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Market Profile is a mystery to most traders, and I want to spend a little time talking about it1* I like this example because this does tend to happen more often than you would think. This setup keeps you in the direction of the most recent order flow. Typically when stocks come out with really good news or really bad news, there are always people in the know who get positioned for these moves before the news is released. This pushes the stock higher {for good news) or lower (for bad news) before the story hits the wire since these insiders load up or dump shares. When the news hits, they get outand often I can too because I'm following these setups. With PSFT, the 8 EMA crosses the 21 EMA on August 25, 2004 (see Fig. 16.12). I set up an order to buy the first pullback to the S EMA. On August 27 PSFT pulls back, and I am filled at 17.11. My stop is 16.43, and my target is 18.47. On September 1 Tm up by 4 percent, so 1 start to trail my stop using the 21 EMA. 2. On September 3 my target is hit, and I set up an order to buy the first pullback to the S EMA. 3. The pullback actually occurs on this very same dayT and I'm filled at 17.62. 1 place a stop at 16.92, and my target is 19.03. 4. The stock doesn't do a whole lot for the next three trading days, but on the fourth day it gaps higher on the ORCL (Oracle Corp) takeover news and opens at 19.97, 94 cents above my target, I'm out for a +13.34 percent gain. Although 1 had no clue that this would be announced, I did know that the order flow on the stock was positive based on this particular setup, so the odds were in my favor that the path of least resistance would be higher. TZOO (Travetzoo, Inc.)August 13, 2004 1. TZOO was one of the hyped stocks of 2004, and using this setup, I was able to catch a few of the moves. On August 13, 2004, the 8 EMA crosses up and through the 21 EMA (see Fig. 16.13). Once this happens I set up an order to buy Options the next pullback tt the 8 EMA. A few days later, on August 18,1 am filled at 30.29.1 place a stop at 29-08 and a target at 32.71. 2. TZOO ramps higher soon after I enter the stock, and my target is hit later that same day. Once 1 am out, I place another order to buy a pullback to the 8 EMA. 3. On August 24 the pullback occurs, and I am filled at 37.03.1 set my target at 39.99 and my stop at 35.55. 4. Similar to my last trade, TZOO ramps up, and my target is hit the very same day. Like a robot, I set up an order to buy the next pullback to the 8 EMA. 5. On August 30 J had a bid set at 40.8]. The stock gapped below this level and opened at 39,24, where I was filled. This is a good example of what I do in this type of situation, because I place my orders before the market opens and don't wait and try to finesse my entry after the market opens. When you have a limit order in place, and the stock opens below that level, then your order becomes a market order because it is at this price or better. However, I will update my stop and target based on my actual entry price. In this case, my entry price was 39.24, so I use a stop that is 4 percent lower than this price, which is 37.67, and a target that is 8 percent higher than this price, which is 42.38. 6. On August 31, the very next trading day. my target is hit. I know what I'm going to do nowI'm going to bid for the next pullback to the 8 EMA. It's like kissing your spouse goodbye when you leave for work in the morning; after a while its automatic and you don't have to think about it. 7. On September 2 I'm filled at 42.36, and I set my stop at 40.67, and my target at 45.75. 8. A few days later my target is hit Time to buy the next pullback. 9* The market pulls back many times but never quite to the 8 EMA until September 20, where I'm filled at 66.34.1 place a stop at 63.69, and my target is 71.65, 10. My target is hit the very same day. SNDK (Sandisk Corp)August 31r 2004 1. On August 3112004t I buy a pullback to the 8 EMA on SNDK, and I'm filled at 23.30 (see Fig. 16.14). I place a stop at 22.37 and a target of 25.16. On September 8 SNDK gets close to my stop and closes near the lows. After I see this, I assume I'm going to get stopped out the next day, but the important thing is that I do not alter my parameters. It doesn't matter what [ think, as long as I don't touch the parameters! 2. Two days later the stock has reversed, and I'm out at my target on September 10. It's time to set up my next bid to buy SNDK on a pullback to the 8 EM A. 3. 1 trail up my bid and it's almost hit on September 20 and again on September 24, but close enough doesn't cut it, 1 don't get filled again on this play during this time frame. SUMMING UP THE PROPULSION PLAYS There are two main things that I like about the propulsion play. First, I don't have to watch the markets all day in order to get my entry. 1 can set up the orders the night before and then check at the end of the day to see which of my orders got filled. Second, I like that these plays have specific targets. I've tried this method by just using trailing stops, but the results were nol as good. Sure, once in a while 1 would catch a stock that would have a parabolic move, but more often than not a perfectly nice profit would roll back over into a breakeven trade. Through trial and error, I have found that by setting a firm 8 percent target using a GTC {good till cancel) order, my profitability improved. Remember, you don't want to become one of the many brokerage clients that the staff pokes fun at. They call GTC orders good till close, because any time the stock gets close to the client's target, the client calls up and cancels the order because it looks like it will go even higher. Of course, most of these stocks end up heading back lower and getting sold for a Joss. Establish the parameters, then treat your parameters like good employees and let them do their job. In terms of actual execution of these plays through your broker, here are two additional tips. First, it helps to drill down and watch the daily EM As update in real time throughout the day. You can do this by overlaying the daily EM As on a 15-minute chart. To do this in Tradestation, set up a 15-minute chart and then do the math. Take the 6.5 hours in the regular stock session, which equates to twenty-six 15-minute bars. 26 periods x 8 EM A = 208, and 26 period x 21 EM A = 546- These 208 period and 546 period EMAs on a 15-minute chart mimic the 8 and 21 EMAs on a daily chart. You can adjust this to include the pre and post market sessions if you like. By watching the intraday charts with the daily EMAs overlaid, a trader can really keep an eye on when the cross is taking place and where to place the orders. Second, like the pivots, 1 think it is helpful to get just in front of the moving averages. For example, if the 8 EM A is at 43.40 and you are trying to buy a pullback, then place a limit order 10 to 15 cents higher, say 43.52, in order to get filled. When the setup h there, don't make the mistake of tripping over pennies when your aim is to be picking up dollars. MARKET PROFILE-REMOVING THE MYSTERY FOLLOWING IN THE FOOTSTEPS OF ELEPHANTS Market Profile is a mystery to most traders, and I want to spend a little time talking about it and at least introduce it to traders who have never used it, since it is becoming increasingly more important to understand how to use this technique. I want to emphasize that this is an introductionthere are entire books written on Market Profile, and unfortunately, none of them is easy to read. One of my trading partners, Alex (alleybhis name in our trading room), uses Market Profile extensively, and he was kind enough to research the examples for this chapter. Again, this is intended to be an introduction into this methodology, so if you are already familiar with Market Profile, there shouldn't be any new information for you here. For the uninitiated, the goal of this chapter is to just introduce you to this technique and give you a basic understanding of how it works. I must point out that 1 do not use a specific strategy for trading Market Profile. Rather. I use it to get a bias on the markets. If Market Profile is telling me that the sell side is more attractive than the buy side, then I will focus on short setups and generally ignore buy setups, and vice versa. By setups, I mean the setups [Ve already discussed in this book. Also, I personally do not do my own Market Profile analysis on the markets. It is not my area of expertise, and I would rather just look at what other experts are doing in this area and view their research. I keep an updated resource list on this at www.tradethemarkets.com. With Market Profile, people can't hide what they are doing, which is the beauty of this analysis technique, and this will become incredibly more important as the financial markets come kicking and screaming into the electronic age. Let's take a look. Market Profile or MP, as I refer to it here,was originated by Pete Steidlmayer in 1982 and was licensed to the Chicago Board of Trade in 1984. In its simplest form, MP is one of the most accurate methods for analyzing market data available, and it is becoming even more important as markets make the switch from open outcry to all electronic. MP organizes data and puts them into a picture type of view that represents timev price, and volume. The picture is shown on a vertical axis in the shape of a bell curve. The price component of this picture is displayed on a vertical axis. This part is easy enough to understand. Now it gets a little more interesting. The time portion of this visual is displayed utilizing letters of the alphabet. These letters represent the time or time brackets, and they are displayed on a horizontal axis. Finally, the third part of this picture, volume, is shown in the form of a histogram and takes different shapes depending on the provider of the data. MP shows in real time the development of pricing patterns, which is sometimes referred to as price discovery. It shows the market organizing data into a unique format in which it is possible to view whether a price is being accepted or rejected over time and through volume. It is possible with constant analysis to establish whether the majority of market participants are long or short and if they are trying to add to or liquidate their positions. It also provides an opportunity for establishing the reference points of the market. Examples of this include establishing areas of fair or unfair value. Because these data are organized as a picture, high-volume prices and low-volume prices, both of which act as support or resistance, stand out clearly. In addition, the data can establish possible price projections by knowing how the various participants are positioning themselves. Any market exists to facilitate trade. In simplistic terms this means that the markets travel up and down to establish points of reference at which the majority of buyers and sellers are satisfied in an attempt to establish value. Value is not necessarily viewed by different timeframe participants in the same way. What may be fair to one is unfair to another, MP attempts to create balance and moves through varying degrees of imbalance or trend or vertical moves followed by renewed periods of balance or consolidation or horizontal moves. This is how the bell curve is created and takes shape, and from this the long-term MP can be used to establish short-term moves. SPECIFIC EXAMPLES OF MARKET PROFILE IN ACTION Let's look at a few examples of Market Profile. Figure 17.1 depicts a daily MP time price opportunity (TPO) together with the open, opening range, 50 percent of each day, close, and value range. The contract shown is the CME big S&P 500 December futures contract, covering September 16 through September 23, 2004. This contract is also referred to as the Spoos (pronounced spooze), with the quantity traded often referred to as cats and points made or lost on a play often referred to as handles. September 21 was the U.S. Federal Reserve or Fed interest rate announcement day. On September 22 the Spoos opened on a gap and underneath the bottom of several of the previous days distribution giving a low risk sell opportunity. This sell opportunity was taken at the opening at 1122 and covered on the close for a profit of 8 points. An additional sell was generated on September 23 on the higher open and at the base of value of the previous day. If the market had wanted to go up, the slop would have been just above the top of value on September 22. The week of September 13 clearly shows that value was being driven higher versus the previous week's value range, and as long as the close remained greater than the point of control from the week of September 7 at 1II 8.70, then the best trading ideas were longs or to stay flat. Short wasn't an option-unless prices broke down through 1118.70, The week of September 20 clearly showed the rejection of the previous week's point of control at 1127,50. The markets rolled over from here and accelerated down through 1118.70. Once this happens, the trader can set up a short To find a target, a trader then starts to look for the bottom of value from the week of August 30, which is listed at 1102.20. The September 21 close to the end of day shows a late running profile in K period, which together with the N period single print and the September 23 retest and rejection at 1.2330 show a seller in control. On a daily chart this can lead to a mul-tiday movein this case lower and a stop close order a few ticks above the high can be used initially for risk management. E mini NasdaqDecember 2004 Contract, September 8, 2004 Figure 17.5 depicts a daily MP TPO together with the open, opening range, 50 per cent of the day, close* and value range. The contract shown is the CME E-mini Nasdaq December futures contract. A neutral day is a rotational day in which the market rotates on either side of the opening range, showing that the market is distributing with buyers at the low end and sellers at the top end of the day's range. September 8 and 9 are both neutral days. On September 8 we see how the D and E time periods are above the B. Additionally, note how the letters M and P are below the B. The B time period is the opening range in this instance. The contract shown is the CME E-mini Russell 2000 December futures contract. In the first example, the Russell developed a buying tail in the B period of September 10 going right into the middle of the previous day's range. Note the lack of trade on September 9 in the middle of the MP creating a form of gap. This occurred after the initial early sell created a buying opportunity which became more evident in the C period. Profits could have been taken either at ihe developing point of control/high volume or MOC. The second example shows again on September 13 the buyer driving the market higher after having opened on a gap up and with a range extension for the first two hours through the E time period. Note that late in the day profit takers were afforded a second chance to buy this time in the N period, which traded right down to the bottom of the C period before bouncing back to midrange of the day |
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