Trading Emotion-Driven E-Mini Markets

Any trader who has spent even a minimum amount of time reading about trading psychology has read, over and over, about the evils of allowing your emotions to influence your potential trading decisions. As an e-mini trader, it doubly difficult to control your emotions when the markets themselves take on a very emotional nature. It sometimes seems a doubly cruel joke when markets behave more emotionally than even the most emotional e-mini trader.

It is not particularly unusual for markets to trade in an illogical fashion; but there is generally some semi-rational explanation for moves that, at face value, don’t seem to make sense. On the other hand, we are in some unique times in the e-mini markets. In several decades of trading I have seen some dire circumstances in the United States economy: the 1987 market crash comes to mind; the meltdown of the dot.com stocks; or the sky-high inflation of the early 1980′s and Paul Volker’s dramatic inflation fighting antidote. But I have never seen a constellation of world-wide events with the potential for catastrophic consequences as we currently face. These events include problems like:

- The US housing crisis, which (in my opinion) has a good deal of correction left before we see any dramatic improvement

- The European Union is in desperate straits, with a collapse of the Euro currency a distinct possibility.

- The US employment problem, with unemployment rates hovering around an economically unsustainable level near 9%.

- Massive Central Bank intervention on a scale not seen since World War II.

In addition, there are a host of problems like wars, natural disasters, and regional conflict in the oil-producing Middle East which all contribute to an unparalleled level of economic instability.

How do trade the e-mini markets when the markets are locked into a news driven mode? The market seems to rocket upwards on the pontifications of politicians, even when the political statements make little sense and are, at times, laughable because they are unfeasible to accomplish even in the best of conditions.

The methodology, especially for the small retail trader, to trade these volatile markets is to realize the limitations of your trading style, and precise and methodical execution of your trading plan. For example:

- There have been several days in the past month that have been too volatile for the small trader to execute trades within prudent stop/loss parameters. Using the Average True Range (ATR), we have seen days when the 3-minute ATR has exceeded 25 points for extended periods of time. A smaller trader simply cannot expand his stops far enough to be economically feasible given the size of his or her account.

- In other situations, the market has reacted to news reports (often conflicting reports) to extent that any set-up is, at best, an educated guess. In e-mini trading, we like to think we are step above the educated guess style of trading. When the market pays no mind to support/resistance and moves randomly, it is unwise to trade aggressively, or even passively.

What is the answer to these problems? I turn the computer off. I am well aware of my limitations as a trader and wildly volatile, high emotion driven markets usually entail erratic and unpredictable movement. I can’t trade these markets with confidence, so I don’t.

On the other hand, we have seen volatile markets that are tradable because they tend to trend a bit, and retrace in broad strokes, but then resume the original trend.

For this type of market action, it is possible (though difficult) to execute your trading plan, but it must be done with precision.

- Take care to enter trades in the highest probability set-up configuration possible.

- Though this type of market can trend for extended periods of time. I generally set fairly modest profit targets and remain vigilant in watching for dramatic changes in market direction.

- If the trade does not begin in the fashion I had envisioned, I generally exit the trade immediately. This is not a good time to hope that Lady Luck will come to the rescue.

- Finally, my constant advice is to trade with the trend. I cannot count the number of times the trend has saved me in a mistimed trade entry.

In summary, news-driven markets are volatile and unpredictable. Know you limitations and don’t let your ego keep you trading in a market that is not conducive to your e-mini account size. If there is some order to the market, make solid entries and avoid being greedy in seeking profits. If a trade gets off to a bad start, I generally exit the trade before I get too deep into the trade. Finally, trade with the trend.