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!