Kane Trading - Education for Serious Traders

					July 4, 2004 Commentary (weekend edition)- For today's commentary I am going to talk about intraday trading as of late with the ES e-mini. One of the things I try to point out in my material and in this column is how important I feel it is to have a comprehensive 'Trading Plan'. This plan goes far, far beyond just knowing which patterns or Fibonacci setups one will use, and far beyond some overly simplistic management plan. My books go into great detail on some of the aspects of my 'Trading Plan', and when I finish up Kane Trading on: Trade Management even more information will be available. One thing I am trying to make clear is that there is a lot more in my plan than just the things I am looking for to initiate a trade or manage that trade. Today I will discuss a key aspect that I feel many skim right over. I fully expect a lot of readers to quit reading today's commentary before the end. The crazy thing is, I expect this to happen even more so with the experienced traders. I ask that you read this through, and think over the implications, before you just say that you already know all this, and already have this in your plan. What I am talking about is understanding when to trade, and when to stand aside. I can't remember the last time I have stood aside so much. In all honesty, it's not a lot of fun. In fact, it's quite frustrating and irritating. But it is nowhere near as frustrating and irritating as losing money from trading when it was clear I shouldn't be trading. I find that I can look at the action and quickly assess if the action is 'tradable' for me. I like to watch for a while and see how things are going. That's not to say that a 'tradable' market can't instantly become 'untradable' the second I initiate a trade, or that as I stand aside in an 'untradable' market I won't miss an explosive move that is very 'tradable'. This can, and does, happen. But overall, I find that it greatly behooves me to trade only when conditions appear favorable for my trading methodology. Let's look at a few charts that, to me, clearly show this difference in trading action. I'll start with a 3-minute chart of the ES, with action from June 29 and 30, preceding the Fed meeting. We all know why we wouldn't expect the market to be real 'tradable' at that time. Just look at that mess. Yes, there may be trading techniques (buying support and selling resistance, for instance) that could work with this, but not the ones I utilize. When I see this, I go work in the garden. Let's look at a 1-minute chart now, immediately after the fed announcement. Now, that looks just great, huh? For my trading style, this is ridiculous action. I'm back in the garden. Let's look at another 3-minute chart, this time showing some action from Thursday and Friday. Keep in mind that Friday is the day before a holiday. Again, days before holidays I expect to be poor. But the end of Thursday and Friday morning, I was expecting some reasonable action. That's just terrible. Yes, there is some range there, and yes, I do see some structure and patterns, but look at the level of chop. Although I think that I could trade this type of action, my net will be a lot less than it would be when the action is better. This is tough going in here. Now, let's look at action that gets me in high gear. Wow, what a difference. That's just wonderful to look at. Look at that flow, and look at those swings. This is what I want to see when I'm trading the ES. This chart is from a week before the previous charts. And it seems the ES changes on a daily basis. Sometimes it is like this, and sometimes it's like the previous charts. The trick for me is to be patient when it's not like this last chart. And lately the amount of time it is 'tradable' seems to be getting less and less. I have a partial theory for that, which I will discuss. I feel that we have just about 'lost' this market to program trading. I remember when program trading ran like 13%-15% of the total volume on the NYSE. Once the bubble burst we entered an era where program trading seemed to increase every week that went by. I guess with decimalization, little or no inflows of retirement money, the death of the 'retail daytrader', and so on, it leaves a lot less for the big guys and the 'hedgies' to fleece. Recently the program trading has been averaging 45%-50%, with a spike up to over 55%. I recall when they had actually talked, way, way back when, about possibly banning program trading completely. Well, the latest stats just came out and program trading hit 70.5% last week!!! I simply can't comprehend this. The market has lost its balance, in my opinion. Just look at the ES chart and that's clear. I know they try to explain away all this program trading, like by saying that part of it was the Russell rebalancing and the double-counting done by the NYSE, and so on. Regardless of all these 'explanations', I still feel that program trading has gotten out of control. I don't have an answer for this, and unless my information is incorrect, this is new territory for any market to be in, at any time in history. It is also possible, perhaps likely, that this is 'normal' for a post-bubble computerized era. It's just that we've never been here before. I don't think computerized trading was anywhere near this advanced when the Japanese bubble burst fifteen years ago. I have no idea what the implications are for trading. I'm merely trying to make people aware of what I am observing, and what my opinions are. It will be interesting, historically, to see how this plays out. The next commentary will be the mid-week edition, posted on Wednesday.


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