A Detour from ‘The Steps to Success’ to S&P 02-19-2008

I’ll postpone today’s planned topic until tomorrow. There is a pattern and a principle in the S&P that are so illustrative of my approach that I just have to mention them. But before I forget, Trader’s Interview did an interview with me. Here’s the link:


Now onto the pattern.


In ‘Rob Nicholas’ USDJPY, I introduced one way that a sideways market forms. If we view a sideways market as being a bell curve, the market first forms a rejection at two extremes and then the Value Area. In Figure 1, I have shown the pattern,


FIGURE 1 S&P 5d Value Area Formation

In this context, the market usually breaks the bottom of the Value Area and then moves to the Primary Buy Zone, 1270 to 1280 (basis cash). If instead it breaks above the top of the Value Area, we’d usually see the high at 1369 breached. In an uptrend, we’d be expecting a strong breakout above 1369 because the market ought to have breached the bottom of the Value Area; instead it broke up above the top of the Value Area (Negative Development).


Principle of Context: If I were right about this market being in a bear phase, then I would not expect to see a strong upside breakout. I’d be looking for the maximum extension at 1380 to hold. Since I have Ray Wave and MIDAS targets coming in at 1370 to 1373, I’d be looking for the market to break above 1369, hold 1373 and the close below the Primary Sell Zone of 1369 to 1270. My stop would be above 1380.

All figures above are basis cash. Now let’s turn to the E-mini March data for the period Jan 23 to date.

Figure 2 shows the combined profile from Jan 23 (1270 low) to date.


FIGURE 2 Combined Profile

Figure 2 shows a number of essential data points:

  1. The Primary Sell Zone is 1400 to 1392
  2. The Maximum Extension above the Primary Sell Zone is 1426
  3. The Value Area is 1365 to 1325
  4. The Primary Buy Zone is 1270 to 1280.

So, we’d need a close below 1392 and our stops would be above 1426. If we get set at 1380, our core profit target would be 1280. So we are risking about 40 to 50 points for at least 100 points, an attractive risk-reward.

The Value Area is complete on the formula I use to determine this and the Profile looks visually complete. It would not surprise me to see a strong move that begins a new IPM tonight or tomorrow night. The only question is in what direction. As I said above: a break above the top of the Value Area would suggest a breach of 1400. If this is followed by a bear-close below 1392, we have a trade.

Breach of the lower end of the Value Area would suggest that the market is moving towards 1270 to 1280 basis March. I’d skip this breakout trade to the downside because the probability of success and the risk/reward makes the trade unattractive.

To take the trade, we would need to lower the stop to above the Value Area, say around 1367.7. Entry would be around 1317. Core profit target would be 1280. We’d be risking 50 points to make 30. Unacceptable to me.

What about a closer stop?

Closer stops e.g. a stop above the Point of Control (1367.5) would increase the probability of being stopped out and then see the market move in my favour. Not for me.

There you have it. Today I showed a further example of the ‘SW Pattern #2’ and how I modify my trade around a pattern by its context. Tomorrow I’ll continue with the next post in the series: The Steps to Success.

The Steps to Success

In the next series of blogs, I shall be considering the steps traders need to take to succeed.

There is no universal formula for success – much depends on where you are on the traders’ evolutionary scale. In this blog, I’ll consider what a newbie can do. For me a newbie is anyone who has had no trading experience to one who has been trading for no more than 18 months. An essential condition for a newbie is to be a trader who has not experienced trading success.

  1. Does this sound familiar: you trade without a plan, taking large losses and small profits; before you know it, your capital is gone?
  2. Or this: you do no wrong in your first trades, and succeed in making money, hand over fist. Then wham, you give it all back and more?
  3. Or this: you read a book or attend some course and experience either (1) or (2). In short, nothing has changed.

Here’s how to change those experiences.

Accept the fact that the challenges facing a newbie are formidable. He must bring to the table a passion and love for the process of trading; in other words, he loves trading for its own sake – he is not in it just for the money. Without a passion and love for the game, it is unlikely he’ll survive the trial and tribulations he’ll face en route to success. He must also bring to the table ‘realistic expectations’.

In this context, ‘realistic expectations’ means you accept that you will take time to build the foundations for your success. One of the best resources in this area is: The Cambridge Handbook of Expertise and Expert Performance. The book sets out the pre-conditions for mastery. One of the steps is deliberative practice of the fundamentals; the other is time spent in practice.

It amazes me how often otherwise intelligent humans lose their sense of perspective when it comes to trading. I have mentored doctors, surgeons, solicitors, two Queens Counsels, even pilots and other professionals. If I had told them that they could become successful doctors, surgeons etc in six months or less, they’d have laughed at me and shown me the door. Yet, they truly believed they could become successful traders in six months or less, and with little effort. Incredible!

Newbies also underestimate the process they need to go through to attain success. But here, they have a lot of encouragement for their belief.

Too many ‘educators’ push the line: ‘Spend $X’ with me and you’ll attain quick returns and easy success!’. I have seen ads for books and courses that ‘guarantee’ results by spending a mere ‘x’ minutes (10 minutes is popular) per day. Many newbies have spent the $X and have little to show for it. The result is a scepticism that is almost as damaging  as their  naivete. I met a chap who went from preview to preview to glean pockets of wisdom! He wasn’t going to pay for an education – not him! He genuinely believed he could learn what he needed in this way. Incredible!

There are facts a newbie must be willing to face:

  • You need to put in the right effort. Before you begin, research what instrument is best suited for you: Options, Stocks, FX and Futures. If the latter I’d seriously consider CFDs to learn to trade and move on to Futures once I know I can win. CFDs are  similar to Futures, but  for beginners trading CFDs means  trading smaller size.  For example, the e-mini is US$50.00 per point. The minimum dollar per CFD tick is US$1.00. That’s quite a difference.

Options are usually best suited to those with a mathematical bent.

  • Know or find out whether you are best suited to a digital method (e.g. Buffett) or a visual (charting) approach.
  • Discover whether you are more comfortable with a short-term (day trade) or a longer time frame.

How do you do this? There are a couple of coaches who conduct evaluations e.g. Dr Van K Tharp. I took his evaluation and found it useful. This is not an endorsement for the rest of his products – I have not been to any of his seminars and cannot comment on them.

Once you have an idea of your nature, then pursue an education in accordance with that nature. Remember this is merely an idea; as you gather more information, be willing to change the initial ideas to accommodate the new data.

  • It is going to cost you dollars to learn. The only question is how much and to whom will the dollars be paid: will you pay the markets or will you pay an educator?

Where educators are concerned, you will need to perform some sort of due diligence – diligence to sift  the wheat from the chaff.

I wish I could say that you can tell just from the price and the ads. Unfortunately, this would be untrue. In Singapore Mirriam Williams’ ads are everything I hate in ads – ‘quick easy money’ variety and the cost is about S$6000.00 (US$4300.00).
So would I say the course  is value for money? What do you think?

I have seen the material and I am impressed with it. I’d say the content of the course is value for money.

I also have seen the content of other courses, courses that would not represent value for me – even though they cost less than S$6k. I say this because I find the proposed plan flawed (or non-existent) and the position sizing either non-existent or too aggressive. Here I am venturing a personal opinion – others may not share my view.

  • How about using popularity of a course as a guide? Unfortunately, there is little evidence that it’s a good guide. Sometimes popularity merely means the educator has a well-oiled marketing machine – the educator is teaching little of substance; sometimes, on the other hand, popularity does give a heads up to value for money.

So the newbie will have to face the fact that sometimes, some of the fees spent will be wasted. I guess a good guideline would be “if it sounds too good to be true, it probably is”. If you are looking for courses, the best advice I can give you is ensure the course covers the triumverate of trading: ‘plan + money management + psychology’.

  • Speaking of money management, know that some trading systems while sound, require large chunks of capital; make sure your pockets are deep enough to handle the system. Here the average dollar loss will and the average number of trades per annum will be of help. And…..
  • …Speaking of capital, make sure you are adequately capitalized to trade your instrument of choice. For a newbie, a reasonable algorithm is the Turtle one: (% risk x Capital)/$ Value of ATR.

Let’s look at what the minimum you would need to trade one contract in the e-mini. Let’s use a popular ATR value of 10 and assume we set our stops on a daily chart. The 10-day ATR is 28. So how many contracts could I trade with US$10k assuming a 2% risk?

(.02*10,000)/50*28 = .04

In other words, you need more than $10k account to trade the e-mini futures. (But note. you can trade 20 CFDs). Using the formula, we find that to trade one e-mini you need at least US$25k.

So, let me ask you: are you are trading the e-mini overnight? What’s your capital base? Are you under-capitalized? Are you over trading (i.e. the result of the formula is less than 1)? Day-traders can also use the formula. Just use the ATR of the time-frame in which you set your stops.

To find success you need to:

  1. Know your preferred instrument (Options or Shares etc)
  2. Know your time frame. By the way, lack of capital is not a good reason to day trade. You day trade because it’s a time frame that suits your personality.
  3. Know your approach; digital, visual etc
  4. Have adequate capital
  5. Get an education
  6. Have a plan with an edge + money management + winning psychology. Of necessity (you’re a newbie), the plan will be a simple one – a first step. At this stage, it’s a robust one based on your current knowledge. As your knowledge of self and the market increases, so will the effectiveness of your plan.

I hear you saying… trading is hard! Yep, trading is not easy but it is definitely worth the effort. Tomorrow I’ll look at the intermediate trader.

Rob Nicholas’ USDJPY

First off a big thank you for all who purchased my book. Snap-scan has the book at number 1 best seller for the week!


Thank you all!

Rob Nicholas <rob-nicholas@cox.net> asked me to comment on a proposed trade. Now I don’t have an advisor’s license so I am not commenting on his proposed trade but as an example of how I would approach the issue.

Figure 1 and Figure 2 are the monthly and daily charts of the USDJPY.





The idea is the 12-m (yearly trend) is in a sideways market and since the market is in the long-term support zone, we’d buy on a close above a close above ‘A’ and exit around 113-114.

On the face of it, this looks like a nice trade setup justifying a normal size position. But if step back to look at more data, we’ll see the data disclose some negatives. Figure 3 is a representation of the 12-m but rather than squash the data, I have used yearly bars



Figure 3 shows that after the low at 79.70, the market has been forming a sideways pattern with declining highs and almost horizontal lows. The 1-period swing highs are marked on the chart. The lows are 101.26 to 101.67. Viewed in this light, we immediately see the market may be forming a long-term descending triangle.

But, having said that, I need to tell you that I don’t personally rely too much on triangle patterns. This point is if I see one, I make a note of it and consider it in my context analysis.

Figure 4 shows the pattern I am relying on: the formation of the familiar Market Profile bell curve.


FIGURE 4 12-m USDJPY Market Profile

Figure 4 shows that the risk to this market is to the downside. Why is that? At A and B the market formed rejection extremes. Since coming off ‘B’, the market has formed around the middle of the AB range, a sideways congestion. This is the Value Area or the 1st Standard Deviation. I have drawn a red P to show the current formation.

On completion of the Value Area, the market breaks the bottom of value (101.26) and moves towards the AB Primary Buy Zone. It completes the sideways market by turning up to form swing low C. I have drawn a red ‘B’ to show the completed formation.

There are two lower probability events:

  1. The market will accept above the top of value (about 124.20). If this happens, we can expect a breach of 147.62.
  2. The market will continue the downtrend on reaching 79.7 and, rather than bounce and form C 79.7, will give way.

But the most likely occurrence is a move below the value area and a bounce off the Primary Buy Zone to complete the sideways market pattern.

Of course the 12-m is a timeframe providing context only. There is nothing preventing the market from moving above 108 to 113-114 and then falling below 101.26. But this sideways market is long in the tooth and I consider the breach of 101.26 a real and present risk.

For this reason, I would halve my normal position size if I am in a normal ebb/flow state. If I am trading below optimum, I’d cut the size down to a quarter or perhaps by-pass the trade.

Position Sizing 2

Yesterday we defined our subjective risk thresholds. Today we’ll look at the metrics – the objective approach to defining them.

There are certain key numbers that I collect from my equity journal. Remember that while I will be speaking in terms of ‘dollars’, I also collect the numbers for ‘% of initiating price’ (see The Art Of Position Sizing):

  • Average Dollar Win
  • Win Rate
  • Average Dollar Loss
  • Loss Rate
  • Maximum Drawdown
  • Maximum Positive Return
  • Maximum Consecutive Wins
  • Maximum Consecutive Losses
  • Average Number of Consecutive Wins
  • Average Number of Consecutive Losses
  • Standard Deviation of Monthly Returns.
  • Average annual return

The information provides the objective bedrock for estimating my normal position size. Let’s illustrate my approach by way of example let’s say subjectively I accept a 4% as my maximum risk. My maximum number of consecutive losses is 3 and the average loss is 1%. I can now estimate that the objective maximum percentage loss.

I multiply my maximum number of consecutive losses by 3. So now the number is 9. So my possible worst case drawdown on average would be a 9 x 1% = 9%. I then multiply the standard deviation of monthly returns by 3. Let’s say that comes out at 27%. I now have the boundaries for my worst case scenario: 9% to 27%.

I can now estimate how long it would take me to recover from a worst case scenario since I know my average annual return. If it’s around 25%, then a 27% loss would take me a year.

The idea is to play with the numbers so you know the most comfortable normal risk for you. This number is partially subjective and partially objective. Once you have this number, you can then adopt a position-sizing algorithm. There are as many algorithms as there are successful trading methodologies. Our job is to find a comfortable one for us.

We need one more factor before using a position sizing algorithm: a measurement of the volatility of the market e.g. the Average True Range (ATR) of ‘x’ days. With this we can have a look at some position sizing formulas.

One of the simplest is the Turtle formula.

(% Capital to Risk x Capital)/$value of Average True Range (ATR)

The ATR is the volatility component that the market brings to the equation, we bring the rest. Notice that too often the ‘% Capital to Risk’ is a figure plucked out of the air e.g. 2%. But if you don’t do the work, you will not know whether that figure is appropriate to you and your style of trading. The purpose of position sizing is balance ‘maximization of profitability’ with ‘minimization of risk of ruin’. If we adopt a random figure we’ll never know whether we have struck the appropriate balance for us. Moreover by doing the numbers we have a ‘feel’ for our run of losses and wins. In this way, we prepare for the drawdowns (and the accompanying anxiety) and exuberant profits (and the accompanying euphoria).

One other point. The ‘Capital’ is the cash you have at the end of your measuring period (weekly, monthly, quarterly) +/- open profits as measured from the stop loss. For example: your cash is $100k and you have an open position profit of +$5k. However, your current stop is at -$3k. Your ‘Capital’ is $100 – $3k, not $100k + $5k.

I recommend you set a measuring period rather than calculate the ‘Capital’ on a trade by trade basis. Accompanying the measuring period, you set a high threshold and a low one which, if hit. you would re-calculate the “Capital’. I use a monthly measure and a threshold of 50% of my average annual return as the upper threshold and 25% of ‘three times the standard deviation of monthly returns’ as my lower threshold. This means I reduce normal size more quickly than I increase it.

So now you have a normal size position. But this is not the end of the story. I believe that the position size should be varied depending on the context of the trade. To do this, I use the standards:

  • Probability of Success
  • Where I am in the Ebb & Flow

Of the two, the Ebb & Flow is the more important factor.

The probability of success is easy enough to understand. You can calculate the probability of success for your rule (setup) if your equity trading journals record the Rule number for a trade (and yours should). This historical probability will be tempered or enhanced by the current context.

So lets’ say that your ‘313 Outside’ setup has a 68% probability of success (normal position size). But on this occasion all the timeframes line up and you feel that this raises the probability to 85%. You may want to raise the position size to 1.5 times normal.

The Ebb & Flow is based on my view of the markets and trading plans. I see our plans as an inlet onto which the waves (the market) wash. Sometimes they only partially fill the inlet. This is the norm. It means we win some, lose some. In this situation, we use normal position sizing. Sometimes the waves cover all the inlet. At those times, we can do no wrong; so we’ll look to increase our size. Sometimes the waves have all but totally receded. At those times, we can do no right; so we’ll look to reduce position size.

We identify the Ebb & Flow by our trading results. If we start to see losses above the norm, especially if we have increased size after a prolonged exuberant profitable run, we’ve moved from flow to ebb. It’s important to understand that, like selling the top or buying the bottom, we’ll always be slightly late in the identification. In other words, we won’t know until after the first few ‘environment changing’ trades that a transitional stage is happening. That’s OK; it’s better than not catching it at all.

In my next blog, I’ll look at the USDJPY and include a position sizing example.

Position Sizing 1

Thanks to all who put pen to paper yesterday. My purpose was to make clear my reasons for writing and I am happy so many share them with me.

In this series, I’d like to talk about position sizing and suggest certain formulas.

Position sizing is part of the Money Management factor in the factors for trading success: Written Plan with an Edge x Effective Money Management x Winning Psychology. The multiplication sign is important. It emphasizes that you need to be competent in all three areas – incompetence in any one area will lead to failure. As an extreme example, if you have ‘0’ competence in any area, then your dollar return must be ‘0’.

I feel that much of what is written about money management misses the point – the authors speak of measuring the outcome in dollar terms. Yet, a dollar outcome fails to account for the differing volatilities which differ in the same instrument over different timeframes, and among different instruments. Hence, I believe we need to have a section in our reports that normalizes results. Now sometimes the position sizing formula itself will do the normalizing e.g. the Turtle formula I’ll speak about that later in the series; but most times, we need to input it somewhere in our spreadsheet.

I know of two ways of normalizing:

  • Using the ATR or
  • Expressing the outcome of the trade as percentage of the initiating price. We do this on a one contract basis. For example: if I sell three contracts of the ES at 1358 and cover at 1348, I have made 10 points per contract. This is a result of (10/1358)% = 0.74%

Either way does the job.

So step one in a management algorithm is to normalize your output.

Step two is to decide on the amount of risk to take per trade. This is both a subjective and objective exercise. The subjective one is more difficult to assess. One of the more interesting ways of doing this is via a visualization question and answer process:

  • Select an amount of money that represents a significant return to you but that is within reach. It could be US$100k or US$1M or US$1b.
  • Select an amount of money whose loss would mirror (1) except you’d feel pain rather than pleasure. Express this as a function of your capital.
  1. Assume you have an indeterminate amount of black and white balls in a jar. If you pull the black ball, you lose (b); if you pull the white, you win (a).
  2. Starting at a percentage you know will be painful – for me it would be 30 & ask: would I choose the game (where I stand to win $X or lose Y%) or not play. If the latter, choose a lower percentage and keep playing until you chose the game. The percentage before you chose the game is your subjective risk threshold. For example: Say at 3% I chose the game, and the percentage before that was 4%, 4% is my threshold.

This provides the threshold for an individual trade, you now repeat the same exercise for consecutive losses and again for portfolio risk. It’s important to do this because each measures a different impact. For example your pain threshold per trade may be 4% but 20% for consecutive losses; and it may be 12% for portfolio loss. In other words, you may not be happy losing more than 4% on any one trade but it would be OK to lose up to 20% of you lost it because you lost on five trades, each losing 4%.

You may be thinking – that’s illogical! I agree but we are talking here of subjective risk assessment, logic has little to do with it. By identifying and keeping below the subjective risk threshold, we ensure we reduce anxiety and thus ensure we keep to our rules.

For the process to work, you need to vividly imagine the pleasure and pain – in short engage your emotions!

So now you have your subjective risk threshold, part of the process to determine the maximum risk per trade. Tomorrow I’ll continue with this thread and look at the objective risk thresholds.

Feed Fish or Teach to Fish?

Once a month I check the analytics for this site. The last time I checked on January 22, we had hit an all time high for visitors. But since then, the numbers have been moving directionally down in a big way!

I couldn’t understand why until I checked the topics. I found that the peak was hit when I was writing on the S&P, basically I was ‘tipping’ the market. Once the series ended, the numbers started to drop and picked up only when I started writing “S&P Intraday”.

So it seems that the majority want a tipping sheet.

Sorry folks, that’s not the reason I write. My outcome is to provide a resource to improve trading results. I don’t see tipping doing that. In fact, in its success, tipping sows the seeds of trader destruction. The reason is tipping focuses on the plan and ignores risk management and winning psychology – elements that are so necessary for investing/trading success. Now I may end up tipping when seeking to illustrate an idea but in that case, the tipping is incidental to the main purpose which is to share my ideas.

I could tell you countless horror stories about the ills of tipping. One will have to suffice.

The latest occurred about two years ago when I was asked to mentor a group of pit traders. The Singapore Exchange had made it clear that the pits would close. This group of very successful order-fillers and a few friends formed a group to trade from their former employer’s home.

Initially they found it tough going but then they came across a spread ‘tipper’ who appeared to ‘be the goods’. He racked up four out of four winners! I am told the room was abuzz with excitement – “the good time would roll again; perhaps bigger and better than ever!” We are talking 6-figure numbers here so you can understand the euphoria. The feeling was: “If only we had really loaded up!”

The next recommendation, they did exactly that. This time the trade hit the stop loss and instead of exiting they added to the losing position. I am told that the market went in their favour after that, so they added even more positions. Well, you can guess the sorry end. By the end of this trade, the group lost all of the profits and some had to quit trading altogether.

Success is a function of having a positive expectancy: (avg%win x win rate) – (avg%loss x loss rate) where:

  • avg%win = (profitable results (on a one contract basis)/price initiating the trade)/all winning trades
  • win rate = winning trades/all trades.
  • avg%loss = (losing results (on a one contract basis)/price initiating the trade)/all losing trades
  • loss rate = losing trades/all trades.

By normalizing the result as % of the price initiating a trade, we are able to compare across results, setups, traders etc i.e. by any metric benchmark you’d like to use.

The positive expectancy is a function of a written plan with an edge x effective money management x winning psychology. A trader with a plan but without the other two skills will not survive unless he quits as soon as he hits a hot streak – and that is unlikely. Can you imagine what my room would have said if I had told them to quit after the third win? What would they have said after the fourth? They may have listened after the fifth trade but by then it would have been too late.

Hence the emphasis on this blog is to provide information that will be of long-term benefit to the readers rather than focus on producing short-term gains. And speaking of results….

Results of last night’s trade: I sold S&P March 1321 and covered 1323.5. There was volume at 1321 but after the market poked below 1321, volume dried up, suggesting a rally was to come. I did not go long because my trading timeframe trend is down and I am looking for spots to add to my shorts.

Why Won’t the Market Reach My Sell Zones?

Raymond of raymond9@gmail.com posed this question:

Ray I am reading your blog and having hard time understanding IPM. Looking at current S&P as end of last Friday feb 8, i understand the trend is down and will break the last low at 1272. Question is: I want to short but I am waiting it at least going up to 1355 or even higher to hit the first fibonacci fan which is around 1367. I often found myself wrong in this waiting game cause a lot of time it run down without hitting my target first. I want to understand how do you think to play this short?”

I am happy to answer Raymond’s queries because I thought the questions had relevance to readers.


It’s not easy to understand the concept of an IPM unless you have grounding in Market Profile. In the USA, I have been recommended to two instructors:

  1. Tom Alexander of Alexander Trading, http://www.alexandertrading.com/home/
  2. Jim Dalton: http://www.marketsinprofile.com/

There is no one I would recommend in the East.

Essentially an IPM is a vertical move; in a vertical IPM, you have a series of bars moving up with no or very little overlapping higher lows and higher highs.


Your question on where to enter raises the question of time frames. This first question I’d have you ask is: what timeframe are you trading? Once you answer this question, you need to assess the structure of that timeframe and where you are in the timeframe’s trading cycle.

  • In this context, by structure, I mean this: is the market moving in directionally (trending) or is it rotational (sideways)? Each structure has its own zones (retracement tools).
  • By trading cycle I mean the cycle Tubbs wrote about in the 1900s. It is a cycle with four phases:
  1. accumulation
  2. markup and pause
  3. distribution
  4. markdown and pause

So armed with that, let’s look at the current S&P cash. For the purposes of this exercise, we’ll assume we are trading the 5-d (weekly trend). The 18-d (monthly trend) and 13-w (quarterly trend) will be the first (18d) and second higher (13-w) timeframes.

Figure 1 shows the 13-w: The market broke a prior 13-w low formed on Aug 17; so whatever you have on the 13-w, you don’t have an uptrend but it could be doing a number of things:

  1. The market may have completed a distribution phase and is now in the beginning of a mark down (directional) phase;
  2. Or it may be forming a sideways market, 1576 to 1270.
  3. If it is forming a directional move, it’s not clear if the directional move is giving way to a rotational phase.
  4. Whatever it may be forming, the up and down bars of the past two weeks suggest that the next price move will most likely be a retest of the Primary Buy Zone (1286 to 1270). The Primary Buy Zone is created by the high of the recent rally and low to date (1395.38 to 1270.05).

Acceptance above the Maximum Extension of 1421.24 would suggest a retest of the boundaries of the Primary Buy Zone (1576 to 1550) bounded by the 1576.09 high and 1370.6 low.

So the first area of 13-w resistance is the Maximum Extension to the lower boundary of the Primary Sell Zone (1421 to 1380) (the area marked by a magenta rectangle in Figure 1).

Note that this area overlaps the Primary Buy Zone (formed by the 1576 high to 1370 low, red lines in Figure 1). In such a case, I treat the Primary Buy Zone as the more important i.e. acceptance above the end of the Primary Buy Zone (1396) suggests the market is moving to the Primary Sell Zone (1576 to 1550). So your ultimate stop level for shorts on the 5-d is above 1396. The sell zone thus runs from 1380 to 1396.

[I have used the retracement levels as substitute for Market Profile zones for the sake of simplicity. I prefer the Market Profile zones where available but for the purposes of this blog to use them would be an unnecessary complication. The retracement levels are an acceptable substitute. (For those that must know, the Market Profile Buy Zone runs from 1370 to 1417. So, my stops would be above 1417 basis cash)].


FIGURE 1 13-w

Figure 2 shows the 18-d which may be moving into pause or accumulation mode. The market stopped at 50% of the IPM 18-d range from 1523 to 1270. Market Profile says once development starts, if a bear profile is to develop, we can expect the market not to accept above 50% of the IPM. Thus we ought not to accept above 1396 to 1397

So now you have the zone ‘1396 to 1397’ within the 1380 to 1396 zone as a sell zone.


FIGURE 2 18-d

Let’s now turn to the 5-d, Figure 3. The 5-d is in a directional mode down (IPM) with a pause. The pause may result in a continuation of the IPM or it may start a rotational move. If it rotates back up, the first area of resistance is 50% of the IPM. This comes in at 1356.


FIGURE 3 5-d

Figure 4 shows the combined 30 minute profile from the M period on Feb 2. This shows that from zones derived from previous profiles, we have major resistance 1356 to 1359. This area is derived from Volume profiles within the price action since the 1370 low on August 17.


FIGURE 4 Market Profile

My plan for today:

  1. Define the type of day.
  • If rotational, classify the type of day (traditional Market Profile);
  • then ask: what should be the high and low?
  • Does the projected high ‘fit’ the 1353 (lowered from 1356) to 1360 (lifted from 1359) zone – stops above 1367?
  • If it does not ‘fit’, I’d look at the next zone being ‘1394 to 1400’ with stops above 1418.

2. If the day is directional, what will indicate this?

  • Friday’s inside day and today acceptance below Friday’s low 1323.5, say 1321.5 (10% of Friday’s range less 1321.5), will suggest a directional move.

In this situation, I’d sell the break with a stop above Friday’s high 1345.5 (say 1347.75).

That is an example of my model. I define the nature and structure of current market conditions and then look for a zone, employing a top down approach.

Based on that model, let me answer your question this way. I can think of two reasons why you aren’t reaching your zone:

  1. You may be mixing timeframes – selecting price zones beyond your trading timeframe; and/or
  2. Your zone tools may be inappropriate for the current market structure e.g. applying rotational zones to a directional market etc.

SP Intraday 4

In this post, I’ll conclude the series on the Market Profile analysis.

Yesterday I wrote in relation to the Directional move from the ‘E’ period on Feb 6:

  1. “Is the move from ‘E’ the start of a new Initial Price Movement down or part of a rotational process?
  2. If a new Initial Price Movement, are we likely to have continuation of the directional move or the start of development?
  3. What is the significance of a ‘Neutral Day closing in the lower quadrant’? (See Mind Over Markets by Jim Dalton)”

Let’s take the (3) first. A Neutral Day closing in the lower quadrant implies continuation in the direction of the gap. Usually we can expect enough follow through the next day, so that by the end of the Initial Balance, the worst result would be a breakeven trade. (This is not quite what Pete Steidlmayer meant by ‘free exposure’ trade but I found it occurs often enough to be a high probability occurrence).

Let’s now turn to (1) and (2). All prices unless otherwise stated are basis March. Here’s how I saw the market:

  • I could not tell from the price action if the price movement from the “E’ period was part a new IPM or part of the rotational process.
  • If it was a new IPM, then continuation was highly likely since we had not achieved mean -1 standard deviation for the IPM. In addition we had the Neutral Day close to lean against. So my strategy in the first 60 minutes was to go short and monitor the break of the opening low. If the break signaled continuation, I’d stay in, otherwise I’d exit immediately.
  • If it was part of the rotational process, then the high of the rotation was limited by the 50% retracement – calculated from the high of the IPM 1386 to the low at 1325.
  • Consequently if I wanted to initiate new shorts, the stop loss for the new shorts was known.

In the “A” period, the market tried to rally and failed. It then went on to break to new lows. However after the break, there was no volume coming through. This signaled to me that price action at “E” Feb 6 and following was part of rotation. I had sold at 1321 as the market went to break the opening price and covered when the market began moving up, losing 2 points. At the end of the ‘B” period yesterday, we had:

  • The possibility of a bullish profile. If the 50% level 1328 could hold, then we could expect a move greater than a normal day’s range (30 mean + 15). With a low at 1317, this projected a target to 1347 to 1362. You will recall from the charts of SP3 that we had resistance zones around 1356 to 1357.
  • But if ‘C’ did not extend the ‘B’ range, the ‘test’ opening (See Mind Over Markets by Jim Dalton), suggested a rotational day. In that case the projected high was 1317.5 + 30 to -15 = 1347 to 1332. Again we had resistance zones between 1347.5 to 1346.5.

Figure 1 shows us the Market Profile chart as at the ‘B’ period.


FIGURE 1 Market Profile ‘B’

The market went on to form a rotational day. Figure 2 shows the situation as at end of trading on Feb 7.

Looking at the larger picture: The S&P has had an IPM starting at 1386 and ending at 1325. Rotation has formed between 1317.5 and 1347.5. The move back to yesterday completed the minimum price action required for development. But, I’m inclined to the view that we’ll see a move to the Primary Sell Zone at 1348.5 to 1344. 5 before the downtrend resumes.


FIGURE 2 Market Profile Feb 7

If we break above 1348.5, and we have acceptance above 1355.75, Market Profile suggests a move back to the start of the IPM. If this occurs, it would throw doubt on my view that we’ll retest 1286 to 1270 (basis cash) before any potential upmove.

Figure 3 shows the 30 minute picture as at end of trading Feb 7.


FIGURE 3 30-min Feb 7

SP Intraday 3

In SP Intraday 2, I said that there were major differences between the gap on Tuesday and the potential gap yesterday (potential at time of writing).

If we put aside the size of the gap, the differences I spoke of were structural. In order to explain these differences, I need to give you some background to ‘the Steidlmayer Distribution’. This is now also called the Market Profile. Initially Peter called it the Steidlmayer Distribution to distinguish it from the traditional Market Profile. The major difference between the two is this:

In the Steidlmayer Distribution, there are no fixed time frames and time periods in which a distribution occurs. In the traditional Market Profile, we use 30 minutes time periods to form a profile for one day’s trading.

A Steidlmayer Distribution has four parts:

1) It begins with a directional move which I call an Initial Price Movement (IPM). Think of this series of directional bars with few or no overlapping ranges and retracements.

2) Development (rotation) begins and with it, the formation of the Point of Control (the mode of the forming Profile i.e. the line containing the greatest volume) determines if the Profile will be a sideways market, a bullish profile or bearish profile.

(NOTE: For the Point of Control to play a part, development must first begin. In an Initial Price Movement, the Point of Control will tend to lag the directional move).

A sideways market takes the form of a bell curve with its Point of Control in the 60% to 45% area of the IPM’s range. A bull profile (looks like a ‘p’) has the Point of Control in the top 1/3 (or higher) of the IPM range; the bear profile (looks like a ‘b’) has the Point of Control in the bottom 1/3 (or lower) of the IPM range.

Think of this as a pause which may turn into the next phase.

3) Development forms and with it the first standard deviation forms. Pete called this Value Area.

Think of this a sideways market.

4) Development completes and usually from the Point of Control of the completed distribution, a new IPM forms that either moves in the original direction or accepts above 50% of the IPM range. If the latter occurs, the IPM will go on to form either a larger sideways market or the start of a new directional trend.

Think of this as the breakout following a sideways market.

Of course the market need not complete the four steps or may stay in any one phase longer than normal. In doing so, the market provides information on the strength or weakness of the market.

Now let’s turn to the gaps.

On Monday, the market had returned to my preferred zone to stop the rally and had formed a balanced day. The next day the market gapped on the open and formed a directional day down.

Pete Steidlmayer used to say: “Trend days are not good continuation days unless they mark the beginning of a move”.

Let’s look at this idea from the stance of the four stages. If the trend day marks the completion of an Initial Price Movement, then the likelihood is the next phase will be the development phase. If the trend day marks an uncompleted Initial Price Movement, we are likely to have continued directional moves.

  • Q: How do we tell whether the Initial Price Movement is likely to have ended?
  • A: By keeping stats on the Initial Price Movements’ duration in the various time frames.

At the conclusion of trading on Tuesday, the Initial Price Movement that had begun on Monday’s close had travelled just under mean +2 stdevs. This made the commencement of development likely. For this reason I took the view that yesterday, we were likely to have a rotational day.

Figure 1 shows a combined profile from the 3:30 to 4:00 PM Feb 4 to 4:00 PM Feb 5. At this stage the Point of Control is 1358 (just below the 50% of the IPM – the white rectangle). There is no development as yet. This can be seen from the even distribution of the volume. BTW, the various lines on the profile represent my resistance zones.


FIGURE 1 Market Profile Wednesday Morning

And so it turned out (got lucky). The market formed a rotational day until the ‘E’ period when it rallied to the first resistance and then started down.

In my view, the new Initial Price Movement came in early and yesterday was a ‘Neutral Day closing in the lower quadrant’ (traditional Market Profile). What this means for today, I’ll complete tomorrow. But the questions to ask are:

  • Is the move from ‘E’ the start of a new Initial Price Movement down or part of a rotational process?
  • If a new Initial Price Movement, are we likely to have continuation of the directional move or the start of development?
  • What is the significance of a ‘Neutral Day closing in the lower quadrant’? (See Mind Over Markets by Jim Dalton)

Figure 2 shows the Split profile as at end of trading Feb 5. Figure 3 shows the Neutral Day.


FIGURE 2 Split Profile


FIGURE 3 Neutral Day

SP Intraday 2

A follow-up to my earlier post.

I said earlier that where there is a gap (I meant open-close gap) of 4% to 8% I expect a trend day if at least 50% of the gap is not closed in the first hour. However, as with all of my ideas, this behavioural parameter (set-up) is driven by context.

Early indications are we’ll have an open-gap of about 4% today – and this brings me to the reason for this entry.

For reasons I’ll explain tomorrow, whether or not the gap closes today, I’ll be looking for a rotational market. In turn this means that I’ll be less aggressive, looking to initiate shorts at my resistance levels.

In the meantime, you may want to consider: what is it about today that is different to yesterday?