Apr 062018
 

I thought this would be a good spot to point out a contextual topic which hasn’t come up in a while in a way that was easy to illustrate. The context in this case being to consider whether your strategy rules will include handicapping the relative size of a current market range much in the same way you do to distinguish more “major” levels from more “minor” ones. In the context of levels, handicapping might be employed to note where volatility is expected to be higher around a major level due to being on the execution radar of longer term, larger participants. Armed with this information your model might either refrain from trading them altogether or if you do, employing a wider risk overlay to accommodate the expected vol while trading smaller around them. In a similar way, you might handicap trading from market structure edges differently based on how wide or narrow the current range is and have modified rule sets for each general category. In this case, when are you willing to trade through a key level from inside it and when will you wait for it to break and only trade from the other side?

Most members who are intraday swingers usually employ a strategy type which we call “continuation trading”. In a nutshell the exact opposite of their other typical strategy type which is countertrend a.k.a. fade trading, which is also always being stalked and/or executing around the edge of a key market structure from one side or they other. As a general rule, most members tend to prefer NOT trying to trade ‘through’ a key structure case price from inside it when stalking continuation type trades. The idea being given a certain long or short bias at the time, they would instead like to see price break through the case price line and then pullback to it from above or below, holding that line from the other side before considering entry. But those who are handicapping ranges might consider only employing ‘enter continuations from the broken side of the case line’ type rules when the market has had to traverse a fair distance from one end of a wider range to the other, and ease such a rule when that is not the current contextual condition as was the case coming out of the narrow Globex range in this example…

Consider the image below. Here we see the initial break above the Globex high 67’s Thursday. But when you consider the current range in context of the current volatility and the range of recent sessions, the market hadn’t really done anything yet and the Globex range it was opening into was very narrow. Had the overnight range been very wide like Wednesday’s was and we had crawled all the way back to retest the overnight high, it would likely carry more weight as a line in the sand in that context. But that certainly wasn’t the situation Thursday. So given the narrow range we had opened into, perhaps you might consider taking a position that intended to trade ‘through’ the Globex high 67’s if you had a bullish bias for the day and wanted to express that. As opposed to what you might consider doing had the OH been retested from under after price had come a long way off its low in the Globex session, in which case you’d likely wait for price to hold the 67’s from above before considering a continuation long entry. In other words before considering your trade idea according to whatever your other usual criteria are, perhaps as a final go/no filter considering whether the level is likely to be as soft as a curtain or as hard as a wall on its first retest…

This image does a good job at illustrating that those bulls who chose to bet below the case 67’s and trade through it were definitely able to find more reward for similar risk than those who waited to bet it long from above as you can see. First we broke above the interim resistance line 64’s set just before the cash open and pulled back to them from above. Note in light blue the strong seller absorption and size leading out hard with long delta divergence there. This was followed by more of the same in dark blue and that time also pulling in a low failure as well. But note in both cases if you were betting long there you had to be betting that the market would firmly break through the more “major” 67’s just overhead. Those who were more conservative may have waited till we had broken more firmly above the 67’s and showed signs of holding from above. Note the shallow pullbacks hard rejecting lows on thin volume due to seller exhaustion in light and dark green. Both of those pullbacks were also showing size leading out long with the second PB also putting in a low failure. Obviously, there was nothing wrong with expressing a long opinion from either inside or outside the 67’s Globex high line, but it’s clear those who correctly read the context at the time would have been able to extract more profit, all other things being equal of course…

For those who did get long from either line, the next real structure above to look to scale into was framed from the 73’s to the 79’s from 3/27 by my measure as outlined in the chart image above. Obviously you’ll see by scrolling right in your price action/prints plots that we didn’t get there right away though. So as an aside I’ve highlighted the big volume that built in no mans land in red that may have been a trigger to scale or flatten for many members. As always, you’ll need to know well ahead of time how thick is thick enough on a relative basis to get you to throw in the towel in these situations when your target structure has not yet been reached but the trade is in profit. Given the current pace of typical average volume at price at the time, I can’t imagine holding through that kind of buyer absorption and seller response. As it turned out it would have be smart to have such a filter in this case as regardless if you had got long from the blue areas or green areas your long would have taken heat had you not taken your profits there. Remember, it’s just one trade and likely statistically insignificant. Trading from either side could have won or lost relative to any risk/reward objectives. I’m just trying to illustrate how you might modify general rules of certain strategy types based on broader contextual considerations. In this case, allowing trading through structure edges only out of narrow ranges assuming your other criteria are met, of course. Food for thought…

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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 & bankroll management as a priority.

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