You never know what kind of day the market throws at you. But considering that 70% of the time the market is simply ranging between values (ie "choppy") and the other 30% in a breakout/trend, a trader should have multiple weapons in his arsenal. Today, Tuesday 6/17/03, was a very pronounced and easy to trade day, although you will have some traders complaining that it was "choppy." Basically, the method I use for range days is simply support and resistance. Slap on other technical indicators if you wish. Anyways, some definitions: UVA = Upper Value Area LVA = Lower Value Area POC = Point of Control Initial Balance = First hour's range The Value Area is defined as the first standard deviation of volume (ie 68.2%). POC is that price that was heavily traded. Whats happening on days like today is that there are no institutional or commercial players moving the market. They've been exhausted or simply waiting for some news to change the nature of the market, much like Monday's 20+ point move. Pit traders, both electronic and floor, are trying to find some known value or agreed upon price that they can trade around. Without institutions moving the market, these traders will rotate around given prices trying to find acceptable price boundaries as well as the much ado about "stop running." They're trying to find buyers and sellers by pushing the market in one direction and then another. If those prices are rejected (ie they can't find buyers/sellers) it heads in the opposite direction. They keep on rotating through the value area in a balanced state until institutions make their play. The POC is what the most traders agree is a "fair" price and acts as an "attractor." So on days like this, you have to think of yourself as an electronic pit trader, trying to make the spread. But instead of a spread of only a tick, we're talking 4 pts or so. Once a range is pronounced, where both the upper and lower range has been tested and decisively rejected, one enters at the LVA and sells at the UVA, perhaps partialling at the POC. Vice versa at the upper range. Beware that all this constantly in flux so the value area and POC are constantly shifting as traders figure out what is an acceptable price range for the majority. Notice the bell shaped curve of volume distribution and the lack of volume at the upper and lower extremes. With such a text book example, the bell curve of volume is indicating that all the traders are agreeing on the same price range until such a time as an institution decides to do something about it. Each range extension into the highs and lows are promptly rejected. This method is most useful in range-bound days because its simply support and resistance. Traders are in control and not likely to move the markets until the Big Money decides to. All this is known as Market Profile. Tuesday's UVA was 1012.5, POC of 1010.75, and LVA of 1008.75. Basically a 4 point range. If adhered to strictly, buy at LVA, sell at UVA, with stops at high/low, you could have made 16 pts and stopped out twice for 1.75 pts (3.5pts total). You can also use this method in an overall trend. In an uptrend, if the market opens above yesterday's value area, you would buy at yesterday's UVA or POC with a stop a little beyond the LVA. Vice versa in a downtrend. Monday's UVA was 1006.25, POC 1004, and a LVA 997.
The classic method is via the "official" Market Profile subscription which one needs to pay for. This method is somewhat esoteric because it increments in half hours and uses letters. Not exactly the most intuitive and trader-friendly, unfortunately. However, there is a user friendly, custom built volume profile that can be downloaded from esignal central in the speciality scripts. Look under volume profile. One is a historical overlay which can be used to look back to yesterday or overlay multiple days (ie to look at the week's distributed volume activity, a month, etc.). Another is real-time intraday. Its default settings are for the ES. Other studies I use in conjunction to round it out include a hi/lo range study made in the first hour and a line label study that I input with yesterday's VA numbers. Both are somewhere on esig.
Thanks for the info. Interesting topic. Did you happen to find these things in esignal or did you learn about this from somewhere else?
JT, Thanks for the great info, I've written my own TS indicator to calc POC, but my number doesnt match up precisely with 1010.75 that you're seeing for today (Tuesday). Is your POC based on 9:30-4:15 for September ES? I tried both sessions, and am getting 1009.75. Thanks, Sean
I've noticed this actually, that not all MPs #s are the same. But yes, the U contract using RTH (PST for me). Note, I did not write the code. This newsletter churns out its own value areas as well. http://www.thelikosletter.com/current/dtusa.cfm Daytradersaction has value area #s as well but you have to sign up. Went in for a free trial and noticed the same type of differences. http://www.daytradersaction.com/ And Enthios http://www.enthios.com/morningcall.htm But all close enough for government work.
I use this stuff in Ensign and also found some different VA's. A great read on Mp imo is "mind over markets" by James Dalton.