Hybrid trading techniques

Futures, Mar 2009 by Gutmann, Michael

Hybrid trading tools fall somewhere between black-box systems and fully exposed trading techniques and potentially combine the positives of each approach into a transparent, fast and automated trading solution.

Day-trading stock index futures is challenging and rewarding. There is a great sense of accomplishment in dueling successfully with the sharp knife that is the electronic futures market. Electronic futures day-trading offers the possibility of low-risk, regular income with minimal account margin investment.

Because it is such a competitive market, trading participants must be equipped with the latest took and techniques. Over the last several years, online tools that augment basic real-time charting and indicator software have become available. Trade management tools on the retail trader's desktop put him on a par with market professionals. In short, if the party on the other side of a trade is using these tools and techniques, then you would be wise to use them as well.

A natural path of increasingly sophisticated discretionary online trading begins with a rich charting and indicator desktop, then adds automated signal generation for initiating trades, and is completed with automation that manages trade stop-loss and target-profit execution. Trade management software frees the trader to focus on getting trade entry conect, by automatically executing fast exit profit targets and providing support for staying in trades with winning runners. Continuously protecting a position with automated stop-loss execution is another critical element.

A hybrid trading approach, one that offers automation for mechanical tasks while the user retains control of major trade decisions, may be the preferred system for the retail day-trader. It also can be described as a gray-box system, somewhere between a fully automated black-box trading strategy and one that is entirely transparent in its execution. A number of software tools are designed to make this approach easier to execute. These gray-box tools are formatted by the trader to perform specific trade management actions, while the user is hidden from the actual implementations.

HYBRID STRATEGY

E-mini day-trading strategies cover a spectrum of technical analysis, time-of-day studies, price level guidelines, use of market internals, economic report release timing, market-depth data and volume strategies, to mention a few. Determining entry, long or short, is a complex and multi-faceted exercise and part of the science and art of becoming a successful day-trader. Perhaps a more generic question that the day-trader must answer is how to manage a trade position once in the market.

One approach is to add strategy automation software to the desktop that assists the trader in managing profit-target and stoploss execution. Both Tradestation and NinjaTrader offer automated order execution software.

In the case of NinjaTrader, trade strategy parameters are easily specified, even as their real-time execution can be complicated. "Bonsai trading" (above) demonstrates a trade management strategy on the CME Group E-mini S&.P 500 (ES) contract that opens with two contracts and uses a fast exit profit target of four ticks for one contract and a 10-tick stop-loss on all open contracts. If the fast-exit winning contract is realized, then the stop-loss contract order is automatically adjusted.

The strategy has been named "ES Basic 1x2." When the position is opened, it will become the stop-loss and targetprofit strategy automatically executed for the trade. This is shown in "Bonsai trading" (above), where a short position from 839.50 is automatically bracketed by the 10-tick 842.00 stop-loss order and the 838.50 profit-target buy order.

All orders for this trade were executed when a one-click entry limit order sold short the market from 839.50. NinjaTrader automatically sent limit orders and then monitored the market for stop-loss prices to execute. More elaborate strategies are easily specified with the user interface.

WINNING RUNNERS

One of the more frustrating aspects to day-trading E-mini stock index futures is determining how to retain some number of contracts in-place to realize a successful winning runner. Without some automation, it's too easy to exit a successful trade with early profits. However, if trade execution tools are added to the trade setups along with the automatic profit-target and stop-loss execution just described, it is possible to enforce a discipline on the discretionary day-trader and realize winning runners. Realizing winning runners can be the difference between breakeven trading and profitable trading.

Invivo Analytics Stops is an example of an indicator added to the Tradestation desktop that provides mechanical stoploss to an open position. The Invivo Stops are not used to determine a trade entry, nor are they used to determine a fast, initial profit-target (see the ES Basic 1x2 example, above), but they are used for trailing stops if a first profit-target is realized and other conditions point to a possible winning runner.