ures markets,remember that the scalper attempts to achieve the following importantgoals:
1. To trade as often as possible to accumulate as much profit as possibleby taking advantage of small but reliable moves within the day timeframe
2. To exit positions very quickly either at a profit or at a loss
3. To avoid having a strong opinion as to market direction in order tolimit the possibility of being influenced to act on opinion as opposedto market factThe Importanceof Orders
To the day trader (in fact to all traders), using the right price order isjust as important as using the right tool for the right job is to themechanic or carpenter. Using the right orders can spell the differencebetween profits and losses. Using a market order when a stop or stoplimit order should have been used may result in a poor price fill whichwill cost you dollars. Since the bottom line is very important to daytraders, perhaps more important than to any other type of trader otherthan a scalper (who is also a day trader), every tick saved is indeed atick earned. Orders should be specifically geared to what you seek toachieve in terms of your timing your trading system. Orders aredesigned to save you money, not to lose you money. They will help youreduce bad fills and avoid lost points or price skids. But to use priceorders to your advantage, you must be familiar with the various typesof orders and when they are best used. You must also know what ordersto avoid and when to avoid them.
What You Should Know about Market
Orders
Market orders must be avoided whenever possible. A market order is,as far as I’m concerned, a license to steal. Rarely will a market order befilled at the exact price you are expecting. Typically, a market order willcost you one tick, at times two or three. In S&P futures, a market ordermay cost you much more than just a few ticks, although one or two ticksin a quiet market is not unusual. If you lose two ticks on entry and twoticks on exit, the cost per trade will most assuredly add up. However,not using market orders will cause you to risk not getting a position atall or not being able to exit a position at all. Here are some guidelinesfor using market orders:
141142 Chapter Fifteen
= Only use a market order when absolutely necessary. If you are using anintraday oscillator type signal which enters at the end of a given timesegment, then a market order is acceptable. If, however, you can use aspecific price order as opposed to a market order, this is preferable. Itis not uncommon for markets to make a quick move following a sig-nal, but very often the market returns to its original entry price fairlysoon, and a price order would have been sufficient. You can save agreat deal of money this way.
m If you are riding a fairly large profit and wish to exit a position quicklysince your indicators have turned, then it is worth giving some of theprofit back just to make sure you are out of your position.
= Avoid market-on-close (MOC) orders. All too often such orders are evenmore of a license to steal, since they can be filled at almost any priceduring the last minute of trading. An MOC order in thin markets is acertain invitation to trouble. Avoid MOC orders unless absolutely nec-essary. Many traders jokingly refer to MOCs as “murder-on-close”orders, since fills are often so poor.
Never use market orders with spreads. You are far better off using specificspread levels for entry and exit, or you may use specific price ordersin each market individually to “leg” into or out of the spread.Considerable slippage is the rule in spread market orders.Unfortunately the only orders you can use in spreads are marketorders or price orders. Of the two types, price orders are clearlypreferable.
Market-If-Touched (MIT) Orders
An MIT order to buy is always placed below the market, and an MITorder to sell is placed above the market. An MIT order becomes a mar-ket order when hit. Therefore, if you have an MIT order to buy at 4150this order will become a market order as soon as a trade occurs at 4150.The pit broker holding this order will immediately buy at the market.You could get filled at any price; however, you will usually be filled ator near your order, at times better than your price and at times worse.This is the chance you take when using such an order. An MIT order isused when you have a specific price level in mind for entry and you donot wish to take the chance of not being filled. Ordinarily such ordersare used for selling at resistance above the market for buying at supportbelow the market.
The day trader who is using the support and resistance methodsdescribed in this book may use MIT orders; however, do note that suchThe Importance of Orders 143
orders can cost you a few ticks. MITs are, however, excellent orders touse when trading support and resistance levels. Remember that suchorders are not accepted by all exchanges nor are they accepted at alltimes. Under certain market conditions MIT orders may be refused atthe discretion either of the pit broker or of the exchange.
Fill-or-Kill (FOK) Orders
A fill-or-kill order is given at a specific price with the understandingthat the pit broker will attempt to fill your order three times in succes-sion at the requested price. Hence, if you have an FOK order to sell at4550, the broker who gets your order will offer at 4550 three times. Ifthere is no fill, the broker will immediately cancel, or “kill,” your order,and the kill will be reported back to you. The advantage of this order isthat you will be able to place it at a specific price, and you will get veryquick feedback as to whether it has been filled. And that’s important!
Be aware, however, that not all exchanges or brokers accept FOKorders. Under certain market conditions such orders may be refused.Some brokers will become irritated if you use too many FOK orders thatgo unfilled, since it takes time and person power to place these orders.Discount brokers may be especially unhappy if you use too many FOKorders.
Finally, do not place your orders too far from the market, or they willnot get filled. This will be even more aggravating for your broker. If youplan to use FOK orders, then please use orders that are very close to thecurrent price. If you abuse these orders you will frustrate your brokerand you will lose the respect of the order takers.
FOK orders are useful in virtually all situations where entry at themarket should be avoided but where there is a need to establish or liqui-date a position. Remember that using an FOK order does not guaranteea price fill, it merely guarantees that you will be filled at your price orbetter or not at all.
Stop Orders
Stop orders are placed either above or below the market. These ordersare especially good for exiting positions when they go against you or forentering markets on breakouts. The problem with stop orders is thatyou will not necessarily be filled at your price in a fast market.Frequently many sharp and sudden moves in the currencies, T-bondfutures, or S&P futures will result in considerable slippage of buy-and-144 ~~ Chapter Fifteen
sell stop orders. The best way to avoid this is to use a stop limit order,described below.
Stop Limit Orders
A stop limit order is a stop order with a price limit on it. The reason forusing such an order is to allow more flexibility in obtaining a fill.Therefore, when you place a buy stop limit order at 6450 with a limit of6465, this means that you will accept a fill within these limits inclusive.The good part of such an order is that it permits the floor broker moreleeway in filling you and therefore improves the odds that you will befilled. Such an order protects you from too much slippage. Stop limitorders should be used more often by traders, although few traders actu-ally use them.
Good-Til-Canceled Orders
A Good-Til-Canceled Order does exactly what its name suggests. It is anorder which will remain in the market until canceled or filled. Thisorder is also called an open order. Typically all open orders are canceledby your broker at the end of each calendar month and must be reinstat-ed. In practice, day traders have no need for GTC or open orders, sincetheir work is done at the end of each day.
One Cancels the Other (OCO)
This is an order qualifier. It allows a trader to have two orders enteredsimultaneously with the cancellation of one contingent upon the fulfill-ment of the other. In other words, when one of the orders is filled, theother will be canceled. This is a good way of bracketing markets foreither of two possible outcomes. As in the case of several other ordersnoted previously, some exchanges do not accept such orders.
Using Orders to Your Advantage
Now that you’ve read about the different kinds of orders, here are somesuggestions regarding their use. The purpose of learning how to useprice orders to your advantage is obvious. Profitable day tradingdepends on making every penny and every point count. You must beconsistent and frugal in everything you do. Here is a list of dos anddon’ts with respect to orders:The Importance of Orders 145
= Try to avoid using market orders unless absolutely necessary. Marketorders cost you ticks. If you lose a few ticks getting in and a few ticksgetting out, then you have lost good money, often unnecessarily.There are many good alternatives to market orders. Some of themhave been discussed above, some will be discussed below.
™ Don’t use MOC orders. They will cost you ticks. Ticks add up. A fewticks here, a few ticks there, pretty soon it adds up to real money. Ifyou must use such an order then you are probably better off selling atthe market several minutes before the close than in giving your brokeran MOC order. As far as I’m concerned an MOC is, most often, alicense to steal.
= Use stop limit orders instead of stop orders. In most cases you will befilled. If you are concerned about being filled, put a one- or two-ticklimit on your order.
u Fill-or-kill orders can be used to your advantage in several ways. If youneed to exit or enter a trade and you don’t want to wait to find out ifyou've been filled then use an FOK order. You'll get quick feedback,and you'll probably save money. If you’ve never used such ordersbefore, then get your feet wet.
= Use FOK orders to test a market. One good way to see how strong orweak a market may be is to use an FOK order. Here’s what I mean.Let’s say that June S&P futures are trading between 406.50 and 406.90.You had a buy signal at 406.50. Trading volume is light. Following thebuy signal, prices moved quickly to 406.90, and you didn’t want tochase the market. You are concerned that the signal might not workthis time, because the market fell back quickly to the original breakoutprice of 406.50. You are hesitant to buy, therefore. What to do? Test themarket by placing an FOK order to go long at 406.45 or 406.40, know-ing that this is below the recent range of trades. Your order goes inand you watch the tape. It reads 406.55 when you enter your order.The ticks then go as follows: 406.55...406.50...406.55...406.50...406.50...406.45B (your bid)...406.45. You are filled at your bid price.What does this mean about the character of the market? Most likelythis indicates a market that is weak. You were filled at a low bid, andthis means that there are willing sellers. This characterizes a weakmarket. ,
However, consider the same scenario with a different outcome. Youenter your bid at 406.45 FOK. The tape reads 406.55 when you enteryour order. The ticks then go as follows: 406.55...406.50...406.55...406.50...406.50...406.55B...406.55...406.60...406.65...406.60...406.55...406.60...406.65...406.70...406.75 and so on. The market never even146
Chapter Fifteen
comes close to your bid, and the order is returned killed. What doesthis mean? It indicates a market with good demand. It suggests thatyou had better get on board quickly. You may even want to use a mar-ket order to do so.
MIT orders are acceptable but not always efficient. They are good for trad-ing within a support/resistance channel, but they will cost you ticks.OCO orders, where accepted, are very helpful. They will help you bracketthe market with different strategies and should be used whereverneeded.
Specify first open only. Some New York markets have staggered open-ings. In these markets each contract month is opened individually inchronological order, traded for a few minutes, and then closed so thatanother month may be opened. Once the process has been completedall months are opened again at the same time. The same procedure isused for closing. Should you need to get into one of these markets onthe open, specify that you want your order good for the first openonly. All too often the second opening price is distinctly different fromthe first open. This can cost you money.
Insist on prompt reporting of order fills. It is absolutely necessary for youto know when you've been filled and when you've not been filled.You must be strict with your broker in demanding fills back as soonas possible. Do not accept excuses, particularly in currencies, T-bonds,S&P, and petroleum futures, where flash fills are easily given. A flashfill is one for which you may remain on hold as your order is hand-signaled to the pit. Although there will be some conditions in whichdelays are understandable, such delays are anathema to the day trad-er and must be avoided whenever and wherever possible.
Know which exchanges will accept certain orders. The rules change fromtime to time and from one market condition to another. If you don’tknow the rules, find them out. The Chicago Mercantile and IMM willaccept almost all orders almost all the time. The Chicago Board ofTrade is a stickler for accepting only certain types of orders—it doesnot accept MITs. Some New York markets have restrictions as well.Orange juice is one of the most notorious markets, but then you prob-ably don’t want to and shouldn’t day trade OJ.
Find out how your broker places your orders. Does he or she call thefloor? Are your orders put on a wire for execution? Does your brokerneed to call someone who will call someone else who will then callsomeone else? This all takes time. Day traders can’t afford the time forsuch delays. Ask your broker for his or her procedures and deal onlywith those brokers who can get you the fastest fills. Anything else willThe Importance of Orders 147
cost you money no matter how low the commission rate. Don’t bepenny wise and pound foolish.
Globex (24-hour) trading requires even more discretion in order placement.Be very careful. Learn the rules and learn to deal with the lack of liq-uidity.
If trading futures options, use price orders all the time. A market order inoptions will frequently bring you shockingly bad results due to thepoor liquidity. Always use price orders in futures options!
Learn how to place orders. Make sure your terminology is correct, makecertain you mean what you say, and make sure you listen to the orderas it is repeated back to you. You are liable for your orders. Errors willcost you.
Don’t beat around the bush. When you place your orders, speak quickly,decisively, and clearly.
Keep a written record of your orders. Even if you trade only one market,once a day, keep a written record which includes the market, whetheryou bought or sold, the type of order, the quantity, the price you werefilled at, your order number (as given to you by the order taker), andthe time you placed the order. Don’t fail to note all the above. It willsave you a great deal of money in the long run.
Report all errors immediately. The longer you wait to report an error, thesmaller the odds of having it rectified.
Always, always, always, always check out at the end of the day, especially ifyou have traded a great deal. By check out I mean make certain you havereceived all your fills and that you have closed out all your trades.Many brokerage firms will send you a preliminary run at the end ofthe day via modem. Print out the run and check it against your ordersheet. Report all errors immediately!
Check your order sheet before market closing to make certain you have takenthe necessary steps to close out positions. The more you trade and thelarger your positions, the more important this will be.
These are just a few suggestions which will help you master the prag-
matic end of day trading. Don’t ever discount the importance of properorder placement and consistent procedures. The wrong order in thewrong market can cost you plenty. I know. I’ve made all these mistakesat one time or another, and I don’t want you to have to repeat them.Learn it from me the easy way—don’t learn it the hard way by losingmoney.How SeasonalityInfluences Markets
A seasonal price tendency is the tendency of a market to move in a givendirection at given times of the year. Seasonal price tendencies exert a sig-nificant influence in all markets. Although some markets are more proneto react on a seasonal basis, I know no markets which are totally immunefrom such responses. The day trader who is familiar with seasonality canuse it to his or her advantage. Seasonal influences cause markets to movein a given direction a large majority of the time during certain weeks,months, and even calendar dates. Art Merrill, in his classic book, TheBehavior of Prices on Wall Street (Analysis Press, Chappaqua, New York),demonstrated this phenomenon statistically. He proved definitively thatthe Dow Jones Industrial Average was prone to close higher the daybefore certain holidays a large percentage of the time. His statistical basedated back over 100 years, and thus the odds that his findings were ran-dom events or chance results were less than 1 in 10,000.
Defining Key Seasonal Dates
148
My work with futures markets has revealed essentially similar results tothose of Merrill, and these results may be used to the distinct advantageof the day trader. Specifically, I am referring to the use of what I havetermed key seasonal dates. A key seasonal date is a date on which a givenmarket has shown a strong tendency to close higher or lower a largepercentage of the time. There are many such dates throughout the year,but not all are reliable. The larger the number of cases we haveobserved, the more reliable the key date. As an example, consider thechart in Figure 16-1. It shows the daily seasonal tendency for Marchcopper futures. As you can see, I’ve marked certain dates with arrowsup and down. The numbers inside the squares show date, and aboveHow Seasonality Influences Markets 149
BEAR es ont]
leat tot eee
 
 
Figure 16-1. Seasonal tendency in March copper futures.
these numbers appears the percentage of time the given market hasclosed up or down on this day. Naturally if the market is closed on agiven date then the reading cannot be used for trading this year.
The solid line plot shows the seasonal tendency. Arrows up andarrows down mark dates which have shown a strong percentage of timeup or down. By this I mean that the arrows up show dates on which theclosing price has been higher a large percentage of the time whereasarrows down show markets which closed lower on this date a large per-centage of the time. The exact percentage appears in the box above thedate. Although there are many arrows up and down, this does not guar-antee that the market will move in its anticipated direction this year.
How to Use the Key Seasonal DateTendencies
The key date tendencies should serve as a guide or a preselection factor.Look for the following characteristics:
1. Percentage of time up close 75 percent of the time or more
2. Percentage of time down close 75 percent of the time or more
3. Fairly large magnitude of move as shown on the solid line plot150 Chapter Sixteen
Figures 16-2, 16-3, and 16-4 show you my selections for dates in sever-al markets. The process is very simple and does not require much judg-ment as you can see. But this is just the first step. Once the dates andmarkets have been selected, you will need to apply timing. This willincrease your odds for success. It will help filter out trades which willnot move in the expected direction.
Here are the steps and rules I use in selecting seasonal dates fortrading:
1. Pick your key date trades for the next date.
2. For trades on the long side use buy signals confirming entry onlyduring the day; however, do not buy unless timing confirms the direc-tion of the move.
w
. For trades on the short side use sell signal confirming entry only dur-ing the day; however, do not sell unless timing confirms the directionof the move.
It’s that simple in terms of the preselection and timing application.There are many timing signals you can use with the seasonals. Figures16-5, 16-6, and 16-7 illustrate my approach using timing and key dateseasonals.
 
Figure 16-2. Finding daily seasonal trades in Swiss franc futures.How Seasonality Influences Markets 151
 
Figure 16-3. Finding daily seasonal trades in Swiss franc futures.
O6TR - TREASURY BONDS
APR 10APR +1APR 12APR 13APR 14APR 15
APRAPRAPRAPR
 
Figure 16-4. Finding daily seasonal trades in T-bond futures.152 = Chapter Sixteen
O6SF - SWISS FRANC
Month % Of TimeUp Down61 3361 38S7 4266 3356 4360 4050 SO70 350 5060 40so 50
 
Figure 16-5. Key dates and timing.
O3UV - JAPANESE VENMAR 9 63 36:MAR 10 60 40:MAR 14 60 40:MAR 12 63 36"MAR 13 69 30:MAR 44 50 50:
MAR 15 50MAR 16 B87MAR 17 50MAR 419 33MAR 19 80
 
Figure 16-6. Key dates and timing.How Seasonality Influences Markets 153
O6TR ~ TREASURY BONDS 2s
FEB 15FEBFEBFEBFEBFEBFEBFEBFEBFEBFEBFEB
 
Figure 16-7. Key dates and timing.
Daily Seasonal Tendencies
Many markets exhibit strong seasonality on a daily basis. Although itcould be argued statistically that a lengthier data history is needed forsome of the daily seasonals, the fact is that seasonals do exist and thattheir reliability has been aptly demonstrated and validated by ArtMerrill in his classic book, The Behavior of Prices on Wall Street.
Since daily seasonals work best in the most active markets where thelargest intraday moves are likely, I urge you to restrict your trading tothese markets. In order to assist you in this venture, I am providing youbelow with my latest daily seasonal listings in S&P, Swiss franc, and T-bond futures in Figures 16-8, 16-9, and 16-10. Note that these listingswill change each year as more data are available. Should you wish toacquire up-to-date listings, please contact my office (MBH CommodityAdvisors, Inc., P.O. Box 353, Winnetka, Il]. 60093). Please read theinstructions in Figure 16-8 for interpreting the lists.152 = Chapter Sixteen
O6SF - SWISS FRANC
Month % Of TimeDay Up Downeeess=  ==5=5 sessFEB 9 61 338
FEB 10 33
FEB 11 42
FEB 12 33
FEB 13 43
FEB 14
FEB 15
FEB 16
FEB 17
FEB 18
FEB 19
 
Figure 16-5. Key dates and timing.
O3uY - JAPANESE YEN
MARMARMARMARMARMARMAR
MARMARMAFMAR
 
Figure 16-6. Key dates and timing.How Seasonality Influences Markets 153
 
Figure 16-7. Key dates and timing.
Daily Seasonal Tendencies
Many markets exhibit strong seasonality on a daily basis. Although itcould be argued statistically that a lengthier data history is needed forsome of the daily seasonals, the fact is that seasonals do exist and thattheir reliability has been aptly demonstrated and validated by ArtMerrill in his classic book, The Behavior of Prices on Wall Street.
Since daily seasonals work best in the most active markets where thelargest intraday moves are likely, I urge you to restrict your trading tothese markets. In order to assist you in this venture, I am providing youbelow with my latest daily seasonal listings in S&P, Swiss franc, and T-bond futures in Figures 16-8, 16-9, and 16-10. Note that these listingswill change each year as more data are available. Should you wish toacquire up-to-date listings, please contact my office (MBH CommodityAdvisors, Inc., P.O. Box 353, Winnetka, II]. 60093). Please read theinstructions in Figure 16-8 for interpreting the lists.154 = Chapter Sixteen
Daily Seasonals S&P Futures
ye Chongt pn 210% ébre wnighe Aver
| J”
Month % OF Time ~-- Average % ---  seree
Day up Down up Down upseeees sees amen) cxameess =5
+e 75 2s 26
AUG 10 Oo oe peo 38
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+ AUG 12 75 25 WD, 35
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+
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Figure 16-8. Daily seasonals, S&P futures.
Down
2
AAANHO ARAN ANNA SAWHH NHR NNW EWN EAM EWS DUNNE
years in Sampleunch.
COOSCOODDOCODAVONVEDADOOOOOOOCOCOOO OD OOSDOO
Total
VONMHBOMDHDIVANSANG OO HDHOHBDHHDIHHHOHHIIROHOHDHHIMOHtee++44+++++
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net
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Figure 16-8. Daily seasonals, S&P futures.
month
Day
SEPSEPSEPSEDSEPSEPsepSEDSEPSEPSEPsepSEPSEPSEPoctoctocToctoctoct
octOCTOCT
 
 
%_ Of TimeUp Downgeee sas87 1275 2s87 1275 es75 es62 37ss 487 1262 37ee 377S 2587 12oe 3735 1437 1262 3762 377S 257s 2562 378s 1487 4262 3762 3773 2575 es62 37as 1487 12°62 3762 a77s ef87 1250 5074 ae87 1250 50so 5G
--- Average % ---up Down
 
How Seasonality Influences Markets
 
up
7
6786567s567567s56656?ss66567?556745744a
(Continued)
- YearsDown
ERAN ESNHH AAU NNHH HASHANAH AMA Hews
in Sample --~--
uinch
eooccc CD OOO DODO OOOO OD OO SOOO DODO DOOSOOO
Total
DHOVOHOTHHHOVHDHOHDOOVOHHHHHVNODHODOTTYHROMOOH
155156 = Chapter Sixteen
 
Month % Of Time - Average % ---  --7-7 Years in Sample ~----
Day up Down up Down up Down unen Total
weeeees snes cess seseexse saeecsas oo osaaee sauess Seaees zeenss++ OCT 24 75) 25 2) -.13 6 2 ° 8++ OCT @5 7s 25 28 -.17 6 2 ° aOCT 26 50 sO 24 ~.417 4 4 O 8++ OCT e7 71 28 -22 -.10 5 2 ° 7++ OCT 26 75 25 25 -.08 6 2 ° 3+ OCT 29 62 37 23 ~.415 3 3 oO 8+ OCT 30 62 37 .30 -.44 3 3 ° 8++ OCT 31 75 25 30 219 6 2 ° 8++ NOVO 1 75 25 29 ~.47 6 @ © 8+ NOV 2 62 37 2e -.10 5 3 ° 8+++ NOV 3 es 44 2e -.93 6 4 ° 7+++ NOV 4 B87 12 25 -.07 7 1 ° 8+ NOV 5 62 37 2e -.4t 5 3 ° 3++ NOV 6 75 25 .e3 ~.18 6 2 ° 8++ NOV 7 75 25 29 -.18 6 2 0 8++ NOV & 75 25 29 ~.417 3 2 oO 6+ NOV @ 62 37 19 “144 5 3 ° 8++ NOV 10 71 28 24 -.05 s 2 o 7++ NOV 11 75 25 29 -.01 6 2 °O S++ NOV 12 75 2s a4 -.412 6 2 ° 8++ NOV 13 75 25 26 214 & 2 Q 3++ NOV 14 75 25 34 -.12 6 2 ° e++ NOV 15 75 es 27 -.14 6 