[ant]

Recently, there have been quite a bit of discussion around Market Profile here and I have participated on some of those threads essentially stating how valuable Market Profile is as a tool for understanding and trading the markets. In this thread, I would like to provide more details of my trading approach using Market Profile by reviewing the last two trading days (8/18 and 8/19), and how they could have been traded from my perspective. Even though this is being posted in hindsight, it is my intention to show that the market on those two days were understandable and tradeable using Market Profile and market logic. I will cover my daily preparation and a blow-by-blow analysis of what was going through my mind on those days on an intraday basis. My goal for this thread is to simply show another way to use Market Profile since I believe that most traders do not use Market Profile in the manner in which it was intended to be used. That comment is based on what I've read in message forums. As Pete Steidlmayer said, “The evolution of the fundamentals of the Market Profile has been lost on the majority of users because most of the interest was in using it to make trading decisions, rather than in understanding the market.” I don't claim to be an expert trader, although that is my ultimate goal and still have a ways to go, but I thought that this discussion may be helpful for traders interested in using Market Profile in their trading.

Before proceeding with the market review, I would like to say a few things about my trading approach. For me, long-term, successful trading requires uniting market understanding with self-understanding. One is not more important than the other - they are both required, in my opinion. Essentially, I divide my trading methodology into three components: Market Profile, market logic, and self-understanding. In this thread, I will only address the market understanding piece, which includes Market Profile and market logic. Self-understanding is a personal thing so I'm incapable of adequately covering that here, but I will make one observation about myself. I've noticed that once I started to get a good grasp of market understanding, which has taken me about 2 years, I now spend about the same amount of time working on my self-understanding. You could have a great understanding of the markets, but if you can't execute your trade plan effectively because of your mental/psychological issues, than it will be virtually impossible to become a successful trader. And as we all know, we all have our own "baggage" to deal with. I would say that Market Profile makes up about 25% of my trading, market logic makes up another 25% or so, and self-understanding makes up the remaining 50%. So note, that although I spend a lot of time talking about Market Profile on this forum, it is only a small part of my trading, albeit an important part.

As I said above, it has taken me about 2 years just to reach a proficiency level of market understanding. Generally speaking, I believe that learning to trade successfully takes years, because one first has to find a suitable trading approach that fits their personality, and there are many tangents or detours that distract us before we find an approach we like, then it takes time to learn that approach while at the same time having to deal with the mental aspect of the game, and then we have to accumulate experience, which cannot be accomplished in a few weeks or months. Yes, everyone is different, and there may be people out there with an innate trading talent, but for most of us mortals, we just have to work at it very hard, just like doctors, lawyers, and professional athletes do. I also believe that it takes more than a financial incentive to succeed at this, you have to be self-motivated and passionate about this.

In my trading, I use bar charts (30-min and daily) and the Market Profile graphic. I will often use a weekly and a monthly bar chart for a different perspective on the market. I no longer use tick charts or 1/5 min bar charts. The reason I don't use them is because there is a danger of focusing too much on the small picture, and as they say, "you miss the forest for the trees," resulting in one catching the small trades, but missing the big ones. If I focus too much on small timeframe charts, I usually miss where the longer timeframes are entering the market, which is critical to understanding the market. The longer timeframes will always trump the shorter timeframes. If the longer timeframes are not dominant in the market, then one can trade off short-term reference areas more effectively. And as I've mentioned in another thread, I do not use traditional technical indicators. I do not consider bar charts or Market Profile an indicator because they are market generated information. But please, let's not debate that here, it really doesn't matter for this discussion. During the trading day, I primarily monitor the developing Market Profile, a 30-min bar chart, and some key levels along with my daily written analysis next to me. I also monitor other markets for diveregences. Obviously, trading off of a 30-min chart is not going to generate many trades per day. My goal is to catch the 2 or 3 bigger moves that usually occur each day. I trade for handles, not ticks, so there are times when I give up a 2-3 point move in my favor and exit a trade that has gone against me or get stopped out. Unfortunately, that's part of the game given the way I play it.

I consider myself a discretionary trader as opposed to a mechanical trader. I do not have trade setups that I blindly execute. I do have guidelines that I use, but they are not hard and fast rules. I believe that one of the problems with using technical analysis, is that it is devoid of market context, which is critical to understanding and adapting to the markets. I try to understand what the market is doing and then I try to identify good trade location. Good trade location is key for me as you will see in my subsequent posts. I also see trading as a game of probabilities and try not to focus on the outcome of any one trade, because if I take the trades where the odds are in my favor, the results in the long-term should be positive. Viewing trading this way, takes a lot of pressure off me while trading since I don't put too much importance on any one trade and have less of a need to be right, an issue I still struggle with. When I look at charts, I see trading ranges (balance areas/brackets), breakouts, and trends, and then adjust my trading strategy accordingly. So I trade in all market conditions and Market Profile is a great tool for the way I trade, it provides a lot of market information that is not easily seen in other charts. Finally, I'll end by saying that my trading edge is having an informational edge, i.e. being able to see the markets in a way that most traders don't. I try to align myself with the dominant timeframe in the market (either short-term or long-term traders) and I try to identify good trade location and asymmetric trades, where the reward is higher than the risk and where the odds of me being right are higher than being wrong over the long-term.

In my next post, I will discuss the last two trading days from my trading perspective, answer any questions, and then wrap up this thread. The trades that I will be discussing will be hypothetical trades, but I hope that that will still make for a productive discussion. Please note that I am only trying to show a my trading approach with Market Profile and I am not trying to prove anything to anybody or convince anytbody that my way is better than another, but I will provide my opinion which I'm sure will be different than others. I'm looking forward to the discussion.

[ant]

Daily Preparation for Trading on August 18th.

I day trade the emini S&P so that is the market I will be discussing. I will start with my nightly homework at the end of the 8/17 trading day. I start by looking at the daily bar chart of the big S&P contract and I make the following observations (see the Chart 1 below):

• The market has been in a 10-day balance area from 989.75 to 1015.60.
• On 8/17, the market gapped open lower leaving a large gap of 7.5 handles.
• The market broke out of the 10-day balance area to the downside.
• On 8/17, the market failed to close "Gap 2" by 3 ticks. This is an important nuance. If the lower gap could not be closed, in which direction do you think the market will trade next? Note that this observation is based on market logic, not Market Profile.

Next, I examine the daily Market Profile and I make the following observations (see Chart 2 below):

• The trading on 8/17 was a rotational day on low volume.
• The odds of downward continuation has decreased based on the low volume and the poor market structure at least on a short-term basis. Longer term, the longer timeframe broke the market out of balance to the downside.

So what does this portend for the next trading day? For the next trading day, the most important piece of information for me was the fact that the lower gap ("Gap 2") was not closed, followed by the poor structure and low volume. The gap not being closed gave me a long bias for the following day with poor structure and volume supporting that bias. I was also alert to the prominent POC where price traded 12 out of the 14 time periods, because that level could be revisited. As I've learned, nuances make all the difference in trading and can make the difference of being a breakeven/marginally profitable trader or a very profitable one.

Next: The Pre-Market Session and Trade Scenarios for 8/18.

[ant]

Reviewing the Pre-Market Session and Trade Scenarios for 8/18.

During the pre-market session of 8/18, I noted that the S&P was going to open in balance relative to the previous day's value area, which was also right at the previous day's POC. I liked the fact that the market would open near the prominent POC, because if it didn't, I would be thinking throughout the day that the POC might get revisited and could hamper continuation in the direction that the market decides to move, so we took care of that first thing early in the morning. I was also aware that the market would be trading above the 5-day balance area from the end of July (see Chart 1 in previous post). The upper limit of the balance area was at 980. So in summary, when the market opened, I was aware of the following levels below the market:

• the POC around 980.50,
• the upper limit of the 5-day balance area at 980,
• the overnight low at 976.25,
• the previous day's low at 975.50, and
• the gap close at 975.25.

My trade plan for the day would be the following. I'll discuss stops in the context of the trades that could have been taken in the next post.

• Get long on any rejection into the 5-day balance area around 980 with a target of the upper gap and 10-day balance area low at 989.75. Given that the gap was large, it may take more than one attempt to close it.
• Play the breakout of the previous rotational day, i.e. short below the previous day's low at 975.50 or go long above prevous day's high at 985. The short would have a target of the lower limit of the 5-day balance area at 965.25. The long would be looking at the same target mentioned above.

Note: The numbers above are based on the emini S&P (ESU09).

There is no doubt that successful trading requires a lot of learning and internalilzing a lot of information, and it all has to become second nature. Hopefully, my analysis thus far is logical. I go through this process everyday systematically.

Next: The Trading Day (8/18).

[ant]

8/18: The Trading Day.

Refer to the chart below while reading this post. The market opens at 981, just above the POC at 980.50 and the 5-day balance area high at 980. Once it opens, I note that the market is in balance and I look at how the market trades around the opening price. On 8/18, the market revisited the prominent POC first, as mentioned above, and then traded a point below the 5-day balance area high and was rejected. As it came back up through the balance area high at 980, that was the long trade. I would not want to see it trade back into the 5-day balance area or to the day's low anymore. You could have also waited for the market to trade through the opening price. Note that the overnight low or the previous day's low was never seriously challenged either. That coupled with the fact that the lower gap was not closed provided the support for the long trade. Also important to note, is that the trade was not based on only one piece of information. I usually do not enter trades within the value area as that is where everyone is trading and I have no edge there, but under these conditions, I would enter the trade within the value area. Again, not trading within the value area is just a guideline. The stop for the trade would be a few ticks below the 5-day balance area high. This trade would provide good trade location because your risk was small with a stop based on market structure and your reward could have been good with a destination to the previous balance area low at 989.75. But that is easier said than done. Once I put a trade on, I monitor for continuation, so let's take a look at the market as it progressed throughout the day.

Let's assume for the sake of discussion that the entry was at 981.50, two ticks above the open (you could have gotten a better entry by entering as the market traded above 980), with a stop 2 ticks below the balance area high at 979.50, you would be risking 2 points. I usually risk no more than 3 points. If my stop is further away, I would usually pass on the trade. So as trade continues, the next level I would be monitoring is the yesterday's selling tail and the yesterday's high. The NYSE composite volume was running fairly low after the first hour of trading so I would do my first scale out a few ticks below yesterday's high. Afterwards, the market pulled back a bit and formed an inside day, which is a form of balance on a smaller scale. At this point, I would still be risking the balance of my position and I still would not have moved my stop. The next trade would be a long as the market trades above the 2-bar balance area, which also coincides with yesterday's high. The stop would be a couple of ticks below the 2-bar balance high. You do not want to see price being accepted with that small balance area again. At this point, I would also move up the stop for trade 1 to the same point. Again, my stop is based on market structure. By the way, I would not have gone with a breakout to the downside from the inside day because of my upward bias. For me to get short, price would have to get accepted below yesterday's low. The rules for trading breakouts is the same regardless of timeframe.

After trading above yesterday's high, I would be looking at the profile shape and volume throughout the day. At this point, the market is one-timeframing higher so fading the market (shorting) is not something I would be considering unless the market closes the upper gap and is rejected from the 10-day balance area (see Chart 1 in my second post) or the market gets accepted below yesterday's low. As the market trades higher, it leaves single prints after the 12:30 bar completes. The next trade would be to go long within the single prints with the idea that the traders that drove price higher would still be there to defend that area. The stop would be a few ticks below the first single print around 984.75, which is the same stop as for trade 2. The trade destination had not yet been reached nor was there a good high indicating that the up auction was completed. Obviously, the market doesn't have to do what I am describing here, but I am simply playing the odds. The odds are not based on backtesting, but on empirical observation from watching and trading the markets over the past couple of years and from learning from others.

At this point, the profile shape developed a P-formation indicating that the market rally was short-covering and not new money buying. A P-formation does not mean to get short immediately as the short covering may not be over. However, the odds for upward continuation had decreased significantly. In addition, the volume was lower relative to the previous days. I would have exited all of my positions a couple of ticks below the daily high, even though the objective was met. The market traded one tick above the 10-day balance area low. No other trades would have triggered for me. Note that trades 1 and 2 were not based on Market Profile, but trade 3 was. Trade 3 was based on single prints as seen through the Market Profile graphic. However, Market Profile kept me from shorting the market because of the one-timeframing which ended in the bar where trade 3 was taken. From that point on, the market kept balancing for the remainder of the day.

I didn't realize how much writing this would take so I will stop here. If there is enough interest in seeing an analysis for the trading day of 8/19, I will do it. Otherwise, I will end the thread here if there isn't any interest. Even though this analysis was written in hindsight, I hope it succeeded in illustrating how I trade with Market Profile. These posts introduced only a few types of trades based on what the market offered us on this day.

[Frank]

great effort Ant..

I would think this would be more sustainable if you would lessen the amount of work. I started a thread which I will get back to when I return home from vacation but basically, what about keeping this to a lesser workload -- and therefore more sustainable by simply stating a MP concept for a trade -- and then showing the application of that concept in an example.

Regarding the chart you just posted -- the one that I think is a tough trade is the first one --- long back at 980... can you explain that concept further? Seems like you are still 'in balance' at 980 with such large volume nodes having been built there and subjecting yourself to serious chop entering there. In real-time, there could of course be very strong order flow or some other reason why a long is correct there --- but on a higher timeframe, which is what you are doing here --- I don't understand why 980 would be a long. You did go below 980 and now you might be expecting to test the other side of the range -- but on a strict higher-timeframe basis -- you are in a bracket and not a trending market and your entry is dead center of the bracket. comments appreciated...

edit: said another way --- perhaps as a concept --- 'look to enter opposite direction, anticipating a trending move -- if there is a test of a key gap which fails to close said gap by a very small margin -- a spot to look for this entry is if the market does return to center of bracket' --- then discuss that particular example... just my 2 cents, discard if you'd like, of course.

[ant]

Frank, thanks for your reply and your suggestion. My goal was to provide some continuity in the market analysis across two trading days. I wasn't trying to explain different MP concepts separately, but your suggestion is a good one.

First let me say that there are many ways for traders to view the markets and they can all be correct. It all depends on one's timeframe. For example, take a look at three different ways that one can see balance areas in a daily bar chart of the S&P. I suspect you were viewing the market as shown in Chart 1 whereas I was viewing the market as shown in Chart 3. In addition, others can break up the market into even smaller balance areas by looking at intraday charts. That's a personal choice based on how one wants to trade.



The chart below provides a little more detail as to how I was seeing the market. I won't elaborate too much in text since I think the annotations should be sufficient.



One of the key concepts in my posts is that balance areas form in all timeframes and the high and low of those balance areas are key reference levels. Balance area highs and lows are important because those are areas where change can occur and the longer timeframe can enter the market. By change, I mean that a market can break out of a balance area and transition into a trending market. Breakouts provide the best opportunities for traders. They are the toughest trades to do, at least for me, but they're the best in terms of potential profit. If the market looks above/below a balance area high/low and fails, usually you get a dynamic move in the opposite direction. The point is good trades usually develop in these areas. When a market is approaching a balance area high or low, especially the first time, I would look to fade it, generally speaking. If the market is accepted within a previous balance area, the destination is usually to the opposite end. The market doesn't have to do that, of course. So that was the concept at play on 8/18. Going long after the rejection of the 5-day balance area as seen in Chart 3 shown in the first attachment.

I viewed 8/17 as a breakout of the 10-day balance area, but then the poor structure and low volume decreased the odds of continuation. The fact that the lower gap was not closed by a tick was an important piece of information for "Trade 1" on 8/18. As of yesterday, the price was accepted back in the 10-day balance area so the balance area expanded in my view as shown below. The game on 8/17 appeared to be simply to go for the gap - that was the game played by short-term traders. 8/17 also becomes an excess low for the 15-day balance area shown below.



I usually don't enter in the middle of the previous day's value area, but I have no problem taking a short-term trade in the middle of a larger balance area or bracket. Trading is definitely more of an art than science.

[DaKine]

Thanks Ant,

Insightful thread you have going on here please continue... I have some questions for you if you don't mind.

"For the next trading day, the most important piece of information for me was the fact that the lower gap ("Gap 2") was not closed, followed by the poor structure and low volume. The gap not being closed gave me a long bias for the following day with poor structure and volume supporting that bias."

Can you explain "poor structure" to me. Do you have any references where i can read more about it?

"As I've learned, nuances make all the difference in trading and can make the difference of being a breakeven/marginally profitable trader or a very profitable one."

If you'd like to share I am interested in other nuances you find useful in your trading.

"However, Market Profile kept me from shorting the market because of the one-timeframing which ended in the bar where trade 3 was taken. From that point on, the market kept balancing for the remainder of the day."

Can you please elaborate on one-timeframing maybe a definition my brain is having trouble wrapping its arms around it...

Also what are your favorite MP resources...

Thank you again kind sir.

[ckait]

Go check out " Balance Trader" Frank has videos that can teach you something about market structure and an approach for trading market profile which is quite easily learned. Marketrs in profile and Mind over Markets are a good place to start as well as the CBOT guide to market profile if you dont yet know what the pfofile is.