Wednesday, 20 August 2014

Evolution and Transition: My New Normal

Market Profile with Footprint Volume Imbalance = Order Flow

-          I have updated what I have on my discretionary charts to take advantage of the latest technology to trade the markets in transition. I recently showed the order flow bars - Volume Imbalance Footprint from MarketDelta. I have taken things further using Volume Profile and the new ideas that Pete Steidlmayer is using in recent updates to Market Profile. Pete has moved on to using volume and order flow in a quite complex series of database interrogations that create a number of charts and spreadsheets he uses to trade intraday and short swings. I have taken that and created a single chart and a legacy Market Profile chart that is more visual and intuitive.

T   Today's pic shows the further development of looking at order flow. I am using MArketDelta for all my discretionary trading as it provides all the information I need in one platform with the best support when I need to chart something new. As you know, I have been using the CCI to see the footprints of order flow for years and years. Now I can see the order flow directly. Win rate is even higher. I am not quite at Pete Steidlmayer's 85% win rate with these new charts but I am confident that with practice I'll achieve that.I made these changes after considerable testing. Leaving a tried and true setup was not easy but when you read the introduction to the book I am writing you will see why.

The Markets Today

The markets have been going through a great transition during the last few years. The transition is still underway. The reason for the transition is:
·         The Pits have all but disappeared which means there are no locals or specialists. This has eliminated the major source of supply to the markets. In the “was”, when a large order came in the locals or specialists took the other side of the trade. They then managed their position to spread it back into the market. This no longer happens and paper now trades with paper creating more volatility if the order is large
·         At the same time, the paper has increased in size. We now have many large hedge fund type customers trading so at the same time as the locals disappeared, the customer size increased dramatically
·         Also, technology is playing a greater part in market activity. The technology provides a cheap and instant access to the markets allowing traders to make more and shorter term trades at a lower cost of entry
All this has resulted in a much more order flow driven market place. While markets were always driven by order flow, the present markets have no intermediaries that dampen or shock absorb the instant activity which therefore results in more relative volatility.
The outcome of this is a much more supply driven market. So we have to trace order flow and supply in order to be Consistently Profitable (CP) in our trading. This means that we need to use technology to capture the information now instantly available and present it to ourselves in a way that enables us to make objective assessments of what is happening and there allowing us to infer what will happen. This means that we need to create a market framework within which to operate so we can see:
·         where there is inventory
·         when accumulation  is taking place
·         when distribution is taking place
·         when accumulation is likely to occur
·         when distribution is likely to occur

Once we have a mechanism for “seeing” this information we can trade CP. The goal of the ebook is to show how I have created this framework and how I identify the conditions I need to make profitable trades.


Here's the MarketDelta chart I now use. It looks a bit busy because of the Volume Imbalance numbers but I only look at that AFTER the trade is on to see how I need to manage it. Pete's mantra is to get the trade on when it fits the plan and then manage it. He's really right as otherwise I get a worse trade location.Trades have a "WHEN" and a "WHERE". This chart plus the Market  Profile chart gives me that. The book will show all. This part of the chart had 7 short trades worth 200 euros each per contract. The decision making was pretty objective, There are two modes: the first hour or so and then the rest of the session.

Wednesday, 13 August 2014

MP for Context, Bar Chart for Timing

Today's DAX trades worked according to Hoyle. These are the type of very high win rate trades that are needed for CP. I was done for the day for discretionary trading within about an hour or so.

DAX opened with a drive up. Job of the electronic local, like the floor local,  is to fade these moves by offering liquidity. We get paid well for this service. The bar chart provided the tining in the zones identified by the Profile. Market then retreated back to the 33EMA where accumulation began which told me to turn the position around. The subsequent pop got me out at a nice profit.

The book is going better now so hopefully I'll have it out before the new year.

Monday, 11 August 2014

It's All About the Context, Still !!

Thee key to discretionary trading is context. A pattern "works" sometimes and sometimes it doesn't. The distinguishing feature is the context.

I woke up with the ES in Asia up about 4 or 5 handles. Firmish. So I was looking to buy the DAX around the open if I had something to lean on. DAX opened a bit too low I thought  so I was there at the bid on the open and filled.

My target was the nearest resistance as the DAX would then catch up with the ES. Q.E.D.

This stuff is not complicated. I keep it simple. It just needs the hours to create the belief.

I'm done for the day as a discretionary trader. Flo is taking over the heavy lifting. We have a full house here in France for the August summer and we'll be off to the mountains for some tobogganing once the sun burns off the clouds.

Tuesday, 5 August 2014

Morning Trading Sequence

I started my day looking at the asian session of the ES. I looked at the pre-market DAX quotes. The result was envisioning the market opening lower and bouncing and testing previous day's VAH.

I placed three orders before the open near the VAL of yesterday in the BUY ZONE. Only one got filled so I was only 33% long.

From there, for the next two hours or so, I followed the rhythm of the market as it unfolded, buying with the trends and exiting as the rubber band stretched.

Trade location is critical to a high win rate. I want to trade where I have the highest probability of success. In today's range, that was at the VAH, POC and VAL of yesterday's Profile. We'll probably move out of this range later in the day but I have my other trading zones selected as price overlaps previous Profiles. The trick is splitting the Profiles into the correct distributions to reveal the support and resistance areas.

Thursday, 17 July 2014

Its the Market Profile that Counts

A trade is comprised of the WHERE and the WHEN. Context is king. I can put on a perfect picture but if I ignore the context - Market Profile - then the perfection means nothing. This context is the difference in performance between a discretionary trade and an automated algo trade.

The chart below is a perfect example. The developing value area (DVA) is straddling the overlapping Value Area Low (VAL). Will it go into the previous VA or will price develop value lower? The bar chart tells that story as it reveals itself.

Looking at the bar chart, the picture is clear. Price is in a down trend and rallies must be sold. Short term scalping traders will cover and reshort. Slightly longer term traders will stay short and add to shorts until support is reached or until the market tells them they are wrong.

Each trader has a so called "style" which determines the rhythm of their trading and the types of trades they carry out.

Wednesday, 16 July 2014

The Market Yells Loud and Clear

Its impossible to know where the trend will lead. All I can do is identify the trend, take a position and ride the order flow to where it goes.

Seeing what is happening is important. Our tools let us see that most of the time if we use them. As I have said many times in this blog, the question is: "what are "they" doing?". putting the context of the MarketProfile together with out bar charts lets us see that.

I've had a number of questions about the OFT bars. They are very useful and give precise volume information. However, the VolumeDelta bars in MultiCharts can be coloured to give almost as much information. It's just not quite as obvious.

I have annotated the DAX charts below for a great trade today.

The pics below show the same trade on the ES and FESX. I didn't trade these.

Monday, 14 July 2014

Another Text Book Trade

Today's DAX trade was a real text book trade. These are the types of trades I'm explaining in the MP book.

As you can see, there was a nice ZIPPER of single prints that I was eyeing before the market opened. There was a bullish tone in Asia so I envisioned the ZIPPER being run up.

The OFT bars and the CCIs provided the timing on the trade. I entered LONG and put a EXIT at the resistance with an alarm. The target was hit while I was doing something else. I flipped to the chart and watched to see if the resistance would break - the resistance being the tail of the overlapping Profile.

We had fireworks last night in our village to celebrate the Fete Nacionale or Bastille Day as we in the english speaking world know it. Happy Bastille Day to all my French neighbours.