Another Pre-Market Trade

It's been awhile since my last post, and took a trade this am which demonstrated the type of thought process real trading involves. It just so happens it was a pre-market trade, just as the last post. Please don't think that I've switched my focus to pre-market:) Just a coincidence.

As always, the preliminary work is done ahead of time, in the form of establishing my baselines for both the nearest demand level and the nearest supply level. Because of the recent market action with all the large gaps, I now weight overnight data rather significantly. This is simply because if I were not to look at overnight market, there are large runs of price where I would not be seeing any levels, even if a level existed.

In this case, the 60 minute chart below clearly revealed clean demand and clean supply.

I always start analysis for intra-day trading with a larger intra-day time-frame; usually a 30 or 60 minute chart. There is no reason for one time-frame over another, other than being able to clearly see the levels. As so often has been happening, a key level (read: key opportunity) triggered in the overnight, so I missed the trade that occurred as price came up and touched the supply level.

While that was indeed the best opportunity, with the lowest associated risk, another opportunity can be gleaned by applying market logic. While not 100%, it's a very strong likelihood that when a supply level is touched and rejected, the opposite demand level will probably be visited by price. Additionally, because the supply and demand levels are relatively far apart, there is plenty of room for price to move down, opening up a margin of profit for a potential trade.

Armed with this knowledge, I immediately began stalking a short trade. I brought up the 2 minute chart below...

On a small scale, I found the perfect storm to take a short trade. Just a couple bars previous to the most current bar on this chart, price made a mini-rally up to and just broke the prior pivot high. Price did this, in the process moving into a range of price bounded by the momentum move just previous. Immediately, this price was rejected.   This all happened in the larger time-frame context outlined above.

Without hesitation, I went short 2 contracts at the market. My stop was just above the most recent pivot high (bar prior to entry bar, which is marked with the magenta down arrow). The payoff is displayed graphically below. Please note that no other form of confirmation was used. The more confirmation a trader seeks, the higher the risk involved. A corollary to this is my STRONG belief that the ENTRY is all important; NOT the exit. I realize this is a somewhat controversial statement. However, if one carefully walks through the logic, this belief becomes inescapable if one is to become truly successful as a trader.

Pre-market Trade

I don't usually trade pre-market, but the picture of imbalance was so clear that I was compelled to take the trade. A strong component of what made the opportunity so compelling was the fact that larger timeframe demand was so far down that it doesn't even appear on the chart. This makes for a very large profit margin potential, which is just another way of stating the market was then very from from equilibrium. Here's where my analysis started...

The supply level (denoted the shaded blue rectangle) was touched well before I got to my computer. I would have taken that trade, but just wasn't there. So, being that demand was so far below, I simply looked to see if any smaller timeframe supply level presented itself. Take a look at the 5 minute chart below...

In this case, I placed my order to sell short at the dotted blue line. Shortly thereafter, price returned to the level, hit my entry and price dropped. Here it is...

I only took one contract, so missed out on a big move; but the smart thing is always to take profits when price reaches an opposite level. The nice thing was the whole trade took literally about 2 minutes!

Current market conditions require a great deal of patience. Why? Simply because the swift moves in the emini S&P500 are occurring in a relatively thin order book. This tends to cause sharp moves with harmonic rotations much longer than average. This in turn means that the supply and demand levels I key trades off of are much farther apart than is typical. So, with the levels  further apart, naturally it can take longer for trades to set up.

Yesterday, I took no trade at all. Today, a nice setup formed based on the larger time frame supply level as shown in the 30 minute chart below...

Because this level was not a particularly strong level (that is didn't have all the attributes I'd like to see) I zoomed into my 5 minute chart and watched for a smaller time frame supply level to setup. Then, I'd key off that level for a short. Here is the chart...

Once the lower edge of the larger time frame supply level was touched, I began watching the 5 minute chart (above) for the fractal supply level. Such a level did form and is shown by the blue outlined-rectangle. Once price fell from that level I placed a limit order to sell (see the order confirm window below).

You can see with this method how relaxed trading can be. I placed the limit order at 9:33, well before price revisited the level at 9:50... more than 15 minutes later. Original target was 1154 based on price action on the 5 minute chart. However, I always manage trades with the MarketDelta Footprint. Because of the patterns in the order flow I decided to exit early. It's a fairly mechanical process to assess Footprint order flow.

While there are numerous subtleties, the main characteristics of the order flow which caused the early exit was a delta divergence indication opposite to my trade, immediately followed up by a retest of the pivot low on very light volume. Notice the print at the low is showing only 5 contracts traded.

Yes, price did eventually continue in my direction, but when order flow changes you gotta watch out. There is no way to no in advance the outcome of any trade, so you take profits when they are presented.

After a long summer break from trading, I opened the charts this morning just before the open. I hadn't done any real homework, so before even considering a sim trade (which is all I would do first day back after such a long break) I would at least need to locate the trade-able supply level above and demand level below. I took a quick glance at a daily chart to see price in the emini S&P is in a trading range. So, I zoomed into to the 30 minute chart you see below.

This is a 30 minute chart and I drew a rectangle around an area that price was showing some degree of acceptance in. Immediately following was a very wide range candle. That wide range can ONLY happen because the price acceptance area marked had a hidden imbalance between willing buyers and willing sellers.

Now, one could just attempt to short this market when/if price retraces to the origin of the imbalance. However, a protective stop would realistically need to be placed just above the upper limit of the rectangle. In this case, that's a pretty good size stop. So, let's zoom in again; this time down to a 5 minute chart...

The larger rectangle shows the same area of interest as on the 30 minute chart. The smaller, blue shaded, rectangle shows a micro-acceptance zone. From that zone, we can see the exact origin of the move down. That's exactly where the imbalance occurred. And, exactly where we'd want to take a trade from. Here's what the trade result looked like...

Readers of my blog will note I've done this trade with only price action. No order flow indicators, no indicators of any sort. Not even volume. As a trader builds skill, much of the other stuff becomes like training wheels; especially when the origin of the imbalance is so clear cut. However, I promise you I'll be looking at all my order flow indications from the Footprint chart and the Volume Breakdown indicator as I fully get back into trading.

When I don't have access to the order flow indicators, I'll usually only take a trade with a clear imbalance (as in this case) and simply enter using a limit order (again, as in this case).

There is something else to look at here. Check out the 5 minute chart below. Look at all the green candles screaming up to my proposed entry point. The trend, to anybodies eyes, at that point is up. And I'm going to short! Also, consider that a significant news report was being release as price rallied into this level. Think about the emotions you might be experiencing: second-guessing? fear? worry? doubt? Those are the emotions that need to be conquered to consistently participate in such successful trades.

Shorting under these circumstances can feel most uncomfortable. Yet, it's the safest place to enter. Accepting that paradox into you trading personality is perhaps the single most powerful self improvement you can work on. Look at the pay off in just minutes...

My Apologies

Hello fellow Traders!

I hope you're all enjoying a nice summer break, that's what I'm doing. I've received some inquiries if the blog is dead, will more posts be forthcoming, etc. I assure you, the blog is not dead. I'm just taking an extended break from trading to handle some personal issues and enjoy the all too short Wisconsin summer. Certainly by September I'll be posting again, probably more trades than before.

Good trading to you all,

Bob Hoffman

June 8, 2011 - Trade of the Day

This entry demonstrates how I integrate different, uncorrelated analytic approaches to improve the odd's of a given opportunity turning profitable. The starting point for ALL my trades is having a predetermined price level at which I've established supply and demand are significantly out of balance. Also, the bigger picture context has to support the trade idea.

The bigger picture suggested that the larger profit margin trades would be to the short side. Stated differently, the path of least resistance was down. Next, note the red circled level (from late yesterday). That is a supply/demand imbalance, the predetermined price level I would be watching.

Trend Channels

I also use the price/volume relationship to back up the fine tuning of entry from the Footprint chart. That's far too much to cover in a blog post, but I didn't want to hide anything I do to help support the outcome of my trades. The fractal nature of price movement is clearly demonstrated by the use of channel trend lines. You can see how price cycles up and down within the context of the channels. Often, the channel direction will reverse once the channel widens... note the upper trend-lines of the up channel. So, just as the channel range widened, price was touching the imbalance level.

Once that happens, it's simply a matter of watching the Footprint to signal a reversal in order flow. The exit was taken as price receded back to the lower trend line. In hindsight, this exit was premature, however this was designed as a grab for a quick few points; so I stuck with the plan and got out where the market structure told me to.

 For the astute observers, you may be wondering about the first trade shown (no annotation, but the first magenta and blue arrows which Ninjatrader automatically places). That was our first trade of the day, taking a stab at another imbalance. I exited early, as soon as the NYSE-TICK was printing high values against my trade (another topic for another day:)

May 31, 2011 - Trade of the Day

This particular trade demonstrates how I combine "Pure Price Supply/Demand" concepts with clues in the order flow to enter in the lowest risk way possible.

Take a glance at the chart below as I walk you through my thought process. As always, the first consideration is whether or not price is at/near a predetermined level that I wish to do business at. The light-red band indicates just such a level.

However, you can see from the annotation on the chart, price has already revisited that level once before. More often than not, once a level is traded off of, the imbalance between buyers and sellers at that level has diminished and the odd's of a second trade working at the same level is not great.

The two important concepts I want to share in this post are the reasons this level was deemed solid enough to trade off again. First, look at the light-red band again. Notice how price barely nicked my band (bear in mind that the bands are drawn in a very specific way, so the edge of the band is meaningful). This suggests that a significant imbalance between buyers and sellers still exists. Second, look at the annotation which says "Lower Low". The point is that after the first time to the light-red band, price dropped lower than the level it dropped from the initial point of imbalance (the small consolidation zone at left edge of light-red band). This simply means the trade has a significant potential profit margin.

At the RTH open, we experienced a gap up almost right into the level. That gap up was caused by a lot of exuberant traders and one must ask, after the gap up into a price where there is a buy/sell imbalance, who is left to buy? I would suggest.... NO ONE!

The actual entry involved a Footprint divergence, neutralization of peak to peak open interest ( I use cummulative delta as a surrogate for real time open interest), and a delta momentum divergence.

Here is the result of the trade...

May 23, 2011 - Trade of the Day

Once again, the trade of the day is a prime example of taking advantage of disequilibrium in the supply/demand curve. This is often the case at the beginning of the regular trading hours, as overnight orders accumulate. Please look at the chart below. This is a picture of the trading range the e-mini SP500 has been trading in for the last several weeks. Of prime significance are the price levels defined by the green band. The band represents a range of prices, created by a huge gap back on April 20th, which has yet to be filled. A price gap represents the strongest supply/demand imbalance imaginable.

When price opened today, a powerful set of opposing forces were in play, setting up a great opportunity. While the unfilled gap prices represents a strong buy side imbalance, something else was going on. Note that today's prices opened BELOW the previous, and obvious, pivot low. The masses are often taught to sell such breakdowns in price. This is the typical herd mentality. We have many selling right into a price range which has already demonstrated (in the form of the huge open gap) more willing and able buyers than sellers. All these sellers are selling into a trap. Once the market opened, it was simply a matter of looking for a transition in order flow from follow through on selling to follow through on buying.

Once again, we employ the trusty Footprint. I have purposefully left off a lot of annotation so that you might be able to really see the pattern I look for. Focus on the lower two price levels of the bar. Second lowest level had about 10 times as much selling as buying, but guess what.... no follow through in price. The low price had almost no trading at all, just 38 contracts traded. This was all immediately followed by adjacent price levels of significant buying. The entry price is marked.

Above is the actual trade log. As it turned out, it wasn't spectacularly profitable, but that's not the point. The point is that if you focus on accurate ENTRIES, and keep getting at least break even opportunities, that some of these trades will go on to larger returns. I scale out of the first two contracts rather quickly, then let a mechanical indicator keep me in the last position as long as possible.

It's about as low stress a way to day trade as you can find.

April 28, 2011 - Trade of the Day

Last night my trading partner and I did our normal homework to determine the price levels we were interested in doing business at. One such level was the 1346.50 - 1347.50 zone on the emini's. As so often happens, you can see this level was touched in the pre-market hours on the market profile chart below.

It can be frustrating when a well planned out level hits when you're not present to take advantage of it. Instead of getting mad, do what my partner did: take a continuation trade. Here's the logic: a significant price level of demand was touched and rejected quickly. Auction market theory suggests that when an unfair low (or hi) is rejected we would expect the opposite unfair high (or low) to be tested next. Our homework suggested that the unfair high was some ways above.

So as the market opened we were watching for a potential long and the tool of choice to monitor order flow was the MarketDelta Footprint chart. You can see the chart we were watching below.

The first 'bar' on this chart is the open of the regular trading hours. Since order flow can be fickle in the very first few minutes, the safe thing to do is wait a bit (at least in this case, sometimes context can change this). The green diamond was a good sign that order was with a potential long (it singles what is called a delta divergence). So far, so good.

Next bar, price made some upward progress, then on the 3rd bar an attempt was made to test range of the opening minutes. Price was swiftly was rejected, the low price of the test occurred on little volume, another delta divergence occurred, and buyers were stepping in with strength. That's all the more you need to take a trade at this point. Here is the result:

Note that the trade lasted only about half an hour and that it was accomplished on a day when the first hour's range was only 5 points. I have no problem with doing this once a day and then spending my life the way I want to:)

April 1, 2011 - Trade of the Day

This trade was pretty straightforward, even if the entry was not ideal (price ran a few more ticks than I would have liked). Note the two day merge (image above), comprised of March 30 and 31. It's usually a good idea to merge profiles of days with overlapping ranges or value. I merged these charts as part of my pre-market homework, so I knew ahead of time that the upper value for the merge was a price I wanted to do business at. Please note, I don't mechanically take trades at 'market profile' levels. Context always takes precedence (and context is a lesson for another day).

The criteria I employ for entry is derived from the MarketDelta Footprint chart, shown above. It allows the trader to use the fine resolution of time and sales data, but organized in a visual format. I usually won't post static charts of the Footprint, as the information gleaned is often not observable on a static chart. However, in this case, there was a classic Footprint pattern which arose, known as a footprint delta divergence. When this pattern is accompanied by a suitable transition in order flow, in the form of significant initiative buying, I entered. Note the small green diamond, that's the signal that a divergence is present. It simply means that price is making a lower low, while at the same time aggressive buying is overwhelming aggressive selling.

This was a 3 lot trade. My normal procedure is to immediately place a target of 1 point (in the e-mini SP500), a second target at 2 points, and then the balance is managed simply by monitoring a larger time-frame Heiken-Ashi chart, holding the position until the Heiken-Ashi reverses. In this case, the second scale ended up being filled a few ticks lower than I expected. Might be from human error, might have been a technical glitch, but all in all, not a bad way to end the week. The snipped above shows a) the merged value area price level as a light yellow line, b) my entry bar and price (the blue arrow and triangle) and c) my exits (the magenta annotations).

During the trade, I do monitor a number of other factors. If an overwhelming indication from all these factors indicates to get out early, I will. But I avoid this at all cost. I consider the NYSE Tick, various Footprint Bar statistics (see the spreadsheet like portion of the Footprint chart shown above), the order que, and some other proprietary volume tracking criteria. Mind you, this sounds like a lot, but it's really only there to sooth the savage beast in me that is afraid of loss, AFTER I'm in the trade. Each trader needs to match his/her personality and psychology with a trading plan that works for him or her.

If you have any questions or comments about this trade, the techniques or tools I employ, or need help in your own trading, please leave a comment. Good trading to you!

Not Another Trading Blog !?!?

I thought I'd briefly define the motivation behind this blog. During my 10 year-plus journey to understand trading as a profession, I found lots of information, lots of teachers. Believe it or not; the majority were and are sincere. They usually had their students' best interests at heart. Perhaps I'm lucky to have avoided scam artists and out and out crooks. Perhaps I just have a different outlook than most. I believe you can learn from ANY experience; and that there is no such thing as good or bad. Being stuck with a mind that operates only in dualities, is NOT the mind that creates success in the markets.

The issue I often did have,  often as not, these teachers that I depended on, traded well but did not instruct well. Often, I've found that the best traders really aren't consciously aware of the thought processes they employ. And when I attempted to tease out these processes, I was usually met by some sort of roadblock. In particular, I wanted to NOT have a mechanical check list that told me what to do. I knew from lots of experience and losses that did not work. What I desired was to think like a successful trader thinks.

Over time, I accumulated many perspectives from other traders, caught glimpses of how they internally operated. And, most important, I constantly culled every potential source for examples to study. A chart and the comments to go along with it. Mind you, it's not as simple as collecting a bunch of charts, creating some setups to trade off of, and then just duplicating the process. The reason for the charts and commentary was to train my mind where to look, what to see, how to expect. Note I said HOW to expect, not WHAT to expect.

So, the purpose of this journal is to build a library of market logic internal process examples, so you, the reader, can begin to hone your own internal skills. I will try to provide examples of the non-obvious, the subtle, and the counter-intuitive. This will occur in the form of trades taken, trades dismissed, market analysis, and personal reflection.

I absolutely love to answer questions, so feel free to ask. Nothing is off limits, so long as it's market related. And, good luck!

Trade of the Day

Context: The chart above is a 24 hour view of the ES on a daily periodicity. Note the darkened area, which represents a fairly large range in which price has been consolidating for several weeks. In auction market theory, the rule of thumb is that when a boundary of such a balance area is tested, and fails to break through the boundary, then the expectation is for price to eventually rotate through to the opposite boundary.

In this case, we see the test of the lower edge (the yellow arrow) is swiftly rejected. The expectation at the end of the yellow candle day (which was also a traditional market profile 'trend day' structure) was to make a higher high , perhaps consolidate the gains made on the test day, and then continue up.

An important component in applying market logic is to be prepared for anything and use the latest information provided to you. This morning, (I'm writing this post the day after the yellow arrow day) I awoke to find that price at the open of the regular trading hours gapped DOWN, 10 points! This is more or less the complete opposite of what was expected. That is a huge clue. Next, we consider that price is revisiting the area that is the lower edge of the balance area. Price is finding some sort of acceptance in an area that should have been rejected swiftly. Why? Well, the full answer is a seminar in itself, but it boils down to understanding that, in statistical terms, the edges of the balance area are '3rd standard deviation' areas. So, the longer price hangs around areas that were or are expected to be such statistical zones, the more likely it is that price will not respect the edge being tested.

Setup: Armed with the context above, the astute trader would be scouting a place to get short. Not just anywhere, but a place where risk can be controlled and where price is likely to turn due to an imbalance between real supply and demand (also a subject for another day).

Now look at the 5 minute intraday chart above.The turquoise lines on the chart indicate the opening range for the regular trading session. The lower of the two lines also happened to more or less coincide with the Initial Balance. For the first hour of the day we witnessed quiet rotations. Then, at the yellow candle marked as such, we observe a strong move down, breaking through the two aforementioned levels. That swift break down in price is the trader's heads up that opportunity is now present. We can state, objectively that the the origin of this break down in price was caused by an overwhelming imbalance between buyers and sellers AT THAT PRICE. The first time price revisits the origin of the imbalance, that is the highest odd's, lowest risk time to short.