[firewalker]

Originally Posted by DbPhoenix »

Firewalker and wasp have initiated a real-time trades thread that has attracted several participants. Perhaps that's what you're looking for. I personally don't learn anything from the "short at 40, stop at 41" type of post, but a lot of people enjoy that, and that's great. But as for teaching somebody how to trade, that requires more time and effort, and I myself can't concentrate on my trading when I'm typing messages to people. For one thing, I just don't have the spare real estate on my screen.

As my name has been mentioned, I'd just like to say that I agree that the posting of live trades will most likely not help anyone else to trade profitably. In fact, I'd rather suggest against using it to learn how to trade, because there's no point in following what anybody else does, or did, if you don't understand the "why". But all that has been laid out here.

[DbPhoenix]

Again, this thread is not about How I Trade. It's about support and resistance using my "boxes". Those who are interested in RT trades can visit the TL chat room. Those who are interested in trading plans, sorry. Those are do-it-yourself. If you don't know how to create one, see The Trading Journal and The Trading Log.

The following chart is of the ES.

The story is not just in the trading ranges nor in just the trend or -- if it forms -- the trend channel. The trading ranges, or PV "clusters", tell you where traders are finding trades and where the extremes of each of these zones are. The trend, or "stride", tells you how strong or weak the overall movement is and also warns you of potential changes in strenghth or weakness, i.e., changes in momentum.

Here, for example, price struggles to move higher with regard to vertical movement, but it's also hugging the trend/demand line. It can maintain this course for quite some time, but it clearly is not as exuberant as it was.

And the micro:

[DbPhoenix]

I hope those who are following this understand that the boxes are drawn around areas of price congestion (and that volume will of course be greater within these areas because that's where most of the trades are taking place) and that price does not congest in a certain place simply because I've drawn a box there. In other words, keep the horse before the cart.

Also understand that these charts are dynamic. As the chart tells me over time that one area is important and another is not so much, I may modify prior boxes or even delete them. It all fits because of where traders are finding value and where they used to find value.

Given all of that, it's important not to get too wrapped up in the micro. Therefore, I've provided two charts, one the usual, and another following which shows the major PV congestion zones within the micro. If that makes any sense.

Those of you who've been following along know that the midpoint of a move was important to W. Clearly there are good reasons why.

And the three longer-term (12 days +) zones:

The ES has two:

[JT_E]

thx for updating these charts, I can compare my updates with yours, I'm getting closer, still subtle differences though .. I must say my charts have cleaned up, don't have lines all over the place any more. JT

[karim0028]

Yeah, i gotta say i appreciate these charts as well... As i am beginning to find the importance of midpoints. Its eerie how price/traders pay attention to the midpoints.... Now i just sort of plot and watch...

Great stuff!

[DbPhoenix]

You can thank auction market theory. But I find these easier to read and understand than Market Profile charts, especially when I'm looking at interactions across time.

I read somewhere recently -- and can't remember where -- having to do with Market Profile, I believe -- that most experienced traders will avoid trying to catch the tops and bottoms and focus on "the middle", waiting for confirmations to enter and confirmations to exit. However, since "the middle" is by definition where most of the trading is going on and is largely non-directional, there is also a lot of whipsawing in the middle, and that generates a lot of losing trades. One can sometimes avoid this by widening the stops, but, since the market always teaches us to do what will lose the most money, this will turn out to be an unproductive tactic.

The safest and generally most profitable trades are found at the extremes. Therefore, you wait for the extremes. Wyckoff used a combination of events to tell him when a wave was reaching its natural crest or trough: the selling/buying climaxes, the tests, higher lows/lower highs, and so on, all confirmed by what the volume was doing and by the effect the volume had on price (effort and result). As a result of this work and of his exploration of trading ranges, he developed the concepts of support and resistance along with their practical application. Auction Market Theory (AMT) takes these investigations into support and resistance further, an “organic” definition of support and resistance like Wyckoff’s, that is, determined by traders’ behavior, not by a calculation originating from one’s head or from a website somewhere. Determine whether you are trending or “balancing” (ranging, consolidating, seeking equilibrium, etc), determine the limits of the range (support and resistance), and you’re in business.

The notion of support and resistance has been and is the missing piece for many market practitioners. One can try to hit what appear at the time to be the important swings again and again and be stopped out again and again, hoping all the while that once one hits the true turning point, all the effort will turn out to have been worthwhile and the P&L will change from red to black. But by waiting for the extremes, one avoids most or all of those losing trades, and, even more important, avoids trading counter-trend. These boxes -- which are simply a graphic variation of the Market Profile distribution curve, whether skewed or not, or of the VAP (Volume At Price) pattern -- are nothing more than a means of locating those extremes. What I've found more useful about them is that they are encapsulated by time, i.e., the price and volume ranges have a beginning and an end. This enables me to see at a glance where the important S&R are, or at least are likely to be. Without them, one ends up with line after line after line until the S/R plots become a parody of themselves.

All of this can be very confusing to someone who’s learned to view the market in a different way, perhaps less so to someone who’s just starting since he has so much less to unlearn. But backing up to the basic tenets of AMT, as well as to the concepts developed by (and in some cases originated by) Wyckoff, one can perhaps find a solid footing and proceed from there.

To begin with, in the market, price is often not the same as “value”. In fact, one could say that since the process of “price discovery” is a search for value, they match only by accident, and then perhaps for only an instant. Blink and you missed it. Add to this the fact that for all intents and purposes there is no such thing as “value” but rather the perception of value. After all, what is the “value” of, say, Microsoft or GE or that little stock your stylist told you about? This state of affairs may seem like a recipe for chaos, but it is in fact the basis for making a market, that is, reconciling the differences – sometimes extraordinarily wide differences – in perceptions of value.

As Wyckoff put it, if a stock (or whatever) is thought to be below “value” and a trader or group of traders see a large potential for profit ahead, he/they will buy all they can at or near the current level, preferably on “reactions” (or pullbacks or retracements), so they don’t overpay. If the stock is above what they perceive to be value, they'll sell it (or short it), supporting the price on those pullbacks and unloading the stock on rallies until they are out (or as much out as they can be before the thing begins its downward slide). “This”, he writes, “is why these supporting levels and the levels of resistance (a phrase originated by me many years ago), are so important for you to watch.” When price then begins to lose momentum and move in a generally sideways direction, you’ve found “value” (if value hasn’t been found, then price won’t stop advancing or declining until it has). Value, then, becomes that area where most of the trades have been or are taking place, where most traders agree on price. Price shifts from a state of trending to a state of balancing (or consolidation or ranging), the only two states available to it.

The trading opportunities come (a) when price is away from value and (b) when price decides to shed its skin and move on to some other value level (that is, there’s a change in demand). This is also where it gets tricky, partly because demand is ever-changing, partly because you’ve got multiple levels of support and resistance to deal with and partly because we trade in so many different intervals, from monthly to one-tick. If we all used daily charts exclusively, it would all be much simpler, though not necessarily easier. But that’s not the case, so we must remember always that a trend in one interval – say hourly – may be a consolidation in another, such as daily. The hourly may be balancing, but there are trends galore in the 5m chart. Or the 5s chart. Or the tick chart. Regardless of how one chooses to display these intervals – line, bar, dot, candle, histogram, etc – there are multiple trends and consolidations going on simultaneously in all possible intervals, even if they’re in the same timeframe, even if that timeframe is only one day (to describe this ebb and flow, Wyckoff used an ocean analogy: currents, waves, eddies, flows, tides).

To sum up where we are so far, and keeping in mind that there is no universally-agreed-upon auction market theory, the following elements are, to me, basic, and are consistent with what I've learned from Wyckoff et al:

1) An auction market's structure is continuously evolving, being revalued; future price levels are not predictable

2) An auction market is in one of two conditions: balancing or trending.

3) Traders seek value; value is price over time; price is arrived at by negotiation between buyers and sellers.

4) Change in demand drives change in price.

5) One can expect to find support where the most substantial buying has occurred in the past and resistance where the most substantial selling has occurred.

Now let’s translate all of this into a chart.

I'm sure everyone has noticed that swing highs and lows and the previous days’ highs and lows and other /\ and \/ formations can serve as turning points and appear to act as resistance. However, this type of resistance stems from an inability to find a trade and is accompanied by low volume*. Price then reverts to an area where the trader finds it easier to close that trade. That's what provides that ballooning look to the volume pattern “A” in the following chart. "Resistance" in this sense, then, refers to resistance to a continuation of the move, whether up or down.

*Volume may look “big” at the highs and lows, but the price points are vertical, not horizontal (as they would be in a consolidation), so the volume – or trading activity – at each price point is lessr than it would be if the same price were hit repeatedly (again, as it would be in a consolidation).

Note that you may have more than one "zone of concentration" (this is how jargon gets started), as in the first balloon. Nearly all the volume is encompassed by the pink lines, but there is a heavier concentration within the blue lines because of where price spends the greater part of its time. The volume in the balloon “B”, however, is more evenly distributed throughout the zone, partly because price spends so much time in it and partly because it ranges fairly steadily within it. Instead of rushing to the limits and bouncing back toward the center, they linger at those limits, the sellers trying to push price lower, the buyers trying to push price higher. Thus there is more volume at these edges than in balloon “A”, but buyers eventually fail in their task as sellers do in theirs, and trading drifts back toward the center, providing, again, a relatively even distribution of volume throughout the range.

Balloon “C” is similar to “A” but much thinner due to the fact that price has made only a single round trip to the bottom of the range. It lingered a bit in the middle, simultaneously creating that protrusion in the center of the volume pattern. But volume at each end is thinner than in “B”, thinnest at the bottom due to the \/ shape, giving the volume – if one is fanciful – something of a P shape.

If price drops through one of these zones, those who bought within that zone are going to be miffed. Some of these people are going to try to sell if and when price re-approaches that zone. This is the basis of resistance. There's just too much old trading activity to work through in order for price to progress unless there is enough buying pressure to take care of all those people who want to sell what they have, then push price even higher (in which case those who sold may think they screwed up yet again and buy back what they just sold). However, those who bought or sold at the outer reaches of these zones will also be disappointed if they can't find buyers for whatever it is they just bought, not because there's too much volume but because there isn't enough.

So how does one trade all this? First, you will have to monitor several intervals at the same time in order to (a) find out what interval you want to trade and (b) where price is within whatever range or ranges is/are in that interval. For example, if you’re most comfortable with a 5m interval, you’ll want to check a smaller interval or two to see what price is up to down there, but you’ll also want to look at larger intervals, such as the 15m or 60m or even the daily (I’m using time intervals here in order to keep this from becoming even longer than it will be, but the same approach applies whether you’re using range bars, volume bars, tick bars, candles, lines, etc).

Second, locate the ranges. Box them or circle them or color them or in some other way highlight them. If you find a range that is wide enough for you to trade (that is, there are enough points from top to bottom to make a trade worthwhile), get “into” the range via a smaller interval in order to find a trend. Perhaps at some smaller interval, price is at the bottom of that range. That gives you a good possibility for a long (or it may be at the top of the range, giving you a good possibility for a short).

At this point, you have three options: a reversal, a breakout, or a retracement. If, for example, price bounces off or launches itself off the bottom of the range (support), trade the reversal and go long. If instead it falls through support, short the breakout (or breakdown, if you prefer). If you don’t catch the breakout, or you prefer to wait in order to determine whether or not the breakout was “real”, prepare yourself to short whatever retracement there may be to what had been support and may now be resistance.

A more boring alternative is that price is nowhere near the top or bottom of any range that you can find but rather drifting up and down, aimlessly. No change is occurring; therefore, there is no trade, or at least no compelling trade. Finding the midpoint of the range may be useful since price sometimes ricochets off the midpoint, or launches itself off the midpoint if it has settled there. Such actions represent change since price may be looking for a different value level. It may come to a screeching halt and reverse when it gets to one side or the other of the range and return to the midpoint, or it may launch itself through in breakout form and extend itself into the next range, if there is one, or create a new range above or below the previous range (in determining which, back off into larger intervals in order to determine whether or not price is in a range in one of those larger intervals).

This isn’t all there is to it, of course, but there are more charts posted in this thread than in any other, and I hope that enough information and examples are provided in these posts to enable you to develop a consistently profitable strategy based on these principles.

[treadstone]

Top work as always, Db. Your continued efforts are appreciated.

[JT_E]

wanted to show a chart using pit session only, I used for todays trade.

it looks quite different than Db's chart of ES yet all the main boxes & turning points are clear, the 1371-72, 1384 - 85 , 1403 - 04 & the 1421 - 22.

I've been plotting both pit & all-session data and am going to stick with the all session from now on.... Seems to be easier using all session..

I have been at this for a while now and am just getting the hang of it. thx Db for this approach. it has certainly cleared up my charts, i had lines on top of lines. made me crazy!!