(I'm putting up a longish post as I'm heading up the mountain to ski some; I'll loop back before the close – Tim)
What I would like to share in this post is a method I like to use
when trading the ES to manage risk.
When I was trying to work out an approach for trading the ES, one of the
things I focused on was how do I control the risk? For instance, in a lot of trading approaches there is
what might be called a natural stop. In
the case of a 1-2-3 reversal the natural stop would be placed below the number
one point. Now if you enter a
1-2-3 reversal after price clears the number 2 point the distance to you stop
is well… huge, which creates fear. Here's an example of a "Natural" stop, which would be placed below the lowest arrow (point 1):
Point 2 is where the horizontal line is placed.
In the example above, I just cringe at the level of risk, which is probably greater then the likely move past the number 2 point.
Using the following chart, I will try and explain the approach I use:
At point 1, I noticed volume was spooling up, but price had stopped going lower. Although not shown that point also corresponded to a pivot point if after hours action was excluded. What I do is enter with 2 ES, then try to scalp 1 or 2 points within that same bar. My stop would be set about 1.25 points below my entry. The exit for the scalp was near the red horizontal pivot just above. Some times you can get a couple round trips. The goal is to scalp enough points to cover your stop on the first two contracts, and then for an extra contract or two as well.
In this mornings example I was only able to get one scalp and only re-entered with one contract on the next bar. On the 3rd bar over I picked up one more contract.
If the consolidation allows the basic approach that I like to use goes something like this:
1) Enter with 1 contract. Stop about 1.25 points below entry
2) If price and volume are acting as expected, add 1 more ES. Stop same place as first even if entry might be a little higher.
3) Scalp out near the far end of consolidation measuring bar.
4) re-enter with 2 contracts near low end of measuring bar range.
5) Depending on how price is acting I may only drop one ES on upper range on the this pass.
6) Now I'm carrying 1 core and will add 2 at the low end of the range.
7) I repeat the process and try to add to the core number of contracts held based upon my stop loss being covered.
In the above example, I drew a Fib retracement from the initial high to the low. The reason was a lot of traders play the retracement by shorting at the 50% line. So my target was to drop my contracts at a 1/4 point below that point. It was a perfect call. Now I could have shorted there, but my read of price was the drop was going to be short lived, so instead I was looking for a place to go long which was at point 3.
Now that I had banked a number of points, I didn't worry about scalping, but rather focused on my next entries and exits. What I did was target the keltner channel mid-line for an exit, and back in at the 5 min opening swing low. From there my target was just below the 61.8% retracement line. Up to that point I was batting 100%. The one trade that stopped out was at point 4. I shorted with a stop 1.25 points above, and price tagged me out. I thought we would fall one more time, but I didn't clue in volume was greater then 20K per 3 min bar which often means the market makers tend to get out of the way, so I blew that one.
I hope the takeaway is that the ES can be traded with decent risk management. That's it. Have fun
