Commodity Futures Day Trading The S&P 500 and E-Mini - Observations PART 1

By Thomas Cathey

Not all conventional commodity trading folklore is correct. Some is and some isn't. Much is anecdotal. Most of it is designed to make you feel comfortable in a trade. Feeling "comfortable" is the fastest way to the poorhouse in commodity trading. We are paid to provide liquidity and take on risk. Read on to see if you adhere to this basic and important market law.

More S&P 500 and E-Mini Futures Contract Observations:

“When the e-mini futures price trend matches the A-D line, (advance-decline line) always wait to liquidate a position into a climax with big volume.“The e-mini futures market has the strongest move (impulse wave) with the main trend. Watching the A-D line bias can usually identify the main trend. The e-mini futures market has a tendency to make higher highs and higher bottoms in this same direction.

The key here is to expect the move to end in fireworks with the same magnitude as the clean-out before. In other words, if a previous move down was slow and sluggish with a single bottom, don’t expect too much for the climax move up. But what if the previous sell off took out a weekly low with a big panic sell off, and formed a triple bottom that took all-day to build? In this case, you have good reason to expect the following up move to end with a bang.

It’s a matter of keeping the context of the move in mind. You can be in a choppy e-mini futures market for a day that goes nowhere, but maybe the previous day had a huge clean-out. So somewhere along the line expect an up move that continues. It’s all about keeping in mind what previous top or bottom the e-mini market is working against and what kind of move it can support.

Always be ready to bail out if your scenario does not work out. But there's a danger in bailing out too quickly. Looking back at some of my S&P 500 futures trading notes from the mid-90’s makes me laugh. The theme throughout is, “If I only held my original position!” “Stopped out again at the exact low because I moved the stop up too soon.”

"Over-managing" a good trade is a symptom of fear. Some fear is healthy to keep us out of serious trouble. But when an e-mini trade is working out, by moving stops up too quickly, or simply starting out with too close a stop is a big mistake. We think we are smart because we can trade with such close stops and small risks, but this is a false sense of security that massages our ego.

To prove this to myself, I once did an e-mini futures contract computer study on averaging down four times. You would buy every spike that went one full point lower, until you had four lots. Then you liquidated everything if the e-mini went two more points after that. The worst scenario loss was six full points from the start. The win/loss ratio was very high, like in the 80% area. It almost seemed workable until I modeled a few one-way days. Then the method got slammed. If we could side-step those days by using say, a 2:1 or greater A-D line filter, then it might be a workable method.

By the way, the e-mini trading exits were a scale out affair too, similar to the entries. I eventually tossed out the idea after coming to the conclusion that I could not handle the pressure of adding to a loser more than once, plus I thought more highly of my ability to call a turn on the first or second try.

My e-mini futures trading method has evolved to averaging down only once during exceptional set ups and that is it. In fact, if it breaks the second low, the move is probably evolving into a "snuff" and all hell is about to break loose, so why hang around? ("Snuffs" are covered in this series of articles.

Part Two of Five Parts - Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course" - they're all free. Main site:

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