Chapter 7

I want you to go to Google and search for images of “es charts.”  Just scroll through a few pages of charts and notice all the different styles and indicators. Here’s 2 examples I found.. Chart 1 and  Chart 2. Now, here’s my ES chart that I use to trade. Big difference huh ? Now, if people can be profitable trading off those charts that look like air traffic control maps, more power to them ! But I’ve found that not only in charting but in life as well, simple usually works just fine if not better. Remember the line at the very beginning of this book,  Noah’s ark was built by amateurs in the desert. The Titanic was built by professionals. Think about that for a minute.

Now, let’s talk more about indicators and why I don’t use them. A lot of people use the MACD, stochastics, RSI, EMA, SMA, etc on their charts to base their trades on. The problem with using indicators is simple, INDICATORS TELL YOU WHAT HAS ALREADY HAPPENED. Well shucks, I can look at a chart and tell you what’s already happened, I don’t need an indicator for that. Now, show me an indicator that will tell you what’s going to happen in the future and then we’ll be cooking on the front burner. I do know of a guy that claims to have invented an indicator that will predict future price moves and he’s probably made a lot of money selling his snake oil but you’re smarter than that, right ? Just out of curiosity I looked at the number of available studies and indicators for the TOS charting software and there are over 200 ! Holy freakin’ cow, there’s stuff in there that will tell you if your first born will be a boy or girl LOL !

So, if I don’t use indicators, how do I trade you must be wondering. Well, I do use indicators but not in the way most people do. Try and follow me here and I’ll make it simple. I take ES trades off a 15 minute chart. On the 15 minute chart I will use the Fibonacci retracement tool for entries and exits. I’ll also have the daily gap and the daily pivot plotted on the chart and that’s all. On a 1 year daily chart I will use the Fibonacci tool with short and long term Fibonacci levels.  So, in summary, here’s what I use to trade the S&P 500 E-Mini  futures:

  1. A 15 minute chart with Fibonacci Retracements, the gap and the daily pivot. The pivot isn’t a major factor but I want to be aware of where it is because it will be a natural support/resistance area.
  2. A 1 year daily chart with the short and long term Fibonacci levels drawn on it for swing trades.

FYI, the gap is the price where the market settled the previous trading day and the pivot is the previous day’s high, low and close divided by 3. Most charting software will plot them for you. If yours doesn’t, simply take the high of the day, the low of the day and the closing price, add them together and then divide that number by 3. For example, if the previous day’s high was 1032.50 and the low was 1010.75 and the close was 1014.25 you would add all those together to get 3057.50. Divide that number by 3 and you get the next day’s pivot of 1019.17. The reason you want to be aware of where the gap and the pivot are is they both have an extremely high probability of being hit during the trading day.

Now, if I’m trading equities, my set up will be somewhat different but the principle is the same.. keep things as simple as possible.

So, in summary, don’t overload your charts with indicators that don’t tell you anything beyond what you already know. Oh yeah, and always use a stop loss order !

¹ Cooking on the front burner means you’re doing really, really good.