I was asked on Twitter yesterday to explain how I pick my line in the sand/important area(s) for the day. That’s a great question.
I feel like a lot of traders try and answer this question. Just because of how dynamic the answer has to be the answers tend to be slightly incomprehensible. I’ll try and keep this as simple as I can. If you have questions beyond what I cover please submit a comment and I’ll respond the best I can.
When I try and identify the most important area for the day I am simply trying to identify the area where that buyers or sellers need to stay above/below to maintain control of the market. So the real question is “How do I identify the most important area to both buyers and sellers?”
There are two main components to how I try and identify that.
1) How is the market responding to value are levels (Value Area High, Value Area Low and Volume Point of Control)?
2) What needs to happen for the buyers to move the market buyer and what needs to happen for sellers to move the market lower?
When I look at the value area components I try and keep it very simple. Is value moving high or lower? Is VPOC shifting higher or lower? The answer to that question can tell you a lot about who is in control right now.
Identifying what needs to happen to go higher or lower is a bit more tricky. For me personally I like to keep things a little bigger picture when it comes to the levels I trade. I know it doesn’t always look like this on the charts I post but I try and view the market in sections of LVN-HVN-LVN.
If you start stacking those on top of each other then you can start to see a market’s volume profile. To get to the next HVN buyers keep to push above a LVN, then buyers need to push through that HVN to get to the next LVN. Likewise, sellers are going to defend each one of those levels and try and push the market the other way. Fairly basic stuff.
The point is that every morning I ask myself, “Where are we now and what o buyers and sellers need to do to get where they are going?” If we aren’t near an important LVN then I will look at the previous day’s profile and value area to determine where I think the best reaction from both buyers and sellers will occur. If a LVN/HVN lines up with an important volume profile level than that brings even more weight to that area. Furthermore, you need to combine that with what happened overnight and what is happening in the morning when you are creating your trading plan. If you have a LVN at yesterday’s VAH and it also happens to be the overnight high then you can definitely say that particular price is very important to both buyers and sellers.
I understand that this might seem simple and not applicable but really there is no easy way to explain it. The problem with explain the process of finding that “one” level is that it is a very dynamic process and everyone views the market in a slightly different way.
It might not make sense but that is my process. I’m thinking in the next couple of weeks I will take one day and write down my thought process for finding that specific day’s important area(s). Sine this is a dynamic concept it might be better to take a day and explain it in “real time”. For now this will have to do.
Again, this is one way (more specifically, my way) of doing this and trading is more about risk management than it is about being right when it comes to an important area in the marketplace. Just keep that in mind. If you want clarification on something feel free to drop me a comment and I’ll respond asap.