Understanding Market Flow

Introduction

The most important information you will read in this document is that the market’s purpose is to TRICK you and TAKE ALL OF YOUR MONEY…period! Now, with that said, for those who understand the market’s flow patterns, the market provides you with unlimited wealth opportunities. The market doesn’t NOT care who you are nor does it care which side of the transaction that you are taking in a trade. Always remember that the professionals and institutions with deep pockets control the overall price movement in the market and they do manipulate the market when it is in their best interest to do so.

Your job, as a day trader, is to understand the factors that make up the market flow of the instrument that you are trading and then, design rules that keep you on the correct side of the directional move and take advantage of the opportunities that are provided. Your advantage is that you are able to react quickly to what is happening and take advantage of the “pockets of opportunities” that the “deep money pocket” professionals give to you.

As a day trader or investor, your critical advantage is when you know how to “react” to what you see on the charts…it is never an advantage to “anticipate and jump the gun” to get into a trade setup. Your job is to wait for the market to tip its hand and then, react to the market, after it has tipped its hand, and then, look for your trade setup to take advantage of the high probability opportunity provided. Therefore, no matter what is happening, your job is to establish rules that help you time when is the best time to “react” for your trade setups…as you TRADE WHAT YOU SEE HAPPENING ON YOUR CHARTS!

In order to be a master day trader or a master “reactor” trader, you must first understand the factors that the big guys use to give the market a sense of flow. It is only after you understand the factors and how they relate to each other, can you then determine the highest probability trades when trading. It is this step that causes most traders to fail as traders because they either don’t know how to properly integrate and interpret all the factors that relate to each other OR they don’t even know what is really happening because they never got the appropriate education. You can’t just take part of the information and think you have learned enough…you will get slaughtered by the “deep money pocket” professional traders who control the major movement in the market, when they want to do so. You must learn how ALL of these factors interrelate to each other and then, properly integrate these factors into high probability trade setups for yourself.

What is the first step?

Oddly enough, the first step is to get clear about your philosophy of trading. This is the difficult part for most people because you are faced with an immediate paradox. How do you become clear about your own personal philosophy in trading when you don’t know enough to become clear about your personal trading philosophy?

It can take you years to read all the books (and you won’t even come close to reading all of them). Honestly, you have to pick ONE MENTOR, who makes sense to you, to follow and filter your trading knowledge with the information that that mentor is sharing with you. Ultimately, you will be able to determine how effective that mentor is for you based on the results you achieve following the final integrated trading plan that the mentor shares with you. But, you must pick ONE MENTOR and then, follow that mentor’s FINAL INTEGRATED TRADING PLAN.

One of the biggest mistakes people make, under the guise of trying to save money, is they read an article about trading, here and there, or they buy some simple home study course or ebook, and then, they attempt to incorporate that piece of information into their trading plan, without checking with their trading mentor to check where that piece of information will conflict with their current trading methodology. Naturally, they wind up losing more money and they get frustrated and discouraged and mentally devastated if the financial loss is larger than they can handle.

Truthfully, over the course of your trading career, you will invest thousands of dollars in your education one way or the other. You will either invest in a mentor to help you or you will unfortunately lose money in the markets. It is better to pay for your education, earlier rather than later, to a mentor who is teaching you to be an independent thinker so that you are taking control of your trading career with an integrated trading plan that works and gives you a better chance to make money in the markets. You should never put yourself at the mercy of a trainer, who forces you to rely on their software or them calling out live trades for you. Otherwise, you will find yourself getting on the roller coaster of the “next” new software programs or “next” new indicators…and it is NOT necessary to have when trading.

Let me give you an example of how incomplete or inaccurate information from anyone can hurt you, when day trading. I know of two different trainers who say to do different things with respect to using the traditional pivot lines of R2, R1, PP, S1 and S2. For example, one of them says that when price goes to either R1 or S1, the trader should buy or sell the breakout on either side. While the other one says, in an up trend, the trader should sell at R2 and buy at S1. Let me make this absolutely clear…both positional statements can mislead a trader into taking or looking for an incorrect trade setup or a very low probability trade setup. As a result, if a day trader follows these types of advice that sounds reasonably good, it may cause them to either enter an incorrect trade setup or a low probability trade setup.

There is a correct way to use these Pivot Lines and I’ll share the concept with you in this document shortly so that you can apply a consistent set of rules around these or any key support and/or resistance levels.

Unfortunately for day traders, there is so much information and so many ways to attempt to teach them how to trade that it makes it very confusing to figure out, not only what is the correct information, but also, it makes it extremely difficult, if not impossible for them, to synthesize and develop an integrated final written trading plan because it is difficult to determine what and how much should be included and what factors should have priority over the other factors. In other words, day traders seem to be frozen and very few really know what, an integrated written trading plan, it looks like. Consequently, day traders wind up hurting themselves when they try to piece the information together for themselves, when the information is extremely complex and counter intuitive in many cases.

As a teacher and mentor, I view my first responsibility is to teach and show my students how to make money FIRST. I do this in our mentoring session by showing them exactly how to have a final integrated written trading plan with the correct trading setups that are extremely high probability. Truthfully, trading is a simple set of procedures, rules and disciplines that can be implemented consistently during every trading session that can be followed by anyone, provided they are taught exactly what really matters (what this means is that it is very likely that a person can be confused or even mislead themselves by trying to actually learn all the specific nuances of trading before learning how to make money when day trading).

My approach to teaching my students is to make sure they know exactly what they need to know to make money when day trading…I teach my students the simplest way to make money…by giving them the fully integrated approach to trading that makes them money first…period. It is not necessary to confuse yourself with all the specific nuances of trading until you are already making money. That is what I do in my private mentoring sessions.

After you are making money and when you want to learn how to trade the futures market 24 hours a day, that is the time for me to teach you all the specific nuances of trading. This is where I differ from all the other trading trainers. I don’t confuse my students with lots of information, just to show that I know the information, because it overwhelms them and causes them to fear not having enough or the correct information. I empower my students with the necessary synthesize trading education, integrated and prioritized to account for all the necessary vital factors that are designed to make money in their day trading session. What I do is give you the specific details and exact rules needed to make money…that’s it…just what you need…period. You can find the simplicity within the complexity, when you follow just what I share with you in our private mentoring session.

You don’t need a lot of fluff or extraneous information that can cause you to lose confidence in yourself when day trading, when you trade the wrong trade setups. .

Let’s talk about the factors that will help you understand how the market flows

The market is extremely complex for the average person to understand UNTIL they are able to find the simplicity within the complexity. This information is not widely known to most traders because the information has to be obtained from multiple knowledgeable sources such as expert mentors, experienced floor traders, innovative inquisitive entrepreneurs, books written by real traders and other interdisciplinary experts.

Additionally, day traders must understand that most experts are not just going to give you the information that they paid for with their own money and a significant investment of their time for free. Once an expert has integrated his knowledge into a complete trading methodology, the expert knows that the student can make a fortune from the information being shared, rather quickly. That’s why some experts charge people $5,000 to $10,000 to $25,000 to share their expertise with people who want to learn how to make money trading.

Here are some of the factors that you must consider when understanding how the market flows from the professional’s point of view and from your point of view:

1. Mass psychology of fear, greed and ego is a determining factor that must be considered when developing your trading plan. These levels happen in repeatable patterns after fairly predictable scenarios have occurred.

2. The “deep money pocket” professionals such as hedge fund managers, commercial banks and major financial institutions are Cause Agents in making the market move significantly in one direction or the other…they move the market.

3. Trading is a Zero Sum game where there is a winner and a loser in each transaction. Truthfully, you are looking for the uneducated trader to be on the other side of your transactions. The hard reality of trading is this…“there is a lot of money going around…it is changing hands from the uneducated people, who are unwilling or too lazy to learn what is required, to the people who are educated and work hard.” Just make sure you are on the correct side of this.

4. Trading is a game of probabilities. What this really means is that even though a trade may work, it may not be a high probability trade that gives you the proper risk reward ratio for taking the trade setup on a consistent basis. You want to get in the habit of taking only high probability trade setups that have a high expectancy profit ratio.

5. The future is unknown and it not necessary to know the future but certain patterns show up on a fairly consistent basis at the same times of the day throughout the various trading sessions.

6. Continuation of price trend is more likely than change but you must watch price action as it approaches the key support and resistance levels.

7. Price has a macro tendency to seek equilibrium based on supply and demand. Therefore, it goes from periods of balance to periods of imbalance (in either the up or down direction). What you realize is that price will travel between key support and resistance levels as it seeks equilibrium. These support and resistance levels can give you sense for the possible range for the day, the potential targets to take off part of your position or all of your position and the possible reversal points of the price action. For day trading purposes, you want to pay close attention to the support and resistance levels on the daily chart and the 60 min chart. These market structure resistance levels are key support/resistance levels to identify in your homework preparation for each trading day. Every day I prepare The Intraday Traders Daily ES Advantage Report which identifies the various key support and resistance levels for the upcoming trading session. I teach all of my students how prepare their OWN support and resistance numbers so they are not dependent on me for producing the report for them. One of the reasons why someone would want to become a part of the Monthly Advantage Inner Circle Membership is that I can save them time (at least 30 minutes a day) by producing the report every day and they also have access to the private Inner Circle Members “eyes only” specialized information regarding trading, business growth and mindset development to help you build an income and create wealth.

8. All markets are either rotational OR extending. When it is in its rotational mode, it is important to understand that price will travel between prior highs and prior lows. If the price does not “take out” the prior low, as it goes to test that area, the most probable place the price will travel to is the opposite most recent significant high, to test this area. Another way of stating this price action’s behavior is that in order for price to establish a new high or a new low, it must first test an opposite area for a significant low area(when price is going to establish a new high) or a significant high area(when price is going to establish a new low).

9. When a market is in an extending mode, the important philosophy to understand is that prior resistance will become the new support level in an up trending extension market and when this happens, you have confirmed that the market is most likely in an extending mode. Similarly, prior support will become the new resistance level in a down trending extension market.

10. I have identified 17 high probability times of the day to take trade setups. You must filter your trade setups based on the various times of the day to increase your odds for having a successful trade.

11. When you factor in Supply and Demand, using the 60 min chart timeframe as your basis, you can see the market structure points where there should be some type of price reaction based on normal supply and demand consideration on an Intraday basis. Now, I know that most people don’t understand exactly what it means when you say take into account Supply and Demand factors. For purposes of this document and keeping things simple, let me make these four points about supply and demand. First, when price revisits a prior level where there was significant “excess supply” the first time, you can expect the price to reverse and go back down again because the odds are high that that area still has some “excess supply” in that area. Conceptually, the same type of rule applies, in reverse, when you have “excess demand”. Second, when the area of “excess supply” or “excess demand” is at a key level of support or resistance and the less time it spent at that level previously, it is a much stronger area of “excess”. Therefore, you should definitely expect a strong reversal reaction at that level. Third, when the area of “excess supply’ or “excess demand” is at an area where there was a continuation of an overall trend, that area is an area of “excess” but it may NOT as be as significant as an area of “excess” that occurred at a major support and resistance level. Therefore, you may see the price consolidate and go sideways before it either continues the newly attempted trend or reverses back in the other direction. Fourth, when you see price consolidating and you see a divergence in a momentum indicator with the price, it does NOT mean that prices will reverse direction permanently. The longer it goes, the consolidation gives the price a chance to work itself out and continue in the direction of the newly attempted trend. You must wait for price to prove its direction first before you decide on entering a new trade position, in any direction.

12. Price Action is your ultimate and primary filter when determining whether to enter and exit a trade setup. One of the most important lessons you can learn about price is that it is absolutely critical to assess both what it is doing at that very moment and what price could not do at that very moment on a bar-by-bar basis. For example, if you are on a 3 min chart and you have three consecutive bars (dojis with wicks) where the price touched the same price attempting to go higher, but did NOT go higher and now the fourth bar is a down reversal bar. The odds are now on your side that the market wants to go lower…so you can look for a trade setup to go short. The important principle is that you are looking at what price is actually doing and what it could not do…then, you make a decision on what you should be doing…based on what price did or could not do.

13. Candlestick Reversal patterns that happen at key levels of supply and demand, or support and resistance, or at key reversal times of the day and at key levels of either overbought/oversold levels or significant levels of momentum or lack of momentum are significant clues of whether a trade setup has a high probability of working.

14. Market Profile Information provides significant clues as to whether the price is in a balancing period (non-trending) or a period of imbalance (trending). When you consider the three basic informational items provided by Market Profile data or calculations, the Value Area High, the Point of Control and the Value Area Low, you can instantly have an idea of the market’s directional bias when you compare the price action relative to prior day’s VAH, POC and VAL. This knowledge is extremely helpful for you when you apply some simple rules such as if the price action is above the prior day’s POC and VAH, you are looking to enter into only long trade setups. Knowledge of how to use this information is absolutely critical.

Every day I research three different sets of Market Profile Information for the current day’s trading session. One set above and the other set below the current day’s market profile numbers. I write these numbers down on the Intraday Trader’s Advantage Report and plot these numbers on a special support and resistance chart. When the market extends itself beyond the current day’s market profile numbers(let’s say going in the short direction for now), many times you will find that the price will pause/stop at the most recent market profile’s VAH (which is below the current market profile day’s numbers) beyond the current day’s numbers. Now, listen carefully, if it does not stop there, it will most likely stop at the POC of that set of numbers.

For example, if you look at the Oct 16, 2008 report, I commented that if the price action broke the 879 level going down that the market could drop significantly. If you would have noticed already, that for the price to do this…it would have already passed the VAH of that lower cluster of VAH/POC/VAL…that means the next stop would be at 865 (the POC of that lower cluster). When you review the intraday charts of that day, you would discover that is exactly where the price action stopped on that breakout move beyond the 879 level. That means you had 14 points, from which to grab a chunk of profits…provided you understood how the market’s price action flows. By the way, the market stopped and turned back upward from there. It turned out to be the low of the day.

Now, even though it looks like I have covered most of the factors, I have not. You must also take into account additional factors such as market breadth information, opening gaps, volume and multiple timeframes when analyzing the price action on a bar-by-bar basis. Obviously, it appears that things are very complex and that it can take years to figure out all the interrelationships. You would be right…if your objective is to be a bar-by-bar intraday trading professional.

One of the mistakes in teaching traders that most of the trading teachers make is that they attempt to teach people how the market flows and they make it a requirement for the trader to learn the details of all of these components. The net result is that the student winds up being confused because the teacher does not incorporate all of these factors into their training and the student winds up with incomplete information and they begin to lose money trading(or never get their confidence in their trading methodology).

It is the final integration of how you use these pieces of information to formulate your final written trading plan that matters. My job, as your trading mentor and coach, is to strip away all the unnecessary information and give my students the exact information that they need to make money first.

It is not necessary to be a bar-by-bar intraday trading professional for you to make money. In fact, it is EASIER to first go out and make money as a day trader, when you are told ONLY exactly what you need to know in order to make money first, as a day trader. That’s why my approach to teaching my students is to give them what they need to make money first. That’s why I do my private mentoring program for people as the first step to trading. I want my students to first go make money in the markets.

For those students, who want to go on from there (making money in the markets) to become advanced students and learn how to be a bar-by-bar intraday trading professional, those are the students who need to learn ALL the details of each component of trading. Those are the people who will invest $15,000 to $25,000 in their education because they have a different objective than most people reading this information. Most people want my private mentoring program because it strips away all unnecessary information and it is focused on how you make money today…period.

In the next section, I am going to point out the various factors that I capture during my daily preparation for each trading session to help me determine which setups will be higher probability trade setups within the confines of where the market support and resistance levels and the other factors mentioned previously. As I stated earlier, each student can make their own report and do their own research and homework, after reading the section below. They do not need me to be their guru…please note that the Inner Circle Private Membership site is on-going interactive site designed to accomplish two specific things for people … SAVE YOU TIME and PROVIDE CREATIVE SOLUTIONS FOR BUILDING WEALTH for the rest of your life…it can be joined at any time…but it is designed to benefit people who are Champions or people who want to be Champions…it is not for whiners and complainers or negative people…it is designed to create a special community of winners who are excited about the opportunities that life is presenting to them in these tough competitive economic times.

I post my daily report in the Inner Circle Private Membership area each morning to save my students time and keep them on top any significant changes prior to the market opening. My goal for my Inner Circle Private Membership is to use that vehicle as a way for my students to SAVE TIME every day and STAY ON TOP MONEY MAKING WEALTH BUILDING SOLUTIONS FOR THEMSELVES and THEIR FAMILIES.

After I complete the next section, I will explain the first 90 minutes or so of the Oct 16, 2008 ES day trading session using a 3 min Gap Chart with a mini bar-by-bar type of commentary so people can get an idea of how to begin to incorporate these ideas into their trading arsenal. Notice I said, “to get an idea”. I did NOT say, “this is going to be the definitive exact way to do it”. This is strictly an educational type of an example…do NOT think I am telling you exactly what you need to do to start trading. I am simply showing you how the words and thinking may sound…it is also why I am not going to provide a chart because you will then, think the conversation has more importance attached to it than what I intend it to be.

Explanation of the Intraday Traders Daily ES Advantage Report

This daily report has been designed to be used by both the novice trader and the advanced Intraday Trading students. In order to properly take advantage of your trading opportunities in the upcoming day’s trading session, you MUST develop the habit of doing your preparation homework BEFORE each day’s trading session begins. This disciplined habit should reward you handsomely over the years. Never miss a day of gathering this information. Now, it would be nice and tidy if you could do all of your homework, the night before…but, you can’t.

However, if you want to properly analyze the market prior to the upcoming trading session, you NEED some specific information that you can ONLY get in the morning. This information is very critical in giving you an advantage over other traders because it takes into account trading activity in the overnight Globex session giving you additional key levels of support and resistance, the directional influence provided by the European Market, strength of the trading in the overnight session and, the up to the minute status of the market being in an oversold/overbought condition. The preparation that goes into The Intraday Traders Daily ES Advantage Report gives you an advantage, stated differently…it is an “edge” that you have over other traders, provided you know how to use the information. I strongly recommend that you have a separate notebook to keep the prior day’s reports at least for one full month, if not forever.

One of the critical secrets of being an Intraday Trader, whether you are a novice trader or an advanced trader, is to trade the Daily Patterns on an Intraday basis. When you follow this concept you are aware of the key levels of support and resistance on daily chart timeframe. What this means to you is this…when you break a key level of support/ resistance and you have decent follow-through, you can expect to garner decent profits when you enter into a trade.

Let’s get started, I will take the time to identify why each point is on the daily preparation sheet:

1. 20 Day ATR – Generally speaking, the 20 Day Average True Range gives you an idea of how wide or narrow you can expect the range of the day’s price action to be and that should help you to determine targets for the trades that you enter.

2. 5 Day ATR – The 5 Day Average True Range gives you a much tighter focus so you are aware any huge swings in volatility.

3. PD’s Range – This number calculates the Range of the Previous Trading Day by subtracting the High of the day minus the Low of the day.

4. Daily Range Last # of Days Back – Identifies the range of the previous day’s back to help you determine key patterns.

5. NR4 Day – If you see a ‘YES’, it means the day was the Narrowest Day in the last 4 trading days. Whenever, you have a NR4 Day, there is a high probability that the next day’s trading session will yield a sustained directional breakout of either the high or low of the NR4 Day. Generally, this is an excellent trade for conservative novice traders because it has a high probability of success.

6. WR4 Day – If you see a ‘YES’, it means the day was the Widest Day in the last 4 trading days. Whenever, you have a WR4 Day, you are most likely going to have one of two scenarios occurring. The first scenario being, especially if the day was a reversal engulfing day, that there will be high probability of a sustained directional breakout in the direction of the trend. Or, you may get a period of consolidation for the upcoming trading session. You need to be aware of these possibilities and adjust your trading strategy to fit what is happening on the charts.

7. Inside Day – An Inside Day is a day that has a high to low range completely inside of the prior day’s range. When the price action breaks out of the range of the Inside Day, there is a high probability of a sustained directional breakout move once the price breaks either the high or low of the Inside Day.

8. Outside Day – An Outside Day is a day that has a high to low range that completely covers the prior day’s range. Whenever, you have an Outside Day, you are most likely going to have one of two scenarios occurring, similar to the WR4 Day. The first scenario being, especially if the day was a reversal engulfing day, that there will be high probability of a sustained directional breakout in the direction of the trend. Or, you may get a period of consolidation for the upcoming trading session. You need to be aware of these possibilities and adjust your trading strategy to fit what is happening on the charts.

9. Doji Day – A Doji day pattern indicates uncertainty in the marketplace. A breakout on either side of the doji day should provide an opportunity for a sustained directional breakout move to yield decent profit possibilities.

10. % of PD’s Range – This number gives you a way to quantify your patterns in relationship to the prior day’s range.

11. % of Above/Below 20 Day ATR – This number gives you a way to quantify your patterns in relationship to the 20 Day Average True Range.

12. Gap Day – This tells you whether or not there was a opening Gap.

13. Gap Filled – Many times a gap is filled the same trading session…usually first part of a gap fill occurs at about 50% of the gap and it retraces back, if the gap is large…then, later in the session, the remaining gap is filled. When you see a ‘No’, you should draw lines on your chart so you can identify when you are approaching the gap in a future trading session.

14. PD’s High – This is the high of the prior day’s trading session.

15. PD’s Midpt. – This is the midpoint of the prior day’s range.

16. PD’s Low – This is the low of the prior day’s trading session.

17. PD’s Open – Prior day’s opening price for the day trading session.

18. PD’s Close – Prior day’s closing price for the day trading session.

19. PD’s 2 Hr High – This is a secret floor trader strategy. This is the high of the day trading session within the last 2 hours of closing. Generally, this is an important resistance/support level for the next day’s trading session.

20. PD’s 2 Hr Low – This secret floor trader’s strategy identifies the low of the day trading session within the last 2 hours of closing. Generally, this is an important resistance/support level for the next day’s trading session.

21. Floor Traders Pivot Points – The most important calculation is the Pivot Point, (High +Low + Close)/3. The floor trader’s pivot numbers provide a flow that makes sense to the floor traders (and I will share that information in detail with you in the training products). Generally, the price action will travel between the S2 to R2 levels throughout the trading session. The R1 and S1 levels usually come into play during each trading session. You will notice that I have calculated not only the R1, R2, PP, S1 and S2 numbers, but also, the midpoints in between the key numbers. Many times you will notice that price may pause and consolidate temporarily at these midpoints…just pay attention when the price action approaches these levels.
22. Value Area High, Point of Control and Value Area Low Numbers – There are three sets of numbers…the current session numbers for today’s trading session are in the middle…these are an approximation of the market profile numbers. The numbers above the current sessions numbers are the numbers for the most recent numbers that are above today’s numbers and the numbers below the current sessions numbers are the numbers for the most recent numbers that are below today’s numbers. The reason I have those numbers on the charts is because when the market extends itself beyond today’s numbers…those value area numbers above/below the existing numbers usually act as a resistance or support level as price approaches those levels.

23. Daily Closing Numbers – Inside the more advanced mentoring program, these numbers are covered in more detail for the advanced student. For purposes of this document, I will briefly cover the significance of some of the items from the perspective of its impact on the upcoming trading session. TRIN reading at the end of the day of 1.5 or greater is POSITVE reading so you should expect the market to go up in the Globex session…but, be aware that if you take the trade setup, you will have to place a large protective stop on the other side of a major support area. VIX reading of 30 or greater means a very volatile trading session…20 to 29 means volatile, but manageable…10 to 19 means slower grinding less volatile trading session. Globex High and Low Numbers are critical breakout or breakdown levels. A Pre-Market Volume greater than 120,000 ES emini contract around the 7 am Central Time is an indication that you could have decent follow through in the upcoming trading session.

24. Weekly and Monthly Numbers – These are reference numbers. When price approaches one of these numbers, EXPECT price to stall and become very volatile as the bulls/bears fight it out to see if that level will act as support or resistance. If price has not been at this level in a while, expect price to reverse the first time price approaches one of these numbers. Whenever the price extends beyond one of these key numbers, the possibility of a sustained directional move has a higher probability because you are breaking through a significant area of resistance or support.

25. Fibonacci Numbers based on the Prior Day’s High and Low Numbers – The concept of trading based on the Daily Chart’s patterns and potential influence on the upcoming intraday trading session requires that you understand where price is in relation to the prior Day’s high and low numbers. Many times there is a trade during the first hour of the Intraday Trading Session where the price action reverses and continues in the direction of the Daily Trend based on the prior day’s price action…right at key Fibonacci ratios. The purpose of having these numbers is so that you can be aware of the key numbers as the price action approaches these numbers. Another reason, to have these numbers at your fingertips, is to know when the market is going from a rotational mode to an extension mode on the Daily timeframe. Look for Fib confluence with Intraday timeframes.

26. Check the NASDAQ Econoday Website Every Morning – You need to be aware of any news items or events happening or reports being released and the time of these announcements…write these down every morning before you trade. These news announcement can cause the market to become very volatile and accelerate the market in a particular direction…you need to know when these times are coming up during the trading session.

Brief Bar-by-Bar Word Analysis of 3 Min Gap Chart for the ES on Oct. 16, 2008

Basis Background

The prior day’s closing was at 904 and the Opening price on Oct 16th was 915. That was a Gap Up Day in a down trend…there was an area of “Excess Supply” above around 921 to 923 (where there was a Value Area Low line on the Gap Chart). That tells me at 8:30 am Central Time, if the price begins to close the gap, I would wait (that means I won’t jump in) for the price to go into the area of Supply first before executing a trade to go short to close the Gap. I always take my first target at 50% of the Gap fill and then the last target at about 90% of the gap fill distance…when I take a Gap Play trade setup.

The Globex Hi was at the 921 number. I look at the Market Breadth Information to see where my starting point for the various numbers for the VIX, ADD and TRIN.

Thinking and Analysis Process Begins after first 3 min Bar is completed

The first bar moved away and closed down. If this 2nd bar starts to break the lows of the first bar and there is room to get to the 50% of the gap fill, I could take that trade opportunity…but, I would rather wait for better pricing when the market go back up to test the area of “excess supply” above the current price action. In this case, I decided to wait and this 2nd bar actually closed the gap (without me entering into the trade).

Now, I notice something…the low of the 2nd bar was exactly at the Prior Day’s 2 Hr Lo and close to the below Market Profile price cluster’s VAH. I see the 3rd bar reversing and becoming a reversal bar…this tells me the market went down to test an area of significant support first and it did act as support, at that moment.

Now, the market begins its process of attempting to establish a New High for the day…therefore, I should expect the price to go higher than any previous bar and I should expect the price to go and test the next closest area of significant resistance above that highest bar in today’s price action. The price makes three attempts at the 927.25 to break that price and establish a new high, with the last two bars being doji bars with long wicks. That means at the close of the 8:54 am bar, we have what is called the Don King Bearish candlestick formation (three long hairs sticking up in the air…looking like the US boxing promoter’s hair style).

Now, what is important right now is that you notice that the market first tested a low (area of support) and now “tried” to establish a New High and Extend beyond the area of significant resistance (area of “excess supply” and the VAL) to establish an upward trend…BUT…it could NOT do so…that is significant information at this point in time. It has tried both ways…but was not able to establish a directional trend YET. Equally as important, no trades have be taken yet…and that is the correct decision if you are waiting for a high probability trade setup.

Now, you will notice a wide 8 point Closing Reversal Bar to the downside forms at the 8:57 am bar. The combination of the Bearish Don King formation plus a confirmation strong Closing Reversal Bar should tell you that the market may be choosing its directional bias at this point in time to go down (some people take this as a trade setup). Interestingly enough, the Philadelphia Fed Survey was released early this day at about 8:58 am Central Time with a negative report.

Now, what I would like to discuss for a quick moment is the very next Green Up Bar…if you look at that bar, you would notice that the body does NOT close above the midpoint of the wide 8 point Down Closing Reversal Bar…signaling the bears grabbed control and still have control.

The astute student, who is looking at the 3 min Gap Chart, would notice that the low of the body of the last two bars is at 915 (which coincidently is also the Open Price). Now, when the price breaks this level going down, it should travel back down to test the previous level of significant support (remember, the level that held on that 2nd 3 min bar after the opening) around the 899 level. Now, you should have about 14 points to grab profit…this would be a high probability area to enter the trade going short.

Now, when the price gets to this low and breakdown below this point, you could either take that new breakout OR, you can remember the principle, that old support become the new resistance…if you know this principle is going to be tested, you can wait until price comes back to test the old area of support to see if it now holds as the new area of resistance and that test happens right around the 9:24 am to 9:27 am time period and it holds…this information now tells you that you have now established your directional bias to the downside…therefore, you could enter into a trade to the downside…knowing that the price should at least go to test the last lowest low (at 888) to see if it can establish a new low since it has now come back to test the most recent significant area of resistance first at this 899 level.

When the price breaks the 888, which it did on the 9:33 am bar, that’s when the market is considered to be extending even further (resuming the down trend). It did so in two steps…one to about 882…then the market pullback to retest the 888 to 889 area to see if there is still “excess supply” (resistance) at that level and then around 10 am there was a wider than normal down bar that broke through the 881 level to go on to established a new low at the 865 level which was the old POC level below today’s Market Profile numbers. It turns out that that was the low of the day…the market began its rotational basis looking for an equilibrium balance as it heads up from the low of the day…which you don’t know until prices continue to rotate back up until it finds its next balance point.

Remember…when the market does not make a new low…by definition, it means that it is going back to test the most recent opposite area of “excess supply” to see if that area will continue to act as a resistance barrier (to establish higher prices)…so the first area is the area about 875 and then 882 and then 889 and then 898 and then 904 (about the Closing Price of the prior day’s trading) and then 915 (about the Open of today’s price action) and then back up to where it was rejected with the Don King Bearish Candlestick pattern earlier in the day. Also, remember that as price go back through each prior “excess supply” level, it is able to do so because the “excess supply” at the levels stated in this paragraph are “trend continuation excess supply” levels…which are not as strong as “excess supply” areas that happen at significant areas of support or resistance…like the level where the Don King Bearish Candlestick pattern was formed earlier. And, if you are actually looking at a chart, you will notice that prices reversed again at this level (the 922 ish level) at about 11:30 am.

If you read through this example, what you will notice is that there IS a natural flow to the market and it IS understandable. You will also notice that I didn’t even use all the tools available to me to describe what was happening, as it was happening.

Now, what I also want to say is that there is a simpler way to integrate this information so that you don’t have to do the bar-by-bar analysis from market open until market close. When I am doing my private mentoring sessions, what I am doing is showing my students exactly how to simplify the entire process so that there is less room for errors, when taking their trade setups in the market.

Summary Comments

In this section, the first thing you should have learned is that there are specific principles, philosophies and rules that help you to understand the natural flow of any market instrument’s price action. Please understand that I wrote this document to give you an idea of some of the factors that go into helping you to understand there IS a specific flow that can be identified and it should help you with your trading. Please…please…please note that even though this document appears to be fairly detailed, it only scratches the surface of what you truly need to know to be a bar-by-bar trader. A 500 page book can be written on this topic alone. This is why I teach this type of information to my advanced students only…and only after they are making money in the market using my concepts and the principles taught in my private mentoring coaching session. My first goal for any trader is to teach them how to make money first…that is what my true mission is for traders.

Secondly, you should now know exactly what factors go into preparation for the next day’s trading session. You should be able to create your own Daily preparation sheet. You should never go into a trading session without completing your Daily Worksheet. You need to be prepared when you are planning to trade in an upcoming trading sessions.

As stated earlier, if you want to SAVE TIME and access my report in the morning before the market opens, I post my own Intraday Traders Daily ES Advantage Report numbers in my Inner Circle Private Membership Area.

Thirdly, if you followed the discussion about the price action flow, you should have already discovered that there is plenty of time to analyze a trade and there is plenty of time to enter into a trade. Therefore you can be patient and have the discipline to be a “Reactor” Day Trader, not a “Jump In The Market When It Feels Right” Day Trader. As a day trader, you wait for all of your trade setup’s criteria to happen and then, you react by pushing the entry button. That’s it!