Which e-mini trading systems for 2008?

I started trading e-mini futures markets in 2002, in the second half of that year that followed the year which coincided with the height of the post dotcom bubble recession. I focused on ES, the e-mini of the full futures contract of S&P 500. At that time, only NQ, the e-mini of the futures contract for NASDAQ 100, was liquid enough to be suitable for day trading, although certainly not as liquid as its somewhat older "cousin," ES.

2002 was a very volatile year in the markets. I did not realize how volatile it was until 2003 arrived bringing with it considerably narrower daily ranges. In mid 2003, the recession was definitely over and the stock market started lifting itself from the depths of the broad and in some sectors (the Internet stocks, in particular) devastating decline. The rise was steady if slow, with gloom and doom emotions giving in to growing optimism and positive economic outlook. The uncertainty was now clearly lower than just a year or even six months ago. Traders and investors became calmer. This had to lead to smaller price fluctuations and thus to smaller daily ranges.

It was in 2002 that I designed my first e-mini systems. They were trend following systems and they did quite well then for the markets were right for them. Wide ranges would give rise to big profits, on some, if rare, days as big as 40-50 points, which translates into $2000-3000 per contract. In 2003, ranges like that and thus the profits that came with them were already pretty much a thing of the past. The following 2 or even 3 years did not change much in this respect. Until 2007 when the markets became more volatile again.

In those years, 2003 through 2006, the right trading systems to use were counter-trend systems relying on the assumption that the markets are most likely to reverse to the mean and so any larger deviations from it should be countered by taking a position against such a deviation. For instance, had a market risen sharply on a given day, shorting it (i.e., selling a contract or more of its underlying futures) would have been a good idea.

Things have changed considerably in 2007, especially in its second half when volatility driven by growing uncertainties in financial markets increased significantly. This was caused largely by the slump in the housing market and, related to it, the crisis in the banking sector where rather dubious financial practices created nothing short of a financial catastrophe among sub-prime lenders responsible heavily for fueling the expansion of the housing market. The size of this bubble and its full ramifications are yet to be grasped. The uncertainty surrounding these issues has lead to increased fluctuations in the price of stocks and futures, including e-minis, producing wider ranges than a year before, in some cases by as much as a factor of two or so.

This volatility is bound to stay with us for at least another few months and, what's even more, the housing crisis and the lending crisis may contribute to a recession in 2008 or 2009. This can mean only one thing for day traders: wider daily ranges in 2008, perhaps as wide as in 2002.

The answer to the question posed in the title of this article seems to be quite clear then. The e-mini trading systems that are more likely to produce profits in 2008 are the same systems that did well in 2002: the trend following systems that bet on strong trends to continue rather than to reverse easily.

I posted the above in early December, 2007, as you can easily check using the updates archive. To say that I was right on the money might be a slight understatement. I was totally right. George IV that I had released just several days earlier did very well in 2008 and kept on delivering also through the first half of 2009. Even George II, as simplistic as it is, also did quite well during those volatile months.