Hi there,
Long time member of Big Mike's webpage (sorry I just can't call it futures.io).
As I have progressed in my trading over the years I have traded many instruments, including FX, bunds and futures (Dax, Dow Jones and ES). I now trade the ES on an intraday and longer term
basis, along with FX, oil and gold on a longer term basis. This thread is mainly concerned with the ES as that is where I trade intraday.
I have followed many concepts and tried various different things, have been on numerous trading courses, was scammed by a well known scammer on forexfactory so like to think I have seen (and heard) a fair amount of bullsh*t. I
almost traded through a well known futures prop shop and trading provider just before they went belly up and all the pooled trader funds mysteriously went up in smoke (a lucky escape). The only thing I haven't done is blow my account.
So in short, I've been around.
The purpose of this post is to try to pass on a few basic tips that will hopefully result in some lightbulb moments for people who are struggling. I want to write in a way that is free of trader babble as in my experience a lot of courses are full of waffle which means basic concepts are hard to grasp. It's also good for me to set down my thoughts in a (hopefully) coherent manner
So here I go.
My main lightbulb moment over the last few years has been simple. Always have this in your head.
On most trading days, there is no fundamental market changing news which can drive price to trade at much higher or lower prices.
In the absence of this market changing news, price will simply move around between major technical levels and react to them
Simple (I hope).
But what does this mean in practise and how do you use this for trading?
Well, using a normal trading day with no big market changing news, if price moves to an area that I have identified as a major area of
S/R then I am looking for price to
reverse at this point.
I expect price to reverse because in order for price to break through a major S/R level and move a lot higher or lower,
there has to be an extra reason, not just a technical one, which can justify price moving to a new price level.
Or, in other words:
In the absence of this market changing news, price will simply move around between major technical levels and react to them.
Think about this logically. If you're sitting at major S/R at the bottom of a swing, what possible reason does price have to break this level and move lower? If there is no bad news/info that the market was unaware of until that point in the day (e.g. a Trump tweet about the trade war continuing/getting worse, poor economic price data which are both bad news), why would the ES move lower?
Trader expectations are unchanged, so how can price move any lower? There is no reason for it to move lower! And if it can't move lower then it will do two things-i) stabilise at that lower level or ii) move higher.
Think of something you really like. Ipods. Peanuts. Tuna fish. Coffee.
Imagine an old fashioned market where there is an auctioneer calling out the prices really quickly. Imagine the price of your favourite product (mine is definitely peanuts) moving up really fast and the auctioneer is shouting out
lots of prices and lots of people are calling out in order to buy more peanuts. Price keeps going up but then all of a sudden people start thinking "well damn I love peanuts but this is getting expensive, there's no reason for me to keep buying up here at these prices so I don't want to buy anymore here."
All of a sudden there is less shouting out from the peanut buyers and the price increases slow down. There are less buyers, or they have stopped buying altogether. In short, peanuts have become too expensive.
Other people who love peanuts recognise that price has gone too high, people got too excited and that the real or fair value where most people will buy peanuts is a lot lower. So they shout out and start to sell peanuts and price moves lower because in all the excitement the price has gone just too high, the buyers have realised their mistake and aren't there anymore.
At this point, imagine two scenarios:
1) There is no news/market info that has been released that can fundamentally change the price of peanuts. Conditions are exactly the same as when people were originally buying.
2) The largest peanut producer in the world has released an update. They have made an mistake with their inventory and have realised that they now have 50% more peanuts in storage than they thought. These peanuts need to be sold.
Under Scenario 1, this is what will happen:
A) Price moves lower to where most people originally bought the peanuts. The majority of people think it was a fair price, and the evidence is shown by the fact that so many people were happy to buy there. So it's logical that they will start buying again, combined with the fact that it is likely that less people will be willing to sell/short in the expectation of making money from a lower price. Think about if you were a seller at a price that just 1 hour ago people were happily buying at. How confident would you be of making a profit? Do you think this would be a good place to open a short? You'd probably not be too confident. And you'd be right.
Or
B) Price moves even lower than where most people originally bought the peanuts. This is because that there were also a lot of people who not only bought at the fair price, but quite a lot also bought at an even higher price. They're now a bit spooked as the price has dropped lower than their buy price and as we're all human, they're panicking a bit and are selling their positions to CLOSE them. The people selling to close their positions might actually outnumber the people who are now buying at what was a pretty fair price that most people were happy with. Hell, some people might even be actively selling to open a position (to make money on the price going lower) as they can see the buyers getting swamped even at these levels.
As a result, the price of peanuts now goes even lower than where the majority of people were happy to buy them.
So say that most people bought peanuts at $100 per kilo. It went all the way up to $101 per kilo. Price has now moved lower to $99 per kilo.
And at this $99 level, you know that for whatever reason, this is a major S/R level.
At this point, now is the time to ask yourself the question. The be all and end all.
In the absence of any market changing news, what chance is there that price can continue lower?
The answer should be-not much chance to all.
In fact, in the absence of any market changing news, there is a very good chance that the entire same scenario that I have listed above will happen in reverse. Or it might be a bit late in the day now and most people have gone home so price will just hang around and not move much.
And so on and so on.
It is important to understand that most days are exactly like the one listed above. Market changing news does not happen every day. Or two days. Or three days.
So when price reaches a major technical level, and there is no news that can explain why it can move any higher lower then guess what. It won't move higher or lower!
At this point, now think about Scenario 2:
The largest peanut producer in the world has released an update. They have made an mistake with their inventory and have realised that they now have 50% more peanuts in storage than they thought. These peanuts need to be sold.
Work out in your head what this means for the price of peanuts.
Does it fundamentally change what people will be willing to pay for the price of peanuts?
And importantly:
Do you think that the major technical level at $99 will hold?
It is at these moments, and at these levels, where both myself and many others make their mistakes.
We do not recognise that we are no longer trading in the conditions described in Scenario 1. This is because most days are Scenario 1 and we are either unaware of the inventory news or we do not understand the severity of the impact.
The $99 per kilo price major technical level is based on old information. In other words, at that price in the recent past, us peanut lovers were happily going about our business without knowing that that the largest peanut producer in the world was about to flood the market with peanuts.
This news is now big enough to fundamentally change how much we are willing to pay for peanuts, and it is going to be a hell of a lot lower than $99.
So why would anyone buy at $99?
Well, when price reaches $99 it might look like it's going to reverse as some people will probably still try to buy peanuts because they have made the mistake of thinking that we are still operating under Scenario 1. Or they don't really understand the implications of the news and mistakenly think that $99 per kilo is a good price to buy peanuts and make a profit as price will now rise like before.
But it won't do any good. There are now huge amounts of peanuts being unleashed onto the market, so the price has absolutely no reason to be $99, it should be a lot lower. You should be happy to sell and make a profit.
So to summarise what I have said so far:
1) Most days, in the absence of market changing news, price will move around between major technical levels and will react/reverse when reaching them.
2) In the absence of market changing news there is a good chance of reversal at these major technical levels.
3) It is important to have a good understanding of what the fundamental conditions are in your chosen market and what type of news, and level of severity, will cause markets to no longer respect previous major technical levels.
So for the SandP at the moment, they market is expecting a trade deal with China. The market is also expecting that interest rates might move lower which is also good news. If there is a credible change in either of these scenarios then price will move quickly and violently lower. Depending on the severity of the news, attempting to go long at major technical levels near the current price will be a mistake.
Price will always react somewhere so there are plenty of chances to go long, but the news is just too big. These areas are traps and price continues to move lower.
What are the consequences of not understanding these core concepts?
Traders lose confidence and
chop and change their trading systems as they don't understand why their levels don't work anymore. Which is a shame as price will stabilise at some point, and then we're back at Scenario 1).
I hope that makes sense. Maybe it doesn't!
If there is any interest I'll post what I do to work out major technical levels. Adios
