Tuesday, October 02, 2007

My e-Mini Setups, part I

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So far I have collected about 6 or 7 setups that I am comfortable with using when trading the eMini stock index futures (ES, NQ, ER2, YM). To reinforce my discipline, I am writing these setups out as a part of my way of internalizing them. I describe them in this first of a series of posts.
These setups may or may not be applicable to the equity markets, but that will not the focus of this discussion.

This first setup is what I call the First Thrust Pullback reversal. I am basically borrowing Dave Landry's favourite swing trading pattern and applying it to daytrading the eMini's.

I use a volume chart (usually 6000 for each candlestick, and a period of 120bars, but it should be adjusted to your own comfort level), and the setup is as follows:
- market runs for 10pts or more
- TTM Trend changes colour and MACD crosses zero within 2 bars of each other (highlighted by the first blue arrow)
- break above either the 10 or 20 bar MA and sustained for more than 2 bars
- pullback does not violate original reversal point (highlighted by the second blue arrow).
- wait for the pullback to finish (draw manual trendline if necessary and wait for the break of the trendline) and enter on the second break above the MA's.

I have recently programmed the ADX indicator in QuoteTracker to give me a green paintbar if the trend is up, or a red paintbar if the trend is down.
A change in colour is the key part of this indicator, so for instance, a change from red to green would signal the start of an uptrend. The ADX indicator is sometimes late, ie. the trend has started before the ADX signals an uptrend. So if I enter a trade before the ADX indicator changes colour, I would look for the impending change in colour, and if I don't get one, that also serves as a strong warning for me to get out of the trade.

The probability of success with using this setup increases if the reversal occurs near a previously identified support/resistance level.

Stop would be placed just below the low of the original reversal point (first blue arrow). Profit target is a minimum of 2points, but beyond that, it depends on the market situation at the time, and will require a bit of discretion.
The key part here is to wait for the shallow pullback to tell you that it is indeed a reversal. This goes a long way to define your risk.
In terms of market psychology, I think what what I am observing here is that the traders are exiting their positions (taking profits or covering shorts), then there is a pause to see if there are new participants entering. If there are new traders (ie. buyers in the example of the above chart) entering, then I want to be a part of that.

I played this setup successfully on a couple of occasions, including the one on July 20/07. One of the reasons that I don't play it more often is probably because I don't always remember to look for this setup, hence I am writing it down here in hopes of internalizing it. The other problem is that it is not that easy to spot in real-time. It does require a lot of screen time and practice. And then once I do spot one, there is always some second guessing and hesitation in pulling the trigger. But most of the hesitation can be eliminated with defining your risk, and trusting in the high probability of this setup.
I find it useful to help me to distinguish reversals from retraces.

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