This is the third and final part of Pro Trader Vince Riflesso’s series on Trader Mindset: The Auction Process. To read his previous articles, click here.
In my last article I covered the absolute importance of having a plan before starting to trade: in my case this plan is based on a beautiful theoretical framework called Auction Market Theory.
The overall idea is that, statistically the market spends most of the time where traders perceive there is value, and this value is represented by volume of contracts traded. In this context, high value areas represent price zones where traders are happy to trade because there is consensus between sellers and buyers, and so there is enough liquidity; while low value areas mean no consensus at all between market participants and high probability to experience rejection with a fast move.
Now if you want to be an analyst, you start to have a good basis here about Auction Market Theory, and you’re ready to go deeper and analyze many cases in the past, developing a good feeling about possible future scenarios. But if you want to be a trader, there’s something still clearly missing here. Because if you want to be a trader you must PULL THE TRIGGER.
And in order to do that you must have the one quality that makes all the difference: timing.
When do you place your order? Is it enough to have a LTF support/resistance level in order to place an order? Is it enough to understand perfectly the context we are right now, eg balanced or unbalanced phase, in order to make our decision? The answer, of course, is NO!
What we should be looking for are clues in the moment: to be an empty cup, a sponge ready to absorb the market information in the now. That means not thinking too much about the plan nor about the consequences of your trade in the future, but ready to jump in if your setup is there.
There are many clues traders look for: cutoff buyers or sellers reading the order flow (for example using Footprint® of Market Delta), waiting for rejection with a Japanese candlestick long shadow or more sophisticated Heiken Ashi Renko bar, or maybe using one of the multiple oscillators in order to explore divergences and enter in confluence with strong initiative activity with the time/sales window.
But in this session I will not speak about these different techniques, and you know why? Because even if great successful traders use them they are not good for me, at least today, at least in line with the level of self-confidence I have right now. It’s not MY WAY. So, I have to find a way that is mine, and try to use it with coherence and in confluence with what I believe.
I found the answer in the Developing Volume Profile (DVP) and the reason is that I like to see the market in a fractal way.
The Chaos Theory
Chaos is the science of surprises, of the nonlinear and the unpredictable. It teaches us to expect the unexpected. While most traditional sciences deal with phenomena like gravity, electricity, or chemical reactions, Chaos Theory deals with nonlinear things that are impossible to predict or control, like turbulence, weather, the stock market, our brain states, and so on.
One of the principles of Chaos is the Fractals Theory. Fractals are never-ending patterns, they are infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over in an ongoing feedback loop. Fractals are images of dynamic systems – the picture of Chaos.
Fractals patterns are extremely familiar, since nature is full of fractals like trees, rivers, mountains, clouds, hurricanes and, guess what? The Marketplace.
The idea is the following: if we are able, with our Top/Down approach, to identify multiple time frames of value area and rejection low volume area/nodes, starting from weekly, daily, LTF 120m/60m and STF Heiken Ashi Renko charts, why do we not use the same theory analyzing what happens in the moment through the developing volume profile?
My brokerage platform is based on OEC Architecture and uses DOM (Depth of Market) with volume as default, and even MD allows me to use DVP in STF charts: developing volumes give me the pulse of the market. Let’s make an example with a real trade I made on the 23rd of September on the Bund future.
My PMA chart was the following, so in this context I was looking for clues to sell. These kind of charts are posted on my Twitter page (@VRiflesso) on daily basis.
The Bund opened @138.55 and immediately I saw a rejection below my STF resistance level @138.50 pretty clear on my DOM window: the volume shows me rejection above @138.50 and good acceptance below.
At 08:07 I received further confirmation from the market: traders are definitely agreeing about where there is value and I start to visualize the location to place my sell order in line with my plan: the area between 138.45 and 138.51 is a good area to sell with an acceptable risk/reward.
At 08:14 I place my short @138.44: In this case I’m ready to increase my position if I see a retest of @138.50 level with less volume than the area developed below (in this case I admit I take a look on Order Flow looking for buyers’ cut off signals) and I know already what I don’t want to see.
I don’t like to see a vpoc shift from @138.44 to @138.50 that shows me acceptance on a level where I just want to see rejection; or price discovering again above @138.50 even with low volume. In these two cases I am ready to cut my risks and exit.
STF CHART 08:24
As expected we have now a test of @138.50 level but buyers are not able to shift upward the vpoc and that is enough for me to stick with my position and increase below @138.48. The probabilities of a move down increased in this context.
To conclude: the fractal nature of the marketplace allows me to apply the concept of the Auction Market Theory into the real moment of the developing volume profile, where my job is to reading the code through the most important question: is this price accepted or rejected?
In my next session, I will develop more the concepts of reading DVP through the analysis of Asymmetry, VPOC shifts, Buyers/Sellers Cutoff with real examples of my trades.
Have a great journey
PS. It’s part of my daily trading routine to update in realtime my trading journal with snapshots of charts and DOM, that’s why it’s so easy for me to discuss my trades with everyone. I find this technique extremely useful to review my trading day at the end of the day, and working better on my Playbook.