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You have to go somewhere because you can't stay here!
This is a follow up to the previously posted chart. It's easy to say price has to go somewhere from what I call a focused point on a chart, but where? Where will it go, and when will it go are (to me) the questions that hold potential for making profit. In public interviews over the last couple years J. Peter Steidlmayer himself said, (I'm paraphrasing) "Market Profile has lost it's objectivity and is now totally subjective due to extended trading hours." It's very easy for me (a small time trader) to say I agree, but I've been using MP and VP long enough to witness those changes and suffer through periods of adapting my trading style to fit the longer and faster moving trading sessions.
This 5m chart shows the price movements for the six hours after I posted the chart above. During this six hour period the range for the day expanded by 9 ticks, from 27 ticks to 36 ticks, 2 ticks on the down side and 7 ticks to the up side. Wow, the price rotation continued for another 6 hours and basically went nowhere, this is a scalper's dream. If you're into that type of trading (and good at it) you probably did very well.
As I add visualizations of the available data a more defined picture of the market emerges. This chart shows bar volume and the Globex VWAP with it's +1 and 2 and -1 and 2 SD bands. I find these two studies can provide great entry points for scalping when the market is rotating in a "go nowhere" consolidation period. These studies also provide areas of interest if I'm looking for a breakout in either direction. The obvious idea of a breakout is that a substantial move beyond the +/- 2 SD level will carry price to new "uncharted areas" of the session. If the distance between the SD bands aligns with your risk tolerance these levels can provide many areas to enter a breakout trade or a probe above the current range along with a predefined stop. A word of caution, I call the area between the -1 and +1 SD levels "the forbidden zone" trading in this area will keep you on your toes. Taking fewer trades outside the +/- 2 SD level in the direction (of your choosing) may be less exciting but (I believe) more rewarding.
As I add another visualization to the available data an even more defined picture of the market emerges, this is the value area of a Volume Profile study which began calculating at the Globex open. Similar to the standard deviation (SD) bands of the Bollinger Band study's 20 period moving average, This value area of a volume profile is (in theory) an area containing 70% of the session's volume. This parameter is user defined, I have experimented with different settings with some limited success but the "normal" setting is 70% and IMO, the notion of "Self-Fulfilling Prophecy" continues to haunt this study as well. I posted this study to show the correlation between the extremes of the value area and the +/-1SD VWAP bands. This correlation may offer savvy traders a more defined area to consider when the urge to enter a position presents it's self.
This chart is an attempt to show a possibility that there may be some legitimacy to the belief that volume often correlates to range expansion. IMO, this correlation theory is more obvious on a daily chart but I believe it holds true on much smaller time frames as well. I believe it holds true often enough to warrant further consideration and study if traders have an interest in finding a method of trading breakoutsor a reversion to a mean method of trading.
Lastly and maybe most importantly is the topic of time, this topic has caused me more grief than any other element of my trading. Not so much the time frame I've traded but the time of day I've traded. Trading before, during and around an economic report keeps many traders on the sidelines during the most opportunistic moments of the trading session. Often the market will focus, focus, focus to what appears to be a laser point of price before a report (first chart) and give only one opportunity for traders to participate in the major portion of the move. Once price begins the rapid movement common in today's markets away from the current trading range traders are left behind looking at higher risk entries if they wish to join in on the move. I've found joining in on fast moving market action can be intimidating and leaves the door wide open for me to throw caution to the wind and fall victim to reckless trading behaviors, mostly rooted in managing my trades "on the fly" while processing the new data pouring in from the market. The speed of vertical price moves in today's markets are IMO best traded with well thought out predefined levels of entry, risk and targets/exits entered early in the consolidation. Many of these moves happen several minutes before the actual release and waiting for confirmation of the report leaves me standing on the sideline watching the opportunity slip away. I've learnt to control my risk by placing my entry orders deep in the anticipated price rotation and honoring my hard stops. J. Peter Steidlmayer (paraphrased) suggests entering trades "as close to your exit as possible" and "don't try to be perfect." He goes on to say, "take losses early and often." This sounded like a contradiction when I first thought about his words, but as I began to understand today's fast one directional moves I found my successful trades fit his criteria. Curiosity may have, "killed the cat," but I believe it has also made many traders a lot of money. Looking deeper and closer into fast market moves can be beneficial to understanding the concepts J. Peter Steidlmayer is advocating. In one of the books written by Robert Pardo he (Pardo) describes the purpose of a trading system (paraphrased), "is to identify non-random price movements and exploit them." I believe the fast one directional market moves (mini flashes) are the non-random price movements of today.
Food for thought, 55.9% (66 ticks) of Friday's range happened in a 16 minute period before 8:30 am. After the news at 8:30 am 37.2% (44 ticks) of Friday's range happened in one hour and six minutes, printing the high of the day. Within a half an hour (32 minutes) of printing the high of the day, the entire 44 tick move was re-traced.
Thanks for the post Cashish. The last couple of charts also highlight the obvious, that when a breakout from a very balanced range occurs, unless it immediately is rejected, then there is often great opportunity to jump on board. Traders all the time say "I don't want to chase it" -- so instead they sit there and trade in crap for 5 hours and get chopped up after the market has made a sizable move. Just when the market is ready to pause and do some rotation for 2 hours, they decide to trade again. When the market makes a move OUT of balance, chase it! When it moves to the high or low of a range and has not demonstrated a desire to break out of that balance, then don't chase it (or fade it if so desired).
Also, I'd bet if you were to put 95% for the VA calculation on the profile study that it would pretty much be equal to the VWAP 2nd band, since 95% would represent the 2nd std dev for the profile.
I've posted many times there are countless ways of profitably trading the markets, no matter which method an individual trader chooses, in the end he'll only trade according to his personal belief system. I'm no different than the next guy when it comes to trading my belief system. Give two traders a simple moving ave cross over system for a 15 minute chart and you'll probably get two different results. One trader might believe the signal needs to be taken after the close of a bar and the other trader might believe if the faster average line touches the slower while the bar is still painting that's the time to pull the trigger on the trade. Same system, different personal beliefs, different rules. I have rules, I have rules for rules. IMO, the less rules the better but when the time comes to implement one of those rules you better have a rule that says, I follow my rules! Markets change, and this can cause the systems rules to be changed but changing a belief system is much more difficult. "From my cold dead hands," that's what it will take for several of my beliefs.
Ask several VP traders about the nuts and bolts of their trading and the importance they place on the different values generated in a profile and the opinions will start to fly. Remember, different instruments have different characteristics and I personally cannot comment of a VP of the September Oat contract or May cattle. This difference in the instrument doesn't effect the theory behind the VP study but I believe the data set used to calculate the study is affected by the instrument. The "future" price of hogs for example is the price I can lock in today to sell hogs that I haven't bred yet!
Trading in the Stratosphere
What I mean by the Stratosphere is when the price on the VP chart enters an area where there is no data,unless I look back several months or years. This 4 hour chart shows Friday's price movement that took out the resent highs of December, that in turn took out the highs of September.
This next chart is a daily, if price peeks out over the top of 1.3488 I would have to look back to the December 2011 contract to find data to build a profile. Since price traded at the Dec 2011 contract levels price has moved down 1450 pointsand back up again! Thanks but no thanks, I just don't put any value in data generated that far back. I can look back and generate pretty profiles of the 2008 July highs and mark POCs on my chart all the way to 1.5900 but I believe it's total nonsense. The whole idea of trading is to trade the new orders coming into the market on the right edge of the chart, not the price level traded by some trader who died 3 years ago or a POC level that blew out newbie's all in all out trade a year ago.
To find levels to trade in the stratosphere I stick to the basics, yesterday's high, low and settlement prices, whole numbers (00's and 50's), the rotations around these numbers, the average daily range and the daily Buy, Sell and Pivot. All these numbers are known the night before and as price begins its normal rotations volume profiles begin to emerge, current profiles. I also look at a longer term charts and look for Fibonacci levels of major moves, there's always something. The price action of Friday revealed a common false belief about the buy, sell and pivot numbers. Although nothing works all the time, it is commonly thought that after a major expansion in the trading range like the one experienced on Thursday (234 points) the buy, sell and pivot numbers hold little validity. This chart shows having it on the chart 85 points above the prior day's settlement price did no harm. In fact I took profits on 1.3344, it played into my belief of taking profits "going to not going thru" whole numbers. On this 5m chart it appears price sliced thru this level when in fact from 8:23 am to 8:33 (10 minutes) the highs were 36,38, 38, 43 and 44. Things are not always as they seem, especially 3 minutes after a economic report. The fresh new profiles will come and new patterns and POCs will emerge and litter the wide open spaces of the stratosphere once again.
I've mentioned earlier in this thread that a friend gave me a trading system when I first took an interest in trading. While cleaning out some old files I came across the original copy. I used this system to trade the Deutsche Mark, that will give an idea how old this is. I made money trading this system but as I've said before I'm impatient and my trading style evolved to much shorter time horizons. I know it was also used on the Yen, Franc and oil but I cannot report on the successes in those markets. Funny thing is, I still chart the 20 day highs and lows on my Euro chart and my curiosity intensifies when price peeks out above or below the averages. I have no idea how it will preform in today's markets but if your searching for something/anything on a longer time frame this simple system might just provide the catalyst to propel you to, The Land of Untold Riches. FWIW, here it is.
As I said, I haven't used this system in many years. I've decided to post it here but please don't derail this thread with questions or comments concerning it, PM me if you wish.
I would be very happy to respond to a new thread if someone was inclined to start one. Thank You
Somewhere I read, "Experience is the best teacher, however it's also the most expensive." When I was a boy (under 10) my Grandfather bought me a brand new handsaw during a visit to a hardware store. I used to spend weekends with my Gram and Gramp on their farm and I would spend time in his workshop cutting pieces of scrap wood and nailing things together. I can't remember anything of value I built but for some reason he felt I needed a new saw (I think He needed a new saw, since I "played" with his). I held the saw in my hands on the drive home and admired the smooth shiny finish of the blade, the grain of the wood in the handle and the sharpness of the teeth. He told me on the drive home if I took care of it it would last a very long time, like his old saw. When we got home I hit the ground running, straight to the rack of scrap wood in the shop. Gramp drug out a couple saw horses and set them out in the barnyard, he laid a stack boards on them, drew lines and said, "cut here." I sawed thru boards until the sun was going down and Gram, called me in for the night.
The next morning during breakfast Gramp asked if I finished my cuts, I told him I had a few more. When I made my way to the saw horses and my work for the day, my life changed. There on the last board I cut laid the brand new saw, I left it out, overnight. The dew from the night before settled on the blade and it was covered with rust! Gramp said, "your new saw doesn't look new anymore, does it?" Then he flipped it over and said, "but this side does." He grabbed a rag, some steel wool and an oil can and within a few minutes brought the rusty blade back to it's full luster, that was the last time I left a tool outside. The experience taught me, as a young boy, if I wanted my new saw to last as long as his old saw, it would solely depend on me.
What does all this nonsense have to do with trading? My answer is, I had similar learning experiences as a newbie trader. A memorable example was when I got caught unknowingly holding an open position during in a scheduled NFP report, I lost 3k in about 3 seconds! I learned if I wanted to keep my trading account shinny and new, it would solely depend on me. IMO, when it comes to trading, what we (I) don't know, can hurt us (Me).
I've said many times in this thread there are countless ways to successfully trade the markets. No matter the method or the tools you choose, whether it's the work of Fibonacci, Gann, Elliott, Arms, Steidlmeyer, Nisson, Wilder, Taylor (Raschke), Pring, Dalton or Al Brooks they all agree on one thing, the uncertainty of price behavior. IMO, the fact they all agree price behavior is uncertain tells me two things, (1) Nothing works all the time, and (2) It (the method/tool) works often enough (for them) to trade it profitably over time. Most of us would consider these men (and woman) experts in their method of trading the markets. The times have changed, the markets have changed, the players have changed, but these experts live on, trading the same core method year after year while subtly adjusting their methods to the advancements in the technologies effecting today's markets.
Big Mike's Trading Forum and Big Mike himself continues to offer traders from around the world a unique opportunity to peek into the minds of several active traders using many of the concepts of the experts mentioned above through the use of webinars. It is often said that Albert Einstein had an audience of only a handful of people in the entire world he could intellectually communicate with, clearly, his concepts were far beyond the understanding of the world's population. It is also often said, "trading isn't rocket science." IMO, traders don't need much education to enter buy or sell orders (I'm proof of that), but to be considered an expert of a market or method, that, takes education and experience.
So far this year life has thrown me a curve, my available time for trading is all over the map and I find myself trading the 6E during off hours and bits and pieces of different sessions. I'm finding a lot of uninterrupted free time and this week I watched the most recent Al Brooks webinar. As I recall Big Mike stated this was Al's fourth or fifth webinar for nexusfi.com (formerly BMT), I confess, it's the first one I've watched. In this post I'm going to walk out on some very thin ice, with the sole intention of showing how two methods can achieve similar results. IMO, Al Brooks is probably considered the "Authority," on trading "Pure," Price Action. If anyone disagrees, take all rebuttals to another thread, this is only my opinion. As pretentious as this post may first appear, I'm willing to 'put it out there' to show in a very unsophisticated way how it is possible two completely different methods can achieve similar results. Furthermore, I ask readers to honor the the individual beliefs of both traders, in this case Me and Al Brooks. I told you this was very thin ice, and unsophisticated, so I ask readers who choose to proceed, do so with an open mind. To be absolutely clear, this is NOT an attack on Al Brooks or Price Action Trading, I respect him, his method and his opinions.
Differences in our Beliefs
I'll start by assuming this post is being read by, "the usual suspects," traders who know my trading style, method and the tools I use. I'll also assume these same readers are familiar with Al's style and method of trading price action.
First, the differences of our beliefs. I believe charting Volume and the use of studies based on volume is extremely important, I use Volume Profile (VP) and the Volume Weighted Average Price (VWAP) as the core of my trading. At the end of Al's presentation the first question Big Mike asked (from the viewers) was, "Why don't you use Volume?" Al's answer was, (paraphrasing),,,, "It (volume) was to misleading." Al went on further about the topic of volume, but the fact is, he doesn't use it, and that fact is very well known, IMO.
Now, when it comes to Price Action Trading (PA) the differences between Al and I become less clear. I do not believe in candlestick patterns of any kind, on charts of any time frame, because I believe today's market (6E) is a continuous timeless market that begins on Sunday evening and (excluding the reset times in the 6E) ends Friday afternoon. To avoid a longer drawn out conversation on this topic I will post a quote (albeit somewhat edited ((by me)) from Richard W. Arms, Jr., "If the market wore a wristwatch, it would be divided into shares (edit,,,, contracts) not hours." In an attempt to avoid further accusations of hypocrisy I'll say this, time is the only constant on a chart and through all my attempts of using ideas ranging from 1440 to 10,080 minute bars and volume bars from 100,000 to 500,000 I've found dividing up the life of the contract I'm trading into 5 minute intervals works best for two reasons, (1) This interval of time best correlates to the average time I spend in a trade and, (2) The notion I have of the market's self fulfilling prophecies. To be clear, I do not believe in or base my trades on bull bars, bear bars, inside bars, doji bars, hammers or hanging men. Lets move on.
Agreements in our Beliefs
There are many, but I'm only going to focus on two that Al covered in his nexusfi.com (formerly BMT) Webinar, (1) Support and Resistance and (2) Self Fulfilling Prophecies. Al and I both agree on levels of support and resistance. I also consider it safe to say we both agree identifying these levels and trading them wisely accounts for the greatest amount of profitable trades. Al also made many references to the notion of the possibility of self fulfilling prophecies effecting price action during trading sessions. During the webinar Al went into great detail about risk and reward, IMO, if you haven't seen the webinar this section alone makes it a "must see." In a short (very short) overview of this section of the webinar I will report and conclude, he (Al), joins the masses with the common recommendation, suggestion and practice of entering trades with a reward to risk factor or 2 to 1. Risk 10 ticks with the expectation to be rewarded 20 ticks, risk 20 ticks with the expectation to be rewarded 40 ticks, this simple equation has been stated by legions of market gurus for decades. And in that lays a key. The continuous regurgitation of this simple 2 to 1 equation decade after decade combined with levels of support and resistance has made it one of, if not the most self fulfilling prophecy in today's electronic, computer augmented markets. But wait, there's more. In the webinar Al outlines and highlights areas in the market, specifically, in previous ranges where he suggests traders should avoid placing trades. That area is the "center" 33.3% of the prior trading range or consolidation area. His (Al's) theory is (and I agree with him) trades in this area have a very small chance of success due to the notion that if the market moves to the upper 33.3% of the previous range or lower 33.3% of the previous range trading will increase due to traders already in the market taking losses and profits correlated directly to the 2 to 1 equation which could expand the current trading range. Although it may not expand the previous range significantly it could expand the current rage far enough to exceed the predefined and suggested 2 to 1 reward to risk ratio, which in turn will stop out the entries in this area time after time after time.
Two Methods Can Achieve Similar Results
"In this post I'm going to walk out on some very thin ice, with the sole intention of showing how two methods can achieve similar results." I'm going to honor Al Brooks and post this chart first. The "hard right edge" of this chart is Thursday's London Open at 2:55 am est. (all times are est.) the vertical green line is the Globex open. I'm taking liberties here, forgive me but I doubt Al has time to play along. I took this 5m chart and divided what I will call the Asian Session into thirds, my understanding is Al would suggest that traders avoid placing trades inside the center 1/3 of this trading range. He suggests placing trades within the upper and lower thirds of the previous range. I know I'm not showing much historic content as to which direction a trader might place a trade in the outer thirds, but the "rule" is or "suggestion" is stay out of the center 1/3. Look closely at the yellow bars, they represent the hour of trading between 2 am and 3 am, I believe they quickly validate Al's beliefs.
This is my chart(s) of the same day, same time, and same range. I've posted before on this thread that I consider the area between the +1 and-1 Standard Deviation (SD) bands of the VWAP "the forbidden zone" and warn traders the chances of being chopped up in this area are high.
Here is another of my charts (it is my thread ) of the same day, same time, and same range. This chart shows the Value Area (VA) generated with a Volume Profile study calculating the volume on price. The idea is similar, trade only the extremes, but if your willing to take the risk of entering in the VA may the trading gods be with you.
This chart is charting the VA of a VP based on time on price the POC at the London Open is exactly the same and the VA compared to the previous chart is 'pretty damn close' but the "old skool" time on price charts can often give subtle clues to future price moves, a topic for another post but briefly, I watch for POC shifts on both charts. Same idea, stay out of the "center" if you do enter a trade, stay on your toes, and "keep your friends close and your stops closer."
Al was absolutely right, any long trades entered in the upper 1/3 of previous range with a stop equal to 1/3 of the previous range was probably taken out on that "Doji" or "long tailed hanging man" or whatever candle traders call them. Same for the any shorts taken in the lower 1/3 of the previous range. As I said, I respect Al Brooks, his method and his opinion. Take a look at this chart, when price sliced thru the "middle" and came out above the center 1/3 it appears it found a level of ROCK SOLID support, just LOOK at THAT VOLUME, sorry Al. I marked these levels to the tick, so the NEXT center should be 15 ticks above 1.3321 OR 1.3336 to 1.3351, the price action on this chart shows that is a pretty good "guess-timation" of what happened, the upper 1/3 OR using the Reward to Risk Ratio would have traders putting targets in at 1.3366,,,,,, that looks pretty accurate too, NICE call Al.
Okay, lets do it again and see if Al's method holds water. This time I'll use the entire range that was just put in, 108 ticks I'll be damn, look at that!
I saw the same thing, different tools, different beliefs, different looking glass but the view from the bridge was 'damn near the same.
The point I'm trying to make with all this is it doesn't matter what method traders choose, there are many profitable ways to make money trading. Here I compared myself (humbly) and my trading style based mainly on volume studies, to Al's style which he admittedly disregards volume stating volume is to misleading, in an unsophisticated comparison. I invite readers to take what they want and leave the rest, draw your own conclusions, do further tests and comparisons of methods you may have interests in. IMO what does matter is your commitment to the method you choose. Find something and stick to it, week after week, month after month and year after year. In the webinar Al Brooks was asked how long he traded before he became profitable, I'm not going to answer that, but I assure you he speaks of it in the webinar. IMO, Al Brooks is an Expert Price Action Trader I believe he will be know in the future (if not already) within the group of expert market technicians I listed near the beginning of this post. Experts have one thing in common, longevity. I believe they prove themselves and their methods by staying with it and staying with it and staying with it. They may look to improve it, but they never abandon it.
When I read threads on nexusfi.com (formerly BMT) and I see traders changing their charts week after week, I think of "A kid in a candy store." nexusfi.com (formerly BMT) has it all, every bell and whistle your heart could desire, and if you can't find it, the nexusfi.com (formerly BMT) Indie Air Cavalry is strategically placed in every time zone around the globe, poised to swoop in and build it for you, all it takes is an @ sign in front of a user name and the launch operation code is activated. If you're a trader struggling to find a method, pick one designed by one of the experts that seems to speak to you and trade it. Commit to the method and commit to yourself to begin a journey of becoming an expert. And above all, don't forget to have fun.
Oh, I almost forgot, even the oldest systems have rules.
They were made by the ones who came before us, for reasons we may not completely understand, until we have more experience with the system.
