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Saturday
Oct062012

When To Exit An Emini Trade

(QQQ)(DIA)(SPY)(GLD)(FB)

 

When To Exit  - Required Reading For All Emini Traders

 

Traders of all types: Emini Futures - Stocks - Options, spend a lot of time and money trying to figure out the "perfect time" to enter the market. We're guilty of it ourselves. We've built unique proprietary indicators that do an awful lot of mathematical heavy lifting in the background while we sit patiently in our tidy offices and wait... and wait... sip our coffees and iced teas and wait... against a backdrop of computers humming, our electronic warriors lifting, and sifting, and churning data while we wait... and then the signal comes in, we check and double check, shift time frames, verify volume, compare our oscillators to the Tick, Trin, and back again. Sometimes we pull the trigger but most times we wait. 

We fail to confirm on the Advance/Decline or the RSI or Woodies CCI and so we wait...

Sounds a bit strange, odd, possibly even mad, but we're traders and that's what traders do. Truth is, entering a trade takes no education, no degree, no experience, no Fibs, Fans, Arcs or Pitchforks. It's one of the simplest things in the world to do. We flex one finger and it's done. Turns out, not one trader in the history of trading ever made a dime entering a trade. The only way to make money on a trade is to exit. That's correct, it's the getting out that pays the bills, carves out a career and creates legends, not the getting in.

Now that we have our mind right let's talk about the truly important side of the equation - the exit. There are only three reasons to exit a trade:

  1. Your Stop Loss is hit.
  2. Your Target is hit.
  3. Man made or natural disaster.

Stop Loss

We could write a book about why it's important to always trade with a Hard Stop. Mental Stops are not stops at all. A hard stop is when you have placed a live order in the market that will take you out of your trade at a pre-determined loss amount. There are many strategies you can employ whether it's a fixed dollar amount on every trade, or the use of a previous swing high or swing low. The critical point is simply that you must have one. You will hear traders talk about how they slipped their stop, failed to honor their stop, or somehow forgot to place the stop order at all. When you hear these stories they never have a happy ending.

Modern technology allows you to automatically place a stop order the instant you enter the trade. Before you enter the trade is when you decide, based on whatever formula you use, how much you are willing to risk. Not once you get in, not during the heat of the battle, not when you're on your knees crying out to God to please let it come back to break even. You define your stop before you pull the trigger to enter. Once you have entered the trade there will NEVER be a reason to increase the amount of your stop loss. Always and Never are two words that you should always strive to never use when speaking of trading. In the world of trading there are very few absolutes but this is one -

  • There is NEVER a GOOD reason to increase your stop after entering a trade.

There will be however, many situations where it is not only a good idea to reduce your risk after you enter the trade, but it is actually a part of your trading plan that you have carefully crafted out and carved in stone. Your plan may have you reducing your risk by half as your trade progresses. Your plan may have your stop at break even plus enough to cover commissions as the trade progresses. Eventually your plan may call for you to begin to lock in profits as price continues towards your pre-established target.

Remember, there are only 3 reasons to exit a trade and hitting your stop loss should always be at the top of your list and the very foundation of your written trading plan. Some times you'll be stopped out for a controlled pre-determined loss, sometimes it will be at the point where you simply cover the cost of the trade, and some times it will be when you are well on your way to your target.

Example - If you are new to trading and fund an account with $5k, lets look at some numbers. Your plan may be different but for the sake of our example we will use 2 points as a hard stop. As a new trader you should only be trading 1 contract.

2 Points X 1 S&P 500 Emini Contract = $100

Without factoring in commissions you would have to be wrong 50 times in a row to blow up your account. In case you're wondering, most new traders do blow up their first account. Why? Because they don't use Hard Stops. You should be consistently profitable in the simulator before your ever attempt to trade the real money deposited in your account. Once you achieve that milestone and do begin trading real money, long before you have 50 consecutive losing trades you will have moved back into the simulator to figure out what's wrong. At least that's what happens with traders on our watch.

You may hear horror stories about traders decimating their accounts but you will NEVER (there I go again) hear them say it was because they got stopped out too much. If you really want to "Learn How To Trade" you must be able to stay around long enough to learn. The way you stick around is by using the cheapest insurance policy you'll ever buy - A Hard Stop.

The Most Important Exit in Emini Trading is Getting Stopped Out!

 

Targets

We could write 2 books on exiting your emini trade at a pre-determined target. If you don't have a Target you don't have a Trade! You have a hope, a dream, or some wishful thinking at best. You can automate the entire process by using a bracket order on the dtPro platform. In other words, with one mouse click you establish the price at which you will enter the market, the price at which you will cut your losses and last but not least, where you will take profits. If at this point you simply put the mouse in the drawer and duct tape your hands to the arm of your chair, chances are your trading results will improve dramatically.

In the section on Stop Loss, we explained that there is never a good reason to increase your risk once you enter the trade. In regards to targets, I don't recommend that you reduce your target once you enter the trade. If the trade appears to be losing momentum, or some other material fact that originally got you into the trade has now changed, what I encourage you to do is decrease your risk. In some cases, dramatically so. If the move appears as though it might be about to reverse on you, tighten that stop loss to within a tick or two of current price levels. Using this method will not only protect the majority of whatever profits you have in the trade, the original profit potential of the trade remains intact. You've probably heard it said more than once by a market wizard to "Cut your losers short and let your winners run". Unfortunately they rarely tell you how exactly to do it. I just did. (you're welcome)

If the opposite happens and momentum appears to be gaining as you approach your target, I do recommend increasing the target with one caveat - make sure that your stop loss is also moved to lock in the majority of your original profit objective. You protect your profits while opening the door to additional profitability.

On the chart below our Price Target was clearly defined  by our Weekly Trading Zone. This also happened to be our highest published Zone for the week. We discussed in the previous post on Thursday, we had called 1451 as an entry spot.  From 1451 to 1466 is a 15 point move. The current ATR (Average True Range) on the Daily Chart is 14.1 -

ATR (Average True Range) S&P500 Emini Futures

The 2nd Most Important Exit in Emini Trading - When your Target is reached.

Our target on this trade was established at our highest Weekly Trading Zone, but having also exceeded the Daily ATR by .9  it just made good sense. The fact that it stopped dead in its tracks and reversed at 1466 to the tick is simply an example of why the Zones we send to our Partners every Monday before the markets open are such an integral part of our trading plan.

Man Made and Natural Disasters

This category can include anything from an earthquake to a ruptured pipeline, a political coupe' or even a power or internet outage. As long as you have a hard stop and you are trading on a platform where your stop loss order resides on the server side and not on your computer, you are probably just fine.

However, make sure you have the telephone number to your Trading Desk handy. It needs to be written down in your trading plan. Not the digital copy on your computer, the hard copy you have printed out and filed away. You should always keep one hard copy on site for daily reference and one hard copy off site with your CPA or in safety deposit box. Call the desk and make sure your stop is being honored and/or simply go flat the market by giving verbal instructions to whomever is on the desk. CFRN Partners simply call 866-928-3310 where they receive Concierge' broker assistance. A bit like Hank-Med but with Emini Futures.

The 3rd Most Important Exit is the one you have no control over.

Now let's apply what we've learned to Friday's chart.

 SP 500 Emini Hourly Chart

(ES) S&P 500 Emini Hourly Chart

 

At the first yellow arrow, also labeled #1 we close north of the CFRN Primary Indicator (CF_MA1) as discussed in the previous post. Either you are already long from the 1451 entry on Thursday or you view the development at #1 as your entry. Over the next 3 hours price rallies to the Weekly Trading Zone at 1466/1467. Since this is the highest Zone we have published for the week and today is Friday, the greatest probability is that price will not close the week above 1467. For that reason alone we feel that the best exit strategy here is simply the target. As you can see the reaction off of the WTZ was dramatic.  If you had remained in the trade, if you had failed to adjust your stop loss after reaching the target, as a last resort final warning you are clearly cautioned to exit any long position at #3 when price closes south of the CFRN Primary Indicator.

Notice at #2 there was very little consolidation. If we drop down to a 1 minute chart we can see that the entire consolidation only lasted 8 minutes.

 

SP 500 1 Minute Chart(ES) S&P 500 1 Minute Chart

 

If we move to our volume chart we can see that only 30k contracts traded at this level and the Doji's and wicks are enough to make us very suspicious that this rally will stick.

 

SP 500 Volume Chart(ES) S&P 500 Volume Chart

 

 In closing let's take a look at one final chart. This is the Daily Chart of the S&P 500.

 

Daily Chart(ES) Daily Chart

 

We now have a daily Doji which formed on a Friday at our highest Weekly Trading Zone. There is still upside potenial inside the Daily Price Channel but for now we are content to be flat. As Globex opens Sunday night new opportunities will present themselves and the cycle will begin all over again. Although new Zones will be issued for the upcoming week, we have not seen real consolidation yet at the 1466/1467 Zone. The "touch and go landing" we saw on Friday's pullback to the 1451/1452 Zone suggests that either Sunday night or Monday the 1466/1467 area will be tested and price may eventually begin to coil there leading to the next big move.

As opportunities unfold we will keep you posted.

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Emini Podcast for Friday 10/05/12

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Reader Comments (1)

On the 1 minute and volume chart you posted, it looks like you could just trade that. Am I missing something or is that what you do? I am looking for a system where I can get 1-3 points per day on 10 contracts. Is that possible with your system!

Can I talk to someone who uses your indicators?

Thank You,
Martin

Oct 7, 2012 at 22:30 | Unregistered CommenterMartin Fields

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