Blog for Trading Success

Raymond of raymond9@gmail.com posed this question:

“Ray I am reading your blog and having hard time understanding IPM. Looking at current S&P as end of last Friday feb 8, i understand the trend is down and will break the last low at 1272. Question is: I want to short but I am waiting it at least going up to 1355 or even higher to hit the first fibonacci fan which is around 1367. I often found myself wrong in this waiting game cause a lot of time it run down without hitting my target first. I want to understand how do you think to play this short?”

I am happy to answer Raymond’s queries because I thought the questions had relevance to readers.

IPM

It’s not easy to understand the concept of an IPM unless you have grounding in Market Profile. In the USA, I have been recommended to two instructors:

1. Tom Alexander of Alexander Trading, http://www.alexandertrading.com/home/
2. Jim Dalton: http://www.marketsinprofile.com/

There is no one I would recommend in the East.

Essentially an IPM is a vertical move; in a vertical IPM, you have a series of bars moving up with no or very little overlapping higher lows and higher highs.

ZONES

Your question on where to enter raises the question of time frames. This first question I’d have you ask is: what timeframe are you trading? Once you answer this question, you need to assess the structure of that timeframe and where you are in the timeframe’s trading cycle.

• In this context, by structure, I mean this: is the market moving in directionally (trending) or is it rotational (sideways)? Each structure has its own zones (retracement tools).
• By trading cycle I mean the cycle Tubbs wrote about in the 1900s. It is a cycle with four phases:

1. accumulation
2. markup and pause
3. distribution
4. markdown and pause

So armed with that, let’s look at the current S&P cash. For the purposes of this exercise, we’ll assume we are trading the 5-d (weekly trend). The 18-d (monthly trend) and 13-w (quarterly trend) will be the first (18d) and second higher (13-w) timeframes.

Figure 1 shows the 13-w: The market broke a prior 13-w low formed on Aug 17; so whatever you have on the 13-w, you don’t have an uptrend but it could be doing a number of things:

1. The market may have completed a distribution phase and is now in the beginning of a mark down (directional) phase;
2. Or it may be forming a sideways market, 1576 to 1270.
3. If it is forming a directional move, it’s not clear if the directional move is giving way to a rotational phase.
4. Whatever it may be forming, the up and down bars of the past two weeks suggest that the next price move will most likely be a retest of the Primary Buy Zone (1286 to 1270). The Primary Buy Zone is created by the high of the recent rally and low to date (1395.38 to 1270.05).

Acceptance above the Maximum Extension of 1421.24 would suggest a retest of the boundaries of the Primary Buy Zone (1576 to 1550) bounded by the 1576.09 high and 1370.6 low.

So the first area of 13-w resistance is the Maximum Extension to the lower boundary of the Primary Sell Zone (1421 to 1380) (the area marked by a magenta rectangle in Figure 1).

Note that this area overlaps the Primary Buy Zone (formed by the 1576 high to 1370 low, red lines in Figure 1). In such a case, I treat the Primary Buy Zone as the more important i.e. acceptance above the end of the Primary Buy Zone (1396) suggests the market is moving to the Primary Sell Zone (1576 to 1550). So your ultimate stop level for shorts on the 5-d is above 1396. The sell zone thus runs from 1380 to 1396.

[I have used the retracement levels as substitute for Market Profile zones for the sake of simplicity. I prefer the Market Profile zones where available but for the purposes of this blog to use them would be an unnecessary complication. The retracement levels are an acceptable substitute. (For those that must know, the Market Profile Buy Zone runs from 1370 to 1417. So, my stops would be above 1417 basis cash)].

FIGURE 1 13-w

Figure 2 shows the 18-d which may be moving into pause or accumulation mode. The market stopped at 50% of the IPM 18-d range from 1523 to 1270. Market Profile says once development starts, if a bear profile is to develop, we can expect the market not to accept above 50% of the IPM. Thus we ought not to accept above 1396 to 1397

So now you have the zone ‘1396 to 1397′ within the 1380 to 1396 zone as a sell zone.

FIGURE 2 18-d

Let’s now turn to the 5-d, Figure 3. The 5-d is in a directional mode down (IPM) with a pause. The pause may result in a continuation of the IPM or it may start a rotational move. If it rotates back up, the first area of resistance is 50% of the IPM. This comes in at 1356.

FIGURE 3 5-d

Figure 4 shows the combined 30 minute profile from the M period on Feb 2. This shows that from zones derived from previous profiles, we have major resistance 1356 to 1359. This area is derived from Volume profiles within the price action since the 1370 low on August 17.

FIGURE 4 Market Profile

My plan for today:

1. Define the type of day.

• If rotational, classify the type of day (traditional Market Profile);
• then ask: what should be the high and low?
• Does the projected high ‘fit’ the 1353 (lowered from 1356) to 1360 (lifted from 1359) zone - stops above 1367?
• If it does not ‘fit’, I’d look at the next zone being ‘1394 to 1400′ with stops above 1418.

2. If the day is directional, what will indicate this?

• Friday’s inside day and today acceptance below Friday’s low 1323.5, say 1321.5 (10% of Friday’s range less 1321.5), will suggest a directional move.

In this situation, I’d sell the break with a stop above Friday’s high 1345.5 (say 1347.75).

That is an example of my model. I define the nature and structure of current market conditions and then look for a zone, employing a top down approach.

Based on that model, let me answer your question this way. I can think of two reasons why you aren’t reaching your zone:

1. You may be mixing timeframes - selecting price zones beyond your trading timeframe; and/or
2. Your zone tools may be inappropriate for the current market structure e.g. applying rotational zones to a directional market etc.

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