The difference between initiative and responsive activity

Responsive buying or selling occures if the price moves back to the Value Area. If the price is below the VA, traders will response to the opportunity and buy. If the price is above the VA, traders will response to the opportunity and sell. They buy or sell because they expect that the price will go back to the VA.
Initiative activity is the opposite of the responsive activity. Traders expect that the price will move away from the VA. Buying within or above the VA or selling within or below the VA is an initiative activity.

There is a difference between the caracteristics of initiative and responsive activity.
Initiative activity has big momentum. It is neccessary to have big momentum so that the price can move away from the VA. If we open position, our position will be profitable quickly. We should keep our position until there is momentum.
Responsive activity is much slower. If we open position, we need to sit patiently until the price moves back to the VA. The price could even go against us because it is quite hard to catch the exact top or bottom. The price target is the VA.
There is one exception. After a strong trend, the price could test the high or low where traders will push the price back agressively. In this case the initiative and responsive activity have also big momentum. This phenomenon is called buying/selling tails and it signals that the other time frame traders entered in the market. Our position should be profitable quickly in this case, although catching the exact top or bottom is hard. Many times this is a start of a new trend and the price will move beyond the VA, however it will probably move slowly through the VA.

Opening Range Breakout

There is a correlation between EuroStoxx50 and S&P500. I trade the Stoxx but I watch the Stoxx and ES (S&P500 e-mini) ladder together. Many times the ES moves first and the Stoxx follows it. I have less than a second to get out of my position before it starts to move against me. In the morning the Globex has a low volume and the ES is not significant, but after the US cash market open, it is important to watch both of them. The Stoxx will do the same as the ES. It is important to analyze the ES before the market opens and watch both market together.

Yesterday there was a big rally in the ES. Today the ES opened much lower. There was a gap. Gap means something changed during the night. It was some negative news from China.

If there is a gap, a trend day is highly probable but in which direction? Up or down? In the first 10 minutes the market tried to find it out. The range was small. After that there was a breakout to the downside with big volume. In the pullback we could open short position. The pullback was slow and on low volume and retraced the whole drop, but after the pullback, the market trended downward.

It is a common phenomenon. The is an uncertainty after the open. When there is a breakout from the opening range and the direction becomes clear, everybody joins to the trend and the trend will be strong.

After the pullback the market trended to the downside and stoped around 1127.50. The volume profile showed that there was accumulation. It was time to close the short positions.

Here is the ES 2 minute chart and the Stoxx 5 minute chart. The US market opens at 14:30:

3 Push Pattern

3 Push Pattern is one of the several useful price actions. It is a trend reversal pattern. It consists of 3 impulse movement. These movements are panic movements with big volume. The movements can be recognized from the big volume. The market tries to go in one direction 3 times but fails. After the third movement there is a trend line break and a new trend starts in the opposite direction.

Sometimes there is divergence and the second and third panic movement has smaller volume despite of higher highs or lower lows.

3 Push Pattern is frequent in the EuroStoxx. Today the market tried to go lower 3 times but it was rejected. The Volume Profile signaled that it was an accumulation phase. After Citigroup earnings report the market broke out to the upside.

Order Flow

The ladder displays the actual orders in each price level. The ladder also displays the last volume. These are the important things we should watch in the ladder:

The big size on bid or on offer does not necessary mean support or resistance. It is more important how the orders are changing. If there is an uptrend, we will see big sizes on offer but they gradually diappear or move higher. This means those who want to sell are not forced to do it ASAP. They place their orders and wait for the paniced traders to fill their orders. When they see, that there is volume and uptrend, they will move their orders higher. They want a better price. We will also see that the bid orders gradually move higher. Those are orders of traders who are impatient because they missed the big movement and they want to be in position as soon as possible or traders with losing short positions and they want to cover their losing short positions but they are waiting for a better price.
Many times the movement ends in the following way: the bids are gradually moving higher until there are big sizes on bids but the price does not want to go up. In the next moment the price falls back several ticks and the big sizes dissappear.
Many times it looks like there is support in a downtrend and resistance in an uptrend but supports and resistances are broken all the time.
The size of the orders could be misleading. It is more important how they change.

Small trades are not important. They do not influence the market significantly. In the EuroStoxx 1-2-5 contracts are irrelevant. The big guys trade with at least 50, but 100-200 is more appropriate for this filter. Watch mainly the big trades.
Watch if the big size hits the bid or offer. It can show if the sellers or buyers are eager to open or close position.
Also watch if the ladder is active or quiet. The quiet market could be a market before the breakout, or a market where there is no big movement and volume. Everything depends on the context.

There is an order type, the iceberg order. This type of order hides big volume. If it is a sell order, we will see 200-300 contracts on offer. Somebody buys 600, the order dissappears and reappears again. Somebody buys again, but the size of the order remains the same. The computer could sell several thousand contracts but we will not see such a big size on offer. The computer sells everthing in small pieces.
Many times we can place our order on the iceberg order and it will be filled with it. Iceberg order can show us the support and resistance levels but beware: it is possible that somebody closes his position and as soon as he finished, the price will move through that level. The first rule is: trade in the direction of the trend. Do not trade because you see an iceberg order. It could mean anything. You should know the context for the proper meaning.
If there is a buying pressure, the sell iceberg order can move higher and if there is no volume because the price is too high, the order can move back a little bit.

Technical Analysis

I tried lots of tools, but these are the ones that really work for me:

1. Market Profile
2. Order Flow
3. Volume
4. Price Action

The purpose of these tools are to understand the underlying forces that move the market and spot the setups where the market is one sided, and that is the situation where the market tends to go in one direction. These tools work together and confirm each other. If not, our interpretation of the market is probably wrong.

Market Profile helps find the fair value. We trade the price but the price does not reflect the fair value all the time. When the price moves away from the fair value, that is an opportunity and two things could happen. The price moves back to the fair value or the fair value follows the price. The first one is a ranging market, the second one is a trending one. It is obvious that we need to follow different strategy in a ranging and trending market. Market Profile helps identify the relationship between price and fair value and helps choose the right trading strategy.

Reading Order Flow is the ability to understand the price movement from the ladder. The size of the orders and how they change for certain actions help us understand the real intentions of the market participants.
Market Profile tells what the market is doing, Order Flow tells why it is doing.

Volume measures the success of the auction in one direction. It shows if the market participants accept or reject certain price levels. Fair value attracts the most volume of trade.
In my opinion, this is the only useful indicator.

Price action helps find the situation where one side of the market trapped or the market is one sided for certain reason. Steidmayer said: "Price movement is influenced by participant willingness to hold on to positions." (Trading with Market Profile 153. p.). Understanding this is the key to make money in the market.

Purpose of this blog

I start this blog because I want to collect my knowledge on the market and on trading. I do this because I want to be a consistently successful trader. I tried several trading methods and styles and realized that these are the requirements for successful trading:

1. Trading psychology.
2. Money management.
3. Trading edge.

Trading psychology means we can wait patiently for the good setups and we do not trade when there is no setup. It means if we win or lose, that does not alter our mentality and we can stay calm. It means if we expect something to happen and it does not happen, we can accept it and move to the next setup. It means that we accept that the market is stronger than us and we cannot beat the market. It means a solid self-esteem in our trading ability that we can make money with trading. It means we know that our psychology is designed to survive and this is counterintuitive in the trading but we can control ourselves and we can make money. If we want to make money, we need to overcome our weaknesses instead of beating the market.

Money management means we know how much money we can risk. It means we know when we can and should increase or decrease our position size to gain the most profit.

Trading edge means we can use the trading tools to spot the high probability low risk setups. It means we can find situations where the market is one sided and the probability is high that it will go in one direction. If we understand how the market works, it is easy to spot these setups.