Today I decided to touch on a subject that is not market specific or a market outlook but rather a trading technique I found to suit my "trading blood type."
In the trading world, there are many ways to make and lose money. Some traders like options, others like to write option premium. Then there are those who are purely long term traders based on fundamentals, yet others who like to swing trade using support and resistance levels. Many traders in the futures and commodities sector like to day trade for several reasons:
- The high leverage that is naturally built into futures (leverage is 1:20 to as high as 1:200 for day-trading in some cases) magnifies both gains and losses
- They prefer to "be done with their work day" and not have to worry about overnight moves
- Instant gratification- you know at the end of the day if you had a good or bad day.
There are quite a few more reasons, but I think you get the point. Day trading is risky, and most day traders lose money, in my opinion. The main reasons for this are lack of discipline and over-leveraging the already highly leveraged instruments. I do like day trading though, mainly because I don't have to monitor positions during the evening or night time. One of the methods I like when day trading is to filter out signals using two different methods put together. The first method I use is tick/range bar/volume charts RATHER than time charts.
The second consists of a couple indicators that allow me to determine the perceived trend. I then look for resumption of the trend to enter positions. Tick/range bar/volume charts RATHER than time charts: My rule of thumb is that if you, as a trader, make decisions based on charts that are less than a 15 minute time frame, it may be worth your time to research, back test and do some homework as to potentially using other types of charts, like volume charts, range charts, etc.
Volume charts will draw a new bar once a user defines the number of contracts traded. An example is a mini SP 10,000 volume chart, which will draw a new bar once 10,000 contracts are traded.
Range bar charts will draw new charts once price action has exceeded a user pre-define price or tick range. An example might be an 18 tick-range bar chart on crude oil. While the volume charts rely ONLY on volume, the range bar charts rely ONLY on price action.
Two Advantages Over Traditional Time Charts
In my opinion, their main advantage over traditional time charts is twofold:
- If the market is moving fast, reports have come out, or there is heavy volume in the market, the traditional five minute chart will need five minutes to complete the next bar before it provides you with a signal...if you day traded futures before, you will know what five minutes can do. In this case, the volume charts or range bar charts will complete the bars MUCH faster, because there is strong price action and strong volume, and it provides a signal faster than the time charts.
- On the flip side, there are times when the market is dead: low volume, sideways, choppy action. If you are using the three minute chart and a moving average crossover, you may get a signal simply because time has passed, and the moving averages crossed even though the market is pretty dead. If you are using a volume chart, and the market is slow...it will take a while for the bars to complete, and it may filter out some "noise" in the market.
Finding the Intraday Trend:
I like to use two main indicators: either parabolics or volatility system to give me clues on where the market is trending today. That will work much better on strong trending days and will get whipsawed on choppy days.
In the chart below, you will see my parabolic along with a custom indicator (almost a hybrid of MACD and Stochastic). I programmed the chart to show red or blue signals when the ILM indicator crosses and IN AGREEMENT with the parabolic. Below, you will see this applied to an 18 tick-range bar on crude oil futures for the trading day of May 19th 2015.
Obviously there is much more to trading than just indicators....trading size and money management are HUGE factors. There are many other questions to ask, such as "Where to place stops?" and "Where to take profits?," but hopefully I was able to give you an idea or two to explore.
If you like to learn more or try some of the indicators mentioned in this article, visit our website.
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