Why Does ‘Substantial Progress’ Matter?

The reference to substantial progress was brought into the Federal Reserve’s statement last month as a qualifier for how long how long their assets purchases would run for and consequently the achievement of substantial progress will initiate the taper process.

“Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”

The 2 key questions therefore are:

1. How will we know when substantial progress has been made?
2. Once substantial progress has been made how soon after will asset purchases be tapered?

How to Trade Substantial Progress?

Substantial Progress is the focal point for this decision and as with every Central Bank decision one needs to have a process for trading the focal point and other potential change. If we break up a typical central bank decision into it component features many follow a similar pattern of release and the way to trade each part of the release differs. The components are:

• Policy changes – typically a press release of decisions taken and any changes to policy or repeat of the current policy
• Statement – further explanation of reasoning behind policy decisions – guidance on futures potential changes
• Q&A – a chance to find out more information – also chance for the Central Bank to hint further without explicitly committing to a change by putting it in the statement

With expectations low of any change in policy or statement you need a process to quickly ascertain the meaning of a question’s answer and how this will affect markets. So, simplify the what the answer relates to – questions about progress ultimately are trying to answer a simple question – when will taper start? Market expectations are that taper will not begin this year – Powell made this clear in a recent speech (key points are highlighted below). Any suggestion that Substantial Progress could be made/achieved this year should bring forward expectation of taper provides a trade opportunity.

Which Markets to Trade on The Federal Reserve Decision?

Market selection is always key on a Central Bank decision and picking a market that will not only be affected by the change or hint in policy but has the scope to more technically is key – this is why a market may over react in one direction but under achieve expectations for a move in another. So market selection is down to deciding whether a certain market will move better on a hawkish (less stimulus) or dovish (more stimulus) comment. Take for example T-Note (below) this is just one of many potential markets to trade – your preparation needs to consider how it could trade on a move down back against the recent steady move higher (potential sweep of range 137’02-136’21-17) and how will it react at key resistance 137’20? What happens if it break 137’20

Plan Your Trade – Trade Your Plan

Whenever you trade a Central Bank decision and when you are learning to trade Central Banks the most important thing is to have a clear plan of what you are looking for and what you will trade if one of your scenarios plays out. Without this you will be left jumping between markets over the decision and perhaps worse, not being able to see where you went wrong because you have no plan to compare your actions to. Every Central Bank decision can potentially be a chance to make substantial progress in you own, not just form a P+L point of few but from a leaning one too.

Richard

What Did The ECB Do Last Time?

In line with expectations the ECB took a number of decisions including increasing their Pandemic Emergency Purchase Programme (PEPP) by €500 billion to a total of €1,850 billion and extending its duration to March 2022. Extending the duration (to June 2022) and reducing the pricing of TLTROs (to -100bp). At same time they brought in additional minor changes: 4 more PELTROs and and extension of their swap lines until March 2022.

However, markets were still disappointed; for 2 main reasons: a small expectation that the Asset Purchase Programme could be increased from €20 billion to €40 billion was not fulfilled and perhaps more significantly confirmation that the entire PEPP envelope may not need to be used stating: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.”

So What Can The ECB Do?

To decide where trading opportunities may be and what the ECB can do, one needs to pay attention to the inter-meeting guidance and importantly ECB sources – these are unnamed sources that will ‘leak’ information to the press. Whether intended or not, they serve to set the tone of expectation for upcoming meetings and consequently trade opportunities. Even during the blackout period where Governing Council Members are prohibited from talking about monetary prior to the meeting sources still abound. On 20th January 2021 this headline appeared on Bloomberg:

As a trader your job is to discern where the trade opportunity is in the story – in this case the suggestion is that the ECB is using its PEPP to buy certain countries bonds in greater proportions than others in order to narrow or maintain spreads between EU economies. As this information is now in the public domain but not yet confirmed or denied by the ECB, Christine Lagarde may well face questions on whether the ECB is doing this. So where is the trade? First we need to understand what has been happening which can be illustrated by the yield curves below: Each dot along a line shows the yield on bonds of different duration from 1 month to 30 years. The top 2 curves are Italy – green was at the height of the pandemic (11th March) and Blue is current – yields have fallen. At the same time the purple German curve from 11th March has moved up to the Orange current curve showing yields have risen. The spread (distance between the 2 curves has narrowed).

So the trade depends on Lagarde’s answer – a confirmation of what may be termed spread control (not the same as Yield Curve Control) suggest that the spread may continue to narrow – implying a trade of buying BTP and selling Bund. Conversely any denial or reiteration of the policy guidance that “flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy” could widen the spread in the short term.

Process to Create Trade Opportunities

As illustrated above a process to compare expectations to current market data and conditions is crucial to developing trading ideas and strategies. From and expectation, the first task is to decided which market(s) will be most affected by a change to that expectation. Second, consider the potential outcomes – what would be bullish/bearish unchanged for that market. Third, assess where the trade can be executed and how far any move could go (this can be done by reviewing previous decisions). Fourth, as discussed in last month’s ECB blog priortise which change is going to be the most significant. Finally execute according to your plan – if you haven’t planned for the result that comes you don’t have to trade something you don’t understand or can’t quantify.

 If you want to learn more about how plans can be formulated, check out our Central Banks Trading Strategies Course. For more information on how to develop your trading career, check out our range of Trader ​Training courses and our flagship 6 Week Career Programme which can be attended live on our London Trading Floor or virtually from home as an online trading course.

Richard

The Federal Reserve has to answer that question – as traders we have to answer the question of what will the Fed do if circumstances have shifted and how will we trade the change in policy

What has Changed For the Federal Reserve?

Since 4th November a lot has changed.

1. A vaccine is now available and starting to be rolled out – a positive development which should see the economy able to get back no track
2. Generally data has continued to improve – unemployment rate has fallen further to 6.7% – below the Fed’s own estimate of 7.6% by year end from the September meeting
3. A stimulus program, so often called by the Fed has still not quite got over the line and this is having an impact on house spending and they are beginning to run out of savings
4. Covid cases have begun to surge putting pressure on the economy in the form of lock-downs and business closures
5. Non-farm payrolls missed estimates 245,000 vs the expected 469,000 jobs created and Jobless Claims have risen suddenly to 853,000
6. Yield curve is steepening – meaning borrowing costs for consumers which are tied to longer end rates are getting more expensive

The Fed has to balance the longer term positive of falling unemployment and a vaccine again the immediate risks of sharply rising cases, jobless claims and no fiscal stimulus help. Without the vaccine their decision might have been much easier

What Can The Federal Reserve Do?

Their QE program is where the Fed can have an impact with much of the expectation relating to how they can guide on future changes to the program in order to “sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Currently the Fed buys $120bn worth of treasuries and MBS but there is no sense of how long they will sustain this with some expectations of a tapering (reduction of purchases) beginning in H2 2021 particularly no with the vaccine being rolled out.

Asset Purchase Guidance

One option available to the Fed would be to link the asset purchases to a data point or their inflation target and maximum employment, as this is already how they guide on interest rates the implication is that QE will not be tapered until 2023 before a rate rise in 2024. This would be seen as dovish and save the need for the Fed to increase it purchases when the impact of a increase may not be felt until the economy is already improving in Q1 2021

Yield Curve Control or Twist

Yield curve control or operation twist would serve the purpose of reducing borrowing costs for the households. As can be seen below are the yield curves after the July, September, November meeting and the Current curve (orange) progressive rising. Yield curve control would put an explicit cap on rates of a certain maturity so effectively see the Fed buying more, say 10 year bonds as yields approach their cap. Currently 10 year yields are ~0.95% a cap below this will create immediate buying until yields reach the capped level. Operation twist will have a similar effective on more buying in longer dated bonds but without an explicit target, the Fed has experience with this having done so in September 2011

Be Ready to Trade the Outlier

Always a good thing to have visualised before a decision is an outlier – this week it could be the Dots: every quarter each member of the FOMC gives their expectation for where interest rates will be set at the end of the coming 3 years. The 17 Dots guide expectations of when a lift of from the lower bound will come – the light blue dots indicate the median expectation. 4 member expect ‘lift-off’ in 2023 if 5 other members join them this brings forward rate hike and also tapering expectations – whilst a huge outlier it is always worth being prepared for something very few other will be

As always. Make sure you have a plan to trade any central bank event and if you want to learn more about how plans can be formulated, check out our Central Banks Trading Strategies Course. For more information on how to develop your trading career, check out our range of Trader ​Training courses and our flagship 8 Week Career Programme which can be attended live on our London Trading Floor or virtually from home as an online trading course.

Richard

“committees, staff members are already at work in order to do this recalibration exercise, and this recalibration exercise will touch on all our instruments. It is not going to be one or the other. It is not going to be looking at one single instrument. It will be looking at all our instruments”

The question this week, then, is not what can they do? but how much will they change and does the market think it is enough

Trading Lessons From History

The wide range of options available to the ECB makes this decision similar to the decision of June 2020 where again the question was not if, but how much action would be taken? It also follows a common ECB template of setting up action and then taking action at the next meeting a la July 2019 set up and September 2019 following the the July. So what Trading Lessons can we take from these decisions?

ECB Trading Lessons: September 2019

Priortise expectations are and absorb the information: The September 2019 ECB decision was a great example of this – expectations were broad and varied – including Asset Purchase Program (APP) €30b/month for 12 months, rate cuts of 15bps, introduction of tiering, possible adjustment of issuer limits from 33%-50% and change of guide on rates/APP. The most important thing here being size and duration of APP, which on the initial reading the ECB disappointed on with €20bn/month causing a dip in bonds (BTP and Bund) however when read fully there was no end date making this a much larger APP and therefore a buy for bonds causing a very strong reversal following a volatility halt in Bund which caught traders selling on the ‘lower’ €20bn/month

ECB Trading Lessons: June 2020 and October 2020

Which markets will react best: In June this year multiple options were available to the ECB, the focus of which was the Pandemic Emergency Purchase Program being increased by €500bn and extended to June 2021, second to that was whether the ECB could deviate from its capital key. It did both and increased PEPP by €600bn producing a a strong reaction in Stoxx, BTP and Euro but a more muted reaction in Bund which would not benefit so much from a capital key change.

A similar strong reaction was seen to the October 2020 “recalibration” commitment when it was enforced during the first question after the statement causing a rally in both Stoxx and Bund – the main lesson to be taken from both these decisions is that equity markets have reacted well recently to any increase in stimulus so perhaps give the greater conviction trade particularly as now both Stoxx and Dax have February highs in their sights

Trading Opportunities For December ECB

The key to the December meeting is distinguishing between consensus expectations and what some are looking for – potential change. First up the consensus:

• Increase PEPP €500bn to €1850bn and extend duration to End 2021 from June 2021
• Discounted rate on TLTRO extended to or past End 2021

The significant change that can come here is to the size of the PEPP increase, duration doesn’t matter so much because PEPP is a total number so the duration only alters the amount bought per month, rather than imply a larger amount of purchases as in APP. A more subtle change would be dropping the reference to using the the entire PEPP envelope which could be seen as hawkish as its full power will not be deployed. As learnt above equities could be the focal point for PEPP change. Other potential changes include:

• Increasing Tiering which had been a possibilty in July, and September – this would be beneficial banks and therefore equity markets
• APP increase from €20bn to €40bn per month – this could be the biggest surprise but its impact will be in respect to whether PEPP is increased or not:
  • Increased PEPP and APP will be a big boost in stimulus and likely boost equities and BTP
  • No change in PEPP and increased APP could be another example of September 2019 where the initial move on PEPP could be taken back as the rest of the information is absorbed
• Adjustments to TLTROs have historically been limited in their impact on the day along with the other potential changes to re-investments being extended and rules for Fallen Angels (countries who’s credit rating makes them ineligible for bond purchases) all of which will be peripheral to the main question around how much stimulus will be adjusted by.

Use the trading lessons learnt from previous decisions – make sure you have a clear plan as to what you will be trading, priortise the importance of the information coming out and absorb all information when there are multiple moving parts. For more on how to prepare and trade Central Bank Decisions check out the first Central Bank Trading Course in the World

Richard

How To Trade The News

Trading news is not about predicting what the next new development is going to be but instead having a clear plan for how you are going to react to various scenarios. What market(s) will you trade? How important is the news? What scope of movement does your chosen market have? It is very important to note that these scenarios and trading decisions relate to the immediate response of markets to a new development, not a consideration for the long term implication the news.

• Trade Wars News Trading
• Brexit Comments News Trading
• Trading Over a Federal Reserve Decision

When considering the Covid-19 vaccine story and planning potential trades, the obvious first choice would be equity markets – they were severely impacted by the original outbreak and provide a direct expression of economic recovery as companies can get back to trading again. Secondly, buying Oil comes to mind – demand increases as travel and freight come back. After these two would come risk on plays – selling Gold or Bonds. Currencies provide a very difficult trade as this is beneficial globally so hard to say which currency should outperform another when it is positive for all. So with these plans in place how did the news trade?

Trading the Pfizer Covid-19 Vaccine News

The initial move on the announcement of the Pfizer vaccine having an efficacy of 90% in 3rd phase trials produced moves the like had not been seen since March and this is where having a plan counted; as can been seen below 400 ticks could have been taken in Gold and S&P 500 futures whilst Bund fell 90 ticks and Oil rallied 150 ticks in 4 minutes.

Understanding the technical landscape counted too – Oil produced by far the fastest move to its first extreme and this is was down to having a block to trade through. This was identified as a potential fast move on the Axia Morning Briefing streamed live to our members the morning of the announcement.

Lessons From Trading The News

Whilst the highlight of the day was obviously trading the news, lessons have to be learnt to be factored into future developments to the vaccine story. So how could the news be improved? The Pfizer vaccine had 90% efficacy however had to be stored at -70 degrees and had only a 3-5 day shelf life in a fridge after that, making transport and administering the vaccine difficult. From a trading perspective, the markets that exhibited the largest continuation moves after the immediate reaction were Bonds and Gold whilst equities didn’t continue – this is due to sector rotation out tech stocks that had performed well during the lock-downs ad into the down-trodden stocks set to benefit most (think airlines, energy and retail). In fact, Nasdaq fell dramatically after the Pfizer announcement. The long learnt lesson from any sequence of news stories is that the first major change in the story (a vaccine, in this case) causes the biggest reaction.

Trading The Next News Development

The Moderna Vaccine is arguably a much better solution: 94.9% efficacy and can be stored in a refrigerator for approximately 30 days so solves the logistical issues of the Pfizer vaccine, but this is now a further development of the story and not ‘game-changing.’ Positions taken and held on the first news will not likely be added to in the same size as when the original story broke. And this is the crucial point, whilst a better recognition of best markets to trade has been learnt, expectation must be managed – trade Gold and Bonds but don’t expect the same size reaction as before and trade equities but expect a choppy reaction as the sector rotation muted upside on the positive news/risk-on basis. As can be seen no markets continued it moves and the initial moves, whilst still not small paled in comparison to the Pfizer story.

Learning From The Best News Traders

Fortunately at Axia we have some of the best news traders in the business, capable of making in excess of $1,000,000 on a news based trade, meaning that the lesson a above don’t have to be learnt the hard way but instead can be learnt from collaboration on our London Trading Floor and specific news based trading process are taught extensively in our 6-Week Career Course and Central Bank Trading Course. To inspire you trading your next news event:

Richard

The Best Futures Traders Take Time to Debrief

The US presidential election was a one off event to be forgotten for 4 years, so why bother debriefing it? Correct. There is not going to be the same event again for a while. But, the work done now in debriefing and learning from the US election should be done, as with every debrief, as a way of paying forward performance – some of the things picked up from the US election may help sooner than you expect – you just don’t know which of those things they are or when they will help, butt you’ll be grateful when they do. I remember taking a trade at the NYSE open, long the S&P 500 futures after the 2016 US election because the pattern of movement overnight as Trump was voted in was almost almost identical to the move on the Brexit referendum night: S+P drop to limit down overnight, grind back up during the European session as the news was fully digested and then bid up after a small drop as the NYSE for an entry back through the opening price for ~20 handle winner.

So what did we learn from the election of the 46th President of the United States of America?

Not Every US Election Trades Like 2016

Traders expecting a binary event like 2016 were sorely disappointed, back then Trump was seen as ‘bad’ (mainly based on uncertainty) – so an easy sell in S&P 500 futures, which traded to limit down on the night (see below). Now, with him in power, the uncertainty had diminished and whilst Biden was the markets’ preferred choice there was still the the issue, at least for stock markets, of the increase in stimulus being countered by increases in taxes. This created a more nuanced trading environment, focusing much more on flow and the ability of the market to continue or reverse a move as more states were won.

Flow Based US Election Trades

The best performances on our London Trading Floor came on a flow based move back through the range in the E-Mini S&P 500 which was counter the conventional wisdom of Trump being bad: A big lesson from the 2016 election was to watch the betting markets rather than try to interpret every twist and turn as different states reported. What they started to show was a shift in odds towards Donald Trump winning, which initial caused a drop however as continuation was not forthcoming an unwind move back up ensued – this was a purely flow driven move, not based on a specific state being won or necessarily the odds themselves. Key Takeaway: if a market should do something and can’t, the counter directional move is often clean and relatively quick and positions exit. This move is reviewed below.

US Election Trading Opportunities The Next Day

For those wanting to trade the result of each state as their election trading strategy, the best opportunities came the day after, with many of the key swing states still having votes counted the US Election then hinge on these few remaining results making for much clearer trades – for examples Biden wins a swing state: buy, Trump wins: sell. These opportunities are also reviewed above, the most important, which set the tone for the S&P rally for the rest of the day was Biden in Michigan. Something that should always be considered is opportunity cost – many traders missed this move after staying up all night. A question for 4 years time, particularly if some of the similarities of postal votes and delayed counting as well as an even less binary decision is on the cards could be whether it is worth waiting until the final swing states report and trading the results of those?

Remember a debrief should never simply be a re cap of past event but should be instructive in how you will act in future. This a hallmark of many of the best futures traders.

Richard.

Why Might The ECB Change Its Monetary Policy?

There are 2 main reasons for changing policy: Disappointing data, particularly inflation, and the potential impact of the Covid-19 second wave. Inflation has taken a downturn in recent months and is now just under the ECB’s projection from September (0.3%) at 0.2% as the ECB has long struggled to get inflation to their target of “close to but below 2%” the recent drop, even though a result of the pandemic, could be a reason act sooner rather than later.

Lock-downs are beginning again across Europe to combat the recent surge in cases with France and Germany announcing further lock-downs of varying severity the day before the ECB decisions. If the economic impact is felt in the same way as in March will be needed. Here the ECB has a balancing act of waiting to see if the EU fiscal response, which is not expected until early next year, can alleviate the issue or whether they will have to preemptively step in with changes to current policy or new measures, Lagarde recently suggested that “options in our toolbox have not been exhausted”

What Are The Expected Changes in Policy?

The ECB has multiple options in how it can change policy, some more dramatic – changing their PEPP program and some more nuanced – changing the tiering multiplier. These potential change are largely expected to be kept until December.

• Increase the PEPP by €500bn from the present €1,350bn level. This would be the most dramatic policy change by increasing money being printed and thereby attempting to avert the problem of falling inflation and preempting the need for more funds in the economy to prevent bank lending seizing up
• Extending the duration of PEPP to end 2021 from June 2021. A more subtle approach that keeps accommodation and ensure the end is far away, a more extreme version could be to not set and end date on PEPP at all as suggested by Villeroy
• Changing some of the criteria in the TLTRO III to make it more attractive to banks to borrow form the ECB – potentially extending the current special rebate until end of year.
• Increasing the tiering multiplier from 6x to perhaps 10 or 12x as was expected back in July. This will help banks profitability but do little to avert the Covid or inflation issues.

ECB Trading Strategy

The ECB rarely changes policy outside of their quarterly meeting, barring exception circumstances, which include staff projection (the last time they did saw PELTROs in April 2020). Therefore signalling the change in policy in December will be the focus, meaning that the statement delivered by Lagarde will where most potential trades lie. Signalling can come in and explicit or implicit form, the expected explicit form of communication would be to use the phrase “task relevant committees” which translates as “we will very likely act at the next meeting.” This phrase was used multiple times by Mario Draghi (in July 2019 before cutting rates and restarting QE the following month) but importantly has not yet been used in a statement by Christine Lagarde. Therefore a different suggestion and variant of “reassessing policy at the next meeting” may well be used instead. The (semi)explicit guidance will send the clearest dovish message, a more subtle approach could be to change language in the opening paragraph of the statement regarding the current situation; the first sentence The incoming data since our last monetary policy meeting in July suggest a strong rebound in activity broadly in line with previous expectations, although the level of activity remains well below the levels prevailing before the coronavirus (COVID-19) pandemic. could be adapted to suggest the rebound is not so strong, thereby implying the need for policy change.

Many of our Axia Traders will be considering the possibility of no change – this is because all the focus seems to be skewed towards some kind of stimulative policy of signalling of one, meaning everyone is looking in the same direction, perhaps a slower burning trade strategy will be need here as throughout the press conference signalling could happen but if no change is coming markets could well be disappointed particularly in light of the recent, Covid induced sell off in equity markets.

As always make sure you have a plan to trade any central bank event and don’t dismiss the importance of no action. If you want to learn more about how plans can be formulated, check out our Central Banks Trading Strategies Course. For more information on how to develop your trading career, check out our range of Trader ​Training courses and our flagship 6 Week Career Programme which can be attended live on our London Trading Floor or virtually from home as an online trading course.

Richard

Market Profile Value in Futures Trading

When looking at a Market Profile, the value area indicates where the majority of people perceive value to be, this then, is not an indication necessarily of the best price to trade at as a day trader. If you are a large participant and need to get a huge amount of business done, then inside value is ideal because there will be lots of other traders willing to trade both long and short, but for a day trader this makes establishing short term direction difficult. In the example below volume is distributed evenly across a small range of prices, created by choppy non-directional trade – the implication here is that everyone agrees that 1.2846-73 is a fair price to trade.

How Does Market Profile Value Help a Day Trader?

If ‘everyone’ agrees on what the fair price to trade is, any move away suggests a change in people’s perception of value and this creates trading opportunity. The first opportunity being a move away from value – this initiative movement provides direction and forces others to act either to exit positions held or to react to the change in PRICE. A short term break out opportunity is available with potential for continuation.

• Market Profile Caught In The Hole Trade
• Price Action Trend Day Strategies
• 2 Trades Using Market Profile Ledges

The second opportunity comes in assessing the sustainability of the initiative movement – whilst price has changed, has value been shifted? If it has then the move can be considered sustainable as the new Market Profile Value Area agrees with the preceding price change. Therefore continuation strategies can be played. Think back to the TV, if price rose to £2500 and stayed there eventually you would accept that anything near £2000 is now good value and likely be winning to pay more that what you originally believed to be too much. If, however value has not shifted then the move looks unsustainable and those who have traded a long way from value may begin to doubt their position and exit causing a reversal move. This is a similar principle to the overnight positioning reversal At best they will be hoping for a consolidation enabling value to catch up to the price move. This lack of value shift is illustrated below.

Market Profile Value Providing Trading Opportunity

Following the unsustainable move higher above, expectations for the next day(s) can be form: either a reversal back to value or a consolidation (accepting value higher) followed by continuation or move back to original value below. The least likely outcome is a continuation after a move without value shift. As can be seen below the consolidation and reversal sequence of event played out – buyers were willing to higher prices but only in the top part of the previous day’s range which shifted value higher on the consolidation day. But when put under pressure again the following day, there was not the willingness to keep buying and the reversal trade became available on the break of the consolidation day’s low. A clue to this reversal came from the tail in the consolidation but that’s a strategy for another blog.

Richard

Why Trade Futures in the Overnight Session?

The main, logical, reason to trade futures in the overnight session is to hedge a position held in the underlying cash market as correlated markets that are open move against your position. An example would be selling S&P 500 futures to hedge a stock position as European equity markets fall before the NYSE open. But another reason could be to speculate on a continuation move and use the overnight session as a chance to ‘get in early.’ In the image below short term traders buy above the previous day’s high during the overnight session, speculating on a the gap-and-go type move when the underlying cash market opens…

It doesn’t work out.

How Futures Trade Overnight Creates a Trading Opportunity?

As a general rule futures traders in the overnight session are not large participants, the reason this assumption can be made is large participants need a lot of other traders in the market (liquidity) to execute a large position so therefore will wait until the higher volume cash session where other large participants are active employing multiple different strategies. Therefore those active overnight are typical shorter term/speculative traders – if their taken position doesn’t see continuation they a will likely exit with the profit they have achieved from the overnight move.

The Trade Opportunity arises in understanding where they will exit. There are 2 logical points to exit – either on a failure to continue beyond the overnight extreme: this is a failure to improve their maximum overnight profit. Or if the opening price is taken in the direction counter the overnight move: The opening price is the notional starting price they have got, anything worse than that is seen as a loss. Once the overnight positioning begins to turn, a highly advantageous situation is created, where short term traders are exiting whilst larger traders are reacting to the ‘mis-pricing’ overnight and trading in the same direction. As a result, a reasonably straight forward move to fill the gap left by the overnight move can be expected.

The overnight reversal trade is one that I have explained in the past . I continue to use it in our Career Training Course not just a one of the many trading strategies taught during the course but as a way to enable new traders to understand the importance of traders intentions and how positioning in a move can undermine the suggested direction market has. Think about positioning next time you see a gap up in a cash session compared to where the previous one closed.

Richard

Market Profile Trading Strategy After Imbalance

On Monday 21st September Euro Stoxx broke from a 2 week range and trended lower for the morning session leaving a stretched/imbalanced profile – this is an easy situation to lose sync as traders may have been taken by surprise by the drop which immediately adjusts their opinion of the market to greater expectations of continuation the next day. However after such a drop balance is required and makes logical sense: New sellers will look for pull backs after a large drop, whilst more profit taking buyers appear if a continuation doesn’t start immediately the next day. In this situation most traders are passive which causes a balanced day as seen below.

Therefore following a trend/imbalance day a passive trading strategy can maintain sync with the market – however there always needs to be a point where the strategy can be adapted – establishing points of change are crucial and this where order flow would be expected to change, here the Value Area High (78) and 52 provide points to expect change at.

• Anticipating Day Types
• Identifying Ranging and Trending Markets
• Elite Trader Initial Balance Break

Breakout Strategy Following Balance

Trading Strategies can be adapted after the Market Profile shows acceptance – now initiative is expected out of the consolidation range either to reference points from the drop or a continuation to the down side. On the 23rd a break above the previous day’s high initiated a move to clear reference point targets: 97/99 high volume node (HVN) and then single prints 3111-3113. Here a breakout strategy can be employed with a bullish bias retained until a drop back into the box at which point a move through the range can be expected as value has already been built there so doesn’t need to trade again.

What To Do When There Is No Shift In Market Profile Value Area?

Euro Stoxx futures failed to stay above the box and fell through the range; again this is where synchronization with the market can be lost with traders looking for a move lower, but Market Profile suggests something different: without shifting value a continued move is not likely to be sustained – this is exactly what happened.

With an open below the recent lows 3137 a continuation could be played for. The continuation idea fails once trade gets into the area between the low (3137) and value area (boxed 3166-3200) and 2 way trade is likely to follow to establish value in that area – meaning once again Market Profile will have kept you in sync and adapted strategy to range bound trade between 37 and 66.

Weekly Market Profile Indicating Energy Needed for a Break

Once value had been established lower again, another leg down (imbalance) could be played for however the weekly volume profile needs to be taken into consideration. Overlaid on the chart below is the weekly profile – value is well established in a tight area (red lines 3179-39) therefore value has been accepted so much more volume is required to move away and repeat the move down from Monday. The small box 3133-26 is where the additional selling pressure is needed as this is the last support before the recent low.

With this expectation, sensitivity to the nature of the move down into 33-26 is key – knowing more energy than normal is required prevents selling when it is not present, despite the market looking like its in the right place. Whereas when volume increases above average and delta starts to fall now is the time to execute.

Whilst Market Profile can aid you staying in sync with market movements, the real key to knowing where and when to trade is down to creating and updating, throughout the day, your hypotheses. Asking where things can change? Does the order flow justify this move? Or can the market be expected to continue with value there? Teaching and constantly refining these skills are a major part of our Career Programme that provides the foundation for our newest Axia Traders.

Richard.