Archive for November, 2011
Here is a simple strategy to follow using Footprint charts.
After a trend, either up or down, as soon as a bar closes with net order flow (Delta) in the opposite direction of the preceding bars, consider a reversal at this point.
This is a super easy entry trigger that works more often than it does not. It is best to use it on an order flow based interval, not a time-based interval. Because this is a signal generated by order flow information, we want to remove the arbitrary measurement of time from the equation. Thus, do not use it on a 1-minute or 5-minute chart. Instead, use it on a price-based bar interval like a range bar, or use it on a volume-based bar like a volume bar.
Here is a screenshot from MarketDelta Trader using the Volume Bars available in that particular program:
As soon as the Delta changed after a noticeable decline with all-negative deltas, there was a good bounce of several points. Works on any interval and is a pattern that repeats several times a day.
Before I begin, this is a Footprint strategy intended for scalpers. It is aggressive, but if used when the market is approaching a predetermined level, it can be a very powerful confirmation tool and provide unbelievable timing to trades.
THE SETUP -The market has been in a short term trend (up or down). After trending for a period of time there is a sweeping of the order book. The moment this occurs or there is a counter reaction in the opposite direction, go with it. The market has probably reversed in the short term and the sweeping of the order book pattern is evidence of the “last person to get in” for that move.
If you are not familiar with what “sweeping of the order book” is, it occurs when a large buyer or seller places a large market order and takes out a bunch of resting orders at multiple prices. This can also occur if a stop order get triggered. A Footprint chart captures this information by showing all the volume on one side, either bid side or ask side.
REQUIRED TOOLS – To spot this pattern a Footprint chart is required. The reason for this is the history of the trading is immediately captured and displayed. A DOM (depth of market) just doesn’t cut it. Everything fills in so quickly and there is no way to tell really how much traded. The screenshots below are of MarketDelta Trader, the new trading interface by MarketDelta. MarketDelta’s native Footprint chart will work as well, but having this information coupled with the trading DOM and the fact you need to react quickly to these opportunities makes MarketDelta Trader a little better suited for this particular strategy.
Here is another example that occurred while typing this post. I was able to get long at 1222.50 and the market immediately moved in my favor and took out my profit target in the move higher. One of the benefits of this pattern is the risk/reward. Stops should be pretty tight.
Please comment if you have any questions. I would be happy to provide additional insight based on your questions.