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.