An Institutional "Look" at the S&P Futures

[steve46 12]

So I am done for the day and managing risk at this point. I have time to post a couple of thoughts on this subject

 

First with regard to value, be aware that professionals take this very seriously. Whether you are in the S&P pit watching locals, or upstairs in any of the many firms trading off the floor, everyone has their own conception of what "value" is, and what constitutes "excess" (pricing that is extreme). In my opinion, one of the reasons the S&P (and other indexes) move in a cyclical fashion is that institutions like to take advantage of the many entry and exit points that it provides

 

On the attached chart I show the local distribution. What is important is not the exact levels I point out....as mentioned professionals have their own view of what value is, instead notice the way that price retests those levels and then reacts (on both the long and short side) This isnt coincidence...What you are seeing is significant money coming in to move markets away from these levels. To me this suggests that I am not the only one thinking this way...

 

I leave it to you to readers to do their own additional research on the subject.

 

Good luck

[steve46 12]

Well I guess I pushed my luck a little too much. I received an email from my employer "suggesting" that I make this my last post on the subject of trading....to those who may have additional questions I am sorry, and I wish everyone good luck.

 

In case people failed to read my disclaimer in the first series of posts, please be aware of the significant risks associated with trading. Also know that my comments are meant as education only, and not as a recommendation to trade or to buy or sell any security....

Edited December 16, 2010 by steve46

[mead 10]

Thanks so much for these posts. They have been incredibly helpful, and I really appreciate all the time you've taken to post and answer questions. .....and I hope your employer will change their mind and let you post some more! Happy holidays.

[WHY? 16]

He will be back just wait and see.

[snowbird 10]

He will be back just wait and see.

 

I certainly hope so.... enjoyed the thread!

[BlowFish 10]

 

1. I have the impression based on the methodology presented, you or most institutional traders generally do not day trade.

 

Jim

 

Jim. There are many many different types of participants. They each have different motivations and quite different methods of operation. It is a vast vast business ranging from second and sub second market making to hedgers protecting against a variety of changes in physical costs. Participants range from governments to little 'prop' shops. Earlier in the thread I pointed out that it is naive (and will never result in a good understanding of how markets really work) to lump everything together as 'institutional'. I hope you don't think I am having a dig Jim but this post illustrates that. I mentioned a reference earlier if you want to know who trades, why and how.

[WHY? 16]

I certainly hope so.... enjoyed the thread!

 

Hope, fear, and greed. All three must leave.

[WHY? 16]

Jack be nimble. Jack be quick.Or Jack shall fall like butterstick (candle stick).

[jim380 10]

Jim. There are many many different types of participants. They each have different motivations and quite different methods of operation. It is a vast vast business ranging from second and sub second market making to hedgers protecting against a variety of changes in physical costs. Participants range from governments to little 'prop' shops. Earlier in the thread I pointed out that it is naive (and will never result in a good understanding of how markets really work) to lump everything together as 'institutional'. I hope you don't think I am having a dig Jim but this post illustrates that. I mentioned a reference earlier if you want to know who trades, why and how.

 

Blowfish, thanks for your good comments. I had been spending quite a fair amount of time on the T&S in my trading. I believe the T&S give valuable information to what the other participants are trying to achieve. It certain help for to understand what the big money's objective are. But as you put it, different parties have different operation methods so it might not be wise to interpret in only one way.

[ghz3rd 10]

Steve466,

Glad to have run across your post. I am new to this website and further new to posting communication to members. Although, you have simply highlighted ideas on how to view the market (different from the majority of retail traders) you are providing a sophisticated insight rarely seen with in trading blogs. Most people do now want to leave their own vantage point whereas, You want to understand the mindset of your competitor. A very simple concept (in war and in competition) but for some reason rarely addressed by retail traders.

 

Anyway Steve466, would love to open a dialogue with you about your astute ideas. I have a myriad of questions but nowhere to find the answers. Google searches lead to hours and days of wasted time. My email is ghz3rd@yahoo.com. I provide this email, for communication, and as a back up in case I can not manage the communication properly on this website. Please feel free to email me. Your ideas and observations would be greatly welcomed. I do believe, I can provide challenging insights, for which your feedback would be appreciated.

Gerry (ghz3rd@yahoo.com)

[elovemer 10]

appreciate the thread steve.

 

thanks

 

 

Here is an anotated chart showing the ES contract from the Globex open, to the open of the Asian Markets (the mark down phase), followed by the DAX open (and the mark up phase) and theimited amount of time in which to recognize opportunity and to act.

[minishark 10]

Thanks for your input since, as usual, there is little out there that leads to the truest picture of how Professional Money views and acts on the same charts that we all see. You figure that if the statistic is correct that 95% of all retail traders get it wrong... then the quest for proper knowledge should be directed toward the following question: How does Professional Money see the same chart that I am looking at and know how to act in silent coordination with other Pro Money participants?

 

I would appreciate your opinion, confirmation, and/or corrections to the following:

 

I have studied up on Wycoff's method of Volume Spread Analysis which begins to enlighten those who are passionately seeking the knowledge of how to understand exactly HOW the markets are manipulated in favor of Professional Money. I have found that the market is a constantly changing story that is playing out in the 5min time frame. In short, if Pro Money truly wishes to take price higher... they will first move the market swiftly lower to flush weak holders out... this is the first step in establishing a NEW ZONE for buying at "wholesale prices".

 

Step 1: The first sign of Pro Money stepping in to BUY is recognized by an extended DOWN bar on HIGH volume that finishes formation in the middle, or better yet, toward the upper 10% of the bar. Stopping a falling knife can only be accomplished by Professional Money, since their analysis is better, more accurate, and includes their ability to SEE full transparency of order flow as they make their markets.

 

Step 2: After the first sign is established visually on the chart... this sparks the patient interest of other Professional Money players. Price will rise to reach technical level retests... then will be rushed to "TEST" that prior LOW.

 

*Here's an aside: All the books out there teach traders that the "Trend is your friend" and can be seen as price continuing to make new lows or new highs. WRONG!

 

Step 3: Often, as Professional Money forces the test on the prior low... they will intentionally throw the public off by allowing price to take out the prior low... therby fooling 95% of traders into thinking that the downtrend is still in place. This is important for the next phase for the move UP.

 

Step 4: RETEST IS ON LOWER VOLUME

Since price is driven by Professional Money, only they have the ability to "PAINT" the volume in the way they do. If the retest of the recently established low creates NEW LOWS but is done so by marking a volume bar that is significantly lower then the original "stopping volume" bar... then the silent community of Professional Money players can assume that this ZONE of price has now been established as a temporary BUY SUPPORT ZONE for WHOLESALE PURCHASING.

 

Step 5: Swift price rejection at the lows to TRAP unsuspecting retail traders on the short side. This is a key psychological component Professional Money players use to their advantage. Since 95% of traders saw that price made a new low on the retest... they think the Trend is their Friend and that they will beat the market by SHORTING the break of those new lows... a fools game. They have essentially just become FUEL that will actually LIFT the market HIGHER as they slowly realize their doom and act to BUY to cover their losing SHORT trades.

 

Step 6: Professional Money traders were watching the retest on LOWER VOLUME as their sign to jump in and help to propel price higher on the 1st sign of a solid momentum rush UP. Their activity in unison is enough to SHOCK price UP through the recent zig-zaging congestion zone which quickly TRAPS all short traders into their losing positions. This ensures that the SHORT SQUEEZE will be in play when price pushes UP and OUT of recent consolidation highs... Just above these highs is where the resting BUY STOPS are sitting wating to be tripped to start the infamous SHORT SQUEEZE.

 

Step 7: The first rush up and out of this ZONE is seen by the losing crowd as ANOTHER SHOT AT GETTING SHORT, since they still think that the UP move was only a minor squeeze and price must be heading lower since they witnessed new lows on the last retest move down. Dumb money will short this rally too, only to be forced again to cover their losing positions as Professionl Money continues to BUY price higher and higher... forcing all losers to also BUY to cover their shorts.

 

 

The opposite can be witnessed when Professional Money is done with the UP move, and the general mechanics are reversed. The first sign of Pro Money stepping in to SHORT is recognized by an extended UP bar on HIGH volume that finishes formation in the middle, or better yet, toward the lower 10% of the bar. There will be a retest... and maybe even 2 or 3 retests... but when Pro Money is convinced the buy volume has officially TRAPPED enough retail traders on the wrong side of the move... That's when they act to psychologically force the losing crowd to help propel price in their intended direction.

 

That's my take. As mentioned, I'd appreciate your professional confirmation or reaction to this viewpoint.

 

Thanks very much!

Regards.

[PiptopiaX 10]

Thanks for your input since, as usual, there is little out there that leads to the truest picture of how Professional Money views and acts on the same charts that we all see. You figure that if the statistic is correct that 95% of all retail traders get it wrong...

 

Thanks very much!

Regards.

 

No argument. If I could just dispel a popular misconception.

95% of all people who attempt retail trading fail.

As, I imagine, 95% of people who attempt surgery, without quality training fail.

[ghz3rd 10]

Minishark,

Appreciate your account on how the institutions coordinate their efforts to participate in the markets. I need a little time to fully digest your insights. However, I do have an initial inquire. As a scalper trying to learn the long term trades (higher time frames), I find that getting the timing correct can be a challenge. I can read the charts and predict moves. However, what I thought might take an hour for pattern completion actually ends up taking over 12 hours. I am not used to a trade lasting more than 1-3 minutes. I am like a deer in front of the headlights when it comes to trades lasting over 30-60 minutes. I suspect that the institutional player are not scalpers (mastering the 10 second trade). Could you please discuss the temporal component to your observations. I suspect they use quarterly time frames and then drill down to daily and perhaps 240 min charts. I would not know because I am used to the 1 min chart and reading time and sales window. I would greatly appreciate your insights on what time frames to look at and how long a general trade takes from entry to exit. I need an improved temporal frame of reference to begin to understand on how to join the institutional players' trades. Thanks!

[steve46 12]

Hello Minishark

 

OK so I read your comment. The markets have changed significantly since Wyckoff and Gann. We don't need to go into all the details do we ? Its a different world now, but what has not changed is basic human nature. So your "read" of market action is essentially correct, its just that the institutional players have somewhat different scenarios (in terms of time frame) for acting as they do, and they have more and different resources for acting in the markets. The bottom line is still about the same.

 

If you want to have a very detailed structure for interpreting market action, please go right ahead. For me what works is to simplify as much as possible. I start by asking simply "what is the market doing"? "what is really going on here"?.....then (in contrast to your comment that it is happening on a 5 minute time frame) I like to analyze market action starting with longer time frames (because that is how big institutions make their decisions) and work towards shorter time frames (because that is how smaller institutions and speculators decide WHEN to take action)....you see?

 

If we are talking about intraday time frame trading, I want to stand aside until I see a very high probability entry point. The timing of these entry "opportunities" varies with volatility...what is nice to know is, that they are always happening (they are always coming along like the next bus so to speak).....As regards tools, the basis for my decision making is identification of areas of supply and demand. This technique works on all time frames and it allows me to find both favorable entry and accurate profit targets...The result is that I can get on board earlier than retail traders, and I can hold my position long enough for my edge to kick in....and as importantly my experience of trading is much less stressful than it is for retail, who are generally late to the party and have to endure watching while price wiggles around like fish on a hook.

 

One thing that interests me is the retail preference for using derivative tools (indicators)....I was stunned recently by the dogged way that people hold on the belief that indicators provide some predictability...they don't. In my opinion, it is the unwillingness to adjust their view to the available data, and the inability to think critically and analyze accurately that cause retail to make the kinds of decisions that result in loss....Oh well.

 

Good luck to you sir or madam (sorry no way to tell with a name like Minishark)

Edited March 23, 2011 by steve46

[steve46 12]

Just for the heck of it I will post this 60 minute chart with my levels in place for this week. From my point of view this chart shows that there are lot of "levels" where a trader could make money...

[emg 12]

Just for the heck of it I will post this 60 minute chart with my levels in place for this week. From my point of view this chart shows that there are lot of "levels" where a trader could make money...

 

is that your opinion on how the funds managers trade the es?

[steve46 12]

is that your opinion on how the funds managers trade the es?

 

Sir or Madam

 

Perhaps English is not your primary language....If that is the case, my short and simple answer is "no".

[steve46 12]

and for those who do speak English...the idea that all "fund managers".....trade the S&P futures is at best misleading....First, there are quite a few different types of funds...too many to enumerate here, and secondly in the United States, funds are often restricted to a specific type of asset class or at the very least to specific guidelines as to which asset classes they can particpate in as well as how they hold, report and disburse funds. Finally many funds restrict their participation to long term holdings only to minimize the impact of taxes on reported earnings. This is why (as I have stated previously) that larger institutions often make decisions based on long term price action. My advice ladies and gentlemen is that IF you want to ge useful comments from those few professionals who show up, you would benefit most by going and getting some background on your own BEFORE asking questions.

[TradeRunner 10]

Just for the heck of it I will post this 60 minute chart with my levels in place for this week. From my point of view this chart shows that there are lot of "levels" where a trader could make money...

 

Hi Steve

 

How are you identifying your S&D nodes? I've looked at the charts you have been posting and I can't see the pattern.

 

TradeRunner

[steve46 12]

Unfortunately it is not easy to explain, and that may be the limiting factor why people don't see the possibilties....

There are several factors to consider, first one has to look for previous trend, and by that I mean wide range bars. I like to see evidence of previous imbalance resolving with strong directional movement and there are degrees of this (as you can see it requires some judgement)..

When you see that evidence of momentum you want to look within that trend for areas where that momentum slows and eventually stops briefly. In those areas (characterized by overlapping bars or candles) you have "nodes" where resting inventory exists and where participants have come in to add or remove orders...these areas are often the places where price will retrace and then continue an existing trend.

The way you find them is by scanning your charts over several time frames...As you do this what you find is that the various time frames let you see "inside" the bar or candle where you can identify these areas (they are actually areas of temporary imbalance.).

As I have said before, perhaps I am not explaining clearly or it could be the audience that is here does not have an interest in doing the work necessary to understand the concept.

At some point I am going to go off on my own and do a class on the subject, so I can give people a bit more personal attention..I think thats probably what it will require. At the moment however I just don't have the time to do it...

I hope this helps somewhat.

Edited March 24, 2011 by steve46

[steve46 12]

While we are at it I thought I would demonstrate another concept that really does work very well

and that is the use of TBP or "Time-Based Pivots" AND Supply/Demand "Confluence" (the operational concept is "Confluence")

 

In this case we see that price opened the Globex session at 1292, then retraced down to the weekly open at 1289.50 (to the tick).....the combination of TBP and identification of a supply/demand level means (to me) that the odds of success for this trade entry are much improved..

[steve46 12]

I posted this over on another thread, however I wonder if that thread will survive because it is essentially spam from some guy who trolling for subscriptions lol

 

So here it is, where it may help some of you

 

The chart shows today's Globex open....My process for trading the Globex is actually pretty simple. I look at the day's price action first....if there is a significant trend, I monitor the close to try and characterize the market. This market has changed since last week. We have gone from an "obvious down bias" to a neutral bias, however the market is still very volatile and is news driven....depending on the market open (in this case the Globex opens near the Nikkei open) local news (news about Japan's reactor problems) can move markets quickly.

 

knowing this I identified nearby supply, and then watched for the Globex open (I watch to see if we have a gap open, or just a continuation of prior market action. As you can see, we have what is essentially a continuation of the regular session last hour action (downtrend). Once I see that I look for price to test nearly supply (you can see that it did just that) where I put on a long postion with small stoploss....in these circumstances, I am not looking for big winner, just 2 or 3 points...and that is just what I got.

 

The other important take aways are as follows....When price moves down to test my supply node, it also tests the weekly open at 1289.50, which is a primary "time based pivot" (TBP)....this makes it easy to take the trade because it means that there is a larger audience of traders willing to act on this setup (its called "confluence").

 

And finally you can see that price comes down to test this supply node multiple times, bouncing off every time....this tells me that I did a good job of identifying the "right" node (there are several other supply nodes that a trader could have identified.

 

Depending on the reader's interest and skill level, this chart and the comment could provide significant help in terms of understanding how to trade the Globex session.

Edited March 24, 2011 by steve46

[steve46 12]

Here is an excellent example of how identification of Supply and Demand can facilitate the trade process.

As you can see in the posts above, we used that same process to identify a favorable point of entry. Those who follow my posts may remember that I suggested that the same process can be use to tell where to take profit. The advantage of this, is as follows;

1. It becomes somewhat less stressful to trade because you can be more confident that the odds of obtaining favorable entry are good

2. You can select a method for taking profit based on longer "holding period" thus improving your profits

3. You can scan additional markets for suitable trade conditions thus improving the profit potential of your business (if in fact you approach trading as a business).

This trade (includng the entry outlined in the previous post) went for approximately 10 pts, in line with what most professionals look for when entering the S&P market.

 

At this point I would suggest (once again) that the Globex market offers interesting opportunities for traders who may be restricted in terms of how many hours they can devote to this purpose, and to those who want to find high probability entries.

[steve46 12]

and this last post show price being rejected from the upper supply/demand node (as we would expect)

The common mistake that retail traders make is to get long right at this point....and of course it may eventually continue through the S/D node, but not for the moment....