Wednesday, March 26, 2014

Mind Over Markets - Dalton (Volume Profile)
Opening Types -
  • Open Drive - 
    • if market opens above or below prior day's range or value area, then an Open Drive is dominated by responsive buying or selling
    • if market moves away from prior day's range, than the open is dominated by initiative buying or selling
    • You want to detect this early and not trade against it - OTF is active and aggressive
  • Open Test Drive
    • Market opens, moves a short distance in one direction and then another advertising for someone to step in.  
    • This will usually test a prior key area and then push once it has gained conviction that nobody is left to oppose it.  
    • OTF has found an area of conviction to participate in the opposite direction
  • Open Auction in range - 
    • nothing has changed between this session and the last.  
    • Market will be unfriendly to breakout traders and reward those who trade from the outside in
  • Open Auction out of Range - 
    • outside of the previous traded range.  
    • There is a high probability of OTF action and these can be big days.  
    • There will be a higher level of conviction by responsive as well as initiative traders.
    • expectation is to go back into yesterday's range or value area
      • if price does not go back in, OTF is absorbing and it will likely continue to push
      • look for test of previous high or low
Day Types - 
  • Non-trend - complete balance, no OTF
  • Normal - everything inside IB
    • MPD_IB_RNG >= 0.85 * (HI - LO) AND (HI = MPD_IB_HI OR LO = MPD_IB_LO) AND (HI - LO >= 18 * 1pt range)
  • Normal variation - IB high / low breaks
    • IB range < 0.85 * (HI - LO) AND IB range >= 0.50 * (HI - LO) AND (HI = IB_HI OR LO = IB_LO)
  • Neutral day - OTF present, so range extension on both IB
    • Neutral: HI > IB_HI AND LO < IB_LO AND CL < (IB_HI + HI)/2 AND CL > (IB_LO + LO)/2
    • X: HI > IB_HI AND LO < IB_LO AND (CL >= (IB_HI + HI) / 2 OR CL <= (IB_LO + LO) / 2)
  • DD Trend - builds energy from one range and then quickly moves to another and balances
  • Trend - OTF remains active throughout the day
    • MPD_IB_RNG < 0.50 * (HI - LO) AND (HI = MPD_IB_HI OR LO = MPD_IB_LO)
The Big Picture- 
  • Market, Structure, Trading Logic, Time
  • Time - regulates opportunity
    • Good opportunities to buy below value and sell above value will not last long
      • If the inventory doesn't move quickly, and stays below value for longer than 'expected' value has changed and it is now being accepted lower
  • Structure 
    • range extension - identifies control and helps gauge buyer / seller strength.  
      • the stronger the control the more frequent and elongated the extension, ie:Trend day
    • 30 min auctions
    • open and close
    • profile shape
    • tails - aggressive buyer / seller enters the market on an extreme and moves prices quickly
      • lack of tails mean lack of OTF conviction
    • initiative vs responsive
      • initiative buying - any buying occurring within or above the previous day's value area
      • responsive buying - any buying occurring prices below value
        • initiative selling on range extension can result in responsive buying
    • Time Frame control
      • Day 
        • open, mid, previous close, high and low of previous day, current day, week (only if near the current price)
      • OTF 
        • bracket highs / lows
        • weekly/monthly high / low
        • unfilled gaps
        • common MA
        • if these are in control switch from rotation to momentum trading
      • Destination - once a directional trade is underway, look for obvious visual cue
        • Day - phod, plod, 3d high / low, top / bottom of a gap
        • OTF - long term bracket high / low and it make take months to reach there
          • Monitor for continuation!
    • Trending vs Bracketed Market (Trading range)
      • Trending market
        • must determine if trend is continuing
        • is price accepted or rejected by market - are 30m value areas overlapping or separate?
        • market profile is not as useful, since the direction is obvious
      • Bracketed
        • Markets trend, balance, and then turn around
        • Different market participants have different views of value, and these are often conflicting
        • market profile is more useful because the composite gives the views of all these participants over several profiles

  • Trading Logic
    • byproduct of experience, it is an understanding of why the market behaves a certain way
    • ie:if there is a large tail, and a rotation back into the tail, and TPO builds over time, trading logic says that the OTF that moved quickly is no longer present or willing to respond to those same prices
  • Extra
    • Must ask the following questions:
      • Which timeframe responded to price?
      • How strong was the response, represented by volume?
      • Were the responders the innovators, early adopters, early / late majority or laggards
      • Were the innovators responding opportunistically to the actions of the late majority or laggards?
    • Preparation
      • Review Monthly, Weekly, Daily bars for excess / trend
    • Overnight Inventory
      • if inventory is long and market doesn't adjust on the open, it is a strong market in the short term

  • Markets ultimate purpose is to facilitate trade
    • Which was is the market trying to go?
    • Is it doing a good job in its attempt to go that way?

Day Trading
  • Day trader begins each day with a set of expectations that serve as guidelines, based on the market's past performance
    • Study of long term direction, recent value area placement, and opening print
  • Opening Call - overnight session?
    • opening call gives an idea of what will happen the 1st 30 minutes to 1 hour of the session
  • Open
    • 1st 30m of the day establishes 1 of the extremes 50% of the time
    • Directional conviction
      • open  drive (OD)
        • market opens and aggressively auctions in one direction
        • price never trades back through opening range
          • price where open drive fails is important
          • if price moves back through opening range, something significant has changed
        • generally caused by OTF who have made their decisions pre-market.  
      • open test drive (OTD)
        • similar to open-drive but market lacks the initial confidence to drive immediately after the bell
        • market usually tests beyond a known reference point (phod, plod, previous swing hi / low) and swiftly moves back through open
        • often establishes one of the day's extremes
      • open rejection reverse
        • opens, trades in one direction w/o much conviction, reverses back through opening range
        • more common the OD and OTD
        • initial extremes hold less than 50% of the time
        • normal / normal variation day should be expected
        • ON high / low will likely be tested
        • strong moves will likely be retraced
      • open auction
        • market randomly auctions around open w/o much movement
        • conviction depends on where the market opens relative to the previous day
        • inside previous range 
          • non-convictional day is likely to develop
          • market sentiment from previous day is likely unchanged
          • market auctions in one direction until activity slows, then the other
          • non-trend, normal, neutral days
          • initial balance unlikely to hold
        • outside range 
          • good potential for market  to move in either direction
          • often gives rise to double distribution days
  • Open vs previous day profile
    • open out of previous day value / range indicates imbalance and more opportunity
    • acceptance (auctions within previous range for 1 hour) indicates balance
  • OAIRIV - within previous value and is accepted
    • range will rarely exceed the previous day range 
    • one of the previous day's extremes will generally hold
      • use MM from an early extreme to find the likely range
  • OAIRIV - within previous value and rejected
    • drives out during the 1st 30
    • very hard to determine how far, or in what direction market will go
  • OAIROV - outside previous value and accepted
    • value will generally overlap previous days value, but only on one side
    • range is reduced compared to previous day
  • OAIROV - outside value and rejected
    • range potential is unlimited
  • OAOR - accepted
    • as long as price does not return to previous day's range the market has accepted the breakout, even if it auctions back and forth
    • if market continues to drive in direction of breakout range potential is unlimited and Trend day usually results
  • OAOR - rejected
    • market is rejected back into range
    • expect price to check accepted value
    • price range is still unlimited, but likely in the opposite direction of the breakout
  • 30m Auctions
    • Auction Rotations
      • successive 30m auctions where low < plow or high > phigh= 1 time framing (1TF) - only buyer or only seller in control
      • if the auctions overlap it is 2 time framing since both buyers / sellers are in control
      • 1TF on 30m indicates Trend day
      • 2TF on 30m indicates normal, normal variation, or neutral days
    • Extremes - Strong high  / strong low
      • tail provide the most evidence of timeframe control
      • no tail on the extreme is significant, it indicates lack of conviction
    • Range Extension
      • less overlap = stronger control
      • must take into account the bigger picture elements
    • Time
      • ability to identify difference between enough time, and too much time is the key to anticipating a change in control
      • this is intuitive to each trader
  • Identifying Time Frame transition
    • No transition - entire day is 1TF or 2TF
    • 1TF to 2TF
    • 2TF to 1TF
    • 1TF to 1TF
  • Auction Failure
    • follow thru - when market auctions through a known reference point
      • new initiative activity will fuel the continuation
      • auction will fail and not follow through - will often fail with speed and conviction
    • failures at longer term reference points are larger than short term reference points
  • Excess
    • market auctions too far and aggressively moves in the other direction
    • only useful in hindsight - should serve as support or resistance in the future
  • Point of Control (POC)
    • fairest price of the day
Profile Shapes
  • Short Covering Looks like a P
    • it is old business covering their positions, and it is unlikely to break to the upside
    • usually happens after several days of selling.  Once imbalance of covering is over, trend continues down
  • Long Liquidation looks like a b - it is the opposite of short covering
  • Ledges - sharp drop that indicates a breakout lower after a lack of continuation
  • High Volume Area
    • has tendency to attract price and slow it down
    • the longer price is away from the HVN, the less significant it becomes
  • Low Volume Area
    • typical in unbalanced trending markets
    • should hold against future auction rotations
    • if pierced significantly price should move quickly through it
Directional Performance - is the market doing a good job?
  • Volume - once direction is known volume, is the primary means to determine performance
    • lack of volume indicates rejection
  • Value Area placement 
    • higher, lower, inside, outside
  • Trading Brackets
    • All trades should be placed responsively
    • Markets test the bracket extreme 3 to 5 times before moving to new levels
    • Markets fluctuate mostly in the bracket, not at the extremes
    • Must wait for price acceptance before buying breakouts
  • Trend
    • the stronger the trend, the greater the beginning of the trend's move
    • must just get on in the initial stages of the trend and monitor for continuation 
    • later in the trend you enter responsively
    • volume on days against the trend will help you determine if trend is healthy
  • Auction tips
    • markets need to auction too high to know they're too far
    • pay attention on these days to see if prices are accepted or rejected beyond their composite values areas
Long Term Profiles
  • Start these profiles when a significant change has occurred
Special Situations
  • 3 to 1 days - initiative tail, TPO count and range extension
    • following day should open within or above value
  • Neutral Extreme - days are likely to open in the direction of the closing activity
  • Value Area rule
    • gap outside previous value offers support / resistance against price probes
    • if price makes double TPO points within value, it is likely to test all the way through value
      • closer distance to value makes it more likely to trade through
      • value area width is a sign of poor trade facilitation and lower volume, higher probability it will trade through
      • long term market direction
  • Spikes
    • If spike occurs at the end of the day
      • if open in or beyond the spike, most likely price was accepted, look to enter a the long at selling spike high
      • if opens in the other direction price most likely rejected
  • Balance Area Breakout
    • Some of the best trades to take where risk is minimal and reward is great because it is the start of a big move
    • if the move is accepted go w/ the breakout
  • Gaps
    • day gaps usually filled within the 1st hour, if not higher likelihood it will hold
    • gaps too far away usually are met with responsive activity to narrow the gap, wait for the initiative activity to return before entering

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