Wednesday, 10 March 2010

Starting Down the Yellow Brick Road to CP

I have recently been getting a number of the same types of questions, over and over again so I think I need to say some more about how to use this blog to help you get to CP (consistent profitability).

In the next few days I will post a series that answers these "how to" questions that can act as a starting point to seeking CP. I will also post this series in KEY POSTS as "The Yellow Brick Road."

OK, you found this blog and it looks to you that we are doing something here that fits the way you want to trade. First step is to read the blog from beginning to end, including the comments, looking at the trades on each chart, trying to work out why the trade was taken. You can print out the blog/comments if needed as a reference.

Next, you read through the blog and the comments a second time now knowing a lot more about how we trade as you have already read the blog, but this time taking notes on the charts that will help you create your own trading "rules". Perhaps you will need to do this more than once. Write these rules down, this will be your first attempt at your trading plan.  Trading plans evolve so don't worry.  I'll talk about this later.

You now should have your own ideas of what a trade setup consists of. The entry trigger for these trade setups are bar close. As a first step, I would, in SIM, only look to exiting trades "all out" at the first logical scale point. This way, you can concentrate on entries and trying to achieve a high win rate without worrying about how to maximise the profits on each trade. That can come later.

The first decision you need to make is which market to trade. It should be a market with the highest daily volume in the timezone you want to trade in. There are markets trading 24 hours a day in different parts of the world so everyone can find a market that is tradeable before or after their working hours so that they can achieve CP in SIM while they are still holding down a job that pays the bills, saving up money for their trading capital.

Next, you need to setup your charts using range bars as your single trading chart. Finding the "correct" settings is easy once you use a bit of logic. The range bar length needs to look to eliminate the "noise" from the market while revealing the vertical movement clearly. The first rule I have is that the length of my range bar should be such that my drop dead stop loss should be no more than the length of two range bars plus a tick. This will give you a maximum value for the range bar. For exanple, for the ES I use 5 tick range bars as I am happy with a drop dead stop loss of $312.50 per contract. I exit most trades well before this limit is hit but I am prepared to lose $312.50 per contract on every trade should I not be able to get out cheaper. Don't have your drop dead stop too close as you will get stopped out of winning trades and you will begin using the stop as an exit mechanism rather than letting the market tell you when to exit both at a profit and a loss.

You find the correct settings by eye balling the chart. I go a step further by using a computer program to test the profitability of different range bar settings for specific setups but you can do a similar thing manually, although it takes longer to do. I'll speak about this in another post.

More tomorrow.

Today's trades below. Not much happening in the Hang Seng and it is acting quite subdued.

Click to enlarge


  1. Hey Tom,

    Any opinion on how the KOSPI is as a market to trade?

    This is the largest volume index future in the Australasian timezone.

    I do notice that quite a few people here in Australia concentrate on the HSI.


  2. Finally got my momentum bars working on TS..thanks to all who helped. It is close to EL but stil deviates...

    EL, are you sure your dead drop stop loss per one contract on ES is $312.50? That is 6 + tick points per contract! 3 contacts(as you provide in examples) - 18.75 you really mean that?

  3. Hi EL,

    Thanks for your time on this. I'm sure everyone appreciates your kind efforts.

    This one bit isn't so clear to me: the length of my range bar should be such that my drop dead stop loss should be no more than the length of two range bars plus a tick. This will give you a maximum value for the range bar. For exanple, for the ES I use 5 tick range bars as I am happy with a drop dead stop loss of $312.50 per contract.

    To my thinking, that makes 11 ticks which is $137.2. Where am I misunderstanding you?



  4. Very good posts Tom, thanks for taking the time.

    For me as I'm doing some research at the moment on this topic a 'How To exit' would be great.

    Apart from trend levels and the different scales I'm looking for a mechanical ingredient, which at the moment could be for example the recross of the 100 CCI level by the 6 line.

    In general, thanks to you, I'm making progress...

  5. Alex, I haven;t traded the KOSPI and don't have that exchange data enabled.
    Nick, driven: I look to risk a max of about 2 range bar lengths as a DD stop. thats $62.5 times 2 times 3 contracts. But I can't remember when I had a DD stop hit. If that happens its because its a fast market or because I dropped the ball and lost focus.
    timokrates, I onlu use the 6CCI for entries to catch optimum momentum. It's too sensitive for exits but the 45CCI isn't

  6. I don't understand how two 5 tick range bars + a tick on ES comes to $312.50. 11 ticks x $12.50 = $137.50

  7. EL, today was very interesting session in ES with inside out and outside trades. Is there anyway you can show us a chart of what you would have done today for US session?

    If you have no time, perhaps let us know if you would of taked 10:53 am (Pacific) short? If not, why not.

    If anyone would like to comment on today session, please do.

  8. Anon 21:09, There are 3 contracts per trade entry

  9. driven, 45CCI was at zero with 6CCI way ahead. This usually causes a bounce off the zero line especially with the smoothed CVD trending green. Also, look at Market Profile. I would have gone long 2 or 4 bars later. If you had gone short you would have cut for a small losss at the end of the next bar when things were clearer that the downside wasn't going to happen.

  10. FYI, YOUR post says, "For exanple, for the ES I use 5 tick range bars as I am happy with a drop dead stop loss of $312.50 per contract." I don't know if you can edit your post, but if so, you might want to do that. P.S. THANKS for all your sharing. Much appreciated.

  11. EL,

    Thanks for the great post! It was very timely. I currently have a day job and am looking for markets to trade in the evening and/or early morning. I live in the Central timezone in the US (Chicago time). Based on the times that I am available to trade, it looks to me like my best options are the Asian markets open and the middle 2 or 3 hours of the European session. Based on your prior posts and my own research, my short list of instruments includes Hang Seng index futures, Nikkei 225 futures, and EuroStoxx 50 futures. Do you recommend any others? I am thinking that I may need to watch a couple of markets at a time since I won't be trading the entire session.

    Also -- what data vendors and/or brokers do you currently use to trade non-US markets in Market Delta. It looks to me like IB and eSignal may be the best (and perhaps only) choices.



  12. EL, thank you for reply... I did get out and reversed on the 2nd green

    I am trading live for the past 2 years using volume share bars, keltners and Ha's, but what you have here is very intriguing and I will even say potentialy "special".(I went over the blog 3 times and implemented some of your comments for further testing)

    In fact I wish there would be a way to share intraday es trading based on your technique with few people, i e to chat privately and share trading intraday experience, If anybody want to start it, let me know....kind of like a mentor group for each other..i e "would you take that trade and why or why not"

    p.s. Kiki, you are very very lucky will learn in one year, what 90 percent of traders will never learn in 10 years

  13. Tom, I'm not sure but would imagine that your levels and outlook for the day may likely be derived from Market Profile? Perhaps longer time frame, multi-day and merged profiles, as well as the makeup of that day's session? Sometime profiles merge in a way that reveals major levels. Breaking apart the half-hour time periods over a stretch of time also can often expose the points where a market will often give way and we experience a breakout.

    For anyone interested in the structure of the market a good reading of Dalton can be helpful. I always recommend Don Jones at Cisco-Futures, who has spent a great deal of time with MP and follows it as the markets evolve. As a sort of opinion poll, can one discern the direction of the following days market from the previous day? I'm not certain that Tom and I would agree but there is an answer that has been examined statistically.

  14. Very good comments Tom, thanks.

    In terms of the CCI do you also watch for kind of an ABC pattern to "confirm" potential bottoming or topping?

    I got one more questing in terms of splitting the profile. Due to the lack of volatility I'm trading the euro a lot recently, but still got a bit of a problem to split the huge profiles produced during the day. From your experience, would it make sense, to split it sessionwise like starting at 8:00 (GMT+2/Germany) when Frankfurt open, then at 15:30 when Chicago open and then after the close?

    Thanks a lot a have a good flight back.

  15. driven, I would be interested in a chat/trading room for trading/posting live El's method trades (ONLY El's method) as we learn from the blog.

  16. Driven,
    I agree with starting a Chatroom to discuss EL's setups while the markets are open on our Search to CP. Like you I've read the Blog many times and while still struggling to achieve CP I am making progress. if you'd like to contact me and we can further discuss the possibility. Thanks.

  17. driven,

    I would be interested in sharing charts with one another. What is the best way to get in touch with you to do that?



  18. Anon 21:09,EL, I still don't understand the math:
    "5 tick range bars + a tick on ES comes to $312.50. 11 ticks x $12.50 = $137.50".
    And this sums up to $412.5 for 3 contracts as max risk per trade 8not $312.5 (not $312.5). This means you risk 11 ticks and make 8 ticks on your first target?

  19. Noijjer, eSignal
    timokrates, no ABC but HH and LL.
    People wanting to get together to share trades might be happy with next Monday's post

  20. tickvix, nicolas, anon1952 and is my e-mail

    We will discuss EL methods and it would be preferable for it to be a private chat, not in the forum format. Anyone who knows how to set up private chatroom, please let us know or set it up and I can let everyone know.

    It would be great to brainstorm entries, targets, scales, exits with occasional, and as time permits, input from EL himself.

    I set my EL on Tradestation and VB, CCI and even ema's at time differ, but the idea is what is important.