Balancetrader

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

Homework PDF LevelsChart DailyChart

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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!

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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!

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Homework 101

Many young traders already know that doing their trading “homework” is an important process. It can play an integral role in shortening a beginner’s learning curve and it can be a key factor in a professional being able to maintain his or her edge in the markets. Lots of educators talk about the importance of doing homework, but rarely have I seen them give a detailed guide with which to do this. So, I’ve decided to do a multi-part guide dedicated to homework. This guide will include how I, personally, recommend doing homework from a Balancetrader perspective. There are many derivations to this and it will be different depending on an individual’s personal preferences, but I think me showing my way of doing this might shed some light for those who want to do this but don’t know where to start.

This installment will be an introduction. I think the best way to start this is to give a general outline explaining exactly what homework is, how to do it, and what to use it for. Once we have a good idea as to what we’re trying to accomplish, we can then dive into more intricate details.

What exactly is homework?

Homework is a day trader’s preparation to the trading day. I like to think about it from an athlete’s perspective. Before a big football game, for example, a team will go over many hours of tape in order to prepare themselves for the coming game. Every player needs to understand the particular strategy changes the coaching staff is implementing for the team their playing and what their roles are regarding that strategy. A team that doesn’t prepare adequately can get run over without this preparation, even if they are a superior team.

Well, trading is no different. There are many traders who can just stroll in at the opening bell without doing any prep work. Chances are, it’s probably a professional who’s been doing this a long time. To be honest, I’ve been implementing Balancetrader so long that my homework consists of very little preparation. It’s not that I don’t need it any more. It’s just that I’ve done this so many times over and over again, that I can do it in my sleep. This, however, is only because I’ve seen so many different scenarios so many times over and over that I can literally look at the market rather quickly and digest it all without going through this whole process. If you’re a beginner or even an intermediate trader that does not do this exercise, I highly recommend making it a habit. If and when your trading improves to the point where you become highly consistent and profitable, you can start to think about shortening your homework process.

Do I have to write my homework out?

I recommend structuring the homework in a written format. Why? Because this makes a fantastic log that you can look back on in the future. You can do everything in your mind, but taking the time to write it down allows you to look at what your prepared strategy was for the day and allows you to assess whether or not you followed your plan or not when the day is over. This, coupled with a trading journal (we’ll discuss this in a moment), is a very powerful personal exercise with which you can use to improve your trading. As we get more into this guide as time goes on, you should start to see why.

What should be in my homework?

Now this is what is important. Here is what I think should be in the homework of any individual that uses a profile to do their market analysis:

* Daily Trade Journal Entry
* Support & Resistance Profile Levels
* Daily Bar Chart With Volume
* Expected News Announcements
* Current, Relevant Events
* Scenarios

Now let’s talk about each of these a bit more to explain them.

Daily Trade Journal Entry

This really is the most important thing an aspiring student should be doing. You hear every guru tell you that you should do this and I’m pretty sure most of you don’t. I could probably spend numerous entires just on the journal alone, so I will save this topic for another blog segment. The importance of including this journal in your nightly market homework is quite high because the journal is how you keep tabs on what you’re doing during the day. You can see how you executed trades based on your homework. Your homework is your strategy for the day and having a journal entry allows you to bring a certain level of accountability to the process. The journal can easily show your mental breakdowns and breaks in discipline as well as reinforce good habits when you do things properly.

Support & Resistance Profile Levels

As I’ve said before, this is where it all starts for me. Without this, I’m blind. I believe mapping out your support and resistance levels pre-market is so important. I’ve already done a detailed video tutorial on how I do my profiles levels. If you’ve missed that segment, please dig through the Balancetrader Outlook archives and go through it. I spent a few weeks doing this process every day so there would be a good tutorial on how to do this. If you learn one thing from all of this, this is what you want to take home with you. It’s the best, free information you’ll ever get. I promise.

Daily Bar Chart With Volume

There are times when the larger time frame pattern is so obvious by looking at this chart that you’ll wonder how you avoided it all this time. My main concern when looking at this chart is to get an idea regarding how the market is currently conducting its business. The first thing I’m looking at are possible areas of balance and larger levels on the daily chart and note them down. Most importantly, I’m looking to get a grasp of how the market is conducting the auction process and the type of volume accompanying it. Are we moving in the current direction on increasing or decreasing volume? What is volume looking like as we test a large level? This sounds so obvious but you really will be surprised some times how the market will be screaming something to you and if you didn’t look at this chart you wouldn’t see it.

Expected News Announcements

Now, if you know me, you know that I’m the biggest ignorer of news in the trading business there is. I can’t stand news. I refuse to pay attention to it. I don’t avoid trading around news like most gurus tell you. In fact, I welcome news. News drives the market participants’ perception of value, which drives the nice moves we want to be on board for. Without news, the market goes nowhere. More often than not, news is the catalyst that gets things moving. You don’t want to be afraid of news. You want to embrace it. You don’t want to exit a position because news is due out. You want to hold the position to see if the news will propel the market in the desired direction. This may seem completely backward compared to all those other gurus out there so I’m going to ask you to trust me on this one. If you take the time to look at the data, you’ll see that trading with news will skew your risk / reward ratio more in your favor. The important thing to remember, however, is that we aren’t going to interpret the news. That’s pure suicide. We all know that the market will sometimes process good news and go down and other times there will be bad news, yet it goes up. We’ll let market structure and the auction process dictate the bias. What’s important is knowing that news will be coming out and when it’s coming out. It’s not our business to interpret it. If we’re not at least aware of it, however, then we’re going to get caught off guard and we don’t want any surprises.

Current, Relevant Events

This section is more speculation than anything else. What’s going on with the economy? What is driving the market? Maybe interest rates are the big thing right now. Other times it might be the price of crude oil. The market is a very fickle thing. One minute it cares about a happening in the Middle East and the next thing you know the market is more concerned with home sales. This isn’t the most important part of your homework, but thinking about these things and documenting them will bring you closer to the market, especially when you’re more of a novice. It will help you to better grasp the drivers in the market and get a better feel for how it does its business.

Scenarios

This is where it all comes together. You take all the above information, process it, and detail the possible scenarios the market may throw at you. I believe that using a profile provides the unique ability to do this that no other methodology can provide. We want to try to come up with every possible scenario we can think of for tomorrow. Where can the market open, where can it go after it opens there, what trade setups can form in that scenario. If this does happen, how do you want to handle it? Will you trade it? How will you execute the trade? How will you manage the trade? We’ll do this process for every scenario we can think of. Don’t worry. It’s not THAT bad. There isn’t as many scenarios as you may think. The importance here is to try to not get caught off guard here (note the key word is TRY). So often you will see the market unfold one of your scenarios and because you’ve documented it in a detailed fashion, you remove the prospect of making spur of the moment decisions. In that situation, all you have to do is execute the plan you came up with when you went through the scenario. Then, when you do your journal, you can immediately either slap yourself for being an idiot, or pat yourself on the back for executing as planned. This is that level of accountability I was talking about previously. If you can’t fix your discipline issues like this, you probably can’t do it at all. Now, there is no way we can foresee every single scenario that is going to unfold every time. That’s just not possible. We can, however, hit the nail on the head quite often. And when we do, the preparation pays off. If we miss the spot, then so be it. Tomorrow is a new day.

Conclusion

Hopefully, you can see the importance that homework has in the trading process. It does require some work unfortunately. The way I see it, there are always people out there who are taking things to the extreme and if you don’t take it further than them, you’re going to get squashed. Despite what people may say about trading being more of a personal fight, I think that a big portion of it is a war against the other traders. I mean, if you lose money then some other trader took your money. It’s that simple. So doesn’t it make sense that being better prepared than the other trades will give you an edge? Some people may argue this with me and I would be more than happy to have that debate. Even if it were not true, doing homework in this fashion is going to help you dramatically in helping you fix your psychological issues. Doing homework is really a win-win situation.

In the next entry, we will go over how I like to look at the daily bar chart with volume and as time goes on we will hit upon all these points in more detail. After a few weeks, hopefully we’ll have finished a great guide you can use to get yourself doing some very serious and powerful homework.

See ya next time!

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