Scalping the Mini Dow off the M1 Charts

I decided to trade this morning.

Note that just because price makes a sharp run up doesn't always automatically mean it's a fade. But in this case it was, and a beautiful one. Where do most traders buy? After a run in price. And that's usually when I'm looking to sell. If the move out of 975s was truly bullish and the breakout were real (at that moment in time), price should have easily continued higher.



Trades 2 and 3 were on the basis that, with no traction to the downside despite heavy selling there, I was expecting those stops to be taken out above. They were, but not in the cleanest way and so trades 2 & 3 were a scratch, essentially.

Today's trading video:

I find that I personally need to be able to view time on the chart, because it shows areas of the chart that represent urgency. That said, there's no wrong way to trade if you find it works better for you.

Ha I knew someone was going to ask me that!

It took a while to figure out but I use Photoshop because it's the only program I've found that can produce full-size charts. There are apps like iGif creator (on the Mac App Store) but they all produce a gif that's tiny.

The only catch with Photoshop is it needs to be limited to 500 frames (and event then, if I try to produce one near that number, Photoshop crashes - at least on my machine).

In Photoshop:

1) File > Import > Video Frames to Layers

2) A dialog will appear. The only thing I set is the selective frames - every 120 frames (so it's about 4x speed) and that gets around the 500 frame limit

3) Using the Timeline toolbox, set all the frames to 0.1 seconds each (otherwise it'll be too fast)

4) File > Save for Web and choose Gif with a 32 color palette (seems to be the best for file size - anything greater than that is useless since, after all, it's just a chart)

Hope this helps.

So on with some more market basics.

Let's examine this chart again from an orderflow perspective because it illustrates something key.

When you look at this chart, you'll see highs, lows ... ranges.

What does it all mean? Don't worry about that. And don't worry about where the market is going to go, either. Let's just put ourselves in the shoes of the other participants in the market.

In this chart, there's a clear range from 330s to 347s. If it's obvious to me, it's obvious to someone else, and if it looks important, even if I don't know how I would trade it, I'll mark it off, because it probably is important.

Now obviously, before there is a range, no one knows a range is going to form. But after the range becomes clear, you can count on several things happening.

Note the swing high (yes - this is a minute chart, but let's call it a swing) at 338s.



1) Those that had been in the move long since the beginning, upon seeing the range, will become worried that the market isn't pushing higher past 338s. What would you do if you're well in profit, but the market starts going sideways? Either take profit, or tighten your stops underneath the range. So sell stops will accumulate below the bottom of the range.

2) Those that had bought the top of the range (perhaps seeing it break past 338s as confirmation long) before the market started going sideways, will be concerned that the market isn't going higher. Time is money, and no professional wants to have their capital tied up in a trade that isn't going anywhere. So they will either sell at scratch at the top of the range (thus helping to re-enforce the range), or again, tighten their stops underneath the range.

3) Those that sold at the top of the range (perhaps thinking 338s was solid resistance) would have been in profit, but now that the market is not pushing downwards, vow to get out in a small profit if the market retests what is now becoming support (the bottom of the range). Additionally those that sold the bottom of the range are either doing one of two things: getting out at scratch at the bottom of the range (thus their buy orders help to re-enforce the range), or tightening their stops above the range.

4) Those that weren't in the market to begin with, seeing the range, will likely stay out. Volume starts to dry up inside the range as traders, who were a moment ago ready to take a trade, will now wait, because they have (rightfully) have no clue where the market will go next. But what they may do, if they play breakouts, is to put an OCO at the bottom and the top of the range. So whichever order is triggered, the other side of the range becomes their protective stop.

This is a long winded way of saying that when the range forms, stops accumulate on either side of the range and traders will remain clueless as to whether the market will proceed north or south.

Then the market breaks out to the downside. Sell stops are triggered (some for entering, some for exiting). Those on the sidelines now dive in.



... and then the market does this:



Remember the pros want to buy in areas of the chart where loads of people are diving in to sell. They don't want to be buying in an area where everybody else is buying. It becomes apparent that the traders that sold below 330s are now (likely) trapped. Fear sets in, and those short start buying to cover, fueling the market higher.

And where does the market go next? To where the orders are - at the other side of the range, to take out those stops.



Why does price travel so easily back through the range? Because when the range was forming, it was filling orders. Once price broke out of the range, all those orders were cleaned out - there are no more orders left to hold price down. (And anyone who may have wanted to sell in the range will immediately pull their orders and get out of the way).

cool

The culling of the forex herd is as immutable as the Serengeti Wildebeest migration (:

LOL

Wishing a Happy New Year to everyone! I hope 2015 will be a great year for everyone.

I would like to share a chart from Tuesday and also post some basics on Support and Resistance. I hope to also debunk some common myths.

As I mentioned I use both S/R and price action to make trade decisions. To break that down simply, there are generally two things (fundamental reasons aside) that will cause a lot of traders to get involved in the market. One is at particular price levels on the chart, and the other is after particular price action. So, it is at these areas on the chart (price levels), and after those times of particular market activity (price action), that I look for a trade opportunity.

I often find that a lot of traders tend to become polarized into one way of thinking. For instance there are camps of traders that say to always follow the trend (trend is your friend) and that picking tops and bottoms is impossible. Then there are others that always go counter trend and say that trend following is a sure way to get killed (only dead fish swim with the stream).

I tend to also see the same when it comes to S/R and the very important concept of supply and demand. I often find traders that see S/R and completely ignore (or are unaware of) the basics of supply and demand. Yet others I see trading pure supply and demand but seem to ignore S/R completely. In my opinion, it's important to understand both.

Now if you are following your rules and are profitable, this really doesn't matter. But the ability for a trader to be flexible given the context is something I find is rare.

Everybody enters the market for different reasons, and behind all price changes in the market is the ever-progressing supply and demand equation, which leaves a footprint. This footprint are the candles (or bars) we all see on the chart. As the market moves and leaves this footprint, it creates visible points which will then be further interpreted by the masses as, among other things, patterns, etc., - S/R. And then S/R will become the basis for other traders to make decisions to enter the market, exit the market, place their stops, etc. And in a cyclical way, the decisions of other traders contribute to and influence the supply and demand equation.

One fairly common misconception is the idea that the more touches a level has had, the stronger it gets. In fact, the opposite is usually true.

As a level becomes repeatedly hit, more and more orders are being filled, meaning less orders are left to hold price. Additionally as the level becomes more apparent, the more likely the masses are to see it, and so as traders become involved at that level, more and more stops build below or above the level and this becomes an obvious liquidity pool for the larger traders to try to run stops.

This was the YM 1 minute chart for Tuesday.



Now I realize I'm looking at this with the benefit of hindsight, but it illustrates one of my setups so I'll post it here.

If you look at the chart, you may find it hard to see any spectacular S/R levels to take a trade off of, and I would agree. But there is one that stands out due to the story behind it.

The setup would be a short on the retest of 964, highlighted by the red arrow.



You'll note that the S/R level itself doesn't stand out as being very well defined. In fact it's had only one touch immediately off the 9:30 open, and then the market seemed to basically ignore it. Until it traded back under 964s where it retested perfectly.

But this tells a very interesting story and when you get the feeling for how others must have traded this, it makes this a beautiful setup.

Remember, at some point, the market would have looked like this.



It's the explosion of price to the upside that is of particular interest. Demand exceeds supply and it shows on the chart. This is a breakout and the kind of move that everyone wants to be a part of.

Some buyers emotionally dive in right at the top, hoping to ride the move higher.

The more patient traders wait, hoping for a retest. If the move looks exciting, there will be a competition to get in first.

So then the market does provide a retrace. All the way down, it gets bought. First it is front-run, then bought at 964s, and then one last attempt at buying the 956s.

When the market thrusts down sharply through 956s, anyone who has bought would be sweating. This trade is not looking good.



At this point it's becoming more and more clear this breakout is not working out to anyone who bought and is continuing to hold. So, the 964s, which was the first logical place to get in on a retest, now becomes the point where those buyers would be lining up to get out.

Hello Felix!

Magnificent thread, congratulations. It's great to see somebody using a real platform and not that mt4 crap...
Personally I prefer volatility and I trade CL and DAX on a daily basis, but the concepts are the same. Do you watch the DOM or anything lvl2 data? For me it added a lot.

I.e.: In this post you describe the emotions / thoughts of traders that are trapped. In the middle of December I saw the EXACT same thing on the DAX.
1) I was lucky to be short, price went down from the high 30-40 ticks, and I had a decent 2-2,5RR trade going on.
2) The average depth of DAX is usually under 10 or 15. Price was just moving down, when someone put a 500 lot buy limit order to the book.
3) A brief pause and then the 500 lots were taken out - cleared. The market hang around the level for 10-20 seconds, and then it started going up, just the way it did in your case. (=Panic)

Since just like you - I’m a "participant analysis" I assume that algorithms and traders usually track the move/volume quota. So at some point they are watching if how much volume was required to push price. Obviously if there is a lot of volume and price is not moving we are talking about absorption etc. etc... Anyway my point is that at this 500 lot print all these algos + traders stopped trading short, and the panic just broke out.

And I just wonder if you use any of the volume or you purely trade off price?

Hi srt!

I wouldn’t wait until the market "settles". In my experience the best opportunities are around the openings and the following 2 hours. Why? Because there is volume. Volume = professional activity = speculation. When volume settles down, professionals wont (and CANT!) trade, (since there is not enough volume) and the algos come in play. Now who the hell wants to compete with the algos for a few ticks. And let's assume you trade a quiet, low volume part of the day - during these times many people get "stuck" in a trade - since price is not moving you are just waiting and waiting. What happened if a market maker wants to take some money? He smashes couple 100 lots in, price drops, and stops are triggered... And then chop comes again. So in my experience low volume times are far more unreliable...
Just my 2 cents.

Hi again!

I read through the whole thread, and it's unique, unlike most of the FF crap. I love the way you analyze things and I hope I can learn some aspects from you.
When I’m trading I tend to look out for the accumulation areas and stops. I’m sure you are aware of the traditional S/D basics - where price first accumulates (in the range) then shots out, and when it comes back some people still expect the accumulation going on, so they buy the retest. (As in the example of your last posts.)
What I found interesting is watch how these "accumulation" and "stop" zones correlate. I tend to think that when price stops to chop/range/accumulate it means that the price is accepted by the market participants (at least for now).
So I would look for the followings:
- When stops are hit what happens? (Sharp rejection? == Professionals fading?) (We stop where the stops were located and we establish a new range there? = The former stop area is now a "fair" price, price might move up further?) etc. etc.
And of course I tend to also analyze the "supply zones" - (Price came back - are they able to defend their positions?)

When the "trading year" starts I will post some charts which probably make these easier to understand.

What I also found interesting in your gif animation is that you trade the pinbar in both directions. (And this is what I wanted to get at my precious paragraph of this post) --> You don’t simply trade "the setup" you more likely trade the reaction.

It is also interesting to look at the cumulative delta in a chop/range but that’s a whole other story...

Btw. Do you have a "preferred" trade direction or you take trades both direction regardless the higher TF (5m etc.)?

Hi Lamer,

Yes, I agree about the first 2 hours(9:30-11:30 EST) being the best. If you're going to trade the 1st 15 minutes though, I think you really need to be able to see & watch particular levels as price is moving so quickly that it's hard to see a trend to jump on. After the 1st 15 minutes, it seems the market finds some form of a trend so you can look to enter on retracements. If using tick(or renko/range) charts then the swings are more visible in a fast moving market. Just depends upon the type of trading you're comfortable with. Felixcattus appears to be good @ watching the quick moves up & down and makes a decision without much hesitation. That's the part I think many will have the most trouble with.