Market and Profile Patterns that affect Odds for Today's and Tomorrow's Trading Sessions

Market and Profile Patterns that affect Odds for Today's and Tomorrow's Trading Sessions

To Shadow Traders,

Per Mark Douglas, an edge is higher odds of one thing happening over another. As we all know, as a result of human behavior, there are patterns that show up in the markets that repeat themselves. These patterns can represent an edge.

If you listen to or watch James, Peter, or Brad for any length time it is hard not to notice that they are always looking at market patterns to assess odds of continuation higher or lower or odds of a reversal.

There are patterns that they look at that impact the odds for today’s session and there are patterns that they look to at the end of each day that impact the odds for tomorrow’s session.

As a result of listening to and watching James, Peter, and Brad, I have learned that the following patterns are helpful in assessing odds for today's sessions as well as tomorrow's sessions.

Market and Profile Patterns that affect Odds for Today's Trading Session
1. Overnight inventory long or short
2. Open inside yesterday's value area/range
3. Open outside yesterday's value area/range
4. Opening gap above or below yesterday's range
5. Opening type directional confidence
6. Prior day double distribution ranges
7. Prior day spike higher or lower
8. Above or below unchanged
9. Above or below halfback
10. Excess high or low intraday
11. Lack of excess high or low intraday
12. Breakout above or below yesterday's value/range
13. Breakout above or below balance area on daily, weekly, or monthly charts
14. Above or below average volume
15. Market Internals strong or weak
16. Timeframe in control
17. Balancing day (day timeframe in control)
18. Trending day (longer timeframes in control)
19. Price tempo as price approaches support or resistance
20. Trending day inventory adjustment
21. Daytime inventory too long or too short

Market and Profile Patterns that affect Odds for Tomorrow's Trading Session
1. Value area placement relative to prior days
2. Symmetrical day profile
3. Nonsymmetrical day profile -- Elongated up or down
4. Nonsymmetrical day profile -- Too stretched out up or down (> 2 distributions)
5. Nonsymmetrical day profile -- "P" profile (short covering)
6. Nonsymmetrical day profile -- "b" profile (long liquidation)
7. Prominent POC or Anomalies on day profile
8. Poor high and/or low on day profile
9. Upward or downward 45 degree line (long or short at poor prices)
10. Exponential affect of multiple occurrences of structural weakness
11. Value area/range breakout day with or without gap (3-I day)
12. Outside day w value area/range breakout (2I-1R day)
13. Neutral day high or low close
14. Excess high or low on daily, weekly, monthly charts
15. Lack of excess high or low on daily, weekly, monthly charts
16. Trend and one timeframing on daily, weekly, monthly charts
17. Unfilled gap
18. Trade location at go/no go reference (highs or lows of prior trends or balance areas) on
daily, weekly, monthly charts

This is by no means a complete list, but it is a long list. The thing that is "really cool" as Peter would say is that once you have internalized these patterns, your mind just naturally looks for the patterns it knows and does so at very high speeds. Per Mark Douglas, your mind can only see what it already knows. Conversely, as relates to trading, you are not going to see any patterns that you do not already know.

As a result of my learning process and personal experience, I have come to two main realizations. The first is that it takes time and patience to learn and internalize each new tool to the point where you can apply it and get results. The second is that with the seemingly infinite number and combination of complexities that impact odds as well as the human element, trading really is an art versus a science. As a consequence, the more scientific you try to be, the higher the odds you will get frustrated. It is advisable to prepare for multiple likely scenarios each day, because anything is possible in the markets.

I encourage you to create your own list of patterns with their associated odds implications, which is relevant to your own style of trading, if you have not already done so. Your level of understanding of the realtionships between patterns and higher or lower odds of one thing happening over another, represents your level of understanding of market logic and the market environment. The better you understand market logic, the better you will be able to anticipate market moves, and the higher the odds you will meet your trading goals and objectives. Remembering, that you can manage risk, but you can't manage return.

I have sent my notes (detailing the odds implications of each of the patterns listed above) to Peter and Brad. I am more than willing to share them with other Shadow Traders who may have an interest, provided Peter and Brad feel it is appropriate and figure out an appropriate way to do so. I do not consider myself to be an expert on this stuff and I am definitely not trying to impress anyone. My only motivation for sharing is to pay back and help other Shadow Trader listeners. I have not only learned a great deal from Brad and Peter, but also from other Shadow Traders' questions and comments over the years. As I mentioned in a prior post, I have been learning about Dalton's approach on and off for the last three years, so I may be a little further ahead on the learning curve than some Shadow Trader listeners. If sharing what I have learned via my notes can help speed-up the learning process for other interested Shadow Traders, then that is great. What makes the Shadow Trader program so powerful is the interaction and sharing among traders.

Also per Mark Douglas, is that the focus of your trading should be on what you need to learn or what you need to do to adapt to the market environment. The process of creating and organizing my own notes has helped me internalize Dalton's approach to trading. I have shared these notes with James and Julia at J Dalton Trading and have gotten invaluable input from both. What I found interesting though, was a comment I received back in an email from James, and that was "Traders are notorious for not sharing". So with this in mind, I thank Peter and Brad for creating an environment where Shadow Traders can share and learn with each other.

Markets Balancing or Trending, Time Frame Participants & Trading Strategy

Markets Balancing or Trending, Time Frame Participants & Trading Strategy

To Shadow Traders,

Per James Dalton, markets are either balancing or trending. From a long term standpoint markets are trending approximately 15% of the time and balancing approximately 85% of the time.

Balancing markets are rotational and trending markets are directional. When markets are balancing, value leads price. Price is being pulled back to value, which reflects that there is general agreement in the markets on value. When markets are trending, price leads value. Price is pulling value with it, which reflects that there is not agreement in the markets on value and that the markets are searching for value.

Market balancing and trending occurs in all time frames (on monthly, weekly, daily, and intraday charts). Besides keeping track of all the go/no go reference levels, what makes trading so challenging, is handling the interaction of all the time frame participants (long term, intermediate term, short term, and day).

Per James Dalton, balance areas, trading ranges, brackets, congestion areas, and consolidation ranges are synonymous terms. In an effort to try and understand time frame interaction, I look at trading ranges on monthly, weekly, daily, or intraday charts as contained areas that include trends plus balance areas. Therefore:

1) Long term trends on monthly charts terminate in balance areas on a monthly charts and trading ranges on weekly charts. Trading ranges on weekly charts contain multi week candle balance areas plus multi week candle trends.To break out of trading ranges on a weekly charts, the addition of long term time frame investors is needed. Conversely, if the long term time frame investors are not present, the markets will be contained by trading ranges on weekly charts.

2) Intermediate term trends on weekly charts terminate in balance areas on weekly charts and trading ranges on daily charts. Trading ranges on daily charts contain multi day candle balance areas plus multi day candle trends.To break out of trading ranges on daily charts, the addition of intermediate and/or long term time frame traders/investors is needed. Conversely, if the intermediate and/or long term time frame traders/investors are not present, the markets will be contained by trading ranges on daily charts.

3) Short term trends on daily charts terminate in balance areas on daily charts and trading ranges on 30 minute charts. Prior day trading ranges on intraday charts contain multi 30 minute candle balance areas plus multi 30 minute candle trends.To break out of prior day trading ranges, the addition of any of the longer term time frame participants is needed. Conversely, if the longer term time frame participants are not present, then the markets will be contained by prior day trading ranges.

Markets that break out of trading ranges/balance areas have a tendency to go to visual references that can be seen on daily, weekly, monthly charts. As mentioned in a prior post, James uses a top/down approach. He uses the monthly, weekly, and daily charts to find important resistance and support go/no go levels, and determine whether the monthly, weekly, and daily charts are trending up or down or balancing.

Trading Strategies change depending on whether the markets are trending or balancing.
1) If markets are trending up, buy breaks and take profits on rallies, and do not short.
2) If markets are trending down, short rallies and take profits on breaks, and do not go long.
3) If markets are balancing, buy the bottom of balance area and take profits at top of balance
area, and short the top of balance area and take profits at the bottom of the balance area

As most of you know, determining the appropriate trading strategy is straight forward when monthly, weekly, and daily charts are either all trending up or all trending down. But as mentioned above the markets are usually only trending 15% of the time. The other 85% of the time, however, markets are going to be balancing on any or all of the monthly, weekly, or daily charts. As a result, markets can be balancing on the monthly charts and trending on weekly and/or daily charts.

So when setting your trading strategy, it is important to know what time frame you are trading, and to trade with longer term trends. Remembering, that that longer time frames/participants trump shorter time frames/participants.

Market Logic and the Big Picture

Market Logic and the Big Picture

To Shadow Traders,

When learning a new trading approach like "The Dalton Approach" or "The Shadow Trader Approach", it is extremely easy to get lost in the details and lose site of the Big Picture. What follows is how I have tried to maintain a Big Picture perspective when it comes to overall Market Logic.

Per James Dalton, the financial and commodity markets function as a two way auctioning process which matches buyers and sellers. The markets auction higher to find sellers and auction lower to find buyers.

How you view the auction process will depend on the time frame you are trading. A day time frame trader breaks the auction process down into 5, 15, or 30 minute auctions/candles on intraday charts. A long term investor views the auction process via monthly auctions/candles on monthly charts, an intermediate term trader looks at weekly auctions/candles on weekly charts, and a short term trader looks at daily auctions/candles on daily charts.

No matter what time frame you are trading, James, Peter, and Brad, remind us that we should always be trying to answer the following questions:
1) Which way is the market trying to go? --- Attempted Market Direction
2) Is it doing a good job in its attempt to go that way? --- Market Confidence

Our read on market direction in a particular time frame, is done by comparing the high and low of current candles to prior candles. Are current candles taking out highs or lows of prior candles (trending) or are current candles being contained by prior candles (balancing)?
Our read on confidence in a particular time frame, is done by comparing the body size and tail length of current candles to prior candles. Are current candle bodies larger with smaller or no tails (higher confidence) or are current candle bodies smaller with longer tails (lower confidence)?

James maintains that markets are visual. The most visual reference levels on the monthly, weekly, and daily charts are prior highs and lows which represent resistance and support go/no go levels.

James uses a top/down approach, which he shared in his interview with Peter. He uses the monthly, weekly, and daily charts to find important resistance and support go/no go levels, and determine whether the monthly, weekly, and daily charts are trending up or down or balancing. When you combine this market information with the determination of the Ruling Reason, you get the ongoing Market and Trading Narrative that James, Peter, and Brad are always talking about and updating. Throw in Trade Location and you have the Market Context, which provides the basis for making trading decisions.

Once you know whether the market is trending up or down or balancing in your particular trading time frame, then you monitor for change. If markets are balancing, change looks like coming out of balance or a breakout. If markets are trending higher, change looks like an excess high. If markets are trending lower then change looks like an excess low. Remember, that if longer time frames are not involved, then change can also be indicated with a lack of excess (high or low).

As far as James is concerned, the two best types of trading opportunities in any time frame are coming out of balance and after an excess high or low.

Examples of important resistance and support reference levels which represent go/no go levels.
1) Prior session -- high and low
2) Overnight -- high and low
3) Prior session close -- unchanged
4) Prior session POC's (fairest price to do business)
5) Prior session afternoon rally high or pullback low
6) Balance areas -- high and low
7) Spikes -- base and top or bottom
8) Gaps -- top and bottom
9) Current session open
10) Current session half back
11) Prior session double distribution ranges
12) Prior highs and lows from trends daily, weekly, and monthly charts
13) Prior highs and lows from balances areas on daily, weekly, and monthly charts

What you will notice is that most of the references listed above are shorter term references. Part of what makes shorter term trading so complex and difficult, is the fact that there are so many references to keep track of. In fact, when you are trading intraday, you need to be aware of all the shorter term references as well as longer term references listed above.

No matter what time frame you are trading, when the market approaches a resistance or support go/no go level, market logic boils down to three scenarios:
1) If the market cannot penetrate a go/no go level, then odds are higher the market will reverse
2) If the market penetrates a go/no go level and is rejected, then odds are higher the market will reverse
3) If the market penetrates a go/no go level and is accepted then odds are higher that market will continue in the direction of breakout

Go/no go levels on longer term charts have higher odds of more significant price moves because they affect more time frames and therefore more overall participants.
1) Long term investors, intermediate term traders, short term traders, and day time frame traders react to monthly chart reference levels
2) Intermediate term traders, short term traders, and day time frame traders react to weekly chart reference levels
3)Short term traders, and day time frame traders react to daily chart reference levels

"The best trades often fly in the face of the most recent market activity, and never lose sight of the bigger picture." This is a quote from James Dalton's book Mind Over Markets.
What often makes it difficult to pull the trigger on a trade is because we are so focused on what price is doing and we lose site of the big picture. What makes market logic so powerful is it takes our focus away from price and gets us focused back on the bigger picture and how markets work.

For example, when the market is trending higher:
If the market can't take out the prior high, then the market will probably reverse and go lower.
If the market takes out the prior high and price is rejected, then the market will probably reverse and go lower.
If the market takes out the prior high and price is accepted, then the market will probably continue higher.

When you understand market logic and know the important go/no go levels for the time frame you are trading, you can anticipate the markets and plan accordingly. When you are ready with trades that are appropriate for the most likely scenarios, you are in a better position to pull the trigger when the market gets to a go/no go level and finally shows its hand.

Long, Intermediate, & Short Term Time Frame Market Development Analysis

Long, Intermediate, & Short Term Time Frame Market Development Analysis

To Shadow Traders,

A major part of your Market & Trading Narrative consists of Market Development Analysis for Long, Intermediate, and Short Term Time Frames. James uses a top down approach using Monthly, Weekly, and Daily charts to speed read the markets by determining Market Development Status in each time frame.

For each time frame, start with Prior Development Status which would be either Trending Higher or Lower or Balancing and use as basis. Determining the Current Market Development Status consists of comparing the High, Low, and Close of the Current Time Period Candle to the High, Low, and Close of the Prior Time Period Candle. The output from analysis on Monthly, Weekly, and Daily charts is Current Period Market Development Status and Current Bias.

I use the chart below as a rough guide. The inputs are in the first three columns of the chart below. First select Prior Market Development (Trending Higher, Trending Lower, Balancing), second select appropriate Current Period Candle High & Low relative to Prior Candle High & Low, third select appropriate Current Period Candle Close relative to Prior Candle High & Low. The outputs of analysis are in the third and forth columns of the chart below. They are the Current Period Market Development Status and Current Bias as mentioned above.

The Market Development Analysis is conducted at the end of each month when the Current Month Candle closes, at the end of each week when the Current Week Candle closes, and at the end of each day when the Current Day Candle closes.

The chart below can also be used as a guide for intraday Market Development Analysis on 30 minute candles after the close of each 30 Minute Candle.

Scenarios 1-8 represent a market that has been trending higher. Scenarios 9-16 represent a market that has been trending lower. Within the scenarios trending higher, I have listed them from strongest to weakest with scenario 1 being strongest. Within the scenarios trending lower, I have listed them from strongest to weakest with scenario 9 being the strongest.

Once in a trade that has been trending you look for continuation.

For a market that has been trending higher (which is defined by higher highs and higher lows) what should you look for to help gauge strength and odds of continuation?
1) Higher odds of continuation higher (scenario 1&2): Getting higher high and a close higher than high of prior candle, therefore continuing to one-time frame higher
2) Medium odds of continuation higher (scenario 3&4): Getting higher high, but close within prior candle, therefore getting excess high & balancing, but continuing to one-time frame higher
3) Lower odds of continuation higher (scenario 5&6): Not getting higher high, but close within prior candle, therefore getting excess high & balancing, but continuing to one-time frame higher
4) Higher odds of reversal lower (scenario 7&8): Getting close lower than low of prior candle, therefore one-time framing higher has stopped.

Note: In scenarios 4&6 the prior low was tested and rejected therefore one-time framing higher still intact. Need a close below low of prior candle to confirm that one-time framing higher has stopped.

For a market that has been trending lower (which is defined by lower lows and lower highs) what should you look for to help gauge strength and odds of continuation?
1) Higher odds of continuation lower (scenario 9&10): Getting lower low and a close lower than low of prior candle, therefore continuing to one-time frame lower
2) Medium odds of continuation lower (scenario 11&12): Getting lower low, but close within prior candle, therefore getting excess low & balancing, but continuing one-time frame lower
3) Lower odds of continuation lower (scenario 13&14): Not getting lower low, but close within prior candle, therefore getting excess low & balancing, but continuing to one-time frame lower
4) Higher odds of reversal higher (scenario 15&16): Getting close higher than high of prior candle, therefore one-time framing lower has stopped.

Note: In scenarios 12&14 the prior high was tested and rejected therefore one-time framing lower still intact. Need a close above high of prior candle to confirm that one-time framing lower has stopped.

The Current Bias from Long, Intermediate, and Short time frames need to be combined with analysis of Trade Location, Market Structure, and Ruling Reason to determine your own Overall Bias for the trading day ahead.

Don't fall into the trap of placing too much emphasis on any one piece of market information when making trading decisions. James talks about this all the time. Trading is never that simple. It is usually a combination of factors that are important. The name of the game is learning how to focus on the appropriate market information. Realizing that focusing on too much market information can keep you from making timely trading decisions and result in poor trade location.

I want to emphasize that the chart below is just a rough guide that I use. The Current Market Development Status column is meant to be more factual. The Current Bias column is much more subjective. Everyone sees things a little differently. The chart below indicates a Current Bias of Neutral/Higher on scenarios 3-6 and Neutral/Lower on scenarios 11-14. The Current Bias is Neutral because these scenarios show excess which could indicate the completion of the current auctions up and down respectively. However, the Current Bias for scenarios 1-6 is also Higher because the Current Market Development Status is One-Time Framing Higher and the Current Bias for scenarios 9-14 is also Lower because the Current Market Development Status is One-Time Framing Lower. Welcome to the land of Ambiguity and Opportunity. The important thing for you as a trader is to look at the facts and come up with your own Overall Current Bias that is based on market information from all time frames that is relevant to your style of trading.

The Glass Bead Game

The Glass Bead Game

To Shadow Traders,

The Glass Bead Game was written by Herman Hesse and was first published in 1943. It was Herman Hesse's last literary work and earned him the Nobel Prize in Literature in 1946.

The story takes place in the future and is about the journey and rise of the main character to "Magister Ludi" (Latin for "Master of the Game"). To play the game well required years of hard study of music, mathematics, and cultural history. The game required a synthesis of everything the players had learned in the arts and sciences. The game proceeded by players making deep connections between seemingly unrelated topics.

The process for becoming a "Magister Ludi" in the The Glass Bead Game (years of hard study, synthesis of everything learned, and making connections between seemingly unrelated topics) is applicable to many worthwhile endeavors in life including the mastery of the Trading Game.

James Dalton is the first to admit that trading is indeed a game. When it comes to short term and day trading, there is no other place where there seem to be more games played than at Market Go/No Go Reference Levels. It is the trade location where traders have the most opportunity as well as the most risk, when it comes to being on the right side of a trade.

Why is price action at the Market Go/No Go Reference Levels so unpredictable?
It is the battleground where market direction is determined. The reason price action is so unpredictable is because there are so many opposing market factors that are interacting simultaneously.

To Review:

Buyers and sellers in the markets are matched up via a two way auction process.
The hallmarks of the two-way auction process are:
1) Markets must auction up to find sellers and auction down to find buyers.
2) Markets must auction too high to know if prices are perceived to be above value and must auction too low to know if prices are perceived to be below value.

Market logic at a Go/No Go Reference Level comes down to three scenarios:
1) Market looks beyond Go/No Go Reference Level and is accepted - Breakout Trade Setup
2) Market looks beyond Go/No Go Reference Level and is rejected - Reversion to Mean Trade Setup
3) Market is rejected at Go/No Go Reference Level - Reversion to Mean Trade Setup

Since market direction is so unpredictable at the Market Go/No Go Levels, the trader needs to be prepared:
1) By knowing the overall market context and the odds of the market going higher or lower
2) With trades for each of the three scenarios
3) To pull the trigger when market patterns indicate trade entry
4) To monitor for continuation once in trade

Some of the factors that impact the odds of the direction and size of market moves at the Go/No Go Levels are as follows:
1) Stops: Number of profit, protective, and entry stops layered in front of and behind the Go/No Go Level which are against versus with the attempted move.
2) Time Frame of References: The longer the time frame of the reference, the more participants and stops that will be involved, and the larger the possible move.
3) Time Frame Participants: If longer term timeframe participants are in control, then there are higher odds of acceptance of a breakout. If day timeframe participants are in control, then there are lower odds of acceptance of an attempted breakout.
4) Overall Market Development: If the move is with the longer term trends, then there are higher odds of acceptance. If the move is against the longer term trends, then there are lower odds of acceptance.
5) Day Type and Confidence: If the day is a higher confidence trend day, then there are higher odds of acceptance of a breakout. If the day is a lower confidence rotational day, then there are lower odds of acceptance of an attempted breakout.
6) Returning to Important Go/No Go Reference: If it is the first time returning to an important Go/No Go Level, then there are higher odds of a bounce. The more times a Go/No Go Reference is tested the higher the odds of acceptance of a breakout.
7) First look beyond a Go/No Go level: The first look beyond a Go/No Go Level has lower odds of acceptance due to stops being tripped. The second time beyond has higher odds of acceptance since many of the stops will have been cleared. The question then is has the market been able to work its way to the entry level stops in the direction of the break out.
8) Volume & Internals: The higher the volume and stronger the internals, the higher the odds of acceptance of a breakout.
9) Tempo: If the tempo is slowing going into a Go/No Go Level, then there are higher odds of a bounce. If the tempo is too fast going into a Go/No Go Level, then there are higher odds of breakout failure.

The list above is not meant to be a complete list. For more complete lists see the 3 prior posts related to Market and Profile Patterns that affect odds for today's trading session and tomorrow's trading session.

The fact that market logic boils down to three scenarios makes the situation seem simplistic, however it is anything but simple. At any Go/No Go Level, the success of a move above or below is always due to a combination of many of the market factors listed above rather than any one market factor. So from a trading standpoint it is best to wait for the start of the move and see whether it is being accepted. According to James it is usually better to trade a little later rather than a little early because it allows you to base your trade decision on more market information. The exception being when the markets are displaying high confidence, when you should trade sooner rather than later.

This is the point where James invariably gets the question "How do I know if a move is being accepted?" James answers by talking about the concept of value building in the direction of the move. Which finally elicits the question "Where do I get in and where do I get out?" And James as a "Magister Ludi" responds with "I don't know" and follows up with "Trading is an art not a science" and "There are no exact answers in trading". Which all mean that at a certain point each trader needs to find their own answers through actual experience trading the markets.

Epilogue:

The "Magister Ludi" is satisfied because he knows that he has helped many become better traders. He also knows that only a few will put in the years of market study, will be smart enough to synthesize all they have learned about trading to the point where market logic and intuition work in harmony, will be able to make the deep connections between the seemingly unrelated pieces of market information to become one with the markets, and therefore be able to anticipate the markets. The select few who reach the status of "Magister Ludi" will pass on their knowledge of trading as well, and yes everyone will live happily ever after.
The End

Intraday Trading Session - Decision Making Process

Intraday Trading Session - Decision Making Process

To Shadow Traders,

What follows is the Intraday Trading Decision Process I use, which implements many of the concepts highlighted in Mind Over Markets to determine Early Market Tone.

Use Steps 1-5 in sequence to determine Early Market Tone and determine appropriate Trading Strategy. Once Early Market Tone is know, use Steps 6-8 concurrently for trading the rest of the session.

If there is a high confidence open you may know Early Market Tone in 5-15 minutes. If there is a lower confidence open it may take 30-60 minutes.

The Landscape Futures Contracts referred to below, include futures contracts like /es, /nq, /ym, /dx, /cl, /gc, and /zb. They are those futures contracts that you look at to get a feel for the overall Landscape of the market.

Step 1: Is Overnight Inventory for Landscape Futures Contracts Long, Short, or Neutral?
Is there any Important Scheduled News that will affect Futures and Stocks?
1) If Overnight Inventory Neutral, then no impact.
2) If Overnight Inventory Long, then higher odds of long liquidation break.
3) If Overnight Inventory Short, then higher odds of short covering rally.
4) Record Overnight high and low as day time frame references.
5) When Important Scheduled News is released, trade accordingly around increased volatility.

Step 2: Is Open for Landscape Futures Contracts and Stocks (of interest) Inside or Outside the Yesterday's Value/Range?
1) If Open Inside Value/Range, then smaller opportunity and lower risk and higher odds of rotational/balancing day.
2) If Open Outside Value/Range, then larger opportunity and higher risk and higher odds of directional/trending day.
3) If Opening Gap is large, then lower odds gap will be filled that day and higher odds of more rotational day.
4) Where do Landscape Futures Contracts open?
5) Where do Market Internals open?
6) Which Landscape Futures Contracts, Industry Groups, and Stocks (of interest) are strongest and weakest at the open?

Step 3: Is Opening Type for Landscape Futures Contracts and Stocks (of interest) either Open-Drive or Open-Test-Drive?
1) The Open-Drive and Open-Test-Drive are the highest confidence Opens with higher odds of evolving into a Trend Day or Normal Variation Day.
2) An Open-Drive leaves a long body candle with no tails or small tails.
3) An Open-Test-Drive leaves a long candle with a buying or selling tail.
4) If Open-Drive or Open-Test-Drive Opening Type, then higher odds of either the high or low of the opening range not being taken out (which leaves the day's high or low).
5) If Open Inside Value/Range, then look for a high confidence single print move out of the Value/Range.
6) If Open Outside Value/Range (Opening Gap), then look for high confidence single print move back into Value/Range or a high confidence single print move away from Value/Range (Opening Gap not filled).
7) Do related Landscape Futures Contracts confirm opening type?
8) Do Market Internals and Overall Volume confirm opening type?
9) Which Landscape Futures Contracts, Industry Groups and Stocks (of interest) remain strongest and weakest after the open?
10) Trade Strategy: If early market confidence is high, trade in same direction as the high confidence single print move and trade sooner rather than later. At a minimum, do not trade against a high confidence single print move which could develop into a trend day
11) Trading Strategy: If as a result of a high confidence open, trade scenario buy/sell signals are triggered, execute trades manually or with resting stops (set ahead of time).

Step 4: Is Yesterday's Value/Range for Landscape Futures Contracts and Stocks (of interest) being Accepted or Rejected?
1) If Open is Inside Yesterday's Value/Range is Price being Accepted there?
2) If Open is Outside Yesterday's Value/Range is Price being Accepted there?

Step 5: Is Early Market Tone for Landscape Futures Contracts and Stocks (of interest) Bullish, Bearish, or Neutral and what is level of Market Confidence?
1) Which way is the market trying to go? Is an intraday high or low evident?
2) Is market doing a good job in its attempt to go that way? Trading back and forth thru opening range (low confidence) or not (high confidence single print move)?
3) Who's in control? Day or OTF participants?
4) What type of day is likely to develop? Rotational/Balancing or Directional/Trending?
5) Do related Landscape Futures Contracts confirm early market tone?
6) Do Market Internals and Overall Volume confirm early market tone?
7) For each Futures Contract or Stock to be traded, what is most likely trade scenario?
8) Trade Strategy: If early market confidence is low, trade later rather than sooner giving the market time to setup.

Step 6: Is Market Development (Trending or Balancing) for Landscape Futures Contracts and Stocks (of interest) changing?
1) Whether markets are balancing or trending, monitor for change. If markets are balancing, look for breakouts. If markets are trending, look for reversals. Once change occurs, watch for acceptance or rejection of change.
2) Look for reversals at 10:00am, 10:30am, 11:00am, 2:00pm, 2:30pm, 3:00pm.
3) Do related Landscape Futures Contracts confirm current market development or change to current market development?
4) Do Market Internals and Overall Volume confirm current market development or change to current market development?
5) Trading Strategy: If markets are balancing, sell top of balance area and take profits at bottom of balance area or buy bottom of balance area and take profits at the top of the balance area.
6) Trading Strategy: If markets are trending higher, buy the breaks and take profits on the rallys. If markets are trending lower, sell the rallys and take profits on the breaks.

Step 7: Have any Trade Scenario Buy/Sell Signals occurred?
1) For each Futures Contract or Stock to be traded, monitor for trade scenario buy/sell signals being triggered.
2) Trading Strategy: If trade scenario buy/sell signals are triggered, execute trades manually or with resting stops (set ahead of time).

Step 8: Is it time to exit any trades?
1) Monitor all futures contract and stock positions for continuation.
2) Trading Strategy: If profit targets are reached exit trades or take partial profits.
3) Trading Strategy: If market structure indicates lower odds of continuation, then exit trades to protect profits or minimize losses.

Anticipating the Trading Day's Market Structure

Anticipating the Trading Day's Market Structure

To Shadow Traders,

As mentioned in prior posts, even if you are a longer term trader, on the day you enter or exit trades you are a day trader. Also mentioned is the fact that the appropriate trading strategy depends on whether the markets are trending or balancing. So if you are going to trade intraday, the first order of business each day is to determine whether the markets are going to be more directional/trending or rotational/balancing in the day time frame.

In James Dalton's book Mind Over Markets, James discusses market information that is available after the open that can give clues as to the type of market that is likely to develop intraday.

First some basic background about the Day Types described in Mind Over Markets.

The Day Types are listed below in order of occurrence:
1) Normal Variation Day: Occurs around 50% of the time. It is characterized by extension beyond the Initial Balance Period in one direction only, and market development characterized by relatively wide rotation for a significant part of the day.
2) Neutral Day: Occurs around 25% of the time. It is characterized by price extension on both sides of the Initial Balance Period. Neither, the OTF buyer or OTF seller can take directional control. It is often a wide range day.
3) Double Distribution Day: Occurs around 10% of the time. It is characterized by horizontal development (balancing) with two distinct nodes featuring rotational market activity separated by an area of low volume, often single prints, indicating a sharp move from one part of the day's range to the other. It is usually a wide range day.
4) Normal Day: Occurs around 5% of the time. It is characterized by a slight extension in one direction beyond the Initial Balance Period, but with a small overall range for the day.
5) Non Trend Day: Occurs around 5% of the time. It is characterized by no extension outside the Initial Balance Period. There is no OTF buyer or seller involvement.
6) Trend Day: Occurs less than 5% of the time. It is characterized by wide range and persistent directional conviction with the OTF buyer or seller in control all day, with little, and narrow, price rotation. It typically opens near one of the day's extremes and closes near the other.

The occurrence rates listed above vary and are met to represent an approximate magnitude of occurrences. As you can see Normal Variation and Neutral Days account for around 75% of occurrences. The least common is a Trend day occurring less than 5% of the time. Even though it does not occur much, the trend day is extremely important because it can account for big gains if you are on on the right side or big losses if you are on the wrong side.

Don't get hung up on the names of the day types, they are mostly academic. You should be more focused on whether the evolving trading day is more directional/trending or rotational/balancing.

Early Market Information that can give clues to Market Direction and Confidence:
1) Opening Price Inside or Outside Yesterday's Value/Range
2) Trading Day Extreme
3) Opening Type
4) Price Acceptance Inside or Outside Yesterday's Value/Range

Opening Price Inside or Outside Yesterday's Value/Range
1) If opening price is within yesterday's Value/Range, there are higher odds of a more
rotational/balancing day with a smaller range.
2) If opening price is outside yesterday's Value/Range, there are higher odds of a more
directional/trending day with a larger range.

Trading Day Extreme
1) The High or Low of the Day occurs in first 30 minutes around 50% of the time.
2) The High or Low of the Day occurs in first 60 minutes around 75% of the time.

Opening Type
1) Open-Drive: Is the highest confidence opening which is generally caused by OTF participants who have made their trade decisions before the opening bell. The market opens and aggressively auctions in one direction. Price does not return back through the opening range and leaves the most reliable extreme.
2) Open-Test-Drive: Is the next highest confidence opening which generally opens and tests beyond a known reference to make sure there is no new business to be done in that direction. The market then reverses and auctions aggressively back through the open. This opening type leaves the second most reliable extreme.
3) Open-Rejection-Reverse: Is characterized by a market that opens, trades in one direction, and then meets opposite activity strong enough to reverse price and return it back through the opening range. Lower confidence opening where initial extremes only hold about half the time.
4) Open-Auction (Inside Value/Range): Market opens, auctions in one direction until activity slows, then auctions in the other direction. Neither, the OTF buyer or OTF seller is present with any level of confidence. Any extremes established early on, have a low probability of holding for the entire day.
5) Open-Auction (Outside Value/Range): Opens outside Value/Range and auctions around open. Higher odds of directional conviction developing because of open outside Value/Range.

The type of opening sets the tone for the day and has a lot to do with the type of day that develops. The higher confidence opens tend to evolve into more directional/trending days and the lower confidence opens tend to evolve into more rotational/balancing days. The chart below shows the relationship between opening types and day types as well as market profiles.

Price Acceptance Inside or Outside Yesterday's Value/Range
1) If there is price acceptance within yesterday's Value/Range, there are higher odds of a more rotational/balancing day with a smaller range.
2) If there is price acceptance outside yesterday's Value/Range, there are higher odds of a more directional/trending day with a larger range.

If you use the clues from the early market action or tone you can anticipate the evolving day type/market profile which can translate into selecting the most appropriate trading strategy intraday and into taking advantage of lower risk asymmetric trade locations.