The Importance of Structural Reference.

[TheNegotiator 13]

To me activity based and structural references are everything. They are the what, the why, the where and the when of the markets and how they move. There are many different ways to define these references, but the underlying goal imo remains the same. To identify paper which ultimately can drive the market from point to point.

 

Here are some simple examples for anyone who may be interested, to deliberate. Please remember that trading doesn't have to be complicated. It needs to be worked at, to be clear and not to be forced.

 

Look at a big price move when for example either a big eco release such as NFP comes out or an speaker says something unexpected and market moving. Attached is the move from yesterday. I don't btw use fibonacci ret/ext to trade, but I do like to use them for structural confirmation. When I get such a clear line up with price areas I'd be looking at anyway, it tells me that this is something I need to be looking at. For example, a drop back into the move and below the last pullback highlighted in the chart late on, would imo opinion be very negative for all those bsd's who piled in. I would think that at least a good proportion of the move would be tested in this scenario.

 

Another really important structural reference which many people look at is the initial balance. This is the first hour of trading in any market (primary session). Now the reason for this is supposedly most paper looks to do it's business in this time. There is indeed much of this type of activity although I believe there are better ways to define it nowadays. However, it's still extremely useful. I've attached another chart to illustrate this. This reference again can be used in terms of activity and strucure. For example, there are times when the IB provides excellent entry or exit points directly. But also, it can be a great activity reference. If say the market breaks only a small amount on one side of the IB and then reverses back into it, often the opposite end is revisited.

 

As I said before, there are many different things which traders do use for references in their trading, but you have to have something which works for you. Do have yours?

Edited October 7, 2011 by TheNegotiator

[clmacdougall 11]

Hello and thanks for your post. Could you please explain how you use the fib ratios in your structuring of the market. I've recently ordered a couple of books on the subject as I've become interested in using them myself. Thanks in advance.

[TheNegotiator 13]

I don't use them to structure the market, I look for important moves or balances and reference in fibonacci levels to see if they lock in with my volume profiles. I also use the extensions as a reference of strength on breaking the initial balance. I'd just say that whilst fibonnaci levels can be great, I wouldn't use them on their own necessarily.

[wrbtrader 10]

To me activity based and structural references are everything. They are the what, the why, the where and the when of the markets and how they move. There are many different ways to define these references, but the underlying goal imo remains the same. To identify paper which ultimately can drive the market from point to point...

 

Here are some simple examples for anyone who may be interested, to deliberate. Please remember that trading doesn't have to be complicated. It needs to be worked at, to be clear and to not be forced.

 

Look at a big price move when for example either a big eco release such as NFP comes out or an speaker says something unexpected and market moving. Attached is the move from yesterday. I don't btw use fibonacci ret/ext to trade, but I do like to use them for structural confirmation. When I get such a clear line up with price areas I'd be looking at anyway, it tells me that this is something I need to be looking at. For example, a drop back into the move and below the last pullback highlighted in the chart late on, would imo opinion be very negative for all those bsd's who piled in. I would think that at least a good proportion of the move would be tested in this scenario.

 

Another really important structural reference which many people look at is the initial balance. This is the first hour of trading in any market (primary session). Now the reason for this is supposedly most paper looks to do it's business in this time. There is indeed much of this type of activity although I believe there are better ways to define it nowadays. However, it's still extremely useful. I've attached another chart to illustrate this. This reference again can be used in terms of activity and strucure. For example, there are times when the IB provides excellent entry or exit points directly. But also, it can be a great activity reference. If say the market breaks only a small amount on one side of the IB and then reverses back into it, often the opposite end is revisited.

 

As I said before, there are many different things which traders do use for references in their trading, but you have to have something which works for you. Do have yours?

 

For the past 15 years I've referred to this as "market context" after many initial talks with institutional traders that are close personal friends. I've also discussed a few in-depth examples of market context here at TL in the Japanese Candlestick threads when someone didn't understand the importance of such prior to the appearance of candlestick patterns or any other type of trade signal.

 

Simply, strongly agree with you and its a shame that most retail traders don't agree with such. Thus, if we don't understand the market context or as you referred to it as structural references...we should remain on the sidelines.

Edited October 7, 2011 by wrbtrader

[TheNegotiator 13]

Hi mitsubishi,

 

No there are no missing "boxes". In fact there are no boxes at all. The lines are the initial balance lines from the first 60mins of each session. Just the high and the low. They are stepped to link to each other which may have misled you slightly.

[steve46 12]

If by "structural reference" one means context, then the context or framework around which we trade is certainly important. For my purposes the evaluation of context begins the evening prior to the open of a RTH session. This initial evaluation provides the big picture for my work the next day....Just prior to the open, I review events to make sure that my view of the world is as accurate as can be, and then switch to the smaller picture of events that concern the open

 

If we have news, or economic events that affect the markets prior to the open, we can observe how markets react and use that reaction as a way to predict how markets will act

 

On Friday, we saw an economic report which surprised to the upside. While the initial reaction was to the upside (see the attached chart), the subsequent reaction or "counter" was a sell off.

Looking closely at the reaction of markets we saw that professionals and institutions alike, viewed that improvement as temporary and were inclined to sell that news. The sell off was substantial. That sell-off combined with concerns about the status of the Euro currency provided skilled participants with all the information needed to anticipate not only the open but the continued selling that occurred throughout the morning session.

 

In other words it required no technical analysis, only an understanding of the concerns of the various participants and then a method that allows us to see how that concern is translated into action.

 

Another structural element that one can bring to bear is analysis of what professionals call "lengh of line"...using Friday's chart simply compare the length of the up and down trending segments as the market trades down to its low at 10:00am PST...what you see is that the down trending segments are longer than the uptrending retracements, however as we approach the low that changes, providing the first signal of an impending reversal. As the market transitions into the up phase, notice how that relationship changes. at the bottom we have an equivalence as the up and down segments are approximately equal in length. and predictable the next series consists of a longer up segment followed by a shorter segment that is now properly called a "retracement". There are additional clues on that chart that an observant trader can use to direct their decision making process, but I will leave that for another post...good luck

 

Steve

Edited October 8, 2011 by steve46

[MightyMouse 12]

If by "structural reference" one means context, then the context or framework around which we trade is certainly important. For my purposes the evaluation of context begins the evening prior to the open of a RTH session. This initial evaluation provides the big picture for my work the next day....Just prior to the open, I review events to make sure that my view of the world is as accurate as can be, and then switch to the smaller picture of events that concern the open

 

If we have news, or economic events that affect the markets prior to the open, we can observe how markets react and use that reaction as a way to predict how markets will act

 

On Friday, we saw an economic report which surprised to the upside. While the initial reaction was to the upside (see the attached chart), the subsequent reaction or "counter" was a sell off.

Looking closely at the reaction of markets we saw that professionals and institutions alike, viewed that improvement as temporary and were inclined to sell that news. The sell off was substantial. That sell-off combined with concerns about the status of the Euro currency provided skilled participants with all the information needed to anticipate not only the open but the continued selling that occurred throughout the morning session.

 

In other words it required no technical analysis, only an understanding of the concerns of the various participants and then a method that allows us to see how that concern is translated into action.

 

Another structural element that one can bring to bear is analysis of what professionals call "lengh of line"...using Friday's chart simply compare the length of the up and down trending segments as the market trades down to its low at 10:00am PST...what you see is that the down trending segments are longer than the uptrending retracements, however as we approach the low that changes, providing the first signal of an impending reversal. As the market transitions into the up phase, notice how that relationship changes. at the bottom we have an equivalence as the up and down segments are approximately equal in length. and predictable the next series consists of a longer up segment followed by a shorter segment that is now properly called a "retracement". There are additional clues on that chart that an observant trader can use to direct their decision making process, but I will leave that for another post...good luck

 

Steve

 

Looks like you have taken a liking to Bolinger Bands. I hope you find them useful.

[steve46 12]

Bollinger Bands (and the moving average basis) are part of ongoing research. So far the results are promising. So yes I do like them..

[TheNegotiator 13]

Steve,

 

I wasn't talking about context. Of course context is important and imo should be understood to some extent at the very least. I am talking about the actual structure of price given reactions to certain events or long term trading activity or like I mentioned in the post 1, the initial balance which for many lays the structural foundations for market movements each day. The context of the market relative to these references is important subsequently. Anyway, here's a chart example of the nfp move friday pre-open.

[joshdance 10]

N, I've read the posts, good stuff. Anything else relative to this subject you can post here?

 

You noted places where the initial activity of the market may be categorized better than the traditional 60m IB window. Would you elaborate on this? I saw your reference to news release time and how that may affect whether the IB is earlier or later, but perhaps you can expound a little. Or, is there a case to be made for it not being related to the passage of time at all?

 

Anything else you or anyone wants to share will be welcome.

[joshdance 10]

Just prior to the open, I review events to make sure that my view of the world is as accurate as can be, and then switch to the smaller picture of events that concern the open

 

Are you talking about fundamental "events," such as those news-related?

 

Looking closely at the reaction of markets we saw that professionals and institutions alike, viewed that improvement as temporary and were inclined to sell that news. The sell off was substantial. That sell-off combined with concerns about the status of the Euro currency provided skilled participants with all the information needed to anticipate not only the open but the continued selling that occurred throughout the morning session.

 

At what point would you say that it was clear that selling would continue? After all, we had been in a nice big upswing for 3 days prior, and the move down after the NFP release was quite tame if I recall. Yet you said that you could anticipate the open based on this. Can you elaborate a little steve? I just don't quite connect what I see and what you're saying.

[TheNegotiator 13]

You noted places where the initial activity of the market may be categorized better than the traditional 60m IB window. Would you elaborate on this? I saw your reference to news release time and how that may affect whether the IB is earlier or later, but perhaps you can expound a little. Or, is there a case to be made for it not being related to the passage of time at all?

 

You have to work out what the initial balance is trying to identify. The reason it is the first hour is that this is supposedly the amount of time most paper does its business in after open. But it is an approximation as Market Profile uses(generally) 30min periods. My contention is that otf activity can't always be characterised so simply nowadays. At the moment for example, I think with the uncertainty about, these guys often sit back for a while before showing their hand. Sometimes I think that much of the business is completed before the standard IB time has elapsed. So yes I think that there is scope for the 'initial balance' to be time independent.

 

I think the NFP release btw, if you look at a eth chart, there was a high put in and selling seemed to be coming in. Then, considering the initial reaction, the fact that there just wasn't follow through was a good indication.

[steve46 12]

Yes, with respect to Josh's question, Negotiator has it right.....strong selling coming in on spike up (as traders decided "sell the news") and no follow through (to the upside)....its a common profit taking scenario. On my side I am reading the tape and I can see sellers coming in at the top of the spike. Then buyers come back trying to lift the bid but they don't have the horsepower to lift it....$VOLD and $ADD showed selling (especially $ADD) and for me that confirms a short entry (I start to look for a place to get short based on this data.

 

Steve

[joshdance 10]

Thanks you two.

 

With respect to the NFP trade, I appreciate that you two saw things differently than I did. Just for feedback, here's a shot of the action--granted, it's a static picture and things look different in real time, however, it looks pretty much as I recall: big spike up, low volume shallow pullback for a few minutes, and then a secondary push up. The thing is, as you can see from the volume on the bottom, the active buying actually increased all the way up to the peak. I can see the offers hold when I look at the tick chart though. After this of course selling came in, but it doesn't appear too strong. Again, maybe I just don't remember it well or have it framed in my mind that it was a very weak move down. I'm well aware of different volume patterns that can occur at extremes but this doesn't appear as anything unusual; in other words, even as it meandered down slowly, my mind was on continuation and thinking long, because the selling looked weak. In fact, up until the very minute of the open there was no volume, and after the first push down there was actually quite a nice bit of buying. At any rate, thanks for the feedback guys.

 

2011-10-19_2334 - joshtrader's library

[steve46 12]

Are you talking about fundamental "events," such as those news-related?

 

Yes

 

 

 

At what point would you say that it was clear that selling would continue? After all, we had been in a nice big upswing for 3 days prior, and the move down after the NFP release was quite tame if I recall. Yet you said that you could anticipate the open based on this. Can you elaborate a little steve? I just don't quite connect what I see and what you're saying.

 

I read the tape...looking at the roll speed, the size on the bid and offer, and in this case I saw the lack of buyers off the spike. Secondly I noticed that they couldn't hold the bid and this was confirmed by the selling tails on subsequent candles down. The VOLD and ADD showed institutions coming in to sell and programs firing off on the sell side. To me it was apparent that participants were going to take profit off of that report.

Edited October 20, 2011 by steve46

[wrbtrader 10]

The one thing you need to be careful with structural reference (market context) is to not use one event only when there are other structural reference (market context) appearing later.

 

Simply, its very common to have several structural references (market contexts) occurring in the same trading day. Therefore, don't get tunnel vision on one structural reference when there will be others occurring in the same day especially when key market participants consider the same.

Edited October 20, 2011 by wrbtrader

[TheNegotiator 13]

There's another point in there steve. The counter-move although relatively weak compared to the move up, was trending down. If a move like that is to continue, any move back should be consolidation or a pause, not a downtrend. The windfall analogy is definitely right especially on a release which personally I didn't think was mind-blowing(esp given the primary concerns were elsewhere at the time). Failure to follow through and failure to entice buyers back in with lower prices meant these ultra short term players (and maybe those who felt like it was a good opportunity to adjust their positions) needed to exit.

 

I've tried to show on the chart that how I was viewing it at the time.

 

Edited October 20, 2011 by TheNegotiator

[joshdance 10]

The one thing you need to be careful with structural reference (market context) is to not use one event only when there are other structural reference (market context) appearing later.

 

Simply, its very common to have several structural references (market contexts) occurring in the same trading day. Therefore, don't get tunnel vision on one structural reference when there will be others occurring in the same day especially when key market participants consider the same.

 

Thanks WRB, could you give a concrete example of what you mean by different contexts within a single day? Could this be several news events, such as a report being released, and at the same time news from europe, etc.? Technically (non news related), what might this be?

[wrbtrader 10]

Thanks WRB, could you give a concrete example of what you mean by different contexts within a single day? Could this be several news events, such as a report being released, and at the same time news from europe, etc.? Technically (non news related), what might this be?

 

It could be like that in that it involves anything on your typical international economic calendar like what you would see @ Forex Calendar @ Forex Factory, any FED/ECB/IMF event that's being watched by key market participants that's not on your typical international economic calendar, any breaking news or new announcements involving global crisis, technically (not news related) as a reaction to the price actions in correlated markets...any thing that catches the attention of key market participants.

 

All of these structural references (market context) can occur different times (not at the same time) throughout any given trading day...causing strong continuation price actions, swing points, trends, trend reversals and even low volatility/low volume tight trading ranges. Yet, I don't recommend trying to predict a particular price direction. Instead, market the X on your chart or bid/ask/time & sales quote screen that represents these structural references sort'uv speak and then wait/watch how price behaves (reacts) when it returns to the area of the X.

Edited October 20, 2011 by wrbtrader

[steve46 12]

There's another point in there steve. The counter-move although relatively weak compared to the move up, was trending down. If a move like that is to continue, any move back should be consolidation or a pause, not a downtrend. The windfall analogy is definitely right especially on a release which personally I didn't think was mind-blowing(esp given the primary concerns were elsewhere at the time). Failure to follow through and failure to entice buyers back in with lower prices meant these ultra short term players (and maybe those who felt like it was a good opportunity to adjust their positions) needed to exit.

 

I've tried to show on the chart that how I was viewing it at the time.

 

 

Yes, agreed, generally on the counter if you believed that the move up had legs you would be looking for buyers to come in right off of that first red candle down (on the second move up)....instead the response was anemic....specifically they couldn't hold the bid, and that is why you see a tail on that next candle...you can see just where they ran out of gas. Any short initiated after that candle was viable (provided you understood why it was happening). From my perspective that "understanding" (the conceptual basis for the move down) is the critical component of the trade.

 

I don't remember the exact conditions now, but the data that produced the favorable report were thought to be temporary, and so participants decided to leave the field and in the absence of buyers, the market was re-priced to the downside (profit-taking).

Edited October 20, 2011 by steve46

[steve46 12]

Interestingly today's day traded in a similar way to the previous report

 

Also very interesting was the news of Gadaffi being captured and killed that supported the move up just prior to lunch (NY time)...that news (not reported on the financial stations) came in about an hour ago in contrast to the news about Greek soveriegn debt which they decided to emphasize, probably because they have correspondents there....

 

Nice rebound off the local low at 1196.50