Buying the Limit-Down (or, How to TRIPLE your account, risk-free!)

First, an admission: I haven't been trading the e-mini S&P's very much, if at all, over the last few months.  Summer was nothing short of brutal, and the promised seasonal volatility in Fall has been lacking.  The corpse of what used to be an excellent day trading market has only continued to stink since then; the lack of conviction and big-money participation hitting new lows has shown in what traders refer to as "Price Action", or lack thereof in this case.  The ES has become largely adrift, with no dynamism or meaningful movement.  For a short-term trader like myself this is a death sentence, as it becomes basically impossible to make consistent, meaningful profits on an intraday basis.

So, what to do?  For me, it was to switch markets entirely - I'm now focused on Crude Oil (CL).  It's not so different from how the ES used to be, and with a few weeks of trying it out on sim I had the hang of it.  I do trade it very differently from how I did the S&P's though, but that's a post for another day.

While my attention is on CL, I do pay attention my old market, especially when a well-telegraphed news event is set to occur in the overnight session.  Unlike many other futures markets, the ES handles extreme prices (limit prices) in an unforgiving way for any who trade towards them when the market is in their neighborhood.  The limit prices are hard - as in, permanent (during the overnight session).  No matter what happens, no matter how long it spends at the limit price or how many contracts execute against it, it will not adjust.

Let's recap from a previous post where I first observed limit prices in action while ignorant to the opportunity they are, and subsequently did the work to learn more:

Imagine buying with NO RISK of your stop being immediately pegged on a sudden price slip or random headline - because the market cannot trade at the price your stop is at.... In the overnight session, a 5% limit-down price is always in effect.  Since the cash market is closed, this -5% price can only act as an artificial floor, and not trigger any trading halts (more on that later).  What this means is that the lowest the market can be offered is at a 5% decline from the current settlement price, set at the close of the previous session.

I cannot emphasize that enough: THERE WAS NO RISK ON THE TRADE so long as you exited prior to 8:22 (when the CME checks if the limit price is currently bid/offered, in prep for the NYSE open).  If the market trades at the limit price long before that time (as it did last night), you have the entire overnight session as your timeframe for no risk existing on the trade.  Combine this with the fact that limit prices are very far away from current trade (and thus perceived as being extremely cheap/expensive), and it becomes very, very easy for the market to move away from them.

No risk + Time on your side + Very lucrative entryprice = OPPORTUNITY

Let's get to the trade.  Remember how on the CTS T4 trading platform limit prices are designated on the DOM via the discontinuing of white data cells.  Here is how it looks in the live market with a real trade on:

Limit-Down on the ES at 10:52pm Nov 8

Observe how I have a stop-market order in (no matter what, ALWAYS trade with a stop in the futures market), but that the market cannot trade where it is located.  As you can see, 17k+ contracts traded at the limit-down price, but it did not trade through it, because it cannot trade any lower in the overnight session.  In this screenshot, all bids at the limit-down price have been consumed, with the limit-down price the current offer.  And since that is the hard floor in the market, there actually is no current bid at any tradeable price!  So you can buy all you like, there is no one to sell to!?  Think about that as you look at the next screenshot, which is how the trade played out from that point:

30-minute chart of Nov 8 Overnight Session w/ Volume Histogram

Looks like that was the exact opposite of what to expect?  Everyone selling and not a single buyer to be found?  Traders ignorant of how limit-down prices work in the ES paid for that dearly, as the market had nowhere to go but up & there was literally nothing to be gained by selling the limit-down price (yet before it rallied, over 20k contracts had traded at the limit-down).  In addition to forced liquidation, limit prices trigger lots of emotion and stress, contexts in which it becomes much easier carry out the exact wrong action.

I exited the trade at a gain of 50 points at a strategic price location (previous macro range low).  Unsure how the test of that significant reference was going to end up and already profiting substantially I decided to step aside before giving the market a chance to crash back down.  I cannot control profit, and although the market did rally much further after my exit I did not know it was going to do so for sure, and I did not want this rare and unique opportunity to be squandered should sellers step back in.  Besides, when you do the math:

$50 (profit per point per contract) * 50 points (price distance captured) = $2,500 total profit per contract

Assuming you enjoy the lowest possible intraday margin for T4 (set by CTS) at $1,000/contract for the ES, the total gain computes to 250%, or better than a tripling of each $1,000 in the account.  Well worth staying up half the night for, wouldn't you agree?