Apply Analysis
Determine Trend
Familiar Charting comes from a review; we are going to use the last 4 weeks of price in the index to
Determine Trend
Identify "continuation" levels
Identify "reversal" levels
Identify Entries
Do not add studies or indicators to the chart yet; we want to use price action & drawing tools in this exercise. I am going to lay out some steps you can take in your analysis. You’ll want to apply these steps with as much consistency as possible.
If you have questions about the application of these principal techniques - just reach out to me and ask.
Steps
1.) Determine the TREND
Where are we headed? Have we left the range?
Did we break out? Did we break down?
2.) Identify CONTINUATION Levels
What area do we need to get past - to consider
the market in a continuation pattern?
3.) Identify REVERSAL Levels
Where is the market likely to reverse & what
would that reversal look like?
4.) Identify ENTRIES
Where would your entry come into the chart?
Wrap Up
Practice marking up the charts & identify the market structure
Trend Up
Trend Down
Range
Practice marking out your trading opportunities
Was the structure your "opportunity to trade" or was the structure lining you up to take a trade?
Evaluate the price of today in context of the previous few trading days. Is this "more of the same" or are we seeing a dynamic shift in market structure?
IDENTIFICATION of Trend
Practice defining the Trend
Practice defining the trend. Focus on the chart you have - not the higher timeframe chart. Try to connect three tops to define the high and three bottoms to define the lows.
An angled TL under the market is used to identify a break-out to the downside
An angled TL above the market is used to identify a break-out to the upside.
When prices are falling, the overhead TL is the TL of concern
When prices are rising, the lower TL is the TL of concern
Working
Go back - look for three market structures
a.) Trend Up
b.) Trend Down
c.) Range
Use the drawing tool to mark the structure. Use the fewest lines possible to identify structure. Answer a basic question -
is this structure tradable
( -or- )
is this structure lining you up for a trade?
Determine Trend
Charting & analysis comes from multiple approaches; the higher timeframe charts provide a greater context of market structure and bias but the 3500t chart (our trading chart) is where we have to work on the trend "now."
The simple focus is "range" first.
Are we still inside the globex range?
Are we still inside yesterdays range?
Looking left, are we still inside the last big bar?
Market Bias
Breakout - If we are inside the globex range during the RTH we can check the higher timeframe to consider a "top-side" breakout
Break Down - If we are inside the globex range during the RTH we can check the higher timeframe to consider a "bottom-side" breakout
Breakout - If we are inside yesterdays range during the RTH we can check the higher timeframe to consider a "top-side" breakout
Break Down - If we are inside yesterdays range during the RTH we can check the higher timeframe to consider a "bottom-side" breakout
Daily Chart
Consider the last 3 or 4 candles on the daily chart. Is there a defined structure or a big candle? Is price at the high of a range? At the low of a range? Is price working to continue higher? Is price working to continue lower?
Did the last candle close at the high or near the high? Near the low? How much wick is there? That distance from the end of the wick to the close of the day is often the range we keep in the globox before breaking out or breaking down in the next trading session.
Filled Orders
We want to focus on where price is going - and to determine where price is going we need to focus on "unfilled orders." What are unfilled orders and where are they likely located?
To answer those questions - let's first discuss what "filled orders" are.
Volume = Filled Orders
Price Candles = Filed Orders
This is not exactly "new" logic - just seeing it differently. When an order is filled - price moves and the volume is shown below. That price movement is the price action traders use to identify price patterns and to evaluate the charts with "technical analysis."
Unfilled Orders
If we want to focus on "unfilled orders" we need to consider where the liquidity is at. Institutional Unfilled Orders are the real focus. We want to identify where these "unfilled" orders are at.
We also need to focus on HOW to SEE these situations to act on it. For this - we can consider the DOM (the depth of market) and the Level II data. With level II data we can see potential buyers and potential sellers at each price point.
The picture below shows us the Level II for the /ES futures. The market is closed when this picture was taken but we can still see the potential buyers and potential sellers.
These are "Unfilled Orders" - and there are programs that will monitor the stacking and pulling of orders on the DOM to assist with analyzing the potential trading opportunities above & below price.
ASK - The price that a seller wants to get filled at. Very often - an aggressive seller will just hit the bid and sell at a lower price just to get filled NOW - without waiting to see if someone is willing to step up to the ask and take their order. This is why BB (below the bid or at the bid) is important.
BID - The price that a buyer wants to get filled at. Very often - an aggressive buyer will just hit the ask and buy at a higher price just to get filled NOW - without waiting to see if someone is willing to step down to the bid and take their order. This is why AA (at the ask or above the ask) is important.
ES Futures Level II
Finding the Unfilled Orders
In the picture above price is at 3974.50$.
There are 6 people willing to buy at $3974.25 and 9 people willing to sell at $3974.75.
For price to fall down to 3973 - what needs to happen?
Either buyers decide to NOT pay above 3973 (and all the orders would dry up) or sellers would need to abandon the hope of selling at 3974.75 and start selling at a lower price.
Imagine if a large seller came in & wanted to get out of 300 contracts NOW and was willing to run a sweep order to get that accomplished. What would happen?
First the ….
6 contracts at the asking price of 3974.25 would get taken out, then the
17 orders at 3974.00 asking price would get taken out, then the
12 contracts at 3973.75 asking price would be hit and then
13 contracts at 3973.50 asking price would be hit …
and for each of these events the price of the market would just drop lower and lower and lower. So far, that would move price 1 entire point and we have not filled even 25% of the 300 contract order! We'd have to move price a LOT farther to fill the whole order.
That would be an aggressive AA trade - a trader coming in and hitting “market order” to fill AA.
Determine Trend
So, how does identifying potential unfilled orders assist us with determining trend? By recognizing where a potential wall of sellers are located overhead (potential resistance).
So, how does identifying potential unfilled orders assist us with determining trend? By recognizing where a potential wall of buyers are located below (potential support).
All of this - has focused on using tools to visually see these orders (Level II, the DOM, the options chain) but we can get some insight from charts as well and later in this course we'll cover that in more detail. There is also the posts Measuring Things and Measuring Things II which discuss finding the BSL (buy side liquidity) and SSL (sell side liquidity).
Setting Chart Pivots
As a pivot point trader - the pivots we mark become very valuable to us (both in analysis and in trading).
While each broker has different drawing tools and studies that make setting charts a simple or complex task - keeping the charts up to date is not going to require so much time.
When approaching the setup for these charts - consider using colors and line styles as a way to distinguish the different timeframes (this way we can avoid using labels).
Since we all use different colors on the charts and candles - the colors for the lines are mostly a user choice; it is advised to pick something & then stick with it.
This may take a little time - but eventually your mind will begin to recognize these different line colors and line types for what they represent and this will improve your analysis times.
Quarterly Chart
Here is a video published in April that discusses setting up Quarterly levels. The idea behind setting up any level or pivot - is the approach later. How will these levels benefit us?
To answer that question - let's start with why these levels have value. The institutions and trading firms focus on larger timeframe charts and will generally use them for defining simplistic bias.
This means we also want to evaluate where price is - in relation to previous quarters.
If we are ranged & are inside last quarters candle then "getting out of that quarterly candle" is going to be the most important thing to focus on.
Inside Candle
Sitting inside the previous quarterly candle defines the whole picture for us. Where are the quarterly O, H, L, & C levels and where is the current price? Are we near a breakout of the High or Low?
Getting a topside breakout of that quarterly candle may mean a market rally that can last days or even weeks. Getting a bottom-side break down of that quarterly candle may mean days or weeks of market weakness.
When we are marking out these higher timeframe levels - we want to really consider what they represent and what it will mean if price does get to them (and past them.) So far - I only mentioned the Quarterly chart but we can take these concepts and apply them to the Monthly charts, Weekly charts, Daily charts…