Surfing Risk Intraday - Volume Profile and Order flow

First post he says he trades futures only.

Yeah doesn't mean it cant be used for spot. The concepts is the same.

Hi Dappa. thanks for your post.

Yes in theory it's possible to trade the spot market using analysis performed in the futures market. Although the currency futures market only trades a small percentage of the volume done in the spot market, the two are very tightly correlated thanks to arbitrage algos etc. I trade strictly futures as I follow non FX products too. I also watch the DOM and time & sales which is something you can't do in spot

VWAP and Midpoint

There are two more tools I use in my trading:

Midpoint:

This one is self explanatory. Since the markets I watch have a defined open and close, they also have a defined high and low, and therefore midpoint. It's widely looked at, and has become a self fulfilling support/resistance line and orders collect around it.
Here's an example in todays Crude oil session. The midpoint is marked in Blue (it updates automatically and the highs/lows are extended during the session)



VWAP:

This one is a little less well known. But a very valuable tool for me. VWAP stands for "volume weighted average price" In simple terms is like a midpoint of volume and price, The line is drawn on the chart where there is a weighted amount of volume above and below it. VERY often you see price react at VWAP, even if it's just for a few ticks retracement. There are various reasons for this. Sell side traders are often judged on how they executed their block trades relative to VWAP, but that doesn't matter for us, we just have to be aware of it. I have found VWAP to be particularly effective on trend days, as price makes small countertrend moves.

This is example is from Wednesday of this week in the German Bund. You can see how Price respected VWAP all session (The light blue line)

Sorry folks, been abroad this week working on a trading project with a colleague. Will start posting again on Monday. The 'theory' section is almost complete, next step will be to post some examples. Some will be cherry picked for illustration purposes, but mostly I'll be talking about potential live opportunities so we can see how they play out in real time.

Thank's for your patience, stay tuned!

Market Depth / DOM

Back in 2011 when I was trading for my Proprietary trading firm, many of the traders on the floor did not use charts; they filled up all their trading screens with DOMS. Dom stands for “Depth of Market” This was all they needed to make their trading decisions. Not only is the Dom used to enter orders into the market, but it can be a valuable tool for reading the order flow and analyzing the strength of buyers and sellers.

The DOM essentially displays 3 main metrics.

1) Last traded price
2) Volume trading at that price
3) Bids resting below the market price, Offers resting above the market price

The DOM can look very complicated and overwhelming for those who have never seen one before, especially in a fast moving market, the numbers move very quickly. I’m posting a static screenshot here first to highlight the key features:



In the futures market there are no ‘spreads’ in the traditional sense like you would find with a retail spot FX broker. There are two ways to enter a trade. You either use a ‘limit order’ or a ‘market order’

Market Orders – To trade ‘at market’ means you get you in or out of a trade immediately at any cost. For Long trades you must buy from someone who is offering contracts for sale at the nearest ask price.
Pros – you get filled instantly meaning you will never miss a trade
Cons – you have to pay the bid or ask price, which essentially means giving up a tick

Limit Orders – Limit Orders come in two forms, bids and offers. If you want to enter a long trade, you will ‘work a bid’ order at the price you want to be filled at, this can be anything from the last traded price or lower. To enter a short trade you must ‘work an offer’ at or above the last traded price. Placing the order will not get you into the market on it’s own. When you place the order you join the back of the queue of limit orders that are already on your price, and you will only be filled when another trader buys or sells from you buy hitting the market price.
Pros – you will only be filled at the price you pre-select, no better no worse
Cons – you risk not being filled and missing the trade if there is no one to buy or sell from you.

Limit orders provide liquidity
Market orders use liquidity



Which order type to use depends on what kind of trade you’re making, clearly the aggressive trade is to hit the market price and not worry about the cost. Most stop loss orders are market orders, meaning when you’ve reached the maximum pain on a trade, you just want to be out of the position, you don’t want to wait for a better price and risk not being filled.


Here's what a trade looks like:

Great stuff so far .

Thanks, the more posts I make the more content I realize there is to cover haha

TPO Profiles

When Market Profiling was introduced in the 1980s, Volume data was not used; instead, traders in the pit used a time-based profile, known as a TPO profile.

Each session was split up into 30 minute periods, (similar to using 30 minute candles). However each ‘candle’ was assigned a letter, alternating for each period. This screenshot shows what I’m talking about. The first period is the 7.00am – 7.30am period, and is assigned the letter ‘k’. The next period is the 7.30am-8.00am period, and is assigned the letter ‘l’. You get the picture. Each letter is called a TPO, or Time Price Opportunity.



To turn this from a regular bar chart into a Market Profile chart, we shift all the bars to toward the left margin. This gives is something that looks similar to our Volume Profile, however the ‘fatter’ parts of the profile are representing where price has spent the most time, rather than done the most volume.



As with the volume profile, we are interested in the extreme fat/thin parts of the profile. In this case, the Point of control comes in at 142.62. This will be a key price going forward.

Take these examples in the Bund. For the first two days in the picture, the following day bounced at the previous days POC, and held as the low of the day.




'Low time nodes’ are also key. In this example you can see one price in the middle of the profile where only 1 TPO printed, this is know as a ‘single print’ and is certainly a level to take note of going forward.

Yes brother continue.

Repairing low volume areas

It is interesting to watch how different areas of high and low volume interact with each other. Earlier in the thread I spoke about how previous high volume nodes often become future high volume nodes when price comes back to that area.

However it’s also common to experience periods where previous low volume areas need to be ‘repaired’ or ‘filled in’ by higher volume. This is explained by the nature of the market wanting to ensure all prices have been thoroughly auctioned in order for the prevailing trend to continue. In fact it can often be observed that one session’s low volume node, can become the next sessions VPOC.

Here’s an example in the Yen future, from January 2014


On the 6th, we had a strong drive up late in the day, leaving behind a clear Low Volume Node:




When the 7th of January session opens up, we have an immediate drive down to test the low volume node, and price bounces higher as expected:




However by the end of the day, we can see that price spent a lot of time chopping around in that area, thoroughly auctioning those prices. In fact, when the 7th January session closed, the most traded price (VPOC) is in line with the low volume node from the 6th:




There are no coincidences in this market!

Well what does the low volume node mean, less activity at that price level.

How do you know which level to trade off of, high or low volume levels?

Can this analysis be used on tick volume on MT4 for spot trading?

I have always been interested in finding a way to interpret volume where it make sense, I was never able to understand how to read it.

Does VSA fit in anywhere in what your doing?

Yeah exactly that. Often they are a product of stop runs

The answer to this depends on the following;

What market are you trading?

What kind of trade is it? (scalp/daytrade/swing position)

How was the HVN/LVN formed / over what timeframe was it formed?

What is the market doing in the bigger picture of things? ranging/trending/chopping violently etc

How aggressive have buyers/sellers been in the very short term, how much progress have they made?

What is the current ATR of the market, and where within that ATR does your level lie?

Do you have confluence with other levels? e.g. when a larger timeframe LVN lines up with a shorter timeframe HVN

There are more actually. I hope to cover them all eventually, but the method is an awful lot deeper than trading every LVN/HVN that pops up


I'm not really qualified to say since I've never tried, however my best guess would be that it does work, but you'd be making life very hard for yourself. The time spent setting up volume indicators and worrying about inaccurate data would probably be better spent just opening a futures account, or at least a simulator account for testing.


No not even slightly, I don't analyze 'bar by bar' volume as I feel the timeframe is irrelevant in trading, the market doesn't care if you're looking at the 5min, 15min or hourly, but the VSA method seems very dependent on this. Fair play to those who make VSA work for them though, I encourage research into all methods, even if it only leads to ruling it out.


Thanks for your interest!

How do you know which level to trade off of, high or low volume levels?
The answer to this depends on the following;

What market are you trading?

What kind of trade is it? (scalp/daytrade/swing position)

How was the HVN/LVN formed / over what timeframe was it formed?

What is the market doing in the bigger picture of things? ranging/trending/chopping violently etc

How aggressive have buyers/sellers been in the very short term, how much progress have they made?

What is the current ATR of the market, and where within that ATR does your level lie?

Do you have confluence with other levels? e.g. when a larger timeframe LVN lines up with a shorter timeframe HVN

There are more actually. I hope to cover them all eventually, but the method is an awful lot deeper than trading every LVN/HVN that pops up



These list of variables are numbing my friend. How do you trade when you have so many variables to take into consideration?

That's what always gets me.

It can be overwhelming at first thats for sure. Especially when you're not really sure what you're looking for. But trust me, by picking one method and really sticking to it, after a while it becomes second nature, it's only takes me a couple of minutes now after first seeing a chart, to deciding if/where I want to trade.

The list is long, but it's not a case of needing every single requirement to be ticked before entering a position. Sometimes I'll see an opportunity I know I just have to take, even if there are several reasons not to do so. Sometimes you only need one or two reasons to trade if those reasons are good enough.

Hopefully I can explain myself better using examples in the future

Weak Highs/Lows

This concept isn't strictly profile (although the profile can help you identify it) but it's something I use regularly in my analysis.

When the market runs up to a resistance level, and continually retests it over and over again (see diagram), we form whats known as a weak high. The opposite would be a strong high, which is when price tags the level, then immediately sells off aggressively. Strong highs are far more likely to hold as major swing points in the market. Weak highs/lows are almost always retested eventually, usually sooner rather than later, and can make great targets for open positions.



See this example in Crude oil, 120 minute chart:




For a current example, I am very doubtful that the December highs in the S&P 500 will be a long term top, as they are very weak looking to me:

So what your saying is the more a supply/demand zone has been touched, the more easy it is for price to break through it?

VSA is useful for spotting turns, where high volume appears in the market is useful for spotting ''hidden'' selling or buying but it is only an indication. What I never found useful was the no demand/supply bars, in fact I think they don't work.

By and large I am with risk surfer here though.

I personally don't think any of it works. I have seen many high volume bars, large range, and price keeps going in the bars momentum. I have seen the so called upthrust bars with large volume and price never turned around, the high of the pin got broken and price kept going. I have seen many no demand and no supply bars and couldn't figure out which one was valid and price still fell or rose. It doesn't work all the time. Its like anything else, you never know if it will work this time or not. Yet to find someone that trades it and makes consistent money with it . Theres time when you have lots of high volume bars and you don't know what the hell is happening, if there's more buyers than sellers or vice versa, and Im talking about just trying to decipher that from the volume.

Yes pretty much. Markets are obsessed with finding out as much information as possible for continuing. So they find it necessary to know what lies behind the wall or buyers/sellers that's creating that weak high/low. Often a weak high can be broken, but is then immediately finds aggressive sellers higher up and falls back, the market is then satisfied and can continue moving lower.

I wouldn't advise playing a breakout of weak highs/lows. But think of them more as having a magnetic pull on price, much like HVNs