Its the Market Profile that Counts

A trade is comprised of the WHERE and the WHEN. Context is king. I can put on a perfect picture but if I ignore the context - Market Profile - then the perfection means nothing. This context is the difference in performance between a discretionary trade and an automated algo trade.

The chart below is a perfect example. The developing value area (DVA) is straddling the overlapping Value Area Low (VAL). Will it go into the previous VA or will price develop value lower? The bar chart tells that story as it reveals itself.

Looking at the bar chart, the picture is clear. Price is in a down trend and rallies must be sold. Short term scalping traders will cover and reshort. Slightly longer term traders will stay short and add to shorts until support is reached or until the market tells them they are wrong.

Each trader has a so called "style" which determines the rhythm of their trading and the types of trades they carry out.

The Market Yells Loud and Clear

Its impossible to know where the trend will lead. All I can do is identify the trend, take a position and ride the order flow to where it goes.

Seeing what is happening is important. Our tools let us see that most of the time if we use them. As I have said many times in this blog, the question is: "what are "they" doing?". putting the context of the MarketProfile together with out bar charts lets us see that.

I've had a number of questions about the OFT bars. They are very useful and give precise volume information. However, the VolumeDelta bars in MultiCharts can be coloured to give almost as much information. It's just not quite as obvious.

I have annotated the DAX charts below for a great trade today.

The pics below show the same trade on the ES and FESX. I didn't trade these.

Another Text Book Trade

Today's DAX trade was a real text book trade. These are the types of trades I'm explaining in the MP book.

As you can see, there was a nice ZIPPER of single prints that I was eyeing before the market opened. There was a bullish tone in Asia so I envisioned the ZIPPER being run up.

The OFT bars and the CCIs provided the timing on the trade. I entered LONG and put a EXIT at the resistance with an alarm. The target was hit while I was doing something else. I flipped to the chart and watched to see if the resistance would break - the resistance being the tail of the overlapping Profile.

We had fireworks last night in our village to celebrate the Fete Nacionale or Bastille Day as we in the english speaking world know it. Happy Bastille Day to all my French neighbours.

Anatomy of a Trade

I drew my FavFib lines onto the chart before the open of this mornings DAX trading. I also checked out how things fitted on my MarketProfile chart. The BUY on the MP chart had not much support but but the SELL had good resistance.

My plan was to take both trades. My backup on the BUY was to double down at the strong VAL support below the FavFib if the market went through the FavFib area.

As it turned out, the BUY was elected first and held. \price then moved up to the SELL where I took profit and reversed to SHORT. Not all the trades work out as envisaged but it's nice when they do. As I pointed out many times in this blog and in my training classes, envisaging is important as otherwise the market catches you by surprise. Envisaging looks at the possibilities and how they fit into my trading plan.

The Market Profile book will go through the whole process of constructing trades in this way.

OFT Example

The chart below shows one way of using the OFT bars.

Price opens in ES RTH with the bigCCI showing a downtrend. Price bounces against resistance of previous POC and the Tail at the bottom of the last MP distribution.

SOLD!

Its then a matter of managing the trade. The OFT bars just show the selling at a critical point. They are not a red light/green light indicator. The context, as usual, is very important in understanding what is happening. I'm spending a lot of time on context in the MP book. That's what is taking a lot of time. I've made an improvement to the OFT bars with a candle display as it gives more information quicker. The way that the Order Flow is coloured is different to each market as the volume of, say, the ES is significantly different to the CL. Again, I'm showing how this is done in the book. As you can see, the selling visible in the OFT bars gives a greater degree of confidence in the sale against MP resistance. Also, seeing the downtrend in the CCI immediately tels you what to look for as the market unfolds.

OFT Transition from Short to Long

The pic below is a good example of the OFT bars showing the transition from short to long. The red arrow shows the bar that is where a long can be taken against support as the predominantly red prices turn to green right where there is "support" from the Bollinger Band. The CCIs also show the possible transition.What the picture does not show is that there was support on the Market Profile too. Putting the two together is a very powerful methodology.

The Market Profile book I am writing will contain many embedded videos so that this technique can be properly shown. I will start with all the Market Profile techniques and then show all the OFT techniques and then I will put the two together so that the reader can create a trading plan to take advantage of  the higher win rate and larger average trades that can be accomplished using this idea.

I need to go back and redo a lot of what I have written and videoed but I am putting more effort into this project now. Once the material has been created I have a guy that will put the material into a format that can be read on many electronic devices.

Order Flow Trade Bars

A few times in my trading life something came along that was a game changer for me - something that increased my profitability by a significant amount. Another one has come along. I don't want to sound too optimistic but I do want to share when good things are discovered.

I'm not a great inventor but I am good at finding great uses for something someone else has invented. I am good at seeing the possibilities. Market Profile is a great example. The latest one is what I call Order Flow Trade Bars or called Volume Imbalance by the folks over at MarketDelta. In the last few years I had been looking for something that gave me more than the old Footprint or Volume Breakdown charts could deliver. I wanted what I had on the floor as a Local. I wanted to see what was trading at the bid price and what was trading at the offer price just as I did in the pit, and I needed that visually so I could react quickly to unambiguous information.

Was it "SOLD" or "TAKE 'EM".

The Order Flow Trade bars give me that information in real time. I can see when there is significant activity that should impact price direction. These bars are just simple OHLC bars with the notation of the number of contracts traded at the BID and the number traded at the ASK and with colorization to show significant Order Flow Trades.

My usual EL trading pictures have not changed at all. It's just that I now have an added filter for both entries and exits. I can get in one bar earlier and bail if Order Flow does not confirm thereby getting a better trade location with very low risk.

A trade is made up of the trading picture and the context. The WHEN and the WHERE.  The picture below shows the Order Flow Trade bars (OFT). The RED shows significant trading at the BID and the GREEN  shows significant trading at the ASK. This is MultiCharts and the OFT bars were coded by my programmer. When NinjaTrader 8 is released I will also have a NinjaTrader version. NT7 doesn't have the technology to produce OFT bars historically.

The Order Flow information has added significance at support and resistance areas and after pullbacks. I will be showing a lot more of these OFT bars in future posts.

Also, this information will be included in my Market Profile book which will need a significant amount of extra information added as the power of the Market Profile together with OFT is quite incredible.