Volume Based Market Profile Trading Journal
 
Tuesday January 4, 2005
Hello everyone, I thought I'd start a journal here showing some interesting new tools.

My main trading vehicle is the S&P emini but you can use some of these concepts to time your stock trades as well.

I like to use Volume based Market Profile charts to show where the trades went off on each bar, they also very nicely show states of balance (consolidation) and trend. I setup my volume profile to also show the volume of the 20+ lot size traders as red. Smaller traders are colored white.

One of the tools I use that is Buy/Sell pressure where we analyze every single trade and show whether traders are net long or short. I look at 20+ lot traders and you can see from the chart that they are slightly long during the first 30 mins. The NYSE volume tool shows the volume for each bar flowing into stocks up on the day or down. Buying was slightly higher than selling but not by much and not nearly as much as the selling yesterday near the close.

You can see on the first 30 min bar the most volume at 1206.25, when the breakout of the first 30 min high failed I looked to see if 1206.25 would hold as support. When it didn't I went short and exited at the previous day's low. On most days when new highs or lows are made the floor traders push it in the opposite direction. I usually only look to make a few ticks on these trades and then reenter in the direction of the trend. Many moves happen at the beginning of each 30 min bar period and I went short at the second break of yesterday's low.

If you take multiple days volume based market profile and consolidate them, you will see a lot of volume at 1198 area. I went long at that area a few times for a few ticks profit each time.

The third bar hovering near the 1198 area was an up bar but you can see that 20+ lot traders were net short and there was more selling volume that bar and no buying at all. Clear sign that we're going lower and 30+ mins later we did. I'm a scalper so rarely hold more than 1.5 to 2 points so left a lot of money on the table today.
 
Wednesday January 5, 2005
One tool I use to determine entry and exit points is support/resistance zones where lots of volume traded using our Volume based Market Profile charts. Yesterday you can clearly see a lot of volume from 1194 to 1195 area on the left side of this chart.

Our NYSE volume tool clearly shows more volume flowing into stocks down on the day than up and it gives a clear signal that the odds are that the market will go lower. The S&Ps rally up to the 1195 area and fail.

Analyzing every trade in our Buy/Sell pressure you can see there were more sellers than buyers for the first 90 minutes. When we didn't make new lows today some traders came in and covered their trades. They were overall still net short and selling volume greatly outnumbered buying volume. The 12:30 bar you can see had more selling volume than any bar of the day and NYSE volume has more selling and less buying than the previous one. It was clear here we'd go lower.

The eminis rarely trend more than two days in a row so today was assumed to be a consolidation day where the plan was to buy the unfair lows and sell the unfair highs near the open and lunch time trade. Fading moves into the close is a very dangerous task as most traders don't hold positions overnight and the close forces them to exit trades. Therefore the market tends to trend more smoothly into the close.

Looking at the NYSE volume tool you can see that there were two bars that had high selling volume and no buying volume. This means that many stocks went negative on the day and it was clear that the market would sell off at some point. That was exactly what happened and the market sold off 7 points into the close.
 
 
Friday January 7, 2005
Friday morning was tough trading for me. I was aware that more volume was flowing into down stocks than up and traders were net short the first half hour. The biggest volume of the first half hour was around 1192. When price couldn't stay above it during the second half hour I shorted. I covered too soon. Sometimes I can't control my biases about what I 'think' will happen and I tried to buy the low too early and shorted the rally back up a bit too early as well. Up money for the day but down after commissions. What you can see on the chart in the lunch time trade is that most traders are net long, thus when the lows are broken they will be forced to cover. Another thing you will notice is that volume flowing into up stocks isn't substantially larger than volume into down stocks.

I use volume based market profile charts to get into breakouts or breakdowns a bit early. When you have a narrow range that is balanced (volume looks like a statistical bell shaped curve) you can take the breakout when it goes above/below the volume 'point of control'. I shorted the eminis at 1192 and again looked to make either a quick scalp of 2 or 3 ticks or 1.5 to 2 points if it moves into my favor quickly. I made a few ticks on the first trade and second time back up to 1192.50 with stop right above the 1pm bar high. The third time back up had very little volume and interest up near the high and when it broke down I held for a point and a half. You can see that volume flowing into down stocks was significant and that is because stocks that were up went down during that bar. The following 2:30 pm bar tried to rally back into the previous bar range but you can see there's very little volume. That is a sign that the test of that previous bar's high was a failure and the odds are that we would go down. The 3pm bar is a perfect example of a narrow range bell shaped curve volume bar and a low risk short. I rarely fade moves into the close so took this short for a point and a half and called it a day. Slightly profitable on the day but the volatile sell off and short covering rally stung me.
 
 
Monday January 10, 2005
I had a lot of people ask me to put notes on the chart to make it easier to understand. Today we opened and has about 20% more volume flowing into up stocks vs down and traders were net long the first 30 mins as you can see in the Buy/Sell Pressure. Our volume tool on the bottom shows that volume for the first 30 mins was about avg for this time period. Low volume readings often predict of choppy and range bound days and avg to above avg volume during the first 30 mins often times leads to breakouts in the direction that most traders take. Today traders were net long 3,314 contracts during the first 30 minutes which was highly predictive of a good rally.

Usually most futures will bounce at least once off of their previous high/low, especially if the move up/down to it is significantly large. You can see that buying dropped off after the first hour which gave me the confidence to sell the high a few times in the consolidation zone. I also sold the eminis at 1193 when I took this screenshot because as you can see there was heavy selling in the bar. I covered at 1192.25 because there was no real selling below the previous bar's low and it needed to take out 1192 area which you can see at the top of Bar A has a lot of volume which acted as support.


 

At point C you can see that there are a lot of contracts net long, 13,259 to be exact. When you KNOW that everybody is long and prices consolidate in such a narrow range, in this case only one point, it becomes a very high probability trade once prices go in the opposite direction. Seeing the volume during the new high wasn't above average for that time period also gave me confidence to look for low risk entries.

At point D you can see prices in a tight 1 point range, traders are selling just a tad more than they are buying and you can see from the volume profile chart that all of the volume is at 1196 and 1196.25 area! This is a dream trade, you don't see these too often but they work virtually every time. When you can find trades where you can risk so little and have such good upside opportunity you have to take it. I shorted at 1195.75 with a stop at 1196.50 and the market sold back through the highs. You can see at Point E there was a lot of selling. I am a new convert to auction market theory and it amazes me at how often prices come back to high volume areas and just stop dead in their tracks. You can't see real volume using bars or candle charts. In the bar after the market heads lower you can see it rallys back above the high but stops at where the most volume occurred in the previous bar, 1195. That volume acted as terrific resistance and if it failed the market most likely was have stalled at the 1196-1196.25 area which had even more volume.

You can see in points E and F that traders were selling the futures and the volume flowing into the stocks down in the NYSE was more than volume flowing into up stocks. This is telling you that many stocks are going below their yesterday's closes and will add more fuel to the selloff.

You can see on the second 30 min bar that there was a lot of volume at 1192, this was the make or break level in the futures and once it got broken the market fell all the way back to where the volume was at Point A. This was the only safe buy point on the chart and you can see it held almost to the tick and we got a great short covering bounce. A major buy program happened at this level also but thats way too complicated to discuss in these posts. We are currently working on adding easy to understand tools to let you see when program trading activity is occurring and how to profit from its often violent moves.

 
Tuesday January 11, 2005
Today was an easy day to trade. We opened up and the Up/Down volume ratio was massively bearish as you can see in our NYSE Volume tool. Even though we were weak you can see that people were buying the dips and in both the first 30 min and second 30 min bar the Buy/Sell Pressure indicator shows people were net long. We analyze every single trade to come up with this tool. 746 Contracts net long first 30 mins and 12,225 the second.

Because the overall market was so weak and so much volume was flowing into down stocks I shorted every rally but it was clear using the Buy/Sell pressure (I also watch this on a 1 and 5 min chart to better time my entries) that the futures we're being supported and bought on every selloff. We couldn't get much above or below yesterday's lows.

You can see on the first bar at points A and B that there is a lot of volume at these levels. These are the key areas I used to go long above and short below. Using our statistical volume analysis at the bottom you can see that the market sold off on slightly above average volume and then rallied back up on very low volume it was a very safe short on the first bar D that crossed back below yesterday's lows. I was looking to see if the volume at 1185 would hold and we blew past it. The NYSE volume tool also confirmed that the first rally up off the low wasn't going to continue as we have more selling pressure than buying.

On the day low bar you can see it has above average volume for that time of the day and more buying than over the last 2+ hours. Short covering rallys can be very fierce but I finally got short around 1188 and got stopped out. you can see at Point E that we had tremendous volume at 1188. I went short again when we went below that level. This was a safe short as people were exiting their longs near the high and there was net selling for the next hour and a half. Volume on the selloff was low so I exited right above yesterday's low. You can see on future bars that the market could NOT get back over the 1188 area. Using volume profile charts is the safest way to trade because you can use REAL support/resistance levels that are supported by volume. I sold the 1188 area two more times for quick scalps. I didn't trade the last hour because I felt there was too much buying interest at the lows to get short but we clearly didn't have any interest at taking the market higher so I felt the risk/reward ratio of trading in the middle of today's range was too high. If you don't feel you have a clear edge its far better to not trade than to just trade for boredom.
 
 
Wednesday January 12, 2005
Today was a great trading day. The market opened and quickly had more selling pressure than buying giving a clear indication that we would go lower. See Point A in the NYSE up/down volume tool and from the Buy/Sell Pressure which is based on looking at every trade and seeing if there is more volume by buyers or sellers. In the second bar we have some short covering at the lows but traders are still net short for the day and again there is more volume flowing into down stocks than up, showing selling pressure across the NYSE. There's also less buying volume than the first bar. When this happens it almost always leads to a sell off in the eminis.

During the third 30 min bar there is considerable selling and most traders are net short at the lows. We bounce off the S2 pivot at 1177.50 and when the next bar rallys over the 1179.25 area which is the high part of where all the volume occurred it caused a steep short covering rally which was totally obvious to catch if you knew where everyone was short at. Volume profile charts are the safest way to trade, without them you really are trading blind.

Short covering rallys usually go no further than the high of the day unless prompted by new financial news. At point C you can see there was more selling than buying even though the bar was an up one. This is something most traders can't see looking at normal charts. I shorted the day high here with that as confirmation and we sold off down to where all the volume in bar 4 occurred. Again it always amazes me at how prices often stop and reverse at areas that have high volume. The market consolidates for two hours but you can see at Point D that there is more volume flowing into up stocks than down giving a clear indication that the market is more likely to go up than down. I bought the breakout of 1184 which was where most of the volume was in bar 11 and covered a point over the day's highs. My goal is to catch 3 ticks to 2 points and not be greedy. I have found the larger my profit target the less frequent it gets hit and many times you can take the same trade multiple times in the same direction and make more by taking frequent tiny profits than waiting for the big one. There was such a huge amount of volume flowing into up stocks after point D that I did not short that rally and there was no significant pullbacks to buy either so that ended my day.
 
 
Thursday January 13, 2005
Today was a very boring day to trade for most of the day yet very easy. Consolidation days are a piece of cake using our tools. Whenever you see a very low trading range day on low volume it allows you to trade the ranges.

You can see on the chart below which I have plotted the statistical average high and low of each hour bar and using 5 min candles. We hit the statistical average low in the second hour and since it was on low volume it was a good scalp long trade. We hit the average low on the third hour range as well and bounced back. You can see on the chart that we never once hit the average high showing NO strong buying at all. We hit the lows twice yet never had enough buying for us to hit the highs. Even though most traders would think the market was going sideways, this tool let me see that the bias was towards the downside. I did buy the low at 1185 but there was no bounce and made only 2 ticks on the last trade down to 1185. I shorted it on the breakdown for reasons I'll explain using a different chart below.
You can see from this 30 min chart that today's market had very low volume in the morning. In fact until the first probe down at point B we never had volume that approached the average for that time period. This is a pure consolidation trade today where the goal is to sell the unfair highs and buy the unfair lows, to use auction market terminology. The NYSE Volume tool showed about equal volume in the morning flowing into up and down stocks on the day giving me further confidence to take both longs and shorts. The market usually rotates about 2 to 3 points and I frequently bought the 1185 area and sold the 1188 area. You can see that at Point A using our buy/sell analysis where we add up each trade to see whether most people in that bar are long or short there was a lot more sellers than buyers. Also look at the second 30 min bar of the day and you can see a LOT of volume at 1187.50. I shorted that area on the forth bar of the day for a quick scalp. It didn't fall away as fast as I'd like but you can frequently take 2 or 3 ticks many times when the market is directionless. It's boring but low risk and adds up over the course of the day. I was disappointed at the fifth bar of the day when we didn't selloff. You can see a LOT of volume at 1185. That level was key to our selloff later in the day. We drifted up during lunch, I was not trading during this time, you can see on our range analysis chart that we never made any moves and the volume was pathetic, trading during this time would have been a total waste of time. Point C we had some buying and I thought the market may try to breakout to the long side and took a shot with the huge volume at the middle of the C bar as support. We didn't breakout and I quickly reversed short. Unfortunately for me I got out near the 1185 area because I saw a lot of volume accumulating and at the time our charts showed buying. I don't ever chase markets so when we soldoff I only took one short at 1180.25 as this was a statistically range of an entire hour that the market ripped back up to in 5 mins. With the heavy selling coming into the market by looking at Point D, I held for 1.5 points.

Tomorrow should be an interesting day. We had a lot of volume accumulating at the low today and in the last hour traders were net long. Tomorrow should see a lot of resistance at the 1185 to 1188 area. If we open higher I very likely will buy the 1178.50 to 1178 area on the first time down to this level. If we open below I will short it if the market can rally up to it.
 
 
Friday January 14, 2005
Today was a pretty predictable trading day. Below average volume on every 30 min bar usually means you can fade each move which I did all day. The first 30 min bar closed up and the NYSE Volume tool showed considerably more volume in up vs down stocks and our Buy/Sell pressure showed that the market was net long. The breakout of 1182 followed through as anticipated. I usually fade breakouts especially on low volume after 2 points up and scaled into a position that provided a nice scalping profit. I shorted the third bar too after I saw a lot of volume at Point C and that there was heavy selling. That trade quickly paid off with a 1.25 pt profit.

There was not much volume on the breakout bar above 1182.50 and what usually happens when this occurs is that the market will come back and fill in that area. Bar D was a very narrow and inside bar so on bar E when it went below the 1183.75 I went short expecting the market to completely fill in the low volume area. On bar A you can see a lot of volume at the top of the bar and considering the market internals were so strong with more stocks up than down and a lot more volume for the day flowing into up stocks I scaled in long from 1182.50 down to 1181.75. The market quickly bounced up and I finally caught a two point trade. I usually scale 2 and 3 ticks but on trades like this where everything points us to going higher I force myself to hold for larger profits.

Because today was a low volume day and we clearly were not trending I shorted the new high for a quick scalp. Whenever I trade against the trend I tend to just take scalp trades. The emini tends to rotate 2 to 3 points up and down on each swing. Being an up day I bought them again at 1184 area for a scalp. Volume was very low and the market was moving so slow at lunch I took off until the last hour. I rarely fade trends into the close but because of such weak volume and knowing that traders definitely weren't taking the market much higher I shorted on Bar H right as it went below the highest volume area at 1185.75 where I made a point. The bar before there was heavy net selling also and that usually doesn't happen on bars right before they really breakout. A no brainer short if there ever was one.
 
Most of the volume over the last two days is above us which doesn't bode well for Tuesday. There should be resistance at 1184.50 to 1186.00 and minor resistance at 1187 to 1187.50. There isn't much relative volume for support but some support at 1182 area and the next support area is at 1178 to 1178.50 area. If anybody would like to get a free demo of our software click here.

 

 
Tuesday January 18, 2005
Today was an easy trading day for breakout traders.  The volume based market profile formed a tight balanced bar during the first bar of the day that was about 70-80% of the average first bar range.  When you get low volatility periods with low to average volume the breakouts from those areas can be fierce.  I missed most of the first 30 minutes today and usually I won't trade if I don't see how the beginning of the day unfolds but because the NYSE volume tool was slightly more negative than positive due to the gap down day I shorted slightly as the market broke out and got stung.  Nothing worse than losing a lot on your first trade of the day!!  One of the keys to successful trading is realizing the market is always right.  I was wrong, took my loss and moved on.  I primarily scalp and use shorter time frame charts to get low risk entries.  I often use linear regression channels to find these points.  I did many long side scalps to get 85% of my loss back.  I received a lot of phone calls today about our software so didn't trade this afternoon but wanted to point our some good low risk entries on here.  If you look at bar 3 I put a >  and < sign near areas that had high volume.  These would have been places I'd go long if the market had pulled back to them.  It didn't.  You can also see a lot of volume at point B.  Later in the day we pulled back to that level.  I'd have gone long here if I was watching it at the time.  Buy/Sell pressure is super bullish and you can see buying volume greatly outnumbered selling volume virtually all day.  If the market on bar 6, 7 or 8 went under the high volume at point B I'd have shorted it if I was watching but was so strong today that that volume level held.  Overall it looks like there are some longer term time frame traders who bought today and held, clearly many people are net long after today so expect some further upside tomorrow.  That's my prediction, I will be buying at around the 1190 area, 1187 to 1188 area.   There are a LOT of traders (about 20,000 contracts) long from 1192.75 to the high.

Since I know there are so many contracts net long if we break the 1192.75 area tomorrow I will short and it very likely will fall to around 1190 area at least.

 
Wednesday January 19, 2005
Today was about as easy as trading can get.  We opened under yesterday's high and you can see from the chart that we had more selling volume than buying in the NYSE as well as traders were net selling during the first 30 minutes.  As you can see from yesterday's post my first support area of 1192.75 held for the first two hours.  Just as predicted once it broke the market sold off to 1190.  I was shorting all morning, scalping mostly for 2 to 4 ticks but when the low of bar A got broken I did hold for 2 points.  I expected a little more selling but as you can see traders were trying to buy the dip.  Six bars into the day we hit the 1190 support area I mentioned yesterday.  I like to scale into trades at these volume based support/resistance trades.  Usually I don't get as many contracts as I want and its always tough to decide where to scale in.  I scale in 1,2,3,4,5 and got filled at 3 tiers so had 6 contracts long.  The bias was clearly down for the day but yesterday was such a strong trend up day and there was major support at 1190 as I mentioned yesterday.  I held this trade for two points.  I always get out too soon and hopefully others can benefit from my commentary and levels and do better than me.  As you can see at Point B there is a lot of volume here and because I can see on buy/sell pressure that on Bar B there was net buying this area is likely to provide good resistance on a retest.  I shorted this 1193 to 1193.50 area on every time back up.  This provided me with many low risk scalp trades, all worked.  I was busy on phone this afternoon and couldn't trade but am showing another chart I use below using a 5 min candle chart, 3 Std Dev Bollinger bands and the Japanese three line break chart. I would have bought the 1190 support area again but the 3 line break chart had just went short.  One of the keys to trading I find is knowing when NOT to take trades.  One of my rules is to not go against a move if it just changes direction.  I would have shorted the break of 1190 due to this chart.  There were 20,000 net contracts long from over 1190 and I knew stops would be placed underneath here which you can see they DEFINITELY were.  On trend days the markets breakout and rally but don't spend much time at any given level till the trend slows.  Unfortunately this does not provide much support on following days and you can see this today.  Once 1190 broke there was no support till a little at 1187.50 area and the rest down near yesterday's open.

Tomorrow:  We have a lot of volume from 1186.50 to 1187.25.  If we open below here by a few points I will short this area as well as short the 1190 area if the market is overextended at the time and again at 1195 as this is another high volume area that should slow and likely reverse the market.  Over the last two days traders are net long even after today's selloff.  We should get a nice move down if Tuesday's low is broken.  I will surely short that as well as the first retracement back up.  I hope this helps and feel free to contact me if you'd like me to share how I use these tools to make trading easier.

 

Some helpful links for trading using the 3 Line Break Method
Top Gun Software 3 Line Break
Trading Markets 3 Line Break
Beyond Candlesticks: New Japanese Charting Techniques Revealed