Emini Russell Day Trading Method With Trading Band Setups

05/30/2006 training

Objective

I was working with a trader that I had just met.  They had been trading for a little over one year, using setups from one of the 'popular' band trading methods that are around - the trader was struggling.  The first thing I did was ask the trader to explain the method to me, wanting to know whether they understood the concepts and context that the various setups had been developed - I then asked them to go through a chart from the previous day and show me their trade setups.  The trader was unable to explain the basics of the method itself, something that I think is a very big problem.  They could show me some setups BUT there were a number of situations that they were confused as to whether there was a setup or not.

I could understand some of the confusion simply from their chart layout - it was very visually distracting to me.  There were indicators that had numerous lines to them, there were price lines, there were fib lines, there were paint bars AND there were times when setups that I was shown seemed to have things that were in conflict.  For instance, it 'bothered' me to see a sell setup sometimes have green paint bars, but sometimes have red paint bars - I saw the same thing in a number of instances where the direction of indicator lines was different than the direction of the trade.

Besides some of these perceived conflicts, this just seemed to be too much to try to absorb and process realtime when trading decisions have to be made AND the last thing you want to be doing is 'talking' yourself into or out of a trade.  I trade with 3 basic indicators:  direction-congestion, momentum-momentum flow, high-low price channels.  These indicators allow me to read a chart faster and more accurately, with regards to price movement in the context of method relevance, than I could with price bars alone.  I regard indicators as information and setup-trigger timing - it is important to me that they do not 'mask' price.

I asked the trader to delete the paint bars, all 'formula' derived price lines, and all but what they felt were the most important indicators AND then again asked them to try to find their trade setups for me.  Their chart became far clearer to both of us, and interestingly they were able to still find the same setups that they originally found, as well as a couple others that they didn't see originally.  IF you are struggling, or confused, try eliminating 'shtuff' from your charts - not adding more.  Learn to read price in the context of your method, and consistent with the indicators that you are using.  You are 'supposed' to be trading defined setups - those that you can see develop across a chart AND then 'wait' for them to trigger into a trade - IF you have things on your chart OR are looking at other charts-indexes that don't specifically lead to those ends - try deleting them.

We went forward using the same chart tick count that they had been trading from, the same trading bands with a small parameter adjustment AND a replacement of the indicators below the chart as shown below.  I also introduced the trader to ticki, and showed them some specific ways that I used this as a setup component for emini russell trading.  The remainder of this page are a series of charts, trade setups-trades done, as well as notes that had been compiled.

Ticki And Index Trading

Ticki had been an integral part of my previous emini sp trading, and I have found it as useful, if not more so for trading the emini russell. This is not because ticki is more relevant to the emini russell, because it is not - it is a function of how much trading volume has been associated with program trading, and ticki is relevant to that.

One of the biggest problems regarding ticki, and where I think much confusion lies in its use, is that there are far more ticki extremes that occur than are usable - of course the same thing can be said for moving average crosses, or indicator reverses, especially if you are trying to use momentum indicators inside of congestion.  The objective is not trying to use every ticki and turn it into a trade or trading decision BUT to have a specific usage, and way to 'combine' them into a trade setup as a component to that setup - some of these are discussed below.

Chart Setup

chart:  emini russell 180 tick chart using esignal data with tradestation 2000i

trading bands [ttBand]:  keltner channel - 14 period with 1.6 constant.

center line [ttDT]:  20 period weighted moving average.

ticki extreme:  ticki data overlay - for tradestation it was necessary to write a dll to 'bring' the data into the chart since you cannot have 2 different data streams on a tick chart.  the plot gives a single dot above or below the bar when ticki is +/-22 AND a double dot when ticki is +/-26.

momentum1 [ttM]:  difference between a 10 period and 3 period moving average shown as a line AND difference between a 23 period and 4 period moving average shown as a histogram.

momentum2 [ttMEx]:  i do not have a specific 'canned' substitute for this indicator - use an oscillator like stochastic AND base the calculation on a smoothed moving average instead of exponential.

yellow dot1:  the sideways condition of the bands shows that price is in 'congestion' - there were a number of breaks back and forth through the blue line BUT there weren't trade setups to do - especially when trading in congestion AND trying to be more selective and overtrade the condition. 

this specific trade was done where the other breaks weren't - there were additional things that differentiated between the other line breaks - there were trade setup components.  the trade setup is a ticki high double top at the upper band as a sign of resistance failure - the trigger of that setup was the break of the center line/blue line.

yellow dot2:  i think of a trade as an ongoing swing that is being managed for continuation - the bigger the swing the bigger the profit AND IF you also can get additional setups within the swing that you use for addons - you will maximize the bigger swings further by having additional trading size. 

there is another reason why this concept is important - what if you miss the initial entry to the trade - you need additional setups to keep from missing what may became one of those bigger directional trades.  trading addons is trader's choice BUT having more than one way to enter a trade is necessary.  there is always going to be a reason why an entry may be missed - you might not have been prepared at the time the trade triggered OR you may enter your trade using limits or stop-limits and you missed filling the trade. 

the trade setup is a shift of the congestion center to resistance - the trade triggers when it breaks the yellow line and the lows of the first break of the blue line.  note the congestion range low - how it is essentially a double bottom - this trade is thus done into a triple bottom break.  this is one of our 'textbook' congestion setups - the center line shift-reject into/through a triple bottom range break.  the trade can be done as an addon to yellow dot1 OR it can be done if yellow dot1 wasn't entered for whatever reason,

one additional note on this trade setup AND that is the yellow circle around the ttMEx indicator.  you can see how momentum has turned red and this is 'flowing' down - price hits the yellow line and retraces back to the blue line WITH the 'flow' continuing down on this retrace.  this is one of the important considerations of this indicator AND why it uses a smoothing parameter to 'slow' it down - to be able to see momentum 'flow' on retraces. 

yellow dot3:  the blue lines show a price momentum divergence - that is price makes a lower low while momentum is making a higher low - the dot then being the trade trigger of the pmd. 

i do not trade a pmd in this way - i would typically still be trailing the open short looking for a resistance area to hold AND the pmd to fail by breaking back down and continuing the swing.  IF i was going to make an exception for a specific set of setup components - this would be an example of that setup where the pmd coincides with a hit of the lower band along with a ticki low. 

also you may be trading using 2 charts with different tick counts/time frames AND this may be the slower chart.  IF the faster chart has 'gone into buy' after this slower chart ticki low band pmd - this would be another situation where this buy would be done - that was the case with this specific trade.

yellow dot4:  consider that the pmd buy isn't done - how do you enter the buy?  the center line breaks to a ticki high that then retraces back to the center line which holds AND the ticki high price breaks - again note the yellow circle on mex and how it continues to flow up on the retrace.  this is the same essential setup as the yellow dot2 sell - a first continuation type setup after the initial trigger - both setups triggering as a 'break and hold' of the area where the initial trigger was WITH mex 'flow' continuing in the direction of the trade.  i would NOT simply buy-sell a line break - for instance the break of the purple line after the pmd.  i do not have a trade setup at that point - so this '1 line break' is essentially 'chasing' the initial trigger after not doing the trade.

yellow dot5:  after the blue line breaks it is important for it to now shift to support IF the buy swing is going to continue.  support shifting to resistance/resistance shifting to support AFTER a retrace-retest - is a very typical 'price action' before a move can continue. 

note the line being tested with a ticki low.  this is one of my primary uses of ticki - a ticki counter to the current swing on a test of an important shift area - in this case a buy swing with a ticki low on a test of support.  these setup components trigger on the reject of the blue line AND the break of the lower high - considering that there has been an initial trade and a first continuation trade - this is an addon setup. 

also note the condition of momentum at the time of the trade - the blue circle showing the fast momentum 'hook' AND that mex has 'pinched' BUT it is not 'flowing' against the trade.  i do not want to enter a trade against mex 'flow' - especially on an addon trade.  for instance look at the band reject-break back through the center line in between the pmd lows - i would not want to do this as an addon trade against mex at the time - regardless that there has been a fast momentum 'hook'.

yellow dot1:  another pmd band extreme ticki extreme - AND this has an additional potential failure component in that this is also a double top on test of the overnight high.  IF you want to try to pick an extreme to reverse with - this is a good combination of setup components.  i couldn't do this trade - it is just too counter at the time.

yellow dot2:  besides not being able to do the yellow dot1 sell - there also is no trade setup on the break of the purple center line or blue support line.  the bottom band hits and there is a retrace back to retest the blue line AND it does so on a ticki high AND with mex continuing to flow down on the retrace - selling the break of the ticki high bar low is the setup-trigger for entering the sell.

dark blue dot1:  consider what this looks like real time - while you are managing your sell AND also thinking what a 'next' trade may look like - be it an addon OR be it a reverse considering you have taken a counter trade.  price continues down to a left side support area - i call this support because it was a 'break and hold' with the fast momentum hook AND where the 'key' to the buy swing continuation at the time - it is 'logical' to now at least pause here on the sell swing.

in general i do not like ledge breakout setups - a ledge being a series of overlapping bars of which many have the same essential high and low - AND did not buy the first break of the blue line even after the shift line hold as support.  buying the dark blue dot became another ticki trade - the higher low ticki low AND break2 of the blue line - with the trade starting from a hold of support.  these components add significance to the trade setup to me where i can try this ledge break buy - where otherwise the trade would not have been done.

i think that it is very important for method traders where discretion is going to be used -vs- mechanical system trading - that your discretion is not random BUT based on decisions that are consistently repeatable.  I find that significant price points as the 'starting place' of a trade setup is one of the primary considerations in being able to do this.

blue rectangle - blue dot:  i suppose that many traders have a setup where an 'extreme' breakout of the upper band coupled with the crossing of an oscillator like stochastic - is then sold on a break of the bar low back into the band at the blue dot AND then hold that trade below that overnight high at the dark blue line. 

however this is a trade that i can never do - it is completely counter to a method that is trading setups to be profitable at these 'extremes' AND then managed for continuation.  there is no pmd here with a ticki high to even give me some indication of resistance failure.  there is nothing to do except exit at some predetermined trailing retrace amount OR hold a trailing contract to breakeven - in either circumstance the previous buy is flat.

after the blue dot price consolidates - consolidation being a congestion type where price has held a test of a high-low BUT also stalls-holds a support-resistance point underneath - in this case the breakout area from the prior buy.  i differentiate between congestion types because i view them differently.  for instance in consolidation the first thing i am trying to do is price hold the retrace above a support-resistance point since - this is consistent with being a directional-continuation trader -vs- a trader who attempts to fade these highs-lows.

'congestion' is a period which is essentially untradeable except for those trying to 'scalp inside' - something that doesn't work for most traders.  what i have seen typically happen - traders try to trade breakouts of the area only to have them fail AND accumulate a series of losses AND then miss a profitable trade - miss a trade setup that has additional components to it that make it worth trying.  these periods are times where it is 'best' for most to remain flat as long as possible - looking for that trade which is setup to break the 'congestion' -vs- trying to trade a breakout.

yellow dot1:  this is one of my 'congestion' break setups - a shift of the 'center' area to support or resistance AND then a break through the range high-low which has already hit twice AND with mex flow in the direction of the break on the retrace back to the 'center'.  this particular setup also rejects the 'center' with the ticki high.

yellow dot2:  another band ticki extreme pmd.  i had no reason not to try a reverse with this setup - a reason such as the size of the prior trade that is being managed OR doing what is the first reverse into a trade that is counter basis the market's direction.  also this setup had 'starting location' significance as it was the support low into the dark blue dot buy from chart2 - the trigger is break2 of the blue line.

yellow dot3:  decent setup BUT not enough movement for a partial profit as the market remains tightly congested - now between the break area of the sell AND 728.60 as support.  there are 2 decisions:  (1) give the trade 'room' and continue to hold the long above your initial risk point (2) go flat on the break back through the blue line - essentially a breakeven exit after the reject of the band.  going short is not a decision for me because i do not have a trade setup - i went flat 2 ticks below the line.

can i have a mulligan and take door number1?  whipsawed on the exit - there is a right side double bottom of support across the chart AND there is a ticki low at this price point.  i re-entered the long on the break of the ticki low bar high/blue line replacing the exit of the prior buy that IF i had known was going to hold at support would have never been exited AND with mex flow in the direction of the trade on this retrace.

this time the move went up far enough to get a partial profit AND a management decision was made in light of the congestion - take 2 partials on a 3 contract trade and trail 1 - instead of trying to trail 2.  then on the 'cushion' from the additional realized profit - hold the long on the break back through the center area or a momentum reverse.  again this is a decision made for congestion and the deteriorating tradeability of the market in terms of continuation and trade swing size.  there was never a sell setup to consider other than a sell of the center area break after the lower high ticki high - the kind of trade i was trying to avoid doing.  then when the blue line was hit 'trying' to shift to support with a ticki low - i held the trailer for a reject of the area giving the trade 2 more ticks of room.  this worked out and the trade was held into the close - there was never a sell to consider BUT IF i had gone flat instead of holding - the buy never would have been re-entered at the end of the day.