Month: April 2011

Markets exist to facilitate trade. In the auction exchange which happens across various time frames, it is important to step back and always assess which time frame of the market is controlling the price moves.

We have seen an up-down april series so far, with the move which started from march 21 off 5577 levels ( actually from the bottom of that large bracket closer to 5370) running into rough weather near 5940 NF levels.

At today’s close we are at 5766 off 200 points from the highs seen recently.

Often when the market is on the verge of a large move, either direction I tend to look at the market through the Steidlmayer 4 step process also called Steidlmayer distribution.

Before we go into the chart, let’s understand what the Steidlmayer distribution actually is :

A Steidlmayer Distribution has four parts:

1) It begins with a directional move which we call an Initial Price Movement (IPM).Most of the time a trend day starts a new development. An IPM is one time frame activity or a series of directional bars with few or no overlapping ranges and retracements.

2) Rotation begins and with it, the formation of the Point of Control ( POC) . A pure rotation should have POC moving sideways.This later takes the shape of a bell curve.This also brings an end to the IPM

3) From this sideways movement, the market moves into a b shaped profile or a p shaped profile.The “b” shaped profile is bearish and the “p” shaped profile is bullish.

4) Distribution completes and usually from the Point of Control of the completed distribution, a new IPM forms that either moves in the original direction or accepts above 50% of the IPM range. If the latter occurs, the IPM will go on to form either a larger sideways market or the start of a new directional trend.

Here’s a chart of the Nifty future as a daily profile.

In the chart we have an initial price movement off 5577 levels followed by a sideways move. We alos saw evidence of minus development yesterday and and an auction today which was at the lower end of yesterday’s profile. Ideally tomorrow we are set up for a move back into the balance zone of last week or a move below 5715 NF which may bring levels of 5630/ 10 below. The balanced profile of today also confirms a range break out happening.

Let’s look at another chart which has merged profiles.I prefer to look at these charts as the structure is based on market movement.

The merged profile shows a bell curve near the top and a b shaped profile at the close today, signaling a possible end to the sideways movement.

 

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Steidlmayer Distribution

In Market profile, the auction theory is all about the buying and the selling of the market.

Fortunately in our trading room, we keep a record of this through our OrderFlow indicators.

The orderflow measures the buying and selling of the market and puts us ahead of some great trades through it’s uniqueness.

It is based on the actual money chasing longs/ shorts and always a good window on where the market is selling off and where it is buying into.

On Wednesday, the buying in the market was depicted through a blue streaming line ( blue is for buying and red for selling) and this morning we had a red orderflow straight off the open.

Today the buying has been less, evident in the lesser blue in today’s charts compared to the one on wednesday which was all blue until the close.

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OrderFlow at 1.00 pm.

We have seen a strong buyer off the open this morning, more as a response to the lower prices near the 5730 levels we had marked out as borderline in Monday’s post.

In profile a gap is considered a splendid risk-reward opportunity as it points to the presence of a longer time frame player in the markets. Incidentally, a gap is considered as a movement away from the previous day’s range ( high or lows), and not the difference in a close and open.

The open drive which was initially a gap-fill turned into a successful 80 % rule trade and current prices are up over 115 points from morning lows of 5750.

Of interest to us now, is two points :

a) staying above the 5850 level marked out in Monday’s post
b) the lower end of the double inside days from last week at 5880.

I have marked the double inside days as one single profile in the above chart.

You would have noted on Friday last, the market rejecting this entire zone from 5880-5936 in the move off the morning.

The rest of the chart is annotated.

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Profile at noon.

Here is the profile chart as of 1.00 pm today.

The region between 5880 and 5940 as well as the probe to 5971 marked a bracket of last week. On friday the responsive seller completely rejected this value and we saw a move lower to the balanced profile and the region of 5860 as expected.

This morning we are seeing a continuation of Friday’s auction with price probing to a new level of 5801 currently.

The possible targets are the single prints from 30/ 3 or the POC from 29/ 3 near 5970 levels.

It will be important to see buyer behavior at these levels. A further down move can bring 5730 which will mark the end of the up auction and one time frame behavior seen from 5300 levels. Also I have marked a dividing line between 5855-5865 for new shorts entered today. However a push to new highs for the swing trader will begin only above the top bracket or above 5911 levels.This can take the market back up to 6031 levels and beyond.

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Intra day Profile

The short answer is “No”.

No trading system can.

The question is asked, because a lot of traders were short last week and found ‘n’ methods and indicators which told them to be short in the market. Some of these were trend lines, divergences, patterns, waves and of course our very own profile charts from your’s truly.

Noticeably, I do not think any of the moving average methods pointed to a short in the market, thus explaining their lagging nature, but that’s the topic of a discussion another day.

Whilst a lot of traders are understandably elated in getting the short right, one must make a distinction between those who anticipated the market to move down and those who predicted.

The people who managed to predict were lucky, but would not live for a lot of years in this market. Those who anticipated the market are the smart traders of today, who would have an edge in their trading careers always.

What is the difference?

A trader who predicts a market ( through x, y, z indicator) would never try to explain the reason for the indicator to fail, should it fail or have a fallback method to rely on. Instead he would use some other indicator to justify the reversal. An anticipatory trader would have a fallback plan ( akin to a stoploss) should his original plan not work. It’s a game of probabilities after all and I have to still meet a trader who got all his trades right!

So when we were musing and anticipating on wednesday, for a move to 5860 to begin, our fallback was “If I am wrong about this, then NF should stabilize above 5940”.It never went above 5940.

That’s anticipation.

Have a great weekend.

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Can Profile predict?