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Trader's Tip
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Trading success is a function of winning psychology x risk management x written plan.
- Ramon Barros |
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Special Message from Our Author
Today's Featured Article
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The Footprint Chart from Market Delta is one of the truly significant breakthroughs in technical analysis. In this article, I shall review some of the ways that I use this unique software.
But before I do that, it is important that I provide a context to my comments.
Why does a trader use something like the Footprint Chart from Market Delta? The answer is simply that we are looking for a measure of trading success. Unfortunately, in our day, effortless, instant success is promised almost daily. But the fact of the matter is, trading success as a function of: Winning Psychology x Risk Management x Written Plan
Something like Footprint Chart is useful in the context of a trading plan;
but a trading plan without winning psychology and risk management is like
a ship without a rudder - ultimately, we will not reach our destination.
Consequently, it is important to understand that my comments assume that
traders applying Market Delta have mastered the other two components.
The next aspect I want to examine is my trading model. Figure 1 shows the
Tubbs Model. Frank Tubbs was a highly respected trader in the 1930s and
author of Tubbs Stock Market Correspondence Lessons; and while today he
is not as well known as Charles Dow, W D Gann, Richard Wyckoff etc, his
ideas still have great relevance.
FIGURE 1 TUBBS MODEL
If you cannot view Figure 1,
go here.
The model comprises of up and down legs, each containing 4 stages:
- Accumulation (Distribution)
- Breakout (and retest)
- Mark-up (Mark-down). Moves within the trend are called impulse; moves against the trend are called corrective.
- Distribution (Accumulation)
- Breakout (and retest)
- Mark-down (Mark-up) etc
The final aspect I want to consider for context ideas in the application of
Footprint Volume Charts is Pete Steidlmayer's concept of 'trade facilitation'.
In any market move, there are two questions I ask myself:
- In what direction is the market seeking to head and
- How good a job is it doing to get there.
In answering the first question, I use a one-period swing. So, if we see higher
highs and higher lows, the market is looking to head higher. In answering the
second question, I use the Footprint Chart.
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So now we turn to the main topic of this article. I'll first lay out the general principles and then provide an example of the application.
Footprint charts assume that offer on the bid is selling volume and volume on the offer is buying volume. Figure 2 shows the traditional Footprint chart. It comes with a number of variables; the one I like best is the Delta i.e. the net difference between the buying and selling volume at a price level and for the period. FIGURE 2 MARKET DELTA FOOTPRINT CHART
 If you cannot view Figure 2,
go here. I keep a record of the Delta for various timeframes and from the records derive a set of statistics. For example, for a 30-minute chart for any 30-minute period, I know what is its mean and standard deviation. From this, I determine what is above normal, normal and below normal. I keep the same sort of statistics for ranges.
Consequently for any bar, I can tell if the bar's attempted direction is 'facilitating trade': if it is, the assumption is the direction will continue and if not, a reversal is likely. A move is said to facilitate trade if both range and volume are in agreement - if we assume that volume is the cause and the range the result, then we need to see the result commensurate with the cause. So, above normal volume and below normal range will suggest that a reversal is likely. Let's say the market is moving up. We then see a day where the range is below normal and volume above normal. What that tells me is the sellers were able to cap the range despite the presence of strong buying. In that
situation, demand is likely to be exhausted before supply, and once that happens, we can expect a down move to occur.
Where you have normal range and below average volume, you are seeing a withdrawal of both supply and demand. The direction is likely to continue until a 'shock' is delivered. 'Shock' can take any form: a figure or earnings report outside expectation; an unexpected rate rise or decline, etc.
Armed with these ideas, let's turn to an example.
Figure 3 shows the E-mini Sept Futures (ESU9) as at July 7. The market had just broken the neckline of a potential H&S topping pattern.
FIGURE 3 5-day Barros Swing H&S If you cannot view Figure 3,
go here. In the complimentary service that I offer my blog readers, I wrote in my Forum pages as a Post-Market Commentary on the price action of July 7:
"We see that yesterday's bar was below normal. Usually this suggests a false break. But as you saw in yesterday's post, total volume, even normalised total volume, needs Delta volume confirmation to obtain a true picture of what is likely to happen.
So, let's turn to the Footprint Chart to see who was in control.
Figure 4 shows that yesterday, sellers were moderately (normal) in control. Figure 5 shows that seller conviction increased in the second half of the day.
Comparing the Average Volume per Bar and the Normalised Volume with the Delta volume leads me to conclude that the down move was the result of long liquidation not new shorts. For the down move to progress we need new shorts."
I reproduce below the charts mentioned in the post. |
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'FIGURE 4 Forum Post July 7' If you cannot view Figure 4,
go here. 'FIGURE 5 Forum Post July 7'
 If you cannot view Figure 5, go here. FIGURE 4 5-day Barros Swing H&S
 If you cannot view Figure 4,
go here. In Figure 4 above, we see the trading for July 8. In the Post-Market Commentary for July 8, I wrote:
"We saw a neutral bar (Doji) form yesterday on the sort of volume I would like to see on breakout days... While the volume would have been positive for the bears if we had seen a bearish-conviction close, this volume and the neutral structure show(s) the possibility of rally."
Two days later, the market did rally (Figure 5).
FIGURE 5 5-day Barros Swing H&S
If you cannot view Figure 5, go here. I apply this approach to the Footprints to any timeframe. I find it invaluable in optimizing my entries and more importantly, exiting before my stops are hit. In this way, I reduce my average dollar loss.
For me, the Footprint Chart offers a DNA of the day's price action. It answers the questions I need to optimize my entries and exits.
Risk Disclosure
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not assure or verify any performance claims made by such systems or services.
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About the Author
Ramon Barros
is a professional trader, fund manager, author, and educator. He is also the author of 'The Nature of Trends' published by Wiley Press. Ray has been regularly featured in regional newspapers and publications like Sydney Morning Herald, Your Trading Edge Magazine, Business Times, and Smart Investor. The interviews have focused on his trading strategies as well as his opinions on market sentiment. They have also dealt with his track record, trading philosophy, how and why he got into trading, and what advice he would give to those wishing to become traders/investors.
Mr. Barros is hosting his "Habits of Success" Webinar - The Foundation of Profitability on September 5-6th, 2009. Go to here to find out more.
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