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

11/16/2010 Highlighting some set-ups

Good evening traders,

I just wanted to highlight some simple setups on the ES that occurred today. These are as much for my reference as they are for yours.

The first trade marked on the chart was a nice short trade that you had to be quick to catch in real time. Price rebounded off support early but was unable to continue higher. The cumulative delta showed buyers drying up and then sellers taking the reigns.

The next marked trade is a long. You can see the big spike down in sellers and then buyers begin to enter the market again. This would have been an aggressive trade considering the steep down-trend at the time. If you waited you got a safer entry the second time around.

The third marked trade showed divergence on the delta and some strength showing up in the Stochastic. This was a textbook trade. If only I wasn't at the dentist, I would have been a few $100 richer!

The fourth marker isn't as obvious as the last three. Sellers did enter the market but that wasn't as clear on the Delta. I took this trade because the entry at the time was a low volume node and the stochastic was overbought. The volume point of control was below us and this area had been support earlier in the day.

The fifth and final marker was pretty straightforward. Divergence on the delta and stochastic. I tweeted my entry at 1173.50 live. It was a sloppy entry and the trade moved against me 4 ticks right off the start. As a result my confidence was a little shaken and I cashed out for 6 ticks. Stupid move in hindsight. I left 4 points on the table. I don't feel bad about it though because my trade plan is to be finished by 3:30 EST. So, that's 6 ticks I wouldn't have otherwise gotten.

Sometimes its OK to break the rules, as long as you know you are doing it and adjust your risk accordingly.

I hope these set-ups help you in your trading. Thanks for reading the blog and following on Twitter. I like getting emails from people and don't mind helping out other traders. If you need an indicator for NinjaTrader, or something explained just shoot me a message or Skype me. I'll do the best I can. I don't consider myself a pro by any means, but I believe communicating with other traders is a great way to learn. Do you agree?

-Nate

11/09/2010 EminiPlayerZones Review

Good Evening Traders,

The chart above is today's five minute ES. I added the Emini Player Zones to the chart. You can get these zones at www.eminiplayer.net. I have been a subscriber to the service for about two and a half months now and I really like it. Along with the player zones, members get a daily trade plan and market analysis. For $50 bucks a month. Can't beat that!

Today's priec action was a much needed pullback. On the 60 minute chart ES had been poking above its top Bollinger band since Friday. That kind of momentum can not be sustained for ever ($600 billion QE or not)!

My trades Today were so-so. I missed the morning sell off but managed to get a good long from 1217-1219. the Initial Balance low was a great entry for short but I was waiting for price to continue higher to the VPOC, which at the time was around 1220.50. I was late on the entry with a short at 1216 and covered at 1214. I took a long at 1212.75 right at support zone and sold at 1214. I was expecting more downside but it was time to leave the screens and pick up my daughter so I missed the final swing low, but you can see it lined up well with the EminiPlayer support zone.

My personal Opinion is that the pullback is over for now. We have $160 Billion in POMO coming in just the next few weeks. The "buy the POMO days" trade has a level of complacency about it that I find astonishing. By now everyone has seen the statistics, the market has made the vast majority of its recent gains on these days. If the pull back is not over and we get another sell off tomorrow I'd expect the Gap at 1197.25 GAP to be a good target. What would be really cool is if this whole move up was just a giant fake out and the market fell back down into the 1179 balance area! That's highly improbable, but a man can dream...

Have a good night everyone and thanks for reading the blog. Click the adds please to help me out. You can follow Eminiplayer on twitter @eminiplayer and me @infectedtrader. Good luck tomorrow,

-Nate

11/3/2010 Not much to report

Sorry to readers of the blog. I know it has been getting neglected lately. I plan to do updates more often once life cools down. You can still follow me on Twitter @infectedtrader every day . See you all soon!

-Nate

10/21/2010 Failed Auction

Hello traders,

Today was a failed auction. That means that prices ticked slightly above previous high's and then reversed. This is very bearish and will likely send us back down to the bottom of the recent trading range. I'm not going to rule out a move to the low 1140's in the ES. This scenario will be even more likely if price Breaks below 1155.00.

The number one thing supporting this market is the "Bernanke put". There are six more POMO auctions to be conducted by the FED in the next 6 weeks. A recent article I read on Zerohedge.com said that the FED is actually running out of bonds to buy! Traders I have been talking to say that quantitative easing 2.0 isn't going to be announced until after 3rd quarter GDP numbers. In my mind its a done deal though. Most traders believe that the expectation of more liquidity has baked in about 50-100 points in the S&P's. That kind of market drop during election season would be a nightmare for the ruling party. Keep that in mind.

Overall the market behaved as I expected today. following the levels I outlined yesterday. We topped out at 86 and found support at 67. The latter being the mid point of yesterday's rage and the the weekly range dating back to the 11th of October.

My trading today was poor. I took one long trade this afternoon buying one contract at 77 and another at 76. Price moved to within one tick of my two point stop before reversing. I was lucky to get out of the trade with a profit. My entry was horrible and I did not have the proper feel for the market today. I was supposed to be studying for my mid-term exam in Strategic Management and just wanted to make a quick profit. After I took my profits I shut it down for the day and hit the books. In the book Trading in the Zone Mark Douglas says "When in the zone trade, when not, Don't". I think that book paid for itself today. Good luck tomorrow traders, and thanks for reading.

-Nate

10/20/2010 Up Auction In Tact

Good evening traders,

First let me preface this article by saying that I am not an expert in market profiling. This blog is very much about me learning and I learn best by writing things down and applying them in real time situations.

The chart above is for the last two trading days with market profile attached. I used the free GomiMP indicator to create these charts in Ninja Trader. You can find the indicator in the Ninja Trader Forums. Low value nodes (LVN's) are marked with a red line, High value nodes (HVN's) are marked with a green lines, and the value area is between the two blue bars (VA). I highlight the point of control (POC) as the white bar on the profile.

Yesterday's closing price was below value. With the gap up open this morning my immediate expectations were for buyers to bring price back up to yesterday's value area. The open went just as expected and yesterday's POC gave a good short entry. Profits could have been taken as we approached yesterday's LVN and the opening print. Buyer's once again stepped in drove price above yesterday's range. after a brief rotation the market resumed higher breaking out above yesterday's high. At this point long targets were the LVN from 10/18. That price was 1179.00 and provided numerous opportunities to short throughout the afternoon. The market closed towards the mid point of it's value range and I expect higher prices tomorrow.

Some areas where I would like to do business on the buy side tomorrow are 1169.00-1171.00. There is a confluence of today's value area low, the LVN's at 1169 and 1171, and yesterday's POC should dry up the selling.

Judging prices above is a little more tricky because I have to rely on other people's charts. I do not have data back to the beginning of May. If any readers have tick data back that far back please feel free to donate it to me! From what I can see (posted on chart.ly and other sources like twitter) there is resistance at 1186 area and an open gap from May 3rd at 1089.50. Those would be area's for me to take profits on long positions and possibly initiate a short.

Like I said at the beginning, I'm not an expert on Market Profiling. I am reading, learning, and applying what I already know. The blog will help me keep tract of my progress and add more transparency to my trading. I post live trades on twitter. They are not recommendations to buy or sell anything. Thanks for reading the blog. Please help me out by following the blog and clicking the adds. It only takes a second. Good luck tomorrow

-Nate

10/19/2010 Market Notes For Tomorrow

Hello again traders,

I am going to jot down some thoughts for tomorrow before bed. First of all I expect it to be a slow day. we have no econ news and after a big move like today's the market tends to balance within a range. speaking of range we are near the bottom of the one that has been forming since the beginning of October.

Again the bears are out in force. On the financial entertainment TV (CNBC) talking their books. The bears have the whole mortgage putback/fraudclosure thing going for them and today's news concerning the NY Fed & others suing Bank of America adds some fuel to the flame. However the bulls have the possibility of $100 Billion a month of quantitative easing in their corner. Personally my bet is with the bulls! $100 billion a month is a lot of money! And we all know that somehow these banks will weasel themselves out of this mess. They managed to do it every time I don't see how this will be any different. Just play the end of the world card again and they can get whatever they want!

Now as I was saying... we are towards the bottom of the recent range and we should get a little churn in the upper 1150's and the 1160's. I would like to short the 1169-71 area on first touch and if price can get over 1176.00 it would be a major victory for buyers.

On the downside we don't have much more meat on the bone. I'd buy yesterday's RTH low if prices get that far but I doubt we'll get that test with practically no catalyst. It would be a great buying opportunity if we did though. The 20 day moving average should be near 1156 and swing traders will be placing bets.

Tomorrow is going to be about trading the extremes. I'll be watching earnings reports, the dollar (which had a big move last 2 days), and the VIX for clues. I am having a good week and I am looking to preserve profits. Good luck tomorrow everyone.

-Nate