The Nasdaq futures contract (NQ) generally trades like most of the other equity indexes though it has a few twists and turns that set it apart from the crowd. For anyone who has traded seriously, it is those “twists and turns” that can spell trouble for the uninitiated when trading the NQ. The purpose of this article is to alert traders to some of the idiosyncrasies that are part of trading the NQ and how to adjust your trading to take advantage of the attractive parts of the contract and avoid some of the less-than-pleasant outcomes this instrument can cause.
There are times when this contract is very easy to trade, especially when it is trending. Of course, you might say all contracts are easy to trade when trending but the NQ (because of volatility) presents some unique challenges and can be profitable if you trade the contract correctly. The challenge in trading the NQ is to understand and profit from the volatile nature of the contract. This can be a double edge sword and the downside of volatility is the tendency of price action to move against your position at a high rate of speed.
In a normal “bracketed” market you can let the trade run against you some, depending on the size of your trading account, but sooner or later (it may be days, weeks, even months) the price action will break out and the trade you let run will become your worst nightmare. The best general approach is to trade this contract conservatively and with the trend.
Countertrend trading is the formula for blown trading accounts on the NQ. You should repeat this mantra 25 times before going to bed each night. “I will not trade against the trend, I will not trade against the trend… “
Here are the techniques that have been successful for me in trading the Nasdaq:
· Reversion to the Mean: Like most contracts, the Nasdaq is a great contract to trade using a technique called “Reversion to the Mean.” This strategy, in general, discourages traders from taking those awful breakout and breakdown trades that are, so often, the cause of many losses. I generally wait until the price action is between 2 and 3 standard deviations against a backtested SMA and find this trade phenomenally successful. I have added a few game-changing rules to quantify the trade more precisely and upped the win rate another 15%. I urge you to investigate this less-than-popular style of trading and see how truly successful it can be.
· Pay specialized attention to support and resistance (SAR): As I mentioned at the onset, the NQ is a very active contract and making any preliminary assumptions about whether or not the price is going to move through SAR is a mistake. A better idea would be to use an order flow program so that you can see the actual order flow at SAR. Are traders hitting the buy side, the sell side, or are the orders placed that represent traders are on both the bid and ask.
· Volume Analysis: By now, most traders realize that increased volume at SAR generally results in a market pullback off SAR. The corollary is true also, low volume approaches to SAR may indicate that price is going to continue through support/resistance. I strongly recommend using a “Better Volume” indicator to indicate, in real time, the nature of each bar. Obviously, high volume at SAR often indicates that a change of direction could be in the cards and low volume signals a possible continuation of a move. The question has always been, “How high should the volume be to indicate a reverse in direction?” Obviously, high volume at SAR often indicates that a change of direction could be in the cards and low volume signals a possible continuation of a move. The question has always been, “How high should the volume be to indicate a reverse in direction?”
Is there a method for finding the “perfect” NQ entry point? No, not so much. But, you can get good enough to read between the lines and consistently score winners. Best of luck in your trading.