CHAPTER 12

Markets

Price action techniques work in all markets, but most day traders prefer markets that have many entries a day on the 5 minute chart and can handle large position sizes without slippage. The 5 minute Standard & Poor’s (S&P) Emini futures contract can handle any order size that an individual trader can place; you will never outgrow it. The Russell futures contract, however, is popular with some individual traders because they feel that it trends well intraday and the margin is relatively small for the size of the average swing. Most successful individual traders eventually want to trade more contracts than the Russell can handle without the worry of slippage.

When starting out, you should consider trading the SPY instead of the Emini. If the Emini is trading around 1,100, the SPY will be around 110.00 and an eight-tick scalp for two points in the Emini is a 20 cent scalp in the SPY (each Emini tick is two and a half times larger than an SPY tick). One Emini is equivalent to 500 SPY. If you trade 300 to 500 SPY, you can scale out of your swing position and not incur too much risk. One advantage of the SPY is that the 20 cent scalp size feels so small and comes so quickly that it will be easier to place orders for swing trades than for scalps, which is a better approach when just starting out. You will notice that the SPY often hits a one-tick entry or exit stop when the Emini does not. Because of this, some traders use a two- or three-tick stop in the SPY.

Once you have increased your position size to 1,000 to 1,500 SPY, if you plan to continue to increase your size, switch to the Emini, which can handle huge volume without slippage being a significant problem. When just starting out, you can scalp 100 SPY using a 20 cent profit target and a 20 cent protective stop, which is equivalent to a two-point Emini stop, so your risk is just $20 plus commissions. However, you cannot scalp and make money in the SPY unless your commissions are minimal, like $1.00 for 100 shares. Also, you need an order entry system that allows you to place orders quickly. Otherwise, just swing trade until you are consistently successful, and then look to add some scalping.

Currency futures, foreign exchange (forex), and Treasury bond and note futures can handle huge volume, but give fewer entries than the Eminis on most days. Bonds and notes can have protracted trends intraday, so when a trade sets up, you can often enter and let it swing for hours. The forex market usually doesn’t offer many great trades during the Emini day session, and since you don’t want any distractions, it is best to avoid it during the day if you are actively trading the Eminis. The DIA and Dow futures are a little thin, so slippage can be a problem for scalpers. Just as the SPY is identical to the Eminis, the QQQ is identical to the NASDAQ futures. The QQQ is also very popular with day traders and can accommodate large orders.

Many stocks trade very well intraday. It is easiest to trade only those with an average daily range of several dollars and an average volume of five million shares or more. You want to be able to scalp 50 cents to a dollar with minimal slippage, and you want the possibility that the swing portion can run several dollars. Currently, Apple (AAPL), International Business Machines (IBM), Google (GOOG), Amazon (AMZN), Goldman Sachs (GS), Oil Service HOLDRS (OIH), UltraShort Oil and Gas ProShares ETF (DUG), Ultra Financials ProShares ETF (UYG), and SPDR Gold Trust (GLD) are all good, but there are many others, and you can add or subtract from your list as needed.