Short Term Trading Strategies from Tina

How I Trade Futures and Options Tactics

Creating Trading Strategies With Positive Expectancy

February 27, 2014 by Trader Tina | Comments Off | Filed in commodity trading, futures trading, how to trade options and open interest, stock analysis techniques, stock futures market, stock volume

index tradingMany traders who start out focus on being right and fall into this pattern. They let their losers ride and cut their profits short and believe that as long as their indicator is accurate often enough they will be successful traders, as you can see in this example this is not the case.

This occurs more often than you can ever imagine and believe it or not there’s reasonable explanation for why this occurs. People are conditioned to associate success in the market with the accuracy of their trading. They believe if they win more often then they lose then they’ll be successful, they believe that “winning” is the secret to making money; the majority of people don’t proceed further. Their focus on what is necessary to succeed stops there.

The majority of people bring to “trading” the same attributes that have made them successful in their lives, and that is their competitive “winning” nature. People by nature love to compete and love to “win”: “winning” at sport. Winning in business, winning in all aspects of their lives, its basic human nature. However to “win”, also means to be “right”. We have been taught from an early age that a good grades at school is far better than a low grades. This continues later in school when a higher exam score is better than a lower exam score, and the only way we’re able to achieve higher scores is to be “right” more often than not!

So we have been conditioned about the importance of being “right” throughout our lives. Instinctively we want to;
• know the “right” answer,
• buy the “right” car,
• purchase the “right” house,
• purchase the “right” insurance coverage
• select the “right” school for our kids,
• pick the “right” 401k plan
• pick the “right” lottery ticket

Unfortunately, it’s this one powerful characteristic that most people possess that works against the objective in making money trading. This is because the significance or consequence of loving to “win” and being “right” pushes most people instinctively to pursue a high winning or high accuracy trading method or indicator. People instinctively gravitate towards swing trade methods that have an 80% to 95% accuracy rate. Yet for trading as seen by my example using a high ratio of winning trades, wishing to “win” and being “right” isn’t that important, and if anything, can work against your objective in making money.

Creating a method with high expectancy is the far more important than having a high percentage of winning trades. . And this goes for all traders, regardless of whether they’re discretionary or mechanical. Unless we as traders know that our methodology produces a positive expectancy, then we’re doomed to failure from the very start and we can forget all about money management and psychology or any other aspect of trading. Trading with Negative expectancy is like going to Las Vegas and trying to win from a casino on a consistent basis, without cheating, it’s statistically impossible.

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Stop and Limit Orders

November 19, 2013 by Trader Tina | Comments Off | Filed in commodity trading, futures trading, how to trade options and open interest, options and open interest, stock analysis techniques, stock futures market

Using Stop and Limit Orders

stockmarket tipsThe second most typically used order is the limit order. – The limit order rules work similarly on the Globex and the Ice exchange. Limit orders are orders to buy or sell a stated quantity at a specified price, or at a better price, if obtainable. Unless otherwise specified, any residual volume from an incomplete limit order is retained in the central order book until the end of the day unless it is withdrawn or executed.

If the price of the limit order is outside of the daily price limits range set by the exchanges the order will be cancelled. For example if the E mini SP is trading at 1100 even and you want to purchase 5 contracts at 1095.00, you would place a limit order to buy 5 contracts at 1095 limit. The order would not be filled till the price of the E mini futures contract traded at or below 1095 for the order to be executed at your price, once the offer is at 1095. If the price never trades at 1095 or lower the order will not be filled that day.

Conversely, if you are interested in selling the E Mini Sp contract at 1200 and the market is trading at 1195, your order would not be triggered till the E Mini Sp contract rose 5 points and was bid at 1200 even or higher. If the bid never gets to 1200 or above, the order will not be filled that day.

The other possible scenario with a limit order is when the market is either bid or offered at your price but there are not enough contracts to fill your order. For example, say that you are looking to go long the E mini at 1095 and you are interested in purchasing 5 contracts, just as in the previous example.

The market gets down to 1095 but the offer is only for 2 contracts and after the market trades there, it never goes down to that price for the remainder of the trading session. In this case you would be filled on only 2 contracts and your order for the remaining three contracts would not be filled.

Stop Order

The next most popular order type on the list is a stop order. A stop order is an order to buy or sell the index contract when its price surpasses a specific predefined price point, once the price trades at the stop price the order becomes a market order.

A long stop is above the market price and a short stop order is below the current market price. For example let’s say the E mini NASDAQ contract is trading at 2660 currently and you are interested in going long 5 contracts when the market price is at 2675. You would place an order to buy 5 contracts at 2675 on a buy stop.

Once the market trades at 2675, the order will become a market order. If the market does not trade at 2675 the order will not be executed. Similarly, if the market is trading at 2660 and you are interested in selling the E Mini Nasdaq contract when the price trades at 2650, you would place a sell stop at 2650 and if the market price declined to that level, the order would become a market order. If the price stayed above the 2650 price level, the order would not be executed.

The stop order is often used as a stop loss or a risk exit in case a position does not go in the intended direction. The drawback of stop orders is the fact that they become market orders once the price trades at the stop price. If the market is moving rapidly, these orders can cause prices to move substantially above or below the stop price depending on the direction the trade is initiated. This can cause the order to be executed at extremely different and unintended price from where the order was intended to be filled.

As a result, both the ICE and the Globex exchanges put safeguards in place to prevent extreme price differences between the intended fill priced and the actual fill price. Stop orders at CME Group are implemented using a “Stop with Protection” approach.

This is done to avoid cascading stop orders being filled at extreme prices. Unlike a conventional Stop order, where customers are at risk of having their orders filled at extreme prices, Stop with Protection orders are filled within a predefined range of prices (the protected range).

A Stop with Protection order is triggered when the index price trades at the stop price. The order then enters the order book as a Limit order with the limit price equal to the trigger price, plus or minus the predefined protected range.

The protected range is typically the trigger price, plus or minus 50 percent of the No Bust Range for that product. The order is executed at all price levels between the trigger and limit price. If the order is not completely filled, the remaining quantity rests in the market at the limit price.

A buy Stop order must have a trigger price greater than the last traded price for the instrument; the protection points are added to the trigger price to calculate the protection limit price. A sell Stop order must have a trigger price lower than the last traded price; the protection points are subtracted from the trigger price to calculate the protection limit price.

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Calculating Trading Expectancy

August 27, 2012 by Trader Tina | Comments Off | Filed in futures trading, how to trade options and open interest, options and open interest, stock analysis techniques, stock futures market, stock volume

Expectancy

futures market tradingBefore I go into position sizing specifics, I had previously mentioned that money management involved two parts, position sizing or bet sizing which I will discuss in detail in a minute, and another equally important part called positive expectancy, Expectancy tells you what you can expect to make (win or lose) for every dollar risked.

Casinos make money because the expectancy of every one of their games is in their favor. Play long enough and you are expected to lose and they are expected to win because the “odds” are in their favor. Most games at a casino are completed in a short period of time so they can increase their odds of winning. The same holds true for trading. If your expectancy is positive; you can make money with a certain number of trades within specified periods of time.

Without positive expectancy no amount of position sizing will produce positive trading results. In order to apply sound mathematical position sizing principles; you first need to have a method that produces positive expectation of profit or positive expectancy.

To give you an example compare position sizing to an amplifier and positive expectancy to music playing. If there’s no music playing no matter how much you turn up the amplifier nothing will come out, but if music is playing then turning the amplifier up or down will increase or decrease the volume.

Positive expectancy and position sizing work the same way, you can have a great trading method but with incorrect position sizing you will not make profit in the long run and with a negative expectancy method no matter how brilliant your position sizing is, you will not make any money no matter what. Simply put, the trader must have positive expectation to apply proper money management.

Positive expectancy is defined as how much money, on average, we can expect to make for every dollar we risk. In other words, the method chosen by the trader must have a mathematical proven probability that after a series of trades the trader will end up with profits and not losses.

The formula for expectancy is very simple to calculate. Expectancy = (Probability of winner * average winner) – (Probability of loser * Average loss). The larger the positive number the stronger the underlying statistics for the method. If the number is below zero, this means that the method has a negative expectancy and will not make money in the long run regardless of the type of money management utilized.

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Open Interest and Volume

April 1, 2012 by Trader Tina | No Comments | Filed in commodity trading, futures trading, how to trade options and open interest, options and open interest, stock analysis techniques, stock futures market, stock volume

Open Interest and volume

technical analysis trading

Volume represents the total amount of trading activity or contracts that have changed hands in a given futures market for a single trading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day.

Another way to look at this, is that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse.

Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart.

Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. This is very important to know when you are day trading or swing trading stocks

Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

Each trade completed on a futures exchange has an impact upon the level of open interest for that day.

For example, if both parties to the trade are initiating a new position, one new buyer and one new seller, open interest will increase by one contract. If both traders are closing an existing or old position one old buyer and one old seller open interest will decline by one contract.

The third and final possibility is one old trader passing off his position to a new trader, one old buyer sells to one new buyer. In this case the open interest will not change. By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.

Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend regardless of up, down or sideways direction will continue.

Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Knowledge of open interest can prove useful toward the end of major market moves.

A leveling off of steadily increasing open interest following a sustained price advance is often an early warning of the end to an uptrending market.

The relationship between the prevailing price trend, volume, and open interest can be summarized by the following table

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