Here is how we should have traded crude oil futures today based on Market profile Auction theory. From a proud student of Jim Dalton.
Today was the day of the oil inventory number. It is quite dangerous to trade before this number as the market usually exibits low volatility and just wait for the number at 10:30 EST. If you don't trade the number there were only a few opportunities offered by the market today. The first good opportunity came around 11:00 when the market rejected the overnight high.
Today I would like to show you how to apply the balance concept to the Market Map 30 minute Volume Tracking Indicator.
The balance principle can be apply to any time frame and can be easily visualize with the Balance and Excess indicator but we will use a very simple manual approach for the 30 minute chart.
First let's define one time framing :
"A trending situation where in an uptrend, the low of the previous auction in a Market Profile is not broken to the downside by greater than 2 ticks or the low of the previous bar on a chart is not broken to the downside. At the same time, the high of the previous auction in a Market Profile or the high of the previous bar on a bar chart is normally equaled or exceeded. ( It is possible that the high is not reached - the determinant is that the low is not taken out to the downside. ) As this situation occurs over multiple bars we identify it as "one-timeframing. The inverse applies in downward trending situation." From JDaltontrading web site.
Now let's define an intraday 30 minute balance :
A one time framing is stopped by an inside bar. An inside bar is defined as a low higher than the previous bar low AND a high lower than the previous bar high and it starts a new balance. This balance top and bottom being the high and low of the bar preceding the inside bar.
These market conditions ( one time framing and balance on the 30 minute chart ) will be a very important piece of information in applying our strategy. I like to apply this analysis to the Market Map 30 minute Volume Tracking Indicator because it also includes volume number to the whole picture.
Today we're gonna look deeper at the Balance Excess indicator using it to read the daily auctions ( or whatever time frame you may use ).
So now that we know about balance and excess we will use them to define the start of a new auction.
A new auction will start when we get an excess bar or a breakout from a balance area that goes against the current active auction. For example the current action is down and we see a buying tail or a balance area breakout on the upside. That would start a new up auction. That's it ! not very complicated...
The auction direction is very important because it will tell us which side offers the best risk-reward potential.
It is always preferable to trade with the trend ( auction direction ) because with are trading with the flow.
Slowly but surely we are putting all the pieces together toward a trading strategy that makes sense. This daily auction analysis will be the first step that we will take EVERY DAY to adapt the way we will approach the market.