7-20-2011 Revisiting the Umbrella

Hello Traders,

I just wanted to revisit the umbrella one more time before I move on to another topic. This afternoon the patter developed late in the day, I bailed on my long trade and flipped short on the break of the regular trading hours (RTH) mid-point. At that time I tweeted that testing 16's was a possibility. Sure enough price tested 1315.75 in the after-hours session. I rarely hold through RTH settlement but the weak close gave me plenty of confidence to give it a shot. Although I didn't get the full move I'm still very happy with the profit I did capture.

Just to reinforce, this is a pattern you will see repeat itself very often. Part of trading is breaking down the market into easy to remember shapes, figures, formats, and patterns. Memorize as many as you can and when you see one begin to form you will have confidence in expecting a positive outcome.

Thanks for reading and stay tuned for some new material.

Good Luck
-Nate

7-13-2011 Umbrella Pattern

Good evening traders,

Tonight I will review today's price action and introduce the umbrella pattern. I learned this pattern while studying with one of my mentors. The reason it is called the "umbrella pattern" is obvious when you view the picture. I drew in the cane part of the umbrella to make it easier to visualize. In this pattern price shoots up and then slowly drifts lower all day. The umbrella shape is formed by the EMA. This moving average is crucial on a 5 minute chart. You fill find that it often lines up with key areas of support and resistance, such as the volume weighted average price (VWAP). I never trade without it!

After breaking over the opening range and then the initial balance high, prices were capped by the 25-27 resistance area. That area coincides with the lows of July 6th. Around 1:15pm est prices had fallen to the VWAP and minor support at 1322.00 I took a small long here but bailed after we couldn't maintain the initial balance high of 1324.25. In the afternoon I tweeted:

"its after 2 pm est and we are below the initial balance hi, this makes me weary of taking any long trades"

The mid point held as support briefly but prices were held down by the VWAP acting as resistance. Once the mid point broke, it became evident that we would end the day toward the lower end of the range. On the chart I drew a lightening bolt where you can tell the umbrella pattern is in full effect. Once price has slipped below the ema and cannot rally above, its a sure sign that a downtrend has emerged. The cumulative delta breaking down and a weak stochastic reading added more conviction to the short side. After the breakdown of the day's lows price had a nearly perfect extension to the 23.6% Fibonacci level. 1310's were also a low value area on the micro composite, a swing low from yesterday evening, and there was a gap fill at 1310.75.

In after hours trade, news of Moody's reviewing US debt ratings dragged the market down to 1302. So far this decline has been very orderly with average selling volume on the way down. I am still expecting a test of the 1290's before further upside. This will of course depend upon the geo-political climate. Things are getting hot this summer and there is a lot of news for the market to react to. I will continue to monitor headlines out of the White house, Libya, European Union finance ministers, and blue chips 2nd quarter earnings. Make note of the umbrella pattern, I can guarantee you will see it again in the future. Just like in nature and architecture, The arch is also a pivotal figure in the stock market.

Thank you for reading. Good luck and good trading,

-Nate

July 11, 2011 Recap

Good evening traders,

I have been wanting to do a blog post on one of my favorite trades, The gap fill. This trade is a bread and butter move for most traders because of the frequency with which the setup occurs and the high win rate. Unfortunately there hasn't been many gap fills to write about. We barely even get a half gap filled anymore! I understand it is mid summer and the market dynamics are different during this time of the year, but I feel like this has been going on for months. Some traders attributed the decreasing of this phenomenon as a result of government intervention in the markets. The Fed's bond purchases and the increased volatility caused by the debt crisis in Europe seem like plausible explanations. However, I don't think anyone will ever know the truth. Regardless of what's causing the lack of the "gap fill phenomenon" one thing is certain, there will be a reversion to the mean. Keeping that in mind, its still important to know the trade and it's rules. I will revisit this topic in the future. When I can illustrate it in real time

Today's trading was boring to say the least. the majority of the day we spent chopping around a 4 point range. If you bought the opening swing breakout in the direction of the gap around 1324.00 (always a high probability trade) you were lucky to get 2 points before resistance in the 26.00-27.00 range capped the upside for the morning, and the day. Remember that the first 90 minutes of trade is likely to contain either the high or the low of the day!

Once the initial balance formed we were trading at initial support for the day in the 19's. Typically, the gap fill traders will puke up their positions around 10:30 est - 11:30 est. This presents you with two opportunities. One is to try and catch the late shorts then jam them back up into the opening range. (If you aren't market minded send me an email for an explanations). The other is to go with the trend. Given the bounce back we had below 15, I thought the trade was going to be trap shorts. I bought at 1315.25 just after 11:00 and the trade worked well. However when priced failed to get above the midpoint or VWAP(volume weighted average price) that was a good signal to take profits or initiate shorts with the anticipation of range extension. At the end of the day, price was ultimately kept above the monthly low and the S&P's 50 day moving average. I would consider this a pullback within a larger uptrend.

Bigger picture; If we are to continue higher I'd say its likely we back and fill down to the 1290's. Or until the US budget is figured out, and fears of contagion in Europe subside. Today marks the beginning of summer earnings season, so be vigilant. Trade smart, don't gamble on earnings. Remembers "Traders know when to quit, Gamblers press their luck." Good Luck and thanks for reading.

-Nate

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6/15/2011 Initial Balance Revisited

Good evening traders,

This week I have been discussing the initial balance and how I trade it. Although today's action was dominated by the headlines in Greece, the initial balance still provided a great trading opportunity!

The market had a large gap down off the open. Almost ten points. The expectation on a day like this is for responsive buyers to be active off the open. That expectation proved to be correct and price rallied to fill 50% of the gap. Traders call that the "half gap" trade and I will discuss it in future posts, for now let's focus on the initial balance.



After the rally into the half gap, price quickly reversed and punctured the opening swing high. This was the first clue that the initial balance was likely to break lower. While price drifted higher over the next few bars, cumulative delta showed that traders were not committed to the long side. A perfect short setup. This trade was a little trickier than normal because the initial balance was wider than my previous examples. In this case 7 points. That still puts it well within the average range of 4-11 points I highlighted in my previous study.

When the market is in a headline driven mode, you can expect more volatility. As the Greece news hit the wire just before 11, ES took a dive. The sell off lasted until quarter after 3, finally coming to a rest near a previous composite low volume node. Generally the summer trading is slow, boring, grinding price action. With all the great headlines and debt crises around the world its going to be a fun season!

Check back again soon. I will be providing more examples of this week's trade. The initial balance. Good luck, and good trading. As always thanks for reading!

-Nate

6/14/2011 The Initial Balance

Hello Traders!

Welcome back, and Welcome new readers! A lot has chanced in the world of futures trading this year. Many new sites are popping up and many more professionals that were former traders on the street have begun to trade their own accounts. Some of the best traders I have seen since I started are now offering their insights and advice on Twitter, Blogs, and forums. FOR FREE! This is great news for the little guys out there struggling to make their way in the financial markets. I have been at this for over two years now. During this time I have picked up some high probably trades that occur nearly on a daily basis. I want to highlight these different trading ideas in their own separate blog posts. I hope you find them interesting and of course PROFITABLE! So lets get started..

The first trade I'm going to highlight is based on the initial balance. If you don't know, the initial balance is defined as the first hour of trading during the cash session. For US markets and equity futures that time frame is 9:30 AM EST - 10:30 AM EST. The initial balance will set the stage for the day's trading. Its also important to keep in mind that the high or low of the day usually occurs in the first 90 minutes of trading. On days when the market has a wide gap off the open and begins to drive hard in that direction there is no initial balance. This trading idea works best on low conviction rotational days. Usually when there is little or no econ news, or the market is expecting a major catalyst later in the day or week. Before I show you the setup I want to point out that it is important to know the average initial balance for the product that you are trading. I trade the S&P's E-mini futures. The initial balance for S&P's is between 4 and 11 points 65% of the time (the sample period goes back to January 2008). The more narrow the initial balance, the easier it is to knock it over. That is an important concept to keep in mind.

The Setup:

It is a very rare occurrence for the initial balance to contain both the high and low of the day. This is a key concept in this trading idea. As you watch the opening unfold you want to get a feeling for the direction of the market. A good question to ask yourself (I have this on a post-it note on my monitor) is "Which direction is the market trying to go and is it doing a good job attempting to go that direction?". Lets say the market gaps up off the open and retraces 50% of the gap (this is another trade I will review in a later post). The market then continues to surpass it's opening swing high and around 10:15-10:25 sellers begin to pull price down to the middle of the range. If at this point price is above the opening swing high, odds are good the initial balance will break to the upside. If the market cannot hold it's opening swing low however the reverse is true and the market is likely to fall lower out of the initial balance. Keep in mind that a narrow initial balance is easier to overcome! I don't have to look far back to find a good example, because this trade works almost daily!

First lets look at an upside breakout:



Notice the narrow initial balance (5 1/2 points). Also note that the market has gaped up off the open. Price was able to hold it's opening swing highs and the expectation is now for the initial balance to break to the upside. Enter long before the breakout and keep your stop below the opening price. Monitor order-flow and conviction to determine if the trade is heading your intended direction. First scale out should be on the break to new highs, then you may hold the remainder of your position until initial resistance (assuming you did your homework and know where to expect initial resistance!).

Now I will examine the opposite. This one is a little trickier so pay attention!



Notice the gap up and again the narrow initial balance (4 points). At first glance you may expect the initial balance to break to the upside, but the fact that price could not hold the opening swing high in the 10:15 bar is a good clue that long conviction is fading. An astute trader would also notice the divergence in the cumulative delta. I would place my short on the close of the 10:35 bar with a stop above the IB high. As you can see the breakdown occurred shortly after! Again your first scale is on the breakdown and the second should be at a predetermined initial support level. On a day like this I would shoot for the gap fill at 1264.50.

That wraps up this trade for now. I will provide a few more examples this week and then next week we will move on to a new trading idea. Once I have posted all my little "tricks" I'll start tying them together with annotated charts so my readers can develop a high probability trading plan of their own!

I hope you found this post informative. Remember to follow me on Twitter, check out my Facebook, LinkedIn, and feel free to Skype me too! I would love to hear what you have to say, and how you use the initial balance in your trading. Please leave your comments below, and as always thanks for reading!

-Nate

02/07/2005 Updates

Should I update the blog more often?

Probably. I've been busy though.

2 college courses
5 year old daughter
Running my own business
Staying current with the 24/7 news cycle

It adds up.

By the time I'm done looking at charts, marking them up, reading news, watching webinars, and checking forums I just want to crash. And that's exactly what I've been doing.

I don't even have time for the gym anymore!

I'm going to work on my time management. I think I should be able to squeeze the blog in during the morning. It would be a pre-market trade plan. This should be more helpful to me as well.

I am constantly refining my trade plan and I am very pleased with the results. I have to recommended two websites that have helped out my trading exponentially, both are great values as well. The first is eminiplayer.net. This site makes the stupid FT71 twitter stream look like child's play. You get a daily trade plan and target zones that almost provide two point rotations. The second is eminiwizard.com . The use of moving averages and mathematics make a powerful and simple system anyone can learn. Also, the chat room is hands down the best I've been in.

I am not affiliated with either of those sites in either way. No one paid me to write this. I'm just giving you straight talk. I've made my fair share of mistakes in this business. I've blown up my account and gotten ripped off plenty of times. Traders International took me for 7k!

So while you are waiting for my lazy @ss to update the blog, go check out those sites! Look for updates here in the near future. Make sure to follow me on twitter @INFECTEDTRADER. good luck and good trading.

-Nate

12/23/2010 Spotting a long trade with the volume ladder

Hello Trader,

Its been a boring holiday trading week so I had plenty of time to prepare this blog post. I have been using the volume ladder more often in my trading to spot entry and exit points. This post will describe my method by outlining a long signal from yesterday's trading. I haven't been trading the market much because of the low volume and practically nonexistent volatility. In fact on a side note, I would be buying puts to hedge any long exposure you might have because protection is dirt cheap right now. The VIX had traded as low as 15.50 this week!

Getting back on topic now... In order to learn how the volume ladder works I read the thread at BigMike's Trading Blog, and watched the seminars. Then every night I looked at the swing lows and highs and examined the volume ladder during those time frames. What I found was exactly as described in auction theory books such as James Dalton's Markets in Profile.

For those that haven't read the book or aren't familiar here's a brief (and rather crude) example. First you need to see Price acting as an advertising mechanism and the merchandise on sale are ES contracts. Now imagine an ES contract as a reposed Ferrari at auction. When the car comes up for bid they start at 50k. At first, everyone's hands go up because it would be a steal! As the auctioneer keeps blurting out higher and higher prices, fewer hands remain in the air. The auctioneer, talking faster and faster edges the price up to 150k, and there are only ten hands remaining. 200k he says frantically, 3 hands. 250k! He shouts as his face turns red. Down to 2 bidders. 275k! He screams. SOLD!

That last guy got the car. But what if the auction didn't end there? If it kept going what do you think would happen to the price? Furthermore, lets say there were a million Ferrari's up for auction. If this was the case (as it is) then the cars would sell for the highest price people are willing to pay for them given the laws of supply and demand. In other words, there would be a balance.

The market works in a similar fashion. If it is not trending it is trying to find a balance. Part of our job as traders is to find that last guy willing to buy or sell, and take the other side of his position. The theory being that price will return to the balance where the most contracts where traded and likely to the opposite end of the range (where the most hands are going to be up).

Looking at the volume ladder will show this theory in action. First observe the tick chart on the far right corner of the image above. You can see that buyer's responded to lower prices at the support zone (zones are provided my eminiplayer.net)at around 2:23 PM EST. An aggressive trader would try to fade the extreme but a move conservative trader would likely enter on a pull back. Let's assume the latter. You can see in the bottom panel of both charts that cumulative delta continues to improve as price pulls back to the moving average. At first price seems to find support at 1250.75, but how do we know to take a long?

Let's look now at the volume ladder on the left. 1250.75 is the dash blue line. The fist test attracted 162 contracts, which you can see in the bottom left box on the ladder. The second test only 100 contacts were sold at the bid, AND a huge block of buyers stepped in. They picked up 2,169 contracts at the ask. That's your first clue. The third test only a mere 110 contracts sold at the bid. You can begin to see selling drying up. Price responds by moving higher and the cumulative delta continues to improve leading into the fourth and final test of our level. On this last test of 1250.75 you can see that ONLY 3 contracts traded! Flashback to our Ferrari auction.. The guy that sold those last 3 contracts is the winner of the action.

Now can you see how to spot when selling is drying up? Fewer and fewer contacts trade at that price (fewer hands going up) until the selling (or buying) just shuts off. The entry on this trade could have been 1251 with the first target at the Volume Point Of Control, where the most trades took place. That level I marked with a white arrow is 1252.50. As you can see the contract did trade back to that level, in fact slightly higher. This quick scalp could have netted you six ticks or $150.00 on two contacts. Not bad for 15 minutes of work!

In the future I'd like to do more of these posts. I have found market profile and auction theory to be a huge help in my trading. I will continue to use the blog to document my learning and share setups and ideas with everyone else. Thanks for reading, I appreciate any comments and I love to connect with fellow traders so feel free to email or Skype me. I hope everyone has a safe and Merry Christmas and a Prosperous new year. Take care

-Nate