Sunny Go Pirate Boat

DAY TRADING PLAN

A 5 steps process to successful trading :

1. UNDERSTAND the market place.
2. IDENTIFY OPPORTUNITY.
3. Work out RISK/REWARD potential.
4. CONFIRM the trade.
5. MANAGE the position.

how it works :

 

1. Market Profile : Provides UNDERSTANDING on how to trade the current market place.
2. Price Action : IDENTIFIES OPPORTUNITY.
3. Market Generated Reference levels : Uses to work out potential RISK/REWARD.
4. Order Flow : CONFIRMS when to trade.
5. MANAGE the position : Focus on minimising risk and maximising profits.

Bellow are some important links to informations and updates that I added to my trading along the way:

post # 26 : Pre-Market Analysis
post # 37 Daily Process
post # 48 Build a Trading Business Plan
post # 49 Keep a Detailed Journal or Diary
post # 52 Self Improvement : Learning How To Develop Self Discipline In Life
post # 117 Euro FX Daily Range Study
post # 90 Three Questions For the Start of the Trading Day
post # 91 Three Questions for the End of the Trading Day

Using the Market Profile to UNDERSTAND Structure and find the best opportunities.

 

1. Helps identify directional conviction through imbalance and ranges through balance, therefore allowing to trade accordingly.

1. If experiencing a more horizontal/sideways day, such as non-trend, normal or neutral day : Trade both sides of the market. Aim to Sell above value and Buy below value.

1. If experiencing a mixture of imbalance and balance with a normal variation day or a double distribution day, the best opportunities will be with the directional conviction, however you still find good opportunity on the other side of the market.

1. On a trend day : Use a go-with approach, Buy the dips and sell the Rallies, NEVER fight the trend.

Using Price Action to IDENTIFY a trade setup :

 

1. Use a setup that I am comfortable with and am able to identify with ease.

1. Setups are coming directly from both Wyckoff and Tom Williams ( Volume Spread Analysis ) methodologies . Common setups are : shake-out, test, upthrust, climatic action, no supply/demand, spring, last point of support/resistance ...

Determine the RISK/REWARD before taking a trade :

 

1. NEVER consider a trade without first working out the potential RISK and REWARD in that trade.

1. Use key market generated levels ( VAH, VAL, POC ) to identify areas to which price may be likely to trade to if I was to get the trade right.

1. If I was to get the trade wrong what is the maximum risk I will allow in that trade ?

1. A trade need a REWARD of at least twice as much as the RISK to be considered.

1. REMEMBER I do not have to wait for the market to hit my stop each and every time to prove that I am wrong !

CONFIRM the trades with the market delta Footprint

When I have a Buying opportunity, things to look for are :

 

1. A closing Footprint with positive delta.

1. Evidence within the Footprint that buyers have liffted the sellers offer at sequentially higher prices - for example 3 prices in a row.

1. Significantly higher volume on the offer than bid.

1. Cumulative delta showing more aggressive buyers than sellers.

MANAGE the position - Minimise risk and maximise profits :

 

1. Scale out of trade to help minimise the risk and maximise the profits at the same time in a trade

1. Aim to get to a risk free trading situation as soon as possible, however do not be too agressive with moving stop to break even

1. Only add onto positions on strong trend days.

Credits and Resources :

 

1. http://wyckoffstockmarketinstitute.com/

1. http://www.tradeguider.com/

1. http://www.jdaltontrading.com/

1. http://www.l2st.co.uk/

1. http://traderfeed.blogspot.com/

1. http://www.balancetrader.com/main/

1. http://www.marketdelta.com/

1. Directional conviction through imbalance to the downside for two days. Yesterday appeared as a double distribution day : Go-with approach.

1. Some selling opportunities but the best one came after the NFP release that moved the price up to D-1 Value Area Low / D Initial Balance High confluence in a climatic manner, then revisited this level with two Upthrust bar and finally when the price returned to this level with drying up volume the setup was perfect to take a short.

1. Value Area low is about 50 pips down offering a good RR.

1. Divergence on the VB indicator confirmed the selling orderflow and the candle highlighted on the Footprint chart is a perfect short candidate.

1. Scalling out of the position at two occasion end roughly at 2,5/1 RR on the overall position ( see picture )

1. Price sustained imbalance to the downside on friday with a normal variation day : go-with approach

1. There was an opportunity that appeared at lunch time with a test of the IBH that I did not trade. After testing the IBL, price moved up again to challenge the IBH. Volume decreased significantly and evidence of responsive sellers came in the form of an Upthrust bar.

1. Two targets : VAL and IBL offering good RR

1. Divergence on the VB indicator confirmed the selling orderflow and the candle highlighted on the Footprint chart is a perfect short candidate.

1. The first target was missed by 2 pips, large buying orders entered the market below POC, therefore I closed 20% of the position at this level, the remaining closed by a break even stop

Every off-floor trader would like to get a feel for how things really are on the exchange floor. Mastering Market Profile may help you get it.

Market Profile Basics

Worried that you’ll never be able to compete with the floor traders? After all, they’re right there in the middle of the action. They’re privy to information that off-floor traders see late or maybe never. Once you start using Market Profile, however, you may find yourself with more information than the floor trader. No longer will floor traders, decked out in their colored jackets, frantically gesturing and scrambling to make themselves heard and seen by other traders, seem chaotic, intimidating, or bizarre. Instead, with the use of Market Profile, you will see the order in the markets.

J. Peter Steidlmayer developed Market Profile in the 1980s in conjunction with the Chicago Board of Trade. Traders who use it say that they get an in-depth understanding of the market, contributing to improved trading. Many factors can be monitored from Market Profile.

Market Profile is not an indicator in the typical sense. It does not provide buy/sell recommendations but acts more like a decision-support tool. It organizes the data so that you can understand who is in control of the market, what is perceived as fair value, and the direction of the price move. It is possible to extract enough information from Market Profile for you to position your trades more advantageously.

Market Profile is useful for the pit trader as well as the offfloor trader. The indicator can help the off-floor trader get a better sense of the market; prior to the introduction of Market Profile, only floor traders had access to this information. Although all references here refer to using futures contracts, Market Profile can be used just as effectively for other tradables. Software vendors such as Cqg and WindoTrader provide Market Profile displays for equities.

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The concept of Market Profile stems from the idea that markets have a form of organization determined by time, price, and volume. Each day, the market will develop a range for the day and a value area, which represents an equilibrium point where there are an equal number of buyers and sellers. In this area, prices never stay stagnant. They are constantly diverging, and Market Profile records this activity for traders to interpret.
Market Profile is based on the normal distribution curve, wherein approximately 70% of the values fall within one standard deviation of the average. If you rotate the normal distribution curve so that price is along the vertical axis and time on the horizontal axis (as shown in Figure 1), you have the structure of Market Profile.

A normal distribution curve assumes that the number of occurrences follow a bell-shaped curve. Anyone who has traded in the markets, however, knows that prices never follow a definite pattern; in fact, you rarely see a normal distribution. What you do see are skewed distribution of prices, which makes it possible to see the price at which most of the trades actually took place. This provides significant clues about the direction of prices and is the groundwork for understanding Market Profile. In theory, this helps the trader identify where prices are in relation to values.

Monitoring price distribution over time gives insight into what levels are considered fair and unfair. You may take advantage of this information and identify good trading opportunities.

Volume is the key to understanding Market Profile. If prices move away from the value area but volume starts to dry up, it is likely that prices will move back to the value area. Such a movement indicates that sellers are not happy that prices are below value and buyers are not happy that prices are above value. Trading activity may increase only when prices return to the value area.

If, on the other hand, prices diverge from the value area with increasing trading activity, that indicates market participants are reevaluating their idea of value. By observing market activity through Market Profile, you can get a grasp of who is in control of the market and determine which way the market is likely to move.

Watching It Develop


The development of Market Profile can be seen during the course of the trading day in Figure 2. Market Profile is made up of time price opportunities (Tpos), which are represented by letters. Each letter represents one half-hour of the trading day (but beware that the letters used to represent time periods are not consistent across vendors). In the example in Figure 2, the periods are represented with letters A to J, with A being the first half-hour.

The first hour of trading sets the general pattern for the day and is your first opportunity to view market activity. This period is important for determining what the floor traders are doing; those traders are trying to find a price at which both the buyer and seller agree to make a trade. There are two broad categories of market participants: the day-timeframe trader and the other-timeframe trader. The floor trader is referred to as the day-timeframe trader and all others as other-timeframe. The latter trader type provides market direction by moving prices to new levels, whereas the former is interested in trading large volumes on few ticks. They provide liquidity to the markets.

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The initial balance is the price range of market activity during the first hour (the first two time periods). In Figure 2, this is represented by A and B. On September 7, 1999, the initial balance for the December 1999 coffee contracts was established in the first two half-hour periods between $91.00 and $91.90. A wide initial balance suggests that prices will stay within the range, whereas a narrow one suggests that prices may extend beyond it. The ability to differentiate between the two will only be possible after some experience. If the price range falls outside the the range set by the initial balance, there is the suspicion that the other-timeframe trader has entered the market and tried to move prices away from the area of balance.

During D period, the other-timeframe seller entered the market and drove prices lower. However, during the subsequent periods, buyers entered the market and drove prices higher. In H, the seller entered again and held control till the close, as can be seen by the activity during I and J periods.

The height of the entire profile — that is, the high to the low — is known as the range. In this example, the range is $90.20 to $91.90, which is wider than the initial balance.
On occasion, prices go above or below the initial balance. This is known as a range extension. In this example, the range extends below the initial balance, indicating a seller range extension.

The price range where 70% of the trading activity takes place, one standard deviation from the mean, is the value area. In this example, it is the area between $90.80 and $91.55. Calculation of this area is covered in more detail in the sidebar, “Value area calculation.” This is where the bell curve comes in. The value area reflects the acceptance level of a certain price range or balance area. Any attempt to move prices away could provide important clues to direction.

The point of control is the longest line of Tpos closest to the center of the range. In Figure 2, $91.25 represents the point of control. This is where most of the trading activity took place and is considered to be a fair value for the trading day.

J period is the closing range and designates the day’s close. Here, it is $90.40. The closing price is important because you need it as a reference point for the following day’s opening activity.

When you have a series of single letters on either extreme, it is known as a single-print buying/selling tail. The presence of such a tail indicates a strong reaction by the other-timeframe traders. In this case, both single-print buying and selling tails are present. Since both are very short — only three letters — the response from the other-timeframe traders was very strong. The buying tail represented by the three I periods shows that the other-timeframe buyer responded quickly to lower prices. Conversely, the three Bs at the top of the profile indicates that the other-timeframe sellers responded quickly when the prices were above value.

Jayanthi Gopalakrishnan is a Staff Writer for Stocks & Commodities magazine.
Source: Technical Analysis of STOCKS & COMMODITIES magazine, 2002

1. Imbalance challenged yesterday with a normal variation day that had a directional conviction skewed to the upside ( closed above value near the high ): Aim to sell above value, and buy below value. Keep in mind that long term the pair is still imbalance to the downside, so I am more comfortable with short than long.

1. I did not trade today but the best opportunity was clearly during the afternoon after testing yesterday POC in a climatic fashion with a stopping volume bar. Some time latter market come to test successfully this level offering a good setup.

1. Value area high is some 40 pips higher : good RR

No trade for me today. I did not find confirmation on the volume breakdown, furthermore I did not have the guts to go long.

That being said there was a good test of the yPOC and yVAH confluence during the beginning of the afternoon, with some accumulation going on at this level. Market then went up straight, surprising me I should confess ...

For tomorrow, what need be pointed is that value is kept lower than price so we still need confirmation for long, I guess it will be an interesting day.

Premium information to understand the personnality of the asset you trade. Useful tool for self confidence and money management

1. With yesterday trend day type, focus was on initiating long position, but as said needed confirmation regarding value that was kept lower than price. This confirmation came trough an open drive caused by long term buyers reaching strong conviction that bring the major above yesteray high.

1. The good timing came during lunch time, after a shallow retracement in low volume. Long term buyers entered agressively, pushing price strongly higher. Almost impossible to predict such a large move ( about 200 pips in few hours ), those kind of moves could kill hard earned performance of many months if on the wrong side. Thanksful to structure analysis via market profile those mistakes are easily avoidable knowing market conditions before placing trades.

1. I did not took any trade today, the opportunity mention above present itself while I was away for lunch, better to stay on the sideline than getting hurt by this type of strong trend day.

Playing a little bit with merging give me a broader view of the long term market structure. Today moved from the VAL to VAH of this big picture balance area. It's fair to expect very long term responsive sellers in the next trading days...

Very bad day today ! I was more focus on the outcome of my trades than on the process of doing them : novice mistake. All started with a long trade opened after the retracement into the open drive near yVAL and VWAP resulting in a loss. I finally think this trade was the best one of my trades today, as I followed the plan and the only real mistake that I made was to probably not wait for large buying orders on the footprint chart to show themselves. After this loss my mind was spinning totally and I took two really bad trades against market structure : Short.

Stupid reaction after a loss, but so common in the novice trader world. I am very disappointed in myself at this time, but this journal is create for this reason, keep analysis as well as feelings and emotions somewhere so to not reproduce them, and therefore become a better trader. I keep my journal real !

So know, let's examine the day and see what I missed during my analysis.

Market Structure tells to only consider long positions as the imbalance to the upside was still intact in the day timeframe with a trend day yesterday. Long trades may have been cut short as longer term structure tells that we are at VAH of the long term balance area, and that very long term participants may have taken the opportunity to take positions short ( as said yesterday ).

Now my first trade was basically a not too bad trade after all even if it has ended as a loss... After this, price came below yVAH which should have served as a warning for longs. My mistake at this time was to try to short, big mistake as I was already close to value area low of the day. The best thing that I should have done is wait for the price to move above yVAH for taking long trades ( as structure implied ) and stay out of the market until monday if price stayed below it. At worst I would have had to wait to sell above value not the opposite.

To conclude, my mind was my worst enemy today not my strategy. When I look at my chart after the fact I really can not believe what I see, and what I have done... I think this journal will be very useful to me in order to identify my weaknesses and work on it. Even if my day was not very good I feel that I have learn something at least today, and I am confident in my self improvement.

No trade yesterday as I usually do not trade during bank holidays in UK or US.

 

1. We still are at the VAH of the long term balance area and price challenged friday rejected high. As we were not in a trend day I decided to look for short opportunities, expecting long term investors to be responsive at that level.

1. I made 2 trades today, the first was a bit early and resulted as a loss, but gave me a great lesson : wait for the candle to close before entering a trade, even with good footprint patterns. The second occured after a buying climax followed by a no demand candle.

1. Good RR targeting VWAP and VAL, good selling pressure on the footprint chart.

1. Closed one half at VWAP, the other half at VAL.

Conclusion : Mixed day regarding win/loss ratio but a profitable one that recovered one average loss. I have followed my plan, focused on the process of doing my trades, so quite happy with this. I add to my plan to wait for the completion of candles before entering a trade and trail my stop with Volatility ATR to reduce emotion at the most difficult time to keep self control : when IN a trade.

No trade yesterday.

Mixed day again today ... I made 4 trades, two losses, a profitable one and another one ended at break even. I ended the day flat

 

1. I am still trading to the short side as we remain in the VAH of the long term structure, I see responsive long term trader distributing for 3 days now and expect a strong medium term downside move. Unless I see a strong trend day I will remain biased to the short side.

1. My first trade was too early, I entered short and as I saw no follow through in the orderflow, even a slightly bullish one I prefered to close my trade at break even and wait for a better opportunity. After the fact I can see it was the good thing to do, price moved up even further and challenged yVAH in a climatic bullish bar. It is during the ensuing consolidation phase that I made two trades that resulted as losses, I get wipsawed 2 times but don't loose control and succeed to entered a third time. I entered a bit late on this one as the Upthrust above yVAH has occured very fast, so I have wait for a small retrace on smaller timeframe before entering.

1. I manage to close my trade for 80% at yVAL for a good profit, I leaved the other 20% open expecting a sharp moved down trailing it with a volatility stop and get stopped out with it.

We are at a critical zone here, the next move will certainly be a medium term move that will either bring the price up to 1.3950 area or smash it to longer term VAL. I am in the short camp until proven otherwise.

Levels to take action from for tomorrow.

I have been away from trading and my journal for some weeks. I needed to take some rest from live trading to digest my new trading knowledge learned this past few months...

I will slowly comeback to live trading and my journal, full of new understandings of the market and expecting to implement them successfully. I have also some new procedures for trader's personal development that I want to follow that I will implement shortly.

I can see that a lot of interest for market profile has grown at Forex Factory during my rest, which is a good thing from my point of view as MP is, I believe, very under-estimated and very valuable...