Evolution and Transition: My New Normal

Market Profile with Footprint Volume Imbalance = Order Flow

-          I have updated what I have on my discretionary charts to take advantage of the latest technology to trade the markets in transition. I recently showed the order flow bars - Volume Imbalance Footprint from MarketDelta. I have taken things further using Volume Profile and the new ideas that Pete Steidlmayer is using in recent updates to Market Profile. Pete has moved on to using volume and order flow in a quite complex series of database interrogations that create a number of charts and spreadsheets he uses to trade intraday and short swings. I have taken that and created a single chart and a legacy Market Profile chart that is more visual and intuitive.

T   Today's pic shows the further development of looking at order flow. I am using MArketDelta for all my discretionary trading as it provides all the information I need in one platform with the best support when I need to chart something new. As you know, I have been using the CCI to see the footprints of order flow for years and years. Now I can see the order flow directly. Win rate is even higher. I am not quite at Pete Steidlmayer's 85% win rate with these new charts but I am confident that with practice I'll achieve that.I made these changes after considerable testing. Leaving a tried and true setup was not easy but when you read the introduction to the book I am writing you will see why.

The Markets Today

The markets have been going through a great transition during the last few years. The transition is still underway. The reason for the transition is:

·         The Pits have all but disappeared which means there are no locals or specialists. This has eliminated the major source of supply to the markets. In the “was”, when a large order came in the locals or specialists took the other side of the trade. They then managed their position to spread it back into the market. This no longer happens and paper now trades with paper creating more volatility if the order is large

·         At the same time, the paper has increased in size. We now have many large hedge fund type customers trading so at the same time as the locals disappeared, the customer size increased dramatically

·         Also, technology is playing a greater part in market activity. The technology provides a cheap and instant access to the markets allowing traders to make more and shorter term trades at a lower cost of entry

All this has resulted in a much more order flow driven market place. While markets were always driven by order flow, the present markets have no intermediaries that dampen or shock absorb the instant activity which therefore results in more relative volatility.

The outcome of this is a much more supply driven market. So we have to trace order flow and supply in order to be Consistently Profitable (CP) in our trading. This means that we need to use technology to capture the information now instantly available and present it to ourselves in a way that enables us to make objective assessments of what is happening and there allowing us to infer what will happen. This means that we need to create a market framework within which to operate so we can see:

·         where there is inventory

·         when accumulation  is taking place

·         when distribution is taking place

·         when accumulation is likely to occur

·         when distribution is likely to occur

Once we have a mechanism for “seeing” this information we can trade CP. The goal of the ebook is to show how I have created this framework and how I identify the conditions I need to make profitable trades.

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Here's the MarketDelta chart I now use. It looks a bit busy because of the Volume Imbalance numbers but I only look at that AFTER the trade is on to see how I need to manage it. Pete's mantra is to get the trade on when it fits the plan and then manage it. He's really right as otherwise I get a worse trade location.Trades have a "WHEN" and a "WHERE". This chart plus the Market  Profile chart gives me that. The book will show all. This part of the chart had 7 short trades worth 200 euros each per contract. The decision making was pretty objective, There are two modes: the first hour or so and then the rest of the session.