Finding the Top of a Major Swing

The hardest thing for me to do as you will know if you are a regular reader of this blog is to hold onto a trade. I've been working on this issue for the whole of my trading life.

The charts below show how such a major top or bottom can be found. Its a matter of using order flow at the right context spots. The bar charts shows the latest tools I use. The buttons at the top of the chart allow me to have Flo trigger trades that meet most combinations of context and order flow combinations. The human eye is still needed as yet to verify the context. The second chart - Market Profile - shows the split's POC that held the market twice. The bar chart shows the reversal of the order flow at the right context for that chart. All that is needed is to have enough contracts so you can scale out at relevant chart areas.

 

Why Algos Work!

One of the reasons that algos for hybrid trading work so well is that it makes me focus on what's important and to ignore what's not.

Recent studies, talked about here, show that if you know what to ignore you can focus on what's important. The article is well worth a read.

Applying that to trading means that I create a trading plan and then strengthen my ability to stick to that plan by having an algo do the triggering based on the rules in my trading plan but only after I arm it for each specific trade after I have determined that the extra context components of the TP are present.

This means I have plenty of time before the trade triggers to arm my algo and then let it shoot the order with just 1 ms of latency when all the rules are met.

As the Great One said, "how sweet it is".

Numbers and Orderflow and Algos

Writing this waiting for the monthly unemployment numbers.

The pic tells the story. Selling revealed itself after the market went overbought. It sold all the way down to the POC of the day's Volume Profile. I've been doing a lot of work on using Volume Profiles intra day and I'll be showing more about that. We've got a lot of information about order flow in our data stream and we have the technology to reveal the information we need to trade CP. Its now just a matter of learning how to use it. We're in very competative markets. We are competing against a lot of smart people and HFTs. Using algos is a must for most of us if we are to succeed.

The markets liked the number, at first but over cooked it. Then the opportunities showed themselves. The buttons at the top of the chart allow me to place trades based on a combination or orderflow and context. Go Flo.

Scalping and Short Term Trading is Like Jujitsu - Using the HFTs to Profit

As these markets continue in their transition, one think looks like it will remain a permanent part of trading: the algo. There's algos and there's HFTs. While a retail trader can't be an effective HFT, we can use algos and we do.

This leads me to Jujitsu. The Wikipedia here says:

Jujutsu (/dʒuːˈdʒuːtsuː/ joo-JOOT-soo; Japanese: 柔術, jūjutsu  listen (help·info)) is a Japanese martial art and a method of close combat for defeating an armed and armored opponent in which one uses no weapon or only a short weapon.^[1][2]"Jū" can be translated to mean "gentle, soft, supple, flexible, pliable, or yielding." "Jutsu" can be translated to mean "art" or "technique" and represents manipulating the opponent's force against himself rather than confronting it with one's own force.^[1] Jujutsu developed to combat the samurai of feudal Japan as a method for defeating an armed and armored opponent in which one uses no weapon, or only a short weapon.^[3] Because striking against an armored opponent proved ineffective, practitioners learned that the most efficient methods for neutralizing an enemy took the form of pins, joint locks, and throws. These techniques were developed around the principle of using an attacker's energy against him, rather than directly opposing it.^[4]

The part of the quote printed in bold above was emboldened by me to highlight the main idea I'm talking about: "use an attacker's (HFT's) energy against him.

In previous posts I've talked about seeing the order flow. Its something that has been the focus of this blog since its beginning in what seems a lifetime ago now, October 2009.

On the floor our function was to take the other side of the trade of the "paper". We were liquidity providers. However, where we differed from market makers was that we only took the other side of trades that we wanted to take. So if, say, we identified a broker coming in with what looked like a big buy order, the smart thing to do was to sell him the last 100 contracts. In addition, we may have also front run his order, buying ahead of his big order and selling to him as he filled his order pushing price in our favour.

No more floor locals.

But we have something now that we didn't have then. We can count the volume contract by contract and see whether the buyers or the sellers were more anxious.

The nub of all this is how to use the technology we have now to trade the way we did on the floor. We had an enormous edge on the floor and this edge is here now, using the right technology and the right strategy.

Traders are looking for a way to use a relatively low amount of capital with limited risk per trade and the ability to make a living trading small size. "Using an attacker's energy against him" is the way to do it.

More to come on this subject.

Stress and Trading

I just came across a webinar delivered by a psychologist, Dr Andrew Menaker, for my friends at MarketDelta about 18 months ago.

This is probably one of the most interesting takes on trading psychology I've seen since Mark Douglas' work.

You can see it here.

If you know your enemy.....

Seeing Orderflow Change to Sell where I Expected It.

As I have said so many times - Context Rules. The pix below shows the bigger picture first: The market traded a swing down and then retraced - our typical pullback in the direction of the trend. While we used to just use the CCI to track this we can now use orderflow. The indicator is the Logik Volume Wand which creates the Volume Profile of the swing. There is also the VWAP there. The second pic is a close-up of where the trade triggers. As I said, there was a swing down and then a retracement. The retracement went to the POC of the swing and right below the VWAP - VWAP is the average value of the swing. The red arrow shows orderflow changing from buy to SELL and this is the trigger.

The context is very important as orderflow changes direction often and often without follow through. What is different here is that the context says that if the orderflow changes direction at the POC or VWAP then there is a good enough probability that there will be a big enough move in the direction of the change. The next piece is the trade management: stops and targets. This last piece of the trade is a very big part of being CP.

It Just Got a Lot Better - My New Tools.

I thought the beginning of 2016 would be a good time to share where I am now in my trading. Let me be clear, the basis has not changed. I trade inside out trades by trading the pullbacks in the trens as well as outside in trqades fading overbought and oversold conditions, all in a Market Profile context.

Lets start by talking about where Pete Steidlmayer is now. Here. Pete talks about trading the swings between accummulation and distribution. He tracks VOLUME. Now that actual live volume is available, he says that TPOs are outmoded. While I don't totally agree with that as I believe that Market Profile provides both support and resistance information as well as a big picture information of where value is moving, I do agree that we now are able to rtrack volume on a much more granular scale.

I tried using Pete's Volume Strips that he refers to in the video when they first became available, but I did not "see" the order flow clearly at all.  I then tried to use Pete's Cap32 software and had a guide with me for a week. Sadly, this did not add anything to my seeing order flow. Perhaps it was just me.

What began to provide me with more information was firstly cumulative volume delta and then MarketDelta's Volume Imbalance charts. Finally, the order flow was becoming visible.

What I have now done is to capture both the order flow and volume information to trade the same way I did before in order to more precisely see my entry and exit points. You still see the CCI to measure trend as well as Keltners and Bollingers to identify overbought and oversold. What is additional is the inside the bar trades and the Volume Profile (VP) to understand the order flow in each swing and to identify, more precisely, my entries and exits (stops and targets). These changes to my chart have provided a huge improvement, especuially in the types of markets we are trading in this modern eara where:

• there are no floor locals - everyone is an electronic local
• Algos make up for a great majority of the trades and volume that takes place every day in most markets

 So lets talk a few specifics. The VP identifies whether a pullback is a probable entry point or not. The VP also allows me to use tighter and better stops. To achieve this, I use multiple VPs on my chart as the swings develop.  The inside the bar information you see allows me to fine tune entries and to better identify exits.

The final piece is the buttons on the right I call GEL. These buttons allow me to hybrid trade and use specific rules in specific context whwre a set of pressed buttons are only valid for the particular trade I am attempting. They reset to zero after the trade is entered.

The Volume Profile is available from PureLogic. I'll provide more info on this great tool in subsequent posts. You can see the Volume Profile on any bars you select and shows, for that selection, VA, VAL VAH, POC, VWAP and Standard Deviations plus a lot more.You can buy it here.

Algos for Hybrid Trading

For me, the optimum way to trade is hybrid trading: a mixture of algo and manual.

What this means is that I have an algo that I can turn on and off, and more. The more is that I have buttons for the different components of all my trading pictures and trade management and I can select which parts of which picture I want to use in a particular context.

I do not believe that its possible to achieve the same profitability with an algo as a proficient discretionary trader. However, with a hybrid algo I can achieve a larger daily consistent profit for less risk than discretionary trading of just one market.

It is not possible for me to program all of the context into an algo and that is why hybrid trading - turning on and configuring the algo for each trade - works best for me. You can see more about this in previous posts and pictures.

Technology Wins! Algos Take First prize.

I saw an interesting article in this morning's Sydney Morning Herald here. My day starts with reading this newspaper, not only because its the newspaper I grew up reading but also because the international dateline is very near Sydney and the day starts there so by the time I wake up in Europe, the news has been well researched and written and I get a good summary of the day before.

What this article talks about is something that I started believing in 1979 or even before, that technical analysis is the only way to get a true idea of what is happening to a particular instrument in the market and that fundamental analysis is flawed due to latency and hidden information.

There can be no better technical analysis than orderflow and price action in context.Using algos to hybrid trade takes this approach to its logical conclusion. Not using algos to action and see the orderflow puts the trader at a significant disadvantage and at the other side of CP traders' trades.