Novice traders can usually be spotted a mile off by more experienced traders and professionals, as they are normally asking questions about the best set-up’s or best settings for indicators. Set-up’s and indicator settings alone have never made great traders and never will. Period. Of course this is not their fault, however they must wake up and get educated on what really matters… Developing a better understanding of the market and it’s participants.
One of the major turning points in my trading career came when I realised that nearly all trading systems or methods attempted to highlight the SAME set up’s! Yet some traders will be successful trading them and yet most will fail. Although we all know that a lot of this is down to an individual traders Psychological make-up, there a few things that traders wanting to stand a chance must realise. Firstly, the real trick is to establish WHEN to trade WHICH set-up’s and WHEN they are best left alone and you are better of sitting on your hands. One of the simplest ways to establish this is to know what Phase (Balanced\Range Bound or Trending\Imbalanced) the market is in. This is Step 1 of the L2ST Trading Game Plan. Which by the way is NOT a system, it’s “A way of Understanding the Markets so that you stand a chance of trading them better”.
Nearly all trading methods\systems are designed to trade ranges by either fading or going with the break-out, and most commonly they are designed to highlight trends and then join a trend. Most automated systems\traders fail overtime because they attempt to do one or the other all of the time. The markets do however Balance and become Range Bound, and they do also become Imbalanced and start to trend directionally. That’s why most systems designed to do one or the other will usually have some successes, especially short-term.
We have to remember that WHEN each phase takes place is down to the market and it’s participants, we don’t control that. However, we must observe the market and understand what it has done, what it is doing right now to better understand what it might do next. Knowing your market should be Common sense for traders. The dilemma most traders face, is that under different phases they must be prepared to take what may be the opposite trade to what you would in another phase. For example Fading an Imbalanced\Trending Market is very different to Fading a Balance\Range Bound market. The odds of the trade working out change in the moment depending on the phase the market is in, and not based upon some statistics of a back-test! I often say that nearly all trades are 50\50, what defines if it has a better chance of working out is the current market phase, as well as what the market participants are doing in the MOMENT. It is when you put things into perspective in that moment that you gain your EDGE!
Discretionary Trading and the methodology I teach at L2ST is all about highlighting the correct market phase at any given time and then trading it accordingly. I call this “The Art Of Adaptive Trading”. In its most simplest form, if the market is Range Bound and Balanced (Trading around an area of Established Value) the focus should be to trade the market by fading the Rallies into Resistance areas\levels or Sell-off into Support areas\levels. If it is Imbalanced\Trending then this must be recognised and the focus shifts to buying pull-backs and selling bounces off my levels. Not rocket science, when it comes to set-ups, it just makes a lot of sense. The levels (Areas of doing business) I establish are normally derived from Market\Volume Profile areas of Rejection or Low Volume, again for a simple and logical reason. The idea is that because the market has proven (Through Market Generated information) it is rejecting those areas through the lack of trade facilitation, it is likely to reject again. Of course it may not reject, but that’s the expectancy. So if it looks like I am seeing what I expect I get in and then start to manage the trade. Trade Management is where the money is made or lost for traders and not in the set-up or entry. Some do forget that simple truth. You can have the best set-up and entry in the world and still mess it up through poor trade management, which is another subject altogether! However taking a trade set-up at the RIGHT time does improve your odds of having to manage a trade that has a better chance of working out rather than one that as a greater chance of failing to play off. Most common Price Action Trade Set-up’s show up within these different phases, and they all work! You just have to get good at trading the right ones at the right times! (See the examples below). However, I must add that the breakouts of ranges are the ones that are the toughest to time well, and for that reason those are the ones that I often avoid. Is it a coincidence that most novice traders focus on taking the trades that I would most prefer to avoid, which is the breakouts?
Characteristics of Balanced\Range Bound Markets
A Balanced Market is established when the market has already found Value within a sideways\rotational range. All markets spend most of their time in this phase, as it fulfils the purpose of the market to facilitate trade most efficiently and effectively. Markets are generally balanced over 80% of the time. Hence the reason why Range Trading can be so effective and profitable, even more so than trend trading when done right!
- Most of the Volume traded is within the middle\centre of the range.
- Symmetrical Volume at Price Distribution (See Below)
- Less Volume traded around highs\lows and therefore proof of rejection at the highs\lows of the range.
- Flat VWAP and 1st standard deviation bands.
- Price is attracted back to the middle of the range (VPOC\VWAP) as it tries to move away outside of value areas range.
- 100-80% retracements in Price swings. Extensions may occur above and below value up to around the 127-161.8% Fibonacci Retracement Extensions of the range’s high-low or low-high.
- Market will usually find Buyers below \sellers above Value for up-to 3-4 swings before an attempt for a move away from value. 1st\2nd and 3rd Swing’s provide highest probability trades.
Balanced and Imbalanced Market\Volume Profile, VWAP and Price Action Example:
Characteristics of Imbalanced\Trending Markets
An Imbalanced Market is established when the market participants perception of Value has changed and they are now willing to accept prices above\below value. This causes the market to move directionally and an inefficiency is created whilst we are in search of a new area of Value, where two sided trade can be found, and the return back to efficiency. The market will Balance again, it’s just a case of when. Whilst the market is imbalanced and is seeking value, your job as a trader is to GO-WITH the imbalance and NOT fight it. Markets are imbalanced less than 20% of time.
- Most of the recent Volume traded is falling outside of prior value.
- Asymmetrical Volume at Price Distributions starting to occur, usually you will see 2-3 new distributions outside of a prior key area of value, with market not spend much time in each new distribution (usually less than 1.5 hours). (See Imbalanced Profile Above)
- More Volume will trade into new highs\lows as the market continues its attempts into new highs\lows.
- The market will retrace and test DEVELOPING LVN’s in today’s profile and find new trade that will initiate further movement in the direction of the Trend (See Imbalanced Long Set-ups Above).
- Trending VWAP and 1st standard deviation bands (turning up\down). Market will commonly retrace back to its 1st SD High of VWAP in an uptrend, and to its 1st SD Low in a down trend. At times it will also pull-back\bounce as far as the VWAP.
- Price is pulling away from to the middle of the prior value areas range and fairest VPOC prices. The developing VPOC may start to shift in the direction of the markets movement.
25-60% retracements in Price swings are possible and the market may still sustain its trend.
- The prior value areas 127.2-161.8% Fibonacci extensions start to break with momentum and volume at price acceptance starts to occur away prior acceptance area.