For those reading this who are unfamiliar with my material, all of my course material and writings are focused only on day trading. Longer-term swing trading and fundamental based plays are a different topic altogether and not something I cover as I find those approaches to be quite difficult and much more capital is needed to make them worthwhile.
This post is meant to help people understand the concept of “anticipating the path of least resistance”. During my webinars, I teach people the idea of anticipating “pressure points”. These are prices where there is very little volume in comparison to previous prices traded that day.
In the following image which is a screen shot of a stock I trade, you can see the cumulative volume profile in the far right column. This shows the total amount of volume traded at each price during the course of the day up to that point. At one point in the morning, the stock had been ranging between 07 and 11 (price column is on the far left) and this is why you see fairly large amounts of volume in the volume profile column. The numbers in red were the current offers at each price showing on the DOM and are irrelevant to this post.
786,069 shares had traded at 09
1,286,381 had traded at 08
695,182 had traded at 07
Eventually, there were less buyers at 08 and 07 and sellers went for the bid at 06. When they hit it, there were only 30,854 there. Price easily moved to 05 where there were only 33,014 and then to 04 where there were only 29,317. Price continued moving lower on very light volume till buyers were willing to buy more size at 00 and 01 which made the market bounce higher. Buyers bid up to 03 before encountering a substantial amount of sell orders again and then price ranged between 00 and 03 for quite some time with a lot of volume trading at those prices.
More money was willing to buy between 00 and 03 than between 04 and 06. The pressure point was 06 to 04. It became the path of least resistance for a few moments which is why price moved through that area very quickly.
As a scalper, I am constantly attempting to anticipate the pressure point. If I’m on my game and the read is there, I’m short at 07 or higher and I get paid as price easily moves lower. I’m not chasing and selling at 01 or lower where the sell-off stops.
The problem most day traders have is waiting for the sell-off to happen before they enter a trade. They want “confirmation” of the breakout before committing. They watch price move from 07 to 01 and then finally sell at 00 only to watch price immediately go against their position. Then they watch it go sideways for a bit and don’t know what to do. They cannot decide if they should cover the short at 03 or 04 for the loss because the market might reverse (and they don’t want to lose more money) or if they should hold the trade and hope price eventually goes below 00. At that point, they really don’t have a good read either way.
They missed the money because they waited too long to take the trade. They suffer from what is called “analysis paralysis”. Even though they may have seen the bids getting cleared easily at 06 and 05, they hesitated on selling 04 and 03 which would have still been better entries. Once they can no longer tolerate the fact that the market is running away without them, they finally pull the trigger and sell at the worst prices. Then they get hung in a bad entry and stare at the screen in disgust wondering why this tends to happen more often than not.
If you think you have the read, you have to commit before the move happens or during the early phase of the move. As my very wise martial arts instructor told me when I was a teenager, “You cannot hesitate. Hesitation causes death.” In trading, hesitation causes losses and missed opportunities.
Here is another example in the treasury futures:
The 10-year note futures are on the left (ZN) with the volume profile column and price column on the left and the 30-year bond futures are on the right (ZB) with the volume profile column and price column on the right.
In the 10-year, the pressure point area was below 7’165 as the market broke lows there and moved lower very easily from 7’160 to 7’135. You see much less volume between 7’160 and 7’140 than you see between 7’135 and the low at 7’110.
The notes and bonds broke lows at the same time so in the bonds, you can see the pressure point area is 11’20 to 11’14. There is much less volume at those prices than at lower prices although there was obviously less volume at the lower prices as the sell-off occurred. In this screen shot, the futures had already bounced off the low and traded back and forth holding a sideways pattern similar to what you see in the previous example with the stock holding a sideways pattern between 00 and 03. The ZN was holding a sideways pattern between 7’115 and 7’135 while the ZB was holding a sideways pattern between 11’09 and 11’12.
With this futures example, a person is trying to anticipate the break to new lows and already be short when it happens or be short on the break as it’s happening. If you wait too long, you miss the easy money and instead chase the move selling at lower prices where more money is willing to buy and find yourself either selling the lows or getting caught at a bad price near the lows and sitting in chop wondering what you should do.
In both samples, the markets eventually reversed and moved higher back through the pressure point area all the way to the previous high volume prices where they had traded earlier in the morning before the breakout to new lows.
If I do not anticipate correctly and miss the initial move, I will only chase up to a point. I know that once it’s moved a certain amount, I’m likely to step up and enter at the exact wrong price if I chase. So if I miss it, I miss it. There are, of course, times when the move does continue after the market chops sideways for awhile but predicting that tends to be more difficult than predicting the pressure point situation. I usually sit on the sidelines for awhile once I see the chop and wait to see if any other solid reads develop a little later in the day.
There are days when a market is a one-way street and you will make money no matter what entry price you have if you go with the trend but those days are the exception. They are not the rule. Markets tend to swing back and forth most days so timing the entries and exits properly is crucial to long-term success. Many people fail at this because they wait too long to enter trades and they allow profitable trades to roll back on them because they want more. Instead of getting more, they get nothing because they do not acknowledge reality.
When a person says, “My target is 10 points in the ES.”, my response is, “What do you know that I don’t know?”
I try to play momentum and react to what I see in the moment. I do not pretend to know what the large market making firms are planning to do in the next two hours. In fact, their strategies shift based on market volatility and which of their orders are getting filled so even they may not be sure what they will be doing in two hours. If they don’t know and they are moving hundreds or thousands of contracts which can push price, how could I know what they’ll be doing in two hours?