Charles Schaap, D.O., is founder and president of TraderDoc.com and a full-time trader in index and commodity futures, as well as stocks and ETFs. He is the author of ADXcellence-Power Trend Strategies, a book for advanced technical traders, and Invest with Success-Big Profits for Small Investors, an investor’s guide to building wealth using stocks and ETFs. Dr. Schaap publishes The Journal of Excellence in Trading, a monthly newsletter that provides market insights, analysis, and trade set-ups. He has written numerous articles for magazines, Web sites, and newsletters, including Technical Analysis of Stocks & Commodities, Futures, SFO, Working-Money, and Medical Economics. Dr. Schaap is a former director and life member of the international Hedge Fund Association. His educational Web site is stockmarketstore.com.
E-mini (ES) futures are highly popular among daytraders, and Dr. Charles Schaap explains how to analyze these markets, spot trading opportunities, and manage risk with precision.
We’re talking the E-mini S&P with Dr. Charles Shaap. Hi Charles. So talk about trading the E-mini S&P.
The E-mini S&P is excellent for the daytrader or the person who wants to trade intraday to make daily income. It is an excellent vehicle because the market is always moving. All you need is some volatility to catch some good trends in the E-mini S&P.
The E-mini S&P is a futures contract that is one-fifth the size of the big S&P contract. You can trade it down on a five-minute chart, which works very well, and look at a higher time frame like the hourly chart and develop strategies to take advantage of the market open, reversals, trends throughout the day, etc.
What about this hourly chart, because there is an extra half an hour that is left over; what do we do with that?
That becomes a small 30-minute bar in most charting programs. The most important thing is that you should use bars that are divisible into an hour. So a five-minute chart—a chart with five-minute bars—you would have 12 bars in the first hour.
Any other time frames that work really well?
You can actually trade looking at a daily chart and an hourly chart. With a little bit longer-term position, you can hold overnight, but for the most part, it is an intraday strategy.
You can also use a 25-minute chart and a five-minute chart; a five-minute chart and a one-minute chart, but the main thing is there is a great edge by using dual time frames.
You use the higher time frame for your price targets; that is, where you expect price to go, or where you expect it to start from. You then enter using a lower time frame so you can enter a little earlier and actually see the trade developing faster.
The lower time frame leads the higher time frame in terms of momentum principles.
See related: More Time Frames, More Confidence
How do you manage risk with this strategy?
The best way to manage risk is to always put in a stop loss at the moment you enter your trade.
The trading platforms out there allow you to do this so that as soon as you put in your buy order, the sell order is automatically in place at the same time. These are called bracket orders, where you can enter at a certain price and it will get you out at one price and so the stop loss is already set. That is the most important thing.
In general, start with a fixed price amount for your stop loss; that may be eight ticks on the E-mini, or ten, or six, depending on how tight you want to make it.
The main thing is to use your stops, don’t move them.