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ant

Trading with Market Profile

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There is a poor high now, but the market doesn't have to go and correct it right away. That will be in the back of my mind today and will use it with other trading information as the day progresses.

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The possibility of the outside day is there - next obstacle is yesterday's low. We could get overlapping-to-lower value today, but the market has to continue cranking to the downside.

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  Frank said:
re Globex -- decide if globex session is strong one or not --- if strong -- that direction will generally generate a move beyond that globex extreme. if its up but weak, then that would be consistent with a selling tail and might hold all day.

 

Frank, I should do that too, but so often the overnight volume is so low compared to the pit session.

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I would scale some more ahead of the 989.75 level that I've been talking about.

 

This is the second time down here, and each time we test a support level the weaker it becomes.

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Notice that if the market does not drive away from a prominent POC on high volume, how it gets pulled back to it. That is always in my mind when managing a trade or considering a reversion to the mean trade.

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It looks like we're going to get unchanged value with the POC in the center of today's range. Volume is not impressive and the confidence in the market is low so we could see a balancing day again. Yesterday's low could not be taken out and we have a poor high so I would exit the balance of my position here. If it goes lower, it will do so without me. I will consider shorting again either around today's high or below 989.75.

 

I will stop with the commentaries for today, but will answer questions, if any, as time permits.

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Below is a snapshot of the ES intraday profile. This is what I'm looking at throughout the day in addition to a daily bar chart with balance areas and reference levels marked and my written daily analysis.

 

IntradayProfile.GIF.983b19803dfe75f0a726ad94f527c77f.GIF

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One other thing I wanted to add to my previous post. Note that today's current low is 1 tick from yesterday's low. If you put that together, that is not a good low either so the odds are that we will take out that low, maybe today or maybe tomorrow.

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The objective of this thread was to show how I view and trade the markets by using MP to read the markets. I attempted to do this by providing my thinking on the ES market as it developed in real-time and also in hindsight. As I wrap up this thread, I would like to summarize some of the important points covered in this thread (in no particular order).

 

  • I use MP to organize market data and understand what the market is trying to do, not for buy and sell signals.
  • I do my homework diligently every night and fine-tune it prior to the market open. I consider my trade scenarios before the market opens, not in the heat of battle.
  • I review daily, weekly, and sometimes monthly charts for a bigger market perspective than my trading timeframe.
  • When I look at a bar chart, I see balance areas, breakouts from balance, and trends. I then adjust my trading strategy according.
  • I trade all market conditions and don't believe in focusing on only one type of market.
  • I trade value and not price.
  • Within the first 15-30 mins of trading, I try to assess the type of day that we're likely to have to set the tone for how I will trade the rest of the day. I will adjust my view during the trading day, if necessary. However, there are days when I don't have a good read. In such cases, I stand aside and don't trade.
  • I take trades that I can justify based on market structure and with good trade location. I try not to focus on a single data point, but use all of the data at my disposal and market context to assess the odds of a particular trade working.
  • I try to think in terms of probabilities.
  • I set my stops based on market structure, not a money stop.
  • I use MP and volume to monitor trade continuation.
  • I give my trades room to work.
  • I don't use technical indicators and I don't use short-term charts (e.g., tick and 1/5 min charts).
  • I think the markets are complex and that they don't always adhere to hard and fast rules. I tend to follow guidelines, not rules.
  • I believe that self understanding is as important as market understanding.
  • Market understanding includes the use of MP and applying market logic.
  • It has taken me a little over 2 years to read the markets as I do and it's still a work in progress. I don't think my learning will ever end, but I do think that my search for the "Holy Grail" is over. I rarely read any technical analysis books anymore. I now gravitate to books focused on the mental aspect of the game.
  • My goal is to become an expert trader and trade professionally for a living. I still have a ways to go in this regard, but the journey has been great. Currently, I trade part-time and work as an engineer part-time.

I think I've covered everything I intended to and I didn't hold back anything given the trading days that I've discussed, but there is more to successfully trading the markets than what is covered in this thread. I don't want this thread to get too long so I will request that it be closed tomorrow. In the meantime, I will handle any questions that you may have on this thread's content or my trading style. Thanks for reading!

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  Quote
I set my stops based on market structure, not a money stop.

 

hey ant, I understand this concept but can you give an example or 2? also, with that in mind, what is your thinking on position sizing -- however you want to discuss that -- just the process of how to position size given sometimes wide stops?

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  Frank said:
hey ant, I understand this concept but can you give an example or 2? also, with that in mind, what is your thinking on position sizing -- however you want to discuss that -- just the process of how to position size given sometimes wide stops?

 

When I enter a trade, I want my exit to be nearby. For example, if I trade a breakout to the upside from a balance area, I will usually put my stop below the the balance area high. If the breakout is real, I don't want to see it get back into the balance area. That is a stop based on market structure. Usually, I'll have a hard stop further away (i.e., a disaster stop) and have a mental stop below the balance area high. The reason I do that is that I don't want the market to simply tick there, stop me out, and then continue in my trade direction. To stop me out, I really want to see conviction. If only a few contracts trade there, I'm not going to let them have my trade.

 

By money stop, I mean putting my stop 4 points away simply because that is my pain threshold. Short-term market movement tends to be random in nature and the market doesn't care about a money stop. I don't use money stops, but I do use a disaster stop in case I lose my internet or PC crashes, etc.

 

Position sizing is a personal thing based on one's risk tolerance. In general, I base my position size as a factor of my account size. I also usually trade the same size for all trades. If the markets get really volatile, than my exits will be further away, which means my stops are further away. In that case, I will reduce my trade size and use the bigger stops (still based on market structure). Usually it works out because with the higher volatility comes higher profit potential so you have less contracts on but the profits are higher per contract.

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  ant said:
10:50AM EST: It looks like we're going to get unchanged value with the POC in the center of today's range. Volume is not impressive and the confidence in the market is low so we could see a balancing day again.

 

Early on, I was expecting another balancing day because the confidence in the market was low, the volume in the early morning move down was not high, we had the prominent POC from yesterday which was acting as a magnet for price, and we had a poor high. We revisited the prominent POC from yesterday and practically spent the rest of the day trading around it and developing a prominent POC for today. See the final profile for today in the chart below.

 

Final-Sept3.GIF.237c54fcef728ed5dac6cbe8b6499644.GIF

 

The trade scenarios for tomorrow (Sept. 4th) are fairly straight forward. The ES has formed a two and a half day balance area bounded by 1003.25 and 991. I will go with any directional move away from that balance area, but will also be alert for a false breakout, where the market looks above or below the balance area and fails. The move in the opposite direction may be swift. Once again, if the market does not move away with strong volume, today's prominent POC will probably pull price back to it. The chart below shows the profiles with the balance area. I will also review the pre-market session before the open to see where the ES is trading and adjust the trade strategy accordingly, in case the market breaks out from the balance area overnight. That's my homework for tonight.

 

Profiles.thumb.GIF.e7e636ee451487e5e6c371de81b4f129.GIF

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  vittorio said:
Please could you give any example how you use

volume ?

 

Thank you

 

I look at the NYSE Composite volume every 30 mins or so available at NYSE, New York Stock Exchange and I keep a spreadsheet so that I can compare the volume from one day to another. For example, today in C period the volume was not high in comparison to recent days (see figure below) so that's how I based my comment about volume today which led me to scale out of my position. The volume in C period decreased the odds for continuation.

 

I like to compare the volume of up moves to down moves to see which is stronger and I also like to compare the volume of up moves to previous up moves to see if higher prices are cutting off activity (same for down moves). My expectations for each market condition is as follows:

  • In a balance area, I would expect lower volume. Volume isn't as important in a balance area except when you start to get to the extremes.
  • In a real breakout, I would expect high volume because all timeframes get involved.
  • In a trend, I would like to see constant or increasing volume if the move is to continue.

Check out the table on page 192 of Mind over Markets which presents Directional Performance Relationships with respect to attempted direction, value placement, and volume.

 

Another factor to consider when assessing the odds for continuation is profile shape. For continuation, I would like to see an elongated profile. If the profile starts to fatten out, that decreases the odds for continuation and I can tell you that volume will also be tapering off when that occurs. If the profile shape remains elongated and the volume is high, don't exit your position! You need to take advantage of these times and ride your winners or it will be very difficult for you to make any substantial profit over the long term.

 

There is a lot of information to internalize when trading. Hope this helps.

 

Volume.thumb.GIF.de4fef53ec4a64cad1f9283b57c77d3c.GIF

Edited by ant

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  ant said:

"Poor structure" is one of those things that is ambiguous and takes a bit of practice to identify it. Sometimes it's easy. A lot of times, there are nuances in the profile shape itself. So when I say "poor structure", I'm referring to the profile shape. For example, on a trend day the profile shape is usually elongated and fairly thin, maybe 4-5 TPOs wide. However, there is such a thing as being too stretched out which is not good as that usually indicates forcing action such as short-covering or long liquidation. Good structure in a trending market has backing and filling. When the profile is too stretched out, you could see 3, 4, or even more distributions in the profile. Those types of days can be taken back quickly. It's important to be able to identify this because these types of days will usually fool traders into thinking that a market is strong, if it is too stretched out to the upside.

 

Hello Ant,

 

Are there any good screenshots you would be so kind to reference to see an example of good market structure elongated trend day vs poor market structure elongated trend day?

 

When you say "backing and filling", do you mean to say you get some sustainable level of Higher High's and Higher Low's vs. just a few gigantic long bars on a minute chart? (Long bars implying unsustainable & near exhaustive momentum)

 

Was Tuesday's downtrend "good market structure" for the bears?

 

  Quote

On a rotational day, the profile will usually get short (from high to low) and wide (from left to right). That is what I was referring to as "poor structure." And then, there are degrees of poor structure, it isn't black or white. I sort of described the extremes of good and poor structure, you should consider structure that falls within those two extremes. Other things to look for in the profile shape are non-symmetric profiles or price levels. For example, you can have a a price level that is 3 TPOs wide and the price above it is only 1 TPO wide. That is not symmetric and if you see that throughout the profile, that too is poor structure. These asymmetric price levels usually get revisited, not always on the same day, but maybe the next. This will take time to get used too and practice. Good question.

 

Regarding non-symmetric profiles, would you be so kind as to show a screenshot of poor market structure in these conditions? When you described 3TPO's at one price level vs 1 TPO at the adjacent level, I was imaginging a double distribution day where there is a thin zone of volume dividing the two trading ranges.

 

Thank you for the thread... it is great. Sad to see it end!

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  StoneTrader said:

Are there any good screenshots you would be so kind to reference to see an example of good market structure elongated trend day vs poor market structure elongated trend day?

StoneTrader, you ask some really good questions on profile shape. It's hard for me to actually find a trend day that I think has good structure. However, it's not hard to find trend days with poor structure. For example, take a look at the profile below from 8/27. On the move back up, it looks pretty stretched out and you can see three distributions. The move just doesn't look sustainable and the market is likely to revisit those prices to check them out again. Usually, stretched out profiles indicate forcing action like short covering and long liquidation (i.e., old business). When that's over, what do you think the market will do next? Healthy structure on a trend day up should look like a "stair-step" pattern and should be elongated and about 4-5 TPOs wide. It should go up, then pull back a little, then go up again, and pull back a little, etc. Like you said, an uptrend should have higher highs and higher lows. Pull backs in an uptrend are healthy just like rallies in a downtrend are healthy. Why? Because that's the markets way of digesting big moves, allows profit taking, and also allows weak holders of stocks/contracts to exit the market and turn it over to traders/investors with more conviction that aren't going to be shaken out easily.

 

StretchedOut.GIF.148772f2db2173b6fc2e1d5a0518fe3a.GIF

 

  StoneTrader said:

When you say "backing and filling", do you mean to say you get some sustainable level of Higher High's and Higher Low's vs. just a few gigantic long bars on a minute chart? (Long bars implying unsustainable & near exhaustive momentum)

Yes, well put, except that I don't look at minute charts. I look at 30 min charts. I think that's probably what you meant.

 

  StoneTrader said:

Was Tuesday's downtrend "good market structure" for the bears?

Tuesday's profile on 9/1 doesn't look very healthy either. There is no backing and filling on the way down, especially in E period. What do you think is going to happen when the market starts trading into that area (i.e., the single prints)? It is going to retrace it probably very quickly since there is no resistance there. I also didn't like the way it fattened out towards the bottom of the profile. It lessens the odds for downward continuation.

 

TrendDayDown.thumb.GIF.06fd5701463323a0a4023a8a65300532.GIF

 

  StoneTrader said:

Regarding non-symmetric profiles, would you be so kind as to show a screenshot of poor market structure in these conditions? When you described 3TPO's at one price level vs 1 TPO at the adjacent level, I was imaginging a double distribution day where there is a thin zone of volume dividing the two trading ranges.

 

First, let's start by looking at a symmetrical profile from 7/31. Notice how the TPOs are smooth above and below the POC.

 

symmetrical.GIF.49ffd612a8d4dac0ddad725d1988d76d.GIF

 

Here is an example of a non-symmetrical profile from 7/24 - very similar to the first profile. Compare it to the one above. Non-symmetric profiles usually get revisited because traders have to go back to see if there is any more buying/selling.

 

non-symmetrical.GIF.01e8a83796c774de965fbdc4809d4e4a.GIF

 

Take a look at this profile with an asymmetric price on 8/21. Looks strange, doesn't it? Four days later the market came back and revisited that price on 8/27 (i.e., the first profile above).

 

asymPrice.thumb.GIF.3b477c4126a572c3dec6480fc15c8309.GIF

 

It's important to note that even if the profiles look "ugly" the market can easily correct that by revisiting those prices and then continuing in its original direction. Like I said before, this is a tough question because it is subjective, which most traders don't like. And as Dalton says, traders like things to be measurable and unambiguous, but if it were that easy, everyone would know the same things and there would be no opportunities. This provides an informational edge.

 

  StoneTrader said:

Thank you for the thread... it is great. Sad to see it end!

You're welcome! I hope I answered your questions.

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  fed2008 said:
Probably I won't be alone in asking to continue to give your vision of market here, maybe in shorter form, if you have time.

 

Are you asking me to give my "vision of the market" for this morning or to continue with this thread on an on-going basis?

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  ant said:
Are you asking me to give my "vision of the market" for this morning or to continue with this thread on an on-going basis?

 

I meant a short description of the market ahead of a new trading day, yes, on an on-going basis, if you may.

We still have some issues to clarify with you, that may be explained by you.

Of course, I am not asking you to do it permanently, but for some more time period acceptable for you, of course.

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  fed2008 said:
I meant a short description of the market ahead of a new trading day, yes, on an on-going basis, if you may.

We still have some issues to clarify with you, that may be explained by you.

Of course, I am not asking you to do it permanently, but for some more time period acceptable for you, of course.

 

Here's the thing... my intention for this thread was simply to show how I view and trade the markets using MP. Too many traders in forums talk about using MP, but what they really mean is fading the value area high/low and the POC, and going long if price is above the POC and going short if price is below the POC. Then, they throw in other support/resistance levels from pivots, fibonacci, etc. looking for confluence. Traders like this because it provides neat little rules by which to trade the markets. I know, I used to do that too. It's measurable, unambiguous, and almost a science. It's not that easy. The key to successful trading is understanding market context, your competitors (i.e., human behavior), and knowing where to conduct your business. MP is a great tool to help in that endeavor. My goal was to provide an alternative to using MP as taught by Jim Dalton. I think I've accomplished doing that so it's time to bring this thread to an end. But I will still be around and will continue to participate in threads where I think I can add value and from which I can learn.

 

fed2008, here's what I will do though. If you're so inclined to provide your own analysis of the market in a separate thread, I will comment on it and give you my thoughts. I will do my best to answer any questions that you or anyone else may have. I think that would be more beneficial to you and others, because it will get you and others to start thinking about the markets in the way that I've been discussing.

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Well, I started looking at MP only recently, and I don't think I could provide this type of analysis at the moment.

Probably you have shared with us quite enough info to start with on MP, but for me it is still quite a new area.

Anyway, thanks for this thread and your efforts!

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  fed2008 said:
Well, I started looking at MP only recently, and I don't think I could provide this type of analysis at the moment.

Probably you have shared with us quite enough info to start with on MP, but for me it is still quite a new area.

Anyway, thanks for this thread and your efforts!

 

I understand. Good luck with your trading!

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