Thursday, August 28, 2008

The Trading Dilemma Zone.

Imagine you are driving in a car, talking on the phone or pondering about something.
You are doing 50 miles an hour in a 40mph road. You are about 100 yards or so from the traffic light just as it turns yellow. Do you speed up or do you hit the brakes... that was a scenario I heard on NPR about a month ago on the program on the traffic dilemma zone. It was referred to as the dilemma zone for brain where it has to make a split second decision whether to make it or stop. I caught maybe 5 minutes of it so I cannot elaborate much. I cant find the recording either. I suspect at that moment the motor cortex takes over control on the decision. It calculates if you are going to make it or not, based on the visual information it is receiving. I think this is much simpler primal process but a good comparison to what we encounter everyday in trading.

Now imagine you are about to enter a long position today in the E period today. You have been waiting for a retrace all morning so you could get on the train. However, instead of a normal retrace, the market makes a steep dive down to approximately your level. You have been analyzing the rest of the markets, news and parameters to see if anything has changed to the long bias - it hasn't. But at the moment the price makes a steep dive to your entry location, you are in a dilemma zone, I suspect. I have fear that the momentum may take it further through me, perhaps the next major level. I have greed to be on the train.

I wrote my premise of my trades and bias today in my last blog. Again to recap. The market makes a strong open drive during A period opening above POC, value, range and the previous levels of resistances. The opening price is bought up on subsequent periods. Strong delta, strong big money delta as well. Price has stopped at strong resting bids @ 6:55, 7:11, & 7:28. Dominant flow is the first 2 bars (reversal of selling pressure). Then we have another at 7:56.

I entered my bid at 1289 at the 8:44 bar after it ticked up from the low just as I notice selling pressure subside significantly and a big block of order trade on the ask (confirming the show of hands @ 7:56) . It was VWAP as well. But by the time my bid was on the dome the market was at bid 1289, I was fighting the market already. I did'nt take the ask. I had maybe less than two or three seconds to take it. I wanted that tick. One of the main reason was that I wanted to stay at the bottom edge of the initial balance and give it a 2 point stop intially, then switch to a mental stop. But I think the bigger reason was because I was mentally in fight mode already. It is what I am calling the trading dilemma zone - when you make a decision to enter a trade. However I think there is a lot more involved to it than that. I don't remember being afraid so much as unwilling to take a higher price and then soon enough my unwillingness to chase (self trained) kicked in. In a matter of couple of seconds the time place opportunity was gone.

I would pose this question to Dr. Steenbarger and see what has to add on how to deal with this zone mentally. His blogs on trading psychology has been of great help. On the managed exit side of things there are couple of good articles
They are similar in nature I suppose yet need different strategies.

I did end up buying the 1st standard deviation of VWAP at 1294 in the J period for a much smaller trade. I thought I was lucky to get that retrace ( see prior midday update) because on days like this retraces can be very shallow. I did end up taking profit earlier because I caught myself dozing from the flu medication at one point (that much action today). I figured they don't let u drive (a much simpler activity) under medication, I might as well as preserve the profit towards trading costs and stop trading.

It is important to me to get the first great opportunity so I don't have to take a make up trade. I would rather be adding than initiating. I hope nobody took the short side of the market today. I posted the advise against shorting today from my well ingrained traumatic memories stored in permanent memory in my brain.

Trend day

I wanted to post the chart above last night. Unfortunately, I passed out after a good dose of Flu medicine. Thanks to my kids daycare we get it from time to time. Thats a part of parenthood. Lots of ginger water, citrus and coffee and a wait out period.

Trend day so far. Open way above value and range (big gap open). And support to the bottom of open range. Notice the 4 point IB. These days are dangerous on the wrong side. We still have some shorts caught. The afternoon may bring further range extendsion if we can hold the 92 level. I put in an order long at 1289 after the E period low. At the same time I noticed a large block trade at ask. Never came to my bid again. I hope some of you caught that. That was the trade of the day to scale out the rest of the day. Good trading. Whatever u do. Never, never try fade the expanding edge of a trend day. The day looks dull on the surface. But days like this has a potential to explode. Did I say never fade this kind of day? I would rather be wrong than hanging upside down.

Wednesday, August 27, 2008

The day in review - top heavy

Heres the Profile for today and clearly we have established value higher. However it has a topping formation meaning price rejection as of now above the 85s.

Look at the order flow at 9:53 pst. 1285 had a big amount of resting offers that got reloaded. Then they hit the bids too pretty heavily. There weren't enough timeframes involved to break the level yet. It was a good short opportunity on the second attempt. I did'nt take it though.

How big is the timeframe universe

The buying at the 60s should not be confused as a signal for a bull market. In fact the very long timeframe, long, intermediate and short price trends are all down (intermediate/short term value is headed up slightly - see monthly and weekly profile). We do have a price rejection/support level in the short timeframe (although it has become a little porous after yesterdays action). And this support is provided by the participants who are outside the balance area of 1290s to 1260s. At the edges they play depending on their inventory. Now are they the same players every time- no. Are they all long terms - no. Will they bail when the level is broke - yes and no. Will they scale in if get to the 30s - some definitely yes. Some may be short and cover. Some may not until they find another attractive level. In the 30s we will encounter a new set of players some of the old and some new. So the timeframe universe is like a video game where advancing to a new level brings new players and new foes. The short time frame trend is flat lining. But whether its the 1200s, 1230s, or the 1260s the first embryonic conception of a market turn appears in the undercurrents just like so. And while the level is not significant as the turning point, it is the behavior of the market that has transformed in the last several weeks. Whether it will turn at the current level or not the is really not predictable and nobody really knows. What is predictable is that the journey will take us through many mini-balances like last week and this week. It is within those balances is where we play. An awareness of the boundaries and potential behavior there is what is paramount for the day traders to keep ourselves from being sucked out into thin space and our accounts with it. Remember we do not have intermediate and long term initiative buying quite yet which will bring us the volume and perhaps out of the balance. The same thing can be said of the sellers .

A thousand Qin Dynasty Warriors

The S&P 500 emini contract opened today slightly above value. It goes on to test POC and you will see the response in the order flow. The significance of the 1268 area? weekly poc, monthly level, daily level. The daily profile below looks to me like Qin dynasty soldiers with their spears pointed forward at the 1268 level.

This is a setup where you buy the levels. Price opens above POC and Value combined with the information that we have gathered from the market so far. A high probalility trade.
I don't strictly buy the levels via resting limits. I use orderflow and buyers commitment at those levels before I enter. I sometimes pay a price for that by getting a fill that is a few ticks higher.
Nothing wrong with resting orders - just depends on your risk manangement plan.

Now here's why I made a market comment days ago. Crude jumped $3. That has been a significant thing ain't it. But what happened today? Why did we not dump 10 points? That is why I said in my earlier post that market is never the same. More importantly, the players are never the same. We think visually that patterns are repetitive, not quite that simple.

We had two dominant flow attempts that was bought up before 7:00 PST. In fact by the 7:00 bar, the dominant flow prior had reversed in the favor of the market structure. The buy of the POC area was a great trade on this bar and if you trade lots of contracts, scaling that out the rest of the day is a good strategy. I was out in the 78 area. I reentered in the D period on a smaller size which I ended up scratching for a few ticks loss and reentered again in the E period at VWAP which was a good run. We should not expect much out of a low volume market. In fact that brings me to the next post.

Tuesday, August 26, 2008

The play of infinite timeframes

So whos buying the 60s and whos selling the 90s. Long term, short term or intermediate term? In my opinion its all of the above and all in between. There are levels though where certain players have more conviction, need for inventory or excess off and thats what causes the temporal balance. This balance migrates almost like a tornado shifting from pressure imbalances. And within these balances the respective players excercise relative control. Almost like taylors market cycles.

The dominant flow today occured @ 6:37 (there was one at 5:08 as well) and it was immediately bought up. That set the mood for IB until 8:40 pst when it sold off.
I generally dont get right on board in the IB, but my affinity to buy this level had grown root.

A dominant flow that gets reversed is significant at a support level and the bias is reversed as well. Especially if it happens during IB. I did not get a chance to enter @ the 6:37 bar as the buys reversed the delta to +ve. I did enter and scratch my trade @70 almost an hour later and seconds later it busted through the 72s. My bullish bias was the buying at support and subsequent orderflow. Very brief trade looking for immediate follow through. The 8:40 bar shifted the bias and it took the next four hours f0r the selling pressure to subside.

The involvement of the mutiple timeframes was evident from premarket tussle, to the IB reversal and as we extended the IB range in both direction. The balance area though drew far less interest and we ended the day in low volume.

Now heres the 2 day profile. It serves as the initial balance of the week. TPO count is 135/85 indicating higher probability for a rotation up. I am still concerned about the slight normal variation fattening the 63 area. Possibly suggesting that selling pressure through this level is mounting and value is shifting lower.

Paying the trading costs,,,,

The S&P 500 spent so much time below value that I was concerned about the structure. I still am. It will have future ramifications as far as where the short term balance may shift. It has taken the confidence out of that level (lower 60s) since it means that the level is not as rare for the other timeframe players. There were many small attempts to break to the downside but resting bids absorbed it. It appeared that sellers did not have the conviction though (no sustained hitting the bids).

I generally don't buy on a buystop ( unless I am trading a longer timeframe) but my order for a buystop @ 65.50 (above the last probe high and above the highest trade @ offer traded) was based on the above possibility of support and the significance at the level. Most importantly, it was based on the order flow of decreased selling pressure, after the initial thrust failed to set newer lows or break the level. I did not like the risk reward though, based on my location of a buystop(thats why I don't like buy stops) vs. entry on a small pullback in the 64s. However, I was unwilling to buy it quite yet as the orderflow did not reveal any buying commitments. I wanted the buyers to commit to something that was not visible in the orderflow yet. Stop new LOD or Trin, Tick surprises.

12:06 bar brought some buyers that bailed. 12:11 bar gave me buyers remorse. I was however, not as much in pain as I would have been if I had fully sized into this position. Ah yes, the stop size needed for the trade, also determines the size too, not just the quality of the oppurtunity. Now lets look at the reward. Either POC or max extension to the high of the G period. Remember we are running out of time as well.

The last reason why I entered this trade is that there is an obscure rule in MP that when price leaves value and reenters, and if it spends more than a period inside value, there is an 80% chance that it might rotate the value range. Now this is a dangerous rule. Don't trade it at face value. However keep it in the back of your mind. Returning to value and spending time within value means to me that price still has an affinity for the value (remember, yesterdays value is what we mean). Don't bet the farm on it because retracing of the range may take the scenic route. The 80% rule does not say that it will not stop you out! However use the odds in your trading strategy.

BTW I took 5 points on this trade and that pays for weekly trading cost. Risk reward 3.25:5 pts. - ok but not a great ratio. Good opportunity but higher monetary risk.

Big small nugget here : whenever you have these kind of trades.. I mean higher risk etc. etc. Allocate it in your head towards your trading cost. Just tell yourself that its going to pay for your crapsignal vendors monthly fee or DSL. That way you dont get over greedy too. Don't forget to also ask - is the opportunity good enough for my crapsignal fee to depend on it?

Value today

I am a little concerned about the structure of the profile today. Although we are very slightly down from yesterday. We have spent considerable amount of time in the low 60s in the later part of the afternoon. I missed the buy at the 64s as it happened during the IB and I was not ready to guess on the news. By the time it came out. I did not get a nice enough pullback to get on. I like to see a buying with conviction. Some profit taking (pullback) and then continued signs of initiative buying. Did not want to short either so ended up trading nothing really. Had a little long in the C period that I scratched. I went and scanned for stocks intead and made beer money on MRVL for the big part of the day. Marvel saved me from getting chopped during the extended lunch hour.

Now I have a long position on the ES on a whopping 1 contract on a buystop. I wanted to go lighter than that if possible;-). I will post more about that thought

Monday, August 25, 2008

Important correction

Please note that I have made an edit to the Open call post. It is the 1/2 hour before the market open. Sorry for the typo. The 5:55 AM bar is what I referred to as the dominant flow during the open call. It 5 minutes early but that speaks of the desperation.

One final question...

If you saw the auction today, you might agree that value was established lower much lower today. In fact we were trading in the lower range of DBY (day before yesterday) value (Friday i.e). We made several attempts at the DBY VAL and a final attempt at the DBY LOD. The question that lingers is, based on the auction that happened at the weekly POC and how we closed, was the auction able to come to completion? Or did we merely run out of time?

Day in review

After the opencall, there were two nice entries. One in A period as price tested the VAL from yesterday or in the B period as price retraced to the open price. Very nice conviction on the part of the sellers. As a market profile trader. one could be managing the runners all day. It was not an easy day to hold positions though. Especially if you are like me and trade just a few contracts. Global saber rattling, crude oil, financials and materials played in the minds of investors. Trend days are tricky to enter into a position. They also don't telegraph their moves like today. If you were able to hold a short till the close of the session, hats off to you. I couldn't. The big question is though, did you take it home? why and why not? I am strictly a day trader but these questions are relevant for us as well.

The test of the 63-64 held but it happened towards the EOD. A lot of silent buying and selling. It was probably a high risk low reward trade to buy the 64s. But for what time frame?

Where we are

Price has found a lower distribution and interest at the weekly POC. No surpise (this is where responsive buyers stepped in from the the other timeframe) .
It has spent 3 hours at this level. Now we do have a delta divergence from the first attempt at 9:30 PST. Indicating a possibility for a bounce to cover. Not the greatest risk reward though since our value today is way down there. Hats off to the sellers. If do we break we have the 63-64 area as the next level which could be an entry.

Open call and the dominant flow

In an earlier post, we looked @ the dominant flow during the initial balance. On large majority of days the dominant flow occurs during the initial balance (meaning A, B or in some cases C period). It generally sets the tone of the day and the trades following the dominant flow can be analyzed to see whether there is likelihood of single or multiple participants during the day. More importantly whether it keeps price in balance or takes it out of balance ( a temporary excess) until value migrates to a new accepted level.

The price behavior in the first 1/2 hour before the market open is generally referred to as the open call. Thats an old term when the commercials call their floor brokers for their balance of orders that need to be executed. It is not always evident but sometimes you can read them. The dominant order flow that occurs during the open call can often be a prelude to what might happen when market opens during the IB and the subsequent periods. It rare that a dominant flow occurs with enough conviction premarket because liquidity is not in the favor of the executing broker. However, when it does, it often indicates the urgency in their positions. Today's open call for the S&P 500 had rare but strong dominant flow @ the 5:55 bar.

The significance of dominant flow also depends on where it occurs with respect to the value.