Wednesday, January 17, 2007

Observations

I continue trading with the Market Profile Chart and am noticing patterns. The questions remain always the same:

  • Is there a signal to take a trade
  • Do I go long
  • Do I go short
  • What is the trend
  • Is the trade I'm about to make a trend or countertrend trade
  • Where is my stop
  • What is my target

I've written about Low-volume zones on the Price Histogram. And I've said, that such a low volume zone either breaks or that prices return to the previous point of control.

For a trader such a statement is just great! It actually helps not one bit!

That is, if you want to be right.

But...

if you see the next trade not as one, where you have to be right, but as one, where the probabilities are in favor of one or the other direction, then the trade decision might be not so difficult at all.

Look at this oilchart

Prices broke down, we are in a low volume zone and the CCI is forming a divergence pattern. Still this 5min bar closed at the low. We can agree, I think, that in this timeframe the trend is down.

Trade or No Trade?

  • Trend continues, Go short
  • Trend Reverses, Go Long

It's 30min to pit-close (my time at 20:30 CET), so you better be right about the trade as there won't be any reversal of a strong move into the close in these last 30min. I have to say, I favored the Countertrend signal, but looked for a test of the 50.125-49.900 area, not 50.900-50.700.

We can assume, that there are quite a number of large Buy orders around the 50$ Level. Either traders being short taking profit or traders initiating new long positions at this psychological level.

So any long trade taken above has some cushion below, on the other hand a run of the 50.000 level might be fierce and in such a way, that the Stops right below this level will get triggered for a spike into the 49.500 area. That would mean the 50.000 level would be no longer support, but strong resistance.

  • FLAT is a position

10 Minutes later at the close of another 2 bars, we have made a new daily low and bounced with the 5min bar low above the daily low. We have clear divergence and we have a low volume zone below the current price level.

How do prices cross a low volume zone to the downside?

  • By volume coming into the market at a new lower level.

This forms a new volume mountain below the previous mountain above.
So, if no volume is coming into the market at a daily low the market should bounce up.

Target? Simple! The previous area of high volume between 51.200 and 51.500

Stop? The low was 50.525. An entry between 50.600 and 50.750 would allow for a 10 tick stop, which would still be located below the daily low. I would avoid 50.500 as Stop, as it's a round number where I don't like to place the Stop, but 50.400 would be fine enough.

I'm developing/clarifying these rules as I write this article and I did not take this long trade yesterday evening. Still it worked nicely. It gave you enough time to enter and it went right into the target zone.

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