About Correlations

Trade Management

These are some of the trade management topics.

What is Trade Management?
How is it different than Risk or Money Management?
Mechanical versus Arbitrary Trade Management.
Holding for a target: How difficult could that be?

You are only as good as your last trade?
Being a smart trader and getting smart during trades.
Difference between homework and in-trade analysis.
When does it make sense to move a stop?

How important is the entry really?
Checking target location before entering.
Keeping track of what is and isn’t working.
A business that doesn't keep records isn't a business for long.

Special thanks to FuturesTrader71

The Opening Plan

The Value Area represents the range of prices that contain 70% of a day’s trading activity. These are opening setups based on the prior day's value area and should be used after U.S. Opening (9:30 ET):

#1 Open Drive (OD)

A: When a market opens above the value area and then goes through the overnight high with volume at highs increasing, it's a bullish signal. Buy early nearest low volume node. Internals should be highly positive. The opening is dominated by initiative buying, do not trade against it.

B: When a market opens below the value area and then break through the overnight low with volume at lows increasing, it's a bearish signal. Sell early nearest low volume node. Internals should be well negative. The opening is dominated by initiative selling, do not trade against it.

#2 Open Test Drive (OTD)

A: When the market opens above the value area and remains above the value area high on the subsequent tests, it is a clearly bullish signal. Buy the high of value area. Internals should be positive. If the market begins to trade within the value area and volume increases at lows, it would be recommended to exit long positions.

B: When the market opens below the value area and remains below the value area low on the subsequent tests, it is a clearly bearish signal. Sell the low of value area. Internals should be negative. If the market begins to trade within the value area and volume increases at highs, it would be recommended to exit short positions.

#3 Open Rejection Reverse (ORR)

A: When a market opens above the value area but then fails to go through the overnight high and begins to trade back with volume at lows increasing, it is a signal of rejection. Sell the overnight high. Internals should be negative. There is a strong tendency to rotate all the way through the value area.

B: When a market opens below the value area but then fails to go through the overnight low and begins to trade back with volume at highs increasing, it is a signal of rejection. Buy the overnight low. Internals should be positive. There is a strong tendency to rotate all the way through the value area.

#4 Open Auction In/Out of Range (OAIR/OAOR)

When the market opens in/out of range within or near the value area it is showing signs of a balanced market. Trading from responsive versus initiative would be preferred. Fade the extremes of the value area. Internals should be neutral or not in trending mode.

Use market internals (ADSPD-VOLSP) to figure out strength or weakness.
Remember, don't try to use any setup as a rigid, systematic trading rule, blindly applied to all market conditions. Context is key.

Auction Theory

The market is accepted as a complex system and value is the primary variable for describing the market. In place of an overarching distribution function, the Auction Market Theory examines the many component parts of a market.

Each component describes an aspect of the market. The sum of the descriptors, collectively, describe the market as a whole. Thus, the goal of this theory is a clarification of the auction process, search and evaluation of the component parts of market. The utility of the theory is in its potential for explaining how the market works.

Futures markets are no different than any other market. All must move to survive. Auctions up and down to find limits of buyers and sellers. Rejection and acceptance identified by volume. Breaking extremes, looking for limits, builds value, breaks again, finds balance and returns to value. That's the natural rhythm of auction process.

In markets, the complexity precludes true forecasting. However, Auction Market Theory provides information reliable enough that market decisions can be based on the Auction Market data.

Market Excess

Watching at the bigger picture, last All Time High (ATH) shows decent excess on it.

Usually, market needs an excess high to call an end to the current bullish auction.

Lack of excess is created by nervous longs who continually sell their positions on each test of current high of day.

Often there will be some action a few ticks above that high but there will be no new buyers stepping in to push higher.

That action at highs is a sign that short term traders are in control and they are nervous at the top.

They are weaker hands that are selling into strength, not feeling conviction to hold. Here is a chart to see how an excess looks like.



An excess high is one which has a top on it that is excessive, meaning having a long single print tail.

That tail can be created either by 2 scenarios:

1) A market opening high and having an early liquidation break back down which causes the spike.

2) A market that moves in a range and then shoots up 'out of balance' in an exhaustion rally to come back into range.

When an excess high appears on a chart in a new swing high area after a market has moved up for some time.

It can be a signal that the recent up auction is over.

An auction should have a "proper" end, with a shout and not a whisper.

Value Transition

VPOC stands for Volume Point of Control, usually called 'POC', and is the price level with the heaviest volume for the day. This is the price level with heavy Acceptance by both, Buyers and Sellers. The level signifies agreement by both parties on Value. Now, if the Buyers and Sellers agree that a certain price is fair, then the market could remain in balance trading around the VPOC until additional information changes the perception on Value or it could head in the opposite direction and test a previous area of Rejection (disagreement).

But how do you trade it? On a Non-Trend Day price could just rotate around the POC until new information (a catalyst) is introduced in the market and changes the opinion on Fair Value. The idea is to fade the extremes of the range around the POC. On a Trend Day, Price will make a directional move away from Value and Value will catch up to Price so any pullback will probably be bought before the POC could shift again.

Market auction is a discovery process, e.g. when price moves down and does not find enough buyers, we see thinner profiles until volume starts to show a peak. Sellers try to push down again but find new buyers. After time and more buying activity that peak becomes the POC, where both parties agree on fair value and sellers quit. Time to exit.

The POC is also a High Volume Node or HVN. Accordingly HVN or POC is where the real value is product. At this level buyers and sellers they agree that the price is reasonable (fair price). When the price moves away from its market value enters imbalance (Breakout Mode) with two obvious results: 'Rejection' and return to its original value to correct this inefficiency, or 'Acceptance' and in this new case, a 'Value Transition'.

Value Transition is the migration or movement of the POC value to a new level in which the perception of its value has changed. Market Profile will show a profile with a double distribution with two High Volume Nodes, but also, and most important, between HVNs will be a Low Volume Area, a zone where buyers and sellers have shown a lack of interest, and therefore, that price has been rejected.

The concept of 'VALUE TRANSITION' is one of the most important topic on the Auction Theory. The work of a Profile Trader is to figure out a potential change on value perception, if the price is acceptable (acceptance) or rejected (rejection). 'Price always precedes Value', the price is the announcement of the change of value, but its acceptance in a new level of perceived value must be confirmed with the volume. Price is Advertisement, Volume is Confirmation.

Trading Value

As day traders we always are looking for the divergences between price and value, so our first goal every day is to find value.

All markets must move to survive. Futures markets are not different than any other market. Consider a simple real estate market as an example. Auction up and down to find sellers and buyers.

Price+Time=High Volume=Value, trading at trade locations relative to value, not price. I define market value using Auction Theory. Even if you do not use it, you should because many CME traders use it.

Understanding the concept of Acceptance and Rejection is essential to apply Auction Theory and Volume Profile techniques. I look to trade from Rejection (LVNs) into Acceptance (HVNs) then back towards Rejection. This is the natural rhythm of the market.

Rule#1: Buy below and Sell above Value (HVNs) until the perception of Value (Breaking LVNs) has changed. Rule#2: Never forget Rule#1.

On a balanced day I fade the extremes. On a bullish/bearish trend day I look for pullbacks over LVNs below/above value.

On balanced range days we define easily where's value, on imbalanced trend days value shifts quickly with every new HVN. At LVNs (Low Volume Nodes) we will find wholesale price for entries and at the HVNs (High Volume Nodes) we will find retail prices.

The LVNs (Low Volume Nodes) are the logical spots for entries and the HVNs (High Volume Nodes) the logical spots for targets. That's make sense, only a few people would like to buy something at the most accepted prices. We always look for some advantages.

Dalton Unplugged

James Dalton (aka Jim), author of Mind Over Markets, is a discretionary trader and uses the Market Profile to organize the Data. He has over 43 years of experience trading the markets and though he retired from the full time business, he was in Bangkok in 2016 for Traders Carnival to talk about his approach, nuances, tips and common mistakes, as he believes to teach how to catch the fish rather then feeding a fish.

Jim talks about the auction process and how the purpose of the auction is to travel from balance to imbalance and back to balance.

In a two way auction process the market participants of a day time frame tend to play to the exactness of levels and in that process tend to break value area levels by few ticks and come back into value leaving an auction failure. Markets hate precision. The people who are obsessed playing to the exactness of levels can enter into emotional trades and the other players are waiting to jump in so that they can be wiped out.

Most traders are anxiously looking and trying to find a trade, and if you're trying to find a trade, you will probably find a trade but it won't be the right trade. It takes a lot of maturity to understand that if you get into the flow of the market when the trade is right for your timeframe you will recognize it.

He talks about how volume is key. If we break out of a trading range and volume decreases, probably it's not going to be a successful break, but if you break out of that range and volume increases then we've a good chance to get a successful breakout.

Jim mentions the three biggest mistakes most traders do. First mistake is being 'too anxious' to trade in the morning. If we're within yesterday's range in balance we want to have some patience, but if you're outside of yesterday's range the chance for a big day are much higher. Second thing they do is trade 'too often'. Instead of looking for 2-3 trades a day, a lot of these traders are looking for 10 trades a day.

The third big mistake traders make is putting their stops 'too tight'. They believe that they're being prudent by having a tight stop when in fact they add up a series of unnecessary losses. They're spread between bid and offer and all transaction costs and it gets quite expensive.

He use market profile to identify market structure and place the stop near someplace that would violate that market structure. He believes that's the best way to control risk. The worst stop we can use is just the money stop. The second worst thing is move the stop to break-even and that's actually a terrible thing to do because it's random.

He talks about preparation. We should prepare every day by writing three potential scenarios that could happen. The worst trader is a trader that has only one idea. He may get lucky but there's too much randomness in the market. We don't know that's going to happen and if we don't have contingency plans for the unexpected, we're scrambling and when we scramble we do some really silly things.

Markets in Profile

Market Profile is not a typical indicator. It does not provide buy/sell recommendations but acts more like a decision-support tool. It organizes the data so that you can understand who is in control of the market, what is perceived as fair value, and the potential direction.

Markets in Profile shows the dynamics of markets through the organization of price, time and volume, and how to synthesize this information with your own intuition. Each day, the market will develop a range for the day and a value area which reflects the acceptance level of a certain price range or balance area. The point of control represents the price where most of the trading activity took place.

Market Profile is based on the normal distribution curve, if you rotate the normal distribution curve so that price is along the vertical axis and time on the horizontal axis, you have the structure of Market Profile. Monitoring price distribution over time gives insight into what levels are considered fair and unfair. You may take advantage of this information and identify good opportunities.

Market Profile can be used to identify the "asymmetric opportunities". These are market set-ups based on anomalies where not only do the odds more favor a move in one particular direction (balanced targets) but the situation is such that a move in that direction is likely to be substantially larger than were the market to go the other way.

Markets in Profile shows it clear that the profile is not some magical technical system. People are generally not prepared to take the time and effort to learn what is essentially an art. This book combines potent theory with real-world examples of how the profile makes it possible to take advantage of these "asymmetric opportunities".

Steidlmayer on Markets lays the foundation for understanding and implementing the Market Profile methodology by providing background information based on Steidlmayer's experiences as a commodities trader, and showing how he developed his ideas and learned to apply them successfully within the markets.

Harmonic Trading

Harmonic Trading is a methodology based on pattern recognition and alignment of exact Fibonacci ratios to determine highly probable reversal points in the stocks market (don't use it on Futures Market).
This methodology assumes that trading patterns or cycles, like many patterns and cycles in life, repeat themselves. The key is to identify these patterns, and to enter or to exit a position based upon a high degree of probability that the same historic price action will occur. Although these patterns are not 100% accurate, these situations have been historically proven. If these set-ups are identified correctly, it is possible to identify significant opportunities with a very limited risk.