The foundation of price movement as we all know lies in
supply and demand. Take the emini, all it is intraday is an auction of who is
willing to buy based on sentiment whatever that may be at the time. We have all
heard of trading ranges, but for the sake of mutual understanding here is an
example:

That is an intraday example of buyers and sellers carrying
out the auction. Often times you may see a strong move up and consolidation for
a few days then test lower. What is happening? Sellers who bought lower are
selling, when prices fall back often to previous volume points of control or
accumulation areas, it is solely price discovery to see, do we still have
buyers down here? When a trading range breaks, sellers close the cupboards in
the pursuit of a higher price to sell at, shorts begin to cover and as a result
price goes parabolic.

My view of market price is that big buyers buy and later
sell at higher prices, market makers, floor trader and other insiders brutalize
the tape in between these major areas of accumulation and distribution.  Here is an example of something that
may play out this coming week:

The target, for if this unfolds, is unknown, however sellers
have found that people are willing to buy above 1100, so if they accumulate
they will look for buyers and prices will continue until buyers and sellers
once again hash out price.

Why these areas? Mainly due to the low volume pockets
especially given the much larger volume below where buyers and sellers have
hashed it out and price has moved higher. 
Where do trendlines and other examples of TA come into play?  The trendline is just an
aspect for sellers to decide to distribute and the flipside is buy at support.
Notice when these are broken either supply or demand evaporates and prices
sprints to find either supply to meet demand or vice versa. Re -testing
trendlines, prices have broken above and have now met distribution, they fall
back looking for more buyers, if found the trend continues.

This may seem blatantly obvious as you are reading this,
however I feel it is often overlooked. If you change your perspective of what
your trading, for example, if you view an emini contract as a physical asset and
you see that people are willing to buy at 1110 and we are at 1065 where buyers
and sellers previously hashed out price, then it is something worth buying to
sell to someone willing to pay at a higher price. In order to do this you need
to take a long term bias out of the equation, price isn’t always reflective of
terrible economic conditions, ask yourself, are there buyers willing to buy
higher up given previous price movement? If so, and you are near an area of
accumulation than assume prices will rise and vice versa if we are at extreme
levels and buyers aren’t found and there are areas lower where buyers viewed it
as cheap go short.
That is the essence of mean reversion trading.

The red line appears to be a place where major distribution
would occur. A few reasons for it is that people who have held through this
mess want their money back and would be taking it. Imagine Microsoft where it
took a very long time for prices to break 30 per share because each time,
millions of people tried getting out near the price they originally paid.  People who held through this aren’t
going to trust the market and will want out if we get there.

(I'm putting up a longish post as I'm heading up the mountain to ski some; I'll loop back before the close – Tim)

What I would like to share in this post is a method I like to use
when trading the ES to manage risk. 
When I was trying to work out an approach for trading the ES, one of the
things I focused on was how do I control the risk?   For instance, in a lot of trading approaches there is
what might be called a natural stop.  In
the case of a 1-2-3 reversal the natural stop would be placed below the number
one point.  Now if you enter a
1-2-3 reversal after price clears the number 2 point the distance to you stop
is well… huge, which creates fear.  Here's an example of a "Natural" stop, which would be placed below the lowest arrow (point 1):

Point 2 is where the horizontal line is placed.

In the example above, I just cringe at the level of risk, which is probably greater then the likely move past the number 2 point. 

Using the following chart, I will try and explain the approach I use:

At point 1, I noticed volume was spooling up, but price had stopped going lower.  Although not shown that point also corresponded to a pivot point if after hours action was excluded.  What I do is enter with 2 ES, then try to scalp 1 or 2 points within that same bar.  My stop would be set about 1.25 points below my entry.  The exit for the scalp was near the red horizontal pivot just above.  Some times you can get a couple round trips.  The goal is to scalp enough points to cover your stop on the first two contracts, and then for an extra contract or two as well.

In this mornings example I was only able to get one scalp and only re-entered with one contract on the next bar.  On the 3rd bar over I picked up one more contract. 

If the consolidation allows the basic approach that I like to use goes something like this:

1) Enter with 1 contract. Stop about 1.25 points below entry

2) If price and volume are acting as expected, add 1 more ES.  Stop same place as first even if entry might be a little higher.

3) Scalp out near the far end of consolidation measuring bar.

4) re-enter with 2 contracts near low end of measuring bar range.

5) Depending on how price is acting I may only drop one ES on upper range on the this pass.

6) Now I'm carrying 1 core and will add 2 at the low end of the range.

7) I repeat the process and try to add to the core number of contracts held based upon my stop loss being covered. 

In the above example, I drew a Fib retracement from the initial high to the low.  The reason was a lot of traders play the retracement by shorting at the 50% line.  So my target was to drop my contracts at a 1/4 point below that point.   It was a perfect call.  Now I could have shorted there, but my read of price was the drop was going to be short lived, so instead I was looking for a place to go long which was at point 3.

Now that I had banked a number of points, I didn't worry about scalping, but rather focused on my next entries and exits.  What I did was target the keltner channel mid-line for an exit, and back in at the 5 min opening swing low.  From there my target was just below the 61.8% retracement line.  Up to that point I was batting 100%.  The one trade that stopped out was at point 4.  I shorted with a stop 1.25 points above, and price tagged me out.  I thought we would fall one more time, but I didn't clue in volume was greater then 20K per 3 min bar which often means the market makers tend to get out of the way, so I blew that one. 

I hope the takeaway is that the ES can be traded with decent risk management. That's it.  Have fun

One of the keys to successful ES trading is being adaptive.  What I mean by that, is that after you start out with what you think price will do next, you have to read the action of price and volume as it evolves, and adjust your trading to the clues as they are left behind.

You're probably thinking what clues?

Well before you can spot the clues, you first have to understand how various people trade.  For instance, people trade various patterns, indicators, fibs, range breakouts; you name it someone's trading it.
Take almost any trading approach and look at an ES chart and see if you could have traded that methodology and made money over the long haul.  If you're like me you'll probably answer no, you're probably thinking 'exactly'.  So what's the answer, or what's one of the answers?

Price action will often trap the most number of traders possible on the wrong side of the trade.  OK, so how does one trade while avoiding getting trapped?  

Well the starting point is a paradigm shift.  Instead of trading 1-2-3, J-hook, or other pattern breakouts, you have to be ahead of the curve.  Typically these early entries are called setups.  John Carter & John Person  have some good examples.  The problem is, even these ‘setups’ will frustrate you to distraction with how many times you can end up with a loss even trying to play the setup game.  The key to success lies in listening to what the market is telling you by virtue of how price and volume are playing out.  Think of it as filtering.  My starting frame of mind is to look for a move that signifies the market makers just screwed retail traders, or are about to, and I get ready to use that information to my advantage.

Here are a few examples:  

1) If you watch the first big move in the morning on the ES, it will often move either up or down and seem like it’s ready to reverse, but after a while it will extend the move (burning retail) then at some point typically reverse.  So what are the clues the reversal is about to happen?  You could pay a lot of money for market delta or some other service that can show you the number of trades hitting the bid vs. ask yada yada yada, but the easiest quickest and fastest way is to watch the movement of price while at the same time noticing how fast the volume bar is stacking up.  If price isn’t moving, and volume is rapidly climbing, then you’ve found a sweet spot where the big boys are often loading the boat for the reversal.  As I watch the price movement, it typically will stall there in a tight range. That’s when I place an order in expectation of reversal.  A Stop loss would be entered a point or so off the lowest price in the range.  The next thing you often see just before launch is a micro burst of buying (I call it a Flash Bang) that blows retail’s stops.  This may or may not also be accompanied by a high TICK reading.  This move in the market typically lights up active trader like a Christmas tree for less then a second taking out everyone’s stops before rapidly climbing higher.  What I like to do, is place part of my buy at the level where volume is spooling up, and then set a buy order to add move if they do a further stop run.  If their flash bang takes out my stops, then I immediately buy at market because that flash of orders very often signals they are going to lift price.  You can scalp out of part of the position on the high of the flash, and as an option, as it comes back down, you can move a buy stop a bit lower on the second test, and drop your stop to make a little more room.  But don't count on a second test.  More often then not these things are like the starting gun at a race track.  To cover my stop loss on this trade, I will often trade in and out of the congestion before the reversal to gain enough points using a couple of contracts to cover my potential stop loss.  Sometimes I like to bank the points I make trading congestion, other times I use them to cover the stop loss on a larger trade.

2) Once the reversal occurs at some point price will break the number 2 point of a 1-2-3 reversal.  If you look at a chart, you’ll see long green bars as the number 2 is taken out.  Once the move has extended and upward movement of price begins to falter, it’s time to drop the trade.  Again, this is based on the flickering up and down of price near the end of the long green bar from the break out.  Basically it signals sellers are starting to hit the bid.  Like playing chess, you need to be thinking 3 moves ahead and you get that edge by knowing what to look for.

3) Next you wait to re-enter long at the bottom of the measuring bar, with a plan to exit near the top of the measuring bar (or flag pole as some call it).  Play this game in and out and if you can keep from laughing long enough while you do.  Now while you are doing this, you want to watch out for when the markets signals it’s time to screw retail traders once more.  There are several ways retail can be burned, but the concept is you’re reading the tape and anticipating the screw job so you don’t get burned.  A classic ploy is for the range of consolidation to tighten near the upper end of the consolidation measuring bar.  The real give away is when the range tightening occurs after a poke above the measuring bar.  The poke above followed by a tight range near the top of the measuring bar is supposed to trigger greed, and cause you to buy long (near the top of the consolidation measuring bar) in fear of missing the break out.  Probably the best way to play it is to short near the top of consolidation with your stop a ¼ point above the poke outside the consolidation-measuring bar.  It’s a pretty low risk trade since your stop is right near by.

4) What often happens next is the market will head lower.  How low you ask.  Ok, that’s easy.  Again it’s about knowing how people trade and how Mr. Market works to take their money.  If you draw a Fib retracement from the morning low to the high of the consolidation we just broke down from (an example is shown below), the key levels for most traders are the 50% and 61.8% retracements.  Normally fib traders will go long at the 50% mark with their stops placed at the 61.8% level.  The way I’d play it is drop some near the 50% level, just in case, and take off the riders near the 61.8%.  I’d enter long again just below the 61.8% with a stop a bit below there depending on how long we were in congestion, and how price was reacting.  The longer in congestion, the further below the 50% retracement we are likely to go.  Typically at the 61.8% level the market makers will trigger another one of their flash bang moves which is a great signal to get long at all costs.  The target for this measured move should be the upper keltner channel set at 1.618, 39 period.  A word of caution.  A market is ranging until it isn't.  You have to watch the strength of the move for clues as to when we transition into a trending market as that can always happen at any time.

The above chart shows several touches of a pivot line which lined up with the 5 min opening swing.  The box highlights the area of congestion that fell below the 61.8% retracement when it broke, and stopped at the lower Keltner Channel just below the upper range of the opening 30 min swing low.  The fact we closed above the 5 min swing low coming out of congestion was a good clue price was going to head higher during the day.    Trading inside the 5 min range is kind of a no mans land as it often is a toss up which way we will break out of that area.

Thanks, and lets knock'em dead next week.