Day Trading and Swing Trading Futures with Price Action: RISK ASSESSMENT | Humberto Malaspina | Skillshare

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Day Trading and Swing Trading Futures with Price Action: RISK ASSESSMENT

teacher avatar Humberto Malaspina, Emini S&P 500 Trader.

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

12 Lessons (1h 10m)
    • 1. Introduction.

    • 2. What do I expect to give you?

    • 3. Real Time Trade "Surprises From The Wave".

    • 4. Discover a key component of a successful trading method.

    • 5. The Right Balance.

    • 6. Concepts to understand risk properly.

    • 7. Day Trading, Swing Trading and the subject of risk.

    • 8. Main concepts to master trend detection for reducing risk.

    • 9. The Trend, a Fractal Phenomenon, and risk implications.

    • 10. Theory for evaluating your trading method to reduce risk.

    • 11. Quick afirmations about trend detection.

    • 12. Words from Humberto.

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About This Class

One of the main obstacles and causes, why more than 90% of traders fail, is because they do not know how to properly control the risk of their trades. The risk in trading is present at all times, it is natural in this business, also in order to win you must take risks but if you do not know how to control risk then it can work as a double-edged sword.

The objective of this class is to introduce the student to the concepts necessary to learn to control risk and to help them in the first steps of this essential task that is crucial to be successful in the trading business.

First, students will meet the instructor and how he will help them overcome their problems regarding trading plan optimization and risk reduction.

In this class, you will acquire the mindset to reduce risk while day or swing trading the Emini S&P 500, any other futures contract, or any financial instrument.

This class will introduce you to the delicate balance that must be achieved between probabilities, capital, risk, and time. Also, students will learn about an extremely important topic regarding the trading business.

Students will review the concepts they will use to learn how to understand and control risk in every trading decision. I will talk about the risk on the day trading and swing trading time frames, as well as helping the student to make a decision on which way to go.

Students will be provided with the right set of concepts, including the fractal phenomenon to evaluate a trading method, also they will find in this class excellent advice about trend detection techniques for risk reduction.

*** Risk Disclosure Statement ***

All forms of trading carry a high level of risk so you should only speculate with money you can afford to lose. You can lose more than your initial deposit and stake. Please ensure your chosen method matches your investment objectives, familiarize yourself with the risks involved, and if necessary seek independent advice.

U.S. Government Required Disclaimer - Commodity Futures Trading Commission. Trading financial instruments of any kind including options, futures, and securities have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the options, futures, and stock markets. Don't trade with money you can't afford to lose.

NFA and CTFC Required Disclaimers: Trading in the Foreign Exchange or Futures market is a challenging opportunity where above average returns are available for educated and experienced investors who are willing to take above average risk. However, before deciding to participate in Foreign Exchange (FX) or Futures trading, you should carefully consider your investment objectives, level of experience, and risk appetite. Do not invest money you cannot afford to lose.

All information on this course is for educational and research purposes only and is not intended to provide financial advice. Any statement about profits or income, expressed or implied, does not represent a guarantee. This course is neither a solicitation nor an offer to Buy/Sell options, futures, or securities. No representation is being made that any information you receive will or is likely to achieve profits or losses similar to those discussed in this course. The past performance of any trading system or methodology is not necessarily indicative of future results. Get the advice of a competent financial advisor before investing your money in any financial instrument.

Terms of Use: Your use of this course indicates your acceptance of these disclaimers. In addition, you agree to hold harmless the publisher and instructors personally and collectively for any losses of capital, if any, that may result from the use of the information. In other words, you must make your own decisions, be responsible for your own decisions, and trade at your own risk.

Meet Your Teacher

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Humberto Malaspina

Emini S&P 500 Trader.


Hello, my name is Humberto.

Working in the oil exploration industry for many years made me see many ups and downs in this business. Oil prices are a Russian roulette, each time they fall to the red zone of production cost, companies fire employees left and right, leaving a lot of people suffering. As a witness of this situation, I always looked for additional sources of income, and I found one trading the Emini S&P 500. Nowadays, after a lot of work and dedication, I managed to understand price action (the language of the markets) and money management, both important skills to have for anyone interested in trading any financial instrument. In my case, I only trade the Emini S&P 500, nothing else, all my focus is on this particular futures. This has given me the opp... See full profile

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1. Introduction.: Congratulations for taking this course about optimizing your trading plan for reducing risk. I am Humberto, your guide during this journey, I will be providing easy to follow, step by step instructions, to help you acquire the skills and tools to increase your probabilities of becoming a profitable trader. Let me share my story with you. Working in the oil exploration industry for many years, made me see, many ups and downs. Oil prices are a russian roulette, each time they fall into the red zone of production cost, companies fire employees left and right, leaving a lot of people suffering. As a witness of this situation, I always looked for additional sources of income, and I found one, trading the markets. But I never had a mentor. I learned how to trade on my own. The hard way and this was my mistake. It cost me a lot of time. The learning process was very painful. I lost money. Then I recovered some and then lost some more. It took me many years to be consistent and it was not easy. Nowadays after a lot of work and dedication I understand how price action and money management work both important skills to have for anyone trading any financial instrument. In my case, I only trade the emini S&P 500. Nothing else. All my focus is on these particular futures. This has given me the chance to specialize my trading method in recognizing this equity price action, that once understood properly, provide a trader of very low risk entry opportunities. During all these years I also discovered the holy grail of trading the markets and this is a good money management plan, without it, any trader is doomed. Having a good trading plan, which is the combination of a profitable trading methodology plus a well-defined money management system, any person can have a good chance to make money trading the financial markets. OK before we start I need to tell you there is not a hidden secret for becoming a profitable trader. There are just four basic ingredients to become one. These are; hard work, experience, capital and discipline. Additionally every successful trader needs a trading plan which includes trading strategies and more importantly knowing how to manage risk. As is trader has a unique style, then you have to make a plan that best suits your personality. This course will provide you the information needed to upgrade your personal trading plan for achieving higher levels of mastery in your trading career. With this course will learn how to spot the strongest intraday trends that provide high probability trades for a winning outcome while reducing your risk. Also, capital preservation is the top priority for your trading business, this course will help you to learn how to do just that. There is something else I need you to remember during your trading career: "In my opinion it is impossible to forecast the market, do not ever try to do it, you just need to follow the money". In order to spot the right trend, during an early stage, that provides less risky trading opportunities, you just have to read past price action. This is something you will learn in this course, and this skill alone, will make a huge different in your trading profitability. Now this is something important for you to know. Risk reduction is the cornerstone of trading the financial markets, if you focus your trading plan on caring for minimizing risk, then profits will take care of themselves. This course makes an in depth analysis for implementing risk reduction into your trading plan, which is the highway to becoming a profitable trader, and this is why this course sets apart from others in the marketplace. The knowledge you will acquire here can be used for trading any financial instrument. but all examples and materials in this course are based on the e-mini S&P 500. With all this information you will have a refined plan, controlling the most important aspects of your trading business. Day Trading Plan Optimization for Reducing Risk Discover how to make high probability trades with minimum risk. If you push it to the limit, then you will profit from one of the most rewarding professions available today in the digital world. Let's begin. 2. What do I expect to give you?: What do I hope to give you in this course? I have created this course to help everyone interested in improving their trading method. When I speak of a trading method, I mean the risk control system integrated with the method of interpreting and managing the trades in real time based on the price action. During this course I am going to teach you how to dynamically manage and reduce risk when trading. Risk is something implicit in trading, it cannot be completely eliminated but it can be reduced as the trade progresses, which is extremely important, I would say crucial, since if we do not dynamically control risk it is very difficult to make money speculating in the financial markets. Additionally, I will guide you in the initial steps so that you can learn to interpret the price action, but here I will be completely clear, I can guide you in your first steps, but only you with your effort, practice and perseverance will be able to understand the language of the market through the interpretation of the price action. It is more of an art than a science. As a special note I also want to tell you that it is important to clean the charts, we will move on from a chart like this: To a chart like this: Do you see the difference? it is liberating. Let's begin! 3. Real Time Trade "Surprises From The Wave".: Surprises from the wave. In this video I want to explain that when we start a trade we never know how far price action will take us, so we have to be prepared for any scenario. Let's get started. The market is in an uptrend as can be seen on the weekly and daily chart. However, the price action on the daily chart seems to indicate that we may be in the presence of a possible pullback that we could take advantage of due to the wavering signal at the top of the trend. All this suspicion must have confirmation in order to take a position. Let's look at the chart to see more detail. This time I am using a 1-hour time frame. You can use any frame that you think is necessary according to market conditions. Indeed we can see that the base of the fractal has been broken and the price does not seem to recover and I take a short position. I placed my stop loss order and also the partial take profit order, the latter near the next support zone. After opening the short position the price deteriorates and goes to the support zone where my partial take profit order is located. My initial appreciation of the market was spot on. We must follow the trade carefully to see if my partial buy order is activated. The price has plummeted lower and my partial buy order is almost hit. You can see how there was a battle between supply and demand, where apparently the buyers were gaining ground but then the market changed and the sellers came to dominate the scene and the market turned down. This is a clear example that the market is a dynamic agent that is constantly changing. You have to learn to adapt to these changes to survive as a trader. Now it´s only a matter of time to see how far this short trade will take us. The market triggers my partial buy order and I must update my stop-loss order with the number of remaining contracts and move it to my entry price. I have also created a new partial buy order in the next support zone, as an additional measure in case the market continues to decline. The price continues to drop rapidly and triggers my partial buy order and I have also updated my stop loss with the number of contracts remaining in the position. The price starts to bounce off the support zone. This is an important area of demand as seen in past price action. You have to be aware of what the price can do from now on to make more decisions. The supply intensifies and the price continues to collapse below the zone of demand, this means that the supply increases and it is possible that we will see lower prices. I have placed a new partial buy order in the next support zone. The price collapses again and hit my partial buy order. In this way, we are monetizing all this trade from the moment it started. I have updated my stop-loss with the number of contracts remaining in the position and moved the stop loss to a technical level to protect the gains on paper. The market recovers and the price increases momentarily, to meet again with the prevailing supply in the market context. We must be patient and wait for more price action to find out what structure is revealed. Minutes later the market collapses again and continues its downward direction approaching the support zone. The support zone cannot contain the overwhelming supply and the price collapses again penetrating this zone of old demand. I have moved my stop loss to a technical level to protect my paper gains. If the price returns to this level and penetrates it then indicates a possible temporary trend reversal. The price continues to plummet rapidly, I have adjusted my stop loss again to protect profits and have placed a buy limit order slightly above the lock limit down price just in case. I don't like getting stuck in a halt trading. The price finds a new support zone, and from there it rebounds aggressively due to the strong demand at this level, which makes me suspicious. After this the price falls back towards the previously established support zone but finds strong demand again which sustains the price and generates a new increase, thus creating a classic double bottom. The price continues to rise supported by high demand that exceeds supply and is near to my stop loss which is hit minutes later and my position is closed with a very good profit. This is a classic example of how I manage my trades when I am in the market, taking partial profits and protecting paper gains to maximize return on capital while dynamically reduce risk. 4. Discover a key component of a successful trading method.: DISCOVER A KEY COMPONENT OF A SUCCESSFUL TRADING METHOD To start I want to talk to you about an extremely important topic regarding the trading business. I will delve deeper into this topic later, but it is extremely important that you take it into consideration from the beginning of this course. Everything is defined in one word: Flexibility. But, let me explain the context first From this moment on I need you to understand that the short-term market movement is a phenomenon dominated by decisions based on the emotions of thousands of people at the same time, which is known as market sentiment. This market sentiment is constantly changing. For a time it may be euphoric and the price rises, at other times it may be undecided and the price remains in a range, at another time the market may be in panic and the price falls. In addition to market sentiment, there is also another variable called volatility, which is what influences how violent these movements are in market sentiment. Sometimes the price can rise calmly, but at other times the price can fall violently, or remain static with little movements, or in some cases, it remains static in a range with wild ups or downs. It might drive traders crazy. Next, I am going to show you a chart so that you can see how the market sentiment can change with different levels of volatility over a period of time. As you can see in this chart during a period of more than 2 years, there are times when prices go up for a while, then the price stays in a range, at other times the price goes down aggressively. In addition to this, there are also changes in volatility. It is quite a roller coaster of emotions. The objective of showing you all this is that you understand that if your trading method is not flexible, capable of adapting to all these emotional changes in the market, then there is a high probability that your trading method is not profitable and you lose money. You cannot apply a rigid, inflexible trading method to a market that is constantly changing all the time. This is a death sentence for your trading account. The solution to this dilemma in order to obtain profits based on monitoring of the behavior of price is to design a flexible trading method that adapts in real-time to market conditions so that it can take advantage of these movements caused by an imbalance between supply and demand. Please always remember to include the component of flexibility in your model, it is essential for your trading business to have a prosperous future. 5. The Right Balance.: The Right Balance. Probabilities, Capital, Risk, and Time. Before continuing with the course, I want to inform you that this particular topic is very important and I will be talking about it several times during the classes classes as shock therapy so that it is recorded in your subconscious mind. What I am about to explain will give you a statistical advantage so that you have a greater probability of success in this business. Please pay attention, because this is one of the fundamental basis of your venture. Probabilities of a Trading Method. The probabilities of a trading method vary from trader to trader, this depends on a myriad of factors. But for the purposes of explaining this topic, we are going to assume that we have a trading method with a 60% probability of success. A 60% success rate means that of 100 trades we make, 60 trades will be winners and 40 will be losers. What if of those possible 40 losing trades, we have a bad streak and 10 losing trades come out in a row? If that happens, then it could seriously affect our trading account if we are not well capitalized and if we do not manage risk well. For example… Suppose you have a trading account with $ 10,000 and you risk $ 800 for each trade on a routine basis. If you lose 10 times in a row you will have lost $ 8000 leaving you only $ 2000 in your trading account. If that happens, it will be extremely difficult for you to recover the $ 8,000 not impossible, but very difficult. In this way, many people end up withdrawing from this business. I don't want that to happen to you. This is why it is so important to manage risk efficiently. There is an inversely proportional relationship in the trading business between capital and risk. The more capital you have to trade, the less risk you have to take in each trade. On the other hand, the less capital you have, the greater the risk you must take to be able to access trades. Let me explain with an example. EXAMPLE OF A LOSING STREAK AND CAPITAL SIZE The micro Emini S&P 500 (MES) initial margin is $1,320 (October 2020) CASE A) Your trading capital is $5,000 Risk 2% per trade = $100 (20 MES points) 10 losing trades in a row means $1000 lost (20 % of your trading capital) (not including broker commissions) CASE B) Your trading capital is $20,000 Risk 0,5% per trade = $100 (20 MES points) 10 losing trades in a row means $1000 lost (Only 5 % of your trading capital) (not including broker commissions) As you can see, the more capital you have, the lower the risk you must assume for the same trade. It is important that you know how to capitalize your trading account to take less risk in the market. ADVICE ABOUT CAPITAL SIZE & TIME FRAMES. For Day Trading The micro Emini S&P 500 (MES) IF YOU ONLY HAVE $5,000 OF TRADING CAPITAL. Then use longer time frames for day trading. Stay away from the 1 min time frames, the noise will dry your trading account. Nowadays with the high-frequency trading and the volatility it produces, the 20 min or longer time frames offer very low price resolution making it very hard to detect entries for day trading. You will miss many opportunities. The sweet spot today is around 5 to 10 minutes time frames for day trading the micro Emini S&P 500. Remember, this might change in the future as markets are in constant change. If you do not find the right balance among capital and risk then you will lose money and time. Study first, make your plan, validate it, then if it is economically feasible, risk with conviction and discipline. 6. Concepts to understand risk properly.: Day trading plan optimization for reducing risk. Terms to understand risk properly. It is very important for a trader to understand each term related with measuring risk. The goal of this lecture is for you to review these basic concepts which will be used later during this course to learn how to keep risk under control. Let's begin. It is vital for measuring risk when trading a futures contract to know its specifications. Point value and tick size is an information you need to know to calculate the risk in each trade. The tick is the minimum fluctuation in price allowed for a futures contract during a trading session. Each tick represents a certain dollar amount in terms of price movement. Let´s see. For example, as you can notice in this chart, the smallest price fluctuation for the E-mini S&P 500 (ES) is 25 cents, where each tick represents $12.50. Since the ES tick size is 0.25, one point would be equal to four ticks (0.25 x 4 = 1 point), or a value of $50. Now, let´s take a look at a very important factor that can make a huge impact in your profitability; “commissions to be paid to brokers”. Commissions. Per Side Cost is the transaction cost associated with one leg of a futures transaction, either the opening or the closing of a position. Per Side Cost are quoted on a per side per contract basis. If for example, a broker quotes you $1.75 per side cost to trade an E-mini S&P 500 contract then your round trip cost will be $3.50 to both, open and close the position. Over trading can lead to paying a lot of money in commissions affecting a trader´s bottom line. A trader must be selective to only trade with the highest possibilities of a winning outcome, reducing paying multiple commissions at the same time. We will learn more about this topic later in this course. Performance bond / Initial and maintenance margins. Performance Bonds, also known as margins, are deposits held at the Chicago Mercantile Exchange to ensure that clearing members can meet their obligations to their customers and to CME Clearing. Performance bond requirements vary by product and market volatility. Initial margin is the margin that market participants must pay when they initiate their position with their clearing firm, whereas maintenance margin is the minimum level at which market participants must maintain in their account over time. Let's see where to find this information. As you can see on this table initial margin equals 110 percent. the maintenance margin. You can always verify this information at the CME Website. Safety capital needed to play per contract. Safety capital needed to play per contract is the initial margin deposit times a safety factor set by every trader. In my case I use a safety factor of times two. This means if the initial margin for the Emini S&P 500 is $4950 then my safety capital needed to play a contract is $4950 x 2 = $9900. Remember, being well capitalized is a key factor for increasing the probabilities of success in any trading business. In the next slides I will explain why this is so important. Now let's talk a bit about risk. Maximum risk capital per trade. This is the percentage of the total trading capital that should be risked in any one transaction. In my case I only risk 1.5% of my total trading capital in any given trade. I don’t think any trader should risk more than 2% of his trading capital on any given trade. If a trader sticks to 1% to 2% maximum loss guideline, his chances of staying in the game are greatly increased, because it will take many consecutive losses to wipe him out, and he will have more money making opportunities available to him. 1.5 % is my limit, I do not go over it! With a safety factor of times 2 and risking no more than 1.5% of your total trading capital per trade, you have enough room to handle a losing string without being wiped out. Here is an example: Let´s suppose a trader has a stake of $100.000 and loses 10 times in a row risking no more than 1.5% per trade, creating a total loss of $15.000 (including commissions). Now the trader has only $85.000 capital left. With this remaining trading capital the trader can review his method and come back to trading to make it back and more. This is the importance of being well capitalized and risk control, a trader have more room for errors and the capability to fix them. Here is another example: Now, let´s suppose a trader has a stake of just $10.000 and loses 10 times in a row risking 5% per trade. This creates a total loss of $5000 including commissions. After this fact, there is only $5.000 capital left to trade. The trader has lost 50 percent of his trading capital and with the remaining $5000 is almost impossible to continue trading the Emini S&P 500. The trader is doomed!. Maximum risk capital per trade (Summary). The point here is: “You have to be well capitalized along with using risk control techniques to stand a chance trading the financial markets”. I will teach you the techniques needed to control risk trading any financial instrument including the Emini S&P 500. Initial capital for the month. This is the capital that I have in my trading account at the beginning of each month. This figure will remain the same for the rest of the current month and only will be updated at the first day of every month. This parameter is used to calculate the total cutoff point. I will explain it later. Capital in account up to date. This is the total trading capital available at any given day. This amount must be updated daily before the market opens, we will use this number to calculate risk parameters. For example, you need this number to know your cutoff point for the day. Let's see. Cut off point for the day. This is the total trading capital a trader is willing to lose during any given day. Once this limit is reached, a trader needs to stop for the day to evaluate his trades and overall market conditions. First, it is important to keep yourself away from the computer to take a rest. Then, you will evaluate the trades to fix any problems. I set my cutoff point for the day at 3% of my total capital in account up to date. YOU HAVE TO HONOR THIS PARAMETER. Total cutoff point. This is the limit of total capital to be lost in order for a trader to review his method before continue trading. I set my total cutoff point at 15% of my initial trading capital for the month. YOU ALSO HAVE TO HONOR THIS PARAMETER, keeping trading after you have reached this limit can lead you to disastrous financial consequences. Maximum contracts to trade considering capital and risk. This is the maximum numbers of contracts to trade considering both, the available trading capital up to date and the risk of the trade to be taken. This is one of the golden rules of trading, “always adjust your trading size per trade”, all trades are different, if you don´t do it, the risk will wipe you out. Beware of it, there is real money on the line. This is key for being successful trading the markets. Please do not overlook this factor. Price limits. Price limit is the largest price change allowed for a given futures contract in a single day as set by the exchange, also called maximum price fluctuation. Trading limits may be expanded during periods of unusually high market activity. Locked Limit is a price that has advanced or declined the permissible limit during one trading session. It is also called limit move. It is not possible to trade a futures contract at a price either above or below the futures contract price. after a limit move. That said, every trader entering the market with a futures trading position needs to know that there is the small possibility, of a market moving against his or her position by the daily limit. That's just a fact of futures trading that traders must accept. Limit moves in futures markets do not occur often but you should know where they are just in case. These levels are updated every day. You can find these levels values at the Chicago Mercantile Exchange website. Risk versus Reward. The risk versus reward relationship is used to assess profit potential of a trade relative to its loss potential. In order to attain the risk/reward of a trade, both the risk and profit potential of a trade must be defined by the trader. The potential profit for the trade is the price difference between the profit target and the entry price. I like to fund trade with a minimum of 1:3 potential payoff. The higher the better. This means that I am going to risk 1 point to win 3 points. Veteran traders are always looking for these kind of trades. A big part of optimizing risk control into your trading plan is to make trades that have a good mix of risk and reward. All these terms we just covered, are key components of a system for controlling risk. Well understood and used will be the difference between failure and success! I invite you to take a rest to recharge batteries. Come back tomorrow for more. See you in the next lecture 7. Day Trading, Swing Trading and the subject of risk.: Day Trading, Swing Trading, and the subject of risk. Before we begin talking about day trading and swing trading, I need you to listen carefully to the next three facts. Think about them before deciding the time frame you will use for your trading method. Fact #1: Markets are driven by trends and psychology in the short-term. The truth is no one knows how far the market will go up or down. Fact #2: No trader has ever had complete clarity about the path markets will take over the short-to-intermediate-term. There are far too many variables at play to know what will happen with anything approaching certainty when it comes to market psychology. Fact #3: The shorter the time frame you use for trading the more noise and erratic price movements you will face. The goal of this lesson is to talk about risk on the Day trading and Swing Trading timescales, as well as helping you to make a decision which way to go. It is important to mention that each person has a psychological profile which will have influence on the way they play in the markets. Although Day Trading and Swing Trading are executed in different time scales, they are both seeking the same goal, to make money by speculating on the financial markets. However, there is a key point between both scales, the appetite for risk and how to control it. I want to make a special emphasis that if you are a person who is beginning in this world, do not Day Trade. The level of psychological pressure is very high due to the noise found on this time scale, which increases the risk of capital loss. Today with the action of supercomputers in Day Trading, where more than 70% of operations are automated, it has become extremely risky to trade manually on this timescale, creating high levels of stress in the traders taking them to a vicious circle of bad buying and selling decisions. Due to the high speed with which these trading algorithms or robots operate, it is necessary to use smaller intraday timescales (from 1 minute to 5 minutes) in order to have a chart with enough detail to catch the day's micro trends. This is a death trap for a human trader. Unfortunately, in these small time scales there is a lot of noise which leads us to make bad decisions in real time, additionally, price changes occur at millisecond speeds, making it almost impossible for a human being to react to these changes, thus increasing the risk of loss of capital. On the other hand, the long-term swing trading time scale allows the trader to think calmly and make informed decisions regarding the trend and the risk assumed. Only very few individuals with a lot of experience succeed Day Trading, this has been verified with statistical data from the accounts of traders of different brokers in the United States. If you are a beginner, I recommend you to start Swing Trading which is a method that requires less emotional pressure, the odds are better and it is easier to control the risk of each trade. 8. Main concepts to master trend detection for reducing risk.: Day trading plan optimization for reducing risk. Main concepts to master trend detection. During this lecture I will be using “after the fact charts” to make it easier for you to understand the concepts. There is a full section at the end of this course with real time charts for you to apply all the knowledge acquired during this training. Before we start with this lecture, I want you to know the three most important assets anyone needs to trade successfully. These are: 1.-The knowledge to spot the right trend to place trades along with it (I mean mastering trend detection techniques). 2.-To measure risk properly, and three to have a good evaluation system to test a trading method. Without these skills a trader is headed into a deadly trap, which will consume slowly his trading account until there is not any more money left. During the trading day there are many products to look at (stocks, futures, forex, options, you name it). You can go insane deciding which product to trade and how to trade it, jumping from one time frame to another, making costly mistakes along the way. This kind of behavior surely will lead you to a financial ruin. You need to focus and specialize in one product while you master your trading methodology, once you do, you can diversify if you want. In my case, I just focus on trading one financial instrument in a very short term horizon, from minutes to hours (which we know as intraday trading). Now, for your trading account survival it is imperative for you to learn how to detect the strongest trend that will lead prices. In this way your chances for making money will increase dramatically. The skill to accomplish this critical task is what I call “Trend Detection” backed with risk analysis and trading method evaluation. Main concepts to master trend detection. During this lecture I will share the main concepts you need to understand in order to spot a new born trend successfully. I want you to focus on these concepts and remove all the noise you have found on the internet about trend detection. I will provide a short review of these concepts that are related with mastering trend detection, you should be familiar with them before continue with this course. You can also download the pdf file attached as a resource in this lecture. I will keep it simple and clean Let's dive in. Law of supply and demand. It is a theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply and demand defines the effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be. Let's see an example. This is an example of supply and demand in the general context of market action. Rectangle number 1 indicates more demand than supply then the price goes up during that context of price behavior. Rectangle number 2 shows more supply than demand then the price goes down during those minutes of trading. Rectangle number 3 encloses a range of equilibrium where supply and demand remains more or less the same and the price is stable trading in a narrow range. Now one of the skills I will teach you during this course is how to catch the strongest trend in order to take high probabilities trades with low risk, reading and understanding the general context of price action created by supply and demand. Let´s continue with the next concept of PRICE ACTION. Price action is the movement of securities price. Price action is encompassed in technical and chart pattern analysis, which attempt to find order in the sometimes seemingly random movement of price. Swings (high and low), tests of resistance and consolidation are some examples of price action. The candlestick and price bars are important tools for analyzing price action, since they help traders visualize price movement. Candlestick patterns are examples of price action. One of the facts you need to accept is that the most profitable ways to trade is to take your trading decisions based on PAST PRICE ACTION. Never try to forecast price movements If you place your trades based on past price action, you will earn less in each trade, BUT you will be right most of the time with minimum risk. Let's see an example. Take for example this after the fact chart, we have a zone of resistance and support. Once the price breaks resistance (inside the white circle), we need to wait for the price to break the final doji high, which is a signal of price continuation to the upside. If you open this chart in a lower tick frame, you can see that this final doji is formed by a pull back to the support area. (previous resistance) indicating that price will hold above this area and is likely to continue moving up. If we take this trade just above this doji high (1) our risk will be just 1.5 points, because our stop loss should be placed a little bit below the support area. I will teach you later how to place stops in the right place (not so obvious). Price action sometimes shows great momentum which is an ideal indicator for price direction clues. Let's continue with the concept of momentum. Is the rate of acceleration of price. The idea of momentum is that price is more likely to keep moving in the same direction than to change directions. Once a momentum trader sees acceleration in price, the trader will often take a long or short position in the hope that momentum will continue in either an upward or downward direction. Let's see an example. Look at the white arrow in this chart pointing at momentum, price is likely to continue its upward direction but we always need to wait for price action confirmation before taking our trade. Price action and momentum are very easy to read using Tick Charts based on candlesticks. I recommend using this type of charts, they give a trader a lot of information about markets mood, which is the most important indicator you can use to find trading ideas. Let´s continue with the next concept of Tick Charts (Based on Candlestick). Tick Charts Candlestick. The conventional charts draw a new bar after a set period of time, for example after every 5 minutes. Tick charts draw a new bar after a set number of trades, for example after every 1,000 trades. What tick charts do is that they count a certain number of trades and then print a new bar every time this number of trades is reached. During high trading activity, a new bar will be printed roughly every minute on the 1000 ticks charts on the E-Mini S&P500, and in low trading activity it can take several minutes for a new bar to be printed. I set my Emini S&P 500 charts to 1000 and 3000 ticks to find trading ideas and to execute buy and sell orders. These settings allow me to remove the noisy moves of Emini S&P 500 and to get a real sense of the average market mood without losing good entry opportunities. Beware, these settings are adjusted for the Emini S&P 500, maybe they will not apply to other trading instrument. Every trading product has its own personality, you will need to adjust your trading chart parameters for each product you trade. I keep my charts “SUPER SIMPLE”, this allows me to act quickly. Let's see an example. As you can see, during the opening (Chart 1), there is high trading activity and more ticks candles are printed in less time, giving us more trading signals, but during low trading activity (Chart 2), it takes more time to print the same number of candles. With tick charts you can also trade more consistently regardless of the volatility, which is very difficult to do with time bars. This is a plus in today’s high volatility markets. Tick bars based on candlesticks are very useful when detecting the validity of support and resistance areas which is key to enter the market during trends in an early stage. Let´s continue with the next concepts of Support and Resistance. Support and Resistance. Support is the price level which a trading instrument has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the market. Resistance is a level where price is finding it difficult to break through it, and may head lower in the near term. The more times that price has tried unsuccessfully to break through the resistance level, the stronger that area of resistance becomes. Resistance and support levels are widely used by experienced traders to formulate trading strategies. For example, if price is approaching a very strong resistance level, a trader may prefer to close the position rather than take the risk of a significant decline if the price uptrend reverses. Let's see an example. In the chart, we can see support area (1), inside the white circle, past price action indicates that support might be valid, and up trending price may resume very soon. This is a clear example of how past price action, support areas and tick bars can be used together to enter trades with very low risk. Once you get to understand what past price action is telling you, it will become very easy to enter trades like this with no fear as risk is very low. Let´s continue with the next concept of trend lines. Trend line Is a line that is drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trend lines are used to show direction and the speed of price. I just use them to have an idea how the trend is developing, gaining or losing strength. For day trading I mostly use support and resistance areas to measure the health of a trend. More on this later on this course. Let's see an example. As you can see, the trend line helps to have an idea where the price is going but as I will show you later, support and resistance levels give you a more accurate idea about the health of a trend. This is part of understanding past price action, a powerful skill that you must have in your arsenal. Now, there are some old saying; “The Trend is Your Friend”, “Trade with Trend”, as these are true, there is one important thing you should know; “Once you have detected a developed trend in a chart it might be too late to place your trade, especially if you are day trading”. You have to anticipate reading past price action to spot a new born trend, take a low risk, and place your trade, if it does not work, get out with a small loss or a small profit, but if you are reading past price action correctly and if you are well capitalized, then most of the time you will win enough to cover operational cost plus a nice profit. Let´s continue with the next concept of trends. The trend is when in an up trending market the price will move in a series of upwards that make higher highs with down waves (pull backs) not dropping below previous lows (downtrends are just the opposite). Trends can vary in length from short, to intermediate, to long term. If you can identify a trend during an early stage, it can be highly profitable, because you will be able to trade with a new born trend and will catch the wildest moves. Let's see an example. As you can notice in this chart, the price is making higher highs, and all the pull backs inside the circles 1, 2, 3 and 4, never dropped below the previous low, showing that the uptrend is still valid. As a tip for this lecture: I can tell you. We can use the pullbacks to measure the health of the trend upwards. The shallower the pullbacks (less sellers), the stronger the uptrend. Pullbacks can tell a lot about a trend short term direction, I will teach you more about it later in this course. Here we finish the lecture of concepts to master trend detection. All the concepts we have reviewed here, cover most of the spectrum of what you need to know to spot a new born trend. We will be using all of them later in this course. Remember to download the resources available for this lecture. Take a rest and come back to continue with the next lectures and sections as soon as you are ready. See you soon. 9. The Trend, a Fractal Phenomenon, and risk implications.: TRENDS IS A FRACTAL PHENOMENON. The subject that I am going to explain next is of utmost importance, please pay special attention as it will help you a lot to achieve success. Trends is a fractal phenomenon that can be found on any time scale, from 1, 5, or 15 minutes, as well as charts of 6 hours, days, or weeks. The crucial thing is to know what time scale to use to be able to follow the fractal without much noise that affects our trading decisions. Time scale charts from 1 minute to 15 minutes for day trading show trends or fractals full of noise which makes trading extremely difficult in these time ranges Additionally, due to the high-frequency trading executed by supercomputers we will find extremely fast and violent price movements that are very difficult for a human being to handle. I recommend swing trading using charts based on timescales from 6 hours, daily and weekly. In this way, we will be visualizing the trends defined by the most dominant sentiment in the market with much lower noise than those found in the intraday charts. OK, Let's see some examples: Weekly Chart: In this weekly chart, it helps us to see the most important trend in a clearer way and with little noise. This is the trend that we must follow to take our plays (I recommend following the weekly trends). The trends detected in the long-term charts are those that provide direction in the market. However, to detect the entry and exit signals, we must use charts with greater detail, which are the daily and 6-hours charts. Daily Chart: In this daily chart, we can find that the trends can also be seen with less noise than in a 5-minute intraday chart. This time scale offers more detail where we can easily analyze entry and exit areas for our trades. A person with sufficient capital could trade off the daily chart without any problem, but the risk is greater. Therefore, for people with less capital, I recommend using the 6-hour chart. 6-hours chart: In this 6-hours chart, you can also see the trends with less noise than in the intraday charts. Here you can find excellent entry and exit spots with less risk than on the daily chart. However, the trader has to be aware of the computer screen every 6 hours to see how prices behave. It is important to note that opportunities to enter and exit the market could occur at 01:00 AM or at 7:00 AM, so this time scale requires more attention than the daily chart. 10. Theory for evaluating your trading method to reduce risk.: Day trading plan optimization for reducing risk. Theory for evaluating your trading method to reduce risk. The goal of this lecture is to provide you with the right sort of tools to evaluate your current trading method for reducing risk. You need to find out if you have a good trading method with a positive expectancy. A positive expectancy is needed to determine if a trader has an edge, without an edge. nobody should be trading. You have to factor different parameters when evaluating. It is the combination of all this data that will tell a trader if a method is profitable or not. Pay close attention to these definitions, we will put them into action very soon. Let's begin. Total month NET PROFIT. Total month NET PROFIT is the overall performance of a trading method during your current month. At first glance you need a system that makes money, and you need this number to be positive for your method to be economic viable. Net profit by itself is not that a great of an indication, of course, you need to have a net profit, but after looking at this value, you need to review others indicators to check the efficiency of your method. We will go over these indicators during this lecture. Let's move on. Total numbers of trades. Total numbers of trades is a record we need to have an idea how often we trade and for other calculations. You want to have a method that makes as few trades as possible, this will reduce the money to pay for commissions and slippage. The total number of winning and losing trades will help you calculate other indicators useful for your risk assessment as percentage of winning and losing trades. During the next sections we will work with these numbers in a risk assessment spreadsheet. Let's see the next line. Largest winners and losers. The next information will verify how profitable a trading method is. When you take out the largest winners if the method does not perform well then it is not very reliable. The other factor is that the largest losers are not bigger than the winners. The key to trading is to keep your losers smaller than your winners. Now, pay close attention to the next concept as it is vital for evaluating your trading method. Conservative losers (Drawdown) It is imperative knowing how many losers in a row your trading method has had. For example, if you are going through a losing streak, you may stick with it because you know it is common to have a six trade losing streak. Also with this information you have an idea about the kind of risk capital needed to trade your method in case you face a losing streak avoiding being wipe out. Remember to keep this number up-to-date. Average trade. This is one of the most important numbers to look at, as it measures how your trading method does on a per trade basis. It will tell you how much on average you will make or lose every time you trade. What is difficult is finding out when the average trade positive but too small to be worth to keep using your method. Each trader must find an average trade he think is worth the effort and the risk. More about this later during this course. Profit Factor. The profit factor is the result of the total gains divided by total losses. It tells you the amount that will be made for every dollar that is lost. If your profit factor is 1 or less you have to modify your method to increase this number. In the other hand, if your trading method have a profit factor of 2 or more, you have a very good method, keep trading with it. Always aim for a high profit factor. Distribution of Returns. You need to find out how volatile your trading method is. If your method has a steady positive return with a minimum variance from the mean is then a good system. In the other hand, if the standard deviation is too wide, then beware, the drawdowns could be large and you might be in trouble. Stick to a trading method that has smaller equity swings, as they are more reliable with much less risk. For this calculation we will be using standard deviation formulas. We will be using these concepts during the next sections for you to understand how to validate your trading method for reducing risk and I will do it step by step to make things easier for you. Relax go out and have fun. Come back tomorrow to continue with this course. 11. Quick afirmations about trend detection.: More about Trend Detection Theory. As I said before, a trend is a fractal phenomenon that repeats itself on any time frame. It can be visualized in the charts of 1 minute, 5 minutes, 6 hours, daily, weekly or monthly. BUT, THERE IS A “BIG” PROBLEM This problem is called noise or price fluctuations. It must be treated with care because failure to do so can turn into a headache. Price fluctuations are something natural in the market trends, it happens all the time, we must be prepared to face this situation by incorporating in our trading method strategies capable of assuming this noise in order to minimize its impact on the final outcome of our decisions. The lower the time frame you use, the more noise you will find. Take a look at these charts. One minute chart has more noise than a 10 minutes chart. This is going to make a 1-minute chart a very difficult time frame to trade. Now, an hour chart has more noise than a 6 hours chart, and so on. The higher the time frame the less noise you will encounter. Again, flexibility …. You need to use a time frame that suits your personality, the volatility of the products you will trade, and your trading technique. Not all financial instruments can be traded using the same rigid time frame since they all have different volatility and rhythms, some are similar to others because they might be correlated, but this is not the case in many situations. Before you start trading any financial instrument, you must first study it so that you can find a statistical advantage, only then can you determine which time scale to use along with other risk control parameters. But remember, the lower the time frame you use the more noise you will face. Try to adjust your trading technique for using longer time frames. 12. Words from Humberto.: Hi I'm very happy you finished this part of the course and i wanted to appear on screen to give you a very important advice there are hundreds of books, blogs, or trading courses over the internet there's a lot of information i know it but the important thing here is that you can filter out the noise and just focus your attention on what is really important risk control is a very important  piece of the puzzle for you to master in order to build a sustainable trading business over time. there is a very delicate balance between the capital you have available for trading and the risk you assume per trade you have to respect the balance if you don't you can get into trouble. if you achieve the right balance between the capital you have available for trading and the risk you are going to assume per trade plus a trading method that has a positive expectancy you will have the best opportunities to be successful in this business so take your time review this part of the course again be clear in all the concepts and continue with the course.