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Inside CME Pit Trading

The E-mini S&P 500 (ES) trades on the CME Group’s Globex exchange.  CME Globex is the electronic market that trades nearly 24/7.  At one point in time, open outcry floor trading, where the traders yell orders on behalf of clients in the “pit”, was the dominant form of trading.  Now, anyone with a computer, the proper software, and a funded account can engage the markets.  Traditional open outcry hours of trading still align with market volatility.  Many of our trading methods focus on capitalizing on this volatility that occurs during open outcry hours.  This is why having an understanding of pit trading is important.

Why do people still want to trade in the pit? Because of better liquidity compared to electronic trading. Executing a combination of trades and spread strategies is easier in an open outcry environment.  For example, a broker can easily buy 25k in options in one day at the same price.  If this was accomplished on a screen, you would likely end up moving the market as you buy.

In the CME pit, there are usually up to 200 present on a given day.  While it may seem hectic, checks and balances, etiquette and rules are practiced.  In some ways, the rules of pit trading are more restrictive than electronic trading.

There are two types of people in the pit: brokers and “locals” (also called market makers).  Brokers represent customers who want to place trades.  Locals try to make a small percentage of profit or “edge” off of each trade as frequently as possible.

Here’s an example of how the order process works:

1. A broker gets a call from a customer to get a quote.

2. The broker yells and uses a hand signal asking for the quote.

3. The locals yell back and mention two prices: what they are willing to pay for the quoted  item (bid) and what they are willing to sell the item for (their offer).

4. The broker tells his customer on the phone what the locals are offering.

5. The customer decides what to buy or sell and tells the broker.

6. The broker yells out the customer’s order to the crowd and uses a hand signal.

7. Depending on order acceptance, the locals will either hold their bid, offer a different bid, or a local will yell “sold”.

8. The broker will confirm the order with the locals after handing out or dividing up the contracts.  Once confirmed, he will tell the customer the details of the order.

9. Once all orders are confirmed, the orders are written down and handed to the broker’s clerk.  The broker quotes the trade to the market reporters who release the information to the world.  The trade is displayed on the board, allowing for additional confirmation.  The clerk then confirms with other clerks the details of the trade.

10. The broker waits for his phone to ring again with another order.

Depending on the broker, customers can allow the broker to execute the order at the broker’s discretion (best price or “feel” of the market).  In other cases, the customer has an exact price in mind.  As a broker, the objective is to be as fair as possible to your customer, the other brokers, and the locals.  A positive reputation is extremely valuable in the pit, as this helps in getting your orders recognized.

Remember to Roll Over Your Futures Contracts

If you trade the E-mini S&P 500 Futures, remember that you will need to roll over to the next contract period (December, 2013) by September 20, 2013.  On September 20, 2013, the current contract period expires.  Note that it is possible to switch over earlier – you can visit the CME’s website and compare the volumes of the two contract periods (Sep 2013 and Dec 2013).  When Dec 2013 volume is greater than the Sep 2013 volume, you can switch.  At the moment this is written, the December volume is only 11% of the September volume, so it is much too early.  You can always find the contract expiration date for any future by visiting the CME Group website, searching for the future, and clicking on the Product Calendar for the selected future (also called a product, market, or instrument).  For example, the December 2013 contract will expire on Dec. 20, 2013.

How to Trade the New Contract Period in NinjaTrader

1. Go to NinjaTrader’s Control Center > File > New Chart
NinjaTrader Contract Roll Over 1

2. In the Data Series window that appears, type in the instrument symbol and the desired contract month, ex. “ES 12-13”
NinjaTrader Contract Roll Over 2

3. Click the New button below, configure your chart settings as desired in the right panel, and then click OK
NinjaTrader Contract Roll Over 3

4. The chart with the new contract period is now displayed.  To keep the new chart persistent through NinjaTrader restarts, save your workspace via NinjaTrader’s Control Panel or opt to save your workspace when you close NinjaTrader.
NinjaTrader Contract Roll Over 4

If you would like to make the new contract month selectable as part of your instrument list, use the alternative rollover method described here.

If you are using a different platform like thinkorswim or TradeStation, your futures contract will likely automatically roll over (but check with the support team of your platform).

Summer is Almost Over – Traders Get Ready!

I look forward to summer every year.  June, July and August bring sun, fun, bikinis, and oh, that’s right – let’s not forget slow moving markets!  Every year, the same thing occurs.  From January through May, the markets move normally as expected.  The following three months of summer bring the slow inactivity every trader complains about.  This uneventful market action is to be expected.  This lack of movement is indicative of a method that I use on a daily basis – the ABC Pattern.  If you haven’t yet watched the video on how to trade the ABC Pattern, now is a good time:  Learn the ABC Pattern.

Nearly every trading day, the market starts off normal, slows down, and then speeds up towards the close.  This same behavior applies to the trading year.  The three parts of the year are historically predictable.  With that said, now is the time to rev up your trading engines and prepare yourself for the action that will close out the year!

Starting in September, the trading volume is expected to pick up as the 4th quarter earnings come into play.  This year is especially important because of the November presidential election.  This coupled with the January Effect (my bullish prediction for 2012) will make the upcoming months worthy of watching.

Let’s look at the specifics…

  • Election year – markets usually rally.
  • January Effect – markets expected to close higher for the year
  • End of the year quarterly reports and holidays – markets again expected to rally

These three conditions point to the market moving higher, but timing is everything.  Wait for the pullback.  This is key, and just after making new highs in the past week, expect a little retracement.  Be ready to buy the equities when they move back up to break the current highs.  September could very well be a down month, and that is a good thing because when the buying does resume, the entries will be that much sweeter.

I always have expectations.  Pay attention to the ATR (Average True Range).  In any time frame and any market, this will be the leading indicator to guide your profits, stops and epxectations.  Watch for the “Yo-Yo Bars” on both the log and short sides for hints that the market is having a difficult time following through.  These are some key basics I teach my Mentorship students as well as students of the Power Price Action DVD Course.

The chart below shows the price action of the weekly candles yo-yoing just prior to the drop.  The term “Yo-Yo Bars” is one I’ve used for years to describe the repeated attempts and failures of a price bar to fully form on its way towards a goal.  When multiple instances of this action occur, play close attention.  The chart below depicts this exact scenario playing out.  Now that the market is at new highs, or at least testing the current highs, a good sign to watch for would be these Yo-Yo Bars once again proving that price is trying and failing to move higher.  Whether or not this will happen again I cannot say.  However, once three, four or five candles begin to demonstrate the Yo-Yo Effect, you can expect a pullback to occur.  These are visiual signs that I like to use as proof to show me where price may be headed.  Regardless of the type of chart used (one minute, weekly, etc.), this action works the same way.  If the pullback occurs (let’s wait for it to happen), the buying opportunity will present itself to close out the year.  Stay tuned!

Click image to see it at full size

Atlas Line Performance on May 21, 2012


Purchase the Atlas Line

Here’s a live trading video on the ES (E-Mini) for May 21, 2012. John Paul enters the market long at 1310.75 according to the Atlas Line software’s advice – a Strength signal. His profit target is 1 point (4 ticks), as determined by the ATR (Average True Range). In the included live training, you are taught how to manually calculate the Strength and Pullback trades. The automatic signals in this new Atlas Line version make identification even easier. Training also covers software configuration, working out stop losses, and everything else you can think of.

John Paul’s demanding teaching schedule prevented him for taking all of the excellent Atlas Line trades. The original Dbl Bar Long signal at 1299 was good for three points. Six other Strength and Pullback opportunities occurred, resulting in a profitable day for Atlas Line users.

Atlas Line Performance on May 17, 2012


Purchase the Atlas Line

Ever miss a trade due to contemplation or a busy schedule? John was conducting a webinar at Tradersworld and missed a Short opportunity on the ES as indicated by the Atlas Line software. While he waits for another trade to set up, he reviews ES activity for the two prior days. Again, many excellent setups were identified, as the Atlas Line is used by traders the world over for confirming entries on a daily basis. At about 4:30 into the video, John enters a live Pullback trade going Short with a profit target of 1.25 points. Profit is reached. The video concludes with a live Strength trade earning another point of profit. Again, if you had taken the original Short when advised and the additional Strength and Pullbacks, you would have had a nice profit. The automated Atlas Line software is entirely based on price action. Being a consistent day trader is easy when using reliable tools.

Insider Trading Bill Passes House

Today, the U.S. House of Representatives passed a bill, the STOCK (Stop Trading on Congressional Knowledge) Act, to curb Congressional insider trading. Vote results indicate 417 Congress members in favor of the bill and two in opposition. This House version differs from that of the Senate, which includes provisions for financial data collectors to disclose their activities like lobbyists. Regarding the differences between both bills, critics claim the House version has “caved in to investment firms” with its exclusion of said provisions.

A political intelligence industry exists to monitor and sell data based on the financial activity of government officials. House Representatives have expressed concern that this “watered-down” version of the bill does not regulate the communication or financial exchanges between these industry members and government officials. Wall Street lobbyists have been accused of leading the “watering.” Nevertheless, both House Democrats and Republicans overwhelmingly support the bill, including the President’s stated endorsement.

The creation of the STOCK Act may have been the result of the CBS “60 Minutes” investigation that implicated that lawmakers enriched themselves based on information obtained through their official duties. Even without the bill being passed, members of Congress are by no means above the law when it comes to insider trading. Members of Congress face the same penalties as regular investors who attempt insider trading. For the last seven years, there have been no recent insider trading charges brought to Congressional delegates.

What do you think?

Are you in favor of the legislation banning insider trading?

• If so, what should the penalty be for insider trading?

• If not, do you think government officials’ investments should be kept entirely private?

• If the investments of Congress members become free public information, how can an industry that sells this data exist? Does this imply a relationship of “shadiness” between these data miners and government officials?

Live Price Action Webinar from February 3, 2012

John Paul once again proves that successful day trading can be easy. The video starts with showing you how to take advantage of the large bullish news event candle at around 8:30 a.m. US/Eastern. A common mistake is made when trying to interpret the news as either positive or negative, then entering based on your judgement. John shows a specific technique where the market can be used to provide direction AFTER the big move, when price movement becomes easier to predict. To keep track of news events, visit the Bloomberg Economic Calendar and note the red star announcements.

Another technique John discuss is the Yo-Yo effect. Based on buyer / seller exchange principles, this effect occurs when price bounces back and forth in a choppy succession. If you’re looking to enter a trade, this forecasting method will help you avoid problematic conditions. Start watching from around the 26 minute mark if you’re interested.

The final topic John touches on is market predictions for 2012. By the end of the year, John expects indices to climb to levels higher than those reached in January 2012. The pattern used for this prediction can be back-tested many years with a high degree of accuracy, as it’s used by professional market analysts.

Will Your Trading Strategies Work in 2012?

As a trader, you are faced with choices every day. Each choice affects your bottom line. Be sure &ndash absolutely sure you know the ‘why’ and ‘when’ before entering each trade. If you are not trading objectively using price action, then you are missing the clear picture.

Attend this informative webinar to see how using price action can provide answers:

• What instruments offer the best bang for the buck?
• What times of the day are best to trade and why?
• Trade management / stop strategies / profit targets
• Configuring your charts (time frames, ticks, data, etc.)
• Day trading methods you can use to maximize profits
• Trading the E-Mini (ES), Euro Currency (6E) and your picks

Webinar Room Link:
http://www.omnovia.com/event/88381319495010/

Date / Time: Thursday, January 5, 2012 at 10:00 a.m. US/Eastern

At Day Trade to Win, we let price tell us how it wants to be traded. We don’t use indicators or outdated information. We trade based on price in real-time. Watch how we trade price action by attending this free webinar. Make 2012 the year you changed your trading for the better!

E-Mini Trading – 11 Ticks in Under 3 Minutes

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Use the coupon code 10OFFATLAS to get 10% off your choice of a
6-Month or Lifetime Atlas Line license.

Here’s a quick example of how to take the guesswork out of trading by using the Atlas Line software. The first trade on Nov. 15 is a Short at 1251.25. This order signal was automatically produced by the Atlas Line based on real-time market conditions. The trade was taken live through NinjaTrader’s DOM, allowing for enough time to capitalize on the reversal, or “bounce” that occurred off the plotted Atlas Line. On November 15th, we logged at least four separate Atlas Line trading opportunities, generating a total of +34 ticks for the day. Be sure to check out our results page to see the details.

As demonstrated, when working with limit orders, it’s important to leave them where they are, as moving the order’s position will send you to the back of the line. Order types, targets along with the three stop strategies (Time-based, Catastrophic and Prove-it) are discussed in the free live training that’s included with purchase. In addition, the training covers the three trade setups that are unique to Atlas Line trading: the Pullback, Strength, and Bounce trades. The Atlas Line is compatible with the latest versions of NinjaTrader, TradeStation and eSignal.

Economic Uncertainty Benefits Futures Traders

eurozone tradingIn these times of great economic uncertainty, Germany is in the spotlight as the country assumed to take part in saving its debt-ridden Eurozone counterparts from total collapse. Due to a weakening Euro, German exports became more attractive to the world marketplace. Investors, noticing the decline of Greece and Italy, then invested in Germany. This transfer of money has made borrowing much easier in Germany compared to other Eurozone countries. In many ways, the European debt crisis has made many Germans wealthy; however, there is concern about its financial role in assisting the country’s less fortunate neighbors.

Italy’s newly appointed lead economist, Mario Monti, is said to share Germany’s modus operandi in terms of economic principles. These principles consist of a capitalistic free market, fair competition and social equity. As stated by an Italian newspaper journalist, “His (Monti’s) idea of a social market economy is very near the German model. You do have competition, you have capitalism. But at the same time, the government is very active in the economy, you have a generous welfare state.”

The U.S. dollar is considered to be the world’s benchmark for comparing the relative costs of country exports. In many cases, the values of non-U.S. currencies are fixed to a set level to reduce export costs for these countries. A perfect example of such price fixation comes from a report released just yesterday (Nov. 14, 2011):

“The yen dropped as low as 79.55 against the dollar following the intervention (by Japanese authorities) after it reached a record high of 75.31 yen earlier that day. On Monday the dollar was around 77 yen.”

On the other side of the coin, there are also those who want to shift away from the Euro. Instead of a total (and likely chaotic) dismantling into self-sustained country units, the belief is that a gradual breakup will ease debt management. Countries would then be able to manage their own currencies and exports. In fact, a British CEO is offering a $400,000 prize (second only to the Nobel in terms of monetary reward) to the person who comes up with the best plan for one or more countries to leave the euro.

What can we learn from these recent events?

  • The world operates on a delicate framework of money deliberately pushed around by governments and private financial institutions.
  • Exports are used to determine a country’s financial health and worth in comparison to others
  • There is great disparity in proposals for coming up with a solution to debt resolution

Since we at Day Trade to Win are primarily futures traders, we can profit in the short term with minimal leverage, unlike stocks. Stocks are usually longer-term and are less liquid and are less affordable (more expensive). Additionally, our trading is based on price action. We trade real-time conditions. If the Euro is on the ride down, there is usually a direct correlation in the E-Mini S&P, and we’re entering to make profit all the way down. We do trade the Euro and other currency futures as well, but this is just an example of our preferred market (the E-Mini). This is why we’re seeing an influx of interest coming from former stock traders who want to get in on futures volatility. For the next year at least, it looks as though the ride will continue.

What are your thoughts?

  • Is the manipulation of currency values essential for maintaining worldwide economic stability?
  • Will there be a ‘trigger’ moment that will cause Eurozone countries to abandon the Euro? If so, do you think this trigger event will be social, political or (hopefully not) a natural disaster or act of war?
  • Is there a fix to the world’s current economic tension? Is this the cause of an increasing population and income disparity?
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