How I Trade Futures, Equities & Forex

I've been getting a couple of emails of late urging me to talk about how I trade, especially as most people are skeptical if I can even trade given that most of my analysis is what long-term investors do (I don't blame 'em, I would think that too).

I'd like to talk about a very simple but precise manner in which I like to trade. This method is probably known by every single trader, yet it works, and is quite simple with high odds of success.

Since I'm usually up 5-6am, the first thing I like to do is monitor inter-market relationship # 1) Yen-USD. This is where my FX trading helps me gain an insight as to how the day is going to be in US. Most of you are aware that Yen has an inverse relationship to US indexes, so depending on how Yen is doing in Asian/EU markets helps me assess what's going to happen.

Inter-market relationship # 2) I like to monitor key economic data that came out in JPY/EU and check what effect it had on the Nikkei and FTSE (some friends of mine like to see the DAX too, but do it if you get time, takes 10 secs max). Was it benign or not? How did the market do 30 minutes and 2 hours after that? Then I monitor what effect this economic data and JPY/EU trading has had on the Globex Futures ES, ER2, NQs (again, you can monitor Eurodollars but only if you get time, I watch it the FOMC week everyday).

By the time I'm done doing this I've got an idea of what pin action we can expect to see in the US markets.

Next I like to monitor the key data coming out in US and go back in my Tradestation (the best platform IMO) to see what effect such data had last time round. Did the market go up, down, sideways? A good way to determine just how important the data is to monitor how the markets did 15 and 30 minutes prior to it coming out. The longer they are holding still, trending sideways, means the more important the data is (not always but most of the time, usually stalled during FOMC related events).

I remember these are the times during my internships when I saw traders position themselves 3-5 points above and below the on-going range, with higher allocations to the position they have most conviction in. For example, if I expect, say Fed meeting day, to cut rates, I'll be 70-30% short, and vice versa. If I'm not so sure, then I'll be 50-50% long/short (in hedge fund terms "market neutral").

So, each step increases my conviction level as to what I can expect during the day. I'm assuming I (or you the reader for example) know what conspired in yesterday's market action (maybe it was up, maybe it was down). One final step also these days is to look at Co-integration/Correlation of sector ETFs at EP Chan's subscription tool, this tells me which sector is oversold/overbought, a vital tool, and accordingly that sector will be on my long/short list.

So let's assume I'm expecting market to rise, Nasdaq specifically (NQ0706 for futures). Then I'll take out my "High-Beta Stocks" list consisting of names such as 1) AAPL 2) EBAY 3) AMZN 4) CSCO & 10 other stocks which are "go-to" tech stocks for institutional investors.

During the day, as I'm long NQ futures and Nasdaq is doing well, I'm going to go long at least 2-3 of these tech names, depending on which charts look good and which price action "sings to me".

The inverse is true if I expect Nasdaq to be weak (I go short the "High-Beta" list). I follow this same strategy for S&P and Russells. As you can read, its quite simple but works with a high probability of success. Why?

When the market is doing good, institutional traders will offer higher prices for the high-beta vs. low-beta names (their high beta makes them volatile and attractive to a trader) and when markets are weak, institutional traders will bid these high-beta names lower vs. low-beta names.

When a friend of mine trades with me, I like to utilize his Esignal subscription (don't ask me why no Esignal of my own, long story!) to screen for stocks that are bought/sold based on trading above their first hour highs/lows on heavy trading volume. Depending on the day, I like to take positions in them after the first hour. For example, if the day is going to be very bullish (according to my understanding of the aforementioned inter-market relationships) then I'd go long at least 2-3 stocks making new highs and vice versa if the day will be very bearish. If I don't know what the day will be like, then I'd monitor those stocks for chart patterns to go long/short.

Also, I utilize the portfolios I built at Stock Pickr (again, highly recommended). These names are printed and in front of me all the time (I recommend memorizing them, at least four- both leveraged and non-leveraged LONG/SHORT names on QQQQs, S&P & if you trade any other index derivatives/equities).

Leveraged LONG Index by Sector

Leveraged LONG Index by Style

Leveraged LONG Index

Leveraged-only SHORT Indexes by Sector

Leveraged & Non-Leveraged SHORT Index by Style

Leveraged & Non-Leveraged Index SHORT

So a quick overview:

1) Long/Short Index Futures, followed by (2) Long/Short High-Beta Names & (3) Long/Short Leveraged and/or Non-Leveraged Index ETFs.

That's my trading routine.

For intra-day trading (the style I'm looking to adapt to for my professional career for when I work on a Sales & Trading desk at a bulge bracket or buy-side firm) I like to monitor NYSE TICKs, VIX, TRINs, S1&2 R1&2, Previous Day High/Lows (Pivot Points) and I like market indexes to compliment each other when making moves, if they aren't, I'll be there fading them most of the times (S&P moves should be complimented by Russell).

Each morning I like to write down on paper each Futures, Equities, Options trade I'll make, when I'll get in, where the stop and take-profit orders will be and implement any contingency plans for days I expect a lot of volatility (FOMC meeting or any related event such as Beige Book).

So you see, through out the day I use my knowledge of Futures, Equities & FX to cross compliment each move I make.

If there is one thing I've known in my short-trading career is be flexible. You never know what the market may throw at you. All the relationships I mentioned above and more can signal one direction but the market may decide to head another, so adapt like a chameleon and follow the trend. Don't be stupid, especially in futures/options as they are highly leveraged, and try to oppose the market when you're day-trading, that's a fool's errand. You'll heart your account and your psyche!

I hope this was insightful, thanks for your time. If you have constructive criticism it would be my pleasure to hear your thought laden comments.

Thanks for your time.

Voluntary Disclosure: I'm not affiliated with Ernest Chan and James Altucher's tools, nor do I have any financial gain from their products. They are just very useful tools.