Market Profile Trading Setup

[Soultrader 12]

It's important to understand the concept behind value area. Whenever price is trading within it, we have a balanced market. However, once price breaks out of value there is market imbalance. Further imbalance is created when the markets extend beyond value and the previous days range.

 

One trading setup in playing these market balance vs imbalance is to use the VAL and VAH as a pivot. In this example, notice the morning breakdown of the value low pivot. I will look to short the retacement back to the VAL.

 

Exit target points are: half position at +10, quarter at previous days low, and a quarter by using smart stops.

 

 

 

The chart below is the same chart but zoomed out to include the previous day's action. Notice in the imbalance created by the extension of the previous days range. Once it broke the lows, it acted as a key resistance point.

 

[TinGull 10]

I'm pretty new to market profile and am darn excited to have found this forum. Here's a q....I trade ER2. This morning around 10:20ish it broke out of the previous days' VAH. It retraced to the VAH and then bounced back up forming a double top. Is this a normal sort of thing? I see in a chart you posted up top that you shorted a retracement to the VAL...could you go long a retracement to VAH after breakout with pretty good success?

 

Just a thought....

 

THANKS!

Chris

[Soultrader 12]

I'm pretty new to market profile and am darn excited to have found this forum. Here's a q....I trade ER2. This morning around 10:20ish it broke out of the previous days' VAH. It retraced to the VAH and then bounced back up forming a double top. Is this a normal sort of thing? I see in a chart you posted up top that you shorted a retracement to the VAL...could you go long a retracement to VAH after breakout with pretty good success?

 

Just a thought....

 

THANKS!

Chris

 

Good question Chris! Any breakout of value indicates a medium risk/medium reward trading opportunity. Any break of value and the previous days range offers a high riks but high reward opportunity.

 

A retracement to the VAH is a good opportunity only if market internals confirm it. Whats important is to understand whether there will be price acceptance or price rejection above value. If the previous days high is right above the VAH, there is possibility that sellersr are waiting in this area to push it back into value. Thus a price rejection.

 

However, a nice trend day like today showed strong market internals. As soon as price broke above VAH and retraced this offered a high probability trading setup. Always look at market internals. This will add further confirmation of a false breakout from a valid breakout.

 

Soultrader

[TinGull 10]

Thanks! This is what I was looking at...and yes, I'm watching internals of the cash market to go along with my futures trades.

 

Notice the breakout of VAH from previous day, and a retracement to it. As it reaches the retracement, you can see a divergence setting up with less and less selling (1 2 POP). When that delta is becoming more and more long and it finally pops, thats when I'd say we have a nice probability trade.

[Soultrader 12]

What is the next line of pivot I see? The chart shows a perfect setup from the VAH to the next line of resistance. In hindsight there is price acceptance above value. Im assuming there was higher value placement the next day?

 

I also dont use delta so hard to confirm with what you are actually seeing. What software is that?

[TinGull 10]

Correct. The level that you see in yellow is a developing value area high. Since this was taken after close today, that will be the new VAH for tomorrow's trading. Interesting how it happened to be like that though....

I use InvestorRT with Market Profile.

[Soultrader 12]

Okay didnt realize it was todays chart. I hardly pay attention to the ER2 although I am slowly getting lured into it.

 

Its scary how MP works perfectly sometimes. Which is why I can never agree with a trader telling me the markets are random.

[TinGull 10]

I'm quickly seeing this too. It's all too interesting a concept to pass up. And yea...the ER2 is a fun one. Twice as much profit per dollar as ES but this thing moves like a bronco!!!!!!

[Soultrader 12]

I'm quickly seeing this too. It's all too interesting a concept to pass up. And yea...the ER2 is a fun one. Twice as much profit per dollar as ES but this thing moves like a bronco!!!!!!

 

Thats what Ive been hearing lately. The swings on the ER2 is supposed to be a whole lotta fun The YM can be dead sometimes so Im thinking of picking a new contract to trade.

 

What else do you use besides MP to trade the ER2?

[Gordon G. 10]

Dear James,

 

you wrote: "A retracement to the VAH is a good opportunity only if market internals confirm it. Whats important is to understand whether there will be price acceptance or price rejection above value".

 

I'm much interested in this concept - price acceptance or rejection - and would like to understand how to properly evaluate which is the case once a breakout happens.

Any idea to try put the probabilities in our favor when anticipating a movement in this situation ?

What can be the instruments to look at ?

 

Bid/ask sizes (filtered to, say, 50 lots) ?

Volume ?

Volatility reduction/expansion ?

 

Thanks.

 

Bye

[Soultrader 12]

Dear James,

 

you wrote: "A retracement to the VAH is a good opportunity only if market internals confirm it. Whats important is to understand whether there will be price acceptance or price rejection above value".

 

I'm much interested in this concept - price acceptance or rejection - and would like to understand how to properly evaluate which is the case once a breakout happens.

Any idea to try put the probabilities in our favor when anticipating a movement in this situation ?

What can be the instruments to look at ?

 

Bid/ask sizes (filtered to, say, 50 lots) ?

Volume ?

Volatility reduction/expansion ?

 

Thanks.

 

Bye

 

Unfortunately this is not an easy topic to sum up in a few words. Each trader has their own method of seeing whether a breakout is valid or false. I can explain a few things that I look for:

1. First I check to see if there is a line of resistance right above VAH. For example, if the previous day's high is right above the VAH pivot, I would watch carefully of the actual break of the previous days high. Sellers like to step in at the previous days high and could lead to price falling back into value. Hence price rejection.
   
2. Watch market internals. Did the TICK make a new high with the breakout? If so, there is a high probability that the breakout is legit. Is there a TICK and price divergence on the breakout? This is a warning signal.
   
3. Is there a TRIN range breakout? Anytime the TRIN breaks out of its range to the downside and price breakouts upwards, this is a powerful signal.
   
4. Volume is also a good tool to watch for on breakouts. Watch out for the 1-minute wonder bars though.
   
5. To me this is the most important. The flow of the tape. I am a tape reader and base alot of my decisions based on tape. Unfortunately this is not an easy topic to talk about. But watch the FLOW of the tape on a breakout. Is it running smoothly with decent size lots? Or is it just the little guys buying and big lots being sold on the bid? There is alot more things you need to watch for on the tape but this is just the basics.

Hope it gives you an idea.

[TinGull 10]

Thats what Ive been hearing lately. The swings on the ER2 is supposed to be a whole lotta fun The YM can be dead sometimes so Im thinking of picking a new contract to trade.

 

What else do you use besides MP to trade the ER2?

 

Basically what you saw in that chart is all I use. I only need a few things to line up for me and then hit the button. I like to keep it as simple as I can, and this is the most simple setup I've been able to get consistent with.

[TinGull 10]

Perfect Profiling....

 

I was short at yesterdays POC. Opened up underneath VAL so I'm looking to short rallies...and BAM. You can see the divergence and then delta shift. Shorted at 768 and covered at 767.40. I only go for about 6 ticks for the time being until I'm completely comfortable with MP levels. So far so good. Ended up going back down to the VAL. $3.40 worth of profit from that short trade that was possible.

[Gordon G. 10]

Thanks for your detailed reply, James.

 

I know, it was not an easy question and a textbook would not be enough to cancel every doubt.

 

At point 1 in your reply you mention that you look at support and resistances given by the high/low of the previous day. Do you like watching other types of S/R ?

 

Point 2 and 3: would you use these if not scalping ?

 

Point 4: this is probably the most difficult part to explain. Entire posts on different trading forum are dedicated to this argument, however no one ever came up with a precise set of rules.

 

Point 5: Do you use some particular software to identify big size trades or do you simply apply a filter to your T&S and take notes of the big size trades as these happen ?

 

Have a great day !

 

Michele

[Soultrader 12]

Perfect Profiling....

 

I was short at yesterdays POC. Opened up underneath VAL so I'm looking to short rallies...and BAM. You can see the divergence and then delta shift. Shorted at 768 and covered at 767.40. I only go for about 6 ticks for the time being until I'm completely comfortable with MP levels. So far so good. Ended up going back down to the VAL. $3.40 worth of profit from that short trade that was possible.

 

I like to keep my trading as simple as possible as well. I like the way you trade. Very similar to the way I process market information.

[TinGull 10]

Great minds....

[Soultrader 12]

Thanks for your detailed reply, James.

 

I know, it was not an easy question and a textbook would not be enough to cancel every doubt.

 

At point 1 in your reply you mention that you look at support and resistances given by the high/low of the previous day. Do you like watching other types of S/R ?

 

Point 2 and 3: would you use these if not scalping ?

 

Point 4: this is probably the most difficult part to explain. Entire posts on different trading forum are dedicated to this argument, however no one ever came up with a precise set of rules.

 

Point 5: Do you use some particular software to identify big size trades or do you simply apply a filter to your T&S and take notes of the big size trades as these happen ?

 

Have a great day !

 

Michele

 

Hello Gordon G

 

Point 1: Theres a couple of key levels I like to watch. Daily pivots, weekly pivots, monthly pivots, previous day high and low, VAL, VAH, open gaps, and globex low/high. This may seem like alot but what I do is filter the key levels from the insignificant levels. The way I filter them out is impossible to explain... just comes from the years of experience.

 

Point 2 & 3: Im not a scalper at all but if I was to scalp, I would rely on the tape only.

 

Point 4: Now this belongs in a completely new thread

 

Point 5: How do I interpret the tape? Very simple. Memory. I can remember certain number of lots that took place at certain price levels. Of course this is just short term memory but I tend to be able to remember key lots at key levels. I use no tools... just a time of sales with size and price.

[Soultrader 12]

Great minds....

 

I would like to think so... but I can never outsmart the market.

[Gordon G. 10]

Thank you James !

[torero 10]

TinGull and Soultrader, got a question, I saw on your chart had a POC of 768.5 but couldn't find it in my chart yesterday. What timeframe do you have your MP on? 30 minutes is the standard frame right?

 

I'm using Ant's MP on Tradestation and didn't see it near 768.5.

[TinGull 10]

Hey Torero...yes, I'm using 30 min TF. Today I'm showing yesterdays POC at 765.6.

[Soultrader 12]

This is for the ER2? I have 12161 for the YM on Ant's indicator. You can double check it here: Daily Notes for Day Traders | Pivot Points for Index Futures and more

[Soultrader 12]

Im using a 15minute MP chart... just noticed the POC is off by a few ticks. Are you using a 24 hour chart or a gap chart?

[torero 10]

Ok, I'll check it again. I used the 30min without overnight data (pit hours only). Soultrader, are you using Ant's MP also?

[torero 10]

Here's what I have for last 4 days, anything wrong here?