Feb 122011

This past week was an experimental week for me.  I have categorized my trades into 3 types, I prefer not to call them “setups” but rather types:

  • Fade T – A fade of a level with the trend (I really don’t like to use the “T” word but I just mean the direction the balance areas are moving.  So if we move up into a higher balance area and I go long that’s with the balance area trend.
  • Fade CT – A fade of a level against the trend.  In the same example where price moves into a higher balance area, fading a level by going short would be against the trend.
  • Pullback – This is a pullback in a rotation or strong move, often occurring after the Fade setup.

First point is that Fade CT would seem more risky.  However with the exception of the week of Jan 31, I have done better with the CT setups.  That was much to my surprise as I had contemplated removing them if they weren’t as profitable.  So I think I don’t have enough data (3 weeks) to determine this.  I also think that sometimes the CT trades shouldn’t be taken – an example is when the move is really strong like on a trend day.  This is actually the main reason for my Fade CT losing trades.

I also noticed in reviewing my results that I was taking very few, almost zero actually, pullback type of trade.  Now if I always nailed every Fade then I’d still be in the trade for the pullback but that wasn’t the case.  I often missed a Fade and missed the pullback.

In order to work on this, for Wednesday, Thursday & Friday I mainly traded pullbacks as an exercise in identifying the current trend & rotation and not missing the pullback.  It was profitable on my main markets (Bund & ES).  I did a few other markets but it was distracting more than anything else.

So my goal is to work more pullback trades into my trading.

But more importantly I realized something on Friday.  It’s amazing how sometimes something finally sinks in.  Something we’ve suspected or even known but it just takes one event and it clicks.  Friday something clicked for me.  I was discussing with FT71 who is extremely generous to take the time to answer my questions on Twitter.  Having access to a real professional during trading hours has improved my understanding of the markets immensely.

Let’s review:  On Thursday the market gapped down and tested the gap, which held.  So one could expect the market to rotate to the other side of the balance area which it did.  One could expect the Dalton “destination trade” would be the highs of the balance area.

However on Friday the market tested the gap area again in the overnight session.  And the gap held.  So nothing should change in our expectations.  Market-generated information (MGI) was telling us that up was more likely.

Unfortunately on Friday I ignored the MGI and listened to my intuition, which went something like this:  The market was gravitated toward this gap during the globex session two days in a row.  It seems professionals are selling here and that would imply the market will go lower.  The gap probably won’t hold a second test on two consecutive days.  The market is way overbought and is due for a correction.  Surely the professional selling overnight is the beginning of the correction…

Here’s what it looked like before at Friday’s open:

See how I took an idea and ran with it?  Even though it was contrary to the MGI.

So at the open I was looking for us to test the gap again.  FT71 even said he would look for shorts below 1314.50.  This helped to re-inforce my idea that the gap would be tested.

I tried two shorts right at the open and scratched both for 1 tick.  The CLVN around 1313 (I don’t have my charts up) held.   When the CLVN held, that was a confirmation of what the MGI was telling us:  Up is more likely than down.  The correct thing to do would have been to get long immediately after the CLVN held.  I missed that as I was still expecting the market to test & break through the gap!  I think FT71 may have missed it too.

Once we went up to 1318 I realized that up was more likely and was looking to get long on a pullback.  Unfortunately IQFeed went down and I missed the pullback to 1316.50.  I ended up forcing myself to take a long on a pullback to the highs after the breakout and got my first scale and stopped out on second while we were at dinner.

Here’s how Friday’s trade went.  I marked the major rotation with orange arrows:

So to summarize:  I was late in seeing what the MGI was telling me.  I listened to my intuition instead of MGI.  And I was late in seeing the confirmation of the MGI.

I think my trade entry skills are quite good.  I can time my entries and trade with a 4-6 tick stop.  When I read the market correctly, I can get in and get a nice trade.  Some of my winners on bund are 400-500 euros as I stay in the trade for an hour or more.  However if I cannot read the MGI and anticipate what the market is doing, then my entry skills do not matter!  If I enter in the wrong direction (such as my shorts after the open) I’ll be getting very small wins, scratches, or even small losses.

So my focus for this coming week is to focus on reading the MGI & ignoring my intuition which has been doing more harm than good.  I thought about not trading at all and just observing.  I don’t know if I need to go that far so for the coming week I’ll take my trades but I want to spend the majority of my time watching the market profile (30min) chart & the daily chart.  Lately I’ve been doing the opposite:  I’ve been watching the 1min & footprint, and that has hindered my ability to see the big picture.

I would like to thank MProfileTrader on Twitter for our exchange which helped me to realize my problem, and I’d like to think Gab for stressing to me the importance of not fighting a trend and to enter with the trend via pullbacks.

Each week is a new learning experience.  Just as I make progress in one area, I discover there is another area that needs improvement.  Often even coming back to previous areas that I thought were already good.  It seems as if this may be a never-ending process, which is good because it’d be boring if it weren’t.  I just hope that I will soon be able to have a small consistent profit while learning.

  6 Responses to “Market-Generated Information & reading the auction”

  1. Hi Michael,

    you have traded on sim last week, right?
    If you write trend do you mean the way the VPOC shifts intraday or do you mean the intermediate trend (VPOC shift of several days)?

    Trading pullbacks was all I did for years and it payed for a modest living, but the market (FESX) has changed. The range has become much narrower and 07 and 1H08 we had very often a morning and an afternoon trend with some nice pullbacks wich are now are quite rare.
    VP generates a much better understanding of the market and let me do fade trades which I have never done before.

    Have a good WE!

  2. Yes last week was 100% sim. To be honest I’ve had a confidence problem. The week before I only took 3 real money trades, was profitable but just not confident enough. So I thought I need more work on sim to build confidence.

    When I said “trend” I was just referring to the direction price is moving from one balance area to another. Determining this is the challenge, but if one looks at the recent balance area from 1310-1322 it’s above the previous balance area which stopped at 1308 (the gap separated the two). So the trend is up. So it’s neither of the two choices you listed.

    The 2nd way you mention is one possibility. I think it would give a “closer” picture. For me as long as ES was in the recent multi-day balance area the trend was up, even if we had a down day.

    The idea of the pullback is if one misses the fade at a level, one can enter on the first pullback and still get part of the rotation.

  3. Hi Michael, Reading your post, it strikes me that your mistake did not come from intuition, it came from approaching the market with a preconceived notion of what would happen that day and not being able to make the necessary mental adjustment when something different happened. The idea that the gap wouldn’t hold didn’t come from your intuitive mind, it came from your rational mind. It was something you reasoned would happen.

    Intuition is the ability to process large chunks of information on a subconscious level and come up with an answer very fast (much faster than the conscious mind) and some would say it is essential to being able to read the flow of the market in the moment. The point, and it may just be a semantic point, is that perhaps you should try to listen to your intuition more, not less. Anyway, that’s just my two cents worth… I am searching for consistency myself! Peace.

  4. Hey Gotham, what you said makes total sense and I’m probably misusing the term “intuition”. I need to stop thinking so much, definitely stop rationalizing, and just trade what I see. Which seems like it’d be much easier, but it’s not. For me at least. Thanks for sharing your thoughts. It’s great when people give me ideas like that. It’s hard for us to see things in what we do but sometimes it’s obvious to see things in others. That’s what makes sharing & collaboration great.

  5. Maintaining objectivity and mental flexibility is tough. I’ve lost count of the number of occasions I’ve failed to listen to what the market was telling me because I was too fixated on a certain outcome.

    One thing on my to-do list is to mentally rehearse reversing positions. There are many times when the failure of a hypothesis is followed by a strong move in the opposite direction, as a whole bunch of traders betting on the same hypothesis get caught out. I plan to replay sessions and look more carefully at what happened *after* I got out of failed trades, seeking the moments when it would have made sense to reverse my position based on the net order flow and price action. I want to make it second nature for me to start looking at alternative hypotheses when my original hypothesis fails. I think training one’s mind to have that sort of flexibility could provide a real edge.

  6. IMO u did really well to recognize when your hypothesis A is wrong and switched to plan B as soon as you could. As you know from the forum post I was looking to get long, and the open test was so swift I didn’t get on the ride until 18, same as you! So I think you should consider your read of the move as a success. I think where you went wrong is you EXPECTED the breakdown before it showed you and you tried to get a couple more points by front running it before it has shown you, conclusively that it is going to unfold. In this circumstance keep the target scenario and your objective in mind, and let yourself know it is ok to be late, but you need to be assured of what is happening. You dont need the whole move from the top to the bottom tick.

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