Feb 012018
 

I wanted to bring up a key contextual consideration that members haven’t seen in a while and that is whether or not in your model development you have some sort of handicapping (as we call it) criteria for how “major” or “minor” key market structures are. The idea of course being that the structures which are still highly visible on much higher timeframe plots will be more likely to be used by longer term, market moving type players to frame trades. It has been our observation that these more “major” market structures tend to have a greater propensity for explosive short term volatility when first retested due to the effect of much larger participants framing positions on either side of these areas. What that tends to mean for intraday market structure type traders is that they can tend to not allow you to use the same risk overlay as you might normally use around more “minor” structures. In other words, if for example you tend to trade with very tight initial stops you may find you won’t usually be able to get away with that around the inside of these “major” structures and may find yourself getting run over initially, only to find out that your basic directional idea would otherwise have been profitable. We have also observed that knowing full well there will be many stop orders to be elected behind these very obvious to all swing lines, top of book market makers tend to love to force action around these areas to auction that flow. So with that one of the tougher things to do is fade on the inside of these swings for many members. Instead they often find the best ops for them are either anticipating the big MM driven stop smash and trading with that momentum, or waiting for that move to complete and only fading once the chasing flow and stop election flow finally exhausts and the market starts to rotate the other way…

That said, I mentioned this exact spot in the room Tuesday long before the market structure in question was ever tested. As always you should never care about predicting what will happen but just know what you will be stalking if and when it gets to your area of interest. Obviously that key area that morning was the former super major support 25’s which should jump off your longer term bar/candle plot at first glance. Again, if you were handicapping potential structures to test today that one would go in its own column so to speak. A spot where you would expect more than just day traders getting into and out of positions, adjusting hedges, etc. And as is typical when it first tested the weakest money longs were the ones who got trapped on the north side of that line. The market makers initially pulled bid liquidity in purple and goosed price over the line forcing the weakest short term longs out initially. Moves like this are subject to happen even at more minor structures of course. The key thing to recognize is that it was going take more than just a little dip like that to get the longer term bigger players in on the action. You can even see in the stats in purple and light blue that there was no real long lift volume there. The calm before the storm. And once the then current low was threatened the MM’s initiated the same bid pull move in yellow and this time it dropped like a stone as the longer TF players got involved. I said in the room before the move ever happened that if the 25’s structure broke I would guess a move to the 23’s and on to the 20’s. Obviously I didn’t pull those prices out of a hat. Just the next structures down to likely draw interest from both sides which you should be able to easily see as marked. Anyway, once the aforementioned flow was auctioned passive and aggressive buyers stepped up hard initially in dark blue. Note the strong lift off the low there led by size with long finish in the stats as well. This was followed by one more push in light green continuing to absorb sellers and then the final low failure push in dark green on paper thin volume countertrend swingers love to see. A last attempt back down but volume is paper thin due to sellers unwilling to hit bids. Also note extremely strong long deltas there led by size. Anyway, as I said in the room if you wanted to fade the market fine. But if you did so on the wrong side of the 25’s you likely lost, but if you just waited for the likely flush and eventual exhaustion you likely won. Food for thought as to whether you want to stalk certain entries differently depending on how significant the structure is…

Finally, for those who did get long post flush obviously the next structure above was the same 25’s (& 22-23’s) we just broke below. The first push back into the 22-23’s saw some pretty intense responsive selling in pink so I can’t fault anyone for scaling or flattening there. Also note size leading out short into that move in the stats. As for those who chose to wait for a more legit push toward the 25’s, we saw more of the same right in the kill zone in the pushes up in light and dark red giving plenty of liquidity to scale or flatten into. The push in light red also showed strong selling off the high there led by size and the push in dark red trapped plenty more late buyers just under the structure case price. Regardless of where you chose to scale/flatten it was a solid 3-5 handle move. But again the main consideration here is how to handicap the various structures differently in terms of what sort of trades you stalk and how, based on what they are and where they are. Context as we always say should be a big part of your overall edge you develop over time…

About the Author

Discovery Trading Group is a unique dojo focused on mentoring aspiring futures traders since 2010. It’s emphasis is on guidance in building bespoke processes and risk overlays rooted in market structure, price action and orderflow, with sound adaptable risk management as a priority.

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