This column was originally published on RealMoney on Aug. 30 at 4:27 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. To learn more about a RealMoney subscription, please click here.
In my last article on
daytrading S&P futures, I wrote that many traders are unsuccessful because they either lack the experience, a solid technical approach and/or a large enough stop-loss to accommodate the large intraday price swings in this volatile market. Some readers were taken aback by my comments since they are familiar with my three books on daytrading (
, all published by McGraw-Hill).
Note that these books were published when daytrading in S&P futures was a more viable undertaking, when there was less competition and price swings weren't nearly as erratic. Since the late 1990s and early 2000s, conditions have changed dramatically. The dream of many daytraders in S&P futures is to make a few hundred dollars a day by taking advantage of the frequent price swings.
Apparently my comments hit some raw nerves, inasmuch as I have received quite a few responses from investors who are frustrated with their daytrading results, particularly in S&P futures. Virtually all of the calls and letters I received agreed with my point of view. This comes as no surprise given the arduous task they have undertaken. It's much easier to be successful with Treasury bond futures, some of the currencies and even the gold market than in the S&P.
Given the caveat that S&P futures is the most difficult market to trade, I would like to share with you some methods that I have developed over the year. Note that these methods are not trading systems per se, but they should help steer you in the right direction. I hope to counteract the haphazard approach used by many daytraders by showing how you can obtain a strong measure of objectivity.
The Moving Average Channel (MAC)
This is a simple method indeed. We plot a 10-period simple moving average of the high and an eight-period simple MA of the low, depending on the time frame being used. If you're using an hourly S&P chart, you plot a moving average of the last 10 hourly bar highs and a moving average of the last eight hourly bar lows. I have found the 10-minute S&P chart and the 30-minute S&P chart very useful for this approach.
When two consecutive hourly price bars occur above the 10-period MA high, the trend is defined as up. Two consecutive hourly bars below the eight-period MA low define the trend as down. These points can also be considered buy and sell triggers. Typically a good short-term trend will follow these signals. The first new signal is usually the most likely to succeed (see my notes on the chart below).
Another approach is to use the bottom of the channel or the range of the channel (i.e. the eight-period moving average of lows) as support in an uptrend, buying when the market drops back into the channel and taking profits if and when the market rallies. Following a sell signal, the trend is down and short sales can be taken when prices rally to resistance (i.e. the area within the channel). The chart below illustrates this methodology.
Moving Average Channel
There are other characteristics of the MAC that may be helpful. These are discussed in some of my daytrading books cited above. Clearly there is risk, and this method isn't perfect. Nonetheless, it does impose a structure, as opposed to the "trading on guts and instinct" that is typical of most daytraders.
Trading with Jake's MOM/MA
Yet another approach to consider is my "MOM/MA" indicator. This very simple method uses a momentum indicator (also known as rate of change) and its moving average. When the 28-period momentum crosses above its 28-period moving average, a buy trigger occurs. When the 28-period momentum crosses below its 28-period moving average, a sell trigger occurs. The illustration below shows how one would employ this approach with a 28-period momentum and its 28-period moving average. As in the case of all technical trading methods, a stop-loss is required.
There will be period of time during which signals aren't accurate. However, if risks are effectively managed and profits are allowed to accumulate when the trends are solid, the end result will be positive. Too many daytraders jump out of profitable trades too quickly. The best way to improve performance is to use a trailing stop-loss once you are in a profitable position or take partial profits and allow the remainder of your position to run.
Without a doubt, a major key to success in daytrading is to maximize profits. Unless you have some large profitable trades, you won't win at the game. The only way to get those large winners is to ride profits.
The Importance of Total Objectivity
Since I made my first trade in the summer of 1968, I have seen many futures trading methods come into vogue and fade into obscurity. Fad and fashion exist in the trading world as well as in the clothing industry. Unless a method is totally objective, the odds are that you will inject your personal interpretation into the picture, and this will, in most cases, be the first sign of trouble. This does not negate the role of experience or intuition, or the fact that there are some very good analysts out there who know their stuff and don't need totally objective methods. However, such individuals are a rare breed.
Unless you're one, you need total objectivity in order to be successful. If you rely on methods that are subject to interpretation, gut feel, psychic ability or a combination of technicals, fundamentals and timing indicators, the odds of success are slim. If you combine a solid plan with effective profit-maximizing strategies (i.e. trailing stop-loss) and a fully objective trade selection method, you will immediately increase your odds of success in the hardest game in town.
Jake (Jacob) Bernstein is president of MBH Commodity Advisors Inc. and Bernstein Investments Inc. He is publisher of Bernstein on Stocks, The Letter of Long Term Trends, Short Term Stock Trader's Hotline, MBH Weekly Commodity Trading Letter, Monthly Key Date Trader, and Short Term T-Bond Hotline. His newsletters and advisory services are read internationally by traders, investors, brokers, financial institutions and money managers. His Internet presence includes: Jake Bernstein on Futures and his stock market advisory 2Chimps.com, Seasonaltrader.com and Patterns4Profit.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bernstein appreciates your feedback;
to send him an email.