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Inside the Mind of an E-mini Trader
02/14/2013 12:00 pm EST
Tim Racette is teaching a trading workshop at The Traders Expo New York this coming weekend/week. In this interview, we talk about his trading methods, how he finds great retracement and breakout opportunities and why his thought processes and mental approach to the markets is so critical to his success as a trader. Register for his session free at: http://www.NewYorkTradersExpo.com.
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Tim Bourquin: Hello everybody and welcome back. Thanks for joining me for another interview on Trader Talk podcast of MoneyShow.com. My guest today is Tim Racette of EminiMind.com. He's also going to be a speaker at the upcoming New York trader's Expo this coming weekend and week over the President's Day holiday. We're going to talk to Tim about how he trades and what he's going to be talking about in his session as well. So first of all, Tim, thanks for joining me on Skype today.
Tim Racette: Thanks for having me, Tim.
Tim Bourquin: All right. Let's talk about your Expo session first because I know the New York show is always a great one. It's the biggest one of the year and you've got a session there at the show. What are you going to be talking about?
Tim Racette: Yeah. The topic for my presentation is going to be 10 Steps to Developing a Winning Trader's Mindset. So this is actually my first time speaking in New York. I've had the pleasure to speak a couple of times out in Vegas, but I'm really excited to see what the New York Expo has to offer.
Tim Bourquin: All right, great. Well we don't want to go through your whole presentation, but I want to ask you about some of those things. So first of all why a trader mindset? What is it about mindset that has an effect on how you do as a trader?
Tim Racette: Well, I think the mindset and whether it's in trading or investing, it's really our mindset that acts as a foundation especially in trading. You know, I think it was Yogi Berra who said baseball is 90% mental and the other half is physical. Well, I believe that in trading, trading is 90% mental and the other half is execution. So with developing a talk for The Trader's Expos, at least the past couple of years, I've tried not to single any one group out. So I felt that this was a topic that is the very foundation to my own trading and whether you're a swing trader or day trader or whatever style you're trading, I felt that it would be a very applicable talk and have a lot of insightful lessons from a lot of different traders that I've studied over the years. I'll try to bring in as much from my own trading as I can.
Tim Bourquin: Can we take one of them and maybe talk about it and give people a little bit of a teaser about your session?
Tim Racette: Yeah, absolutely. I think one of the most important things—so you know the talk is titled 10 Steps so I've got 10 various steps or principles, if you will. One of the more important things in trading, I found, is that it's really important to be able to accept your mistakes. You really need to be able to just check your ego at the door and accept that you'll be wrong. I really think that mistakes provide the path to your improvement, and a lot of people and speaking from my past experience, try to cover up our mistakes and really not embrace them in a way that provides exploration. So if you make a significant mistake in your trading, write it down and find a way to learn from it. I think that the mistakes that we do make should be embraced as learning opportunities and not necessarily bad things in and of themselves. So that's one of the sections that I'm going to elaborate on trading mistakes.
Tim Bourquin: One of the things I ask traders all the time and I get about a 50/50 split on the answer to this, is you hear sometimes that we should always know when we take a loss as a trader what happened, what we did wrong, and then the other half people say you can't always do that. Sometimes you're just going to be wrong and it's just the way the market is. Which side do you come down on?
Tim Racette: I definitely believe that you can have a good trade that ends up being a loser. You know, you never know what the outcome of any individual trade is going to be. You try to structure it in a way so that over a larger statistical set, you produce a winning, a positive expectancy and profitable trades over time. But the way I look at it is, if there is a valid setup that meets my criteria, I'm going to take the trade and if it's a winner great, if it's a loser and I followed my rules and entered the trade according to my criteria then that's a good trade.
NEXT PAGE: Details of Tim’s Strategy
Tim Bourquin: All right. I want to get into some of those criteria here in just a bit, but in terms of these ten steps is this something that you were taught that you learned on the way on your own? How did you come about these things?
Tim Racette: So this is really a collection of eight or ten years of research and studying that I've done in terms of what makes great winners. So I've looked at people from business leaders, great traders, athletes, and kind of comprised all of my knowledge and then just kind of condensed it down into these ten principles that I'll be sharing at the Expo.
Tim Bourquin: All right. Let's talk about your trading and trading of the E-mini specifically. That's E-mini S&P, I take it?
Tim Racette: Yeah, that's correct. I focus on the E-mini S&P and then I also trade the euro 6E futures and the soybeans and that's all on the day trading timeframe. I also do swing trade individual stocks and we could talk a little bit about that, too.
Tim Bourquin: Okay. Let's start with that E-mini trading. So how many times a day do you trade and kind of give us a general idea of those things and setups that you're looking for.
Tim Racette: So what I'm looking for on the intraday timeframe is retracement. I have basically two methods. I'll use a retracement method and a breakout method. You know, the market can either be trending or range bound so I like to have a couple of options to pull from. So kind of a garden variety trade that I will use, so to speak, will be price will retrace back to a 15-minute level. I should mention that I'll look at two various timeframes, the 15-minute and I'll also use a 5-12 tick chart for trading intraday. I use a little bit slight variation of this for all three markets. But kind of a general example would be price pulls back to a 15-minute 50% retracement and then what I can do is zoom into that little bit smaller timeframe that 5-12 tick chart and I'll take the first setup that shows up in the direction of that 15-minute trend. So this way, I can identify some larger support level in terms of a long setup and I can identify that there are some sort of buyers or some sort of support there. Then I can zoom to a little bit smaller timeframe and that allows me to use a little bit smaller stop and then enter the position and manage it from there.
Tim Bourquin: Do you usually go in with a full size and what is that size and do you scale in at all?
Tim Racette: I do. I do trade all in and then I will scale out. So I keep my size less than ten contracts, which is small for some people and larger for another but I think it's important to kind of keep the focus on the risk side of things first. So I will put on the entire position at the onset of the trade and I will typically have a first target point where I'll take off a third or a half of the position and then I'll leave the second half or the remaining third as a runner and try to let the market be the one to take me out of the trade and I'll use a trail stop for that.
Tim Bourquin: All right. In terms of the 50% retracement, is that a Fibonacci retracement?
Tim Racette: Yeah. Well I use the Fibonacci tool. 50% technically isn't a Fibonacci number but it's just convenient to use the tool. So I'll use a pullback to that 50% retracement and then I'll put my stop just below the 618 Fibonacci number.
Tim Bourquin: Okay. Let me ask you about that too. When it comes down to that 50 as a retracement, are you waiting for it to turn, do you execute right before it hits that number? I mean what if it passes through that number? What do you like to do?
Tim Racette: So I'll use a limit order and place it just before the 50% retracement. That way price can come down and it usually needs to trade through the order to get a fill. So if I put my order two pips in front or a tick in front of that 50% then that ensures that if we do get a full pullback and price retraces to the 50 that I get filled. If the price just blows through that 50 and trades to the 618 then I'll have a stop in place to protect me.
NEXT PAGE: How Tim Manages Risk
Tim Bourquin: How often does that 50% retracement trade present itself to you?
Tim Racette: So for each market, the ES, the 6E, and the beans, mostly the ES and the 6E, there's on any given day between two and six setups that I'm taking per market. So what I found is that on good days, and what I consider days were my trades are going entry to target, then I have another setup entry to target, I'll have more trades and continue to trade on those good days. But then on the slow or days where we're chopping around and there may not be as much going on, I'll only have one or two setups.
I should mention from the risk side of my trading, I'll limit myself to two stop outs per market. So if it's Tuesday morning and my first trade ends up being a loser and then the next trade is a winner and then the third trade is a loser, well that's three stops and I'll exit or I'll be done with that market for the day. So in that way, I limit my downside risk while at the same time on those good days not setting a daily profit goal. That way when those good days do occur, I just continue to trade throughout the morning and that allows for some days out of the month will be—you know, my months are kind of based, made up of a few really good days, a few days of losing trades or zero trades and then a handful of just mediocre days. So if I were to cap myself on winning days, then it would skew the end result of the month. So that's kind of how I look at trading on good days versus bad days and really focusing on how can I manage and reduce my risk first and then the winning days will just—you know, the winning trades will present themselves.
Tim Bourquin: So let me ask you about that. That's interesting. Is that a way to keep you disciplined? I mean I would have thought you were going to say two losing trades in a row, but you're just saying two trades on any day even if you've had four trades in between those that you've won on, you'll quit for the day. Have I understood that properly?
Tim Racette: Yeah. Since I'm only taking, we'll just call it four or five trades on average a day per market, if two of those are full stop outs or big losers then that's 50% of my trades for the day. So in some cases you look at it as well if my first trade is a loser and my second trade is a loser well then I'm down on the day. But the other view is if my first trade is a loser and then I have two winners and then I have another loser, well I don't want to start continuing to take loser after loser after I've had a couple of winners in the morning and then just start giving back my profit. So I'd rather say okay I've had two losers for the day, I'm done for today in this market and I'll come back tomorrow and continue swinging the bat so to speak.
Tim Bourquin: All right. Let's move on to the 6E. Is that the number 6, letter E? Is that the contract you're talking about?
Tim Racette: Yup. That's the euro futures and it's really the same setups that I use just you have a little bit wider range with the euro because it's a little bit more volatile than the ES. So it makes it nice because you can still get away with small stop sizes. I should mention I use eight pips on the euro, which is very small but then you could still allow for profit targets of 24, 30 pips so your risk reward is really good with the euro. That's why I really like trading that instrument.
Tim Bourquin: Now I know a lot of E-mini S&P traders strictly are technicians. They rarely watch the news. Maybe they'll know obviously the non-farm payrolls is coming up but with the forex traders and what happens with the euro especially, it seems like you have to pay more attention to the news. Do you?
Tim Racette: I look at the news of when an announcement is coming out so that I'm not putting a position on 30 seconds before a news announcement, but I don't use the economic numbers and news for my trading execution specifically. I have been becoming, I have been getting rather more involved in the macroeconomic perspective just from a learning and education standpoint over the years just kind of expanding my horizon. But I don't specifically use the news and the numbers and things like that for execution and I don't swing trade based off of any sort of earnings announcements and things like that.
NEXT PAGE: How Tim Finds Trading Opportunities
Tim Bourquin: A lot of us E-mini traders also only trade the S&P E-mini. Why trade stocks occasionally? Why trade forex occasionally as well?
Tim Racette: Well I like to expand my markets. I should mention that the euro that I'm trading is the euro futures contract so sometimes on the ES it will be a day where there's not a whole lot going on and if that was the only market that I was trading, what I found is you end up forcing trades or you end up taking what I call boredom trades. So I'm sitting there looking at the ES all day and there hasn't been much going on. Maybe I had one or two trades in the morning and the afternoon rolls around and I just had this market to look at, you end becoming bored and impulsively just pulling the trigger. So by having a couple of different markets to look at and I'm placing all these trades manually, I'm not using any sort of automated system, it gives me a couple of markets to look at and it really helps me remain patient. Then the swing trade aspect helps to diversify so to speak. When volatility is really low, as we've seen in the last couple of months, the ranges on the intraday charts are a little bit smaller but that usually coincides with low volatility in most cases coincides with a trending market. So if you can take advantage of overnight swing trading positions, holding positions anywhere from a few weeks to a few months, that can help I don't like the term make up but that can help add balance to the intraday trading that may not see as much volatility. So that's kind of my way of diversifying so to speak.
Tim Bourquin: Then you've got the stocks, let's go to that and then I want to go back to your breakout trades and talk about that since we already covered retracements. But which stocks do you like to trade?
Tim Racette: So I will use not necessarily a basket but I will do a scan each evening for stocks that are making 52-week highs and 52-week lows and I'll just add those to my watch list. I'll go through that list and that's where I find my setup. So it's not the same specific group of stocks but that's kind of how I scan and set my parameters.
Tim Bourquin: Yeah, I was just talking with somebody the other day. I was doing a presentation of that 20 Habits of Wealthy Traders that I do and I was telling somebody if you're having a tough time making money, if all you do is buy 52-week highs and sell short 52-week lows you're in a better position. I'm glad to hear you also say that look those are possibilities for me. But then again I should ask you, are you looking for the 52-week high to turn around or are you looking for these to continue their trend?
Tim Racette: I am looking for them to continue. My view is that a stock that's at a 52-week high and perhaps making a five-year high is there for a reason. Of course, there's going to be some instances where they're not going to obviously continue making new highs but the odds are that if these individual stocks are breaking out and the trend is really strong, that that trend is going to continue.
Tim Bourquin: All right. Let's talk about the breakout trades, also Fibonacci or how are you finding good opportunities with those?
Tim Racette: So the breakout that I use intraday is kind of a variation of my swing trading method. So with the swing trading style that I'm using, I'm just looking at the daily charts, the daily bars rather and for a long trade I would buy just above a recent breakout and put a stop below the recent low, very simple, very hands-off. Then for shorts, it's just the reverse. I'd be selling just below a breakdown and then put a stop just above the swing high. So on the intraday timeframe, what I noticed is the market doesn't always make it back to a full 50% retracement.
On some really strong trending days you end up with a market that might push lower and then get a very small bounce and then push lower again. So what I will look to do on these intraday breakout setups is use a sell stop below the low of a high bar in a down trend putting a stop above the high and then in a strong up trend, I will look to put a buy stop above the high of a low bar in a pullback. In that way, the market momentum and the change in that momentum is getting me into the trade and then my stop is just below or above the prior swing high if that makes sense.
NEXT PAGE: There’s No Substitute for Experience
Tim Bourquin: Yeah, absolutely. You're pretty open with your strategies I mean and yet it's nothing secret, right? I mean good traders always will tell you that it isn't a secret yet you're pretty forthcoming with how you do this. Why do you think some traders that I talk to are so secretive about how they do it? Do they really not have a strategy? They can't explain it or what do you think is going on there?
Tim Racette: Well, I spent some time hanging out with some traders down at the Board of Trade and the floor and one of the things they tell you is if you have a strategy keep it secret, don't tell anybody. But that may be true for down in the floor and in the trading pits but in front of the computer screen, there are so many other factors than just having an entry, a stop and profit target criteria listed out. So all of these other factors that go into becoming a winning trader over time is all I feel comes back to that mindset and to that mental aptitude and some level of trader intuition. Try to be as mechanical as possible but there's a level of discretion when you're managing a trade that you really can't teach. It comes from experience. I know for someone new, it was always frustrating to me to hear that there's no substitute for experience. You have to put in the time and everyone wants a shortcut or something to speed up that learning curve, which having a mentor or someone that you can trade alongside with or follow and kind of learn from their mistakes can certainly help accelerate the learning curve, but there is really no shortcuts.
When you think about people like Michael Jordan, Tiger Woods, these great athletes, Steve Jobs, great business leaders and successful leaders of our time, you know, they put in so much time and have so much life experience that they can draw from that I think trading is the same way. So in that regard you can give someone a list of rules to follow but there's always going to be some level of discretion and intuition when it comes to managing the trade and just the ability to be able to pull the trigger and have faith in your system. So over the years as I go through and have developed my methods and picked off different pieces, I guess picked off isn't the best term but picked up different ideas and listened to other traders' views on the markets and gather opposing views and things like that, you try to collectively incorporate all of this knowledge that you obtain into your own trading. Then as you go through the process of developing a methodology and working out different tweaks and incorporating different observations that you have, you really begin to develop a very strong understanding of how your methods work and you in turn result in a lot of confidence in your methods. So it starts with that level of commitment and then you begin to develop that consistency and then if you can learn to adapt to changing market conditions then you can end up prospering over the long term because that's really the goal. It's not about making a quick buck on one or two trades. It's about being consistent and building a foundation for the longer term.
Tim Bourquin: Right. Well Tim, what time is your session and what day is it at The New York Trader's Expo?
Tim Racette: My session is on Tuesday and that's the 19th and it's 4:30 I believe Eastern time. So if you're going to be in New York and if you're going to be at the Expo, I'd love for you to stop by.
Tim Racette: Thank you so much, Tim.
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