What I look at when trading?

What I look at when trading?

These are questions from an email I got a couple of days ago:

  • Do you look at other market information/indicator for trade confirmation besides volume profiles and ‘trade areas’?

If you are asking if I look for any technical indicators for entries, the answer is a resounding “no”. You will notice in my prior post that there are no technical indicators on my futures charts except for VWAP. The rest are subcharts of internals (VIX, TICK and ADD). Even those are fairly useless, in my experience, because they don’t give you a true picture. It is best to create the tick and others on your own. I used to have this with CQG, but haven’t learned TS enough to create them myself.

My entries are refined through heavy usage of the Depth of Market (DOM). I started out trading as a SOES bandit back when the NASDAQ was the exchange to trade electronically. When I switched to futures, I continued to be a momentum scalper who really never looked at his charts. I have somewhat of a refined ability of reading the quality of the prints (sales) going through the DOM. My entries are based strictly on the quality of the move into my levels that I want to trade. I don’t stand in the way of the market except on my scale-outs.

My process is simple: I do my homework before the market opens (at night or in the morning). I identify the “areas I want to do business in“. Generally, I have at least 3 fundamental setups every day before anything happens at all. When I come in next morning, I note what happened overnight by looking at a chart of the overnight session only. I put a line up for the high and low of the overnight session. That becomes another benchmark. The next benchmark is where we open relative to the prior day’s action.This gives me a couple of more setups for the morning. I measure the participation by the bigger traders through the opening swing size and how it is treated.

At that point, it is just a matter of waiting to take those setups or to wait for the market to get to my “areas I want to do business in”. Note the last statement that I’m waiting in either case. Once those areas are close, I use the DOM to measure how it is approaching and what is happening by keeping track of 3 dimensions of the tape. These are hard to describe in writing.

Does this answer your question? If not, please reply in the comments section.

  • What’s your screen setup for different time frames?

I use small time frames across the board, but have composite charts of 405 mins (Regular Trading Hours) to quickly assess the bigger picture when one of my areas gets violated.

  • Do you trade breakouts from value?

No, I only trade breakouts on scalps of economic or news releases. When the market was thinner and less mechanized, the big trades were breakout trades that a trader can take and actually add to. Now, it is mostly reversion trading. I generally trade rotations from one important area to the next. I let the market come to the area and go the other way unless something says differently.

On a separate note, I don’t use “value” as defined by Market Profile in any of my setups. I think it is theoretical and is irrelevant. Why should the market stop at 1 sigma? Why not 2 sigma? Was it a trending day yesterday. If so, what value does “value” have? It is a day for price discovery, so obviously the market didn’t find value so it kept going in one direction or the other. Do you follow what I mean?

  • What are your stops based on (do scalps have different stops)?

My stops are based on whether or not it has violated an area. In some areas, they are tight because there is a sharp volume cluster or other setup that just got violated. In most instances, I will manage a trade within the “area of interest” unless I see aggressive actual prints going against me as algorithms and people panic out. I feel comfortable adding when I need to in order to improve a position. I also scalp around those trades to keep improving my average as well. Stops are generally pretty big when they do happen, but their occurrence is statistically acceptable.

I use different stops for scalps than I do for the “heavy” positions. In either case, I know how much I can lose if I’m wrong and, most of the time (LOL!), I accept it before hand. This is key to consistency. Create a hypothesis, define the risk, put on the trade and let the market prove it right or wrong. In away, a trader is a scientist who is getting paid to validate a hypothesis that is later shown to be right.

I hope that has answered your questions.
13 Comments
  • ESV
    Posted at 13:17h, 02 October Reply

    Thank you for this post, it reinforces and puts into context a lot of areas I've been thinking about lately. One term you've used isn't very clear to me and I was hoping you could shed some light on and that is "opening swing size and how it is treated". Hopefully it is something you can verbalize, even if partially or in simplified form.

    Thank you.

  • FuturesTrader71
    Posted at 13:38h, 02 October Reply

    @ESV: The opening swing shows the MOO (market on open) orders and other business that is conducted first thing. On most days, the market opens, pushes one way and then the opposite force comes in to push the other way THRU the open. The high and the low of this is the opening swing. You can then use it as a yardstick to see which way the market tips after that. I use it much like I use the Initial Balance (IB) as described in Market Profile circles.

  • E-Mini Player
    Posted at 13:41h, 02 October Reply

    Nice post! I use a TradeStation ELD that can be configured to plot any of the following:
    Globex High/Low
    First Hour High/Low (Initial Balance)
    First 15 Minutes (Opening Range)
    Prev day's High/Low/Close
    Prev Week's High/Low/Close

  • E-Mini Player
    Posted at 13:42h, 02 October Reply

    FT71, what do you use as the opening range? I know some people use the first 90 seconds, and others use the first 5 or 15 minutes.

  • FuturesTrader71
    Posted at 13:47h, 02 October Reply

    @E-Mini Player: RE: Opening Range. Look at reply to ESV.

  • D_A
    Posted at 17:08h, 02 October Reply

    Thanks again for the detailed answer.

    The screen captures answered my first and second questions.
    I know most professional traders use mainly the DOM.
    I have less screens (NO FDAX) and a couple of EMA's & pivots but fairly similar setup. I'm also running a relative volume study on excel. The $TICK is a larger graph window on my desktop..for divergences and extremes.

    One question re tape reading: is one of the DOM dimensions are 'flash' offers or bids being pulled away as soon as the offer or bid getting hit?
    It must take a lot of focus reading the DOM as it climbs to a price, hope twitting is not interrupting 😉

    Breakouts- I can understand your view on breakouts. A lot of 'big moves' or breakouts from an area happened lately on overnight globex.

    I asked those questions re the setup because the 'knots and bolts' of a trader and the basic trade elements are easier to describe, I'm sure you'll agree the mechanics of the entry is only a (small) part of the trade. The management and psychology aspect is what makes the difference.

    For the readers here, there's a good article called "the basic elements of a trade" by Jim Kane here:
    http://kanetrading.com/free_art/elements.html

    Last question for now: Do you keep a trading journal of some sort?

  • David L. Spurr
    Posted at 13:38h, 03 October Reply

    Thanks for the information. I've been trading futures for a year or so. Thought I was smart and then I got it handed to me a couple of times. I'm still fighting and learning to be a better trader. It's interesting what you've said about market profile. I discovered it and got sort of hooked on it, but as you say. The biggest concepts for me are IB and TPO movement from prior day to help me to determine short term trend. It does help me to do my homework the night before and write down areas and specific levels with stops and targets. Some days I find I just sit and watch all day and don't take the trades…..I get itchy. Do you only trade with the long term trend, typically ? Or do you take both sides ? ….Great Post….Thanks for sharing….http://displacedema.blogspot.com

  • Jedi
    Posted at 19:39h, 04 October Reply

    Enjoy your insights.

    How important is it to scale in and out of a position?

    Thanks.

  • Jeremiah
    Posted at 17:00h, 09 October Reply

    First i would like to say thanks! In the short time i've been following you, you've definitely helped me learn how to read the market better.

    Do you use 24 hour charts or trading hours only (8:30am – 3:15pm cst)?

    On some charts it looks like 24hour and on others it doesn't given the fact that you see the "gap" between days.

    Again thanks and I look forward to future posts.

    jtrader9

  • FuturesTrader71
    Posted at 10:34h, 13 October Reply

    @E-Mini Player: I don't use a fixed opening range. Information like that causes us to be passive. I use an opening swing based on auction theory. I want to know where the first high or low took place regardless of time.

    @D-A: Yes, I look at what was offered/bid in my area of interest and how those bids/offers react as the market approaches. I also look for algo activity and the quality of the "prints" in that area.

    Entry is a critical thing for me and so are my scale-outs. I'm not trying to split hairs when I enter, but I expect a certain quality in the areas I'm interested in. That cannot be described in writing here.

    I ABSOLUTELY keep a trading journal. More so when I'm hitting a rough patch. Let me say this way: If anyone is inconsistent and they are not keeping a journal, then they are probably going to remain inconsistent. Random trading = random results. No journal = no clue what is going on = random trading.

    @David L. Spurr: Have you at least learned to have a plan and to only trade that plan? Have you learned to have a daily limit for losses that is no greater than your average winning day?

    I don't pay attention to TPO's. I look at volume instead (although the too are correlated on most days). I don't look at the big trend after the current day opens. I trade market generated information in a time frame that is too small to be concerned about the long term trend. I'm not an investor, I'm a trader. In the time it takes a swing to move 25 pts, I am able to find 100 pts of potential profits with much smaller stops so I can trade much bigger size. I'm on both sides of the market on almost every day.

    @Jedi: It is important as a risk management tool for me. I can't say I know enough to say that the market WILL go here or there, so I hedge my risk by scaling in logical areas. Scaling in is a VERY ADVANCED technique. Not recommended without deep study and lots of time researching it.

    @Jeremiah: I am only interested in day-session volume. 2 reasons: 1. There isn't enough volume to work from overnight, 2. The futures are based on a cash product that is not really trading overnight, so it is meaningless. I DO note important areas overnight on my day chart though. I'm not going to ignore it even if I don't trade it. My charts are all day session only.

  • Robbywons
    Posted at 15:48h, 09 December Reply

    How do you use your tick indicator on trend days, consolidation days and when will you explain how you can get 100 points out of 25 points by using volume analysis. I know of great traders who say they do the same thing but are unable to “explain” this. I have been using bid/ask chart for over 5000 hours. 2 years ago I could take candy from a baby trades using the 6 tick reversal bid/ask chart only. But now with HFT’s using 1,2,3 lots even using the Time and Sales with bid/ask and VB indicator is iffy at best at key levels. I use your charts every day for the past year. But am at a wall for over the past 3 months on how to further read the mkt based what I am using now. I realize you are a very busy man and am grateful for all you are doing for traders. Without your help we would be …… well… lost for years.

    • FuturesTrader71
      Posted at 19:01h, 12 December Reply

      I use it mainly for entry regardless of day-type. I don’t rely heavily on the tick but i do watch it early on to get an idea of where the OS will be.

      • Robbywons
        Posted at 12:28h, 17 December Reply

        Thanks for answering my question FT71. It means a lot.

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