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:)