Doyle Brunson, one of the world’s most celebrated poker players has everything you’d hope for in a gambling icon. To start, there’s the 10-gallon cowboy hat. Just under the brim, an expressionless dead stare that you’d admire if it wasn’t so intimidating.
He even has an opening hand named after him, the 10-2 – which he rode to two championships. If you’re thinking that 10-2 is a crappy hand to lead off with – you’re right. Your odds of winning are less than 10%.
Yet, those are pretty much the odds that most retail traders enter with. Why?
They’re looking at candles and price. Their indicators are also looking at price, with a red or green arrow at the ready. Many simply believe that if they can capture even the smallest of price moves, they’ll profit. The chances of that happening consistently?
Somewhere south of zero.
An institutional trader would never take those odds, much less contemplate that type of trade. This is because they’re looking for completely different entry conditions. Sure, they keep an eye on price, but they don’t dwell on it – that’s just the current score.
Instead, they’re watching something that gives them a far better sense of what price is going to do. It’s the very element that shapes a market and effectively gives the institutions x-ray vision.
The one thing you should be watching… (not price!)
It’s not iron or plutonium. You won’t find it on the elemental chart. But it’s the one thing that precedes price. Volume. And not just any volume, the market market’s volume profile, detailing exactly what it’s preferences are at each price level.
Think of it as the market’s very own ‘tell’. An indication of when it will be going all in, or essentially folding when it reaches a price zone, or even a specific level.
This is exactly what the institutional guys across the table are watching for.
Millions of retail futures traders that unknowingly enter the market, not having any idea where they are, the game they’re stepping into – or what the stakes are. Talk about easy pickings.
If you know what to look for, volume will reveal the market’s hand, well in advance.
There are no complicated algorithms involved. You don’t need a PhD in anything to spot it. In fact, once you know the conditions to look for, you can literally watch as the market sweats and fidgets in front of you.
Like an amateur poker player with a royal flush or a high schooler on prom night – it will be impossible to miss what’s on the market’s mind. Sure, the institutional traders are smart – but they’re not superhuman. They simply know what to look for and what specific price levels to stalk.
Why? Because volume is a direct indication of value. When the market perceives a decent value – volume goes up. When it thinks conditions are getting oversold or overbought volume goes down. It’s that simple.
It it’s gone ‘all in’ in the past at a specific price level, there’s an excellent chance it will do it again, when it revisits that price level. If it’s backed away from the table and headed for the restroom at a different price level – guess what, odds are good that it will do it again.
95% of the retail trading public tries to predict these moments, with little or no visibility as to where they are or when they’ll take place.
Institutional traders? Well… they can see them… wait for them… and trade them.
Spotting high probability market ‘hands’ to play.
If you’re an amateur, fear is a very difficult emotion to conceal. The outward physical signs are impossible to miss. Your heart rate starts to increase, there may be visible sweating, shortness of breath, trembling. Not the best condition to be in if you’re entering, or trying to manage a trade.
Imagine the weight that would be taken off your shoulders if you no longer had to guess where you should be entering. If you could visualize the market like an institutional trader, simply by looking at the market’s profile. This is the key to making high probability entries.
When an institutional trader sizes up a trade, they are waiting on market extremes. Specifically, moments when value reaches frothy, overbought conditions or ice cold oversold conditions. They do this by monitoring the value zone – the price range where 70% of the volume is taking place.
Why? Because when price breeches a value zone either at the top or the bottom, price has a habit of pulling back and/or retreating. These are the reversal moments that consistently profitable swing traders are looking for.
To illustrate, check out the ES chart to the right. Notice the reversals that seemingly come out of nowhere? If you’re reading chart patterns, chasing candle tails or leaning on a lagging indicator – these are missed opportunities. Or potentially huge losses in the making.
Sure, you could ‘look left’ as a lot of old school educators would tell you. Or you could evaluate volume performance by looking at a market profile.
Look at the same chart with a 45-day market profile applied. The same exact market just had the covers pulled back. You now know in an instant what price levels are too expensive, dying for a sell – and what price levels are too cheap – begging for buyers to come in.
Why pay attention to volume? Well, 90% of it is driven by institutional traders. When they back away or come in – you’ll want to know the price levels they’re interested in. From this perspective, you can start to see why price suddenly becomes a footnote.
Instead, you’re now watching to see where volume picks up and drops off. That middle portion of the profile that’s gray? That’s the value zone – where 70% of the volume takes place – otherwise known as the ‘sucker zone’.
Making your entry with swagger.
Within each of the value zones that volume defines, there are price levels where the market has gone all in – and others where they’ve backed away from the table. A detailed market profile reveals this with high and low volume nodes. Like a poker player that’s grinning inside, or about to lose his lunch, you can spot them easily as long as you know what to look for.
In this case it’s simply a matter of looking for extremes as noted with the same ES chart below. High volume nodes will spike out and low volume zones or nodes will create depressions or dips in the profile.
Volume nodes are the market’s tell at each price level. When they spike or when they dip – get ready for action.
If you’re wondering how these nodes translate to intraday locations… look below. In each instance, you’ll see that price has a healthy respect for the volume that’s preceded that level.
Simply being able to see this gives you the ability to enter with Doyle Brunson-like confidence. Instead of bluffing, you can patiently wait on price to approach these levels and make your move.
Start playing hands with visibility as to what the money room is doing.