One of the major difficulties traders find when they study Market Profile and the Auction Process in general, is how to apply it. I mean, the intellectual framework is beautiful and makes a lot of sense to me, but from a practical point of view, how I can use on daily basis?
Working with Market Profile means a lot of different approaches. Most of them are just a tentative way to transform the theory into fixed rules that are “easy” to apply. Unfortunately, if you do not understand them intellectually and, much more importantly, emotionally, then failure is guaranteed.
In my case, I started to study Market Profile with a friend in 2010. I read Mind over Market and Trading with Market Profile several times over (both books are by Jim Dalton), but I still didn’t get to a point where I knew how to use and implement it: my real learning started with L2ST experience as a member of the L2ST Trading Room.
L2ST is a trading coaching company headed by Kam Dhadwar, an active trader who has developed a practical approach on futures markets based on Market Profile conceptual framework. The way I trade the market today reflects the way L2ST approaches the marketplace, starting from Top/Down Analysis on daily chart, LTF on 60m charts and Heiken Ashi Renko Bar for STF analysis.
Through the help of other active traders, I worked on a practical approach to futures markets based on Market Profile conceptual framework. The way I trade the market today reflects this approach, starting from Top/Down Analysis on a daily chart, LTF on 60m charts and Heiken Ashi Renko Bar for STF analysis.
Every day I prepare my plan, my PMA (Pre Market Analysis), where I identify LTF and STF levels, places where I’m ready to do business with a vision in mind. I post the charts every day on StockTwits and Twitter for any further evidence before the market open.
The methodology is based on a discretionary approach, which means that you don’t change your old way of trading overnight (at least it wasn’t like that for me). Rather, it requires a steady amount of time in order to implement it in line with your personality, what I like to call the MY WAY.
Personally, I initially spent a lot of time trying to replicate a way of trading that was not mine, without any considerable result, until I realised that the only way it works is my way. You cannot be somebody else, because you are unique: you can improve of course, you can work on yourself, but the most precious resources are already inside you. You just have to find your way to get them and utilize in your best interest.
Discretion means that you have to trade with strong coherence inside yourself and fully understand the method, trust yourself in the way you apply and find YOUR GAP between where you are now and where you want to be, as Ari Kiev says in his famous book Trading to Win.
I often use the words YOU and YOUR because that’s the critical thing in your trading: the best methodology in the world, the best coach, even, I suspect, the best trading system in the world, are not as important as your way to apply the methodology, your efforts to go deep inside yourself, working on psychological issues even with the help of a coach. Not forgetting the way you set up your risk parameters and, crucially, the discipline to follow your system in critical moments, when the market moves against you.
So let’s now talk now a little more about the PMA Analysis and the way I use it.
First of all, what the PMA represents for me is a specific commitment: a promise to myself to be coherent with the vision I have and remain disciplined in the moment of the truth. Paul Tudor Jones, as quoted in the Foreword to the Alchemy of Finance, says: “In Patton, my favorite scene is when U.S. General George Patton has just spent weeks studying the writing of his German adversary Field Marshall Erwin Rommel and is crushing him in an epic tank battle in Tunisia. Patton, sensing victory as he peers onto the battle field growls ‘Rommel, you magnificent bastard, I read your book!’ Every day I say the same to myself”
Well, preparing a plan is strategically important for traders as well, because it will help them to be centered and disciplined with their methodology in the long term.
I recently received some “comments” on my PMA from a friend. He said something like that “Hey, your PMA doesn’t work out. You put a buy signal here and the market breaks through the level without any hesitation!”
Well, the point is that a plan, is just a plan. A framework to do business within: I do not predict what the market is doing on a level, whether it’s going to break a support or remain below a resistance. And if somebody tells you that, I think you’re better off running away. Nobody can predict the market.
When I put an arrow on a level, it means what the market should expect to do following a vision I have: but it doesn’t mean that I’m going to trade that level. I need to know what the market does in realtime on that level, and look for clues that sustain that vision.
A vision is just a vision: a trade should be sustained by realtime information.
And that leads me nicely onto the subject of the next article. Stay tuned for next time!