Sunday, December 2, 2007

Ode to the Market Profile Setup

I owe a great deal of credit to Michael at Enthios for opening my eyes to a vision I had for this system many years ago. It seems my ideas weren't that original when they hit me on the head wading through breakout system after breakout and fail system. I think the main draw for people with breakouts is that you can enter a stop and a trailing stop and potentially gain the greatest return from being right or being wrong. But for me the percentages don't suit my temperament. I want to be in rhythm with the market. Mean reversion is about finding balance and riding a wave. Breakouts catch the biggest of all the moves but you get nicked time after time, in fact some of the greats say 70% of the time you'll get nicked, but the big returns will come eventually after time. I would prefer to have a system like that on auto-pilot like a kind of lottery trade that I don't bother with but still get to collect the windfalls when they finally do roll around. If I'm going to actively observe the market I want to be in tune with what it's telling me.

For the moment it's telling me that mean reversion will give and give and give and then 3 out of 7 times will take. It's a risk I would prefer to live with.

So here is my current setup. I grabbed a random chart off of my Metatrader charts to show exactly what I am looking at during the trading day. A huge difference between what I am doing and Market Profile purists do is that my Points of Control are not created in a cohesion of Volume and Price but strictly from price. This is not something I am doing to be subversive, it's more out of necessity since my free charts don't provide accurate volume information. Plus the clever Russians who make most of these amazing free indicators for Metatrader haven't found a way to make a 100% authentic Market Profile indicator =)

5 basic parts:

1)Price should be outside the Keltner bands

2)Stochastics should be outside the bollinger bands and crossing back up inside for a buy(the opposite for short). But they should be below the 35 level. Both the bollinger and the stochastics work together in the same range of 0-100 on my charts.

3)Daily Absolute Strength should be indicating bullish action for a buy and bearish for shorts. If Absolute strength is neutral or weakly biased trades on both sides of the range can be considered.

4)Point of Control should ideally be taken from previous days trading as the current POC can shift quite a bit intraday.

5)Virgin Point of Control levels from previous trading sessions are valid if not touched until the current days trading session. This is perhaps the most unique and fitting elegance of the original Enthios system as it implies that price must revert to a point of balance or as I like to think of it, as a reversion to a mean.

These are the annotations from the trade setup posted above.

1)Absolute Strength is indicating short so there will be no buys during this session.

2)Stochastics have crossed from above the 65 level down through the upper Bollinger band.

3) Virgin Point of Control (VPOC) has been touched. It is advisable to not take trades even if price comes close as most likely price will return and give a better entry later on. Patience is definitely rewarded with VPOC's. Note also that price is outside the Keltners  when signalling short.

4)Profits can be taken in one of two ways on the initial position. Either by touching the opposite end of the Keltners, or the median band if you want to be ultra-conservative about exits. Or...

5) If you wish to follow the wave to its end, you can wait for the stochastics to cross up through the Bollingers from the opposite end of the initial setup, in this case from below.

I hope you find this market sense a fresh perspective on a very tired pursuit, finding a psychologically manageable, risk averse and profitable method for extracting healthy profits from the intra-day markets.

Indicators and template are here

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