Thursday, February 22, 2007

Planing the trade and what to look for on your chart


Large block trades noticed on IWM (50,000s block trades are red. 500,000s block trades are green).



I plan on studying this pattern in trading and combining this information with Volume profile analysis to find the best value in price.
What we are looking at is value defined by the largest traders. You will notice they only enter trades at tick extremes near the HOD, mid point, and LOD(alternatively the LVA, POC, & UVA). Are the professional traders buying the LVA, selling the UVA, or buying/selling around the midpoint. Also, where are the large trades being taken in relation to the 3-5 day volume profile.
Here is a great article by Dr. Steenbarger on tracking large traders.

What are the key questions we should be able to answer before entering a trade that will make the trade have a high probability of working?

1.What time is the trade being executed?
This question is important because you will need to base your stop and profit target for the trade according to the volatility. Volatility is also directionally proportional to volume; moreover, volume is highest during the first hour and a half of trading. Also, the initial balance (first hour of trading) normally covers 90% of the days trading range.

2.How are the major indices trading relative to each other?
If all the indices looked to be in tandem and trending one direction then this would be a strong indication to go with the trend and not fade the market. However, if ES is making a new high on light volume while ER2 is 2pts below its high while also on an uptick and we are 2 hours into the trading day, then this might be a setup to fade ER2.

3.Where are the volume gaps?
Volume gaps are important areas you need to be aware before the trading day because once the price trades into a volume gap the volatility can increase significantly from lack of established support or resistance.

4.What market sectors are trading up or down?
If all the sectors were trading down, then this would be a no brainer that we have a selloff taking place. The more sectors you have trading your direction, the better it is that the trend will continue. (I track some of the major sectors by following XLF, XLE, SMH)

5.What is the NYSE TICK value before you enter a trade?
Buying at 1000+ TICK readings may be dangerous because this value normally represents a climax in buying and is sometimes used as a value that traders watch to fade the market. By making sure you enter long trades when the TICK has pulled back you will be in a much better position of not buying the top. The same goes for when entering short trades as well; moreover, you want to short when the NYSE TICK is in a high range relative to the day, and only when the trend of the market is down.

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