The following files illustrate an example of my personal market homework. I am posting this just after preparing my work. The following links are for the chart snap shots as well as a PDF file with my written work. This should give you all a good example of what my homework looks like and should help make the guide come to life for you. Please remember that I’m providing this as an example to get you started. There is no right or wrong way to do this. My way of doing something may not be best for you and you should try to adapt the methods to fit your own personal needs.
Until next time.
Frank
This is the last chunk of the homework tutorial. In the next week following this post, I will post some homework examples to help tie it all together. As always, if you have any questions, please feel free to email me with them.
The last part of your homework should include possible scenarios. Now, I want to make sure you distinguish the difference between possible scenarios and forecasting. We are not psychics. Predicting what the market is going to do tomorrow with any degree of accuracy is not only impossible, it’s just plain stupid. What I’m talking about is using the profile to visualize possible market activity and then using these possibilities to generate trading strategies. This way, if and when these scenarios happen, we can be ready to trade them exactly the way we planned for. This allows us to take a bit of the emotion out of the trade because we have our plans in writing.
Let’s look at an example. The following shows the current ES market profile as of this posting:
By using just the information we’ve gone through via the blog, we can see that this chart shows a few basic concepts we’ve been covering so far (if you haven’t reviewed the level work from the video blog posts, please review them), we can see we have 3 identifiable levels to work with right now in ES. The red balance area is current resistance, the blue is support, and green is the currently developing area.
One thing to notice is these levels were also the main levels coming into this morning’s activity. The market respected these levels during today’s session and has started to form balance between them. Our goal is to look at this profile and think about what COULD happen and try to be as thorough as possible. Now, I don’t want to go into extreme detail here because I’m just trying to lay the foundation for a post to soon follow, but we can go over some simple ideas for now.
What simple scenarios can we come up with looking at this profile?
For starters, assuming this currently forming balance area (in green) matures in the over night session, what do we want to do? What if the market opens out of balance (gap up or down)? Do we want to fade the open or go with it? Do we not want to trade that scenario at all? What if the market opens in our green balance? Should we try to buy support or short resistance? Should we do both? Should we do neither?
What if the market opens in balance, but not in this current area. A lot can happen while we’re sleeping. What if the market breaks out of this balance area in the middle of the night and subsequently balances somewhere above or below this area? What do we want to do then? Is that something we want to trade or is it something we should not?
Hopefully, you are starting to get the idea. Going over scenarios is simply a method for us to visualize what may happen and prepare ourselves for when it does. This way, when it does, we know exactly what to do. How many times do you look at your trades at the end of the day and say to yourself, “What the heck was I doing? I should NEVER have taken that trade.” Well, if you define your possible trades for the next day while detailing how you will try to capitalize on that opportunity, you only have yourself to blame if you stray fromm that plan. Most traders don’t even have a plan, so they lack the essential structure required to implement a disciplined strategy.
This is the power of having the profile as our main analytical tool. Using indicators alone will not allow us to do this type of pre-planning. We can, before the fact, identify our levels and plan accordingly. In this one, simple example using only the tools I’ve gone over since starting this blog, you could have been on top of things without even going into the Balancetrader content more deeply.
In the next week or so, I will post a full, detailed homework example for you to brainstorm some ideas.
Happy trading!
The first segment of the tutorial has us taking a top-down approach to the market. Meaning, we’ll be looking at the highest time frames first. I think this makes the most sense intuitively. I think it helps best to know where the market is on a big picture level first. This helps one to develop a bias before they dive into the day to day ups and downs, which can start to get messy very quickly.
The charts that are shown here (graphic A) is a day session only daily chart (8:30am-3:15pm central) with volume the only indicator on the bottom of the chart. As always, I’m more concerned with the market’s balance cycle, except this is on a much larger time frame than the one we looked at during our profile support and resistance guide from earlier in the blog. Despite the time frame difference, however, I’m always doing the same thing. Essentially, I want to know where the market is with respect to the current time frame’s balance cycle. Are we currently forming balance? Are we attempting to break out of it? Have we broken out of the most recent balance area? Are we retesting a previous balance area? And in all these cases, is volume telling me anything?
Now, there are plenty of directions you can take this analysis. I’m sure I could write numerous articles pertaining to the daily chart alone. To keep things short, I’m going to focus on the two balance areas shown in graphic B. You can see how intuitive it is to identify an area of balance in hindsight. Now, hindsight is one of the words you normally never want to hear when dealing with market data right? Hindsight usually means you can see what happened after the fact, but it leaves you in the dark at the time it’s all happening. Well, not the case here, which is good news. It’s always quite easy to see when the market has already balanced and then broken out. Being able to pin down when the market will break out or what the resulting balance area will end up looking like is extremely difficult. Unless you have a crystal ball, I highly recommend against that.
The fantastic news, is that in this very rare case in market analysis, hindsight is going to be our friend. After the market finally breaks out of balance, we can usually pin down the balance area, which is to be our big picture reference for support and resistance. Hopefully as you look at graphic B, you can see rather clearly how the market rotated numerous times at these locations (the areas with the parabolas around them) and finally broke out to the downside.
This is very typical of a strongly trending market. Balance, new trend leg, balance, new trend leg, etc. Now, from the lesson on support and resistance levels that we covered in the beginning of the blog a few months ago, we remember that these balance areas should act as support and resistance zones later on if and when price retests it. Remember that retesting previous reference points is part of the auction process and the market will do this time and time again, albeit in different ways.
The interesting thing that immediately struck me with this example is how volume drastically rose as price finally breaks out of both areas. All good students have heard that volume should be stronger in the direction of the trend and weaker on moves against it and this is no different. We see volume spike as price breaks out to the downside and we see volume dry up as price tries to probe the previous reference point (graphic C). The second example is quite exaggerated as volume tapered going into the Thanksgiving holiday. In both cases, holiday or not, price retested on significantly lower volume which is a great indication that a reference point reaction is soon to follow. If the market cannot muster strong volume on the reaction back up, odds are you’re going to get your opposite reaction in the direction of the trend.
Now, you won’t always get that reaction. Many times the market will break out of balance and b-line to a new location and will not retest for quite some time. Unfortunately, we have no idea whether it’s going to work like this example has in the future.
Hopefully, this example has shed a little light on what you can look at regarding the big picture side of things. Getting a grip of what’s going on regarding this time frame should be an integral part of your trading homework. Most day traders are probably not going to be using this analysis to place trades as this time frame is most likely way too big for most people’s risk structure. However, it’s a fantastic view to get a handle on when it comes to managing your risk structure on the day time frame.
For example, if volume and price is showing you something with which you see a solid assymmetric opportunity because of, this can help you decide how to manage your day trades. In this case, you were probably trading long on the bounces after the breakdowns on the lower time frames. However, it would probably make more sense to manage those trades with a rather tight leash. If you’re shorting, you should probably be looking to stretch those trades a bit more and hold runners for, hopefully, larger gains. I know that this sounds obvious, but so many traders aren’t even looking at it.
Just remember that there are lots of times where looking at this view may not give you much information. Such is life in trading. It is what it is. However, many, many times the market opens up an opportunity and even if you take advantage once out of five, you are better off for having this be the first part of your homework. It’s what can shape the tone of things for what you want to accomplish from your trading plan. Different scenarios and conditions warrant different strategies at times and knowing where you’re trying to day trade small time frames inside the big picture can be quite important.
Hopefully, this has made you think about things on a different level. If it’s something you already do, then great! If not, I highly recommend practicing it.
In the next part of the homework tutorial, I’d like to talk a bit about how I handle news. You’re probably going to be quite surprised when you find out. 
Cya next time!