29.09.2010 market review

- going into today, based on yesterday action and ON trading activity, i had an neutral to positive bias

- the reasons why: we have closed in the upper distribution yesterday, we cleared a few levels below and we just built upon the balance area of the past 2 days; the ON high was above yesterday high.

- i knew that we don't have any catalyst for this trading day, so i was expecting low volume and range day building further the balance area.

- ON found S@1137.25, the same area the previous ON and yesterday RTH

- after the open, which was below the spike (see spike rules) in the middle of the balance area, my bias has changed into neutral to negative

- we can see clear a few divergences on the order flow and price which may have yield very nice profits if played correctly, by my plan. For some reasons I wasn't focused enough and didn't follow any rules or discipline outlined in my plan. I did all kind of mistakes, including over-trading, not noting my trades, etc and in the end I lost - 7.75 points.

- today trading results: -7.75 points

- in my premarket prep i said that i have to play the balance area scenarios (see balance area scenarios), based on the order flow.

- we can see the first opportunity presented itself after the IBL was set in stone, with price moving higher, order flow just found S, as well, and went to probe the IBH.

- second opportunity was a quick scalp to the upside when order flow sold but price didn't dropped too much, creating another divergence. After the RE was made this was just a normal reaction of RE continuation, but on low volume and without follow through

- the most profitable trade came from VAH, with very clear and huge divergence between price and order flow, price making new highs, but order flow struggling, responsive sellers were present in huge amounts at different levels (seen on the footprint chart)

- this is a very strong setup, used in context (balance day with high chance of just a range day); i have to focus more on days like this and to be more confident in my strategy, to find a way to effectively execute my range day trading strategy

- definitely, on days like today trades will be placed at the extremes of the range. If there is a catalyst i might consider placing trades from dVPOC or midIB. Scalps could be made from inside the structure, but scalps will be executed like scalps and not transformed in trades.

spikes

Q period = Spike: - a spike is a late price probe either to the upside or to the downside during the market's two way auction process. It happens too late in the day to be verified as having been accepted or rejected. For example, if an upside probe was rejected we would be left with a selling tail. If the spike was accepted, price would trade within the range of the spike over time. We are forced to wait for the market open of the following day for the market's verdict.

- without placing the spike within any context the simple spike rules are:

- upward spike:

• a price opening below an upward spike would be considered negative since the price probe or spike was rejected leaving a selling tail
• opening within a spike shows price acceptance and keeps the rally intact; price has found a level where two-sided trade is taking place - the price discovery dream of all business
• opening and trading above an upward spike reveals that price has not auctioned (probed) high enough to cut off the buying allowing for two-sided trade. The auction is not over
• the bottom of the spike is "support", i have to begin to think in term of spike to see how visible this reference is

- downward spike:

• a price opening and trading above a downward spike would be considered positive since the price probe or spike was rejected leaving a buying tail
• opening within a spike shows price acceptance and keeps the break intact; price has found a level where two-sided trade can take place
• opening and trading below a downward spike reveals that price has not auctioned (probed) low enough to cut off the selling allowing for two-sided trade. The auction is not over.
• the top of the spike is "resistance"

Successful trading transcends executing exact entry and exit points.

I often say there are no hard and fast rules to trading but we do have market-generated information such as spikes that can guide our market perspective and trading decisions. Leveraging these opportunities will help protect you from narrowly following price and enable you to keep a broader perspective as wide price swings occur.

balance area

- balance is one of the most important concepts we deal with because it represents the potential for change to take place. Change is were a trader has opportunity; without change there is no opportunity.

- when we are at balance extremes, depending which side of the position is taken, we have high risk or great opportunity. Balance area extremes present potentially asymmetric trading opportunities; we want to be ready to act.

• today, 28.09.2010, was a very good example, we moved out of the balance area formed ON, an aggressive entry could be the POC of the balance area; or waiting for confirmation, the bottom of the balance area, but under any circumstance don't fade the move from POC

- possible scenarios to consider for playing the balance areas:

1. stays in range or extends range slightly
2. looks outside the range, gathers stops, and fails; comes back inside the breakout level followed by a downside/upside counter auction back into the range
3. looks above/below breakout level and goes

- trading the balance area illustrates 3 important concepts for long-term trading success:

1. understanding balance, recognizing it, and leveraging it in my trading strategy formulation
2. the importance of a bigger picture market perspective in formulating my day timeframe strategy
3. understanding the magnitude of the opportunity and using my imagination to visualize the possibilities

Balance is everywhere!!!

As a final comment, beyond the concept of balance, this disccussion also illustrates how powerful it is to view markets with a top down, bigger picture perspective. A broader market perspective keeps us from getting chopped up at crucial levels and also enables us to see trade potential in terms of risk as well as reward.

28.09.2010 market review

- going into today RTH i had a bullish bias, based on the ON profile which looked like a balanced area with a rejection from below, price even got rejected from 1132.50 WPOC, with B & C making HH, with a ledge at 1137.25, and trading around & above 1140.25 which was R/S for a few days now.

- also the past 2 trading days formed a balanced area, and open and trading around VAL from yesterday and from that balanced area, my vision was positive and was thinking we'll take out the highs of the range, and my initial plan was to buy VAL for a move to VAH.

- as soon as we opened ES started to sell and i saw the order flow selling, my vision has changed and i just sat on my hands. I wasn't quick enough to realize the short opportunity, reinforced by the fact that price hit the double prints & singles from Friday and went all the way down to NPOC@1128.50 and was rejected from LVN between 1125.50-1128.25 (previously identified and marked on my charts, its a V shape LVN on MP and VP charts)
- seeing price rejected from that area, validating the theory behind LVN, and seeing a range bar positive but on negative delta (sellers trying to push price lower but were absorbed by responsive buyers), that was my second heads up

- the VPOC shifted from 1133.25 down to 1128.75, that was my third heads up and confirmed that the bottom might be in place, the move down looked like limited, the order flow was buying sellers tried to push lower but looking inside the bar I could see they were absorbed by buyers, and I waited to see if the candle is closing up which triggered my entry

- due to volatility and huge IB, i chose my T1=1132.50=WPOC and my T2=1137.00=bottom of the balance area from ON. I had more confidence in holding for my T2 as VPOC moved higher @ 1133.25 again, and price found support there for the next move up

- i was happy with the trade, very relaxed as all the things lined up, followed my plan, managed the trade at the close of each bar, didn't get upset for not holding for higher target (i identified 1136.00 as a re-entry setup, were all my things were lined up, but i preferred to lower my risk, and gain more confidence in my methodology first):

2L@1129.25 > T1@1132.50 (+3.25) > T2@1137.00 (+7.75) = 11 points

- price continued higher, making RE to the upside, building acceptance in the ON balance area and in VA from yesterday, balancing in the same range.

- price made double prints at the top of the profile, in theory its an indication that business at that level is unfinished and there is a high probability for the price to revisit that level either in the same session or in the near future; so i kept that in mind.

- price came down to dVA and balance area from ON and from today. The order flow was selling, but not too aggressive, price kept making LL but order flow started to build a divergence. I took a look inside the bars and saw sellers being absorbed around 1137.25=S=dVAL=bottom of balance area and i chose that level for my long. I entered 1 bar sooner but i preferred to get at that price, aggressive, knowing that I might be too soon in it and use i tighter stop than usual.

- theory: if we have RE we can use dVA for entering trades in the direction of RE

- i had my T@1143.50 the high with double prints; price started to move in my direction, order flow started to turn up from flat, and as soon as i had the first 2 bars in my favor i moved my stop at BE, managing the trade according to my plan until T was hit

1L@1137.25 > T@1143.50 (+6.25) = 6.25 points

- today trading results: +17.25 points

- that was my trading day, i can say my first good trading day, my first trading day with my first trading plan finished

- what i did good? I identified levels from MP and VP, i identified the balance area (from RTH and from ON). I was flexible and open to new information after the open. I was patient for the news to come out and for the price to find a bottom. I observed the changes in order flow at my entry locations. I executed the trades and managed them according to my plan. I was happy with the results and with the fact that i followed my plan with confidence and without second guessing it.

- now i have to build upon these positive aspects of my trading to be able to duplicate the results day after day, to print them in my "muscle memory" so i can capitalize on opportunities presented in the market

27.09.2010 market review

- in hindsight fairly easy day to trade, even if it was a low volume day without any econ news to affect the price

- we can see from the O/N profile a kind of balanced area with a O/N POC@1144.25, from which level the ES started to sell all the way down to IBL and making its first RE down to 1138.50

- the best trade, based on O/N profile and context was short the POC, which was in the proximity of VAH from Friday with a target at VAL, trade worth +4 points

- the second trade was long at IBL based on divergence in price and order flow (see the first short blue lines); price was moving down, but the selling volume didn't follow through. Due to lack of volume trade should be exited at midIB when price showed us that we are trading in a congestion area, seen through the range bars overlapping and EMA's horizontal and close to each other (the price was stopped at 1143.00 the VPOC from Friday)

- 3rd trade was long from IBL, based on a lengthy divergence building on (1.30 hours) at the lows of the day; price was trying to make new lows but order flow was buying, showing us that the move down is limited, for now. After that price went straight up to test the IBH and made us neutral for the day with RE to the upside

- in theory, after a neutral day is established price tend to move towards the middle of the range. The above happened indeed, and even more, the sellers took control of the market and order flow started to sell making further RE to the downside and closing at the lows of the day

-notes for the future:

- when the order flow is selling at the high of the range or the move, go with it, don't try to find counter entries

- when there is divergence in price and order flow at the lows of the range (price moving lower, or price just chopping without direction) and order flow moving higher, thats a clear indication that the move to the downside its limited and the next logical move is up

- have to study further down candles on positive delta at the high and up candles on negative delta at the lows, when rejection is made and price turns around, like today at the high made in RE

- always be aware how the VPOC from previous day and from actual day affects the price action during the day

- at the bottom of the profile, in G & H periods there were double prints which is a powerful indication that the market could return to that level (I missed that from my sight)

my trading plan

MY TRADING PLAN

WHY, WHAT, WHERE AND WHEN

I will trade the emini S&P

I will note every trade and why I entered and exited

I will only enter trades at Support and Resistance areas

To enter a trade the following conditions must be met:

• Price is in a support/resistance area
• If it is a trend trade, than I am entering with the trend
• If it is a countertrend trade than I have to be far enough from value to make multiple of my risk when the price goes back to value
• Momentum is with my trade
• Order flow is in my direction

Stop loss per contract will be 12 ticks, but I will not wait to be stopped out if I determine that the trade is a loser

Trade size will be 2 contracts, all entered at the same time

When setup conditions have been met, my entry trigger is alignment of all requirements

I will scale out of my trades. My scales will be at logical support/resisrance area

Why I am a trader?

Trading offers lessons in life.

In mastering trading, we necessarily face and master ourselves. We are put face to face with the basic human challenge: the need to judge, plan and seek values under conditions of risk and uncertainty.

In trading we learn to master ourselves.

Trading teaches us to identify and pursue opportunity in the face of uncertainty.

Trading requires us to understand and respect risk, but not become paralyzed by it.

Trading pushes us to seek situations that offer more reward than loss, to stick with what is rewarding and exit what is not.

Trading requires that we be prepared and disciplined, that we continually learn and relearn.

Trading teaches us that there are times to be aggressive to go after our convictions with confidence; it also teaches us the value of prudence and protecting what we have.

Trading calls on us to be patient and to be decisive, to believe in ourselves and to be ever aware of our vulnerabilities.

Success in trading and life comes from knowing your edge, pressing it when you have the opportunity, and sitting back when the edge is no longer present.

I trade to win, therefore trading offers me the opportunity to be more than who I am by being more of who I am when I am at my best.

I am a discretionary trader and this Trading Plan is my structured roadmap to guide me on my quest in achieving all my goals.

My trading plan structure:

1. Grand strategy

2. Strategy

3. Tactics

GRAND STRATEGY

My Grand Strategy is to use and rely on a combination of Market Profile and Volume Profile to identify the context, market structure and key price levels and targets in any given trading day.

Context – identifying the context is very important to understand what information I am getting. I have to correctly determine the context that exists as I have to trade within it and fit the trade in it.

Context represents all the factors surrounding the upcoming day of trading. What I use in identifying the context:

• If the prior day was stronger/weaker than the days before
• What sort of day was the previous day (trend, normal, range bound)
• Where was the support and resistance
• How is the value moving, is there acceptance or rejection
• If we are trading in a short term range or trending
• Volatility is expanding, contracting or is constant
• What happened overnight in Asian and European markets, what happened in the news overnight that might affect support and resistance
• What economic news, numbers are to be announced

Identifying the context will be done first thing during morning preparation.

Key price levels – identifying key price levels and reference points it is hugely important as these will be potential targets as well as entries. I have to mark them down on my charts and closely watch the price action around them.

Key levels or reference points will be classified in 2 categories: levels from prior day/s and levels from the current trading day (noted and observed as the day unfolds).

All these levels I’m watching and analyzing during the trading day gives me crucial information about how the market is trading, it gives me the necessary confidence in entering and exiting a trade.

Key levels from prior day/s I’ll be using:

• Overnight high/low – very important level as in almost all trading days the H/L from overnight is either probed or taken out
• I’ll be aware of overnight POC and VPOC, but use them to base trade decisions only when meaningful overnight structures are developed
• Previous day POC, VPOC (these are the prices that get the heaviest acceptance by both buyers and sellers; they could be used either as targets or entries) and any NPOC’s and NVPOC’s (these tend to act as magnets and I’ll use them as targets)
• Previous day VAH and VAL, representing the range where 70% of previous day activity took place, it gives me important information and trade location based on acceptance/rejection of the area
• Support/resistance from prior day/s, identified from market profile and volume profile composite charts. I look to identify price levels where trade has shut off in recent days. Many times these levels are helpful in gauging possible breakout trades and trades that fail to break out. I will use significant trend lines as S/R as well
• HVN – high volume nodes, range with a high amount of volume, heavy acceptance (price is not moving very fast through it at first touch, usually rotates around it, and gives me valuable information, and is indicative of aggressive other time-frame activity. I will not fade any moves through HVN)
• LVN – low volume nodes, range with low amount of volume, areas where there wasn’t much trade facilitation. The market usually rejects these prices quickly on a re-test, or slices through them, offering valuable information about market conditions
• Buying/selling tails – indicating other time-frame activity at the extremes of distributions
• Singles – indicating other time-frame activity inside the distribution

Key levels from the current trading day:

• Opening price and opening range (OR), I’ll use the first 5 minutes of trading as the opening range
• IBH/L – the price range of the first hour of trading. These levels tend to act as magnets and S/R levels during the trading day. I’ll be using these 2 reference points in my trading decisions more than any other key levels because it provides me with very important information and offers low risk trade location when the context and structure is identified and used properly. Buying activity above IBH indicates a strong market; selling activity below IBL indicates a weak market.
• midIB – middle of the IB is a very important key level
• dVPOC – developing Volume Point of Control, very important dynamic reference point, this is the price level with heavy acceptance by all market participants, signifies agreement on value. The market will balance around dVPOC until additional information changes the opinion on value and the price could change direction and test a previous area of rejection (disagreement). dVPOC serves both as great targets and great entry locations but all depends on the context
• dVAH/L – developing value area, monitoring dVA gives me important information about the current trading day, acceptance/rejection of price levels, of previous day value, change in sentiment. The extremes of dVA could offer entry location if previous range extension have been established

Day structure – the concept that unifies Context and Key Levels is Day Structure. Each day has a different structure and identifying this early in the day is a very important skill I want to develop.

In market preparation I think about 7 day structures:

• range day
• upside trend day
• downside trend day
• upside breakout day
• downside breakout day
• false upside breakout day
• false downside breakout day

It’s important to realize how the market is trading and to visualize the form and shape it’s creating. These shapes allow me to look at the current situation and create logical deductions and form superior opinions about where the market needs to go. There are 4 primary shapes I look at, on all time frames:

• balanced
• the “P” shape
• the “b” shape
• double (or multi) distribution.

Each aspect of my Grand Strategy outlined above it will be viewed as an individual part of my trading but, in the same time, should be viewed, reasoned and understand as a whole.

Preparation work will be done with a consciously focus on mental flexibility, focus on the ability to keep an open mind to the evidence of the evolving marketplace and revise views and strategies accordingly. I will be formulating multiples “what-if” scenarios, each one of them with clear strategies and tactics for achieving the final goal/target.

Each of these scenarios calls for a specific trading response, specific strategy. Each offers potential trading opportunity. I will be reviewing in advance each scenario mentally, so I’ll become more prepared to act upon them.

The meaningful hypotheses and scenarios formulated prior to market open will be constantly reviewed during the process of unfolding action and new data entering the market, will quickly and accurately determine whether or not those hypotheses are finding support.

STRATEGIES AND TACTICS

The Strategies will be implemented through Tactics.

Tactics are designed to achieve specific objectives toward a successful Strategy.

Strategies and tactics are flexible and can be quickly modified and even replaced if they don’t work.

• Range day - the market will oscillate around an average price value with relatively low volatility through the day, likely ending the day not far from its opening price and/or POC/VPOC.
• Upside trend day – the market will open near its low price for the day session and build its way higher through the day, closing near its high price. The market will tend to stay above midIB
• Downside trend day – the market will open near its high price for the day session and build its way lower through the day, closing near its low price. The market will tend to stay below midIB
• Upside breakout day – the market will open within a range but will build volume and attract participation at the upper end of that range, leading to a price break above that range, and further acceptance of price above that range with solid volume. An upside breakout represents a transition from range to upside trending conditions
• Downside breakout day – the market will open within a range but will build volume and attract participation at the lower end of that range, leading to a price break below that range, and further acceptance of price below that range with solid volume. An downside breakout represents a transition from range to downside trending conditions
• False upside breakout day – the market opens within a range and moves above the range, usually with limited participation and volume that wanes with higher prices, only to fall back into the range and return toward middle. A false upside breakout represents an extension of range trading conditions
• False downside breakout day – the market opens within a range and moves below the range, usually with limited participation and volume that wanes with lower prices, only to bounce back into that range and return towards the middle. A false downside breakout represents an extension of range trading conditions

Each of these strategies will answer the basic questions of whether the price will move toward or away from its most recent estimates of value; whether is there acceptance or rejection of value.

Trading tactics will be simple and based on the following setups:

• Reversal trades – the market moves to or just beyond the edges of a trading range (a consolidation area, the value area from prior day, IB range) cannot sustain buying/selling interest, and falls back into that range. The initial target for such a trade will be the midpoint of that range; a reversal on good volume and momentum behind will frequently test the opposite end of that range. Reversal trades are likely to appear in environments in which relative volume is weak, as no longer timeframe participants are actively present
• Breakout trades – in this situation market is trading range bound and surges out of the range, generally on enhanced volume and with a lot of momentum. Very often there will be a catalyst for the breakout and the move will be reflected by other markets. The initial targets for breakout moves will be the daily price targets identified as key levels during morning preparation (R1, R2, R3/S1, S2, S3)
• Continuation trades – a trend is already in place, the idea is to wait for a pullback to enter the trade. A good continuation trade can be thought of as a trade that has already broken above or below its recent POC/VPOC/pivot, hit its R1/S1 level relatively quickly and now is positioned to possible moves to R2/R3 or S2/S3. A good continuation trade will show volume expanding in the direction of the trend and contracting on pullbacks

In range markets and on false breakouts I’ll be trading for moves towards the middle of the range and often the previous day POC, VPOC or dVPOC; fading price strength and weakness in range and false breakouts.

In trending and breakout moves I’ll be trading away from the middle and from POC, VPOC or dVPOC towards R1/R2/R3 or S1/S2/S3.

I will be trading E-mini ES.

I will trade 2 contracts.

I will do the preparation work: 8:30 – 9:30 AM. Trades will be placed in premarket session only within strong overnight structures.

Trading hours will be: 9:30 – 11:30 AM and 12:30 – 4:15 PM.

I will be focusing on my work, I will be focusing on my trading. I will be taking a break from 11:30 AM – 12:30 PM. During working hours there will be no phone conversations, no chat, no internet browsing, no TV, no distractions what so ever. There is nothing else during those working hours, but trading.

I will have my trading plan in front of me and I will stick to it.

I will note every trade and the reasons behind my actions. At the end of each trading session I will review my log. I will review the whole trading day, context and structure and how I fit my trading in it.

Seeing the markets

I use 3 charts to trade from.

First chart is a MP chart for the regular trading hours, with all the levels marked down in different colours.

Second chart is a 5 minutes chart with volume profile (volume at price) indicator, it contains just the primary sessions. It is used for guiding where we are trading in regards to previous day volume profile and important reference points.

The second chart is a 5 range chart (1.25 points), used for entries and exits. I have a 33EMA which divides the market, is a major S/R as well as a trend tool, it is the centre of the value at that moment (not in the MP sense). I have a combination of order flow and momentum indicators, which gives me valuable information (CVD, Volume Breakdown).

Range bars:

• Range bars look at vertical development and discount the horizontal development. Time is taken out of the display, but I follow how long it takes for a bar to form, how much volume. A range bar that takes long time to form is usually a result of no distinct direction of order flow, the price goes nowhere.
• Reveals the order flow, it reveals acceptance and rejection of price
• Momentum and volatility tool
• Trade management and money management: by using a drop dead stop of 2 range bars plus 1-2 ticks. I have a consistent risk per trade
• Consolidation, congestion and distribution tool

I will look and relate the CVD and VB (volume breakdown) to the range bars patterns and formations. CVD its flow, its peaks and troughs and the relationship between them are all important. Divergence between a peak in price and the CVD tells me a lot.

All these elements need to answer a few basic questions: Do the range bars overlap? Are they going anywhere or is it sideways? Where are they in relation to 33EMA and its slope? Are they closing up or down? Are there any hammers or hanging men? How long does it take for bars to form?

The process and the mechanics of my trading

The key to trade execution is:

• Establishing the context and structure of the trading day
• It exploits immediate market conditions
• It limits risk by having a clear stop loss point
• It holds onto profits by having a clear set of exit conditions

Starting with a vision and adapting it after the market opens, with some beliefs in mind: I don’t know what’s going to happen next and I don’t need to know in order to make money; anything can happen; any moment in the market is unique. Price is driven by the order flow.

A trade idea begins with a price target, not an entry pattern. The idea of a trade is to catch vertical development as the market is trading, so I can profit from a move to one of my predefined price targets.

The entry setup becomes important in the execution of trade idea, finding an entry point for the trade that maximizes the profitability and minimizes the risk exposure.

To enter the market all the things have to come together, all the guarding questions have to find clear and concise answers that fit into the context. The setup must be linked with the context. The price should be at one of my predetermined levels, momentum, volume and order flow should be in the direction of my trade. The trigger of my trade is the range bar close.

Stop loss orders placed in the market are a must to prevent disasters that can happen due to black swan events.

Stop loss orders are changed in line with volatility. Stop loss order will be place at the length of 2 range bars plus 1-2 ticks. Knowing where my target is, based upon identified levels, is key to knowing where to place my stop, I always want more reward than risk.

I will not use my stop loss order as an exit strategy, I am not married to any trade and I’ll quickly cut a position for a profit or a loss if I see the market action deteriorating or the order flow weakening.

Addition rule to my exits: if 3 consecutive bars can’t push the volume flow and price my way, I’ll get out.

However, I trade from within a structure so I can know what to expect and so I can achieve the consistency required.

I will scale out 1 contract at plus 2 points, for instant gratification and a trick for my mind, to know that I already won; I will scale out the second contract at next logical level. Trade should be actively monitored at the close of each bar, with focus on momentum and order flow, i look to see whether continuation is probable or not, and act accordingly so I can maximize profits on each trade.

Every trade will be recorded with complete reasons why I entered the trade, where I entered and where and why I exited. Each trade will be analyzed and provided with solutions for improvement of trade execution and management.

Each week, on Saturday, I will have a self assessment of progress session, a reality check to know when I am ready for the next step.

Goals are to make no more than 5 trades per day and to execute them good. Good execution can minimize losses on wrong ideas and maximize the potential of good trade ideas.

Further goals will be set after the first week assessment of progress.