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Learning to trade the ES using volume profiling
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Learning to trade the ES using volume profiling

  #21 (permalink)
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Economic Data: new homes

ON Profile: We have a very distinct p-shaped profile thus far. I really didnt expect spoos to be back up here when I woke up given they were trading 1487-ish when I went to sleep but apparently there was some good news out of europe and/or japan. The current hi is 1 tick below yesterdays RTH hi and the low is 2 ticks above yesterdays RTH lo- which also happens to be a CHVN. So it seems 1486.75 is seen as too cheap and market now likely to check the 1502.75 CHVN and see if new buyers show up or supply overwhelms. ON vpoc stands at 1494.75.

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Closing Swing: 1492.5-1489.5

Levels Above: 1499.25 CLVN, 1502.75 CHVN**, 1509 CLVN

Levels Below: 1493.25 LVN, 1490.5 nvpoc, 1488.5 CLVN, 1486.75 CHVN*/1487.25 MCVPOC, 1482.75 CLVN, 1480.75 nvpoc*

Hypo#1- Spoos open OAIR around VAH, sell off to 1493.25 LVN from yesterday or 1490.5 nvpoc to pick up buyers then bounce higher through the day.

Hypo#2- Spoos open OAIR, push higher to 1499.25 CLVN/1500 and fail then head back down to 1490.5 nvpoc.

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  #22 (permalink)
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@djkiwi

yeah, FT71's style is what I am trying to emulate. It may seem as though I am a scalper but thats only because I am trading 1 lots now. My goal is to increase size and then scale out and potentially let winners ride all day in best case scenarios.

at any rate, please keep dropping by to contribute anything, particularily if you see me making glaring mistakes.

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  #23 (permalink)
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1. Sold 1492.5 mid/vwap on 3.5 pt move up off double bottom/poor-ish low. Breadth +96 and tick +172. Vpoc shifted to my entry 1 min. after entering. Expectations are for a rotational day but we have a double distribution type profile at the moment. Breadth opened ~ +250 and printed hi +300 shortly thereafter and has steadily sold off but bouncing off zero line. Scaled after 10 min and .25 MA.

2. Long 1694.25 LVN on 3.25 pt move down. Breadth +158 and tick -300. Scaled after 6 mins and 0 MA. Second scale given.

3. Sold 1499.25 CLVN on 3.5 pt move up into cash close with breadth +273 and tick +670. Scaled after 3 min and 0 MA. Second scale given.

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Recap
Spoos opened OAIR inside value and above vpoc. A move up to prior highs failed 1 tick below that set the stage for the move down to close nvpoc 1490.5...unfortunately market stopped 1 tick before and then proceeded with its usual grind higher. The close was pretty wild with some good swings. It became clear early on that the day would develop into a rotational, balanced day and that's what we got. Vpoc continues its march higher along with an overlapping higher value area. Price closed incrementally higher inside value, basically right at the vpoc for a truly balanced day.

I felt my trading was good today but could have been better. Market didn't give me the nvpoc close trade I wanted and I failed to pay up for it as well. I really don't know when to front run and when to hold my ground yet so until I develop some sort of feel I will continue to put my orders at my numbers exactly. I also really thought hard about selling 1498.5 after it 1 ticked higher with tick being negative combined with rotational day expectations. I guess its good I at least noticed it in real time. Hardest part is pulling the trigger though. I am happy to end the week with a positive day. I need more of them.

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  #24 (permalink)
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We have all time frames trending higher. Additionally we are at 5 year highs so all time frames are likely to be active in this market. The only negative I can say about this market relates to its volume. Dalton says that moves in one direction on declining volume are likely to revert to the mean. This market is definitely auctioning higher but on very poor volume. Since the new year, ES is averaging a paltry 1.16 million contracts per day in the RTH session. September 2012 averaged 1.34 million so we are down 15% from then. Is this just a function of declining volatility? Any thoughts on this?

At any rate, trading from the long side seems to be the safer trade for now.

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  #25 (permalink)
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The only negative I can say about this market relates to its volume. Dalton says that moves in one direction on declining volume are likely to revert to the mean. This market is definitely auctioning higher but on very poor volume. Since the new year, ES is averaging a paltry 1.16 million contracts per day in the RTH session. September 2012 averaged 1.34 million so we are down 15% from then. Is this just a function of declining volatility? Any thoughts on this?

As much as I respect Dalton (or some others who I've heard say that declining volume is a sign of weakness or potential reversion to the mean), this is simply flawed thinking. This is one of those "rules" you hear, you read it in all the books and hear it said by so many people, but it simply is not true. Just look at previous multi-month grinds higher and you will see time and time again that the slow grind up can continue for much longer than anyone thinks, on paltry volume.

Sometimes a market will move up on low volume, sometimes on healthy/high volume. Either is prone to continuation or reversal. This is true on an intraday basis as well. Look how many intraday moves begin with exhaustion from one side, and then on super low volume (during the middle of the day usually), the market will trend the rest of the whole day.

The best indicator of supply and demand is price, NOT volume. Volume tells you nothing about supply or demand, it only indicates interest in participating, and in establishing value. In the most objective way I can express, demand in this market has been MUCH higher than supply this year, and on a macro scale, since 2009, while most people have been staying out or selling because the world has been coming to an end any day now for several years. How can I objectively say this? Because prices are HIGHER now than they were. That's it, and it is this simple.

Since the last day of 2012, the S&P has had 13 positive closes, and 5 negative ones. It has traded from 100 handles up, from 1400 to 1500 (the gap up on Jan 2 counts, very much so) with a max rotation down of 17 handles. You tell me, who has done better, the ones who have been scared away by "poor" volume, or the ones who have taken the high probability trade and BTFD?


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At any rate, trading from the long side seems to be the safer trade for now.

Yes, and it is too obvious for most people to do. Not to say there aren't short plays; on the contrary, in the day timeframe there have been a few, but there have been far more on the long side. On the swing (multi day/week) timeframe, there have been NO reasons to short this year, and only one or two good opportunities in all of Q4 2012.

By the way, you may want to give the cash chart a look:
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Consider that the S&P traded as high as 1576 back in 2007, the all-time high, and that investors and people with real money (the ones who actually move the market) likely are referencing a cash chart, not an ES daily that has been back-adjusted 22 times since then, or any other futures chart using any of the other many ways to splice a futures chart to make it continuous. In the ES world, we are 20 handles from the high, but in the real world of cash, we are 70+ handles from the all-time high. Said another way, there is one chart that always shows where the market actually traded, and it's not a futures chart.


Last edited by josh; January 27th, 2013 at 11:31 PM.
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  #26 (permalink)
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@josh

very true josh about these low volume upswings just continuing on...

and thanks for providing the cash chart, I had been getting very confused about how spoos could be 20 handles off highs but the cash over 70. its def an argument for not using back-adjusted data which brings me to another question. if some people are using back-adjusted and some arent and both groups are using volume profiling and both are making money, does that mean that entries and exits don't really matter, just discipline and money management?

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  #27 (permalink)
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Economic data: durables, homes

ON Profile: Very slow action overnight. Light volume and small 4.5 pt range almost entirely within yesterdays value area. ON vpoc sitting at 1496.5, basically inline with friday's. Shape is mostly balanced but the low showed better rejection. Really not a lot to say about it. I had thought with all the headlines of 5 years over the weekend there might be a decent pop to start the day as the public sends in some buy orders for fear of missing out. Per my weekend post, uptrend is strong in all time frames. I see no reason to have a sell side bias today.

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Closing Swing: 1499.25-1495

Levels Above: 1499.25 CLVN, 1502.75 CHVN*, 1509 CLVN, 1514 CHVN/nvpoc*

Levels Below: 1496 nvpoc/1495.5 MC VPOC, 1493.5 CLVN, 1490.25 CHVN/nvpoc, 1488.5 CLVN, 1486.75 CHVN, 1482.75 CLVN

Hypo#1- Spoos open OAIR, inside value and drive weakly higher to pHi then fade 5-6 handles before the pattern of grind up buying begins anew and close near highs, targeting 1502.75.

Hypo#2- Spoos open OAIR, grind higher to 1502.75 and fail then auction down to 1493.5 CLVN or perhaps 1490.5 nvpoc/CHVN.

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  #28 (permalink)
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and thanks for providing the cash chart, I had been getting very confused about how spoos could be 20 handles off highs but the cash over 70. its def an argument for not using back-adjusted data which brings me to another question. if some people are using back-adjusted and some arent and both groups are using volume profiling and both are making money, does that mean that entries and exits don't really matter, just discipline and money management?

Absolutely not; what it means is that there are different ways to determine entry and exit points, including different methodologies.

The issue in my eyes is this--how much do we care about old prices? When making fresh highs, the only reference the market has for these prices are those that were traded in 2007. But, does the market (in other words, anyone with money) care about intraday-level data from 6 years ago? To think so is, IMO, naive. The daily cash chart provides a nice view of where the index traded at that time, and it is to be viewed as an area of balance as a whole; all the profiling that needs to be done can be done visually with a daily chart. Even from month to month, due to the futures/cash convergence as the contract nears expiration (usually about 5-8 handles from when it becomes front month to next rollover), there can be discrepancies.

We have to appreciate that working out these things with a futures contract is art, not science. There is no right or wrong way to do this, so we have to adopt some belief system and work with it. I firmly believe that futures data from 6 years ago is totally irrelevant in the current context, but if someone believes differently, and takes a trade and makes money, who am I to argue? People every day are generating lines on their chart, and most of their observations are likely based on hindsight bias, or pure randomness, but in trading, all that matters is that enough people want to buy or sell, and the reasons at the end of the day do not matter and cannot even be known.

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  #29 (permalink)
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1. Long 1493.5 CLVN on 4.75 pt move down. Breadth -229 and trending lower with tick -577. Stopped after 7 min and .25 MF.

2. Sold 1494 on 2.75 pt bounce after 7 pt move down with breadth -231 and tick 0ish. Possible trend down day-toothy profile. Low looks good however. Stopped after 20 mins and .5 MF.

3. Long 1495.75 1 tick ahead of mid on 2.5 pt move. Breadth -160 and tick -600. Scaled after 27 min and .75 MA. No second scale.
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Recap
Spoos opened OAIR above previous value a tick below pHi and were immediately sold by responsive sellers. Price managed to come back to the open only once the rest of the day which surprised me as I expected a 1500 print. Per usual, after an early sell off that stopped 2 ticks short of friday's low, buyers stepped in and auctioned the ES higher. Value was established inside of yesterdays VA with VAH to the tick the same but VAL shifted higher by a point. Vpoc also shifted upwards slightly and managed to pull the MC vpoc up a tick from 95.5 to 95.75. Price finished unchanged at this level. Volume garbage as usual at 987k.

Both today's hi and low featured strong rejections so I guess no surprise price closed in middle at vpoc. Market followed my hypothesis #1 to the tee but I still lost money. Frustrating how that happens. My first trade was a good trade I thought but I got stopped. I tried to get long again at 1490.5 nvpoc but market stopped 3 ticks before. My second trade is debatable. The low had a strong rejection but at that point the profile and internals looked very trend down-like. Tomorrow is another day...

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  #30 (permalink)
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1-29 pre-market


Economic data: case shiller, consumer confidence

ON Profile: We have a double distribution so far with a bit of range expansion (ok 1 tick)! Yesterdays hi was not challenged as it stopped 3 ticks short. Yesterdays low however was taken out by 1 tick but buyers have stepped in and as a result we have vpoc sitting near the low at 1492. Perhaps today will finally be the day that sellers can find a nut? The LVN seperating the DD sits at 1493.75 which also happens to be a CLVN. However, that CLVN hasn't really been working the last few days so I'm not willing to place a bet on it working today. Ideally I would like to spoos to open around 1493, push up to the 1495.75 MC vpoc and get rejected then travel lower down to the 1486.75 CHVN for a bounce up to 1490.25.


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Closing Swing:1498.-1495

Levels Above: 1495.75 MC vpoc**, 1499.25 CLVN, 1502.75 CHVN*, 1509 CLVN

Levels Below: 1490.25 CHVN, 1488.5 CLVN, 1486.75 CHVN*, 1482.75 CLVN*

Hypo#1- Spoos open OAIR, push lower to 1486.75 CHVN where buyers step in and grind it higher through the day (same ol' song).

Hypo#2- Spoos open OAIR, push higher to 1495.75 mc vpoc and find rejection then auction lower down to 1486.75 CHVN where buyers step in.

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