Blog for Trading Success

In the S&P series (S&P I to VII), I showed my thought processes for end of day analysis. In today’s blog I want to do the same for intraday data.

I generally do not day trade. Even when I do, like my trading on February 05, it’s within the context of improving my entry price. My intraday entries rely more on Market Profile, Market Delta and the normalized volume provided by MarketVolume (www.marketvolume.com) than on the Barros Swing and Ray Wave. (I do use the Barros Swing and Ray Wave to provide context rather than as entry tools).

I looked upon the bars of February 3 and 4 in the same light as that of the bar of January 30th but with an important difference. Both sets of bars showed the market moving into balance; but whereas the bar of January 30 was still showing above average range, the bars of February 3 and 4 were showing normal ranges (mean range of 20 +/- 10 [10 = 1 stdev]). Figure 1 shows a comparison of the days.

FIGURE 1 Comparison Jan 30 & Feb 3, 4 (cash)

What I wanted to see was some follow through on February 5th: ideally a poke above the Feb 3 high, followed by a sell-off. Instead the market gapped on the ISM figure.

I like gaps of between 4% and 8% because they give me a behavioural parameter to lean against. (A behavioural pattern is a pattern with an edge). If the market fails to close at least 51% or more of the gap by the end of the first hour, then we are likely to see a trend day (a directional move) in the direction of the gap for the rest of the day.

Figure 2 shows the Market Profile with splits for each 30 minute distribution to show the volume distribution.

If I suspect a trend day, I use the split to warn me of a possible bottom. To understand how the warning sounds, you need to know that when Pete Steidlmayer developed his Steidlmayer Distribution (the modern Market Profile), he postulated only 3 shapes:

1. The sideways (Bell curve)
2. The Bullish (Positive skew - like a ‘p’)
3. The Bearish (Negative skew - like a ‘b’)

Pete also taught that:

• As a rule, markets went from Bull to Sideways to Bear and not straight from Bull to Bear.
• Down trend days tend to close in the bottom 25% of their day’s range (top 25% for up days)

My reasoning is this: for a trend day to turn, we will see a sideways volume configuration ahead of or at the same time as the bottom. This gives me time to exit should the market structure be changing before the close.

With a trend day, my strategy is to define the type of trend day (double distribution: where the market forms a small range in the first few hours, breaks out and then forms another range) or slow trend day (each break of the extreme is followed by a retracement).

Each type of trend day has different strategies but in each case, I trade more aggressively than normal. For the double distribution I look to get set above the value area for shorts and I place the entire position (the sizes for the position trade as well as the ones for the day trades) on the rotation.

For a slow trend day, I place the position size first. I then place the day-trade sizes as the market retraces after making to new lows. In each case, the stop for the day trade is placed above the start of the previous distribution down.

Let me now walk you through Figure 2.

I placed my position size on the retracement at the ‘E’ period after the break to new lows during the ‘D’ period. This break and rally suggested a slow trend day. When the market rallied during ‘F’, I sold 1/2 my day trade size. The Volume Profile for the “C”/”G” distribution is a bearish one; so I am looking to continue selling.

In “H” we break to new lows. I sell the rally at ‘J’ (1/4 size) with stops above the high of ‘C’. I move my stop for all day trade positions to above ‘H’ when the market breaks to new lows in ‘I’. When the market rallies during the ‘K’ period and the range extension forms a low extreme, I sell the remaining 1/4 day trade size. At the end of ‘K’, my stop on the full day trading position is above ‘H’.

At the end of ‘K’, the volume profile has formed a sideways pattern. Since I expected the market to close near its lows and I had support at 1340. I determined that if the market broke below 1342, I would exit. When the market broke at ‘L’, I exited all day trading positions at 1341.5.

The result of the day trades has been to reduce the risk on my position size.

FIGURE 2 Market Profile (ESH8)

Pete used to say that traders reversed the natural order:

• On trend days when they ought to be aggressive, traders tend to sit back and admire their great trade location. At the end of the day, they can rightly boast that they sold near the high of the day, and bought near the low (on a down day). In fact they failed to take advantage of the opportunity presented by the market.
• On rotational days, traders tend to trade fast and furious and generally in the middle of rotation, the second worst trade location. At the end of the day, the result is usually not commensurate with the risk and the effort.

If we learn to reverse these tendencies and apply the correct strategy in the appropriate context, our bottom line will be much improved.

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