It’s time to talk about the ES/S&P500 Futures and Sucking

Published on: January 26, 2022

This has been a recurring question of late. Newer traders asking “Is the ES always like this?” and it’s time to discuss openly. 

The S&P500 Futures suck right now.

There – I said it.

People are struggling – especially newer traders. Those that didn’t experience a ‘normal’ S&P500 Futures yet!

The whole world and his dog seem to be focused on trading the S&P500 Futures. There’s a lot of content out there, including on our site that discusses S&P500 – and for this reason people gravitate towards it.

But this mass of content was mostly created before COVID. People still find it and it doesn’t come with a “COVID Update”. So this is our S&P500 COVID Update – 2 years after COVID started. Better late than never.

First, let’s look at why we liked S&P500 before COVID:

• It was medium-paced. Faster than index futures and interest rates but slower than Crude.
• It had good liquidity at most prices in normal circumstances (but not after FOMC), with very little slippage.
• It is based on US equities which are widely reported in the news.
• On days where big news wasn’t hitting it – it would put in lovely tradeable swings of 10-20 points and often put in 4 or 5 in a day.
• It was market order-driven and so cumulative delta was a big help nailing down reversals.

COVID came, the liquidity disappeared and I guess market makers scaled back thinking there was a high chance of COVID news swiping the market and taking them out. I don’t know – that’s speculation – but our liquidity went and remember liquidity is the opposite of volatility. So less liquidity, more volatility and now the ES makes Crude look static.

The S&P is no longer medium-paced. It is wild. Pre-covid techniques are either no longer working OR need adjustment. You can’t really finesse an entry most of the time – but still – new traders are going there first and struggling.

For new traders – especially those new to order flow and starting to do drills – it’s too jittery. My experience says that at some point the ES will get back to it’s old self. There’s an ebb and flow of volatility in all markets and right now the ES is at an extreme. Using it to learn order flow or trading right now is going to lead to disappointment and it doesn’t matter what techniques you pull from the internet – those that are pre-covid are going to need adjustment IF they work at all and IF you have the deeper pockets to get through the learning experience on such a volatile market.

Now – you can of course use the micros to trade – which is less risky but still exposes you to the same volatility. So you can trade smaller – but you still face a market that needs a very experienced hand to trade.

Looking at Crude right now – well it looks quite stately, it’s more readable, it’s a much better market for the beginner for trading and it’s a much better market to do order flow drills on.

I get that there is so much info out there on S&P500 futures, it’s natural to want to trade it. I personally haven’t touched it since COVID took the liquidity away. To be honest, my thoughts were:

“hmmmm… COVID took away the liquidity, I’ll come back when it all blows over. It might even be a couple of months”

So I’m obviously no fortune teller. The way it’s moving – it’s not my game – but there’s other places to find the volatility I like.

So – for those new to trading or order flow. Please consider that the market is not the one being described in pre-COVID articles/education. It has changed, it’s not friendly and it’s not for beginners.

Keep an open mind now – you don’t need to take my word for it – but take a look around at the alternatives. Right now, Crude and Gold are moving nicely. Gold might change if the S&P500 keeps moving down and if people see it as a safe haven and start piling into it. Interest rate futures are also worth a good look. Grains like wheat and corn are too. It’s worth first going to the CME website, clicking Markets and going through them to find which have decent volume. Then spend some quality time with them.

What I like to do with people that are focused on ES and struggling – is have them set aside a few days to watch the order flow on other markets. To see, if one speaks to them in a way the S&P500 doesn’t currently do. Focus on that first, as you build your skills and later on if/when the S&P500 Futures return to normal – you’ll have built the skill to trade it – as it’s returned to volatility you are comfortable working with.

Sticking with S&P500 like a dog holds onto a bone is going to be a very negative experience. This is not supposed to be self-torture. You don’t have to leave – but I do think you should scope out other markets if the S&P500 is frustrating you right now.

Because to be honest – it’s kinda awful right now.

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Order Flow itself is simply information. Just like charts, it can be used in a number of ways, some good and some bad. But let's first break down order flow into it's components so we all agree what we are talking about:

Order Executions/Tape Reading - This aspect is the real flow of orders. It's the information we see in Time & Sales, Footprint Charts, Cumulative Delta. It is looking at market orders, either as they execute or historically. I guess this is the "true order flow". Every trade is a buy and a sell. We look at market orders because we consider them to be more aggressive. When someone trades with a market orders, they are giving up a price to get an instant fill. Limit orders on the other hand just lazily sit there waiting for a market order to hit them. Often these are market makers with no directional conviction. So we see market orders as being more significant.

But we don't use these in isolation.

Volume Profile/Positions - The tape reading part helps us assess various things like momentum, traders getting stuck, balance of trade BUT the volume profile helps us understand where people are positioned and likely to get stopped out. I sometimes call this "Order Flew". It's important to know when trades will be "washed out" - for example - if we have a volume cluster on the S&P500 Futures and the market moves up 100 points and back down to it, it's unlikely short term traders on either side that were positioned there will still be there. But recent, nearby volume helps us assess areas of positions.

Market Depth - The bids and offers, the lazy passive orders waiting to be hit. This is part of the story but in terms of overall importance, I'd put it at around 20% at most. For example - if you return to the high of the day on any market, the offers will be quite large directly above the high. It means nothing at all. It's just a quirk of the market. It does not help you tell if a price will hold. On the other hand, if you see large depth and as we approach it, we see more added to the depth in front of that price, it means others are front running that depth and that is a useful bit of information.

This is the key - it is all just information. Just like price charts are information. When people look at Order Flow, they consider it to be a technique more than a set of information. They look for things like iceberg orders and decide to make a one rule trading system to fade every iceberg, For these people - yes, order flow trading is overrated because they are trying to ignore everything else going on in the markets and construct a trading system a chimp could execute.

For those looking to improve a decent trading approach, the best thing to focus on in Order Flow is momentum. Once you can read momentum you can:

• Avoid getting into positions when momentum is against you.
• Confirm trades are working after entry when momentum goes your way.
• Exit trades in profit when momentum fades.

That's perhaps the easiest way to use order flow because momentum is easier to read. It's about the market continuing to do what it's already doing. On the other hand, reading a turn in the market with order flow takes a higher level of skill and a little longer to learn.

Order flow can't put lipstick on a pig. It won't help you 'improve' something that doesn't work anyway, which is why whenever someone calls me, the first thing I ask is what they are currently doing and we discuss whether they need a reset or whether it will actually help.

When Jigsaw started back in 2011 - we were one of the first in the space and certainly had the best education. It was always going to attract the underbelly of the trading education/tools world and now we see stuff out there that is so complex but so impressive and futuristic that new traders are drawn to it like moths to a flame.

So here's my advice when looking at Order Flow

• Order Flow can't improve something that doesn't work.
• Order Flow can be used on it's own, without charts to enter and exit the market but you also have to be able to recognize different market states that need different/altered setups. There is nothing magical about this.
• Don't start jumping at shadows and take 50 trades an hour in your first week looking at Order Flow, be selective. It can be exciting to see cause and effect play out in front of you for the first time but don't overtrade.
• Do drills to learn how to read it before you trade it.
• Markets can only go up and down. Don't overcomplicate it. If you have too many Order Flow tools on your screen - you will not be able to make consistent decisions. Less is more.
• Take time to choose a market with a pace you like. Interest rates might send you to sleep, the DAX might give you a heart attack.

It is hard to see how a set of information could be overrated. It is true that some methods of presenting this information are better than others. It is also true that some people simply get on better with different tools (e.g. Footprint vs DOM).

There's a middle ground between complexity and simplicity that will leave you making consistent decisions where you improve over time. For those people, Order Flow will be way underrated because they will be the one's getting the most out of it.

Those that jump in with both feet on day one and those that have 100 different tools up, for those, it's a painful experience.

Keep it simple and manageable. Start with momentum reading and build from there. You will never look back.