What is a Market? For our purposes, a
Market is a tool that interested parties use to determine
the fair price for an item or commodity over a given time
period. That time period could be the next 10 seconds, the
next week, or a 6 ½ hour trading day. Now that we have
defined the term Market, how do we define “fair price”? For
our purposes as Traders, we will define “fair price” as the
price at which the most volume occurs during regular trading
hours. We can get more flexible with the time period, but
for now we will just consider the regular trading session.
That definition of
“fair price” is important to us because the best trading
opportunities will occur away from the fair price for the
The Trading Tools Research Action
Levels Indicator calculates the fair price for the regular
trading session for the E-mini S&P(ES), the Euro(EURUSD),
and for any US traded stock or ETF that trades from 0830CST
to 1500CST. Once we have the fair price, we can use the
volume traded at price to determine when the odds are in our
favor for a winning trade. To that point, have a look at
Figure 1.1 below.
Notice how the number of contracts
traded is listed at each price level. Most DOM(Depth of
Market) Trading Platforms can display volume at price in
this fashion. The location of the current price level and
it’s orientation to fair price are what we need to consider
before we can determine what the volume being traded at the
current price level is telling us. If the current price
level is above the Inflection Point(fair price), then the
Buyers are in control. If the current price level is below
the Inflection Point, then the Sellers are in control. This
information is of vital importance to us. For example, when
the Buyers are in control and bidding the Market higher, we
are waiting for the point where Sellers, considering price
levels too high for the time being, will step in with force
and take the price level lower. When we identify this point,
this Price Battleground, we want to get short(sell) with a
tight stop, and ride the selling wave back down.
How do we identify such a level? To
begin with, we have to think about how the Market is moving
higher in the first place. Conservative Buyers place limit
orders to buy at the bid. Aggressive Buyers hit the asking
price. When there is a wave of Aggressive Buyers constantly
hitting higher and higher asking prices, price levels will
move higher. As price levels move higher, eventually, a
price level will be hit that Aggressive Sellers feel is too
far away from what they believe is fair price. When that
happens, Aggressive Sellers will step in with force, and
begin hitting the bids. At that point, the rise in price
levels will stop dead, and we will see a volume battle
develop. That will be our Price Battleground. How we will
know it? Take a look at Figure 1.2 below.
Figure 1.2 is from 0834CST on November
28, 2011. This is an ideal trade setup. First, we have the
Price Battleground that is shown by the volume activity. A
Price Battleground occurs at either a high or low for the
day when the volume at the extreme price level is greater
than half the volume traded at the next closest price level.
See Figure 1.3 below.
Notice how the volume traded at
1190.00, 5,135 contracts, is greater than half the volume
traded at 1189.75, 4,158 contracts.(8,316/2). Combine that
fact with the open above the Inflection Point for the day,
1159.47, and we have a perfect, low risk selling
opportunity. In addition, we have further confirmation in
that the current price level is right around our Reistance3
Action Level, the dark green line in Figure 1.4, and we have
a hanging man followed by a doji on the same chart.
When we take a trade such as this one,
our stop will be one tick beyond the extreme price level,
1190.25 in this case. If the setup is going to work, 1190.25
WILL NOT be touched.
Images 1.2, 1.3, and 1.4 were all from
0834CST on November 28, 2011. The next two images show what
happened prior to 0834CST on that day.
Figure 1.5 – 0831CST – November 28,
Figure 1.6 – 0832CST – November 28,
As we can see, the volume began
building from 1189.50 to 1190.00 right from the open until
the setup was complete at 0834CST. Figure 1.7 is the
screenshot from 0837CST on November 28, 2011. It shows the
aftermath of the 0834CST setup.
Figure 1.7 – 0837CST – November 28,
This is only one of many possible setups that can be derived
using our Action Level Indicator and volume at price.
blog, we will be going over several excellent setups in the
coming weeks for Futures, Forex, Stocks, and ETF’s. Please
feel free to email us if you have any questions. Thank You
for your time.
Past performance is not necessarily indicative of future results. The data and graphs above are intended to be mere examples and exhibits of the educational topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
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Trading Tools Research