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.