ES EminiMore on the Scalping Style of Trading

There are a variety of trading styles that traders employ, some with great success, others with less than satisfactory results.  My style of trading, scalping, is a direct reflection of my personality, experience and emotional disposition. ES Emini traders who scalp typically stay in trades for five minutes or less, or longer, if need be.

My views on the way the market functions precludes me from making long term committments to a given market direction.   Market prognostication is an inexact science, at best, and most economists and traders have a miserable track record of predicting the future direction of market movement.  So, I don’t even try.  I suspect I would be as poor at predicting futures market direction as the experts.

As a adherent to portions of chaos theory, I believe there is a level of randomness to the market, which makes it less than predictable in the long term.  I do believe that certain means can be employed, and probabilities analyzed that will allow a trader to get an idea of what the market may do in the next ten minutes, though.  Chaos theory is about small patterns, called fractals, that exist in a far larger random pattern.  I take advantage of those smaller patterns and try to pull two or three points (on both the long or short side of a position), and then exit with my small prize.  Of course, if I find myself in a continuing trend, I may push my profit limits higher to take advantage of the trend.   By and large, though, I am looking for two or three points.

A casual glance at any intraday chart will show an undulating wave pattern that is the basis for scalping.  I try to identify the starting point of a wave and exit the trade when the little spurt of momentum stops.  Of course, there are days when the market trends in one direction, not often, and on those days I may take a position and hold until my comfort level erodes and I am ready to take a profit.

When you are in a winning trade, you never lose money by exiting the trade.  Sure, maybe the trade angled upwards another two points and you did not participate in that price action, but I am still content with my three points.

Never let a winning trade become a losing trade.  Take that to the bank because it is a common mistake by a legion of traders.

On the ES Emini contact I set my stops fairly tight, usually a 12 tick bracket and never adjust my stop lower to accommodate a lousy trade.  If I am wrong, I am wrong.  My goal is to find another trade that is profitable.

I don’t hold trades overnight, and I don’t set up trades and walk away.  The scalping style requires constant attention to the trade at hand, and this requirement makes it an unpopular choice for traders who don’t care to spend a lot of time at the computer.  You will be spending time watching charts looking for trades, and once you are in a trade it is important to monitor the trade.

In baseball terms, scalpers are singles hitters.  Nothing more.   We may hit an occasional home run, but the is the exception, not the rule.  The goal of a scalper is to extra small chunks 5-8 times a day from the market.

I write mainly about financial topics, specifically daytrading the ES and YM emini contract, and many of my more advanced techniques can be found at my blog, The Fractal Futures Trader.

I also write an ongoing commentary, which is a bit more opinionated, at The Fractal Traders Commentary

I encourage all to read the blogs and learn how to trade, as you can add $500-1000 dollars a day to your pocket book. Best of trading to all.

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Slippage: ES Emini Trading

Back in the days of open outcry trading, the futures market was not nearly as efficient as it is today.  Online trading has greatly improved the quality and quantity of trading and executing trades.  
But there is still one little nagging issue to beware of: slippage.

From Wikipedia:

“With regards to futures contracts as well as other financial instruments, slippage is the difference between estimated transaction costs and the amount actually paid.”

There are many other definitions on the internet, some very complex, but I believe the above referenced quotation is simple enough for our purpose.  Slippage occurs when you sell or buy at a specified price and your actual execution price is higher or lower than your specified pricel.  Even more likely, slippage can occur when you have a stop price specified and the executed stock price is higher or lower than you intended stop.

Slippage can occur for a number of reasons:

1.  You are trading in a thinly traded market and there are simply not enough traders to fill orders in a timely manner.

2.  Your brokerage software package is not efficient and is unable to execute buy/sell orders on a timely basis.

Whatever the reason, slippage can sap your profits if you don’t pay close attention to your execution prices and specified prices.

Very thinly traded markets, say copper, often don’t have the liquidity to handle large market orders.  If you intend to trade thin markets, you will need to cut down your order size to accommodate the reality of the thin market.

On the other hand, markets that have a high degree of liquidity are excellent for avoiding slippage.  For ES contract, for example, is one of the largest futures contracts, and I experienced very little slippage when trading this market.   More than a million contracts, some times even higher, are traded daily on this exchange and you will have little trouble getting your trades executed and filled in a timely manner.  I have trade up to 100 contracts on the ES and had excellent fills.

Pay close attention to the manner in which your broker’s software fills a trade.  Sometimes slippage can occur because the firms software is not “up to snuff” in the digital age and cannot keep pace with the fast moving, highly liquid markets like the ES.

For whatever reason, slippage is a real cost in your trading operation and you should do what it takes to make sure you trades are executed and filled at your specified parameters.  The failure to do so will result in real costs to your trading account, which is an undesirable outcome.