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When Does Context Trump Bias?

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Apr 172018

No, not that Trump…

I thought I would start the week with one more example from Friday as I think it punctuates a few topics which come up over and over again to consider in your model development. The first is how you develop your process for handicapping the relative importance of key market structures and frame your actions around them contextually. The second is your stance, perhaps also on a case by case basis, on whether you will stalk continuation trades which seek to trade through a major line in the sand or will only look to trade pullbacks to them from the other side. As an aside, even when your directional bias is strong, will the context of relative strength of the structure line influence whether to trade at all in that direction at any given time? In other words when does context negate bias?

So with those considerations in mind, consider the action on Friday which tested the super important 79-80’s structure as shown. As always, we suggest taking a very zoomed out view of the ‘shape’ of the market over many weeks or even months as part of your analysis process – yes, even as a day trader. The reason isn’t to draw any hard conclusions for predicting direction, but simply to be aware of areas in the market which are likely to be attracting longer term swing and position trading participants. No doubt in our mind the line based on the prior 79.75 case price from 3/26 as marked was the most important price overhead coming into the session Friday for the bears to hold or the bulls to retake. It was the highest high over several weeks since the last sustained selloff in the first two weeks in March. Hopefully it jumps right out at you with your zoomed out view as a day trader regardless of what your chart setting is. And again, removal of time from the process is always something our members are seeking to do. The idea being to identify key market structures which are likely to attract both buyers and sellers and used to frame entry/exit decisions, stops, hedges, etc. which show up the same on any chart periodicity setting. As you will see the 79.75 swing definitely fits that bill and then some…

Often super major lines in the sand like this will early reject initially and have rotation auctions a bit inside them before being legit tested and/or crushed, but that wasn’t the case here. The market rallied hard in Globex with hardly more than fleeting shallow pullbacks and went right to the legit test in this case. Point being that had it not quite made it there initally and instead rotated around the 75’s structure or a bit above for a good while, the perception of many who chose to play it in one direction or another might have been different. As always, most every decision will be wrapped with various contextual considerations to ponder. So with that said, the first question would obviously be asking yourself what your directional bias was at the time, if any. From the conversations we had in the room and elsewhere, most seemed to agree that there was strong upside pressure in the market and that sustained right through the cash open shown in the chart above. But given that this was such a super major line in the sand, were you willing to bet that the bulls would be able to crash right through it without a serious effort from the bears to fade it? In other words, even if you had a strong long bias, could the context surrounding such a major level keep you flat or even have you betting the other way? Trading straight through such a major level would be a pretty tall order for the bulls especially given there wasn’t any immediate news hitting the wire at the time driving prices higher. Not to mention likely profit taking from earlier bulls who had entered far below slowing the momentum down. And finally, another question which I poised at the outset is regardless of a long bias, do your process rules permit you to buy “under” a major line in the sand price like this and trade through it from below? Or do your rules require price to break firmly beyond and then pullback to the line holding from the other side before considering entry? As you can see here the answers to these questions would have absolutely determined whether you traded at all at this level and if so, in which direction…

Note the strong aggressive and passive bull pressure in pink coming in to test the case high followed by more of the same in red, which ended in a strong seller response to the buyer absorption into the high via short finish led by the largest size. The stage was definitely set at that point for those wanting to make short bets on the merit of the large number of late trapped longs into the highs there. But from there you can also see that the bulls didn’t give up and continued to absorb aggressive sellers through shallow pullbacks, especially the ones in blue and purple. But as I said earlier, if you were still a bull from there bias-wise, would you be willing to trade through the line above from below it? At that point it would be fair to say that the stage for likely mass ‘puking if wrong’ was set on both sides. Plenty of new buyers betting the current top would break higher, and plenty of sellers betting we would at least rotate back to test the prior day high 75’s area below before moving higher. And remember, though it is a broken record by now around here, any and all analysis is only an analysis of what IS happening right now. It can never predict the future relative to every risk/reward objective trade by trade. But what DOES tend to be quite predictable trade by trade is the psychological pressure of immediate fear and greed on most participants. In other words, we “knew” where a lot of traders entered in both directions, and we also “knew” that a good deal of them would be short term outrights traders who would get out if it didn’t go their way. Whether your bias, process rules and contextual reads at the time had you betting long or short there, it didn’t cost you very much to find out if you were “right” due to the likely puking of whoever was wrong once it did move out of the current range…

As it turned out it was the sellers who ultimately won the initial battle, obviously. The trapped longs got more and more nervous as time marched on and price didn’t make new highs. And back down to test the Thursday RTH high former R turned S structure 75’s from above we went. Those members with ‘structure to structure’ type risk/reward overlays no doubt had that area on their radar as a first scale or flatten spot. And as you can see there was plenty of seller absorbing relative volume to scale into on the initial early reject in light green and the legit test in dark green areas there as would be likely. Congrats to those who bet the short side here and won of course, but as always it doesn’t mean those who bet the long side above were ‘wrong’ either. Either way, hopefully it will spark some thought about your implementation of process rules and contextual considerations for your models. And remember, edge is only found over many events in a series, and from many contributing factors. .02

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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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A Flimsy Curtain Or A Brick Wall?

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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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Nice Catch, Fish

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Mar 232018

This was a short entry range stalked by one of our long time members Fatfish, which he mentioned in chat and we discussed in the room yesterday. I wanted to be sure and use it for Thursday’s intraday swinging educational example not only because I happened to concur with his choice on all fronts, but also because I think it’s an especially good visual example for newer members trying to improve implementation of the so called ‘Trifecta’ concept employed by many DTG members. The idea being to start with pre-identified edges of key market structures likely to attract interest from buyers and sellers in a relatively tight range to stalk entry, followed by looking for failures (or lack of ) as identified by the pushes and pulls of price action, and finally looking for a ‘lot’ or a ‘little’ relative print volume identifying absorption and response and/or exhaustion of prior aggressors on one side or the other. As I said, I think this particular section of the action makes it very easy to see what these concepts look like manifested in chart form, so it might be a great spot to study in replay for those who haven’t been around long enough to digest hundreds of these…

So here we see the pullback in pink back into the (hopefully) very obvious former key S turned potential R from under 97’s from 3/19. Any question as to whether the market was keenly aware of that price? Yeah, I’m being facetious. Hopefully, the volume metrics there jump right off the page at you. BIG buyer absorption and seller response right on the bubble there followed by a waning interest from bulls into highs just above the case price. Also note that in that entire big single push up, the largest traders ended up net sellers against net buyer retail in the aggregate. This was followed by a classic second push high failure in light red, hard rejecting highs due to eventual buyer exhaustion/disinterest. Again, note the stats below which show net seller aggression across the board into that second attempt back up. For those who still wanted more bearish evidence to consider fading there we got a third push in dark red with a steeper failure, continued hard rejection of highs, and continued net short aggression across the board in the stats. Absolutely textbook stuff there for many countertrend DTG swingers stalking this area at the time…

Obviously I couldn’t fit the eventual move into what was then the next key swing structure below on this image. But if you make the effort to skip ahead you will see we eventually moved down to and retested the Globex low area which was based on the former IS line from the 3/6 Globex session 86.25. Plenty of action there to scale or flatten into depending on what your risk/reward overlay was/is. Originally I thought Fish might have been looking to hold multiple scales past the 86’s and on to the next structures below which were the 77-78’s followed by the 68-69’s from 3/5. Now that would have been a quite a score indeed for an intraday trader spanning 20 handles or more overall! As it turned out though, Fish’s idea was to stalk flattening an initial short from the 97’s area just above the 86’s structure and then re-sell a pullback to the 77-78’s from under looking to trade those into the 68-69’s as a separate position. Nothing wrong with that to say the least. Again, a great job reading the structures, price action and print flow and fitting those reads into his overlaid risk model and trade management context considerations. We are all rooting for you and impressed with the strides you’ve made Fish!

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The Old Crush & Bounce Routine

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Mar 152018

Ah yes, a perfect ‘anatomy of a market maker initiated stop run play’ example followed by the post flush bounce yesterday for your perusal. To get the most out of these types of examples in particular I strongly suggest running these back in live data replay in your charting programs if you have the means. And as always be sure to go back and read the chat transcript for the day if you weren’t in the room. It’s critical to get a sense of context as it relates to the process of pre-planning areas to stalk prospective price action activity well ahead of time. As you will note yesterday, the OL/YL 62’s were earmarked and discussed well ahead of time but as always completely non-predictively. “IF price gets to here and X happens, since I have THIS context and bias opinion I’d like to express, I’ll look to do THIS…”. Always the same mental process for most members based on noting key market structures well ahead of time in context and their likelihood of drawing increased interest from BOTH buyers and sellers. In other words, anticipated liquidity in a relatively narrow range…

As I said in the room there was no doubt this line was going to attract the crowds across a wide range of time horizon objectives, buyers and sellers alike. This line turned out to be especially important as of the time of this image snap because as it turned out, the first test respected it very tightly putting in a low just two ticks below the case price on the far left. This was suspect in this case as it always would be for such a major line in the sand likely seen by the vast majority of participants as being super important. Would the S&P let new intraday buyers enter long right at that edge and get away with it without being put to the test with any heat? Would longer term longs from earlier sessions also get away with it with their wider stops well out of the way a few handles behind this line in the sand? My answer if I were stalking action in that area would tend to be a resounding “NO” to both questions, hence the potential trade idea for those executing strategies seeking to profit from what we call those ‘market maker initiated stop run plays’.

The concept is fairly simple. Armed with the knowledge and a hypothesis as to the likely answers to the above questions, top of book market makers will often pull liquidity on one side to see if they can get price over such lines in the sand in an attempt to force out the weaker hands in question – in this case prior longs. The panic selling into the limited liquidity often creates big bursts of motion which momentum shorts hop on and then those momentum scalpers are also those taking the other side to get flat with a profit of said prior longs stopping or puking out at a loss. Poetry in motion and business as usual in the S&P. So here we see the characteristic paper thin relative prints in yellow especially on the offer side which was a direct result of the above plan set into action. Just below the yellow box, though unmarked, you see the prints start to get thicker, likely from the shortest term day trader longs throwing in the towel roughly one point behind the case line. Stops one handle behind a swing line. Hmmmm…(wink). Right where ‘they’ say you’re supposed to put them. lol. And below that but a bit further behind the case line (where one might think they would be “safe”, we saw the really big action take place in purple as the longer term prior longs joined the party and also threw in the towel. So there lies the first possible op from this area we discussed being the short momentum scalp from the 61-62’s line. Shorting just ahead of or into the line break and covering right back out into the volume swell from the stop election/longs puking.

Obviously since there was no pullback back into the broken line post crush there was no classic continuation op as we would call it for the short biased swingers. They would have had to be content to sit on hands and miss the move unfortunately. Such is the life of a trader. But another group of members were undoubtedly stalking what we call a post crush exhaustion bounce, or something to that effect. As we agreed in chat the next discernible market structure below the 62’s was framed by Friday’s RTH low on the high side and extended on down into the Globex high 49’s from that same session. So that would be the zone where those longs would be looking for PA and/or flow to confirm a potentail bounce entry. As it turned out there was something for those members as well did you can see in the chart above. Note in light blue there was no question the 56’s were on plenty of trader’s radar and it started to firm up there as passive and aggressive longs stepped up fairly hard, especially the largest size. Though the shorts prevailed initially and proactive first push type bounce traders would have had to puke for a small loss or scratch at best, once the low of that rotation was in, subsequent pushes showed plenty of signs of firming up. For second push type entry guys the push in dark blue showed strong seller absorption and size leading out to the long side proactively against still chasing retail sellers. For any still waiting for later pushes, the last attempts back down in light and dark green showed paper thin relative volume from seller exhaustion ending in size leading out super hard to the long side. Though it’s off this chart given the big recent volume action in purple and likely new trapped shorts there, that was likely the first scale spot to stalk for most members. If you go back and look you’ll see that this newly minted minor structure got plenty of respect on the way back up. Obviously for those holding for subsequent scales the next structure above the 59’s was the same 61-62’s we just broke below. Unfortunately though, any longs from the blue or green areas would have had to scratch their remaining positions as it didn’t quite make it back there before rolling back over and making new lows. Regardless, a solid 4-5 handle move for the longs to the first scale spot for most members playing this bounce based on these metrics. Again, this is one of those sections of price action that you should run in replay if you have the means. Good stuff educationally and very Spoos personality specific IME. .02

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Risk Relativity Ramblings

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Mar 022018

I thought this was another great example spot not only because I happened to “call” a few possible ops around it ahead of time in the room, but also because there is much to support recent discussions on the forum about the impact of risk/reward overlays on any strategy/process. As always, I advocate picking your spots well in advance and away from the current price action in the session as I did with this area as an educational example. “If the market goes here, I’ll look to do this, IF and when it gets there…” is always the type of rhetorical question you want to be asking yourself. Obviously this structure wasn’t put in play until late in the afternoon Wednesday, but here is what I said in chat many hours earlier that same day:

ROB@DTG:(10:11:57 AM):Gbx low 38s landed in no man’s land just spill from yd RTH low 42s. So I’d say YD CR into 42s one zone and perhaps 38s stand alone so to speak. Weak structure there so I’d be looking for maybe a crush into very key 28s-31s R to S below. Careful fading 38s unless post footfake crush for a scalp. Maybe good momo op playing with the crush beyond 38s or cont Pb after firm break below and PB to 38s-42s holding from under. Trading into 31s as a scale/flattening structure obviously.

As most members know this isn’t some kind of wizardry. I didn’t predict anything. Eventually the line in question was going to break and it just happened to be that same day. Furthermore though off this chart it did trade right down to the 28’s-31’s and if you take the time to go back and look you’ll see it got plenty of PA and flow action there to trigger your scale or flattening. Structures draw attention from both sides and always will. This is why we advocate using them to frame entries and exits as well as naturally expand and contract your risk overlay with volatility changes. But what you never know (as in this case) is that it was going to trade down to those 31’s in an exact rotational manner that will allow your risk overlay to profit from it ON THAT ONE TRADE!

Some things to think about…

What is your initial stop loss point on entry? Obviously if you sold the momo op in purple into the MM bid pulling, the market only moved that one way initially. You would have scaled at the bottom of the purple section at the earliest and no doubt would not have held out at the latest past the huge seller absorption in blue after all the stop flow behind the 38’s line was auctioned. Likewise if you were scalping the proposed post crush exhaustion bounce long from the blue area, you also would have taken no heat and been able to scale profitably into the pink or the red area at the latest. But what if you were stalking the continuation short op as a wider periodicity swinger? The PB back into the 38’s-42’s after firm break below as I suggested might materialize in chat. I think the second push on thin relative volume in red would have been a viable final entry trigger, but how big was your initial stop in this case? Guys who like to play tight risk and bigger rewards may have been stopped out long before the 31’s were reached. Conversely, those with wider inital risk say out past the 42’ YL line had plenty of room. Of course they had to risk 4 units or more to make only 6 units or so which is far less math advantage than those playing tight if they had also gotten away with it on the same trade. Perhaps risking only 1 or 2 units to make that same 6 units. No right or wrong here but you have to learn how YOUR R:R math unfolds over groups of events and decide what’s best for your approach. Also, what about any special situational trade management provisions? Do you have a reward side earlier exit rule for big relative volume spots when encountered early, like the action in green around the then current low? Do you scale some or all there when encountered? What do YOU do EXACTLY in those situations with your process? Obviously those without a scaling provision in this particular situation subsequently had to take some heat before the eventual march down to the 28-31’s structure. Do I think the action in dark red is remarkable in any way as a final trigger for the classic DTG’er style intraday swinger entry? No, I don’t to be frank. But I have highlighted it here mostly to show that guys trading short from the pink or light red would have at least taken heat there or been stopped out depending on what their scheme was. What would have been the outcome with YOUR risk overlay? All important questions to ponder…

The bottom line is the risk overlay WILL turn would be profits into losses and vice versa depending on what it is, and you can’t explain why trade by trade. When you would have lost anyway you’ll always wish you were stopped tighter, and when you would have caught the giant move if only your stop was looser…you get the idea. That’s why the risk model overall can only be evaluated in concert with all the other components of the strategy and only over larger GROUPS of trades, not one at a time as we harp on over and over in the community. The risk model will also need to be adapted over time as markets evolve as well. Lots of food for thought on how you want to handle these things. As always it will require lots of trial and error in SIM along with extensive ‘what if’ based manual backtesting (as we call it) in a variety of conditions to see how various criteria hold up over time. You just have to roll up your sleeves, mock up a range of various combinations with a given entry criteria and see what speaks to you. I can’t stress enough how critical it is to do this work and repeat it from time to time as markets evolve. It’s time consuming but hopefully you are passionate about finding answers and can have some fun shoving it all in the woodchipper and seeing what shakes out.

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One For The Money, Two For The Show

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Feb 162018

I happened to be in the room yesterday to comment on this test of the key Globex high line as it was being tested, so as always if you are a member of the dojo make sure to see the chat transcript each day as a companion to these educational examples. There may sometimes be extra info, thoughts from others in the room, etc. which you may find useful in tandem.

So we see here the very first push into the Globex high zone saw massive relative buyer absorption and seller response. Note in the stats size also leading out hard with short delta divergence. This was followed by a second push in pink one-ticking the case price, again showing more selling from size and this time also joined by the broad market. As I said in the room in DTG parlance its always good if key market structures get tight respect if only for one reason. And that is it will allow you to frame your trade with the lowest possible risk to the stop point relative to potential reward IF you happen to be on the right side relative to whatever that reward objective is. A sound strategy never has to be about being “right” trade after trade. You can’t outrun the unknown future guys, nor can you outrun the power of relativity of risk and reward objectives. Were you “right” for eight ticks but not nine? “Wrong” with a six tick stop but not seven? Case in point here…

If you were a bear from this zone and sold from the evidence in purple or pink that was fine of course – that would be the first short op of the “two for the show”. And those bears trading structure to structure would be looking for the next below being the pre-open Globex interim low 4’s by my measure. That’s a long way to go for a single scale obviously but if you even got half that it would more than double or even triple most risk overlays. It never got there obviously. Such will be the case on many of your bets. Get used to it…

And that brings me to again punctuate the power of the relativity of your risk overlay, whatever it is. How wide was your stop? Do you like to play your occurrences super tight with a lower hit rate and make big multiples on your event risk? Like in this case some members trading short from the purple and pink areas might only have a handle or so of risk to the stop point. If so, even if they scaled after realizing that the initial move failed to the downside (unmarked), they might have covered and still made 2x on their risk. Others risking wider may have been stopped out when the market rolled over and we saw MM’s pulling offers over the line at the bottom of the yellow section. And note at the top of that section all the thick print volume effectively in structural no mans land. Most of that flow of course initiated by stop elections and aggressive puking of prior shorts from the line below. But was your risk up and over that headfake as your model runs it wider naturally in increased vol conditions? Or are you a whiffleballer as we call it, which means you play initial entries tight and if they get stopped out you get back in post head or foot fake? Obviously the top of the yellow area or the subsequent hard rejecting high failures in red would be viable spots to get back in for those members – the second of the “two for the show” short ops here. Or perhaps your model doesn’t ever consider entry except post head or foot fake? No stop run behind a line, no countertrend entry is absolutely a potentially viable strategy over time and is likely in the rule sets of many members. All important food for thought items as you construct your models…

And as for the bulls, as I said in the room I’d expect those members to be looking for a firm break above the Globex high and a PB and hold from above. As I said in the room, those trading zone to zone would be looking for the next key structure above for a scale or flattening spot as the the 2/7 former MR line 26-27’s. As of this image snap we had pulled back into the area in blue, holding the line we just broke out of from above. Note the majority of size leading out long in the stats below, absorbing and responding to retail sellers. Certainly a viable spot to make your bet as a continuation long if so biased. This was the “one for the money” from this structure today…

Remember guys as I always repeat over and over, any analysis of any market metric can only tell you what IS happening as of right now, not what WILL be x minutes or hours in the future. The very next rotation can and will potentially show at least something to the contrary. Any market is a complex, ever evolving auction environment. Hence why any edges you find will occur over GROUPS of trades, not found one trade at a time. Erasing that mindset of, “if I win THIS trade it means I did something right, and if I lose it means I MUST have made some kind of mistake…”. Rubbish. This is simply ridiculous, amateurish thinking to be frank. And this is why from time to time for these examples I love it when I can manage to snap the image before the bigger move reveals itself and unfolds – hence the question marks above and below the last rotation in progress when I snapped it. I have no idea which way it will ultimately move and where it will be trading an hour from now. All I know is whichever side is “wrong” won’t lose much relative to what they would have won if they were “right”, and whichever side is “right” will most likely make a good multiple on their risk to the stop point trading from this structure in either direction…

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Handicapping Not Just For Sports?

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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…

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Trifecta Textbook

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Jan 262018

Today turned out to be fortuitous for newer members working on developing their own non-predictive model variants rooted in the ‘trifecta’ of market structure, price action and orderflow as we call it. This is one of those examples where the respect of the case prices of the key structures was so strong the price action and orderflow concepts literally leap right out at you off the page. As it turned out I also happened to be in the room every step of the way from before this move all the way through it narrating it in real time for those following along. Be sure to see the chat transcript today especially if you weren’t in the room and run this back with tick data replay if you have the means.

So we had made another new high early in the session but sold off back below the former day RTH high 43-44’s structure shown here. As I said in the room short biased members might stalk seeing if continuation bears would effort to resell a PB to the case 44.75 from under, and/or bulls would show signs of total lost interest in rallying back through that line. To say that both ended up being true would be an understatement. The very first pullback under the line in purple was shallow and on thin volume. Note size leading out with strong short delta divergence into that very first attempt back up. Next we saw the super thick auctions in pink as buyers loaded in across a relatively wide range but were still unable to break the case line as they were met by both passive and initiative sellers saying, “give us all you’ve got…”. The stage was now set. LOADS of positions trapped to the long side. What do you suppose they might feel and/or do if pressured and they came to realize price wasn’t going to go up in the near future? Puke-O-Rama Wednesday edition. lol. And with that stage set we had one last attempt back up, this time unable to retest the case high and putting in a failure. Note the volume into the high there in red is paper thin due to total buyer exhaustion and disinterest. Also note in the stats there as well the strong short delta divergence. It was only going to take a feather to push the market over at this point, and as usual we could count on the top of book market makers to be that feather. Note the thin volume in through the top of the range in yellow leading into the thicker volume at the bottom there. Market makers pulling bid liquidity to speed up the fall and induce puking of trapped longs. Business as usual in the S&P…

As I pointed out in the room the next structure below to look to scale into for those who sold from the 44’s was framed by the prior close and then current Globex low 36-38’s. By my measure the relative volume on the first push in light blue down there was unremarkable. I can’t really blame anyone for not scaling/flattening there, but given the size of the move I also can’t fault being more proactive than normal and scaling/flattening in spite of it either. The second push in dark blue was a different story, this time showing a hard lift off the low there led by size. I can’t imagine not scaling/flattening there ever, but for any still holding on this was followed by one last push showing very strong seller absorption and buyer response in green which finally legit tested the case price at the back of the zone. Again, overall a great stretch of action to watch on replay if you have the means as it really shows the synergy of PA and orderflow and how they come together to tell the immediate story quite predictably around key market structures…

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Don’t Worry, Be Adaptive

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Jan 192018

I happened to be in the room early today and suggested several potential ops to stalk for bulls and bears as usual, two of which for the bears are illustrated here. The first is the short momentum scalp keyed on stalking a market maker liquidity pull on the retest of the Globex low line. And the second is the trend continuation op on PB to the Globex low line after firm break below. As it turned out both materialized as hypothesized, but likely didn’t turn out as profitable as hoped for most members. Always remember that whatever the market does post your entry is never in your control. How could an unknown future ever be, right? Seems obvious I know, but it will rarely fail to challenge your emotions when it happens. Sometimes, despite being “right” according to your strategy/process there just won’t be as much meat on the bone as you would like. And as always your ability to capture whatever is there for the taking will be a function of the adaptability of your risk/reward overlay to market context and volatility changes. The main takeaway here being that if you are still using a rigid fixed tick/point stop and target criteria for your trades,, you might seriously consider the ongoing potential pitfalls of doing so.

So first we see the characteristically thin prints in dark red as market makers pulled bids to goose price over the case line right around the figure print (2800 even). The momentum was definitely set in motion and the speed picked up which was exactly what the short momo scalpers were stalking to hop on, but it very quickly petered out. It rotated up off the low there and you can see the volume thickened at the bottom of the pink area as many of those shorts covered out for a few ticks profit at best or a scratch at worst. Case in point number one – sometimes you have it right but it won’t pay you off to a large degree. Such is trading, but at least if you are adaptive you can get what it gives you. And as for the continuation shorts, they were happy to see the buyers disinterested on the first push back up there at the high side of the pink area hard rejecting the case line from below. This lack of interest from buyers continued on the second push in red with the bulls unable to even reach the VWAP. Surely what many classic intraday swingers were looking for also to hop on the continuation bear train. From entries there they were no doubt thrilled to see another big liquidity yank set in motion in yellow and price charge under the current new low. So far so good, right?

The next structure below by my measure was framed by the former 96-97’s MR line turned potential S from above as marked. As it turned out the 97’s side drew the action and provided plenty of liquidity to scale into in blue. Note swelling of print counts right in the kill zone as passive buyers stepped up against late chasing sellers. Those who’s models had them still holding contracts for subsequent scales though were no doubt disappointed. Given the recent explosive range expansion days I’m sure many hoped for some follow through today to the down side, but as of this writing price action remained contracted. We subsequently rallied right back up to where the move started even quicker than the initial selloff. I highlighted the volume spike in purple to illustrate that it was no mystery of course why the action was right there. Those short from that same range earlier still holding positions and not wanting to turn winners into losers covered out by lifting offers just under the swing line. I wouldn’t be surprised if more than a few members were in that flow as well scratching the second half of their shorts. If your model rules had you holding through the ranging that followed and you caught the later move down to the next structure below which was the 94’s, good on you. But remember, those who didn’t haven’t made a “mistake”. All you can do is execute your process rules trade by trade, adapting to context and volatility and find your edge over GROUPS of occurrences, not trade by trade. I still see the majority of aspiring traders out there trying to [i]explain[/i] why they win or lose event by event. I realize it’s a broken record at this point, but you need not predict the future to be a successful trader guys and girls. But you do need a repeatable process paired with sound management of risk and bankroll…

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Is Timing A B*^ch?

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Jan 122018

Well troops, once again we find a great example of what most members are keenly aware of by now. The good news being that market structures are almost always very predictable magnets for crowds on both sides, allowing for tight lines and risk overlay benefits that can be ground into edges over groups of trades. The bad news is just like any other indicator, price action and orderflow only tell you what IS happening right now and cannot foretell the future X minutes or hours from now event by event. The reason of course should be obvious, but has been the topic of many recent discussions on the forum related to finite vs infinite outcome games of chance (yes, trading is a game of chance folks, embrace that or be gone. lol). So here we see the action on the break above the 54-55’s structure (which had extended to include a new Globex high in the 56’s) and into the then current all time high 60’s structure. As would be expected, plenty were thinking enough is enough with this rally already and wanted to fade there, and likewise plenty wanted to stalk a shallow pullback to the 54-56’s from above to reload long there. And that brings us to the main message in support of the aforementioned realities of trading. Whether a bull or bear from these structures today as an intraday swinger, timing may have been a b*^ch…

First, let’s consider the initial test of the then current all time high 60’s. Shortly after the cash open we saw the case 60 even reject to the tick after strong buyer absorption and seller response in purple. Also note in the stats the largest size finishing net sellers into that push up. Obviously the bears who were strong in conviction not waiting for so called ‘confirmation’ sold into that push and made a score trading structure to structure. The next structure below the 60’s was framed by the Globex high 56’s and into the 54-55’s as marked to stalk a first scale or all out (the next below that was the one starting with the YH 51’s but we never got that far). For members reading significance in volume I’m sure many of you who were bears from the purple would have had a hard time holding through the buyers stepping up and absorbing new sellers in light blue at the high side of that first zone. They did eventually break through and hard reject prices below the low side of that same zone though so for those who held on to the bottom zone reject in dark blue, good for you. But the key takeaway here is there is no right or wrong in this stuff, just whatever your process specifics are seeking. If we consider that same action in light blue there is no doubt many bulls were looking for just that same action that bears from above were looking for to scale into, as is usually the case. Were the bulls that bought into that seller absorption on the first pullback into the YH in light blue after break above “wrong”? No such thing is the answer. We never know what the aggregate of market participants are going to do and what effect that will have on price in the future, even when reading orderflow. Intraday swinger bears who sold the first test of the 60’s got to win, but intraday swingers who bought the first pullback from it had to puke for a loss. So like I said, timing can be a b*^ch…

But what about the action on the second test of that same all time high zone? As you can see this time the case 60 even was tested to the tick the second time around. But note on that first push in pink the buyers really exhausted into the high. That can often be a great signal for faders but in this case only was for the scalpers. Why? Almost immediately into that first pullback in light green passive buyers swarmed in and absorbed continuation sellers in a big way. From there we saw a second push double top failure in red, though again on thin volume with generally disinterested aggressive buyers. Were intraday swinger bears “wrong” to frame trades on either of those pushes looking for a move back into the 54-56’s or beyond? Obviously those who were short from there who read the super thin hard rejection of the VWAP in dark green were able to scale for a few ticks profit or a scratch at worst. But those who didn’t may have booked a full loss wishing they wouldn’t have waited and instead traded the earlier test in purple. Likewise, any bulls who didn’t catch that seller exhaustion hard reject in dark green may have missed getting in on the biggest move of the day as we saw the case high break and another big rip higher. Again, timing can be a b*^ch, but of course I say this in jest really. Only to continue to illustrate that you shouldn’t keep trying to build a trading process that evaluates itself on its ability to read whatever indicator and predict the future, one trade at a time. All you can do is execute your process in concert with your adaptable risk/reward overlay and see what unfolds event by event. Any edge that you are able to develop won’t really be able to be seen trade by trade without variance and will only be found over groups of occurrences. In our experience this seems to be the hardest fact for newer traders to accept – that they need not be able to predict the future in order to be successful. .02

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