Surfing Risk Intraday - Volume Profile and Order flow

Welcome all, many thanks for viewing my thread

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First of all, full disclosure, I am a commercial member since I run the website www.risksurfer.comwhich does advertise a service. However the purpose of this thread is not simply to promote myself. I am interested in participating in the community here, helping others as well as picking up a few new things myself, anyone who’s been trading for a while knows the learning never stops no matter how successful you become.

I have genuine reasons for selling a service which is fully explained on the website http://risksurfer.com/why-am-i-doing-this I hope you can spare the time to read it and see for yourself that I am different from many other vendors who are either straight up scammers or are failed traders who resort to ‘educating’ for a living

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I have been trading for 10 years now in various different capacities; it has only in the last few years that I have finalized what my edge is and have become comfortable with what I am doing. I have traded at a proprietary trading firm in the past, but truthfully I was only just profitable enough to cover my expenses and desk fees at that stage of my career (it was costing me several thousand GBP per month in desk fees just for the pleasure of being there) so it was not worthwhile financially to stay there, plus working at a firm takes away your independence, which is one of the main reasons I got into trading the first place.

My method uses a combination of Volume Profiling and Order flow analysis. I trade FUTURES only; this is because of the nature of the centralized exchanges and accurate data regarding prices and volume. Spreads are one tick and most of the markets I trade are thick enough to avoid and slippage even on news spikes. I stay away from thinner markets such as gold and crude oil.

I use 3 main charts for each market I watch: A 5-minute, a 120-minute, and a Daily. However the timeframe is completely irrelevant to the way I trade. I do not care about chart patterns, candlestick patterns or ‘hourly closes above x level” etc.

I also watch the market depth or DOM. I watch orders being executed at the bid and the ask to gauge how aggressive buyers and sellers are around specific levels. This is also known as ‘tape reading' and is something I’d like to talk about here at some point.

I use no oscillators or indicators apart from ‘cumulative delta’, which will be covered.


That’s it for the introduction. Next post will be showing what charts I look at

INTRADAY CHART

This is a 5-minute chart that I use to view the intraday action. The screenshot posted is a ‘stripped down’ version showing nothing but the price and a volume profile for each session. 3 sessions are included in this picture. Monday, Tuesday and Wednesday of the week starting 6th January 2014. The product is the E-Mini S&P 500 contract with March14 expiry.



This is a good time to explain what a volume profile actually is.
Each time a trade is made between a buyer and a seller, the size of the trade gets added to the total quantity for the day. For example if I buy a 5 lot from you, the total quantity or ‘TQ” increases by 5. On an average day, the TQ for the day in the S&P 500 is around 1.5 million contracts (That’s a lot of commission for the CME at $2.28 per contract!).

This total volume is of course, divided up amongst every price level that traded that day. On an average, the S&P 500 trades over about 50 prices, from the high to the low of the day. However it is never the case that each price trades an equal amount of volume. There are always some prices where a lot of trading occurs (high volume prices) and some prices that trade very little volume occurs (low volume prices).

The volume profile is simply a visual representation of this. Going back to the screenshot, for each of the 3 days, you can see my charting software has drawn a profile indicating these high and low volume prices. When the profile becomes very fat/wide, it is indicated that a lot of trading occurred on those prices. Conversely the troughs in the profile represent low volume prices where very little trading occurred.

These ‘nodes’ in the profile that are derived by trading activity often become highly significant prices, and if’s very common to see some kind of reaction when they are revisited.


The pink lines are simply highlighting the ‘Volume Point of Control’ or VPOC for each day. This the single price for each day where the most trading occurred (a very significant piece of information)

PS, you'll see that I have marked up the 1820.75 in green.. This is a level I will be buying if price retraces back down there. One of the reasons is due to the VPOC there left behind from Monday's session

ROLLING CHART


The rolling chart consists of 120 minute bars. It includes only the last 120 days of data. Data from 121 days ago gets ‘chopped off’ every time a new day starts.

It is a very simple chart showing me a slightly more ‘zoomed out’ view of the market. It does not take into account individual sessions, but aggregates them all to form one big 120 day rolling session. Once again you’ll see a volume profile. This time to the right of the screen.

The chart is collecting ALL the volume data from the past 120 days, and aggregating it to form one big profile. This allows me to see more long-term areas of high and low volume. The green lines are drawn on High volume nodes (HVNs) and the red lines are drawn on low volume nodes (LVNs)


Screenshot showing the rolling chart applied to the same E-Mini S&P500 contract

COMPOSITE CHART



Finally I use the composite chart. This is very similar to the Rolling chart, however in this case; each candle represents one day or session. And the data is not limited to 120 days. In fact the profile on the right hand side, is grabbing all the volume data going back to 2007. This chart highlights for me the major levels in the market. I am always aware of them and have this chart up continually. If one of these major levels aligns with something I am looking at intraday, it can be a VERY high probability trade

Once again, Green lines are showing High volume nodes where much trading has occurred, Red lines are showing Low volume Nodes where very little trading has occurred.





In the next few posts, I will outline what the implications are of these zones, and how they impact the market.

High volume nodes


High volume nodes are created when there is a high activity of trading over a narrow range of prices, this is showing that these prices are being accepted by traders, Buyers are happy to buy, sellers are happy to sell, both are equally aggressive resulting in stable prices. We can call this an area of acceptance. You can sometimes see this in a candlestick chart as a consolidation area or ‘boxing’.

Eventually something will change, This can either be a fundamental piece of news, or something as simple as one side (buyers for example) running out of bullets. If sellers continue to sell at the same pace, while buying dries up, we are going to see a shift in prices.

Imagine the Euro is trading at 1.3000 and we have created a balance zone/high volume node. There has been lots of participation at 1.3000, buyers buying from sellers, sellers selling to buyers, over and over, doing more and more volume at 1.3000.
Then imagine the buying starts to dry up, maybe a hedge fund or central bank has done all the business they need to do and go for lunch. The sellers remain aggressive. However now they find themselves in a situation where there are less bids to absorb their aggressive selling. In fact, they may hit all the bids at 1.3000 and clear out the price completely, meaning if they want to continue selling, they must start hitting the bids at 1.2999, if they are truly aggressive, they will do exactly that, then the same at 1.2998, 1.2997 and so on. We now have a situation where value is being shifted; we are leaving the 1.3000 High volume node behind.
Now imagine all the participants who were buying 1.3000 earlier, they are now offside, their team is loosing. Some of the shorter-term traders will realize this and want to get out of their longs., their efforts, along with the already aggressive sellers, means that price will start to accelerate away from 1.3000 very quickly. Prices may move sharply to 1.2980, where buyers become motivated once again by a cheaper price, and the whole balancing process starts over.

Once a clear High Volume node has been created, and price moves away. It is very likely that the node will cause a reaction in price when it is revisited.


Take this example in the GBP futures contract on the 120 minute rolling chart.
We have a period of consolidation in late December 2013, A lot of trading occurs over a small number of prices generating a high volume node at 1.6347. Sellers weaken and ‘puke’ their positions as buyers regain control and we see a rally up to 1.6560. We drift lower and test the previous high volume node, and price bounces aggressively.

Low Volume Nodes


Low volume nodes have very different characteristics. They are generally created when participants see prices as ‘unfair’. Either too expensive or too cheap. This creates a bit of a vacuum effect. Low volume nodes are often the result of a stop run or a breakout from balance.

Upon the revisit, price usually slices right through the zone, or bounces very aggressively; this makes them harder to play. However when there is a bounce, it is usually very quick and clean, allowing you to keep a tight stop and hopefully getting paid very quickly.

Take this intraday example in the German 10 year bund future this week. On Wednesday we had an interesting profile, with a clear Low Volume Node left behind at 139.83, towards the top of the profile, before price sold off to close near the lows. On Thursday, we opened up and eventually started to drift higher again towards the Node at 139.83. The price tagged it and immediately got rejected, price sold off over 40 ticks, without going one tick against you.


With that kind of risk/reward ratio, It doesn’t matter if you loose on 50% of your entries, or even 75%! You’ll easily come out ahead, given a large enough sample size of trades.

Gravitational pull of High Volume Nodes

High volume nodes tend to be magnetic to price. Price likes them and often gravitates from one to another.

Take the US 10year Note for example, rolling chart.

Price has been stuck for some time around the 123'055 level, it has tried several times to break away, both up and down, however the gravitational pull of the HVN at 123'055 has been too strong and we have always drifted back towards it.

After todays Non Farm Payrolls release however (Much weaker than expected -> positive for treasuries) There has been a sudden shift in the perception of where value is. We have clearly broken higher and left the old HVN behind.

Looking above we see another large HVN at 124'160. I feel it is very likely that we now get pulled towards that HVN, rejecting it initially, then finding ourselves stuck there until the next piece of information becomes apparent and value shifts once more.

You are making sense here.

Market profile, order flow analysis and supply and demand levels are good edges. I think all of this is interlinked and when combined could make a very effective trading system.

I have read your links to your website and you appear to be honest and forthright - I like that, and will be following this thread from now on.

Your best bet to get subscriptions is to upload a live explorer. I don't think anyone expects massive gains, but consistent gains over time, that will get followers.

Hoping the best for you.

MC

Many thanks for the feedback and for following along.

I will definitely consider a trade explorer if there is enough demand for it. However I want to distance myself from the 'follow my trades' style service. I just think I can give people a helping hand defining important areas in the market where I expect a reaction, Followers can take trades off them if they wish, use them as targets for opposite positions, or use them in conjunction with their own trading method.

Once I finish posting the theory, I will move on to real time trading and post some of the levels I'm looking at ahead of time, followers of this thread will then be able to see their effectiveness and make their decision based on that. I actually think that's beneficial to people than a trade explorer, even if it means less subscribers.

Thanks again, and looking forward to any contributions you can make in the future

VPOCs


One of the key metrics that develops through a trading session is the Volume Point of Control, or “VPOC” This is simply the single price where the most trading has occurred, i.e. where the most contracts have changed hands. It can be identified visually as the ‘fattest’ part of the profile; my charting software automatically draws a pink line at VPOC.

These VPOC often provide a bounce or reaction upon revisit especially if there have been several days in between the formation and the revisit. Un-tested VPOCs are known at ‘Naked VPOCs’. They can remain naked for months, and become very strong areas of support/resistance, when price finally finds it’s way back to them.

Here’s an example in the German Bund. 15-minute chart.


The VPOC forms at 141.45, and is immediately retested the next day, holding as good support to the tick, providing another low risk opportunity.

Your youtube videos?

Is there meant to be commentary on them, I can't tell what you are doing with the quotes.

The Youtube section is very much work in progress. I've only recorded 2 trades so far, Both showing my entry orders being filled and following price action. I want to improve on this in future with commentary or at least annotations

Here's a follow up to this 10yr-Note hypothesis. We did get pulled towards the 124'160 level, rejecting it initially (visible on the lower timeframes) and now chopping around that previous high volume area.

120 minute Rolling chart;

Opens, closes and gaps

Most Futures markets have a very well defined open and closing time. Any product traded on the Eurex exchange opens at 7AM GMT and closes at 9PM GMT. Between 9PM and 7AM no trading occurs. If there is a shift in value while the market is closed, the market will open the following day with a gap. The opening/closing price is a very valuable piece of information regarding the overall auction.

You have probably heard the notion that “Gaps always fill”. Whilst not entirely true, there is a certain amount of logic to this. A gap represents an un-auctioned range of prices, i.e. a range of prices where no trading occurred. If there’s one thing that markets hate, it’s missing information. When a gap occurs, participants have no idea what orders lie within the gap (size, quantity, level of aggression and so on), It’s very common for markets to want to determine this information before any significant progress can be made in the direction of the gap. Thus, when markets open outside of the previous days range, it’s a common observation to see markets auction this missing prices before continuing.

An even better piece of information is when the gap fails to fill. If a market opens with a gap higher and the gap attempts to fill but fails, it can be very telling to the underlying strength of the market. In that situation you’d want to be trading far more aggressively to the long side than the short side.

Here's an example in the S&P. The 23rd of December 2013 was a Monday and the market opened higher due to some weekend news flow. We then sold off sharply in order to retest Fridays high, before continuing to push higher

Initial Balance


Another metric traders use is the Initial Balance or “IB”. The IB is the range established within the first 60 minutes of trading.

There are many implications of various forms of Initial Balance, but for now I’ll stick to one basic concept. Once the IB has been put in for the day, it often becomes a major support/resistance line for the remainer of the day.


There is a clear example in the S&P 500 from just a few days ago, 2nd Jan 2014. The session opens and the market puts in an Initial Balance of 1828.25 to 1838.00. Eventually the IB low breaks. The session continues, price tries to rally back up into the IB, but is rejected by the IB low of 1828.25 5 times in total

Hey risk surfer,
Been researching all this for a year along with cumulative delta. Have finally got my head around it and seeing the ebb and flow of the market. And after trawling the internet and reading lots of disparate (but helpful) sources of info, you then go and post it all in one page!
Clear and concise-easily the best synopsis I've seen so far.

Thank you sir! More on the way

Great stuff. Funny that you use the 120min chart as well-realised that the 1 hour still gives too much noise while the 4 hour provides nowhere near enough detail so is a happy medium between the two.

Value Area

Personally I do not use the Value Area much when analyzing the market, but it is an important component of Auction Market Theory so I’m going to post about it anyway.


The VA can be seen on most Volume Profile graphics. It is showing an estimation of the sessions ‘acceptance region’ or where prices are finding value that day. Mathematically it is the range of prices that contain 68% of the days trading volume.


The Value Area is being calculated continually as a session unfolds, it can shift up and down, expand and contract. This is the developing value area. Once a session has ceased trading, the VA is fixed, and we have permanent values for the VA high and low. These values are known to be significant for the market as potential support and resistance points.

Again, I don’t use the VA much for my own trading, but I to take note. If a potential level I am watching lines up with an old VAH or VAL, I will treat it as confluence and have more confidence in that trade.


One thing I do watch is to see if the current days value area is forming above or below the previous days. This gives me a clearer indication of the trend.


This screen shot shows some examples in Crude Oil, Pit session only. The value areas are highlighted in blue

Hi there, its great you are talking about volume, something I have been trying to get my head around for a long time! Now your explanation about high volume bars. That signifies that there is a lot of transacting going on at that price. Now obviously the same concept applies to spot forex and all markets except that spot is not centralised correct?