Identifying patterns that repeat in the futures market, then jumping on them, is what it's all about. These patterns can be rather complex, requiring an accumulated library of observations. The best way to do it is through your own intuition. There's no better computer trading program than your own trained mind.


Here's some observations from real-time futures trading notes - to give you an idea what to look for:

"If the A-D line (advance-decline line) has been down in the morning and a rally occurs, watch to see if the A-D line does NOT improve much. If it remains 2:1 or worse on the downside at the rally peak, then look to short for a big and long decline into the close. A price peak around the top five minute channel band is a good resistance point to short."

In most cases, you want to be very careful taking a futures trade against the A-D line. It puts the probabilities and power of the market against you. It's a loser's attitude wanting to be a hero and catch the big turning point. Of course, there will come a day when the A-D line is very bearish and this is the day when the market turns in a big way and makes a new up-move up lasting many days. But as a day trader, who cares about the BIG turns?

You want to be with the main trend that lasts an hour or so. The "big" turns come every five days or so, so why waste money trying to find them? To make matters worse, there usually needs to be a double or triple bottom lasting all day before the big five-day trend changes anyway. You will get frustrated trying to buy these down days. Just sell the rallies until the A-D line is decidedly bullish. A near 1:1 A-D line is good for chop trading on both sides, but never be caught going long when the A-D line is 2:1 down (or more) bearish.

Observation:

"There is a tendency for the market to have one more push to clean out the longs or shorts before the anticipated move begins. It MUST feel scary. Usually after all the indicators show a bottom or top and the pivot point is not especially sharp, the last fake-out occurs. Another good turnabout indication is a double bottom making a slightly lower low, with little time involved - then reversing up violently. "

Do you know what I'm talking about when I mention the slightly lower low and the futures price violent reversal? Instead of the market continuing into new lows as it had been doing in the decline, it spikes the recent low in one bar and then does a key reversal. The idea is not so much a price key reversal as it is a one-bar TIME wonder that did a search and destroy move.

I envision the big guns knowing it is time to buy, but fail to get much panic follow through to load up. The market simply holds firm at the lows and hesitates. Then all hell breaks loose. They start buying "at the market" for whatever contracts they can get. I can just hear Paul Tudor Jones screaming on the phone to the futures pit, " Get ANOTHER 1000!... no, make that 2,000 contracts at the market! Did you hear me? 2,000 MORE !!!" And the futures market responds with offers disappearing as price moves straight up for a few bars.

The market MUST feel scary when you enter or it is a "comfortable trade". A comfortable trade is almost always a loser. Use this as a filter. Get suspicious when thinking of executing a comfortable commodity futures trade. Something is probably wrong. Wait a few minutes and see what happens. It works for me. A friend of mine calls a scary trade a "shaky hand" trade. You get the picture?

Part Three of Three Parts - Next!


There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.