When I was a younger trader, I felt that I was capable of trading in any market condition, regardless of the size of my trading account or the volatility of the market. As you might guess, that attitude would frequently part me and a portion of my futures trading account. As I aged some, I came to the realization that I did not have the ability to pound out gains unless I was trading a large account and could stand the "heat" created by volatile and unpredictable E-mini trading conditions.
As a smaller retail trader, unstable and potentially explosive E-mini trading conditions are times when I am very conservative, bordering on timid, in my trading decisions. Experience has taught me that these conditions can stop me out of a trade at any time; sometimes blasting through my stop/loss setting faster than I can hit the sell/buy button; this is often just in time to watch the market reverse direction and go for a sizable gain as I watch the E-mini price action in helpless amazement.
So, what are my limitations in trading unpredictable markets?
There are a number of indicators that can help any E-mini trader determine whether the market volatility is conducive for profitable trading. Some very simple ideas might include:
• Simple observation of the price action. Is the market moving at a swift pace and crashing through support and resistance lines with impunity?
• Is the Average True Range (ATR) at levels that exceed a comfortable stop/loss setting?
• Is the market trending and channeling or is it choppy and unpredictable?
I get most of my trading indications from chart observation, not indicators, so it is logical that two of the three indications for difficult trading indications are based upon simple observation. If the market is in a mode that includes spikes of 10 ticks or more, you may want to consider waiting for a time when the market is moving smoothly. Like most E-mini traders, I have yet to find a reliable method for trading in choppy market conditions. Spikes in price action, rapid reversals for no apparent reason, and watching the price move through support and resistance without pausing should all be events that send red flags waving in wildly in your mind. You should interpret these events as dangerous!
For less experienced traders, a high reading on the ATR indicator is indicative of a general range to set your stop/loss. For example, you are trading the YM contract and the ATR is pegged at a reading of 23. Are you prepared to set your stop/loss at that level? If you are trading a smaller account, this is a substantial risk to assume. If you normally use a stop/loss of 12 when trading (and the ATR confirms this is a rational setting) you will find yourself frequently stopped out of your trade at 12 ticks when the ATR is 23. In short, you want to be diligent in limiting your risk, and a stop of 25 on a $5,000 account is on the risky side.
In short, I have had to concede that trading in volatile conditions is simply not worth the implied risk when trading smaller accounts. When the market is choppy and unpredictable I become a spectator. Sometimes it's the trades you don't take that keep money in your E-mini trading account.
