Wednesday, January 26

Lagging Indicators, Real-Time Indicators and E-Mini Trading

I’ve been writing quite a bit lately about the difference between lagging indicators and real-time indicators when trading e-mini contracts. It’s tough to classify any indicator as a real-time indicator has there is some lag in reporting the market data to any chart. For the sake of argument, we’ll refer to real-time indicators as indicators that do not aggregate historical information through an algorithm. Lagging indicators, on the other hand, generally do aggregate historical data and run that data through an algorithm and create some form of line or other indicator to be read. level indicator

For years, lagging indicators were the name of the game in e-mini trading. Notions like tape reading, order entry and chart and price reading were not specifically taught to traders. Instead, traders generally read some form of indicator or oscillator and took a trade when the indicator or oscillator formed some favorable configuration.

The problem with this thinking is that lagging indicators can be 2 bars behind the price action. In order to effectively trade lagging indicators you have to make the assumption that since the market has started in one direction it is going to continue in that direction. That is the essence of the theory behind lagging indicators. Unfortunately, as many e-mini traders are well aware, the market is not always prone to continue in a straight direction as the lagging indicator predicted. As a result, many e-mini traders and up with some uneven and sometimes unsatisfactory results.

This is not to say that lagging indicators never work, because the e-mini market often does start in one direction, as the indicator predicts, and a trade can be profitable. But there is a distinct reduction in the probability of success by having to utilize lagging indicators for the reasons outlined above. Quite simply, you are starting your e-mini trade late and this can adversely affect your results.

In recent years, a number of programs have come to market that effectively allow e-mini traders to visualize the actual order flow as it takes place. I can think of no more effective trading aid then and knowing, in real time, the direction of the order entry and the level of buying and selling at any given moment. In my trading, I have raised my success rate 15% as I have incorporated order entry and tape reading programs. This is been a slow process, and has taken several years to fully integrate and understand order entry processes.

Time after time, I get students who have been trained to initiate e-mini trades by using some indicators/oscillator and are struggling. With some changes in the contracts they buy and sell and a gradual introduction to real-time indicators and how they work the students have shown tremendous improvement. Take some time and investigate the tape reading an order entry programs available.

In summary, I have tried to contrast the difference between trading e-mini contracts with lagging indicators and real-time indicators. I have indicated that real-time indicators provide a distinct advantage to e-mini traders and encouraged those traders to investigate real time trading.

 

 

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