Saturday, January 30, 2010

My "Setup" or How I Enter a Trade

A question I'm frequently asked on the Blog is, "how do you enter the trade once price reaches your Key Area of Support/Resistance", or what "setups" I look for. Before I answer this question, I just want to put out the disclaimer that I'm in the learning stage myself, and what works for me, may not work for you.

The nightly preparation where I define the Key Levels to do business are an essential part of the setup. The chart I post every night is my Road Map for the following day, and even though I could trade without it, I would feel a little lost without the nightly preparation work. I already have scenarios in mind before price ever reaches those areas, and the scenarios are constantly being tweaked based on the latest market-generated information (price/volume). For example, if price reaches an Area of Resistance, my expectation is Rotation or a Pullback. Will price pull back 2 points, 5 points, or 20 points? I honestly don't know how much it will pullback, or whether it will pullback at all. But I anticipate enough of a pullback to allow me to move my stop-loss to break-even (generally stop is moved to break-even once price goes +6 ticks in my direction). Once price reaches my "pre-defined" Key Area, I don't have any specific "setup" -- all I look for is price to stall for a moment, and I'm in. If I hesitate, analyze or start looking for an elaborate "setup", price WILL move away from my ideal entry price, and I'll have to use a wider stop-loss to enter the trade (unacceptable to me). I am not an aggressive trader and I hate taking heat on my trades. I'm not trying to nail the top or bottom of the day, but I do try to nail the top or bottom of the current swing. I don't mind scratching trades because even my retail commissions are fairly low. Eventually I will either be working at a prop firm with member rates or will lease a seat at the CME, so I'm not worried about commissions.

ES 233 tick-bar Chart (Execution Chart)

I'll use a trade from Friday as an example and walk you through how little went through my mind when I entered this trade. The 233 tick-bar chart above illustrates the Trade. 1066.25-1068.75 was a pre-defined area of Support off the Key Levels chart posted the night before, so as soon as price reached that "area", I began looking for a Long opportunity off the 233 tick-bar chart (execution chart). Price built a small base at 1067.50, and I pulled up the DOM to execute the trade. I entered Long at 1068.25 when I saw the offers being lifted at 1068.25 -- I want my order to be one of the last few that gets executed at that price. That's all I looked at; and that was my "setup". Price quickly moved away from my entry and began building a base in the 1069.25-1069.75 area, and I moved my stop-loss to break-even (stress-free position now). Immediate resistance was the Globex Low at 1070.50, and I scaled ahead of that at 1070.25. 1074.75-1075.00 was stronger Resistance based on the 5-minute chart, and the final target should be around that Level. Once price broke above 1070.50, immediate resistance became immediate support, and the stop-loss was moved to 1070.25, locking in +2 points on the remaining position. Price moved up again and began building a base in the 1073.00-1073.50 area, and I scaled at 1073.25 because I didn't know whether price would base and move up, or rotate down. An important point to keep in mind is that, I don't know what's going to happen next, so I must manage the trade based on the information I do have. Price then pulled back to 1071.25, just one point away from my stop-loss. When price shot back up to 1074, and began building a base at 1073.25, I exited the position completely at 1073.25 due to the time of day (2:44 PM cst, nearing market close). The final target was 1074.25, ahead of that 1074.75-1075.00 Area of Resistance.

The main point to take away from this post is that I don't look for any elaborate "setups" once price reaches my area. It takes me a decent amount of time to prepare the nightly Key Levels, and what's the use of all the preparation if I'm going to look for 30 different confirmations before I enter the trade? The whole point of preparing the night before is to improve Execution; to make it almost automatic. I can't afford to over-analyze because that would require me to widen my stop. I'd rather get in at what I perceive to be the best price at the time, and then get stopped out at negative 4-6 ticks; than over-analyze and miss the trade completely.

If you're doing the preparation and homework ahead of time, you don't need elaborate "setups". Wait for price to get to your area of business, and then execute the trade. Whether you look for divergence on some oscillator, or NYSE TICK divergence, or something else -- it really doesn't matter, so long as the method gets you IN the trade. As an example, check out the following 1-min chart with NYSE TICK. I haven't looked at this chart in several months, but you can see how we had positive NYSE TICK divergence going into that 1067.50 Low.

ES 1-Minute Chart with NYSE TICK

In conclusion, my advice is to do the homework and preparation, analyze the overall context based on the day's action, and once price reaches your area of business, just focus on executing the trade. If you're a new trader, use a wider initial stop-loss to compensate for (lack of) precision.

I hope you found this post helpful. If you have any thoughts on this subject, please post in the Comments.


  1. Well defined objective + Plan + execution. Augmented with experience (or the intangible, unteachable pattern recognition X factor) to break it or stick to it; that should give you the edge.

    Have you noticed that scaling in and all out techniques statistically give the largest Profit factor.

    On ES futures especially, which are often prone to range bound trading (more so than commodity plays), scaling in and all out has often been my way to go (and whether or not that is true on a large enough sample size size) - it plays out well.

    Thanks for sharing that, awesome stuff.

  2. Very good post. I use very similar entry, but based upon 512 tick chart or 400 tick chart. Thanks for everything.

  3. Hi of your best posts really...some questions...which chart timeframes do you use for finding the áreas of support and resistance? Do you use the whole session or the cash session only(rth) you use the 5 min chart to trade or you just and only use your s\r areas from your preparation,thanks in advance


  4. very helpfull indeed. I am not sure if what i am going to ask you is proprietary info or not, if so please apologise.

    Could you discuss in future posts:

    1. What initial stops do you set on your trades?
    2. How do you determine your support/resistance areas?


  5. Great post, very straight forward. Thank you for sharing.

  6. Hi Sandy,

    I haven't mathematically tested scaling in/out techniques, but I don't view trading as all math -- I have to take the human factor and my own psychology into account as well. From a psychological perspective, scaling out works great for me. My focus is on Risk Management, and scaling out allows me to reduce risk on a position. It also goes along with the belief that "I don't know what's going to happen next", so I'm always looking to reduce risk and take some profits. This example was just one setup; there are times when I'll scale out at a higher profit, or even add to a winning position, but those are different setups and at different times of the day. This specific trade was near the close on a Friday afternoon, and my objective was to minimize risk.

    When you have time, I'd like to hear more on your scaling in to a position, and exiting all-out.

  7. Thanks Randi!

    Daniel, during the day I use the 24-hour session on a 5-minute chart. For identifying the Key Levels, I use a variety of time-frames ranging from 5-minute up to a Weekly or even Monthly chart.

    Luis Paulo, I use a 6-8 tick stop loss. As far as how I determine the areas of S/R, that topic is a little large for the Comments section and needs its own post. I will try to get to that at a later time.

    Lorin, no problem -- glad you liked the post.

  8. Hi Awais,
    That's a good explanation of how it works. Nightly preparation to create a roadmap is vitally important. For me its the most important work I do. I completely agree in that once the roadmap is layed out you just pretty much react when you see price making its expected reaction and don't all of a sudden start looking for needless confirmation (i.e. lack of confidence in your plan). I have all sorts if rules (like most any trader) and one day it occurred to me that I was trading without cycling all those rules through my head. It made me wonder if I was trading by the rules or just doing gut reactions. So I looked at every setup and every gut reaction and found that I was in fact following the rules, I just wasn't consciously repeating those rules in my head. And that I think is how the "roadmap" plays out. Price reacts and then we react and its all over (trade or no trade)in a flash. Great post. So many people tend ot overthink and outguess themselves especially when they are still new.

  9. Excellent points Chuck! Hope all's well on your side.

  10. HI A

    Just thought I would share with you part of a dialogue (See comments) that went on behind closed doors. One of our members loved the simplicity of your approach.

    He had over traded the middle lunch chop (I think trying to force his schedule on the market), and was gracious in sharing that experience so that all of us could benefit.

    I usually don't bring this detail out into the open, but thought I would share it with you since it relates directly to your wonderful post.

    Thanks A-

  11. As always, I enjoyed reading your post D! Thanks for posting it here. Wish you the best!

  12. Hi Emini, Brilliant, clear process and explanation! Thank you so much for sharing it with us.

    FuturesMagnate, Ed

  13. Hi Eminiplayer,

    Thank you for your post. I respect your key levels precision and it was nice to hear the details of how you trade. I have a question. If a trade goes against you, do you stick to your stop loss?
    I just this past week lost $3500 of an $8500 acct. My stop loss was hope-imum - hehe. Can chuckle now but was a sucker punch at the time. So now have decided to be more serious about the stop-loss.

    The reason I ask is that the Emini goes up and down 10 points easy before it comes to the target and if the stop loss is too narrow we may not give it latitude to hit the target.

  14. I will take a stab at the stop question from MaeRae.

    If you were to take this trade, the stop could be placed at 1067.25. Where you enter, on the other hand, is entirely up to you. If you're confident with this "setup", there's no particular reason to wait for loads of confirmation and your entry can be very close to your stop. If you're not confident and you want more confirmation, then your entry will be farther away from your stop and your price risk will be higher. The stop, then, is where it should be, above the "danger point". Your price risk is determined by where you choose to enter, and that's entirely up to you. To put it yet another way, the question is not so much of a tight stop since the location of the stop is determined by the market, but of a tight or loose entry, which is determined by the trader.

  15. Randi put it very nicely, and is absolutely correct.

    MaeRae, Yes I always stick to my stop. My trading platform is setup to automatically put in a hard stop-loss order as soon as I enter a trade.

  16. Hey,
    Perhaps a very naive question, but I have hard time finding tick bar chart for ES. What do you guys use? I use Interactive Brokers and I don't think they provide tick bar charts. Are there any free software/websites out there which would give free real-time tick bar chart? If not free, what are my paid options? Thanks much! Thanks for the blog and information!

  17. I haven't used Interactive Brokers in a couple of years and don't recall whether they support tick charts. You could download Ninja Trader and then use the Interactive Brokers data feed to drive the charts in Ninja Trader -- I'm pretty sure NT supports tick charts.

    Paid options would include Trade Station and eSignal.

  18. Emini,

    Last year when I started to get traction on my results, one of the next goals was to quantify what was working and what was not (for me).

    In that process, one day - a peer asked me why I had taken a particular trade. I was blown away by how little I could say about it.

    Sure there were simple things like trend (higher highs and higher lows), bounce of an EMA band that I use plus the elliot wave struture of a trend.

    But I kept thinking the real turnkey factor was undefinbale, instinctive and came without quantiftifaction (some of the keys were time of day, surge in volume, change in pace of tick formation or as some might say change in pace of tape).

    What followed after that is a series of obeservations that as time went by, this intangible gets stronger and better at its own pace (i coudn't force it). And on some days I just didn't have it.

    Is that helpful? I don't know. But what I do know is onw my my most influential mentors said that pattern recognciion (a big factor in my trading) is visual and by defintion not easily quantififiable.

    10,000hrs of study and 10,000hrs of screen time. That sort of cliche. But I must say, it does work, no shorter route than lifting the heavy loads before the path becomes appraent.

    By the way, I am uploading my trading charts on a blog for the time being. It's an experiment to see whether it develops into something larger and beneficial. Drop by something and see if it helps making a picture. Just charts, no commentary.

    Lastly, going back to the scaling in question. Although I would like to be more mathematical about it, the chaotic nature of markets and trading simply hasn't allowed for it. So for now, a mjority of the time I go all in all out.

    The rationale is simple, if am not sure that a trade can be taken with full size then thats a very good reason to just walk away completely.

    Not ventured nothing gained, you might say, but a cardinal rule of trading is preseravtion of capital, that overrides all other justifications.

    So for now, it's what I mentioned to meversuswallstreet yesterday....

    and paraphrasing....."I only take no brainers, my brain simply can't handle anything else...."

    Sorry for rambling.

    And Caret 311,
    Tick charts are excellent on larger frames, but you get what you pay for. Heck, even some of paid data providers bundle up ticks into your research. It'll be worth it if you are serious.

  19. Thanks emini-player, downloading NT to see if I can get tick charts to work there.

  20. Thanks for sharing your experience Sandi -- really appreciate it. I will definitely check out your Blog.

  21. One question, you said, " I entered Long at 1068.25 when I saw the offers being lifted at 1068.25 -- I want my order to be one of the last few that gets executed at that price."

    What do you see to know offers are getting "lifted"?

  22. I watch the DOM and see trades being executed at the Ask, and the # of contracts being offered declining rapidly. That's what I want to see when going Long -- it allows me to reduce risk very quickly and exit at break-even or minus 2-3 ticks if the trade isn't working out as planned.

  23. well that was the clearest explanation of the DOM I've had ever. Pretty much crystalized it for me. Thank you.


  24. Great post E-Mini,

    What do you look for the last size traded at the BID/ASK when prices reaches your level?


  25. Generally, I want to see activity drying up as price reaches a level, but I don't look for any specific Size traded at the price. Also depends on where we are in the range; lot of volume at lower end of a range can give way to heavier liquidation. I don't view it mechanically, so there's no single answer here.


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