Volume profile and technical support and resistance

As many have already observed, I’m sure, volume profile confirms technical support and resistance over time. Or maybe it’s the other way around. Put another way, composite profile studies render — in what to some may be a much more visually appealing way — the inflection points and consolidation areas already shown by conventional charting. It’s as simple as that.

This is why I’ve eliminated volume profile from my technical toolkit. Even intraday, volume profile is aligned with horizontal support and resistance on price and time series charts. The same is true for market profile. Throw up any volume profile chart or market profile chart alongside a time or price series chart. On the market profile or volume profile charts, draw horizontal lines at the range extremes, at breakout points, and at the end of “open drives”. Now look at a time or price series chart and look at areas of consolidation, breakout, and price spikes. Notice that these areas align. Notice that in consolidation, the points of control and value areas on both charts are clearly evident.

Some will argue that volume and/or market profile charts make important points about value, the amount of volume at price, etc. I could counter that there are *no* statistical studies that I’m aware of which prove that one point of control (POC) is better than another when it comes to the number of contracts traded at that level. For example, if I am looking at a 200 day volume profile composite and a 20 day composite with two different points of control, I have no statistical evidence one way or the other about which will be more significant now. I can only infer that the more proximal POC may be more significant because, well, it is closer to where the market is trading. I can’t count the number of times I’ve watched price blow through a POC, some other high volume node, or some low volume node, without so much as a wink, and stopping finally at some inexplicable number which after the fact may have been a ratio of the average daily range multiplied by a triple weighted moving average of historical volatility. (Joke.)

The same applies to value areas, standards of deviation from the POC, standards of deviation from initial balance (2 minute, 15 minute, or 30 minute?), etc. The same logic applies to studies of volume at breakout points and at range extremes. I’ve taken into consideration several variables — time of day, market events (OPEX, rollover, end of quarter and FY, etc.), data-driven market reactions, and global event risk (news releases, geopolitics, extremes of nature, etc.).

If I haven’t said it enough already, there simply is nothing that volume or market profile can tell me that is not already evident on an ordinary time or price series chart…in terms of what is statistically significant for a speculator. And in particular, for a trader who defines risk and reward based on inflection points, short term trends, and projected excursions. Which, in so many words, is how most of us pikers trade, right? (Do you think for one minute that a market maker or institutional trader or corporate hedger would read this blog? LOL. A post for another time, maybe.)

I’m making  progress in intraday time and price studies, and refining the daily range and probability studies. More on that later.

 

Quantifying key market days

Just out of a trade this morning. In profit, but not at target. As expected, the range is tight today — but tighter than the norm by about 19%. Rather than shift to a more granular setting on my execution chart, I’m just going to sit out for the rest of the day. Which gives me some time to think while I still have some focus left.

I’m still under-developed in my programming/analytical approach. This is something I need to resolve. Friday was a perfect example of the limitations in my analysis of the crude oil market.

I noticed during the late Asian and early European session on Friday that volume for Dec crude was twice that of Nov crude. The day before, volume for Nov was twice that for Dec. When this shift occurs, I move to the more liquid contract. It is a good idea to wait until volume in the forward month is sufficient before rolling over and not before – not because I believe that volume equates to price direction. Clearly, there are better indicators for price direction than volume alone, as has been proven over and over again in a  myriad of studies going back 20 years, at least. For me, it’s simply a matter of liquidity, in particular during fast market periods. A huge day for me is not measured in volume. Rather, a huge day for me is measured in terms of ticks, volatility and, in particular, the range.

So what about ticks, range and volatility on days like these? What about specific price/volume/time studies? Up to now, I’ve focused mainly on what happens at a given time of the trading day, with a given price pattern, without putting the day in proper context. Lots of traders talk about “end of month”, “end of quarter”, “options expiry”, and “rollover”. But how many of them quantify what happens during these important periods? I’m vaguely aware that these days are important and I take it on faith that something will happen. What that might be, I have no idea. Honestly, I have no idea how my trading models would perform differently on these key days compared to any other day. Until I have quantified these periods, my model remains incomplete.

On Friday, I was expecting a breakout, given the narrow trading days all week. The breakout happened, but I underestimated the strength of the move. Fortunately, I have a model that keeps me in 70-80% of such moves, if I can enter at the right price. But what if I could more precisely define, in all market trends, the probabilities of a contraction, or an expansion, or a duplication of the previous day’s range? What if I could more precisely define the probabilities after three consecutive highs or lows? Or two consecutive inside or outside days? Or the days before, during and after OEX or rollover? And what if I could compare that to the probabilities of what happens after other conventional patterns, like a narrow or wide spread day, NR7, etc.?

It’s time that I did something about it. Excel will do for now, but I’ll need a more robust software application to do the statistal work in front of me. Any ideas?

The refinements continue

In an effort to streamline and simplify, I’ve been refining my trading models and analysis over the past couple of months…leading to inconsistent blog entries since returning home from overseas.

My three latest refinements, which have not gone unquantified, are:

• Eliminate volume profile from my analytical toolkit;
• Move to less granular analytical perspectives; and
• Move to price-series execution charts vs. time series execution charts.

What the hell does this mean? I’ll take each in turn.

(1) I have decided that volume profile is not necessary for trading CL, the DAX, the ES, and currencies. This is not an easy decision, because I think volume profile charts yield very important information about supply and demand. However, for my trading model they are not necessary from a statistical standpoint. So bye-bye volume profile! (And consequently a savings of $95 a month. Investor RT charts ain’t cheap.)

(2) I was also trading on a scale that was too granular — I’ve moved up to a less granular price/time scale. My stops are wider, but my profit potential is spectacular and I am not feeling as frenetic in the mornings. I think that will translate into lower transaction costs and a less frenetic equity curve as well.

I’ve researched price and volume series charts quite a bit over the last two years. I’ve settled on price series charts over both volume and time, although I still use time series charts — albeit on larger time frames than I had used previously. It should really matter whether I look at tick charts, renko charts or some median thereof. I have settled for now on Renko charts because I can more effectively manage my risk. I don’t think anything is inherently better here — but renkos work for me.

(3) When I said, “I’ve moved up to a less granular price/time scale,” I meant to say that I have incorporated key time periods during each trading session into my analysis and trading rules. I’ve always paid attention to sessions — I started my trading journey as a short term spot currency trader, after all, where the session is (or should be) the cornerstone of any trading strategy. They are:

• The Overnight Range (OR) — typically from 1730-0530 PST;
• The Asian session — 1730-2300 PST;
• The Frankfurt/London session — 2300-0530 PST;
• The NYMEX pit open — 0600-0630 PST, which I look at in combination with the OR for an early bias;
• The Opening Range (OR) — 0630-0700 PST, which I use as the opening range (OR) for crude instead of the actual NYMEX pit open (if you care, I’ll just say that it work for me); and
• The US session — 0630-1315 PST, but I no longer trade after 11am PST without a prepared idea for doing so.

I mentioned “early bias” above. I am consciously engaged — through the filtered lens of a consistently applied analytical framework and trading model – in disproving my thesis from 0500 through 11:30 PST, because the market maker’s job is to take my money. If you trade crude, you have to be ready to flip your view on a dime — which as it turns out is ten cents for me…at the moment.

Slowly paring away unnecessary analytical tools and other encumbrances brings a strange, unsettling feeling at first. It’s something I should have done a long time ago. Adapting to the market — not in a whimsical way, but in a studied, procedural way — is a new paradigm for me. I can’t count the number of times I’ve read statements urging new traders to never change trading rules or tools. I’m now mature enough as a trader to know better.

I’m also slowly paring away my reliance on time series charts. While time is an essential component of my trading, I suspect time series charts distract from seeing price clearly. I admire people who can look at a 5 or 15 minute chart and understand, instantly, what the hell is going on there. I just can’t do it. I’ve been trading on a combination of Daily, hourly and Renko charts. This seems to be doing the trick for now.

I’ve also revised my statistical studies of a myriad of instruments. Up to now, I have only posted numbers for CL, but will be incorporating more as I refine and automate my processes. It’s time consuming to post these studies on the blog and finding a way to do this more efficiently is a smaller project that I’ll get to in time.

These statistical studes are my framework for the day’s market view. What is the previous day’s pattern? What is the average range for the day of the week? What is the range of the overnight session? Where are the range targets, given the day’s projected ranges and their probabilities? And if I’m executing a trade, where am I in relation to those targets and how does this impact my risk profile? This ultimately tells me if I want to take the trade or not.

Current projects include volatility and options studies, optimization, and ATS coding.

If anyone wants to assist in refining my quantitative tools and building automated models, ping me at L O N E L Y T R A D E R AT GMAIL DOT COM.

$CL_F numbers

Yesterday’s price action caught a few people off their guard, I’m sure. I didn’t expect such a deep retracement. With today’s numbers — coming in just under an hour — I wonder if we are in for the kind of excursions seen yesterday and the day before.

Levels to watch –
94.50/96.17/98.16 — next distribution higher
93.85 — Sep 21 swing high
93.35 — Oct 1 swing high
92.95 — statistical resistance
92.16 — high volume node
92.01 — yesterday’s high and a high volume node
91.84 — overnight high
91.02-90.80 — low volume node
90.50 — “bucket level” support and daily PP
88.95 — Sep 26 swing low
87.40-70 — yesterday’s low and a low volume node.
87.40/85.36/83.80 — next distribution lower

$CL_F numbers

Yesterday took my by surprise, I admit. Although profitable, the price action didn’t make it easy to trust the move until the move was well underway. This is probably just due to being unprepared — I neglected to look at previous occasions where inventory data surprises and algos conspired to keep us punters from getting our fair share. I’ve corrected a few formulaic errors above — the 10d max and min ranges were calculated from the wrong dates.

The charts below show that we are decidedly trading in a new distribution — or rather, an old one. In fact, we are still trading within a massive range, and pretty darn close to the weekly median, as evinced on the weekly charts.

$CL_F numbers

With the break below and holding below 91.34, next targets are as previously pointed out. A break below the overnight low of 91.09 is immiment.

Update 1000 PST: We got the break. Numbers above are busted. Not necessarily a bad thing!

$CL_F range still in play

The CLX2 range is still in play, with pressure currently to the downside. Supply and economic slowdown concerns have not given way…yet. A new event risk — ahem, Iran — would help push the market to 93.33 and above. Until that happens, I’m afraid fundamentals are winning here just by virtue of holding prices to within 1 stddev from VWAP.  Just my opinion.

$CL_F numbers

Overnight crude ticked back up into the middle of the 10 day range at 0.4, with 1.0 being at the high or higher, and 0 or a negative number being at the low or lower. I had expected the market to crack 93.50 yesterday, but of course I was wrong. It did, however, tick just two basis points above the projected high for the day at 93.33. Hard to say at this point whether the way forward is higher or lower, but there will be several opportunities for the market to tell us this week.

The chart has me thinking there is a good possibility 92 will be tested…but then again it tells me that yesterday’s high could also be tested. Without some sort of event risk or market moving data, I doubt crude will move beyond these levels to levels discusses yesterday.

 

$CL_F numbers

We’ve obviously hit the top of the range projections already, as I post this. Not sure what is going to happen now so I’ll just play the levels.

$CL_F daily notes

Crude has already traveled one handle overnight and there appears to be some momentum behind the move. Of course, I was short from 53 and bugged out at 51, missing a nice, tidy profit for a Sunday.

The profile on the left is a 24 month composite. The profile on the right is a 20 day composite. The thin (24m) and thick (20d) red lines are high volume nodes. The thin and thick green lines are low volume nodes.

Below 89.88, watch for 88.95, 87.40, 86.30, and 85.35. If the market gets that far, I expect some rotation around 85 for a spell. Above, 94.00 is a level quite a few people are watching. I think the LVN at 94.84 will suck the market in, with an initial rejection and a follow-on move potentially swinging up to 96.50. (LVNs usually act as probative price points and are often initially rejected for areas of better “value”. HVNs also act as magnets for price action, but usually have a higher “gravity” as they represent areas of value, with an initial bounce and then rotations until the market is ready to drive to higher or lower prices. Sometimes these patterns are not always consistent, which also provide important information about the market.

And I haven’t even got to the retracement and MA studies yet.

Numbers to follow in the AM.