March 18, 2011 10:40 PST

Link to additional Systems entries

Getting Started

This blog is not meant to purvey any specific S&P Futures trading system. But it may be useful to share some general ideas so you can build your own systems or develop a systemology that fits your personal trading style.

The first thing you should do if you are serious about systems trading is buy a book or two. You can start with "New Trading Systems and Methods" by Perry Kaufman. (I have the previous, not 'New', edition, but I suppose it can only get better). This book reviews many specific indicators and also talks about the effects of combining them. And it has a decent discussion on the 'Risk of Ruin' that too many traders forget about. I was going to say beginning traders, but even so called professional traders can loose sight of that.

For a respite and a little lighter reading, I highly recommend "The New Market Wizards: Conversations with America's Top Traders" by Jack D. Schwager. With this one, you should enjoy both the original and the 'New'.

There's a lot of exploration you can do on the Internet. The problem is the amount of garbage out there. Try to find a couple of sites you are comfortable with that are in the business of Futures trading, not the business of selling trading. There are a few links on the right that I think are legitimate and might be helpful. Don't be too caught up in the adage that if they were any good, they would only be trading. Doing things like this blog for me or educational seminars for others are a real part of keeping our own psychology on a reasonable keel.

Concepts

Everybody has to find the Futures trading concepts they like and can work with. Here are some of mine.

  1. Some people like to buy high and sell higher. I'm cheap, so I like to buy low and avoid selling lower. Now that is where my bad psychology meets the system road. The systems almost universally say buy low and find aggressive targets to hit. Just like a pilot on instrument flight rules who 'knows' which way is up, really knows he better believe his instruments; I sometimes 'know' the trade isn't going to work out, but really know I better follow the system.
  2. Traders are always looking for divergences. The reason they are always looking is because they can't find ones that work. I used to think divergences would be so easy to find and model. Now I've done the analysis and haven't found one that I can say improved my trading.
  3. Can you count to three? I think counts work better than divergences. That is, how many 'swings' have there been since the initial target entry point. Did you hit it on the first swing? For the kind of trend continuation trades I like to make, I have found no improvement in total return going on '1', i.e. the first swing. Going on '2' probably has the best rate of return, with '3' giving up slightly on return but greatly reducing risk. My point here is that sometimes the third swing is the biggest of all, i.e. not a divergence. But if you are at the trend continuation zone, you have to take the trade on '3'.
  4. This leads directly into another concept. Find something you can do while monitoring the markets for the big swing setup. Scalping for break even is fine if it keeps you centered for the big trades. Or maybe you can start your own blog ;-)
  5. Know when you are outside the box. I blog the 'Key Level' everyday. That is really the optimum trading box. In very general terms, the best risk reward is inside the box. If you're outside the box you're likely to have either too much volatility if it's counter trend, or too little if it's with the trend. You can still trade it, but never go on '1' when you are outside the box.

Goals

Every Futures trader should have goals - "keep your eye on the prize" so to speak. I like to think in terms of points and not get caught up in the money. At least that is what I am trying to do. If you can average between 1/2 and 1 point a day for par and be ready for the occasional big wins, you will be in the 100%+ return class. If you can take care of the money management and psychology, there's a lot of systems that can make 1 pt. a day.