Scalping the Mini Dow off the M1 Charts

I want to share how I make money scalping the Dow E-Mini Futures Market (YM) off the 1 Minute chart.

This thread is primarily to be a tool for my own purposes, as I strongly believe that the process of explaining what it is I do enhances my own thought process. I am a student of the market and not here to sell anything. I'm a discretionary orderflow trader and I use S/R and price action to enter and exit trades. My primary focus is to trade.

While I realize this is a Forex-centric website, these strategies apply to any liquid market and I choose the Dow as my market for several reasons, including spread and the way the equities markets work (specifically the volatility of the cash open at 9:30 AM ET).

Like a typical retail trader, I came into this business starting in Forex unsuccessfully, until I eventually stumbled on James16's thread in 2009. It's likely that without James16's chart thread, I would not even be trading today, and I also have James16 to thank (whether he knows this or not) for initially piquing my interest in trading the Mini Dow. However, over the years I've gained experience in the markets, I learned that everybody has different strengths and weaknesses, and you have to discover on your own what works and what doesn't for you. When you start to truly make a strategy your own, you discover things that no one else could teach you. And one thing that I've learned is that it is possible to enter and exit trades with a high degree of accuracy off the 1 minute chart.

Now I was always told to avoid the 1 minute charts (or anything below the 4 hour charts) because they were just "noise". I've found them to be anything but. The market is fractal and the same price action that occurs on the weekly or daily occur on the 1 minute charts as well. However, there are some nuances that come with trading the lower timeframes and there are some advantages and disadvantages. Additionally, each market has its own personality.

Let's start with the assumption that the 1 minute chart is just noise, or simply contains "less data". This may seem logical at first. However there is actually more information that can be gained off the 1 minute chart that can't be gained (easily) off the higher timeframes. And this is the concept of candle formation.

The 1 minute chart affords the opportunity to read candles as they are forming, which provides you information about the bull/bear battle that isn't readily available on the higher timeframes (at least without a market replay). In other words, on the higher timeframes, you're only looking at candles that have been fully formed, but not how they were built. On the 1 minute chart, however, you can see much more clearly how the battle played out which can give you critical information about when it might be a good opportunity to trade, or stay out.

Now before I get too far, let me just iterate that scalping is not for everyone.

The most obvious problem with scalping is that it opens a very wide door to overtrading and revenge trading that might not be otherwise possible. If you can't control your emotions or bad habits, I can practically guarantee you will lose.

The market is the only competitive arena in the world that doesn't play fair - unlike school, a traditional job, sports, etc., it doesn't segregate people based on their skill level, experience level, age, race, whether you have disabilities, or the like. Only one thing matters: If you are not on the top of your game, you will be beaten by someone else who is. Period.

Overtrading is something that, unless you are a complete disaster, is very hard to do if your strategy is based off the daily timeframes, because it takes days or weeks for a new setup to appear. But with scalping, something that looks like a setup can appear every other minute, so the market can easily fool you into thinking you have another legitimate trade opportunity when in reality you do not. It is very easy to dig a hole for yourself that you can't get out of.

This goes without saying, but as with any strategy, demo first. The demo feature is not just there for you to learn how to use your platform.

Because my strategy is heavily reliant on price action as the candles form, I post videos on youtube of my trading sessions v.s. static charts and this acts as a key part of my trade journal. I record videos of my trading sessions with Camtasia. I am looking for 1-4 key trades each day off the 9:30am open, when there is a sudden surge of volume (and, hopefully, volatility, which is a trader's best friend).

The below is a compilation of trades taken for the last trading day of November through the beginning half of December, to show an example of what this kind of scalping looks like. I did this especially as a thank you to the person who helped teach me a lot of this but is a good example of a typical series of trading days. This is a live account I trade and while I do illustrate the P/L in this video (not including commissions), I've learned that the money is not what is important. It is the skill and the process that is important, and the money just becomes a side-effect of following your trading plan.

Note: Video is sped up for brevity.

Let's examine a particular trade setup using the 1 minute chart.

Now in everything I do, as an orderflow trader, I am constantly thinking about what the other participants in the market are likely to be doing. And I'm not kidding when I say, if you want to understand how other traders think, you have only to look at your own trading journal and examine all the times and reasons you entered the market and took an absolute #$%$ trade. This information is invaluable and it's important to study and embrace your losses, because they will help you become sharper if you use that information to turn your trading around in the long run.

In this example, we can see the market has made a significant drop (relative to the 1 minute chart) from 400s to 365s, where it reverses sharply.

For anyone who has read the J16 thread, you will immediately recognize the price action of the reversal off 365s. It's a pin bar, and a nearly perfect example of one.

But, what exactly is behind a pin bar, and why does it form? Let's examine this in detail.

1) Those that were in the move short to begin with at 400s, will see the drop, and being 35 points in profit (which is pretty decent), will look to close out their positions (resulting in buy market orders, pushing the market up).

2) Those that weren't in the market to begin with, having seen the drop in price, will look to get in short. Those that were unfortunate enough to get in short AFTER a significant drop in price, and entered with the market pushed lower at 370s, will see the rejection and get spooked. Although some will hold, a lot of traders will immediately experience fear and buy back their short positions (resulting in more buy market orders, fueling the move higher).

The pin bar in this example is a simple example of a bear trap. Before the pin bar forms, it suckers traders to get in short at the worst place possible.

Here's another example of the same setup, that was taken recently on December 1, 2014. (Click the image to watch in action)

But the problem with pin bars is, as anyone who has traded them know, a lot of times they don't work. Now while there are always thousands of possible reasons and explanations, and ultimately, nothing is guaranteed, let's have a deeper look at this and examine in detail how, in certain situations, they can become trade opportunities.

Before I give this next example, let's have a look at a fundamental problem that every professional trader trading large size has, and that is the problem of slippage.

The average bid / ask on the YM during the cash session is somewhere around ~50 contracts. As a retail trader trading small size, if we want to enter the market at a particular price, during normal market conditions, we can pretty much hit the bid or lift the offer with a market order and get the price we want. But a pro does not have that luxury because if there aren't enough orders on the bid or offer, the size they are trading will actually move the markets. If a pro is scalping for 3-4 points, this creates a huge problem because by simply entering, they can potentially move the market 3-4 points (meaning they are essentially entering at the price that they were looking to take profit at).

As a result, a pro trader needs to enter in an area where there will be a lot of orders. So where will a pro trader find a lot of orders to fill their position?

The simple and most straightforward answer is, in a place where a lot of retail traders are doing the wrong thing. This includes a) after price action that everybody recognizes, and b) around S/R levels that everybody recognizes (including areas where a lot of stops are likely to build up).

The basic problem with pin bars by themselves is that most traders recognize them and trade them. As a result, the way pin bars are traded by the masses can become obvious liquidity pools for the professionals.

Let's have a look at an example.

Off the open, we see the market push down in continuation with the trend, but is immediately rejected. Now to be fair, this pin bar is very weak looking which would have given some hints as to what might happen next, but you'll notice that it does push higher immediately on the next candle.

What the market is doing is providing the bigger players with an opportunity to fill their positions short. How so? Because after a rejection like that, a lot of traders are likely to hop on board long. Subsequently, the market continues down the path of least resistance (down the wick) since there are no more buy orders left after that initial rejection, and stops get taken out below the wick, fueling the move down further.

(Click the image to view the move play out)

Another example. In this instance, the market pushes higher after the formation of a pin bar, but what doesn't happen next is key information. If the bulls were fully in charge at from 550s to 560s, the market should have gone higher and continued, which didn't happen.

Another example. In this case, it seemed clear that a breakout of 658s was expected and more often than not, breakouts fail. But watch the pin bar that formed as the market broke out, suckering everyone to get in short. After a rejection like that, there should be some followthrough. When that didn't happen, the case was clear for a long.

It is said that human behavior is unpredictable. And that is generally true - except in cases of fear and greed.

A simple illustration would be, if you were to go to a crowded train station and watch from a balcony, you couldn't predict where everybody is going to go ... until you pull the fire alarm. Then it's a pretty sure bet everybody will (out of fear) head to the exits.

The same works for greed. Let's say that you heard over the PA system that a train that was leaving from track A is now leaving from track B. It's a sure bet everybody that was at track A will immediately head to track B and (out of greed) scramble to be the first in line.

The same thing happens in the market. Often times, the best moves in the markets are created by traders that are forced to liquidate their positions out of fear (either by protective stop orders, or simply scrambling to cover their bad positions).

Here's another example of what would have been an almost sure-fire buy setup for most price action traders. What is of particular concern is that, after such a strong rejection, the market hardly went anywhere to the upside. That shouldn't happen after a rejection like that. This is key information and, given the right context, the case to make a short trade here.

Let's have a look at this chart. As you can see, price was trading in a range between 330s and 347s coming into the morning open. The market then tanks, forming what looks like a pretty convincing bearish engulfing candle breaking out of a range.



At this exact moment in time, where would you think the market is going to go?

How many other traders in the world do you think saw this and immediately smashed it short? How many do you think had a sell stop order at the bottom of the range, and a buy stop order at the top of the range? How many other traders do you think were on the sidelines during the range, but now have gotten involved in the market?

And if the market were truly bearish, what should happen next?

Let's see. Click the image below to watch.



Hopefully if it wasn't clear before, it is clear now the kind of information you can get from watching candles as they form.

Another setup example.

I do trade a classic break and retest of S/R levels.

What price action traders will often do is look for confirmation that the level will hold by looking for a rejection candle (e.g. pin bar) off that key level and then act off of that. I do it too and sometimes, they work nicely.

However, seeing a bullish engulfing candle that looks likely to break through the level would put most traders off taking this trade short.



For me, this only strengthens the case, after what happens next. Because instead of a pin bar that the masses are likely to pile in on short (not really what I want), and with stops piling up just above, I now have a case that traders were likely to have done the opposite (buy that candle) expecting the level to break. So in this case, stops have just piled below, allowing the needed orderflow for the pros looking to a) short that level at the price they wanted, and b) providing the necessary protective sell stops to fuel the move downward.

Admittedly, I did not manage this one well and was expecting a bigger move to the downside. My target should have simply been a retest of the prior low. No need to get greedy when scalping.

Hi Felixcattus,

Seems you like to trade the times I usually tried to avoid :-)
I always thought the 1st 15 minutes was the most difficult to trade because of the extreme volatility @ the open. I usually waited until things settled a bit to try to see the swings & direction better. If trading the open, best to watch the levels like you do.

When you mentioned breakouts, that's where I usually had to keep an eye on the S&P (ES). With 10 times the volume in ES as YM, the ES picks the direction so if ES doesn't "breakout" when YM does, then YM will often have a "fake breakout". I wish ES had price levels every .10 like YM rather than every .25. The levels are cleaner & respected better on ES but if the swings are too small the entries/exits can be more difficult on ES with .25 increments.

Thanks for the thread. I'll keep following.

That is funny - I'm doing the exact opposite, looking to trade only within the 1st 15 minutes each day before volatility dies Thanks for the follow - hopefully some good info will come out of this thread!

better than 1 min chart is a renko chart

Really nice way of trading. I try to do the same - sell an buy human emotions

Sorry to bother.
I am curious how do you create those animated .gif from a chart?
Thanks