA basketball kicking off at the end of the week.  I am biased toward basketball since I have kids that played college basketball and one playing professionally in Europe.  I mention that to give you a foreshadowing of my comparison of trading and sports.   

Have you ever watched a sporting event that is timed and the score is tied or very close?  In the NFL there is something every team prepares to run and it is called “The Two Minute Drill”.  This drill is when both teams are trying to change the outcome of the game by either scoring points or keeping the other team from scoring points in the last two minutes of the game.  The game may have been a real grind throughout the entire game but when the clock hits that two minute mark both teams turn up the intensity to full output.  You would think that with the maximum last ditch effort both teams are giving there would have to be mass chaos on the field.  For me it’s the most fun part of the game, and that is where the comparison to trading Fast Moving Commodity Markets hits full stride. 

As you closely examine players during the last two minutes you will notice that well coached teams are very polished in what they are doing.  The quarterback barks out predesigned plays that teammates execute flawlessly, often putting maximum pressure on the defense of the opposing team.  I love to see the teams that to the fans, appear to be quick but not in a hurry, execute the drill to a desired outcome of a score and win the game. 

If you examine a commodity trading day as you would a two minute drill you will begin to notice that there are times throughout the trading day that closely resemble the urgency of the two minute drill.   For me these times are the most advantageous times of the day to reap the profits from commodity markets.  This is when you need a polished well thought out plan to trade these “Fast Moving Commodity Markets”. 

The Art of Trading Fast Moving Markets

There are several schools of thought concerning trading.  One group considers that trading is purely technical in nature and can be successful with technical analysis that completely removes the human thought process from trading.  Another group is fundamental in its reasoning.  The fundamental trader spends hours gathering information pertaining to the commodity market being examined and makes a trading decision based on possible weather patterns, changing population, expected consumption and a list of other components that traders believe will affect the change of market prices. 

I consider myself a hybrid.   When trading commodity markets I believe a trader must be a little of both of the above groups with a large amount of understanding the nature of people.  I often remind traders that we need a good understanding of what patterns of repetition people repeat day after day.    I love watching people especially in airports.  There is such a herd mentality.   You can sit back and predict the behavior of the big majority of people, even when they are holding a card with a seat number on it, when the gate agent announces that the plane will now begin boarding about 80 percent of the people jump up and stand in line, often for 30 minutes.  The process, lets hurry to wait. 

In trading, there are times during the day when the most volume of traders are active in the market. These times vary from market to market. For me, a short term trader, that is when I do a majority of my trading.  I believe when there is maximum liquidity, when the most money is changing hands, which is the most opportune time to get in or out make a profit and exit before the herd scatters.   I consider this an Art.  A trading Art.  A feel for the market and an understanding of the character of each of the markets you will be trading.   The Corn market will move different than the Crude Oil market.  Bonds will move in different patterns than Wheat, and I could go on and on with the comparisons.  Traders need to know the character of each market they trade and it take time to learn these markets.  If you don’t, there are traders that will be waiting every day to help you adjust the value of your trading account.  That is why you must have a plan.

Without a Plan Emotions kick in and often lead to bad decisions

The Plan

Every trader that desires to have a successful business trading commodity markets must have a plan.  I don’t know of many people that would dream and save for years to build the house of their dreams and start the process without a blueprint.  Trading is no different.

As you embark on your desire to succeed in trading let me encourage you to sit down and weigh the cost.  One of the most common questions asked by new traders is where do you start.  That’s a great question.  The answer –Start by building a Solid Foundation.   Many traders today want to open an account and start trading the same day.  Will that work?  Yes, it will.  It will work you right out of trading and usually at a rapid rate of speed.  You must have PLAN a blueprint of how you will operate your business. 

I have a friend that tried the route of fund the account and trade as soon as possible method.  He started well for about an hour and thought this is great.  He picked a stock and was up about $5,000 in the first half of the morning and let me add, I had no idea he was attempting this craziness until late that afternoon when he called and explained what he had done.  He had purchased 10,000 shared of a low priced stock that was moving well in the morning session and enjoyed the success all day long thinking it would move higher in the afternoon.  He noticed the stock was losing some of the gains rather quick and decided to sell but there was a problem.  His order was being rejected by the platform he was using.  As panic begin to set in he decided to call me to see what he was doing wrong.  It was a rather simple answer. The market was closed. 

Through the years, I have seen almost every type of plan that you can imagine.  Some that would look like a trading prospectus written by the best Wall Street lawyers with every detail that you could imagine written in the plan and on the other end of the spectrum, a one page plan that was short and to the point.  Which is best?  Both, as long as you have put enough thought into the plan, the plan is able to be followed and you fully own the plan.  It is yours and you have to have the confidence that it will work.  If you are new to trading you will hear this quote often…”Plan Your Trade and Trade Your Plan”.  There is a lot of wisdom in those words. To become successful in trading fast moving commodity markets you must have direction and I believe that is only accomplished by a well thought out plan of attack.  It is time to get organized.

Set Rules and Follow The Rules

Set rules for your strategy and setups.  When you have a checklist you can develop rules to trade by and if you follow the rules consistency will become a cornerstone of your trading.  This is a foundational must have. There is no way around rules.  How would like to play a game without rules or drive a mountain road without guardrails.  Rules should be like Protective Stops, you never trade without them.  Most traders are very reluctant and some refuse to set rules for themselves to follow, and this refusal often delays the development in becoming a successful trader.  When I have a mentorship I have all traders work on a set of rules throughout the week and show me they are following the rules.  When you have rules and don’t follow them, you have no one to blame except yourself when your results are less than desired or if you consistently make mistakes.  We all break them from time to time, but rules are like a reset button when we get off track.

Organize Chart Workspaces

When I started trading over 30 years ago this was easy.  We had a chart book that came in the mail every week that we updated throughout the trading day and week.  The technical indicators had to be calculated by hand and you may be thinking what a pain and you are right but one thing it did was keep you organized.  Get behind and you were waiting a week on the next book to catch up and get back on track.  

The charting platforms today are filled and I mean filled, with hundreds of technical indicators that are useful in trading markets today.  Which one or ones are the best.  That is also an easy answer.  Use the one that makes the most sense to you.  One that you understand how it works and what it is showing you.  More on that latter.

You most likely have a charting platform on your computer that you have been learning to use.  Most have extensive tutorial libraries that explain how to get started and how to setup up the workspaces that you will be using every day.  After you set the workspace to your preference do you know what you are seeing?  That may sound a little crazy but when the markets are moving fast it is one of the most important tools you will use every trading day.   You need to know what you are looking at without having to guess and you need to be able to repeat the process over and over and over again.  Day after day.

Make Your Charts Easy To Read and Uniform.  It will increase speed.

When you are trading fast moving markets you do not have the time to hunt down the indicator you have purchased, hired, to work for you.  You need to know here it is and be able to get to it quick.  Let me explain.  I am a private pilot and when I was learning to fly, my instructor taught me what to look for when I was scanning an instrument panel.  When I was scanning the panel he wanted me to have a routine that I would follow because the more I followed the routine the quicker I would get my eyes outside the airplane.

IF YOU USE INDICATORs KNOW THE SEQUENCE THAT THEY FIRE. 
WHICH ONE WILL ALERT YOU FIRST?   

Imagine the workspace as an instrument panel. One that you would quickly look at a moving average and it would be at the same location on every chart and that moving average is the same color for every chart or a Relative Strength indicator that would have the same setting on every chart.  This will help you get a better feel for the chart and indicators and allow you make quicker decisions every time you trade.  If it is constantly moving and you are using different setting on every chart then you have to study the chart every time you look at it just to determine what you have on the chart.   With fast moving markets, that delay can be the difference of a good entry or exit on a trade that can make you hundreds of dollars or potentially cost you hundreds of dollars.  When seconds matter you don’t need to be on a hunt for an indicator or chart. 

Using Price Data Without Time

A quick word about what I believe is a much overlooked tool.  The Point and Figure Chart. 

With the multitude of charting platforms in the world today I have observed that very few traders have ever used anything other than weekly, daily, hourly and minute charts.  A majority of the charts I use in my daily trading have TIME as a component of the chart.   I did say majority.  There is one chart that is a solid fixture in every trading setup that I use. It's called the Point and Figure Chart. 

The Point and Figure Chart

Point & Figure charts focus only on price.  Time is not an element or component of this chart.

In order to build a P&F Chart you have to determine two factors.  The size of the “Box” and how many boxes to include in a “reversal”.  Let’s start with the “Box”. The size of the box can vary depending on the amount of information you wish to see.  An example for the soybean market that I use is a box size of .25 (one tick), that is the same for corn, wheat and the e-mini S&P.  The next factor is the reversal and that is typically 2 or 3. Personally I use 3. 

In the chart above, you see the green “X” and the red “O”.  As long as prices are going up, an X is added to the top of the X column every time the price is .25 or one tick above the previous X.  When the market turns down and reverses by 3 ticks or $37.50 a column of O’s is started to the right of the column of X’s and for every tick the market drops another O is add to the bottom of the column.

The P&F Chart is a pure reflection of supply and demand.  The supply and demand methodology is a very teachable methodology.  Most of us understand what drives price movement.  When there is an imbalance in supply and demand price will move and the Point and Figure Chart will show which one is winning the battle. 

When used with a volume chart I believe it helps build a great sense of market flow somewhat like being in the middle of a trading pit in Chicago.  It is worth mentioning here that the trading pits are quickly fading away.  The computer screen and chart is the “New Trading Pit” and traders have to be able to read this new pit to stay active in the game. 

The next requirement to increase you comfort level in fast markets is to know when to trade.

Times to Trade

This may not seem important, but to me this is a step that I cannot afford to overlook in every day trading.  TIME – if you trade commodity markets you need to know when reports are released.  If this slips up on you, it will bite you in the rear.  I can’t tell you the number of people I have talked to that have been caught napping when a report or news event was released.   When this does happen, it will usually cost you.  Commodity markets have different opening times so you need to make sure what time the market you are trading operates.  The same holds true for the close.  In the grain markets you need to know when major and minor crop reports are released.  Crude Oil moves with the release of the Petroleum Status Report.  Most major commodity markets will have a report that will move markets.  Did you see the movie Trading Places with Eddie Murphy?  The traders were waiting for the Crop Report on Orange Juice.  Times are important!!!

Trading Setups or Strategy

Back to flying for a brief time.  When I started flying, I was required to use a checklist every time I flew the airplane.  The instructor demanded that I use it.

The reason was that he wanted me to come back alive.  When flying, if you forget something you can’t pull over and stop to check out the problem.  You have to prepare ahead of time. 

I would highly suggest when testing a trading setup or strategy that you prepare a trading setup checklist.  The reason is very similar to flying.  When you have money on the line you don’t want to skip something that can cost you a winning trade.  It is important to maintain a consistent strategy.  Most traders tweak setups that suffer performance issues.  A few bad days of trading results may be due to market environment and not necessarily the results of a flawed strategy.  Remember we are seeking long term performance and I have never found a strategy that works every time without fail.   

I do this when I am working on a new setup for uniformity and consistency.  The goal is to do the same thing over and over again.  We will never be satisfied with our current results, at least that is what I have witnessed with top traders, so if we tweak a strategy or setup make sure the changes have been tested and tracked for improvement.    When I evaluate a new strategy I treat it like I do an employee I am interviewing.   If the strategy is worthy of working with proven setups then I will slowly integrate the method in my business.  I have noticed on sports teams that chemistry among players is extremely important.  The same is true with your trading strategy.  

I have index cards that have my trade setups printed on them like the checklist above.  I want to know what pattern the indicators must be in at the time of trade execution.   When you become familiar with the setup, you will notice that each trade will have a repeating pattern if it is working for you.  If it is different every day with no consistency I need to make adjustments or discard the setup all together.  I am very visual oriented and pattern recognition is an important part of my trading especially in short timed charts.  If I am trading in the opening hour of the trading day, I often use a 50 Tick Chart for gaining an edge for trade execution.  Opportunity comes quick when using these short time frames charts.

On your checklist you may want to include something like this:

- List the Futures contract or contracts that works best with this setup

- Time the setup works best -   Opening Gap, End of Day, Report Setup, First 30 Minutes, First Hour, Last Hour

- Indicators and Settings  - Moving Averages, MACD,  Trend Lines, Candlesticks

- Which indicator will fire first?  Example- 8 and 21 period Moving Average Crossover.  Pivot Point support or resistance

- What is your first target?

- What is your stop?

- When do you move your stop?

- When trading multiple contracts do you scale out of the trade or carry the entire position until stopped out or your target is          reached. 

Track Your Progress Every Day

Back to basketball for a quick lesson.  In sports today, even at the high school level, it seems like everything is tracked for the purpose of analyzing the results for better performance.  In high level college programs, you would astounded by the programs that track every move a player makes in a game and often in practice.  Programs track performance going left, going right, closely guarded, when a player shoots with or without a dribble, and it would not surprise me if they tracked breathing.  They track it all.  I guess that is why they were the number One ranked team in the nation when my son played for them.

With teams tracking progress, don’t you think it is of equal importance when analyzing your daily trading results?  Track everything you do that generates a trade from start to finish for every trade that is made.  This needs to be kept in a Trading Journal and make sure you update the journal every day for every trade.  Habits will surface along with patterns both good and bad.  The journal will help with consistency in trading strategy and the day to day operation of your business.

Simply put, I would encourage you to do the following ….

“Plan your trade and Trade you Plan”

 I have seen it over and over.  Even marginable traders with a good plan can make money in Fast Moving Commodity Markets.

THE SPECIAL OFFER

Back to Table of Contents

Barry Burns, TopDogTrading.com

There are 2 ratios that dominate professional traders’ thinking:

- The win/loss ratio of their trades.

- The risk/reward ratio of their trades.

Notice that I intentionally worded each bullet point above with the words “of their trades.” It may seem practical and objective to back test a trading system to determine these ratios, but what’s more realistic is to trade a method yourself over a significant, statistically significant number of trades, record your actual real-world results, and use these numbers as your own win/loss and risk/reward ratios. 

I know traders who play one game or the other. 

In other words, it’s not unusual for scalpers to have a very favorable win/loss ratio, but a risk/reward ratio of less than 1:1. 

On the other side of the continuum, there are trend traders who have an excellent risk/reward ratio (making 3-5 times or more what they risk on their winning trades), but they have more losing trades than winning trades. 

Both types of traders can be profitable as long as they know their numbers and keep the combined ratios in check so that they maintain the net results of their P&L in the green. 

In my own trading, I use both styles. I have various trade setups that have different expectancies. Some of my trade setups are designed to catch short-term high probability wins that put money in my pocket consistently. Other trade setups are designed to participate in long-term trends. 

I like having tactics for both styles of trading because it allows me to trade under varying market conditions. You can only make as much money as the market provides (based on its range), and markets only trend approximately 20% of the time. Therefore I have a quiver full of trade setups designed for various types of market conditions. 

This article is focused on trading for a high reward, while risking a small amount of money. Therefore I’ll focus on trend trading and its counter-part, trend reversal trading. 

Being the author of the book, “Trend Trading for Dummies” (Wiley), I’m quite familiar with trading trends and it’s at the core of my trading style. The first step in my chart analysis is always to determine whether or not there is a trend.

Before we go any further, it’s critical to define the term “trend.” According to Webster’s Dictionary, the word “trend” means “to extend in a general direction.” In that definition, the words “extend” and “general” clearly indicate that a trend refers to a long-term move. The fact that trading with the trend is designed to catch long-term moves therefore makes trend trading an ideal trading approach for cashing in on big financial rewards while risking a relatively small amount of money. 

As mentioned above, markets don’t always trend. They don’t always follow through in long term direction up or down. Sometimes they consolidate and meander sideways for a period of time. 

This begs that question, how do we determine when a market is trending? What objective method, tool, or measurement can we use to indicate that the market is making a long term directional move up or down? 

Hindsight is 20/20 of course. Analyzing historical charts is always easier than actively trading the hard right edge of the screen where the future is unknown and therefore any trade we take will always have an element of risk. 

To keep our risk small (half of the low risk / high reward equation) I use protective stops and hedge my positions with the use of options strategies. 

But what about the “high reward” half of the equation? We need an objective measurement of when a trend is likely to begin. 

There are many ways to do that. Some traders define a bullish trend as simply higher highs and higher lows, although such a price pattern can be a short-term move. 

There are a plethora of sophisticated mathematical calculations converted into indicators that can be used. I’d be dismissive if I said there was one “best” way to determine a trend. 

Personally, I’ve tried many different approaches over my decades of trading, and like most things in my career, I’ve returned to the simple basics. 

The two most commonly used moving averages, used by traders and investors I have known over the years, have been the 50 period simple moving average and the 200 simple moving average. I consider these to be the two most important moving averages. 

Don’t attribute any type of “magic” or mystical numerology to them. They’re effective for the very practical reason that they are used by such a large number of market participants and as a result have a self-fulfilling prophetic nature to them. 

Because such a large portion of the trading community watch these two moving averages, when the price of a market comes into those levels, people buy or sell off of them, or take profits into them. 

They serve the dual purpose of support/resistance and trend indicators. 

I consider the 50 SMA (simple moving average) to be the intermediate-term trend and the 200 SMA to be the long-term trend. 

At this point in the discussion I normally receive questions asking why I don’t use exponential moving averages, or shorter-term moving averages, because “they follow price more closely.” 

That’s exactly why I DON’T use them. I don’t want a moving average, or any indicator, that follows price. That’s useless since I can see what the price action is doing. I want something that shows me something DIFFERENT from what the price bars are doing. Looking for the indicators doing something different than the price action is actually what gives us high-probability setups! 

Depending on your trading preference, you can trade trends based on the intermediate-term trend (the 50 SMA) or the long-term trend (the 200 SMA). 

Trading the intermediate-term trend will provide you with more setups, but lower rewards simply because it gets you into shorter-term trends. 

Trading the long-term trend will provide you with fewer setups, but higher rewards because you’ll be getting into longer-term trends. 

If you have an agile mind and can handle both perspectives, you can trade both! 

In this article I’ll focus on the 200 SMA.

In the above chart of the S&P 500, the 200 SMA is the purple line angling up.

One of the keys to successful trend trading is to enter EARLY in a NEW trend. 

A very popular saying in trading is: 

“The trend is your friend until the end.” 

Then there’s the follow-up joke:             

“How do you know when the trend is going to end?”             

“Right after you get in!” 

I know it feels like that sometimes, but the saying is instructing us in a very important lesson. Trends are long-term moves, but they don’t last forever. In order to get the best risk/reward ratio, it’s critical to enter as early in a new trend as you can. That leaves you plenty of time to participate in the majority of the move and enjoy maximum profits. 

One potential optimal time to enter a new trend, using the 200 SMA is when price crosses it from one side to another. 

In the chart below you see an example of the EURUSD crossing from above the 200 SMA to below the 200 SMA to begin a new downtrend.

Entering the market short after the cross of the 200 SMA would have provided you with an excellent reward because you’re trading in the direction of the long-term trend and you’re entering that trend early.

Notice in the chart above, the market crosses below the 200 SMA and then comes back to test it as resistance before continuing down. This is a frequent occurrence and an excellent opportunity for a trade entry. 

Notice the same retest of the 200 SMA in the chart below, this time in an uptrend.

We’ve seen examples with the S&P 500 daily chart and the spot Forex EURUSD daily chart, but this approach also works for intraday charts for those who like day trading, and it can create some huge winners … IF you do it right.

Here’s an example of how to do it wrong on the e-minis 1,000 tick chart:

QUIZ: Can you tell what’s wrong with that trade entry?

The market is below the 200 SMA and the 200 SMA is going down, so we’re in a downtrend, right? 

The problem is the timing. Remember the basic trading rule: Enter a trend EARLY in a new trend. This entry is too late to the party. All trends come to an end, and the longer the trend continues, the less likely it is to sustain. 

Here’s what happened after that …

Luckily the market did go down a little after that entry (the market won’t always be so kind), but comparing with the chart above this one, you can see how little of the potential reward you were able to get out of a long bearish move if you would have entered when the price bars initially crossed the 200 SMA.

Extended trends are very risky. There isn’t a high probability that the market will continue trending, thus lowering your win/loss ratio. But there is a certainty that you won’t get as good a risk/reward ratio. 

Now if you waited for the next time the price bars moved above the 200 SMA (as shown by the arrow on the above chart), let’s see what type of reward was available to you in the chart below:

Most importantly, not only was it a better risk/reward trade but it was a safer, more conservative trade. Also notice how the price bars responded to the 200 SMA when it first approached it from below. Price bounces off of it twice as resistance before breaking through above it. This is because a large number of market participants are watching, and responding to, that 200 SMA.

Trend trading is one of the most tried and true, tested over time techniques for making money in the markets. It’s an especially good method for making low risk / high reward trades. 

But it must be done with care and skill. Entering a new trend early is key and staying in the trend for the full move is critical for making the most of the reward offered by a long-term move in the market. 

To continue this lesson, you’re invited to watch a free video that builds on the foundation laid in this article. The video was created specifically as a follow-up to this article and take you deeper into more details. 

THE MOVIE 

It’s a free video, and no opt-in is even required. It’s just there for your benefit.

THE SPECIAL OFFER

If you’d like more in-depth training, I also offer a free trading course which focuses on the difference between how amateurs and professionals trade the markets.

Back to Table of Contents

Hubert Senters, HubertSenters.com

If you are an active trader, it’s important to build futures into your trading activity. Why? Because all markets are exposed to risk, and you want to hedge yourself.  For example, if you only trade Apple (Nasdaq: AAPL), and Apple is doing fine, you can do nothing, or you might want to consider going long on the Nasdaq (NQ) futures. If you are long AAPL, but the stock starts moving against you, you can hedge your position by shorting NQ. Everyone who trades the stock market should have a small futures account so that you can hedge.

Futures are highly leveraged and can be dangerous, but if you use tight stop/losses they can be a very valuable ally. For example, it is possible to risk $156 to make $1000. That’s great news, but the bad news is that it only works 41.37 percent of the time. Here’s the profit plan over 10 trades: 

1. 6 losing trades at $156 = $936 loss

2. 4 winning trades at $1,000 = $4,000 profit

3. Net profit on 10 trades = $3,064

But let’s say it is worse. Let’s say it only works 30 percent of the time. Then our profit plan looks like this: 

1. 7 losing trades at $156 = $1,092 loss

2. 3 winning trades at $1,000 = $3,000

3. Net profit on 10 trades = $1,908

Before we talk about this trading strategy, it’s important to first see where you are in your trading career. Be honest with yourself and see where you fall on this continuum: 

The Five Stages of Trading 

1. You learn how to lose lots of money

2. You learn how to lose a little money

3. You tread water. Make a little, lose a little

4. You start making consistent cash flow

5. You’re making serious money

Most traders are stuck at Stage 3. 

The strategy we are going to discuss is how to move you up to Stage 4. There are also basically three styles of traders:

The “A” Style Trader – This trader takes huge losses, and follows it by a string of little wins. After taking a beating on a big loss, the trader probably exits out of a lot of winning trades early to build the account up. Then there’s another big loss, and the pattern repeats itself.

The “B” Style Trader – This trader manages risk to reward better. The “B” style trader is a much better place to be. You let a couple winners run long.  You manage money and risk control much better and have strong discipline on controlling your losers. This is harder to do than it looks, but it is a much better place to be over the long run.

The “C” Style Trader – You don’t want to be this trader, because he won’t be around very long.

What is the best market to trade? If you are going to trade, you need to trade the S& P E-minis. You want to trade it because it has the most volume and everyone trades it. Then you start trading the E-minis, and you start getting chopped-up. You start wondering “Why can’t I do this?” or “This is just too hard. It’s got to be rigged.” You may feel betrayed.

The E-mini S&P (and many other markets) are very choppy. They rise and fall abruptly. They make unexpected breakouts, and then reverse course. As traders, we rely on a lot of information from outside sources to make decisions and sometimes we can feel like they are lying to us. Those sources are other traders, the media, investors, etc. The key question is: Did you test what they told you, or did you place blind trust in them? Does that market even reflect your personality or trading style? 

If you don’t match your trading style to the right market, then trading can be very painful and frustrating. If you are a breakout trader, the E-mini S&P is not your friend, and neither is crude oil. But gold, bond, currency and agriculture futures will be your friend because of their inherent volatility. 

So, which markets should you trade? Once again, that depends on your personality, so here’s a comparison of some of the futures markets:

This table shows a variety of futures markets. The Average True Range (ATR) is the number of points that market typically moves in one day. The multiplier shows you what each point is worth and the total is the most money you can expect to make. Each market has different characteristics:

YM Dow - You can make $465 a day, but it will chop back and forth on your way to that total.

ES S&P – Just like the Dow. Very choppy

NQ Nasdaq – Behaves just like the Dow and the S&P

TF Russell – Behaves very choppy, followed by a breakaway, and then it chops again.

US 30 Year Bond - This market goes up, pulls back, up, pulls back and reverts to half of its range.

CL Crude Oil – A little crazy. It can behave nicely, and then turn on you

SI Silver – Dangerous. Avoid at all costs

GC Gold – Will run, consolidate, run, consolidate, run, consolidate, then come back and adjust.

AD & EC – These currency markets can be good for trend traders.

This article is going to focus on the US 30 Year Bond. The Federal Government is starting a program called tapering. They have been buying enormous amounts of bonds, but that is going to end soon. When that happens, they bond market is likely to drop. The bond market may trade a little sideways just to keep an eye on the Fed, but if key levels are broken, then it could be a run. 

Bond Futures Basics 

Let’s get started with some basics about bonds. Bond futures are not like the paper bonds our grandparents bought and held until maturity. We will talk about the following bond basics: 

- Months

- Time

- Caution

- Symbols

- Tick 

- Values

-DOME

- Margins

- Bond 1st Hour Trading Rules

It’s important to have this calendar of futures months handy for reference. Whomever came up with this lettering system should be locked up, because it makes no sense. The letters that futures traders need to be focused on are:

- H  March

- M  June

- U  September

- Z  December

These months trade just like the E-minis. Each of these months started trading 2 weeks after the previous time period. For example, in the second week of March 2014, you would start trading the US M 14 bond futures, or the June contracts for 2014. In the 2ndweek of June, you would start trading the US U 14 September contracts. 

The Bond markets are open 23 hours, from 6pm EST to 5pm EST. The floor traders in the pits actively trade bonds between 8:30am to 3pm EST. When you look at these markets in Trade Station, here’s what the markets look like:

The symbol for the US 30 Year Bonds is @US. You will see the start time and the end time. It’s $1,000 a point, and the minimum move is $0.0313 or $31.25.

The cautionary things you need to know about when trading the US 30 Year Bonds are: 

- Interest Rates

- Any other major economic news, such as FOMC notes

- Econoday.com (good source for news)

Using the DOME

This is the DOME in Trade Station. In this example, let’s assume that you want to get long at 135. Each tick is worth 1/32 of a point. Your profit target is 136, or one full point, or $1,000. Your stop/loss is 5 ticks, or $156.25. The bond market moves around 1.15 points per day. If you got long at the right time, you have a better chance of reaching your target.

Here’s a side-by-side comparison between the Trade Station DOME and the Infinity Futures DOME. The only difference is that Trade Station uses fractions in their pricing and Infinity uses the decimal equivalent.

First, you want to determine the direction of the market. Is it going to be up or down today? Next, you want to use an 8, 12 or 16 tick reversal strategy. This will be discussed shortly. Then you need to take a look at your margin requirements: 

Margin Intraday and Overnight

When is a trade intraday or overnight? Remember, the Bond markets are open 23 hours, from 6pm EST to 5pm EST. If you hold a trade from 9:30 am EST to 4:30 EST, that would be an intraday trade, and your margin requirement could be somewhere around $500. If you held a trade from 9:30am to 5:10pm, that would be an overnight trade, since you held the trade past the close of the market. If you opened a trade at 6:10pm and held it until 4:45pm the following day, that would be intraday. That would give you almost 23 hours of intraday trading to see if the bond market is going to work for you or against you.

Here are the Rules for Trading the 30-Year Reversal Trade 8,12,16 

You really only want to focus on the 8 tick or 16 tick reversal. Ignore the 12. 

- First mark open 5 min chart 8:20 EST

-Can be used overnight

- Can use Globex

- Calculate using 8 or 16 tick reversals

- Stop at 5 ticks ($156.25)

- Target 32 ticks ($1,000)

- Trail StopLook for the High or Low

- Try to stay on the side of the daily trend

So let’s play this strategy out:

The overall direction of the market is down, so we want to follow the trend. We wait for an 8 tick uptrend reversal and enter a short limit order.

1. First trade – Wait for reversal place a short limit order with a 5 tick stop loss. The market spikes and takes out your stop.           You take a $156.25 loss.

2. Second Trade – You do the same thing, and you get the same result. Another $156.25 loss.

3. Third Trade – You make the same trade, but this time it doesn’t get stopped and it runs for your target of one full point. You        win $1,000.When you subtract your two losers from your winning trade, your net profit is $687.50. So you took a little bit of        pain in order to reach your goal. Let’s review the rules of this strategy again to be clear:

1. Take a look at the daily chart to confirm the direction of the market. It was on a very nice uptrend from March through April,        but now it is in a sharp downtrend. The direction of the market is down.

2. Only make trades in the direction of the market.

3. Let the market bounce 8 or 16 ticks against the trend as your entry signal. Use it based on the 1.15 ATR for the 30yr bond.

    a. If half of the ATR is reached, use an 8 tick reversal

    b. If the full ATR has been reached, use a 16 tick reversal

4. Set your target at one full point, for a $1,000 gain.

Let’s take a closer look at a winning trade:

We have determined that the direction of the market is down after a selloff during the previous day. At around 20:00, the market spikes downs and forms a low. It does an 8-tick upward reversal, triggering a short sell with a 5 tick stop/loss. Your risk is 5 ticks or $156.25, and your reward target is 32 ticks or1 full point, or $1,000, which was achieved about 14 hours later.

Bonds are very predictable in their behavior, because they tend to go up, and pull back 8, 12 or 16 ticks, and they repeat this pattern all day long until the market chops sideways or gives back roughly 50 percent of its gains. 

The EBT “Sneak Attack” Trade - 30yr Bond 

This is another bond trade that works very well, and the rules are simple: 

- Determine the direction of the market. Is it going up or down? In this example, remember again that we are in a down market.

- Always trade in the direction of the market.

- Bracket the 7:20am EST – 8:20 time frame on your chart.

- Identify the low and the high during that 1-hour period, and count how many ticks the range is. This strategy works the best       for 17 ticks or less. If the range is greater than 17 ticks, then this trade is too wide.

- Use a 5 tick stop/loss: $156.25

- Since the market is in a downtrend, wait until the market hits the bottom range of the 7:20-8:20 time range and SELL with a 5   tick stop/loss and your profit target is the range  of ticks covered between 7:20am EST and 8:20am EST. If it is 10 ticks, that is   your target.

In this example, you can see that the 7:20-8:20 EST time period has been bracketed. The low and high of this time period has been marked, and it is 10 ticks. The overall market is in a downtrend from the previous day. The bond market drifts up slightly, and then starts its downward journey. Once the market hits the lower end of your 7:20-8:20 range, you SELL the bond market with a 5 tick stop/loss, and a 10 tick reward. You are risking $156.25 to make $312.50 and it works surprisingly well. It’s called the “Sneak Attack” because the setup occurs before the pit traders start trading at 8:30 EST.

Conclusion

To be successful at trading, you need a good plan which consistently gives you good entry points and good exits. If you manage your stop/losses and have a good profit plan that leads to increased profits, which in turn makes you a more confident trader.

Trading the 30yr bond market is good because it travels predictably. It moves up or down in generally the same pattern. It moves, pulls back a little, moves and pulls back a little. You have now learned two strategies for trading bonds that can yield strong consistent profits throughout 10 trades. Your losers will be minimal losers, but your rewards are much greater. 

THE MOVIE 

Hubert Senters will walk you through the basics of the 30yr bond markets, and goes into the two trading strategies discussed above. In addition, he makes a live trade and goes through a “lightning round” where he analyzes markets and stocks.

THE SPECIAL OFFER

Take Hubert’s "My Favorite Trades Right Now" class and learn how he spots some great seasonal opportunities that you can add to your trading arsenal right away!

Back to Table of Contents