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Four Months -- ZN Trading
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Four Months -- ZN Trading

  #1 (permalink)
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Four Months -- ZN Trading

I've traded for a while with a variety of different brokers, platforms, indicators, and the like. I've made money and lost money and I'm here to stop screwing around. I'll be trading ZN (the 10 year US treasury) for the first hour of every day. My day job starts up here on 1/8 so I can't trade much later than that. An interesting fact is that my trades throughout the years have been in ES, ZB, 6J, CL, and only occasionally ZN. I'm picking ZN for two reasons:

1) It is tremendously liquid. My experiences in CL and 6J make me appreciate a liquid market! If/when I increase trade size, I won't run into issues with execution like I might if I trade a thinner product.

2) I classify risk in two categories; there's the simple risk multiplier of adding additional contracts to one's position, but the risk which I am seeking to eliminate by trading ZN is what I call "product risk". In thin, fast products, one cannot eliminate the risk of simply being in a volatile market. If some hotshot decides to fat-finger a 30 lot in CL, the slippage caused by his error could stop you out and affect your edge. If some hotshot decides to fat-finger a 30 lot in ZN, the market continues to auction like nothing happened.

My approach to markets comes from watching about a million FT71 videos, and I've gravitated towards volume profile and auction theory as it applies to markets. I'll be keeping statistics which I believe to be relevant in ZN and these will help inform my trade decisions and overall edge.

The Four Months designation comes from one of Peter Davies' webinars with Jigsaw Trading. In it, he describes setting a deadline for your trading. Can you do it in four months? Can you be consistent and disciplined and control your risk well enough to chisel out your edge in four months?

This is what I intend do to. By May 1, 2018, I will have found my edge in ZN and I will be a consistent trader. I may not be profitable--after all, profitability does not determine consistency!!--but I will have created discipline in my trading.

So, without further ado, I'll begin my new journal!
________________________________________________________________________________________________

I trade from 6:20 AM to 7:20 AM MST. A typical range in ZN for the opening hour is 5 ticks, with a typical day's range of 18 ticks. Note--this data is a small sample (N = 20, N = 55 respectively) and I need to increase the sample size to improve my perspective. Similarly, a typical swing in this timeframe is 2 ticks. This is almost insignificantly small, so I will be using 3 ticks as a general guideline to determine whether I am capturing a statistically significant swing in my timeframe.

Why do I need this data? Well, with this data, I know when things are "normal" and when things are weird. I can tell whether the opening minutes are populated by OTF traders--if the range is large--or whether the market is in a quieter mode. Now I know that I will have, typically, 5 ticks of range to make 2 to 3 ticks off of.

Good things about this: My risk, typically, will be a function of my size in the market and how well I'm reading the auction.

Bad things about this: My range of execution will be pretty damn limited. Sure, some days will have wider ranges than others, but I should expect no more than 5 ticks on either side of the opening print. I'll really have to fine tune my strategy to get around this.

Neutral things about this: Comparatively speaking, looking for 3 ticks of an 18 tick range in ZN represents 16% of the daily range. Looking for 8 ticks in the ES with (roughly speaking) a daily range of 48 ticks represents 16% of the daily range. So, I'm looking at a similar range percentages which I used to trade in the ES.



For tomorrow, 1/4/2018:

Sellers were present and absorbing any and all aggressive buyers in the 123-270 to 280 range. There were many instances I observed in which buyers would hit into the offer for 800+ contracts, but the market didn't move. After sitting around for a few minutes, it would grow really quiet, and then sellers would hit the bid for 2500+ contracts and push down price by a couple of ticks.

I believe that this was the sellers' defense of old lows in the 123-260 to 280 range. It's a fundamentally simple trade; after the level breaks, sell retracements to that level. The volume profile was really weird... I've attached a photo taken 35 minutes after the pit close today. There were two high volume areas at 270-65 and 250. The 260s, in between, saw about half the volume that the other prices traded. The only reason I can think of why the market would leave a gap in the middle of a high volume zone is that 123-260 is a dividing line. I'll definitely be watching this number in the future. It's important to note that 260 was also Tuesday's LVN produced when the market dropped significantly.

FYI, the volume profile below in white with the 9 doesn't mean that only 9 contracts traded at 123-255. It means that 9 contracts was the last size to hit the offer for a 255x250 market.

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Plan for tomorrow: Bearish bias. Sellers stepped on it all day long and may continue to auction lower. An 18 tick range gives us (roughly) room down to 123-120 on the lower end, and 123-300 on the upper side. I'll update these numbers on the open. This was calculated with a last price of 123-210. As a side note, ZN absolutely loves to extend past its overnight range. I'll be looking for a break--likely lower--of whatever the ON range turns out to be.

What I want to see: Market opens around 123-200. Buyers take it up into the HVN created around 123-215 on Tuesday, before sellers absorb the favorable prices and begin to drive price down past the ON Low. I want to participate near the absorption, get short, and exit for 3-4 ticks.

I've included Tuesday's profile below for reference in the future.
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  #3 (permalink)
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Morning of 1/4/2018: ON range was 14 ticks, POC is 123-195 for that range, and it appears that buyers stepped in near Tuesday's lows to defend their position. I personally think it's going to be a helluva lot easier for the market to trade lower based on how close we are to running through stops at 123-170.

5x5 is 210x 160

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  #4 (permalink)
Market Wizard
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lax99 View Post
The Four Months designation comes from one of Peter Davies' webinars with Jigsaw Trading. In it, he describes setting a deadline for your trading. Can you do it in four months? Can you be consistent and disciplined and control your risk well enough to chisel out your edge in four months?

This is what I intend do to. By May 1, 2018, I will have found my edge in ZN and I will be a consistent trader. I may not be profitable--after all, profitability does not determine consistency!!--but I will have created discipline in my trading.

Hi there lax99

Just a question regarding the above - by reading the second paragraph I quoted, it sounds like you have yet to find your edge. By edge I mean something you can exploit in the manner that Peter described in that video.

Unless by 'finding your edge' you mean being consistent?

N.B.: not asking what your edge is. That's yours to know and to work on. Just wondering whether you have one at this stage. It may be a matter of vocabulary here

In any case, I wish you good luck.

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  #5 (permalink)
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Hi there lax99

Just a question regarding the above - by reading the second paragraph I quoted, it sounds like you have yet to find your edge. By edge I mean something you can exploit in the manner that Peter described in that video.

Unless by 'finding your edge' you mean being consistent?

N.B.: not asking what your edge is. That's yours to know and to work on. Just wondering whether you have one at this stage. It may be a matter of vocabulary here

In any case, I wish you good luck.

I'd definitely agree with that, yes. I don't yet have an exploitable edge. I think that I'm using edge and consistency somewhat interchangeably because consistency and discipline issues have plagued my trading for years. In the past, I'd take random crap trades because "the chart looked good" or "large buyers are just below here". Eliminating the crap is certainly a huge aspect of pursuing a viable edge, and I apologize in advance if I frequently swap the two in my journaling.

_______________________________________________________________________________________________

So we didn't quite see what I had expected. The market opened at 185 and almost immediately pushed down a solid 5 ticks. I had offers above the market and I dropped them down as the market came down, but I was never filled. I finally got short 145 in the churning trade about a half hour after the open. I'm still waiting to see whether I'm stopped or filled on my target at 130. The 18 tick ADR means we could see as low as 095 today which would be great for my short!

In the meantime, I'm managing risk by using 165 as a stop (LVN) and I added my last lot at 160 as one of Inletcap's "add when it hurts" old adages.

And as I typed that, I was stopped out On to the next trade.

In hindsight, I should have kept my old limit sells in and been more patient with price action. I think one of the ways that I can control risk is by exercising patience, especially in ZN which is slow moving.

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  #6 (permalink)
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Hindsight being 20/20, I should have exited my short for -1 or -2 instead of letting it go to full stop. I record the hour that I trade on my GPU to watch back after the close or when I have some free time. Here's what I saw today...

1) Market opens. A few buys go through, and then things quiet down for a minute or two. Things get lively when aggressive sellers step in and knock the market down. The sellers reload the offer a couple of times, but then they step back. The market is as lopsided as 4310x467 at one point. It seems like sellers have pulled away, but my guess is that this action is more indicative of sellers absorbing bids before the morning push downward.

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2) Market sells off. We see clear indications of aggressive selling. Price moves downwards, large sells are hitting the bid, and the bidXoffer suggests that most trades are on the sell side. Note 12,151 x 3,460 at 155 x 160, and 7342 x 2475 at 145 x 150. I had entered short at this time, and the trade went +2 in my favor.
KEEP AN EYE ON THE 10,613 x 9271 at 140 x 145

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3) Market begins accumulation. My trade moves to scratch, then -1, then +1, over and over. What I should have recognized is in the following image. In the time that it took the market to chop back and forth one tick above the low, sellers had sold an additional 8000+ contracts.
THE COUNT IS NOW 18,829 X 10,957, AND THE MARKET HASN'T DROPPED

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4) Market begins to move upwards. My trade got stopped out, but the important information is in the DOM. Right at the time that I thought my trade was looking good, that sellers were with me and we'd see new lows, is when buyers let nearly 5000 contracts hit the market. They had accumulated thousands from sellers looking for new lows, and then a market order let everybody know that a new force was in control.
BUYERS CONTINUED BUYING, AND THE COUNT JUMPED TO 19,539 X 37,913

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So, in hindsight, I had plenty of opportunities to scratch the trade or even take +1 on it. What I should have been doing though is accumulating with the rest of the passive buyers, and targeting my stop out price of 123-165.

I'm down 9 ticks so far for the week.

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Seth
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I'm also trading ZN at the moment, and I've been recording videos for quite some time. I've also been livestreaming it so there's a lot of commentary about what I'm thinking. You might find today's particularly interesting since I took the same trade successfully, and noticed a few extra things around that same spot that I don't see in your analysis:



The part I think you'll find interesting is at 16:50 when a 3k market buy lot went through.

We've been seeing this a lot in ZN for a few weeks now, and the discord room has started to call it "Tyler" after the fight club character. I got out when I saw him, and the market took another push lower. However, then when we got back to that spot we saw tons of size trade around there. Basically when we see that 3k lot go through from Tyler exiting we tend to get pegged to that price.

It's really effing annoying.

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@lax99

Really nice to see you putting in a solid effort.
Well done!

I'm almost 100% sure you're not doing this, but you really should be looking at the US10YR yield when you're trading the ZN. (In fact, if you're trading US treasuries you should absolutely be looking at the US curve — 2, 5, 10, 30 year yields).
Pricing and yield have an inverse relationship.
The thing is, the guys pushing vast sums of money will be looking at yields and noting key levels. If they're looking at yields, you're looking at yields! That is non-negotiable!

We currently have a 2.40%-2.50% range in the US10YR.
2.50% is capping right now. So chasing ZN today into the lows as the 10YR pushed up toward the 2.50% probably wasn't the best idea, considering too that we are fresh out of the New Year.

2.50% is the game right now. If you come down from 2.50% roughly 50bps, then you get center of current range (2.45%).

Yields up this week so far and they still like fatteners (Fed and inflation/inflation expectations driving the curve right now).

All the best!

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Hi kellys and TWDsje,

Thanks for participating! It's nice to see the community getting a bit more active once again. I'm new to bonds and it sounds like you guys have some valuable input!

@TWDsje--I remember seeing that size go through. I need to set up my tape in Jigsaw a bit better; I saw a flash of action and a large trade go through, but I couldn't remember exactly how much size was offered a moment before. I'm going to fix that and my setup will reflect that tomorrow. Also, I'd agree that we were both biased short, but I'm going to respectfully disagree that our trades were the same.

Mine was certainly the wrong one to take, as it was put on near the low of the day after the majority of the move had occurred, and I kept the position on in the face of tons of long accumulation. It appears that yours was pretty darn near the open, and you successfully captured the push lower. I think--and please correct me if I'm wrong!--that your trade was made in an anticipation of an opening swing down. Mine was made in the anticipation of a stop run through 123-120, but I was wrong.

@kellys--You're totally right, and I don't have the 10 year yields up when I'm trading. After Googling around a bit, I see that CNBC and Bloomberg have intraday 10 year yield data. Is this where you're checking yields, or does your data provider have a stream that you subscribe to? In any case, thank you for checking in! Part of my daily post-mortem is figuring out a way to trade better tomorrow, and this will certainly help.

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Seth
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lax99 View Post
It appears that yours was pretty darn near the open, and you successfully captured the push lower. I think--and please correct me if I'm wrong!--that your trade was made in an anticipation of an opening swing down. Mine was made in the anticipation of a stop run through 123-120, but I was wrong.

Ahh, I guess they were a little different. I went short just off my reading of the order flow after the ADP number came out. I was watching closely for an exit just because it's been doing this all week where the move down will suddenly stop. Seems to me that the market overall is just too short, and people aren't rotating enough to keep it moving.

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