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Here are some random and probably incoherent thoughts/ideas on daytrading
the ES/NQ - or more specifically which one to trade and when. These are
just my ideas and certainly not the only or possibly the best ones. Other
ideas/suggestions are more than welcome.
Most traders I talk to trade the same contract (and size) every day and on
every trade regardless of the conditions, but in my experience the best
course of action is to let the market determine which contract (and size) to
trade. From late 1999 up until earlier this year the NQ was the best
contract on almost every occasion (at least for me since I love volatility),
but things have changed since the bubble burst and the bear began.
In terms of size, 1 NQ is approximately equal to 2 ES (factoring in margins,
risk per trade, volatility etc.). A 10 point move on the NQ is worth $200
(1 x $20 x 10), which equates to a 2 point move on the ES (2 x $50 x 2). So
during the course of the day I am always looking to see whether it's easier
to get a 10-20 point move on the NQ or a 2-4 point move on the ES, and in
which directions. In other words, which contract is offering the best
risk/reward ratio based on the information the market has provided. These
aren't profit objectives, and naturally I hope every trade works/trends for
a lot more than that, but this gives me a framework to make a decision on
which market to initiate the trade in.
To help make this determination I pay close attention to what the 3 major
indexes are doing. The best trading conditions occur when they are all in
sync, but unfortunately it's not uncommon to see the Dow up with the Nasdaq
down or vice versa, or one index noticeably stronger (weaker) than the
other. And since I am always looking to buy strength and sell weakness it
can pay dividends to monitor these relationships. For example, if the Dow
is strong while the Nasdaq is weak I would likely take Buy setups on the SP
and Sell setups on the NQ (if I trade at all). For me this makes sense
because I want to take the path of least resistance and prefer not to swim
upstream. A lot of traders have the thinking that the one that is weaker
has more room to the upside so that's the one to buy (or vice versa). I
used to be in that camp, but experience (spelled "pain") has changed my way
of thinking...
Let's throw some numbers at this to add some clarity. This example occurred
on Friday. After the early selloff (which I missed...insert sad face here)
all 3 managed to repair a little bit but the Dow had a much stronger
reaction off the lows and the S&P managed to get back above Thursday's low.
After seeing 1178 hold twice it looked like there were potential buy setups
in the 1180/1600 areas (and sells if 1178 broke). Since the ND was still
trading below Thursday's low coupled with the Dow looking much stronger and
the S&P holding 1178, it looked like the ES was the better contract to try a
long with if it triggered.
The S&P managed to get to 1196 on the up move before the Friday afternoon
range-bound crud set in while the ND managed to get to 1633. Using the
above math that gives us a $660 potential move on the NQ versus a $1,600
move on the ES. That is a huge difference for the same trade with the same
level of risk. The differences won't always be this dramatic, but they can
and do occur.
Another way of determining which contract may give the best risk/reward is
to compare earlier trades your methods/system gave you that day and see
which contract yielded the best results. Or compare the size of the swings
in each market/direction. And/or compare your stop/profit objectives on
trades setting up to see if one would be a better choice than the other.
You won't always pick the right one, and some days/times it won't matter,
but a little judgment/experience in this regard can improve your results
meaningfully. Of course you could always trade both at the same time, but
my experience has been that most folks aren't totally comfortable trading
one at a time let alone both, so that option is dependent upon where you are
in your trading.
I've met a lot of "I only trade ES" or "I only trade NQ" traders (recovering
NQ-only trader myself). But it can prove beneficial to be more flexible in
your approach, and not just with these two markets.
***On a side note for those folks who may only trade the Minis, eSignal has
a nice package that may interest you. Not all data providers split the
Minis off and therefore force you to pay the CME fees to receive that data.
This is fine if you need the data intraday for the full contracts, but a
waste of money if you don't. eSignal has a "stocks" package that gives you
the Minis, the indexes (with adv/decl, uvol/dvol, etc.) and up to 50 stocks
for about $80 a month if you prepay for a year.
I wasn't aware of this package until recently, and actually had called
eSignal previously and was told it didn't exist. But it does...I'm using it
now and have been very pleased so far. If interested call Scott Wilks at
800-322-1819. If you mention my name he'll give you a $25 credit or more
depending upon what promotions they are currently running. (btw, eSignal
feeds other programs besides TS2k).***
Just my 1.5 cents,
Bob Heisler
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