From the December 01, 2009 issue of Futures Magazine • Subscribe!

Anatomy of a day-trade

There is a great sense of accomplishment in dueling successfully with the sharp knife that is the electronic futures market. When analytical techniques are combined with the inherent thrill of trading, then day-trading the E-mini stock index futures market becomes a fascinating and compelling endeavor.

To be successful, the E-mini futures day-trader must be armed with top-notch tools and plenty of experience. Without these, the trading day may feel more like a trip to a casino rather than a professional activity based on intelligent risk-taking. The day-trading practitioner eventually realizes there is no Holy Grail indicator or technique that ensures success. If it were easy, and profitability could be achieved automatically, we wouldn’t be trading an actual market.

The road to profitability will consist of applying a variety of methods that create high probability trades. When high probability trades are combined with proper trade management, a complete day-trading system is realized.

The best way to illustrate a well-defined, high-probability trade is to look at an example of how multiple techniques can be combined. We’ll use the E-mini S&P 500 futures (ES) from July 16, 2009. The strategy will incorporate four key techniques, all of which exist in the public domain: Market Profile theory, day-type determination, price-level determination and scaled trade management. The example illustrates how an eclectic mix of trading techniques are put to use by the experienced day-trader.


Market Profile was first described in 1984 by the highly regarded commodity trader J. Peter Steidlmayer. It was disseminated and popularized at the Chicago Board of Trade over the next 15 years. An authoritative text on the subject is “Mind Over Markets,” by James Dalton, Eric Jones and Robert Dalton (Traders Press, Inc., 1993). There has been a resurgence of interest in the technique in the last several years, especially in the active electronic day-trading community.

There is significant substance to the Market Profile theory, but it often is unclear how to specifically trade with it. For the purposes of this example, we will apply one of its key definitions, the price distribution value area.

Market Profile makes use of a unique presentation of price charts. Every 30 minutes of the trading session a new time-price opportunity (TPO) is printed. The TPO is drawn into a price distribution curve that, like typical price charts, has price on the vertical (right-hand) axis of the chart, but with the entire day drawn in one vertical distribution. This price distribution shows how many times the market traded at a given price level and shows certain characteristics of price movement to new levels. As always, a picture is worth a thousand words.

In “Different view” we see the Market Profile price distribution chart from the middle of July 2009. (This chart was captured from TradeStation using the ActivityBar indicator.) Each day’s price distribution is shown in the vertical format specified by the Market Profile. From the daily price distributions, it’s possible to discern where the market spent much of the trading day, as well as extensions to the high and low ends of the trading day’s price range.

One key Market Profile concept is that of value area (VA). A price distribution VA defines a one-standard deviation movement in price. It is the price range that covers approximately 70% of the trading day. The VA identifies where the bulk of the market is currently positioned and from where it will initiate new price discovery. The terms value area high (VAH) and value area low (VAL) are used to identify the VA range.

On the Market Profile chart, two dark lines have been drawn by software. These lines identify the VA for the July 15, 2009, trading day. During that day, the VA was between 920.75 and 930.00. We will be interested in how the market performs, relative to this VA during the next trading session. In particular, we note that the market opened the July 16 session at 925.50, well within the previous day’s VA. Using this information, a trade setup can be developed. Specifically, if the market opens within the previous VA, it may remain constrained there. Taking a position regarding this assessment — the likelihood of the market remaining within the previous day’s VA — sets the stage for a possible trade.

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