Futures Q & A

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Futures Q & A

Over the last several weeks, my inbox has been bulging with questions from readers of Lessons from the Pros, and Online Trading Academy students alike. I've gone through most of them and picked a few that I feel will be instructive to readers of this newsletter. So in this missive, I thought I'd share some of them. Let's get right to it.

The first question is from HF who asks:

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Hi Gabe,

Lately, I am doing a back test of data to find out what the ISEE number can tell me. I remember during the class, you mentioned that we have to pay attention when the ISEE number is <100 and when it is >200. However, when I look at the data for the whole year, the highest number is 185, it never goes higher than 200. So are my notes wrong??

I find that when ISEE index is below 100, often times, the opening will have a gap.

I am trying to track the data to find out when the gap will be filled and when it would just go in the same direction and continue the move. Are there any indicators that help you to determine if the gap is a runaway gap or it will fade?

Thanks. Have a good weekend.
-HF

Before I share my reply, I need to set this up so that readers understand what is being written. The ISEE index that HF is referring to is a call/put ratio published on the International Securities Exchange's (ISE) website. This index is a good way to gauge what the dumb money is doing, as it tracks "long only" calls and puts on stocks. This group of traders is perennially wrong at extremes due to the fact that the majority of options purchased on equities wind up expiring worthless. So, it's worthwhile tracking where this cohort is putting their money, and then betting the other way.

Here's my reply:

Hi HF,

Regarding your question: The ISEE number that I focus on is the "equities only" column which is the middle one. When this number persists above 250, it is an early warning sign that traders are overly optimistic, and that higher prices although still likely, are unsustainable. That said, however, it is not a trigger to short the market; it is only ONE indicator. Ultimately, it is price (supply level) that should determine your entry.
Similarly, the placement of the gap vis-a-vis the supply and demand level will help determine the likelihood of a gap continuing in the same direction, or fading (moving counter) its opening direction. I hope this helps.

Regards ,
Gabe

Below are examples of a runaway (Pro gap) and fade (Novice gap):





The next query is about setting targets and what levels should take precedence in a trending environment. AG writes:

Hi Gabe!

I had the pleasure of reading one of your articles a couple of weeks ago re: holding trades. It's something I've aspired to get better at, but I get really antsy when we're coming into a 60-minute high, low. It SEEMS like when there's no intermediate time frame trend, price tends to be boxed in between the day's high and low, until it bounces off or penetrates, and then becomes the intraday trend to follow.

It SEEMS like when there is an intermediate time frame trend, price moves more easily through immediate opposing levels (in this case, supply) in the direction of the trend, particularly if price bounces off a midway level between the prior day's high and low.

My question is:

For the intraday swing trade, is there a rule set that you could share with me as to when to take profits in an intermediate time frame trend vs. a non-trending or basing market?

It seems that unless we're coming into a major daily, weekly, or monthly supply level [as with an unfilled supply gap today], we can hold through an opposing 60-minute level if there's an intermediate time frame trend present. This is an assumption, but I was hoping to get your insight on it.

Any thoughts you have would be much appreciated. I feel like my entries are getting so much better. Now I need to focus on setting and forgetting.

I hope all is wonderful with you. Thanks in advance for any thoughts you have time for...
AG

My reply:

Hi AG,

I'm really glad to hear your entries are getting better as I know you've been working very hard to improve those.

Regarding your query about rules for profit-taking: If you are looking to stay in a trend trade (which I'm assuming is what you mean by swing), your perception is quite accurate. In the short and intermediate term time frames, trends tend to either stall, or reverse at the longer time frame supply or demand levels. Armed with this information, you can look to set some rules for yourself. If you trade multiple contracts, one rule might be to have several profit objectives at the various levels and simply begin jettisoning one contract per level . If, however, you only trade one contract, then I would consider taking profits at the major level and prepare to re-enter if the level is broken or on a price retracement.

Regards,
Gabe

The last inquiry comes from an experienced trader encountering some frustration because he has been missing some bigger moves in the market lately. These are occurring amidst strong trending days.

CV writes:

Hi Gabe,

In regards to trading, I have a question about your personal trading style that I wanted to know if you could share with me.

Over the couple of years I have been trading full-time, I have come up with various strategies and trading plans for different markets and different market conditions. However, the market conditions such as today (10/05 - Tuesday) in the equity futures indices are the most frustrating for me. The reason they are so frustrating is that my market forecast and bias are correct, BUT, for the life of me I cannot devise any kind of trade plan that offers a low risk entry to join the trend. For example, the [TF] (and all the other indices) have just taken off dramatically almost since the opening bell. I know and you know (well as much as we can "know" anything in this business) that today is going to be a strong uptrending day, but being that I do not have a trade plan for this environment, I sit on the sidelines just watching the market take off.

So, my question is, in this not-too-uncommon environment, do you have a specific low-risk entry setup that allows you to join such a trend? If so, would you mind sharing it with me? I understand if you may not want to share. I'm actually more curious as to if you are forced to sit on the sidelines and be left behind like me, or if you are able to catch part of the 17+ point parabolic move the [TF] has made since the open.

Please let me know your thoughts at your earliest convenience.

Thank you,
CV

My reply:

CV,

To answer your question : Yes, there is a strategy that I use during trend days. That strategy consists of buying pull backs into clusters or pivots in an uptrend, and selling rallies likewise in downtrends. There is one caveat though; when entering a trade in the middle part of the move, the risk is generally higher and the probability lower than when entering at the turning points. If you're comfortable with this, it's not a bad strategy, since strong trends do persist, particularly if there aren't any strong supply or demand levels in close proximity.

Below is a chart illustrating this strategy:



To conclude, I trust that some of you have similar questions to those posed here. And I hope that the answers help in clarifying, or perhaps serve to further a constructive discussion on this fascinating journey we call trading.

Until next time, I hope everyone has terrific week.
- Gabe Velazquez

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