Questions & Stuff
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This site is about making you a better trader.
When trading privately, you have far more freedom to trade how you want.
When learning independently of a prop firm, you can form proper opinions rather than be brain washed into one strategy that might not be the right thing.
Prop firms tend to push you into one style of trading even if it’s not for you or in the best interest if your account balance.
This is partly to do with covering their backside and partly to do with them earning more commission.
So many times, I have heard a prop traders say “my account is down, but would be up if it wasn’t for commissions”.
Not really. If you want to trade for a prop firm, just don’t go in empty-handed. Go in armed with as much knowledge as you can. MasterClass training will help you with this.
The more training you have beforehand, the better perspective you will have.
If they are teaching you one style of trading, you will have a better appreciation of when to apply it. You’ll also know when to knock on the manager’s door to ask for more limits and a wider range of markets. You will be better equipped.
The guys that do well in prop firms are the ones that forge their own path.
Personally, I learnt a lot at prop firms, but it didn’t bring out the best in me as a trader.
In futures, as far as I know, yes. At the least I can say most are. This has changed only in recent years as old school scalping has disappeared thanks a little overcrowding and algo activity.
That said, there are still plenty of scalping trades out there.
If you plan to scalp one market, you still need to know how spreading works. Why? Because spreads and market correlations drive pretty much every market.
Every FX market, every crypto, every commodity market, all indices, all interest rates – these are all correlated to other markets. To know one market, means you must know several.
Bonds & Stuff
euro-bund futures contracts work in the same way as euro-bobl futures contracts except that the underlying deliverable product is German debt securities with a remaining term of 8.5 to 10.5 years and a coupon of 6%.
Bobl is an acronym for bundesobligationen – debt issued by the German government. The acronym crops up in a futures contract used to trade medium-term German debt. The contract has a notional value of €100,000.
On the Eurex exchange euro-bobl futures contracts exist for the months of March, June, September and December. The underlying deliverable product for this contract is German debt securities with remaining term of 4.5 to 5.5 years with a 6% coupon.
schatz-bund futures are the short-dated equivalent of the bobl and bund futures. Here the underlying deliverable product is German debt securities with a remaining term of 1.75 to 2.25 years and a coupon of 6%.
Germany hasn’t issued debt with a coupon as high as 6% for some time and so the contract values are adjusted to reflect the market price of a bond with a 6% coupon.
Go to this page:
Look for the ASX24 futures and options calculator (excel file). Download it.
Open it and enable editing and macros.
This spreadsheet was written to calculate P&L from a trade, but we can use it to calculate DV01.
To do this just put the current price in the Settlement field and a price of 0.01 away (plus or minus) in the Contract field. Set Number of Contracts to 1.
The Profit/Loss column will show your DV01. How easy!!
I’d say I’m a beginner/novice trader with the fortunate position of not having to work for a living and having sufficient capital to make an attempt at learning how to trade for a living.
My goal is to trade either the ZN or the CGB for a living (I’m in Calgary, Canada). I am set up with Ninjatrader + Jigsaw DOM, and Kinetick for Level 2 data for the ZN. I am a little familiar with order book scalping but I haven’t found my tempo yet.
In the ZN I look for absorption (+3000 contract icebergs) and back ticking. When I see this I participate and exit when I see absorption going against me. I sometime use charts and if I see price trade 4-5 ticks from where it was a minute ago I look to fade that fast move.
Answer: Re the ZN versus the CGB, I think that is a fantastic idea. I have a lot of experience in the Aussie bond versus the Tnote. It involves looking for little divergences in an effort to grab a tick here and two ticks there.
For some time now I have had the idea that the same thing can be done with the Canadian bond.
There are some similarities between it and the Aussie bond:
* Shorter trading hours compared with the ZN (meaning cap trades).
* Different quotation – meaning prices can get out of whack in DV01 terms.
* What I call ‘one way correlation‘ (CGB follow ZN, but not no much ZN following CGB) – that means potential lag trades.
I spoke with the Canadian exchange about this and a broker mate of mine in Chicago. Neither knew what the heck I was on about – and that to me says we might be onto something interesting. I prefer the path less travelled.
The Depth Traders Boot Camp on this site is a good place to start. Then I have the ‘Speed Trader’ course which is a set of exercises designed to build your speed.
Here my question:
“It is context which matter, there is no right or wrong in trading.”, this is what my mentor say when I still in prop trade firm(be honest I am a drop out from prop firm as my level still not as expected even there is progress). During my time at prop firm, I can come to some situation where one trader go long while another trader go short yet both of them make a profit from their trade(actually one going for pull back while another looking for continuation). What scares me actually context is nothing more than how you look at the price and info blipping in front of the trading screen, as those flashing order and price are meaningless without context put on.
Now the thing is how I can build up my context (I mean my own way looking at the market), as I feel that trading is rather subjective than objective.
I wish I had a quick thing for you to do, but the answer will come from spending more time in front of the screen.
That said, it’s not just sitting there starting at a screen. You need to make the time useful and productive. The Depth Boot Camp is a good place to start, and even repeat the drills if you wish. Practise those drills in different markets too.
What are you currently trading or looking at?
I am currently looking at 10 year and 30 year treasury bond. Platform: Ninja trader with jigsaw market depth add on. Currently trying the depth boot camp on it. Attached here is a picture how it look like (need opinion whether this is an appropriate platform for boot camp).
I’d include the 5yr note also. Keep a short term chart of them up there too, say a 5 or 15 minute chart. Watch levels in all three. Sometimes a breach of a level in one market happens before the others and can trigger a move across all three.
Also keep an eye on the emini (inverse correlation)
Understand your DV01 too. Check out my Bonds eBook. It talks about DV01s. These are also called Basis Point Values (BVP). It’s need to know stuff if you plan to go anywhere near a Treasury bill, note or bond.
Challenge: “To be able to recognize the trend, pull backs, reversals, trend continuations on the DOM.”
I suppose that’s everyone else’s challenge too.
Reading trends though is hard. I would say the approach would change from market to market. For example how you do it in GC would differ from NG or the mini. Overall, I think you need to watch charts at the same time. What plays out as for example an iceberg resistance level on the DOM would more likely be clearer to see as a on a chart as a level.
One drill I used to run with the in-house trainees was to force them to wait for pullbacks before entries. If for example, you saw a buy entry at a certain level, you could only place an order three ticks below it. It sounds simple, but it taught patience and helped the guys get better entries (at the expense of missing a few trades of course).
The next drill was to continually place orders to buy or sell at any 3 tick pullback, not just the ones you want to trade. In other words, ignore your view on the market and just buy on dips and sell on up ticks. If you could get over the urge to break the rules, it would work out quite well. It then dawned on the new guys that most or all of the senior traders, particularly the curve guys, do exactly that day in and day out.
So those drills were an approach to trading pullbacks. It can work for shorter/smaller movement, but how you do it should take into account the details of the specific market and time of day (i.e. near the open, close or data).
One other tip is to also keep an eye on related markets. A break of a level in the Bund for example can see the Tnote follow along or a failure in one to continue will see the same in the other.
My current challenge in trading is that i’m not able to get positive risk/reward ratio, my losers are equal or sometimes a bit bigger than winners, plus commissions add up and I’m burning my account every day by little pieces…
I recently trade 5 year treasury note futures, my stops usualy are 1 – 2 ticks, winners for the most part are 1 ticks…
I totally understand where you are coming from. Risk:reward becomes more of an issue when you are scalping.
I like the 5yrs as it’s easier to scratch a trade (buy and sell at same price). Don’t be afraid to do this often if the market doesn’t do your thing straight away. It might stop you from taking that 1-2 tick loss as often.
As for commissions, that’s less of an issue when you move to the Tnote and Tbond, but those are harder to scratch. There is a bit of a trade-off there.
My current trading challenge is basically one thing – profitability. I have been using retail trader’s indicators and patterns hence my inability to profit. I want to learn more about order flow namely DOM and hoping your course helps.
First up, have a good read of the Bullseye: Top Trader Thinking book. It’s a great book. It’s not about DOM, but there are some good insights there.
The DOM course is about building your skill, speed and most importantly confidence. It takes practice. All good things do.
As well as my site, NoBSdaytrading.com has some great material. Highly recommended.
Is there a reason we don’t use a bracket order to set up the market maker scalp trade?
Could we not click at the best offer and then the best bid, and have both positions in place quicker?
And maybe a programmer could set software to get both side on instantly.
Am I thinking clearly, or am I missing something?
I’m sure there is a reason why it’s done this way, but would like your thoughts, or reasoning behind this.
No doubt, time and vast experience, trades upon trades, upon trades has taught us that this method work, and works well.
Great question. Now since I have just finished watching Cobra Kai on Netflix, I’ll answer the question with a Karate Kid analogy.
Setting up bracket orders or using other automated features would be like Daniel using a commercial sander to sand the deck or an electric buffer to put the wax on and take the wax off.
Smoothing out the deck was not the purpose of the activity, nor was cleaning the row of cars. It was about learning the process and committing it to muscle memory.
It is 100% the same with these drills. They are not trading systems. Yes, you could adapt these methods to trade, but that is not the point here.
The point is learning how the DOM works and how your market works. Part of the drill is all about effective screen time.
One thing that can make you hesitant is a lack of confidence in what you are doing. That comes directly from not knowing your market inside out.
Think of it this way: you need to know what is normal and what is abnormal for your market. That applies to daily movements as well as tick by tick.
Some years ago, a trader walked into my room and said something like “do you see that move in the DAX? I just made my month’s profit on that.”
He explained the DAX opened in one direction while all other markets, European and US, were trading higher. He bought the DAX without hesitation, the market moved back inline, and it was all over in a matter of a minute or so.
I said: “Did you not think there was something significant making it move that way?”.
He said “No, I just got in the trade and was going to think about that later”.
Now that may sound cavalier or even stupid, and for many it would have been. For him however, he knew those markets back to front and specialised in trading that time of day.
The “trade first and ask questions later” method can only be used if you know what is normal and what is abnormal.
This is why this course does things manually. Automation can come when you are ready. Nuts and bolts first.
Thank you for the “7 weeks of Trading” course.
I have just one question:
Does technical analysis have any merit?
Great question. Yes I think it does, but I certainly don’t get too fussy over it. I first worked as a technical analysis about 17yrs ago. The job required me to be able to comment on all styles. After a few years, I realised you have to keep it really simple. If you can eyeball a chart and get a feel for where the market is, that is as good or better than following some obscure method. It also helps when more people follow the same idea as it become self-fulfilling. That means the simpler the approach, the more useful it is.
Now, that is just my view. Others have different views. Good on them. Different views are what makes a market.
Yes they do insofar as they are smaller. Check out the contract specs of each one. A good measure of risk is using the ATR multiplied by the point value. That gives you an average daily dollar range. (Use this for calculating spread ratios too).
Q: What platform do you recommend for trading spreads? I heard of QTrader and TT, but is their any you recommend?
A: I’ve used both CQG (IC) and TT quite a lot. They are expensive. That’s the only problem with them. Qtrader is cheap. With some brokers, it’s free. Funnily enough I have been using Sierra charts lately and with a bit of tweaking, it works as well as the others. I think using Sierra will work. Free with many brokers, or cheap by itself. I hope to write more about the ‘tweaking’ of Sierra soon.
A key consideration for spreads is making sure your broker offers ‘SPAN margining’ for spreads.
Q: When is it at a point as a trainee trader that i will say finally i got the hang of trading?
A: It will take a few years at a minimum. That assumes that you find your niche and focus on it. By niche, I mean you may be trading options, spreads, position trading, scalping etc. In time, that niche may well change too. Then, there is another learning curve to climb.
I think the trick is to realise it is ongoing work, as opposed to training hard for six or so months then expecting the money to flow in. I won’t go so far to say as there is ‘always’ something new to learn, but regularly enough there will be a new software platform, a book or a course worth learning about.
Hope this email finds you well. Firstly I would like to thank you again for your training sites. It has been teaching me loads about the DOM And the gradual steps to learning how to spread is like gold dust. (there is so little about this method online, the big institutions and prop houses seem to use this approach as there bread and butter. Go figure)
The question is this if you would be so kind to answer. On your YouTube page you show a trade done over a rate decision with the Aus Dollar as a leading indicator. Would you say that you could use the dollar index for use with the US Treasuries to give you the same heads up?
Also is this viable with only the rate news or with other economic news as well?
Maybe I’m pulling at straws. Thanks again Guy.
That’s great feedback, thank you.
Question re DX as a lead indicator – I think you could use the Euro. Using the currency instead of watching a data headline is a really good and very simple idea. I love it. They have algos that read headlines now, so you’re never going to trade the immediate reaction like the old days. Back then the SFE used to break for lunch from 12.30 to 2.00. Then on RBA meeting days, the rates decision was released at 2.30. The SFE happened to be situated right next to a pub, so a lot of the floor traders would be well hydrated so to speak – and the 1 minute charts showed that extra bit of bravado. Funny stuff.
I’ve been meaning to write something about what I call the 2nd and 3rd reactions to the data. That is trading the reversal and trading the reversal of the reversal. I’ll write it one day, but you can probably figure out what I mean from what I said just there.
Re other news, yes I think it’s 100% viable with other news, Payrolls for example. To really simplify it, all news is about inflation or perception thereof. Is inflation going up or down? Does the news imply any change to what was previously expected? How does that change affect the market you’re trading? Let’s say you have a strong Payrolls number. That implies higher growth, hence higher inflation. Treasuries will drop accordingly. It will happen pretty quickly, but if it was a significant number, watch for that retracement to give you a new opportunity to get short.
A related point – a few years ago, I mapped out several years of payrolls data next to the Tnote. I looked at the number as well as the number minus the expected result. Then aligned that with market reaction. The one pattern that stood out head and shoulders above any other was payrolls will often be a day or short term (swing) reversal day – irrespective of the number itself. Lesson: whatever direction you see the market moving in the days or week leading up to the data, trade only in the opposite direction right after the data.
I wanted to pick your brain about Crude Oil (CL) and DAX.
I know these are two of the most volatile markets around (DAX for sure) and that a 1 or 2 lot can go a very long way in either of these markets.
I am considering trading CL because if I get funded with [a prop firm] they make no distinction in buying power between different markets. They start you with 1 or 2 lots whether it is Crude or 10yr Notes.
We both know that 2 lots in Crude is way more than 2 lots in the notes.
What is the prop trading world view on these two markets? I am sure they have a presence but I wanted to get a seasoned veteran’s take on these two markets.
Any thoughts or comments about them are greatly appreciated.
My prop experience, as I expect would be others, would suggest you should go for the Tnote.
CL is more volatile which means more risk, which means it would be more hit and miss trading when trying out for a prop firm. Many good short term traders I know make their living from the ranges and quiet times, some call it ‘noise’.
The Depth Boot Camp course, if you haven’t done it already, will show you how and why.
That said, I have seen a lot of people try a market like crude or a currency, fail, then do well in fixed interest. So you could argue it’s a good learning place.
I know TST let you try and try again, so perhaps start in a more volatile one, then come back to a safer market. Remember plenty of sim time is a good thing, as long as there is a planned approach of course.
If you go down the crude oil path and stick with it, contact me again we can talk about progression from one market to a few.
My current challenges in trading are figuring out whether I should have a fixed stop and profit target or if I should let everything be intuitive. By intuitive I am referring to the process of watching everything on the fly and making a call based on the volume printing at price. I have found that on the emini it is constant fake outs and that this does not bode well. I also cannot decide if I should go all in and all out, or if I should go all in and scale out.
For example, right now I trade the Emini SP from 9:30AM EST (opening bell) until about 10:30 or 11:00. I find that the momentum is there in its most active fashion during that short block of time. Even during this time however, I only usually find 1 to 4 good trades max. Some days I end the day up but typically what happens is I end up cutting a trade at 4 or 5 ticks that would have yield 10 or 12 ticks. Then when I lose, I end up losing a full stop which might be anywhere from 4 to 8 ticks. I seem to have trouble finding a favorable risk to reward. Consistency is maybe at the core.
You are right regarding the constant fake. I used to scalp gold quite a bit and found the same. Those fakes seem well designed to weed out the weak intuition, and can be very frustrating.
Personally, I like to keep stops fixed and let upside be more intuitive. I know that is not always the best way, but you can only tell that after the fact.
I also think scalping those markets requires you to rely on more than just the dom, because the dom draws you into acting faster. I found for example in gold, halving size and doubling stops to work better.
Perhaps try using short term charts like a 3 or 5 minute chart for your stop and/or targets.
“My biggest challenge would be psychological and how to overcome it.”
I wish I had a single answer for that one, but I don’t. Problem is there is no single answer to it.
For some, it’s more education. That’s easy. For others, it’s more about getting your own mindset in order. That’s a more complex thing. It could be making the effort to read something new each month or daily meditation or doing a bit of goal setting and weekly planning.
I take the approach of trying new things regularly. I read new things and try new ideas. When it comes to market education, I think I have read most things. That is, there aren’t too many things that haven’t been written about before. So I don’t get inspired by the latest book on trading. I do however, like to read motivational or psychology books. I love podcasts too.
I’ve recently finished an interesting book called The Morning Miracle. I’ve now written a course that adapts the lessons in the book to trading. I think it’s very interesting.
My current challenge is to be able consistently trade options with a rate of return that exceeds simple stock investing or mutual fund investing while providing good downside protection.
I’m hoping that good information regarding trading concepts will enhance my chances. There’s way too much information out there and many pundits repeating cliches’ and even contradicting themselves at times. Straightforward information shouldn’t be at a premium but it seems to be. I’m willing to put this service to the 7 week test.
Thank you for the offer to chat.
My background is in options, although I’ve shifted more towards futures spreads in the last 10 years.
I still get excited when people ask me options questions though (“get a life” my other half says). I haven’t put much options material on the site yet, but have a ‘home study’ style course ready to go. I just need a few people to hound me about it I suppose.
Without writing an essay, I would have a few tips on options trading:
1. Don’t ignore your Greeks. Most people stop at delta, but if you are spreading or selling time, then if you don’t have a good feel for gamma, it’s only a matter of time until you lose your money.
2. Don’t get greedy. Greed happens when things go well and you leverage up or ignore those black swan risks (e.g. gamma). Don’t bet your retirement money on a trading strategy.
3. Following on from the above, don’t forget to take money out when things go well. I have a mate who trades in a little FX, options and futures spreads. He has been through some dreadful periods, but had kept upbeat as he’s always taken money out of the market when things do well. I like that approach.
4. Find a good source of market analysis. For commodities, I like Hightower and I used to subscribe to the ElliottWave.com newsletter. It’s very well researched, even if you don’t follow waves (I don’t).
5. Software – have good analysis software. I like OptionVue. Good software is not cheap unfortunately, but you need it. You need to know where you are with volatility and you only get that with a good database and data feed.
I’m happy to help you with any of that if you have other questions.
Nice to have the opportunity to speak with you.
Here’s my challenge “Should I join a prop firm?” That is, should I trade for myself at home or join a firm? I realise desk costs and commissions are something to think about.
I took John Grady’s course quite sometime back. I am a U.S Treasuries order flow scalper currently trading 3 lots at a clip.
Hope to get your point of view on this.
Prop firm commissions are not too different from a discount online broker, so they are not really an issue. Yes the desk cost (think of it as rent) is a thing to cover, particularly when you are starting out. However, the advantage is you are not using your own money to trade.
One disadvantage is you have to trade the way they want you to, and that might not always be the best way for you.
One thing I would often say to some of the younger guys is put yourself first. Some of the strategies a prop firm will push you towards are designed to generate commissions. Trading only in that way may not be putting yourself first. It’s putting the company first, then the exchange and then the clearer. Then down the list is you.
Now, that aside, one advantage of a prop firm is the potential education. Irrespective of the above, time at a prop firm will teach you a few things. If you do chose to join a firm, be sure to ask, and be comfortable with, what they are planning to teach you.
I built this site after my experience with prop. The DOM material I have here is for the prop trader. The idea is you can get prop trader training without going to a prop firm OR train here first and then be a stronger candidate when you knock on their door.
Also, the idea with this site is you won’t have to Google ‘how to be a trader’ then sift through all the garbage online. There is more training on my site any other prop firm I know has to offer. In other words, I have tried to make it a better place to start. Feel free to shoot me questions if you go ahead with it.
Question: What do you think of this trade? GEZ20-ZNZ20
GEZ20-ZNZ20 as a seasonal spread or any type of spread right now – it’s a definite no from me – two reasons.
1. Short term rates are not going anywhere.
Try overlying this spread with just the ZN. You might find there is a high correlation here. That is Eurodollars are so low and not moving anywhere that it’s not really a spread. By low I mean prices high and rates are low. (price = 100-rate)
Just take a look at forward prices here:
It takes until Dec 2024 until rates go above 0.50% (price <99.50) and that’s still a low rate!
Sure you could adjust the ratio of GE to ZN, but it would just become messy.
2. Second reason is the month selection (Dec). With short term rate futures, the near month is most often the dead month. It’s the only futures contract where this happens (that I can think of now). It’s because of probabilities. In most parts of the economic cycle, the Fed has one chance per month to change interest rates (theoretically they can do it anytime, but I’m talking in most cases). So up to Dec, there are only a couple of chances for them to do it – and right now, they aren’t about to. That means the chance of much movement in the Eurodollar is very close to nothing.
So, that leaves just the note. Perhaps it’s a bear trade, perhaps not, but it’s not a spread. As an outright, it’s a different risk. As a seasonal, it has to make sense also. For me ‘seasonal’ interest rates aren’t a thing. Sometimes for Eurodollar calendar spreads they are, but not this kind of yield curve trade.
Question: What do you think of this trade? ZWZ20-ZCZ20.
The MRCI platform has this as a short trade in October and the stats look good.
See attached images.
Take a look at the table. The last column gives you a small idea of the volatility of the spread. Not entirely, but it’s a bit of a guide. MRCI suggest a stop of $1990, or 40pts. That’s pretty big for a single contract trade.
That’s the thing about inter-grain spreads. They can get volatile. They can each do their own thing, and/or be swayed by soy. Most of the time they are well correlated, but the risk is they go off on their own given a USDA report or weather. The Dec contract is new crop. We have harvest to start in corn and above to end in wheat. There is still uncertainty in Corn and less so in Wheat. That probably accounts for the spread pattern.
Just to confuse the issue, it’s not just US grains that affects these prices. Wheat is pre-harvest in Australia and Argentina right now for example. It’s hard to stay on top of this stuff, but I find the CME daily videos are very good for this. I embed these on my site: bowerpost.com, scroll down to the bottom.
Short story – yes this kind of spread looks good, but it is volatile, and given it’s an inter- it’s harder to manage a stop without autospreader software. So expect slippage. Perhaps as an exercise have a think about how big your stop might be an how many you would trade in an account. 1 per $10k? 1 per $50k? It is attractive once you think of this? I’d put this spread in the expert category.
Q: I’m trading Crude Oil and have started thinking about spreads. Can you explain the advantages?
A: Well you could look up the benefits of spreading and you’ll see things like less risk, lower margins etc. They are fine reasons at the basic level, but the real advantage in spreads (and as it should be in any style of trading) are the opportunities. There are different opportunities in spreads than say options, scalping or swing trading. Better – sometimes. Worse – sometimes also. Overall, just different trades.
I was attracted to options trading years ago because it was the path less travelled. To me that meant better risk:reward trades. It’s the same with spreads.
So is CL the best market in the world for spreading? Some might say no because there are no many people and algos already doing it. However it is a good market to watch and learn how bull and bear spreads play out intraday. Monthly expiries mean plenty of combinations. Quick tip is to pick just two spreads. Pick a near month: June, then watch the spread between it and July and December (so it’s June-July and June-Dec).
Some platforms do not offer spread charts or the DOM for the exchange spreads. At the very least you can watch the three charts and the three doms. The front month will always lead the way, but watch for when the back months follow tick for tick then stop following tick for tick. I think for intraday trading, that’s where the trades might be. Longer term CL spreads are very directional, so the June-July spread will simply act like a lower vol position in June. June-Dec, more volatile than Jun-Jul, but less than the outright.
Q: What is the approach i should have regarding money management in spread trading? When is the point i should cut my losses?
A: It should not be any different from trading outrights. Being a spread doesn’t mean managing losses or position size should be any different. My favourite approach is to have a predetermined dollar amount to risk per trade with which I am comfortable. I set stops based on ATR or some other volatility measure.
See the lessons toward the back of the Advanced Spread Trading course for more info on this.
Just a quick question on ‘Spreading’. Is this the concept of trading the same instrument with different expiries? So buy Dec Futures and sell Mar Futures for example? Would you still use the DOM for this type of trading? Would you say that this type of trading is for the more ‘risk averse’ type of trader?
Actually that was 4 questions….sorry about that ..lol No rush if you don’t have time. I understand that markets are due to open shortly.
Spreading – what you describe is a calendar spread. That’s one type of spread. Yes you can still use DOM for this. Without going into a stack of detail, some exchanges will offer an ‘exchange traded spread’ for calendars whereby you have one DOM for the spread. It’s made up of spread orders plus the synthetic orders from the outrights. When you buy or sell a spread on the DOM, it’s one click, but your account still ends up with the two contracts. So the exchange traded spread is not a product, it’s just the facility – if that makes sense. (FYI, we have a ‘FastTrack’ course on exchange spreads.)
Some of these exchange spreads will have far more volume than just the outrights. Natural Gas is a good example.
If an exchange does not offer the spread market, some software platforms allow you to build it. TT and CQG-IC for example do this. Interactive Brokers do not. Well they do, but function is limited. To my knowledge you have to go professional level to get that type of function.
Another type of spread is an intermarket spread. That means trading 2+ related markets. That’s what we do in the DOM courses for example. We trade the US Treasuries: 5yr note, 10yr note and Tbond in the Boot Camp. You could also call these yield curve spreads.
There are also exchange spreads in common intermarket spreads, such as the US Treasuries.
For our DOM courses however, forget all of the above. We ‘leg’ trades in (trade each contract separately). It’s a better way to learn. It’s like learning to drive manual instead of auto.
As for risk of spreads, that’s a huge topic. It’s all about risk:reward. Some spreads will show lower risk, but they would most likely have lower reward. Interesting point though: EVERY single professional trader that I have met that is making money is a spread trader. That says something.
Please check out my Advanced Spread Course. I think it might open your eyes quite a bit.
In futures, most are either market makers or spreaders (or both). This has changed only in recent years as old school scalping has disappeared thanks to little overcrowding and algo activity, with a leaning towards market making.
For stocks, it might be different.
This is part of a bigger conversation, but prop firms can be good as they accelerate your learning and immerse you in the environment, but private trading still has more flexibility.
A prop trading firm will have a certain risk management profile. They want a very short-term approach and always looking to cover their backside, so that in part dictates what type of trading they allow. Some prop firms also earn money from exchange fee rebates and the comms they charge the trader, so it’s in their interest to have scalpers as opposed to position traders. Trading privately, you have far more freedom.
Just one more question. When it comes to spread trading, how do people usually trade intraday? A spread trader from another investment bank told me that there are basically three strategies in trading the spread market: trend, range, mean reversion. However, the part I don’t get is that do people trade from chart or the DOM? He told me that applying indicators on spread chart is actually useful enough for trading, but I feel that it is way too simple for that. Isn’t spread trading more complex than that?
You can approach a spread any way you like. There is no reason for analysis to be different from trading outrights. Some use DOM only, some charts only, some a mix.
Trending, ranging and mean reversion is a good part of it. There is market making too – but all of these apply to outright trades too.
Every firm and every good trader finds their little niche. All prop guys I can think of have a niche within spreading and relative value. However what is different is their specific approach.
I can think of one guy that trades only the 3yr Aussie bond, the 10yr Aussie bond and the exchange spread between the two. Others are trading the 10yr bond in one country versus another. Bund-Tnote used to be a big thing, then Aussie 10s-Tnote. STIRs used to be bigger and a lot of guys are still flogging that horse, but with rates very low and expected to stay low, the easy trades aren’t there now.
I know some that spend their time looking for mean reverting markets and formulas. I once asked a room of traders to produce a research report their choice of market. One guy came back with a long report on mean reversion. I hadn’t even mentioned that, but that is the only way he looked at things.
One CEO of a prop firm once sat down with me and explained his model for his new firm was STIR condors. It’s a great strategy for when rate hike expectations slowly fade from the market but boxes all trainees into one idea. So many prop firms seem set on trading one idea. Sheep!
I like the longer-term seasonal stuff because they make sense. Also, everything resets every year. If seasonality does not work one year, which happens, then there is next year’s supply to trade.
It’s both – and anything else you want to make it. The Advanced course is more a long-term approach, but I also send you short term bond spread material. The DOM course also talks a lot about spreads and relative value trades, also using bonds, but applicable to things like the micros, energies and grains. The DOM course looks at spread and relative values on the shorter time frame.
What is Your Trading Challenge?
I have been involved in the markets a long time. I got serious around 2000….There is one constant that arises after all my trials and tribulations is everyone that is successful in trading has had a mentor. You can only take yourself so far.
So for the past couple of years I have not traded because I am trying to find someone who will bridge the gap.
Yes, I have tried a few people but you know how this industry is, who is real who is not. Try this platform for this type of trading or this method? All you end up with is a lot less money in your wallet. Please, don’t think that I am being cynical but you ask what is my challenge, it is finding someone that knows and wants to teach you! Be it spreads, scalping or whatever method.
Well sometimes (often) I have to stop myself from being cynical too. It’s hard not to be.
Just yesterday, I had a guy come by house to cut back a few trees in the yard. We got to talking and he told me about an online FX options broker with whom he has opened an account. It was one of those $10 minimum places that make their own prices (OTC).
While I love options as an exchange traded product, I don’t think much of the firms that make their own prices and allow buy side only. The very flashy trading platforms seem designed to lure you in and do not resemble anything the industry would really use. Remember that binary rubbish?
Even for someone working for a prop trading firm, that garbage end of the industry is still competition. The problem is people are lured by the simple answer, get ripped off, then never approach a prop firm or find the better training out there.
Outside of a prop firm, you will not find anyone that doesn’t want to sell you something, but that doesn’t mean everything for sale is crap. I really like the material from Jigsaw Trading and No BS Day Trading. I think between the three of us, we are all on a similar track.
As for prop firms, some charge for training, some do not. The ones that don’t tend to be ones that either have extremely strict acceptance criteria. Some firms will not take anyone over 30. They also look for things like: not married, no kids and living with parents. Fair or unfair, it is part of the industry.
Those that charge for training, by default, are able to take on more people and not just because it’s an earner. The money training earns can mean more features or a broader reach.
I used to work for a firm that would not charge for training. However, when I recruited for them I had to stick to their strict criteria and that made me uncomfortable. I didn’t like to discriminate. My argument was charging for training allows for a broader range of applicants – and surely that means a better probability of finding good traders.
Further, paid training (at least the material I have written) is far more thorough than the free stuff. The free stuff is likely to box you into one style and if you don’t pick it up fast enough, you’re out. A paid program should be both broad and forgiving.
Enough of me soap boxing. Getting back to your question, bridging the gap and finding a mentor.
I do not think the best place to find a mentor is online. It’s within a prop firm. That is, you need to be around equals – other guys trying to make ticks. Your mentoring comes from peers when you are immersed in it.
As for my personal experience, my best mentor was someone with whom I was in business. I’ve had good business partners and terrible ones. What I learnt was to choose wisely and trust gut feel even more than logic.
Its been a while since we spoke. I just want to let u know that I have just gotten my first pay cheque from prop trading. Thank you so much for the guidance during these period, was almost on the verge of giving up. I would like to hear from you on your thoughts of what’s next for me from this moment going forward.
That’s great! It’s really good to hear and I’m glad I could be of some influence. Congratulations!
The next challenge, in my opinion, is to make sure you keep learning things. This approach needs to be an ongoing discipline. A lot of guys don’t do this. I think it’s a major factor in the failure rate, but all it takes is a little discipline and curiosity.
So, keep reading. Get a subscription to Futures magazine or Stocks and Commodities magazine. S&C mag is awesome because they have an archive going back to 1982. The idea is something there will give you things to do. It might be a new idea to research or market to learn about. It might just be the way to think about something. (Futures mag is industry stuff and S&C is technical analysis – both are good.)
Constant study can be pretty boring, but you need to keep at it. Make it a silent competition if you like. Think while other traders finish the day with a beer, you are reading something new, going to a seminar or testing an idea in excel. When others people are on the train or bus tweeting about the cornflakes they just ate, you are learning something.
The overall idea is to come up with your own ideas. Taking on the approach of regular learning will shape the way you move forward.
I hope this helps and I’m happy to answer more questions from you
Ok you said hit “reply” so here goes…I am very interested in trading, but I have blown 2 accounts, blew out 2 demo months with a prop firm …I think my big challenges is how do I break through to profitability?
I have tried courses, trading rooms, different software, etc…all the usual stuff. I seem to have decent market knowledge, but unable to put something together that constitutes a profitable strategy. A big part of the challenge is mental. I seem to shoot myself in the foot more often than not.
Perhaps I have just enough knowledge to hurt myself. I am considering another shot at demo trading. I STILL feel like I could make it as a trader! Anyhow if you have any comments on this, I would appreciate hearing from you.
OK, the two account blow outs – that happens to everyone. The mental challenge – everyone also. No big deal on either of those (although I hope you didn’t lose too much). It happens. You learn.
I’m interested in the demo trading though. How did you trade? what did you trade? Why do you think it didn’t work? FYI, two months of crappy P&L does not tell you anything. In fact, I think it’s better to not to have stellar results at first and take time to figure a few things out.
I traded mainly the ES on the demo platform. The first one I actually did pretty well, I think I ended up about 5K on the 150K account, but managed to hit my trailing max drawdown partway through. The second one I just blew up…I need to understand risk a lot better. I think what got me was having several trades lose in a row…I must have been trading too large of size.
I did trade some CL and did pretty well. Holding trades for runners, seems to work for me. But then I hold and hope, and then I start having winners that are a point or so…and losers that are 3 handles. The 2 edged sword (as so many things in the market seem to be). Thanks for your time, I will be working my way through the trading plan course.
Thanks for that.
If I may make a couple of suggestions:
- Delete CL from your consciousness for now. It’s a tricky market to scalp/day trade. There are one million algos just waiting to take your money.
- Add the Tnote and even the 5yr note. Keep watching the emini. Watch how the notes and mini correlate (negative correlation) around open, close, quiet times, busy time, data etc. Watch levels on charts and levels on DOM. One will affect the other.
- Start looking for smaller trades. In something like the Tnote, you can have 1-4 tick targets and stops.
- Trade small. That’s a 1 lot default. Don’t be afraid to double up when offside a little.
- Don’t trade with the idea that you have some magic ability to predict the market. No one does. You can however learn how it behaves at certain times of the day and place orders accordingly. You can learn what is normal and what is out of place and trade accordingly.
Fixed interest is a good market to learn. It tends to be behaved relative to things like CL, GC and especially FX. The above suggests you learn to scalp, but I’m not suggesting you do that forever. It’s just an approach to learn markets. Some people stick with it. Some evolve. Either way, you’re learning a skill.
FYI scalping skills and styles are covered in the DOM Boot Camp course.
Dear Mr Bower,
My current challenge in trading is to become a full-time trader. I have been trading for about 5 years in stocks and FX.
I have recently started looking at futures as an alternative. I am interested in learning more about DOM and order flow in combination with technical analysis. But I hear that DOM doesn’t work today, because of “high frequency trading” – there are lot of “fake” orders which make the DOM illegible. Is that true?
Fake orders – well there but probably fewer than what would first appear.
I should first point out, it’s actually illegal to place fake orders or ‘orders without the intent to trade’. They still exist, but that law is policed by the exchanges/regulators, as it should be.
There are a lot of orders that look fake but are not. They may be ‘autospreaders’ placing orders to trade or make market in a spread between two markets. When ‘market A’ moves, it will automatically move an order in ‘market B’. It can look like a fake order, but isn’t. It’s just an order being adjusted.
I would not say DOM does not work because of this at all. I would say you need to know how it works to take advantage of it. It’s about knowing the markets you are trading. For example, the DOM for Gold looks very different from the DOM for a Natural Gas spread. Also, the way a DOM looks at one time in the day can be different from another time.
It’s about ‘knowing your market’. When you know the differences, you adjust your approach to trading it.
Before you start trading any market, you’ll need to spend some time with a demo account. TT is good, Sierra also. The DOM Boot Camp course is something I have written for newcomers to learn how to trade on the demo account. It gives you a path to learning rather than opening up the demo account and hoping for the best.
Q: Regarding prop trading, I’m told I should be trading 5 lots, not 1, to start with. 5 lots are not going to cut it as I feel trading that way is high risk and is only asking for trouble. I don’t want large size, I only want 1 at a clip and access so size if you are following me. Is this going to be a problem starting at prop and finishing there because they will only allow 5 max or whatever they will offer? They say you need to crawl before you walk but come on, this is the reason so many fail. It looks as if it’s designed for failure.
[GB] Depends on the market of course, but if you are talking prop, you might be talking STIR spreads and in a low rate environment, 5 lots is bugger all. IU have a feeling it was meant as a maximum size as opposed to default trade size. While five lot trades can be a lot when you start out, you do need some size so you can actively queue for position and stack.
You do need to consider costs. There are fixed costs such as desk, data and platform. Budget on as much as $2k/month. Without a bit of size, that can be a hard one to get past.
If we are cynics we could also say a prop firm that charges commissions will want you to size up so they earn more $$ from you. I’ve seen plenty of accounts that would be up if not for commission. Guess who is taking home that money. To be fair they have to make money too, but just keep in mind you are the most important person there, so put yourself first.
Q: Please give me more information on how position sizing works and how they expect one to build up to size, if its how I think it is, they are making it very hard almost impossible to make big dollars and this is something that can be done with a small account therefore no point going prop. A shop I have spoken to says size will be unlimited and just changed the subject.
[GB] Then change the subject back again. If they are expecting you to go full time with them, you have every right (and the responsibility to yourself) to get clear answers.
As for my opinion, I think you can do what needs to be done on 3-5 lots. You need to be able to stack and double up if needed. Do well with 3-5 lots, cover costs and make a little, then ask for more.
One of my current challengers is finding the right market to scalp futures with. I only trade the SPI which limits my opportunities when it comes to trading. I would be interested to know what Future contracts prop traders like to scalp. At the moment I’m looking into adding HSI or MHI and I would also like to add a financial like XT or YT but I don’t know if these are good choices. What are you thoughts?
I think the best advice right now is you should not be drawn to volatile markets. A scalper likes a quiet ranging market (a general statement of course).
This analogy comes to mind: You have to hunt for your own dinner and see two chickens, one is fast and the other is slow. They will both taste(yield) the same. Which one do you go after?
The point is: forget the Hang Seng for a start.
As for SPI, that one has been frustrating traders for as long as I can remember. I was speaking with a manager at a prop firm recently and he said something like ‘if a new guy insists on trading the SPI, we let him. He will tend to fail. However, then we show him fixed interest markets and he pick up the advantages straight away.’ I’m paraphrasing, but I hope you get the point.
There is no perfect answer to where someone should start, but here are some suggestions:
- Learn about the Aussie 3yrs.
- Learn about the US Tnote (ZN).
- Learn about the US 5s and bonds (ZF and ZB).
- Read up on basic spreads (bull and spear spreads).
- Read up on yield curve trades.
- Learn a bit about STIRs (Au bank bills and the US Eurodollars).
You could do all of that briefly or put in a lot of time. Unfortunately, you’ll get out what you put in…
You’ll then need to start with something, perhaps the 5yrs note. You’ll need patience, not adrenalin to trade these.
Also, and I’m guessing I don’t need to tell you this, but just ignore the glitzy crap you see online that tells you trading is all about their secret indicator or working “just 15 minutes per day”. I’m sure we could all perform open heart surgery by looking at a few pics for 15 minutes, but we’d be terrible at it.
Finally, stay tuned to my emails as I’ll be launching new training within a few weeks.
Good Afternoon Guy,
My Current Challenges are:
- Unsure of what times of the day to be trading
- Desire to trade the smaller time frames really having difficulty adapting
- Getting into a trade to early and having to wait for a move.
- Knowing when I should be taking profit when markets conditions change.
- Getting on the wrong side of trades when trying to enter trades by watching DOM and order flow. (Almost feel that I should do the exact opposite of what I think).
- Had a simple technical trend following swing trade system that I created and tested live that was profitable for about 5 months and has since failed. I am currently trying to work out if I should go back and look at ways of improving that system or try something new. As it seemed my previous system gave a lot back to the markets. ( I believe the problem was risk management).
- Working a full time job and having difficulty for when I have the time to be using that time to effectively trade or conduct meaningful trading study.
I think there are enough question there for me to write a book, so one email may not do it justice, but I’ll give it a shot.
Challenge: Unsure of what times of the day to be trading.
Response: That’s a hard one to answer with not knowing what type of trader you want to become. If I can assume you are looking at intraday trading and scalping, you need to be there for the after hours session as much as the day. In fact, I’ve seen countless more people take to trading after hours than day time hours for many market including fixed interest and indices
Challenge: Desire to trade the smaller time frames really having difficulty adapting.
Response: I wrote the DOM Trading Boot Camp course for this exact reason. It requires the correct practice
Challenge: Getting into a trade too early and having to wait for a move.
Response: Sometimes it feels like picking direction is easy and it’s the timing part that is difficult. In fact, it’s more than ‘sometimes’. It’s pretty much all of the time. That’s trading. Practice doesn’t make perfect, but it makes you better. Screen time is important, and again the Boot Camp course gives you the things to look for and do while in front of the screen. The DOM Starter Material will be good to read. It looks as some specific DOM patterns, but the point of it is to give you the mindset for finding your own.
Challenge: Knowing when I should be taking profit when markets conditions change.
Response: My old options mentor used to say over and over: “plan the trade, trade the plan”. Part of that involves having an idea of where you will exit before you enter. Sure you might have a time based exit (e.g. take a small profit if the trade doesn’t make the move you want fast enough), but you can still have that idea in your head before you enter. If you get in the habit of doing that, it’s takes a lot of stress away.
Challenge: Getting on the wrong side of trades when trying to enter trades by watching DOM and order flow. (Almost feel that I should do the exact opposite of what I think)
Response: Then do the opposite. Do the scary thing and I bet it’s no longer scary. Years ago, I was doing the California Superbike School courses. In one particular session I was given an exercise where I had to take the wrong line through corners. Go narrow in, wide out and just be in the wrong place in a corner. It was a fantastic exercise for two reasons: 1) I had to face fears about what it means to be on the dirty part of the track and I learnt it was not that bad. I survived! 2) It showed there was more than one way to do things and when I raced, with people around me, I had to be able to approach a corner in several ways and still keep the speed up. It’s a fantastic lesson and a good metaphor for trading.
So, apply the same thing in your trading. Of course it’s easier to do this on a sim, but even if you’re trading with real money and getting it wrong, then doing it on a live account might turn out to be massively awesome.
Challenge: Had a simple technical trend following swing trade system that I created and tested live that was profitable for about 5 months and has since failed. I am currently trying to work out if I should go back and look at ways of improving that system or try something new. As it seemed my previous system gave a lot back to the markets. ( I believe the problem was risk management)
Response: If you want to share the details, I can offer my opinion.
Challenge: Working a full time job and having difficulty for when I have the time to be using that time to effectively trade or conduct meaningful trading study.
Response: You need to put the hours in. If you cannot give up work, then it’s a matter of giving up other things, like that glass of wine at night and Friday night out. Think of it like training for a race. The guy that trains twice as long and smart as the next one will do better. Simple.
Sure, you need to do the ‘right training’ not just any old training, but it still takes time.
Try reading a book called The Power of Focus.
Current challenges and persistent challenges have been my inability to be patient so I over trade, which in reflection I would define as a lack of discipline in my trading.
There are two issues there: overtrading and lack of discipline. For overtrading, sometimes a little trick can fix things. Try changing your chart time frame, focusing less on the very short term. If you’re trading with 3 minutes, change the chart to 5 minutes. If 5, then change to 10. Trading only with DOM can also make you trade more often, but if that is not working, then you need to change it.
Lack of discipline is a bigger issue – but you’re not alone. It’s something we all go through. Good planning can really help here. The Organized Trader and My Morning Rituals courses are designed to help with exactly this.
There is also a great book called The Power of Focus by Jack Canfield et al. It’s a very good read.
Then of course there is Matt and Sari Kirk’s Bullseye: Top Trader Thinking.
Biggest challenges for me are understanding spreading, trading economic data, identifying intra-day levels and risk management
Understanding spreading – That is what the Advanced Course is all about.
If you are trading STIRs, then Trading STIR Futures by Aiken is pretty detailed. The other books on spreads are now a bit dated.
Trading economic data – Totally agree with you there. I’m sending you access to the course on trading the NFP. It’s (mostly) applicable to other data and markets.
Identifying intra-day levels and risk management – I think there are two approaches here: Technicals and reading DOM. For DOM, again my site has some material on this. You can also check out John Grady’s site: http://www.nobsdaytrading.com. He’s a good guy and has written some great material. Also check my course on daily rituals. It’s a more refined version of what we would give the guys in-house.
As for technicals, the funny thing is so far I have little on technicals on the site. It’s on the to-do list. I can say however whatever I end up writing and putting up there will be pretty simple because I think that is all that is needed. Basic S&R and chart reading is enough to get you started – and there have been a millions books written on this.
I hope this helps, at least a little.
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