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THE ES - WHEN TO ENTER

Welcome to the course. Just go through the lessons top to bottom and feel free to contact us on
traders@jigsawtrading.com with questions or comments.
Part 1 - Why?
Part 2 - The Game (This isn't Kansas Toto)
Part 3 - Experience
Part 4 - Targets
Part 5 - Liquidity
Part 6 - Sheep
Part 7 - The News & Liquidity
Part 8 - How the ES Behaves
Part 9 - Experience
Part 10 - Trading Day Trader Days
Part 11 - Trading High Volume Trend Days
Part 12 - Trading Low Range Days
Part 13 - Incorporating The Jigsaw Tools
Part 14 - Using "Levels"
Part 15 - Setting Up NinjaTrader & Other Products
Part 16 - July 2012 Update

A number of people have asked about keeping in touch on Skype. I have created a Skype group called
"Jigsaw Trading". This is not going to be a training room, rather somewhere we can hang out and chat when we
have time. I think it will be useful for you guys to share your experiences amongst yourselves and I'm certainly
up for discussion on trading.

To get into the room, add "jigsawtrading" as a friend in Skype & drop me a message that you'd like to
join the group.
Lesson 1 - Why?
This on-line course is going to outline exactly what I do to set my entry points on the ES.

First of all, to keep this short, I am going to refer to the use of any of our products as Tape Reading.
They all have the trade flow on them and Depth & Sales of course has the depth as well. This is all Tape
Reading in my opinion. If you disagree on the semantics, that's fine - but to keep this course brief, I'm going to
use the term "Tape Reading" throughout.

1 - Why are you doing this?

Our software has been out for about 7 months now and we are missing out on a lot of sales because
there is no training component. There are 3 options people can take in terms of training. They can read our Free
Lessons page, they can go to the "No BS DayTrading" eBook/video and they can go to Joel Parker. Joel is the
best option for training in my opinion but some people newer to Tape Reading do not understand the value in
that. If you look at the "No BS" book and ourfree lessons, it's pretty much geared around using the Tape at
areas you suspect something will occur. On the Treasuries this is less the case, you can use the "No BS" setups
as described without the need for a chart to tell you when to refer to the Tape. Move to the ES though and you
need to use Tape Reading in conjunction with other factors such as the intra-day swings.

You can see the problem. We say "hey - use this great tool to confirm your setups" and 95% of our
visitors leave because.... they have no setups. People aren't looking for the icing on the cake, they need the
cake too.

So - this is the cake. I will be honest and say that I want more people to buy the software. I could create
a $1000 course and teach people in groups but I'd rather be trading or at least I do not want to be tied down to
training schedules because I personally did not get into trading to end up tied to specific working hours. So the
plan is to give the method away with the software. That way people get what they want, the cake and the icing. I
get what I want - software sales without turning Jigsaw Trading into a 9-5 job.

2 - If you give this method away, won't it stop working?

I have thought about this long and hard. I really cannot give a definitive answer. My gut feel is that is is
extremely unlikely. The key to success is to understand the crowd mentality of the ES and how it operates day in
day out. We will be getting on the right side of the crowd. We are not necessarily all going to be getting in at the
same time but if a lot of us all trade the same pullback at the same exact time, then of course we can't all get the
same entry price. If that ever happens, then what we learn here will still work. This isn't a cookie cutter
mechanical formula here. This is an understanding of liquidity and herd behaviour. If the behaviour of the herd
changes, then this course will allow you to assess the new behaviour.

3 - Why an "Entry Manual"

I think it needs to be explained why this is an entry manual and not a full on trading guide with
information on psychology, money management, trade management and all that other 'good stuff'. The fact is,
I'm not a big believer in 'trading psychology' as it is described on a lot of web sites. A lot of people suck at
trading but it has nothing to do with psychology.

Let's take Tiger Woods (if you are a pretty blonde you may already have done). It would be fair to say
that he's been through a rough patch performance-wise and as of writing this (end of 2011), it would be fair to
say he's back on top (of his game at least). Now, if anyone needed help from a sports psychologist to get his
mind back in the game, it's Tiger. How about you? Well, you aren't exactly Tiger Woods are you? I know I'm not.
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I am terrible at golf to be honest. The most dangerous position to be in on the driving range is the stall to the
right of mine. I don't know anyone else who can consistently slice the ball with every club (except irons 7-9) the
way I can. Now, is it a psychological problem? Not at all, I'm just a really poor golfer, in fact, I am terrible at any
game that involves a ball. The only way a psychologist/psychiatrist could help me would be if they paid for my
golf lessons.

Let's strip away the excuses. If you are losing money trading, then the reason for this is unlikely to be
psychological. The reason you are losing money trading is because YOU DON'T KNOW HOW TO TRADE.
That's right. You have no clue when to enter and exit the market. You simply don't have any working method by
which to evaluate when the market will move in one direction or the other. There is nothing wrong with this.
There are a few genius level traders that figure it out themselves and then there's the rest of us that need some
form of training to knock the information into us.

Now, I understand the doubts. "More nonsense from Jigsaw" I hear you think (I'm a mind reader). I am
going to hazard a guess that you have this mental image of a trader. That is some Zen-like master sitting
peacefully in his chair, heart rate at 45bpm and breathing slow and steady the silence is overwhelming. He
sees an opportunity come by. The 'click' of the mouse as he puts his order in sounds like a tree falling silently in
an empty forest (huh?). He is now in the trade and in the zone, he is 100% composed, as price flutters around
his entry price he is neither hopeful, nor abject. Price moves his way, first one tick then two ticks, then three,
four, five, six, seven. Just one tick from the target it falters, our master retains total control as it moves back
down to his entry. All is well, we are in a trade, there is nothing to do but let fate wash over. Now one tick away
from his stop, the zen master takes a deep breath and marvels internally at how life throws at us such
opportunities to totally control our emotions. He stops out and without the need to internally compose himself
has put that experience to one side, has cleared his mind and is ready for the next trade.

Is this what you think?

The reality is somewhat different. I know a number of full time traders and some of these are fairly
relaxed. On the other hand I know some full time traders that are borderline psychotic. A friend of mine worked
on a small team day trading US stocks. The head trader was a trading genius but also bi-polar. If one of his
people missed an opportunity, he would scream at them, sometimes for 30-40 minutes whilst other trades went
past. He made tons of money and still does. He breaks keyboards, falls out with people, has tantrums, screams
and shouts and swears. The fact is that traders are human and I've seen no common personality traits amongst
the different full-time traders I know. If you think that you need to change the type of person you are so that you
'fit' trading, don't bother. If you break keyboards, keep a spare. If you talk to yourself, buy a mirror. If like Tiger,
you have been performing well and your performance starts to wane, of course then get yourself some help. If
you've never been profitable, then don't look at psychological issues as an excuse for your poor performance.

The most common issue that unprofitable traders have is that they have no idea how to trade or rather,
they have no idea why other people are trading.

First thing first, whether you are a scalper, a day position trader or a swing trader the first thing you need
to learn is WHEN TO PLACE A TRADE. Everything else comes from there. You need to know when the time is
right to either to go long or short. Now, of course money management and trade management is important but
this isn't what is holding most people back.

It is a simple fact that most people want to trade directional, outright positions with no idea when the
market will move one way or the other.

4 - How long will it take me to learn?

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This really depends how much you are willing to stop reading trading books and trading forums. It takes
a leap of faith to adopt any method and if you do adopt this, then you need to give it a try. This is a discretionary
model, it is not magic formulas or red/green lights. As you work with the tools here, you will become better at
using them. As you understand liquidity (and liquidity vacuums), you will have a bit more confidence to buy when
others are selling. If you can commit to this, then I see no reason you can't be up to speed in a couple of
months. Most people will not do that. They will half commit to this whilst continuing to look for magic bullets.
They'll take a couple of trades, fail and write it off.

5 - Will you help people reading this?

Yes - you can email me and PM me/post on the Jigsaw forum. Just don't expect a rapid response at
9:30am EST.

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Part 2- The Game (This isn't Kansas Toto)
The game of day trading the ES can be mind boggling at times. As of writing, the price of the ES 03-12
contract is roughly 1200 points or 1200 dollars. Each point move is worth $50. This gives the ES a nominal
value of $60,000 a contract. It is normal to see 3,000,000 contracts traded a day which gives a days worth of ES
trading a nominal value of $180,000,000,000

The reality is that this amount of money is not really changing hands. No-one buys a $60,000 contract
and sells it for $0. $60,000 isn't what you risk. The reality is the nominal value means very little. You might buy a
contract with a nominal value of $60,000 and sell it for $60,100 after a 2 point move or you might sell it for
$59,900 after a 2 point move against you. You gain or lose $100. Still, the nominal value is the sexier number
and the one you'll see quoted in media horror stories about derivatives exposure.

When you trade a futures contract, it's the $ per point or $ per tick (tick = minimum price increment) and
the number of ticks you win or lose that is important. The ES is $50 a point or $12.50 a tick(1 point on the ES =
4 ticks. 1 tick on the ES = .25 increment 1201.25, 1201.50, 1201.75 etc). If you buy the ES at 1200.25 and sell
at 1201.50, you make 5 ticks or $62.50 for each contract you buy. So, why is the ES $50 per point and not $1
per point or $500 a point? The answer is pretty simple the $/point is set at a price that people will trade it. If it
was $500 a point, then people like you, the retail traders, wouldn't be opening up futures accounts and paying
commissions to the exchange that provides the market. In this case the exchange is the Chicago Mercantile
Exchange (CME). The CME that provides the market exists to collect the fees we pay to trade there. They want
as much trading to occur as possible so that they can collect as many fees as possible. It costs your average
retail trader (that's you) about $4 for a 'round turn'. A 'round turn' is buying and selling a single contract. If you
buy 5 contracts and sell 5 contracts, you have done 5 'round turns' and you pay $20 in fees (not all to the CME).
To maximize their revenues they need to price everyone into the market, especially the people that lose the
most money, the retail trader (you again). Hence $12.50/tick or $50/point is a good price point to attract lots of
people. Look at the other markets, their average range, the price to trade and the price per tick. You will see that
many markets with a higher range have a lower $/tick price. They don't want you to think the risk is too high.

The larger players buy 'seats' on the exchange and end up paying cents, not dollars for their round
turns. As such, they can employ techniques which get them into and out of the market at a high rate that would
bankrupt a retail trader. By the way, these seats are not chairs somewhere; it's more like a membership. On one
particularly poor day I managed to do 50 round turns and turn a $10 in profit after fees. I'd done the hard work
(although the trading I did was pretty poor), my broker made $200 and I made $10. At that point I quit for the
day, always a good thing to do when you are getting nowhere but paying your broker.

Is this starting to sound like the chips might not be stacked in your favor?

The ES is one of the most complex instruments around. Its price is based on the S&P500 equity index
which is in turn based on the price of 500 individual equities (stocks or shares to you). The price of the stocks
will impact the market. Then there are stock options on the stocks that will impact the market. You also have
futures options that have an impact. On top of this, there's an inverse relationship between US/European
treasuries and the ES. Finally, the value of the dollar also plays a part in the price of the ES.

The fact is, even if you understand all of these relationships, it's not really going to help you. Don't waste
your time looking at the other markets, trying to figure out if one leads the other all the time (it doesn't). Don't
bother with market internals like TRIN because initially, it's not going to help your plight. Certainly do not try to
understand options pricing formulas and the expectancy associated with them. What you need to do is
understand is that there is a game being played. The game is not being played all the time. There are days
when news drives the markets and it heads off in one direction all day without looking back. There are days

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when the markets are in shock and they barely do anything. These days are the exception and you will be able
to recognize those days early on if you work on it.

The game is simple. Push the market in one direction, then turn around and push it in the other
direction. On days that we'll call "Day Trader Days" the market quite often moves up 5 points, down 12 points
and up 7 points again to end up exactly where it started. As well as price, the Cumulative Delta (buy market
orders minus sell market orders) also ends up exactly where it started too. In effect what happens is everyone
that got in also got out and price ended up back where it started. During this time a lot of money was transferred
from the accounts of losing traders to the accounts of winning traders.

Auction market theory has a very nice explanation for this game. At the top, the prices were considered
'expensive' and at the bottom they were considered 'cheap'. You could argue that this is at odds with the theory
that players are pushing the market around backwards & forwards. It really isn't. The very fact that the large
players switch from selling to buying means their perspective went from expensive to cheap....

Here is an example of a Day Trader Day:

In this example we can see the market closed very close to the opening price. Now you might go and
look at some charts and say "he's wrong I see charts where price ended up 2 points/5 points/20 points". You
are of course, correct. I am keeping things simple. Please don't write down "+5,-12, +7" in your note book. It
could just as easily be -10, +20, -8, +25. Sometimes price & delta end up, or down. The thing is though, the
market is swinging up and down for no other reason than people think that's where the money is, they trade in
that direction. Isn't this after all what you want to do? You know, jump on a move and ride it a few points? The

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market gets pushed around in nice chunky moves, up and down and people jump in on these moves and
perpetuate them. It's not that complicated but that doesn't make it easy.

If the price of the ES can move down 10 or 20 points and then up 10 or 20 points on the same day, does
it mean that the "value" of the ES was different throughout the day? Does it mean that other, more enlightened
traders have "value calculators" that changed throughout the day and the price merely reflected this new value?
Is this all about having the same supercomputer and value algorithms that look at the earnings of all those
stocks, figure out what they are worth, what they will earn in the future and the discounted cash flow and value
of these stocks? Do you need your own algorithms?

Price isn't Value and Value isn't Price. The 'price' of the ES usually refers to the price the last people
were willing to buy it/sell it for. That's it. In fact, as we will see later, the market always has 2 prices, not one.
Most of the time, the ES is not moving up and down because people's opinions of the markets are shifting. The
ES moves up and down because a bunch of people think they can make money out of it. It goes down because
people think that's the way the money will be made and it goes up because that's the way they think money will
be made. In short the markets are driven by people exactly like you. Yes, YOU. You are in this to make money
out of the market and you don't really give a crap about which way it goes as long as you can make money that
way. Welcome to the world of Day Trading the ES. Where a lot of people with a LOT of money simply don't care
where it goes as long as they make money that way.

Obviously, it goes without saying that you are a gentleman/gentlewoman. It goes without saying that you
never lie and never cheat. You probably never kept a few 500's of Monopoly money under your chair or made
up a word when playing scrabble. In short, you are an honest person that plays by the rules and would not do
anything 'unfair' to tip things in your favor. Let us now say that you have a $200 million trading account, you
want to buy 5000 e-mini contracts and make 4-6 ticks a contract. What would you do? Would you just put up a
limit order for 5000 contracts so that everyone can see what you want in a fair & transparent manner? Would
you do this in such a way that everyone knows you are into the market for 5000 contracts and trust the purity of
other players not to let this sway their behavior so they can benefit from you losing money on those 5000
contracts? OR Would you perhaps wait until we'd just bounced off the high of the day and make the market
appear weak so that other traders think that the money is to be made by selling. When they sell, they sell to you
because you have a hidden 'iceberg' order absorbing all their selling. After a while you start buying more
contracts, the people that sold to you realize they are in a bad situation as the market moves up against them.
They then need to exit their positions, they do this by buying at a higher price than they sold for earlier who do
they buy from? You, of course. You brought contracts from them at a lower price and now you sell them back at
a higher price. You exit your position, 6 ticks x $12.50 x 5000 contracts = $375,000 richer. Perhaps "cheating" is
not the right word for this, it's more like bluffing in poker. Anyway - please dispel any notion that the markets are
in any way fair. They are RIFE with manipulation but this manipulation is visible to those that learn how to read
the Tape.

On "Day Trader Days", it is this type of activity that is driving the market. People push the market around
and try to get other traders into bad positions so that they can benefit. As long as there is money to be made to
the downside, the markets will go down. As the market moves down you will see repeated moves up that get
squashed by more sellers. At any one time, people looking to enter will be thinking "should I go with or against
the current direction?". Even if the mix was 50% with and 50% against, the people that go 'against' the current
direction will be a LOT more nervous than those go with it. Those people will be much more inclined to exit when
things move against them and they then end up feeding the move 'with' the current direction. So, if you keep
selling up moves and buying down moves - STOP IT.

Let's say the market has moved down 10 points, it then puts in a 2 point move upwards and starts
moving back down

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If you were one of the early sellers, you were sitting on a 10 point per contract gain. As the market
moved back up 2 points, this got reduced to an 8 point per contract gain. Still, you are not that worried as you
think the market can quite easily move down some more. At no point have you been particularly nervous about
that 2 point move back up.

If you were one of the early buyers, you saw the market move down 10 points then you decided to buy.
You were quite happy to see the market move up 2 points but when it started to move back down towards your
entry point, you started to feel a bit uneasy. Do you give the trade some room to breathe? Do you exit when it
comes back down?

You can see that in this situation, the sellers are going to be quite comfortable with what's going on
whereas the buyers are going to be very nervous when price moves against them. The sellers know this and
they will start selling more to move the price down. When the price moves down, the buyers can do one of two
things, they can start buying to stop the down move or they can puke (also known as exiting their positions). To
puke out, they must sell and that adds even more fuel to the downside move.

This is one of the keys to understanding the moves in the market. It's not about magic indicators, it's
about understanding that people will keep pushing to get the most out of a move, it's about understanding when
people are going to get 'run over'. It's about understanding it's all about making money when others lose money.

Of course, there is one thing you aren't going to understand or be able to analyze. The fact is that every
decision you make is based on the activity of people that have already shown their hand. These people may or
may not still be in the market but the activity you see is based on people's trading that has already occurred.
You cannot see the impact of somebody that is yet to enter the market. You could buy seconds before a guy
from a large fund decides to hedge his stock trades by putting a huge sell order onto the market. I remember
buying just before an announcement that Goldman Sachs was to be taken to court for fraud. There is nothing
you can do about this, shit happens. There is no 100% system, you can make good calls based on your analysis
of the action but you won't be right all the time. You will get caught out by 'unfair' stuff like unexpected news.
This is the nature of the game. Pick yourself up, dust yourself down and move on when this happens.

Anyone that tells you they have a 100% trading system is lying.
Anyone that tells you trading is easy is lying.
Anyone that tells you they have a simple trading system that relies on watching lines and NOT
considering the people behind the action well, they are just full of crap.

So now we understand the game and this IS a game, do not think that it's a mathematical endeavor. Do
not think that trading is a problem with a simple solution. Think about how YOU could push people out of
position if YOU had a few hundred million dollars. This is NOT a gentleman's sport.

It's a game, you are a player. You are now ahead of 99% of people that attempt day trading. You are
ahead of 100% of the people that are trying to trade off red light sell/green light buy systems.

This is the game of trading.

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Part 3 - Experience
Please keep in mind that this is what I do every day, I have experience with this. I have tried to write this
for beginners but it's possible I have presumed you already understand something and that this leaves a gap in
your knowledge. I have probably made some presumptions. Please email me or discuss any aspect of this
course on the forum. On your side, once you understand this stuff, you will be at the beginning and not the end
of a journey. It is one thing understanding something in theory but another thing having the experience of
executing it yourself.

The experience is much more important than the theory. You may try to employ the techniques outlined
here and fail the first time. You may then conclude that it doesn't work and move on to the next thing and the
next thing and the next thing, To be honest, getting the experience is most likely going to be painful. You need
to persevere with it. This stuff all seems so damn obvious and simple to me that a monkey should be able to do
it. I know that's not true though, it's just that I've put the hours in and now I just see it.

The most difficult part about following this method is that it does not give you an entry all the time. This
is just one way to define a low risk area at which to enter a trade. It involves a fair amount of waiting for a setup.
If you find yourself looking back at your days trading and see 15 entries on the ES, only 2 of which really fit the
method, then you need to find a way to wait for the best setups. They will come. If you wait an hour, get a bit
bored and take something that doesn't really fit, you'll more than likely suffer for it.

The biggest secret about the markets is - THERE ARE NO SECRETS. The professionals do not have a
set of hidden levels or magic formulas. They do have low fees, virtually unlimited risk capital and a lot of
experience. Lots of people out there are selling secrets but it's all smoke and mirrors. All you need is common
sense. The problem with trading is that there is a whole industry trying to sell you 'solutions' to a problem they
made up. There is so much misinformation out there that it is as if the industry is intentionally trying to hide what
would be quite clear if you didn't have all that bullshit information to wade through.

The information in this course is simple. To some it will be a disappointment. It will be disappointing
because it subjective and not objective. It is about understanding the market and not some 3 step plan you
could get a trained monkey to execute. The fact is that when you start trading, it is 'obvious' that the simplest
route to profits is to find a set of fixed rules to execute without thinking. You will do your reasearch to find those
rules (or ask someone on the internet if they have a spare set) and then once found, you will apply them like a
robot and make money forever. The trouble is, there are trillions of combinations of indicators and patterns you
could apply. That's why people spin the wheels for 5,10,15 years looking for that magic combination.

Objective rules based trading SOUNDS the right way to go. The problem is, it's a never ending quest.

On the other hand, a subjective approach sounds scary, even to those that have spent 5 years trying to
'solve' the market with math. The subjective route says "OK, I'm not going to get it right all the time, there's no
mathematical solution, so I need to look at other things other than math". All of a sudden, with math to one side,
you are left thinking about things you should have considered from the start. "Who are all these people
trading?", "Why would they want to buy right now?", "who's running this market anyway?","what is motivating
these people to do what they are doing?". These are the questions that should have been asked from the start,
not "what's the best settings for MACD?".

I can't really do any more to explain it. You will either buy into the concept that you will improve
experience or not. Hopefully, you will take the leap of faith that the objective route to trading profits is a much,
much more difficult route than learning how to read the action.

In any case, I wish you good luck.


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Part 4 - Targets
It's worth considering the targets for your trading before we continue. It may be that you have a $5000
account and that you realize you can't trade 10 contracts with that, regardless of what your back-street broker
says is OK. You probably therefore have your sights set on trading 1 contract and aiming for 10 points an day.

Let's do away with that right now. Ten points a day would make you a top tier trader who has a serious
amount of risk capital. This is not you right now. Let's just do away with that and look at something achievable
10 points a week without making too many trades. Let's say you do 10 points a week and place 20 trades to do
so. That's $500/contract in profits and $80/contract in commissions. This is your target. It will take work but it is
achievable.

Now, I am quite aware that you probably can't live on $420/week. Well you should be aware that you
can't retire on $5000 either. Still, this is hardly the point. If you can make 40 ES points a month consistently,
money will find you. Seriously, you think your broker isn't monitoring their client accounts? You think they won't
approach you to manage some of their client funds if you get to that level? What about prop shops that train and
fund traders, do you think they won't take your account statements and see that you are a good bet?

I got into trading a few years ago after cashing in my pension. I was disgusted at the amount of money I
was paying Fund Managers to shrink my account. If someone had come up to me at that point with a proposition
to use my money to trade based on their proven performance, I'd have welcomed the opportunity.

Don't underestimate just how many people out there are totally disillusioned at the terrible performance
of their investments. If you have a $5k account, I can understand your perspective, you think that having $500k
in cash is a dream. On the other hand, someone that has $500k in their pension plan struggling to make any
gains thinks that pulling in 10-15% a year is a dream.

For now forget the money. The focus is to get consistent and pull in 40 points a month, or 20, or 50,
just don't set your sights on 200+ points a month. There are a lot of big-mouths on line that say they do it but
they don't.

Think small

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Part 5 - Liquidity
It's common knowledge that no market moves in one direction for an extended period without 'pulling
back'. There are many methods of analysis that try to make sense of these moves and counter-moves, these
methods mostly rely on price data alone to guess the start and/or end point of a pullback.

In this section, we will look at the liquidity model and how liquidity makes pullbacks inevitable. This isn't
an exercise in market theory; this knowledge will help you jump on board moves at the right time. It is not easy
to sell into a rising market but if you understand the liquidity model, you will understand that at times, the market
is rising because of a lack of sell side liquidity and NOT because buyers are jumping into the market.

In this section, we will look at the lowest level of the market to show liquidity; the lowest level being the
order book. Do not think that the liquidity model only operates for order book scalpers. This model applies to all
timeframes. The existence of liquidity is key to understanding price moves whatever timeframe you are looking
at. It is merely easier to explain at the lowest level.

I am guessing that most people already know "don't trade the news". News releases cause some pretty
violent movements in price. Have you ever stopped to wonder why? Point "A" on the chart below shows a typical
news release.

We can see that at 8:38am, news was released and 20,000 contracts traded. There are two other times
that day where we see a large number of contracts trade in the time period Points "B" and "C". At those later
high volume points, the number of contracts was high but the price move itself was much smaller. The range of
the bar at point "A" is 7 points. That's a 7 point move in 1 minute!

What we are seeing there is a lack of liquidity. That is what makes the news moves so large. The
volume of trading itself is only part of the picture. It is liquidity or lack of liquidity that causes the big moves.

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Imagine for a minute that the market is a hi-rise building. Price can rise up when the ceiling is broken
and it can move down when the floor is broken. The market does have a ceiling above and a floor below. This is
in the form of limit orders and this is what we refer to when we talk of "liquidity". In the market some
floors/ceilings are thicker than others and some are thinner than others.

Something needs to 'eat' these ceilings for price to move up. The eater of liquidity is called a "market
order". When someone submits a market order to the market it eats some liquidity and makes that floor/ceiling a
little bit thinner. To trade a market you either need to provide liquidity (limit order) or consume liquidity (market
order).

This is what causes price moves. You will often hear people say "price moves up when there are more
buyers than sellers". This is impossible. The markets are a mechanism for matching buyers and sellers. If there
is no seller, you will not be buying anything. The markets move up because buy market orders consumed seller
liquidity at a price level. The next buy market orders will eat the liquidity at a higher price. The numbers of
contract brought = the number of contracts sold.

In the following image, you can see both the consumers and providers of liquidity on the order book. We
can see existing Limit Orders and we can see the market orders that were filled against them:

The following stuff is IMPORTANT

12
One of the most important things to understand about liquidity is that is that liquidity always and only
exists at better prices than the current price. In other words, seller liquidity exists at higher prices than the
current price. Buyer liquidity exists at lower prices than the current price.

This is common sense. If sellers wanted to sell below market price, then a trade would take place.
Buyers would fall over themselves to buy at lower prices than market price because they would be able to turn
an immediate profit.

Now, whilst liquidity only exists at better prices, ORDERS can exist at worse prices. This is not liquidity;
for example a breakout trader might have a buy stop order to enter the market above the high. This is an order
to enter at a worse price than current but this is going to consume liquidity, not provide it. This is not liquidity.

There is no seller liquidity below the current inside offer and there is no buyer liquidity above the current
inside bid. In case this is not absolutely clear, here is a picture:

As you probably know, a lot of the limit orders we see on the DOM are fake. Some liquidity is real and
some is not. This means that the numbers on the DOM won't always help us. There are some presumptions we
can make about the real liquidity above and below that will help us to understand the market.

Some people are PAID to provide liquidity. These people are often called "Market Makers" and in many
cases they are, although HFTs muddy the water somewhat. Anyone can be a liquidity provider and get paid to
place limit orders. Most people don't as you need deep pockets to play that game. The Market Makers get paid
to place these limit orders. As price moves up and down, they are effectively capturing the spread between the
inside bid and offer. They do not capture the spread at each price point; no-one can do that. What happens is
that the market tends to move back where it came from and the spreads are captured over time. Market Makers
have deep pockets. If a market is roaring up with no retraces, then the Market Maker is going to be short at
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higher and higher prices; as the price moves down, they'll unload that position, capturing their rebates and the
spread as that occurs. These people aren't going to remain totally passive if things go too far against them. They
can and do play games to ensure they make money. They will push the market around and shake people out
whenever the opportunity arises.

These people are not a charity. They are doing it solely for their own benefit. They will stop providing
liquidity when it is most needed, which is one of the things that feeds a market crash. As markets move down
rapidly, liquidity providers end up with a large offside long position and they stop providing buy-side liquidity
which fuels the move down. Crashes are not caused by selling; they are caused by lack of buy side liquidity.
This applies to all markets; look at the US housing crash of 2008 onwards, there was a complete lack of buy
side liquidity. It was not that case that everyone decided to sell their houses at the same time!

Other traders, for whatever reason, will put in limit orders at better prices than current. These may be
algorithms or they may be actual people. On the sell side, people can put in limit orders to sell for higher prices.
On the buy side people can put in limit orders to buy at lower prices. This is common sense, buyers want to buy
low and sellers want to sell high. A trader might have put his limit order in a minute, an hour, a day or a week
ago. Various people will have put in limit orders at various times putting in various amounts of thought into the
process. If you are day trading, it doesn't follow that everybody else is day trading. You might see 5000 Bid at a
level and think it is somebody trying to turn the market around; this may be the case OR it may be that someone
put this order for 5000 contracts in a week ago as a hedge and they aren't really concerned at all what happens
in the next 5 minutes.

One thing that is always true is that there are ZERO buy limit orders above the current price and there
are ZERO sell limit orders below the current price.

This is important - so let's put it up in bold : "there are ZERO buy limit orders above the current price
and there are ZERO sell limit orders below the current price".

Nature abhors a vacuum

If you want to understand why the market pulls back in an uptrend. Keep "Nature abhors a vacuum" in
mind.

- An uptrend starts.
- Price is at 1245
- There is ZERO buy side liquidity above 1245
- There IS buy side liquidity below 1245
- There IS sell side liquidity above 1245
- Market buy orders 'eat' the sell side liquidity and break through the ceiling
- Price moves up and up and up
- We are now at 1250
- There was no buy side liquidity above 1245 before
- There will be SOME buy side liquidity between 1245 and 1250 but it will be NEW liquidity that got
placed there as price moved up.
- Some of this new buy side liquidity will be Market Makers who were SELLING as the market moved
up
- Other people will have submitted new buy side liquidity on the way up
- Other people will still be THINKING about submitting buy side liquidity

The area between 1245->1250 now has (to an extent) a 'liquidity vacuum' on the buy side. The liquidity
hasn't had chance to build up in that area as it has on the sell side. We are at 1250 - we have moved up into an

14
area where sell side liquidity has been sitting for a while. We moved up into an area where no buy side liquidity
existed before but where sell side liquidity exists. The ceiling is strong and the floor is very weak. Any uptrend
will have a mix of market buyers and market sellers eating liquidity on both sides. If you only have market orders
on one side, look out!

We have market buyers and sellers, we have a strong ceiling and we have a weak floor.
- The market starts to move down as the weak floor is consumed on relatively little market selling
- Some new sellers may be thinking 'reversal' and jump on short
- As we move down we move 'further back' in time OR to prices that have been traded a while back and
where there has been more time to consider a buy side limit order
- We move down and the floor gets a little thicker
- At the same time, we move down into an area with ZERO sell side liquidity, the vacuum is now being
created above us.

Eventually, we get to a point where we have a thicker floor below us and a relatively thin ceiling above.
Price starts to move up and a whole bunch of traders (like me) think "Continuation". Anyone that sold the
pullback starts to feel a little queasy and pukes out (by buying); we may see a little acceleration to the upside as
the market becomes quite one-sided. Then the process starts over again.

15
We can see here a typical intra-day move. The top chart shows the price and the bottom chart shows
the cumulative delta. Price moves down about 14 points with 2 major pullbacks. You can see that as the market
is pulling back up, the cumulative delta hardly moves up at all (relative to the down move). We can safely say
that this up move was caused by lack of sell side liquidity as a 'vacuum' was created there by the down move. It
didn't take many buy market orders to move the price back up to where the liquidity was.

This is where we have the confidence to sell into a move up because we know that the move is caused
by a temporary lack of sell side liquidity.

In Summary
The market is like a hi-rise building. It has floors (buy limit orders) and ceilings (sell limit orders).
It takes market orders to eat these floors & ceilings.
As you move up and go through a ceiling, it takes time to rebuild the floor behind you.
This lack of a floor, or 'liquidity vacuum' is the cause of pullbacks in trends.
This represents opportunity for you. Once you know that the market is 'vacuuming back', you suddenly
aren't scared of fading that pullback.
Of course, you also need Tape Reading to tell you where this pullback will end.

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Part 6 - Sheep
We have an understanding of liquidity now and how it acts as a floor and a celling to price.

If liquidity were the only thing that caused price moves, then price would just Ping-Pong around. It
obviously doesn't do that. Price has to move in one direction in order to create the vacuum behind it. Something
must cause that move. If news were the only thing that caused price moves, then we'd see a flat market on days
which were light on news.

There is a constant search by new traders looking for the answer to the million dollar question.... "Where
is price heading?" and the two million dollar question "where will price reverse?". They add all sorts of indicators
and jump through all sorts of hoops to try to determine their entry points. Moving averages, Fibonacci's,
standard deviations, pivot points - all sorts of price derived indicators that quite literally hide the truth that is
staring you straight in the face.

The simple fact is that the market is full of people LIKE YOU, trying to make money out of it. The market
is a herd. When you watch the action, think of a herd of sheep. You might see the sheep all milling around not
going anywhere, then one of them runs in one direction, others follow and suddenly the whole herd is going in
that direction. There's your move, this creates the vacuum behind and you get a pullback, still the herd is now
used to going in that direction. That is the direction that is safe, sure they may run back a little but fewer sheep
are doing that. As soon as a few sheep start running in the original direction, all of the sheep follow. This will
happen over and over again.

Next time you watch a big move down with pullbacks, think of the sheep. Lots of sheep run forward, a
few sheep run back, lots of sheep run forward and so on. Then the sheep stop. They have run a long way; they
think this is a good run already. This is how far they usually run in a day. Should they run back now? Should
they carry on forward? Most are unsure what to do. When I see consolidation at the end of a good run, my
thoughts are always "look at these sheep, nobody wants to run out first, nobody knows what to do" and this is
true. You see the sheep run in circles for a while until a few brave sheep (with deep pockets) throw some size at
the market, it makes a break and then all the sheep run in that direction.

You can analyze these consolidation zones for years looking for clues as to which way it will break. Stop
it. You can't tell. You are watching a bunch of people JUST LIKE YOU that are also trying to figure out which
way it's going to go. Think about how absurd it is for you to try to figure out the actions of a bunch of people like
you trying to figure out the actions of a bunch of people just like you. In my experience, consolidation is more
likely to carry on the way it was going before the consolidation but there is no way I'd trade that alone.

Even with the liquidity vacuums behind, the sheep can run a long way. To some extent you CAN
estimate how far the sheep will run forwards & backwards. This is the same sheep remember, they might take
20 steps forward, 5 steps back, 21 steps forward, 6 steps back, 19 steps forward, 7 steps back. More on that
later...

The fact is that when the market is running in one direction intra-day, the most likely thing to happen is
that it will carry on in that direction. Unless you see lots of sheep running against the herd, then you should not
attempt a counter-trend trade.

Let's consider again

- Market moves down 10 points (lots of sheep short)


- Market moves back up 2 points (a few sheep long)

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In this scenario (and we have been over it before), the shorts are happy and content. Their profits have
gone from 10 points to 8 points in the retrace but they are still sitting on a fat profit. Their only worry is how to
spend the money they will bank. The new longs have up to 2 points of profit, they are not comfortable, and they
are swimming against the tide. They know they are in a precarious position.

Some traders have VERY deep pockets and so the game they play is a little different to the game we
play. We are little fish and they are whales with good knowledge of sheep (huh?). These people with deep
pockets will see what is going on when the market pulls back, they will know that the longs can very easily be
put out of position and so they put in some liquidity on the sell side and/or throw some sell market orders at the
market. People like me see this and we get short again too. The market goes down to the longs entry point, the
longs get out (by selling), more people see this and the market goes down some more. We often see
acceleration at this point as the market becomes temporarily one-sided.

At some point the game will be over. Quite often at the end of a down move, you will see a big move
down (AKA "capitulation"). I am no really sure how this is done or if it's just a natural market phenomenon but I
have been on the wrong side of it many, many times. The market moves down, back up, down, back up, down,
back up and then it makes a huge move downwards, usually with a lot of participation. It seems that after this
big down move, all the people that didn't get short yet decide to go short - maybe they missed out as it went
down 2 points, then 4 points, then 8 points and in the end they can no longer bear to miss out any longer so
they go short. It is VERY odd that so many people get caught at once but when it happens - THERE IS NO-ONE
LEFT TO SELL. There is also a large vacuum above and quite often this is how these intra-day 'trends' end.

This isn't how all down moves end, sometimes they just hit a wall of liquidity, selling continues but price
refuses to move down. Most likely this liquidity is big fish exiting their positions. Other times it's simply that
selling fades and other times it's that buyers come in aggressively with market orders.

Think about the market in these terms. Don't think about candlesticks; think about the people behind the
action. A price chart is an abstraction. A price chart is not the market. The people are the market. You are a
person too, right? You sure don't look like a candlestick.

Think about sheep

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Part 7 - The News & Liquidity
In this section, we are going to look at News releases and how the liquidity model we discussed stands
up at the release times. When a scheduled news release is imminent, you can see that the DOM thins out. It
goes from 1000's per level to 100's per level and sometimes 10's per level. If you ever see this thinning out
occur on the DOM and you aren't expecting it, it probably means there's a news announcement you forgot
about. Let's look at the action around a news release (the left most red arrow):

We can see that at 8:38am, news was released and 20,000 contracts traded. There are two other times
that day where we see a large number of contracts trade in the time period Points "B" and "C". At those later
high volume points, the number of contracts was high but the price move itself was much smaller. The range of
the bar at point "A" is 7 points. That's a 7 point move in 1 minute! These periods with high volume are also
periods where the price movement was above average. This should be no surprise as there is obviously more
liquidity being eaten by the additional market orders. The news release has a much larger move and again, this
should be expected, we already mentioned that there is less liquidity at these times. The DOM thins out prior to
the news release. The liquidity providers won't take the risk of providing a lot of liquidity at these times. What is
also different about the news release is that the move is in both directions. For the other two high volume areas,
the move is in one direction.

Let's look at that move on the left arrow in more detail, with a little history thrown in:

19
We can see that the action actually takes place over a period of about 3 minutes. We can see the wide
bar contains most of the action. The two preceding bars are the initial reaction to the news. Those two preceding
bars see us moving down into the 1244 area before we pop aggressively up to 1251 and then price moves back
down again.

Perhaps now we can look at this in a different light considering what we know about liquidity vacuums.
Can our 'liquidity model' explain the action here? We can see that the whole event has a low of 1244 and a high
of about 1251. We can also see a very small amount of time between the high and low. This was a rapid move
that was over quickly.

- Prior to the news, we were moving 'sideways' between 1250 and 1252 for about 45 minutes.
- This gives time for liquidity to build above that point on the offer side after a move down; there won't
be much of a vacuum above this level after 45 minutes.
- Price later moved down to 1244, therefore we can presume a liquidity vacuum exists above that point
on the offer side. We also know that up there at the 1250-1252 area there won't be much of a vacuum.
- Price bounced off 1244, buy side liquidity below 1244 was not consumed and certainly there will be
people adding liquidity a little above that point as it moves up because they now think this is now support.
- We now have 2 areas where liquidity might reside, the on the offer side at the 1250-1252 area and
above and the bid side at the 1244 area and below.
- We have a reasonable expectation that there is some sort of a liquidity vacuum to the upside to 1250
and to the downside to 1244, purely because of the price action.

Can we presume that the reason for the extended price move was a relative lack of liquidity both to the
upside and downside? Can we presume that the reason it stopped where it did on the downside AND upside
was liquidity existing in fairly predictable places?

Let's look at the 1 second chart...

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Interesting and not what I was expecting. The move down was relatively slow. The lower volume on the
down move shows us that this is not a move caused by a lot of sell market orders but rather a lack of buy side
liquidity. As we move down to 1244, we do see a little extra volume but we don't really see evidence that there
was a lot of selling into buy side liquidity. It actually appears that at this point, people started more aggressively
submitting buy market orders. These traders are possibly pre-empting 'support/liquidity' at the 1244 area.

On the upside, it's much clearer, there was good volume up to 1251 and that was sustained. If you look
at the orange circles, you can see that as we got to 1251, the volume was still high but the price stopped moving
up. This is what you expect to see when you hit liquidity. There was more sell-side liquidity than buy market
orders. It is typical on the ES to have 1000+ contracts at each level and we can certainly see that the bars with
1000 contracts cut through more than one level as we moved up to 1251. On the way up to 1251 there was little
liquidity on the offer side. We hit the liquidity at 1251 and now we definitely have a vacuum on the bid side below
us that was created by the rapid move up. So we have a thick ceiling above and no immediate floor below. At
this point, we should expect the market to stop moving up. At least in the short term, with a strong ceiling and a
weak floor, we must retrace down a little.

I am not suggesting you trade off minutiae like this. It's just interesting to observe something like a news
release and consider it in terms of areas where liquidity will reside and where liquidity vacuums are created.
News releases might appear to be random but they still fit within our understanding of liquidity. When you see
the action around the news, the natural presumption is that the large moves are caused by lots of people
entering the market based on the news. Big move = big volume is a fair assumption to make but is not
necessarily true when you consider the completely different liquidity situation at the release. It is a combination
of additional volume and lack of liquidity. We can also use our liquidity model to predict where the liquidity may
reside and where the moves may end.

The apparent randomness in the news moves is down to the fact that liquidity providers move aside at
news release times. I have no doubt that these same liquidity providers are buying at the bottom of the news
release move and selling at the top of it. What puzzles me is - who are the people placing market orders at
these times? It seems like an insane thing to do.

In terms of how to trade the news, my advice would be not to trade it. There are better, more predictable
opportunities out there for you. If you do trade it, the way to go is to put in limit orders at extreme points to fade
those initial moves. The extremes are the places where you believe the liquidity resides. Sometimes that will be
clear and sometimes it won't.

21
Some news is scheduled and some comes out of the blue. The schedule of news releases can be found
on many websites. You do not really need all of the financial news, you don't care what Wal-Marts quarterly
results are if you are trading the ES but you do care when the unemployment numbers come out. News with a
macro-economic impact is what you are looking for. My recommendation is to use the calendar at Forex Factory
- http://www.forexfactory.com/calendar.php

Use this and stay out of the way when the news comes. If you are in a position in the minutes before an
announcement and are a couple of points in profit, then close it. Your risk of slipping if the market moves against
you is higher, the fewer points of profit you have. If you are 5 or 6 points in profit, then you can consider keeping
the trade open. You have some breathing room with 5 or 6 points profit and if the news goes your way you could
very well be sitting on 10 points. You have to put it in perspective. If you are up a few thousand dollars on the
day and have $300 in this trade, by all means keep it on. On the other hand if you are down $500 and you have
$300 in the trade, don't take the risk, book the profits.

As of writing, Europe is about to implode and as I look out of the window, I think I can see the sky falling
in. It nearly did two weeks ago because I slipped 23 ticks on a Bund Trade when Angela Merkel came out with a
doom and gloom announcement as part of a speech. To be clear, I am not talking about a 23 tick loss, I am
talking about 23 ticks of slippage on my exit. That's 230 Euros per contract in slippage. I had my stop loss at 10
ticks, total loss was 33 ticks per contract instead of 10. Not nice.

This is an unexpected news announcement and in the past few months there have been many. At the
time I slipped on that trade, I didn't know what had caused the move and someone else (who had an audio news
feed on) told me it was the beloved Angela making a point. I decided there and then that I needed a news feed
myself. As a stock trader, the only news squawk I'd used was "The Fly on the Wall" which is great if you are
trading stocks and you want to know what's in play. If you are trading the ES, it's just damn annoying because
it's talking almost all the time.

The friend that identified Merkel as the culprit was using a service called "Talking Forex" at http://talking-
forex.com/ - this service is perfect for someone like me that trades the ES.
1 - It reminds me of any scheduled news announcements 10 minutes before the release.
2 - It calls out only the news that has macro-economic impact. So you don't hear a lot of fluff you don't
need. What you do hear is news will affect US currency and US indices.
3 - It is quiet most of the time.

I keep the Talking Forex audio feed on all the time I am trading. If the market spikes against me and
news comes out, I now know the reason and I might just stay in if I think it's a temporary blip.

The other time I benefit from a news feed is when something big happens that makes us switch modes
to a trend day. The other day Talking Forex announced that Standard & Poor's might downgrade France. I was
already long the US Treasury Bonds & short the ES and I got my targets immediately when the markets moved
on the news. Still, this move looked so strong that I got in again on both and took another 5 ticks from the
Treasuries ($31.25/tick/contract) and another 16 ticks from the ES ($12.50/tick/contract). These later trades
were not 'precision timed' trades taken on a pullback because there was no pullback. These trades were "pucker
up and dive in" type of trades that would kill you in more moderate market conditions. Most of the time you can't
just jump into a trade, you need to pick the right location. On the other hand, if the market is roaring in one
direction and you have good reason to suspect it will continue, you can either pass the opportunity by or just
jump on board without a pullback.

Scheduled News almost always creates a large move because of the lack of liquidity. Unscheduled
news can ruin your day or make your day; it's a matter of pure luck being on the right side of it. Any news event

22
can change the type of day we are having. This is especially true of 10:30 announcements and FOMC days.
The very fact that the announcement is due can make the market move in a tight range. The news gets rid of the
uncertainty.

News does not override the way the markets work. You don't need a different model to define how the
markets work at release times. The moves are not really any different, just that the liquidity picture is very
different and so the moves can appear to be somewhat random.

23
Part 8 - How the ES Behaves
There's a reason we need to look at how this instrument behaves. Every successful trader I have met
has some sort of 'theory' on how their chosen markets work overall. Not all use the same theory, it's just that
they all have one. I am not sure how much the actual theory matters as much as the confidence it gives you. I
personally like the idea of market profile theories. The market is an auction and I like the auction theory aspects.
Still, I am not a follower of Dalton and I don't try to implement market profile theory.

My theory of the markets can be summed up as follows:


- You don't need to be capturing huge moves to make a living trading. In fact, larger targets mean
taking on more risk
- If you focus on smaller moves, then you do not need to worry too much about 'higher timeframes' if
you want a 6 tick ES trade, you really don't need to worry about the monthly/daily/hourly chart.
- A single chart will give you reference points to trade off and the DOM/Time & Sales will tell you what is
going on RIGHT NOW.
- Every day is different but there are common themes or day types that change the way you right want
to play the day

My interpretation of the ES is that every day will unfold in one of three ways. As such, we will now go
through my own "Day Types".

Day Trader Days These are my favorite days. On these days, the market puts in usually two to four
decent sized intra-day swings. For example, price might move up 6 points, down 12 points, up 10 points, down 8
points. These are not fixed numbers and the reversals do not occur at fixed times. There are no 'fundamental'
reasons for these changes in direction. It's just about day trading firms making money. The market is not being
revalued 4 times a day; it's just about making money. There are lots of fake reversals to catch people out but
when it does reverse, lots of traders will jump on the move and keep running it to maximize their profits. Your job
is to not be the last buyer on a move up or the last seller on a move down. Your job is also you to not get
'wiggled' out of a trade.

There are some points at which reversals often occur yesterday's high, yesterday's low, overnight
high, overnight low, day high, day low, todays open and yesterday's close. These reversals are not consistent
enough to trade without confirmation from the Tape/DOM. Trade them all and you will lose money. Just keep
them in mind.

High Volume Trend Days These are days where the market moves in one direction, often straight from
the open. We used to get one or two of these days every 2 weeks, as of writing they are quite rare. These days
are usually driven by some piece of news which has either got people piling into the stock (and therefore index
futures) markets or that has got them getting out of the stock markets. You don't care which, you only care that
you need to get on board and try to stay on board. The key here is that we have an above average amount of
people coming into the market that are not intra-day traders. This has a huge impact on how the market moves.

Low Range Days These are days where you are better off not trading. Holiday periods produce a lot of
days like this. These are days where we stay in a fairly small range all day. For example, we might just move up
and down in a 6 point range all day. This can be caused by fundamental uncertainties or by a prior big move
where no-one really knows what to do next. Day traders aren't going to go 'all in' and because of that you don't
have so many people willing to jump on to a move. These days are great for getting chopped out of your trades.

Of course, we can have mixed days. As a High Volume Trend day is generally caused by some news
item, that can occur at any time. As of writing, Europe is in all sorts of debt troubles and a couple of days ago a

24
fairly dull day was made more exciting by Standard and Poors announcing that they were putting France on their
watch list.

So that is it that's my list. I don't have anything more complex than that. All I do is adjust the way I play
the day according to the type.

So there's the 'big picture'. That's it. That's how the ES operates for me. I look for nothing more than
this. If people look at it a different way and make more money, that's great,

25
Part 9 - Identifying the Day Type
Now we are going to start getting into method. Please keep your head full of sheep and vacuums as you
read this. As of writing, the volatility on the ES has been very high. I am guessing this will still be the case in
mid-January when this material is officially released. This will change. We are seeing days where the market
runs 20-30 points a day when 7 or 8 months ago 10-14 points was the norm. Don't get caught out when the
volatility starts to lower. Don't get 'mechanical' with this. Don't start analyzing the average size of pullbacks
across the past months and then start entering at that point. To do that would be to ignore the sheep, once you
start getting abstract and looking at numbers instead of people - you will lose touch with the human aspect of the
market.

Before we continue, a word about charts and timeframes. I do not use multi-timeframe analysis in the
traditional sense but I do find it helps to have 2 charts to hand, although you do not need both necessarily. I
have one chart which is my intraday chart and another which is 'zoomed in'.

(A day trader day)

This is my intraday chart. I trade the overnight session and the morning on the ES. My chart therefore
shows 1 day. The timeframe is irrelevant. I use tick charts because minute charts look a little 'funky' when you
include the overnight session. I use High Low bars, I am not interested in candlesticks, I am not interested in any
individual bar. I am only interested in where price has been throughout day,just the overall action. This is a 900
tick chart and it is compressed so that is shows a day. If the market slows down a bit, I might reduce this to 500
ticks or 467 or 349. It does not matter which you use. All that matters is that you can see the day unfold and the
major swings. The lines will be explained later, these are not magic bullet lines.

The blue numbers are the size of the swings in ticks.


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I do not look at anything higher than this. You might hear people coming out with stuff like "look at the
daily or 4 hour charts for trend and only trade in that direction" - well that'd work well for you on this day wouldn't
it? Can you imagine only attempting shorts or longs all day here? The sheep are running all over the place on
this day aren't they? What chance have you got following them if you need a daily, 240m, 60m, 30m, 5m, 1m
chart to all line up?

My second chart is a smaller timeframe - 40 or 50 ticks usually but again, it depends on the pace of the
market. Here is one:

I do not use this for entering the market but if you look at it you can see why it's useful for a short term
trader. You can see how we moved down to 1247.75 and we then moved up 13 ticks. Then it did the +4, -3
sheep dance for a while. You don't see this on the other chart and these swing sizes are something you can get
from the DOM if you are quite focused.
We can also see the bounce off 1250.25 and the consolidation there for a while. Again, if you are long
biased and you think this pullback is done, then this gives you a bit of focus for your Tape Reading.
For those of us that like to leave the screen during the day and those that don't have great memories for
numbers, these charts are an aid to, not a replacement for your Tape Reading efforts. You do not necessarily
need the second chart and certainly if it makes you think of patterns and not people, you will be better off
without it.

Day Types

We have 3 day types.

1 - Day Trader Day


2 - High Volume Trend Day
3 - Small Range Day
27
The small range days tend to occur come after a big move. This could be a big move the day before or it
could be because of a big move in the globex (overnight) session. As we said before, it's a sort of shock. The
market moved a lot, people think it's a big move and aren't willing to commit to further moves in that direction
until someone else does. On the other hand, it looks a bit tricky going against the big move too. People will be
cautious, people will be waiting for other people to do something decisive - then of course people will start
following the leader when something decisive occurs.

This decisive event can occur at any time. The small range day can change to another type of day and
you will be able to tell when that occurs.

There are two things I used to tell me what type of day we are in; the price action and the volume. I don't
look at volume in the traditional sense. I look at something we shall name "CSI" - the Cumulative Sheep Index.

Cumulative Volume = the volume so far at any point in the day


Average Cumulative Volume = the average cumulative volume so far at any point in the day for the past
30 days (or 40 or 50 or 60 - whatever).

CSI = Average Cumulative Volume - Cumulative Volume today.

If the average total volume traded at 10:30am each day for the past 30 days is 250,000 contracts and
today at 10:30 we have traded 300,000 contracts, we have a Cumulative Sheep Index of 50,000 at 10:30am.

This is the CSI applied to the ES 03-12 contract on the 12th December, 2012. We can see that
overnight, the volume was below average to the tune of about 50,000 contracts. By 10:30, not only had we
made up that difference, we were now 184,000 contracts higher than average for the time of day. If this chart
levels off at this point and stays at +184,000 contracts for the rest of the day, it means we have reverted back to
average volume again. If we see this chart rising, then it means we are getting above average volume still and if
it starts to fall, it means we are getting below average volume.

Now - the market can do whatever it likes. This is not a magic bullet but if we use this alongside the
charts, then it gives us some guidance in terms of what we can expect. Everything is relative. Right now we are
trading about 2 million contracts per day on the ES 03-12 contract. If volume is about 5,000 contracts higher
than normal, then this is irrelevant. If the volume is 200,000 contracts higher at 9:35 AM this is high. If the
volume is 200,000 contracts higher at 3pm, this is not that high.

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Globex/Regular Session

The premise of the CSI is very simple. Most days we see an average amount of volume and we see
normal behavior. The market moves up and down and of course market sentiment plays a part in that. On other
days, something significant is going on and a lot more people are participating. They are either getting into the
market or getting out. Perhaps 1 in 10 days are like this. Then we have days where the market is spooked OR
it's a holiday weekend coming up and there just aren't many people playing. That is all we are trying to
ascertain. This isn't a magic indicator. We are just trying to gauge whether participation is out of the ordinary or
not.

Let's divert for a minute and consider the overnight (Globex) and day sessions. The overnight session
starts with most global markets closed. Or maybe 'Closed' is not the right word - 'outside of office hours' is a
better term. The market is plainly open as you can trade it but most offices and banks are closed around the
world, so there's not a lot going on. Later on, the Asian markets open and later on still Germany and then
London. With Germany and London in full swing, expect the ES to be in line with the European stock indices like
the DAX (do not try to look for which is 'leading'). In terms of volume, I do not put too much weight on the day
type based on the Globex information. If Europe and Asia are really piling into the markets with huge volume, it
can't be totally ignored but the expectation should be that it's the US session volume that's important. The US
institutions start trading stocks at 9:30am EST, although the Bonds open an hour earlier. There are a lot of
people paying attention to the news, so it's 'fair' on news days to consider volume from 8:30 onwards as
important. The reason we are more interested in the US session is because the big players start trading at 9:30.
If an institution decides they need to put more money into stocks, then they will not be doing that at 3am in the
morning. No offense to anyone in Europe but the volume of US trading the ES DWARFS that of Europe.

So - it is up to you - you can use the Cumulative Sheep Index just looking at the 9:30am->16:15 EST
timeframe and ignore the rest. On balance, I prefer to see both Globex and regular session volume, I just put
more 'weight' into what the US institutions are doing.

Remember one thing. If you look at CSI for the Globex and day sessions and you see the Globex
session end down 200,000 contracts on CSI and then by 9:35 you are back to average, then this means the day
session is way above average. It has made up for the shortfall in Globex trading. If that isn't clear, then just use
the CSI for the 9:30->16:15 session.

Back to CSI

You do not look at the CSI every 2 minutes looking for signals, perhaps a glance across once an hour.
For me, I often forget about it and use it just a few times a day. Mostly this is because the action usually tells me
what is going on. Here's specifically how I look at it.

1 - My presumption at the start of the day is that today will be a day trader day
2 - If the market goes in one direction (ignore the first 5-10 minutes) and I see overwhelming volume
accompanying the move, then I will consider we may well be in a High Volume Trend Day. I will consider that
this could be an extended move and that there may be no pullbacks. I may well have to grit my teeth and do
something I would not do on a Day Trader Day - jump in on the move and NOT wait for a pullback.
3 - If the market is choppy and I see much lower volume than usual, I consider this will be a Low Range
Day. I can try to trade from the extremes of the range back to the other end or I can switch off the PC and trade
another day. Note that if there is news due at 10am EST, then you have to consider that this lack of volume
might be just because people are waiting for the news. If it's an FOMC day - switch the thing off.

That is it.

29
I think you were expecting a little more, right? There isn't really much more to tell. If we have a lot more
people than usual coming into the market, it means that longer term players are coming into the markets to
adjust their positions. This usually occurs after some news has them spooked. You will obviously see the market
move in one direction. On a Day Trader Day you can't just jump on a move because the market tends to pull
back (vacuums) and that pullback may well be outside of what you are willing to risk on the trade. Only in certain
cases to do we throw caution to the wind and get in on a move that has a lot of momentum behind it. Day
Traders are not 'in control' of a one way, high volume market. The firms that nudge the market this way and that
would get slaughtered if they tried to stand in the way of moves like this.

On the other hand, there are times when volume is low AND you can see from the price action that no-
one knows what to do. Day Traders are too scared to get in. Perhaps they got burnt yesterday or perhaps no-
one has the nerve to be the lead sheep. On these days, continuation trades will kill you as the market has no
direction. You need a certain amount of sheep to be playing this game. You need them to jump on board. If the
sheep aren't there, then the market will be hard to play.

Finally, when volume is average and we have good directional intraday movement from the start, you
can look at moves that go against the short term trend and say 'I think that was a reversal' . At that point you can
start looking for sheep in the opposite direction. We can see from the chart at the top of this page that there
were 4/5 'moves' intraday and the chances are that you'd have been playing both to the short and the long side
if you'd been trading it.

Before we look at examples, remember the part about experience. Right now, you have zero experience
of using this method. Most books on trading give you very clear, cherry picked examples to look at. Then you go
to the actual market and you can't figure it out because the real market never looks as clear as the examples. I
can give you an idea of what to look for but I can't give you the experience of using it. You can email me if you
have trouble and you can post in this forum. The 'rules' themselves above are very simple, the complexity is in
making a judgment on borderline cases. This you will only get through experience.

Example 1

30
In terms of volume, we can see the Globex session was down 50k on average volume and by 10:30 we
were up 184k. So we could say that since 9:30 we are really up 234k contracts. Average volume for the past
days has been 2 million so this represents an additional 10% of daily volume and we only got into the first hour
yet. On the other hand we do expect a high percentage of the day's trading to be in the first hour.

This market is heading down, we definitely have above average volume and price has moved down 30
points from the Globex high. We do have pullbacks though. For me, this says - "market is probably going down
some more but there's no need to chase the market as it does have pullbacks". There are lots of people who
would be looking for a long entry here because the market has already moved down 30 points from the high, I
know this as I used to be one of them and I consistently got run over doing it.

For now at least, I'd be short biased but I'd be looking for a pullback. I would not necessarily try to time
the pullback to the tick on the DOM, this market is volatile. I'd be happy to see signs that the pullback had ended
and even get in after it had moved back down 4/5 ticks. Normally, I'd try to be a lot more precise on my entry
and have a small stop but in this kind of market, I'd be looser on the entry and live with a wider stop. There is
even a case for trading breakouts in action like this but I do not trade breakouts ever and I suggest you don't
either.

The day ended up like this:

31
We can see that volume kept rising until about 11am and just before lunchtime it peaked and then took
a dive. This quite naturally led to price going sideways. We managed to push down a little more after 10:30 and
there was a nice pullback to 1229 area that saw price take a dive. When the market makes a huge drop like this,
we have to consider the sheep will be nervous. That is what leads to the sideways move AND the drop off in
volume. It's gone down a lot - both the upside and downside look unattractive and so the market loses direction
because the sheep don't know which way to run.

WARNING - Nuance Alert


32
Do you see what just happened? I gave 3 simple rules to determine the day type and then I went and
confused it all with nuance. That is trading for you. Many people want a totally objective "if a, then b" set of rules.
Many people want "if CSI > 200,000 then .....". Sadly, trading is subjective. At this point you may just give up
with this part and many people will do that. On the other hand, some of you will actually embrace the fact that
this is subjective. If you do that, tell yourself that fixed, mathematical rulesets do not exist AND tell yourself that
you will give the 'touchy feely' stuff a go, you will find that the subjective analysis isn't difficult at all. You know
about sheep, you know that most days play out in a familiar way , you know that sometimes lots of people will
jump in and that other times people will be scared to jump in. Looking for numerical patterns in this data is the
thing that is difficult, if you tried to mathematically calculate when a trend day will occur based on past data, you
could spend months with no result. On the other hand if you watch this for a few weeks and start to familiarize
yourself with it, some days you will find yourself saying "whoa, there's a lot of people trading today" and you will
know how to react.
It's all Tape Reading in my opinion....

Objective looks easy until you realize you are dealing with trillions of combinations. Subjective analysis
looks hard until you get the experience.

Example 2

This is yesterday, or rather the day before I wrote this section. I am trying not to cherry pick the best
examples here. What do we see? Remember, to do our 'day type' thing we need to look at CSI & the price
action. We can see that in the Globex Session, we were down about 200k and at 9:30 we started to make that
back up but not convincingly. The day session volume is about average. In terms of price action, we can see
good swings in the Globex session , we can also see an 8 point move up in the day session and we are now
33
back at the open. This is a day trader day. Note that this was also an FOMC day. The FOMC announcements
are at 2pm and usually these days are dreadful in the morning. This one isn't too bad at all. I've seen mornings
where we've been in a 4 point range all morning on FOMC day.

The day ended up like this:

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Example 3 - High Volume Trend Day

Before we look at the price chart, let's take a good look at that CSI chart. By 8:30 am, we were already
500k above average for the time of day. By 10:30am we were over a million contracts above average and by the
end of the day we were 3.5 million above average. I'm not sure what happened on this day but I presume it's
safe to say there was some news event. The thing to consider is we have something happening that is bringing
lots of people into the market. These people might be getting out of positions, getting into positions or hedging
existing positions. It doesn't matter. What does matter is this:

- A bunch of people are coming to play in 'our' market that don't usually play, or they are playing bigger
- These people probably have much longer term objectives than the next 5 minutes, so they are unlikely
to reverse/close these positions today
- It is unlikely that this market will be in any way balanced, it's going to go one way; these 'new' people
are all trading for the same reason, reacting to the same thing
- These people of course could finish their business at any time and the market revert to norm
- Liquidity providers are going to be working VERY hard to not get offside too much
- Some big liquidity vacuums are going to be created
- You are a little sheep

The thing about this day is that even by 10am it's VERY obvious that this is not the same market and
cannot be played in the same way. Unfortunately, I can only retrieve minute data for this day and no cumulative
delta. Here's the chart.

35
It looks fairly normal until you look to the right and see that at 3:30am, the market was at 1190. Note that
4am is not long after the London open. This is when we start to see decent volume on the ES. We ended up
closing at 1114. This is a volatile market, there is a pullback which goes from 1147.25 to 1168.25, that's a full 21
points. The next pullback is from 1114.50 to 1149, 35.5 points.

This is an extreme example but if you are concerned about whether it's a day trader day or a trend day,
then don't worry. It will be very obvious.
- Overwhelming volume
- Moving in one direction
- Backed up by some fairly major news

36
I had to look 3 months back to find a day like this. The market has been in a range for a while with good
intra-day swings of late. Don't forget about these days. Don't forget to look for volume that is way above average
because these days will become more frequent and they can bite you if you play them like Day Trader Days

Example 4 - Low Range Day

Any day can have a low range. This happens when the sheep don't know what to do. When the volume
is lower, it's a little more significant. With lower volume, it's much easier for Market Makers to nudge the market
up and down, push it to a 'resistance' level, watch people go short, push it through resistance, stop them out and
let it go down again. That is why we are interested in lower volume. The more volume, the less Market Makers
can screw around with people. You will see this when you watch the DOM. On a day with average or above
volume, when the sheep are selling, you'll see iceberg orders on the bid and even though they may absorb on a
lot of market orders, we just keep pushing through. On the pullbacks, this sort of thing stops the market dead.
That's the way it is on the ES. This is why "DOM Setups" without context of the overall move are very risky in
this market.

37
As of writing, the range on the ES is very high, 20 points per day is as low as it is going most of the time.
The average as of writing is roughly 30 points a day. What used to be normal was 18 points a day. This started
in August 2011. I have no idea how long this will last. The term 'low range' therefore is a relative one.

Example 5 - Low Range Day

38
This is a recent day. At 10:30 we can see that we are 105k below average. This isn't actually that
significant as we were down that much in the overnight session. What we can say then at this point is that the
volume for the day session is about average. The action on the other hand is quite significant. We generally
expect a decent push one way or the other not long after the open. What we see instead is that for the first 30
minutes is that the market is in a 4 point range. Then it drops a more significant 8 points down to 1212. Then the
market stays in another 4 point range for almost 30 minutes. The Cumulative Delta (more on this later) at the
bottom moves from -280k to -294k on that 8 point drop, this is a VERY small move in delta for the 8 point drop.
What the chart doesn't show is the speed at which this market was moving. If you watch this every day, you get
a 'feel' for how fast or slow a market is moving. Watching the ES on this day was like watching paint dry. Even
though the -105k CSI is not so significant, the action alongside it tells us to be cautious. We have to consider the
CSI and the action. Not just one of them.

Here's how the day ended up:

39
We can see that the CSI continued to move down, leaving us almost 350k contracts down on the day.
The market did indeed breakdown to 1209 but after that it stayed in a choppy 6 point range for the rest of the
day.

If we compare these two low range days, we can see they are quite different. The first is very obvious
from the start and the second is much less obvious. Both are tricky to trade. On a Day Trader Day, we can
effectively play continuation moves. Those continuation points are REVERSAL points on the Low Range Days.
Low Range days are effectively the opposite of a Day Trade Day. Day Trader Day Techniques will consistently
lose you money on these days.

40
Summary

Most of the time, the ES moves in a fairly predictable manner. It puts in nice, tradeable intra-day moves.
When these moves become apparent it is far more comfortable for intra-day traders to follow them than to trade
against them. This makes moves in that direction run for a while. When the move ends, we get the same thing
happen in the opposite direction. There are lots of people looking for magic bullets to tell them where the
reversals will occur. A lot of people have small accounts and so think they need big targets, which leads them to
try and capture the whole move. If you put that to one side, you can exploit these reversals after they occur,
have a smaller target and a much higher win rate.

At other times, there is an 'occurrence' that is moving the market. This has institutions coming into the
market for reasons other than intra-day profits. In fact, they don't care about the profits on the day. They may be
adding to long term positions, unwinding long term positions or hedging. On these days, the normal sheep are
often overpowered by this one-way activity. These days are harder to play than the Day Trader Days but there
can be a large range and if you are willing to take on more risk, you can benefit from an extended move.

Then there are times when everyone is unsure or people just aren't interested. The markets may be
open on December 24th but you should not expect to see normal participation. Most people in the West are at
home with their families on this day, or they've had a lengthy, large (and possibly liquid) lunch. You can hand
back a lot of money on these days if you try to capitalize from the continuation of a move because moves tend
not to continue.

Each day type requires a slightly different strategy.

There are shades of grey too. On some days it's not 100% clear. Some days will start choppy and then
suddenly we'll get some news and then the move will start. This is where experience comes in. Nobody can give
you a fixed mathematical formula to tell you absolutely what the day type is but if you watch for a few months
you'll soon be able to identify it yourself.

One final thing to consider...

Does this sound like common sense?


A bit obvious isn't it?
It's not a big secret.
But it's not a magic bullet, which is what most retail traders are looking for. This is why they spend so
much time on mathematical solutions, magic indicators, black box auto-traders and other snake oil solutions.

This is also the reason a lot of people that read this will ignore it and keep looking for the magic bullet.

41
Part 10 - Trading Day Trader Days
We know that on Day Trader Days, we should see 2-4 decent sized intra-day swings. A lot of trading
methods are geared around trying to identify the exact point where those swings begin and end. I guess this is
because people want to capture the whole move. We have market profile, floor trader pivot points, Fibonacci
retracements, Fibonacci extensions and all sorts of supposedly predictive methods of creating reversal levels to
trade off. Trying to capture the exact point of a decent move up or down is a great way for an inexperienced
trader to consistently lose money in the markets. The alternative is to wait for the market to show its hand and
jump on board to capture some of the move. This is a much easier proposition.

We will trade the Day Trader days as follows:

1 - We will wait for the sheep to start clearly moving in one direction
2 - We will then wait for a liquidity vacuum
3 - We will then focus on Depth and Sales to confirm/refine our entry
4 - We will enter in the direction of the sheep from step 1

Let's now look at what we will use to see where the sheep are going. Before you do that, please go here
- http://www.jigsawtrading.com/lessons/lessons.html and read the information about Cumulative Delta.

As you know, this course is called "The ES - When To Enter". If you were wondering which parts of this
course I think might be specific to the ES, it's this part. This may or may not apply to other markets; it very much
depends on how much the markets are driven by Market orders and how much by Limit Orders. This course is
on a forum and you are welcome to post info on your markets and we can discuss it. We can certainly look at
different markets.

When the ES is putting in a 'decent' intraday move down, we expect down moves followed by pullbacks
followed by more down moves.

42
In this image, we can see the market moving up and then down. On the way up, most of the pullbacks
are generally small and barely visible on the cumulative delta. On the way down the pullbacks are larger but
again none of the pullbacks show a significant change in delta. What is happening here is that the pullbacks are
not really caused by people trading counter to the overall direction. They are caused by liquidity vacuums. The
size of the delta change for the pullbacks is relatively small compared to the size of the delta change on the with
trend moves. What is interesting on the up move and the down move is the way they both end (the right hand
side was the end of that down move). The trend ends with a big change in delta in the direction of the overall
move. We see a lot of buy market orders at the top and a lot of sell market orders at the bottom. This does a few
things.

- It leaves no-one left to trade in the direction of the move. All these traders jumped in at the end of the
move and there is no-one left to trade in the direction of the short term trend
- The extended move creates a bigger liquidity vacuum in its wake
- This tips off the smart sheep that a whole bunch of people just got in and that a push in the opposite
direction will see them exit and fuel the move against them
- Other sheep see what the smart sheep did and saw that they did it with a bit of size. They now jump in
and add fuel to the move

Here are the trading rules


- If the market is moving up & the cumulative delta change on the pullbacks is relatively small, do not go
short. Go long on the pullbacks. Stay long biased regardless of how much you feel a reversal is around the
corner.
- If you then see a relatively large down move accompanied by a large down move in delta, consider
that the market has now changed direction and look for a pullback from the new downtrend to go short.
- If you see an accelerated move up in an established uptrend and an accelerated up move in the delta,
then consider that this may be a final exhaustive move and do not take any additional long trades. Look for the
market to show its hand downwards before any shorts.
- If the market is directionless and Cumulative Delta is pretty flat - wait for the sheep to make a
decision.

What we are doing here is letting the sheep decide what they want to do. Then we are exploiting their
move. We are not taking the whole trend, we don't need to. We are taking a bit out of the middle.

The reasons for these rules are simple. If the sheep are moving the market up, they will want it to
continue up to maximize their profits. Remember there are some pretty big players out there who can throw
thousands of contracts at the market if they think it will start the ball rolling on a large move. Once the move is
established, everyone simply feels a lot more comfortable trading in that direction and they are less likely to bail
on their trades if it moves a little against them. You cannot say the same thing about people going against the
general momentum. Such people will be nervous. That is how you feel in the same situation, right?

The pullbacks are inevitable because of the vacuum, reversal traders and people taking profits. Some
stray sheep will go long on the first pullback in a down move, there are always people trying to guess the end of
a move too. In each pullback in a down move you will have people going long but they will exit very quickly if
price starts to move down again. We often see acceleration when this occurs.

This gets more interesting at the end of the trend. Both yellow arrows show the end of these short term
trends. What is happening here is that less inspired traders are jumping in at the end of the move. This is great
for the aggressive early longs in an uptrend as it allows them to exit their long positions. With these aggressive
traders no longer inclined to push the market up and the less inspired traders already having entered, the
market no longer has the fuel it needs to rise.

43
On the ES, the game played is one of nudging the market up and down. Sometimes it's in a small 4
point range and the CD won't help you. About 1 out of 10 days, the ES goes in one direction all day. CD can
help on these days by allowing you to jump in on a pullback with a small delta change. Other days the ES will
move 10-20 points in one direction before reversing and doing the same in the other direction. CD will, of course
be very helpful on these days.
One of the problems I had with my trading was that I didn't want to go short if the market had put a
good move down. It took me years to stop going long in downtrends. The market will move in one direction as
long as it likes. If the delta is still moving down well with the down moves, it means there's selling pressure and
you do not want to go against it.

Previous to using Cumulative Delta, every fiber in my body would be telling me to go long at this point.
My brain would be saying "higher high, new uptrend, go long". Price is approaching the point of the left most red
arrow but delta is nowhere near. If we look at the middle & right most arrows we can see that delta is back up to
where the last pullback was but price is much higher. Here is what happened next.

44
The circle shows the pullback above that appeared to be a reversal. Note how different the picture looks
now that the scale of the chart has changed. The shift up in CD here looks much less significant now. You have
to practice this on the hard right edge. Looking at historical charts will not help much because when you see the
action historically as above, the cumulative delta chart scaling is affected by the subsequent down move. It looks
more obvious in retrospect.

Like anything useful, this takes practice. You can only gauge these moves in delta through experience
and that is best done on the right edge of the chart in my opinion.

As per the above picture we are looking for the Cumulative Delta to tell us when a move might be a
reversal and when a move might be caused by a lack of liquidity. The Cumulative Delta (CD) tells us how many
market orders (consumers of liquidity) it takes to move the market. If the market moves with relatively few
market orders, then it means there is not much liquidity there.

The above chart is great retrospectively but we have to trade on the right hand edge of the chart, here's
a chart from 16th December.

45
We can see at this point that the market is definitely moving upwards. The last 2 pullbacks barely
changed the delta and the last 2 pullbacks were both 8 ticks. We are now at 7 ticks and the delta has moved
sideways during this down move. This does not appear to be a reversal.

Let's have a look at what happened next.

46
Again, a pullback of similar size and so far no real shift on the delta. This also does not appear to be a
reversal.

A little later.

47
What about now?
Do we think this is a reversal?
To me, this spells danger for longs. There's participation in that down move. I'm not looking to go long
with that relative shift down in delta. I could be wrong but this is NOT what I want to see.

This is how it played out:

48
49
These 2 charts are of course showing the same action with the second chart showing the situation a
little later on. The second chart appears to show no clear entry points to the downside. The first chart does - yet
it's the same data. This is a fantastic example of why looking at historical charts is mostly useless. On the first
chart, the range is smaller and you can see the action. As the range expands, the chart re-scales to show all
available data. What you end up seeing is a squashed chart that appears impossible to trade. It's OK to look at
historical data but slowly scroll the chart across to reveal the more recent data. That way you will get a feel for
how the day progresses, just as it does live.

Now - the caveat here is that you do not trade this purely based on the chart. You need the Depth &
Sales (or Summary Tape) alongside the Reconstructed Tape to make this work. We are showing you areas
where it MIGHT be good to enter but Tape/Depth & Sales is you confirmation/entry refinement tool. As your
Tape Reading skills improve, you will be looking at these charts less and less.

In terms of the entry, I don't have much more to add. There it is, it's very simple. With experience you
will be able to trade it and it's based on a common sense understanding of market dynamics.

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Don't make a mountain out of a molehill
We've discussed how looking at too large a set of historical data will 'squash' up your chart and hide
what you'll see in real time. The inverse can happen when the price/delta range is small. The screen will expand
the charts to fill the screen. Here's an example:

We can see the delta and price putting a good move up. If we look at the scale to the right of the delta
chart, we can see it's only moved up 4k and price is up 9 points. As of writing (December 2011) this is a very
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small change in delta. When you see this be very careful. Over time, the volumes and ranges change but as
you'll be watching it most days you'll keep up with those changes. Right now, the fact that the delta moved up
such a small amount would put me off a trade.

Expected Number of Ticks in Pullback


Occasionally, you'll get into a good trade way too early. The pullback will be very deep and you'll get
wiggled out of the trade. This is absolutely intentional and it is someone pushing the market around to stop
people out. The market will move down, then pullback and you'll go short. The market will continue its pullback,
you'll bail on the trade and then it will move down again. There's a few ways to handle this.

First of all, you can simply stay in the trade and take the heat. The fact is that unless there is a LOT of
people jumping in the up move, then it's likely just a fake out. I understand that a lot of you have been on trading
forums and will be thinking about Risk:Reward ratios and that having a big stop without a big target is going to
kill you. This isn't going to be every trade. Maybe you think you can get 10 ticks out of the trade and you have a
6 tick stop. The market comes against you but you don't see the conviction in the move. You are now 2 ticks
away from your stop, the market could spike there in a second. If you believe in the trade still, then stay with it.
Let it spike against you with low volume before carrying on down. If it does go your way again, you can probably
move your target out a bit. Maybe the opposite will happen, maybe you take 8 ticks risk and then when it moves
back down it stops moving when you only have 4 ticks profit. If this is what you see and your judgment tells you
the move is over - CLOSE THE TRADE. Don't worry about mythical Risk:Reward ratios. You are becoming a
discretionary trader, not a mechanical one. If your read of the action is such that you think a move against you is
fake (and you WILL be able to tell, given time), then stay with it. Of course sometimes you will be wrong and
take a bigger stop but you will also stop out of more trades if you are too rigid.

The second way is to bail and then focus on the DOM for another entry. This is fine too but it does incur
more transaction fees. Still, this puts you in a better position with the trade you should have put on in the first
place. A lot of people find this more mentally appealing but your overall risk is the same as if you'd stayed in.
Maybe you took a 4 tick stop and now you have another 4 tick risk (albeit that 4 ticks risk is in a better position).
It's still 8 ticks down if you lose on both trades.

So how do we know where to get in? How do we know how deep a pullback will be? Of course, this is
what our DOM is for but before we go into that, there is something else to consider...

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As you can see, we had a nice swing down here. From the top of the initial move up on the left the
retracements were 9,5,9,9,8. On the way up the retracements were 11,11,8,10,8,8,8,10. In this scenario would it
be wise to consider a retracement to be complete after 2 or 3 ticks? Of course not. This is why I display swing
sizes on my chart. It gives me a 'rule of thumb' to guesstimate where the next retracement might end. It's not
perfect and that's why we have the DOM/Tape to enter from but it is a very good discretionary guide to prevent
you from jumping in too early.

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Part 11 - Trading High Volume Trend Days
As of writing, December 2011, we haven't had a good High Volume Trend day for quite a while. I put
this down to the fact that the markets changed in August 2011. Average volume is up, the liquidity providers
seem to be a little shy to step up and so volatility is high. If we compare volumes right now to those at the start
of 2011, every day is a high volume day. We have to consider the action and participation relative to current
norms. This will be a skill that you will easily acquire as you watch the market every day. Right now, there is
frequent news about European debt coming intraday, panic is the new calm. As such, it's going to take a lot to
kick this market in one direction all day. This will change and when it does, this day type will become more
common once again.

As mentioned earlier, a High Volume Trend day is one where the volume is way above average and the
market is heading in one direction. There will also be trend days where the market moves in one direction and
the volume is not way above average. This is fairly common and the Day Trader Day methods will suit these
days fine. You'll just see sheep going in one direction and nice pullbacks to jump in on. The key aspect of a High
Volume Trend Day isn't really the market moving in one direction, it's about the extra participants coming in and
how that effects the price action.

First, a thought about the liquidity providers and how these days could impact them...

Liquidity providers exist in all markets. On the ES, you have liquidity providers on the ES itself and you
also have liquidity providers on each of the 500 stocks in the S&P500 index. The liquidity providers put limit
orders on both sides of the market and they rely on the fact that the markets move both up and down over time,
the overall result is that they capture the spread. They also get a kickback from the markets for providing the
liquidity. There are three things that prevent you from doing the same thing. Firstly, they have some fairly smart
algorithms telling them how much liquidity to provide on each side at any one time. Secondly, they get paid to
place limit orders and even their fees for market orders are almost 0. Not like your $4 per round turn. The other
thing is that they have a LOT of money. They know they can go a few million offside because the market tends
to go up AND down. If you tried this with a $5k account, you'd blow up in a typical day.

When the market runs one way, these liquidity providers get considerably 'offside'. The nature of what
they do means they are buying when everyone else is selling. These institutions are not charities and they can
only bear so much pain. This means that a couple of things happen. Firstly, in an extended move, they will offer
less liquidity. In the case of the famous "flash crash" this became a sort of market death spiral. There was so
much selling that the liquidity providers stopped providing buy side liquidity and that meant there was no floor in
the market and the move down spiraled out of control until some equities went to 1cent.

Most trend days aren't that severe but a lot more volume and one direction means that of course
liquidity providers will back off a little. They will also take whatever opportunity they can to lighten their load on
the pullbacks. These days can really move. These are the days when you can make 10, 20, 30 points. These
are also the days when you can lose 10, 20, 30 points.

The key things to consider are:

1 - Like all "Day Types", they may last the whole day. They may fizzle out when everyone is done or
they may start on a news announcement. You should at least expect the day traders to be unwinding in the
afternoon and for that to cause a move counter to the days direction. This may not occur until after 15:15
though.
2 - If you try to trade countertrend on these days, trying to pick the bottom of the move because it has
moved 'too far' already, you will get squashed. Keep trying it if you like but if there is one thing you take away

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from this course it should be - STOP GOING LONG WHEN THE MARKET IS MOVING DOWN (and vice-versa
for shorts). As obvious as it sounds, this is what people try to do. It is what I used to do.
3 - This can be a wild ride with big retracements caused both by liquidity vacuums and offside market
makers.
4 - There simply may not be an entry for you, certainly not in the sense that you would get on a Day
Trader Day.

The day prior to me writing this wasn't a High Volume Trend Day but it did put in a similar type move
which is very typical of a High Volume Trend Day.

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As you can see, we had doom and gloom news about Europe at about 10:40 and the market moved
down 13 points. On a High Volume Trend Day, it can do this for 20 or 30 points without much pause. Here's the
issue - where do you get in? These days are gravy but you have to throw caution to the wind. You know this is a
news driven event because you have your news feed on. You know volume is on the sell side and you know the
market makers are in pain. There is a 5 tick pullback at 1209 but that is pretty small and we have individual bars
at around the 1215 area that are larger than that.

Before we talk about how to enter, let's look at a more extreme example.

In this case the market dropped 80 points but not without a lot of volatility. Obviously, nobody is going to
want to sit through that 40 point pullback at 2pm but by the time we got to 2pm, we were pushing our luck
anyway because the Day Traders are sitting on a fat profit and they want to unwind. They won't wait until 15:15
to start unwinding because they know everyone else is going to be doing the same thing and a LOT of Day

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Traders will have jumped on this. They do the smart thing and try to get out before everyone else unwinds. Of
course, when the sheep see other sheep unwinding...

The best case scenario is that the market moves as in the first image. It moves without a pullback giving
you no place to enter with the Day Trader Day rules. Still you cannot rule out a vicious pullback and the market
to then carry on. Sheep are behaving differently, liquidity providers need to push back, liquidity vacuums are
bigger and we have a different set of players. So we need a different set of rules.

1 - Don't trade. This is a good option.


2 - Accept that it may take multiple attempts to get into a position with low risk. You can use the DOM
and/or a very low timeframe chart (40-50 ticks) to get an idea of how much 'wiggle' there is as the price moves
down. If for example you can see market is going -8 ticks, + 4 ticks, -10 ticks, + 5 ticks etc - just jump in on the
next 4/5 tick pullback and give it a LITTLE breathing room - perhaps another 5 ticks. If the market carries on
doing what it has been doing, it'll go down and you'll soon be 3-4 points in profit and can now relax. On the other
hand, this might just be the start of the first proper pullback in which case it'll run over your stop and you'll need
to try to get in again.
3 - Just jump in and give yourself a large stop. By large I mean 5 or 6 points. You could lose 5 or 6
points of course. If the average 900 tick bar has a range of 2 points, you can't hope to use a 4 tick stop when
there is this much volatility it's very hard to finesse an entry off the DOM by looking for an iceberg order or
similar DOM setup. This stop is only large by your standards, not by the standards for the market on the day.

I have done all three. I prefer option 2, I'd rather try to get in a few times with lower risk than a single
high risk trade. As with all trades, the most nerve-wracking part is the start of the trade. Once you get into profit
by a 3 or 4 points you can relax a little bit. That is what I do, try to get in, get a 3-4 points in profit, then (believe it
or not), I leave the screen. I do this because I tend to close trades early. Not sitting in front of the screen on a
day like this pays dividends for me. Of course, I always have an exit order on, if for no other reason than there
could be a power cut. I am so used to Day Trader Days that I tend to manage these trades as if it is a Day
Trader Day and I exit to early. In fact, I did the exact same thing yesterday.

During this move down, there will be people who didn't do what you did. They saw the move down,
expected it to turn, waited a bit more, didn't get in and they got more and more frustrated until they ALL jump in
and you see a massive spike down. If you see this kind of action, it's usually a good place to close out your
trade. It is a mystery to me why we see these spikes at the end of the move and why so many people jump on at
that point and put a stop to the move. I've tried to understand the rationale behind it but I don't. I just take it as a
sign the move may be over.

There is one thing that can help you to work a position on these days where you don't see any pullbacks
and where it's hard to define how much risk you are willing to take on a trade. A low timeframe tick chart.

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This is showing the action from 19th December we saw above, only this time on a 50 tick chart. 50 isn't
a magic number. 40 would be fine as would 60. A 1 tick chart would not be OK! Right now, the 50 tick shows just
the right amount of action. As someone that uses the DOM, you should be able to see these 'micro-swings'
anyway as the price flows up & down. In the above picture, as we move down we can see that we are pulling
back 3-5 ticks. If you are going to 'jump in' on this action it makes a LOT of sense to wait for a 3-5 tick pullback
before doing so. This also gives you a fair guide to how much risk you should take if you are going to make
multiple 'low risk' attempts at entry. If you get in on a 4 tick pullback, you do not need to give it 10 ticks stop to
see if that spot is 'good' for an entry. You could give a 4 tick stop, let yourself get stopped out and then try again
with another tight stop.

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Part 12 - Trading Low Range Days
As discussed, low range days can occur for a number of reasons. The US Holidays cause them, the
futures markets are open from Sunday evening to Friday afternoon and don't generally close for all US holidays,
they are open but there's not much participation. The ES also has a few half days which are usually very think in
terms of participation. You can find information about the holidays here - http://www.cmegroup.com/tools-
information/holiday-calendar

There are also the typical vacation times in the US summer where the volume drops, especially towards
the end of the school holidays when plenty of people are out of the office. The markets aren't closed and there's
no official national holiday, just a lot of people on vacation. The same happens at the end of the year
approaching the Christmas and New Year holidays in the US. The markets are open between the Christmas and
New Year holidays but there's not a lot of people are trading them.

Other times when it is quiet are FOMC days (your Forex Factory calendar will tell you this), where US
interest rates are announced at 2pm and very often not much happens in the morning. When there's a 10:30am
announcement, the lead up to that can also be quiet.

Finally, we have days when the market is simply directionless. This often happens at the end of an
extended move. We've put in a good move and it seems no-one know what everyone else thinks will happen
next. This is a game of sheep, on these days the sheep will mill around and wait for some other sheep to do
something decisive. This often doesn't happen.

The single best thing you can do on a day like this is switch off the PC and do something fun. Trading
will not be fun. Maybe this is just me. There are a few issues with these days. With lower participation, the sheep
tend to not want to stray too far away from where the market has been before. This causes a trading range. You
will see the market move up and down in what appears to be a predictable range. The sheep know this; the
smart ones know that the game is to play the range when you get to the top of the range you short it back to the
bottom. When you get to the bottom of the range you take a long back to the top.

There is an issue with this; liquidity providers know this too. Low Range days are gravy for liquidity
providers because price moves up and down, handing them the spread and they never really go too far offside.
Of course, this isn't a gentleman's sport; because of the lower volume it is actually easier to push the market
around. For example:

- Top of range is 1215.25


- Range traders have short orders at 1215
- Breakout traders (duh!) have long orders at 1215.50
- The market gets to 1215 and then moves down. Range traders are short.
- Someone with deep pockets then pushes the market up to 1216. Range Traders are stopped out
(giving their money to Mr Deep Pockets). Breakout Traders are now Long.
- The same person with deep pockets then pushes the market back down. Breakout Traders are
stopped out (giving their money to Mr Deep Pockets).

So it continues. You do have to play the range but be totally aware that this is a market that can be
seriously gamed. This is where your skill on the Tape/Depth & Sales really pays off. You will see the
manipulation and you will be able to profit from it. The other key consideration is that the more times a range
holds, the more liquidity builds outside of the range waiting to be exploited. The more obvious a range is, the
more likely it is to fail. This is the mysterious "Stop Run" which needs more explaining:

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We can see here that we were in a range and that the price reversed off the high of the range four
times. The fourth time actually reversed a little lower than the other times. This is to be expected because you'll
have people that didn't get filled on the prior attempts and so more and more put in their orders a little lower.
This is why these ranges aren't uniform. You have people getting in earlier and others trying to squeeze them
out of position.

Now, in this image, you can see "Cause". Cause is growing from left to right. Cause is the stop losses of
people that went short. The more reversals down, the more stop losses are presumed above there. This is a fair
assumption and this assumption applies to all channels and ranges you see, regardless of market conditions.
Got that? Any range or channel. Stops either side.

More and more people are short and to exit these positions they must buy. Of course, some shorts will
have exited at the bottom of the range but some are holding with their stops above the range. Those stops are
Buy Market Orders. That means there's a bunch of people who are going to buy at ABOVE CURRENT
MARKET PRICE if we get there. The amount of people willing to pay above market price is growing - that is the
assumption that we make when we see this action and that is the assumption that people with deep pockets
make too.

Let's say you have a hundred iPhones for sale. The market price is $399.99. The people in the house
next to you are willing to buy these phones from you for $399.99. There are some other people a few miles
down the road that are willing to pay you $499.99. What do you do? You take a drive and you pocket the extra
$100. That is exactly what the market does and this is one of the most natural things in the world. There is much
said about those evil players and their stop runs but why would it take a stop run to take advantage of those
higher prices? Would you be called evil for going the extra mile to get a bit more cash for your iPhones? Of
course not. The simple fact is, no-one can see the stop orders. It is just presumed they are there (sheep,
remember). The presumption is that there's a lot of people up there willing to buy from you at higher prices. That
is the crux of 'stop runs'. You have a group of people who are willing to pay higher prices for something, this is
an auction and sellers will be less motivated to sell when they know they can sell to those buyers up there. Don't

60
doubt that people push price around on purpose but also remember that what you have up there is a 'pocket of
liquidity', a 'pool of buyers'. If I was a seller, I'd be less inclined to sell at a lower price because I know I can sell
to those guys up there.

So - you might call it a stop run. To me, it's just the natural effect of better prices to be had elsewhere.
You might drive to another supermarket for cheaper goods but when you do this, people don't curse you and
accuse you of manipulating the supermarket do they? All markets work the same way.

Here's an interesting day. We can see that the price formed a 'channel' as denoted by the light blue
lines. Lots of people can see this. We can see that we had 8 hits on the range before it failed. This is a range
but the range is moving upwards. Stops are building above and below. People can clearly see the channel
forming and despite the lower participation, they are playing the range. People are trading from the outside back
in. We can see that as we continue from left to right, the amount of stops below (and of course above) is
growing. In this case, it is safe to assume that there are more stops below than above. We can assume more
stops below because the market appears to be rising and so people with long positions are more likely to be
holding on. This sort of situation creates a 'cascade' of stops. First we'll see the stops created by traders that
entered at point '8' being triggered, the selling when the stops get hit will push the price down so that traders that
entered at point '6' get stopped, that selling then pushes price down further until point '4' traders get taken out
too.

Stops below are people willing to sell at a low price. The market seeks out these sellers willing to sell at
a cheap price. That is what markets do.

I am not suggesting that you will be able to catch the stop cascade on the way down. I don't know any
way to tell when it will stop ranging and a 'stop run' will start. All I know is that you need to do the following:

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1 - When you see the low volume, presume the market will range
2 - Your best possible time to enter is point "4" above. Once you have 3 touches, presume the range
and play it there.
3 - Any play you make after that has a risk of being gamed. By all means play it but realize that those
with deep pockets can easily push the market either way 6 ticks just to catch you out.
4 - Rely heavily on the DOM/Tape on these days. This is what tells you where the games are and this is
what will keep you out of trouble. In fact, on these days, you do not really need a chart. A DOM with a Volume
Profile is quite sufficient.

Let's look at another day...

We started off with a fairly tight 4 point range which did actually channel downwards for a while. This is
a good example of how the 4th touch is your entry point. The channel hasn't really formed after 3 touches, so
the '4th touch entry' is based on your presumption that it WILL form. After the bounce off the 4th point,
everybody has seen it and as you can see there was an attempt to reverse back down off the top of the channel
but it spiked up (stop run), no doubt taking out a few channel surfers.

You can see the next thing that happened is a 12 point down move. This is not something I would have
traded. This is not because I am some trading whizz kid but because by now I'd no longer be at all focused after
watching the market do very little for so long. This is one of the problems with range days, they are so dull, you
end up losing focus.

Then we can see a nice 12 point move down. I can absolutely guarantee that I will NEVER catch those
moves down. After 2.5 hours of chopping around like this with no real indication of what will happen, you just
lose focus. Of course, it could be that you are the opposite of me and find these days easier to play. I have put a
green circle around the CD at the point we went down, it is possible you'd have caught it but my gut tells me I
wouldn't have risked it because I'd still be thinking about the range.

What followed was pretty much as bad action as you could get; an 8 point range with no real hits of the
upper and lower boundaries. The swing sizes are all over the place too and during these sideways moves the

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best thing is to stay out of the way. I know you want me to tell you the perfect way to trade this action but to me,
the best thing to do is to stand aside.

I know you won't listen to that and so the best advice I can give is:

- Do not buy near the high of the range (this may sound obvious but you'd be amazed).
- Do not sell near the low of the range
- Focus on the DOM/Tape for LONGS in the bottom half of the range
- Focus on the DOM/Tape for SHORTS in the top half of the range
- Be very aware that the range could fail as liquidity providers attempt to shake you out.

On these days the low timeframe chart might look quite an appealing option.

The thing is though, this looks much better in hindsight than it does live. By all means try it but if you let
this low timeframe chart be your guide the chances are you will get shaken out of position a lot.

Finally, here is a video of a range day. In this case, we got to the top of the range and although it
appeared that we'd move down, some big fish decided he'd step up and absorb the selling. This highlights the
danger of selling the top of the range blindly. If the volume is low, it doesn't take too much to stand in the way of
the market and catch the chart-only traders out.

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Note that the video can also be opened in a new window/downloaded here:
http://www.screencast.com/t/FvopTMvJmps

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Part 13 - Incorporating The Jigsaw Tools
Before we go into how I use the tools, make no mistake - you have to pay your dues first. I designed the
tools because I couldn't use the standard DOM and Time & Sales. Even then, it still took me a long time to be
able to read what was going on and get a grip on what different sorts of action meant.

A while before I got serious about Tape Reading, I'd read John Grady's "No BS Day Trading Book" and
watched the accompanying videos and they made absolutely no sense to me. Even as I was watching the
videos and hearing his commentary, I couldn't see the things he was explaining. It went totally above my head.
At the point I read it, I'd not sat down and spent time watching the DOM. Of course, after watching D&S for a
while, I went back to the material and it was very clear. In fact, I wondered how I could possibly of missed what
he was showing.

Before continuing, make sure you look at the Lesson on Depth & Sales here -
http://www.jigsawtrading.com/lessons/lessons.html
Also look at this Lesson here on the benefits - how this aspect of your trading can seriously limit your
risk - http://www.jigsawtrading.com/lessons/lesson2.html

The fact is, I'm no 'grade A' student when it comes to this stuff. I estimate that it took me about 180
hours of staring at the Depth & Sales before it 'clicked' with me. Now I read Johns book and see the videos and
it makes perfect sense.

As a primer, I would say that John's book & video are a must -
http://www.nobsdaytrading.com/course.html

The difference between what you see in that book/video and what we are doing here are:

- Depth and Sales is much better than X-Trader DOM in terms or readability and history

- John is scalping treasuries; we are refining entries on the ES. This is a KEY difference. You cannot
just take any DOM setup on the ES because the sheep are very strong. If price is going down and someone has
an iceberg on the bid, you might see 3 or 4000 contracts hit that bid and then plough right through. On the other
hand, if price is pulling back in a downtrend and you see an iceberg on the offer side, this is a very strong signal
that the pullback is done.

- It is safe to say therefore that the setups will best work in context. You now have an idea where to
enter, if you see a confirming signal off the Depth & Sales, that's where you get in. If you see a setup against
you - well, you might just want to consider that this isn't the best place to be getting into the market. Still, don't
take a trade against the overall direction unless you have been doing this for a while. You'll most likely lose.

- Some of the setups in Johns book are related to spreading activity. This doesn't really apply to the ES.
Some of the other setups are to do with specific ways that people will build a position. These setups are good to
scalp off on the Treasuries and you do see these things on the ES but if you expect to always see one of these
'setups' at the entry points defined in this course, you will be disappointed. Sometimes you will, sometimes you
won't. My take on this is that you need to take a slightly longer term view and look at changes over time. This is
the sort of analysis that Joel Parker at http://www.priceactionroom.com/ specializes in. It is well worth taking one
of Joels courses.

- I have attended one of Johns 1 month 'watch me trade' webinars. He explained a lot about how he
uses Volume Profile during the course of the month. I use volume profile on the US treasuries and I it works very
well there. My own belief is that volume profiles work better on markets with less intra-day swings, so for a
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product like the CL, it would be pretty useless. You could say the ES is a borderline case in this respect but I
prefer not to use the volume profile to trade the ES. I do get a lot out of the 'split profile' on the Depth & Sales,
though.

Great Expectations

One of the main problems when a retail trader uses the DOM for the first time is that no-one has set any
expectation of what they might get out of it. At a prop shop, you will have people around you, be able to watch
them and pick their brains. When you are at home watching it, you have very little information about what it can
do and what to look for. So, you go to the internet and look for some forum posts which will tell you "You have to
watch it for 2 years" or even better "you need to watch it for 10,000 hours".

See - it's simple - just give up your job for 2-5 years, have no income at all and watch the DOM.
Honestly, the people giving out this sort of advice are absolute idiots. Do you think a real prop shop gives
someone 2 years on site without making a trade? Do you think there are many people on the planet that are in a
position to watch this for 2 years with no income? Even when they give you this 'sage advice' they don't even tell
you what to look for. It's just regurgitated nonsense they read on another forum.

This information just isn't readily available. In terms of Tape Reading, I have not seen anyone other than
Joel Parker actually explain what it is, what the benefits are and how/when to apply it. In terms of very specific
Order Book scalping techniques used in prop shops, I haven't seen anyone other than John Grady explain it.
This section is a primer and does not replace what these guys have.

I will now attempt to set the expectations.

No retail trader knows whether price will tick up or down next. The only trader that knows this is the guy
with deep pockets that can throw a few thousand contracts at the market. He knows it'll tick up because he's
placing an order that will take out the next 2 offers. The DOM is not a magic bullet that will tell you, without
uncertainty, what will happen next. Your reading of a chart/Volume profile is telling you where something might
happen. The Order Flow tells you IF it is happening.

Setups are of interest, especially those in the "No BS Day Trading" ebook but this isn't just about
setups. It is about reading the flow and sometimes that means one side just fades away. Reading the flow is
something that needs experience. I can look at the ES and at any time think "wow, this is moving fast" or "this
thing is crawling at snail's pace". The reason I can do that is because I watch it every day. I can't give you that
experience. Still, the flow and the change in flow is what will give you a large percentage of your entries. Joel
Parker described this to me as waves washing up on the shore. You can walk along the shore and predictably
tell where the waves will come and of course, sometimes you will get your feet wet when you misjudge it.

If the flow is important as you will soon see, then for something to turn around, it must first stop flowing
in one direction and start flowing in the other. This can happen suddenly but quite often the market turns at a
pedestrian pace. Sometimes there's a big spike up at the end of a decent up move which exhausts us of buyers
AND creates a vacuum below, this sets the stage for a rapid reversal.

The best entries are those where you get in when the flow stops in one direction. Later you will see
traders jump on board in the other direction. When the market is in a short term move upwards you will often see
a price that no-one wants to buy. It may make 3 or 4 attempts at this price but no-one wants to buy there, no
trades go through at the inside offer. You are not the only one seeing this and you are not the only one reacting
to it. You may see a large player start selling straight away or the selling may build up gradually. In theory,
jumping on a trade when you see the flow stop in one direction is a higher risk trade. In theory you have more
chance of the trade going against you if you wait for size to come on board in the opposite direction. On the

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other hand, if you wait for other traders to move the market to confirm the reversal, that will move the price
before you get chance to enter. Confirmation comes at the cost of ticks. You will therefore be getting into the
market at a worse price and this also means your stop needs to be larger. Personally, I try to get in before the
sheep jump on board.

When you start your trading session, expect it to take a few minutes to 'tune in' to the Depth & Sales. I
hate to be 'touchy-feely' about all this but there absolutely is an element of developing a gut feel for the action.
It's like a sport that you improve with over time. You don't get better at tennis by calculating angles and velocity
and you don't get better at Order Book Reading that way either. You practice, you get better. You will get to a
point where you just know that the market won't go any higher. You can accept this in other aspects of life - such
as not putting any conscious thought into driving and you need to accept it here too. Just like driving, it's not that
hard. So, when you turn on, relax a bit, focus on the Depth & Sales and give yourself time to 'get into the flow'.
This doesn't mean you'll be immediately trading, it just means you are reading the Depth & Sales, getting into
the swing of things so that as the opportunities come, you are already tuned in.

What to look for

There is no exhaustive list of things to look for. You may recall the following image from section from
lesson 5 on liquidity.

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Every trade is a buy and a sell.
The limit orders are 'liquidity' and market orders eat that liquidity.
Price moves up when the inside offer liquidity is eaten by market buy orders.
Price moves down when the inside bid liquidity is eaten by market sell orders.
Some limit orders are fake, all market orders are real.
Some people 'hide' limit orders by adding more contracts to the inside bid/offer as market orders eat
them.

That is it. Everything you see on the Depth & Sales is going to be based on those fairly simple facts.
There's an infinite number of ways any particular move could play out but these facts remain regardless.

Your goal is to 'make a story' of what you see happening and then trade accordingly. Each story will be
slightly different. The danger in giving you 'setups' is that you look for these things and these things alone
without considering the people behind the order flow. I'm going to tell you what to look for but understand that
this is just a starter for you. It's not a mechanical ruleset. It's an attempt to put you on the path of gaining your
own insights. Note that I will not be repeating any of the No BS Daytrading setups here.

One of the easiest things to start looking for on the Depth & Sales is "Buying Pressure" and "Selling
Pressure". Obviously, if you can recognise buying pressure and selling pressure, then you can also recognise
when it's absent. This is a term that a lot of people throw around with the expectation everyone knows what they
are talking about.

Here is buying pressure:

In this image, we have moved up from 138.39 to 138.45. What had happened on the way up was that
every offer had been hit with market buy orders and price had ticked up through each offer. We can see that the
first 2 levels were pretty weak, 17 and then 33 contracts traded. As we moved up there was more liquidity on the
offer and we saw 186 and 294 contracts traded there. It took only 2 contracts to get through 138.43 and then
195 contracts to get through 138.44. On the bid side, you can see that during this up move, there was relatively
little in the way of market sell orders. This is the sort of activity that signifies buying pressure. It won't last
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forever,but this is a sign of strength and something you do not want to short against. It may pause & then
continue. Don't take the first pause of the end of the move up and sell into it.

If you can initially spend some time just looking for buying and selling pressure, getting used to which
way the market is moving, then you'll find it easier looking for the reversal signals later on. You will also get a
feel for when buying pressure is building up before a move, especially on a thick market like the ES.

Now - there's going to be some contradiction here. I will mention 2 scenarios where you have a large
quantity on the offer above you. In one case it leads to the market going down and in another it leads to the
market going up. You are reading a story here and every story will be different. I personally like to see signs of a
reversal when the market is pulling back or at the top of a small range. The market is easier to read at that point
and that is why this course focuses on pullbacks. Of course, you can graduate to trading reversals in a trend.
This will take a lot more experience and you'll need more than this course offers. Again, I would advise hooking
up with Joel Parker if this is where you want to go.

1 - Price moves up and you see a huge offer. When you get closer the offer disappears. This is
obviously a fake offer. This is quite normal. The large offer may re-appear when price moves down again. What
you should also look for as well is the action on the bid side as we approach that offer. If you see an iceberg on
the bid side (e.g. inside bid is originally 500, then 1000 contracts trade against it but the inside bid is now 450),
then almost certainly this is a sucker play being set up. Someone puts the offer up and that 'scares' people into
placing sell market orders but they don't eat the buy side liquidity. Sure, it may move down a tick or two but
overall there is a LOT of market selling hitting those bids and the bids keep refreshing. Not only is that big offer
above fake, it's there specifically to make people sell. The guy with the fake offer above is the same guy with the
iceberg orders on the bid below. You are selling to him because of his big offer above. This sort of thing mostly
goes on near the high of the day or a prior swing high. He knows people are looking there for signs of a reversal.
In my experience, you can't trade into these large offers without seeing the activity on the opposite side. Short
term - market will likely go up.

2 - Price moves up to a point and no-one buys there. It comes down a few ticks and moves there again,
no-one buys. Each time that price becomes the inside offer, no-one throws a market buy order at it. Maybe you'll
see a few contracts go through but no real volume. The inside offer itself might not be very large. In fact, it is
more significant when that inside offer is small but nobody wants to eat it. Short term - market will likely go
down.

3 - Price moves up into an 'average sized inside offer'. People keep buying but price no longer moves
up. We might be ticking up on 3-400 contracts on average and now we see 1000, 2000, 3000 hit the level. This
is the iceberg order. It's very simple. Somebody wants to sell a lot of contracts. If he puts up a large offer, it
might scare people away (see setup 1 above). Instead, he offers 400 and as people consume that liquidity with
their market buy orders, he adds some more. Now - someone might throw 1000 contracts at him and we see
price tick up momentarily because that was more than he had offered at that time. No problem, he just offers
more and price ticks down again. Short term - market will likely go down IF this coincides with the setups
we have discussed on this course. Watch how many times this happens in a big move up on the ES and
we just carry on up. On the ES, an iceberg alone is not good enough reason for a trade.

4 - Price moves up and there's a huge offer above. It scares people. We see it get within 2-3 ticks but
people stop buying. The offer scared them off. I've seen this on stocks too. You'd be in a long trade and
suddenly you'd see an offer with a Market Maker id of UBSS (UBS Bank) pop up a few cents higher. All of a
sudden every buyer is running for the doors. In this scenario, you won't see the iceberg on the bid and
obviously, the move down will be more sudden because there is less bid side liquidity to absorb the market
selling. Short term - market will likely go down IF this coincides with the setups we have discussed on
this course.

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5 - Price ticks up once every 3 seconds, then it slows down. Each successive tick up takes longer. You
may also see the quantity of contracts to tick up increase as it moves up. There could be two things happening
here. If the market is ticking up more slowly but there's no increase in quantity of contracts to tick up, it means
the buy market orders are slowing down. Less and less buy market orders are being thrown at the market in any
given time period. On the other hand, if the number of contracts to tick up through each level is increasing, then
it means that the sell side liquidity is thickening up. Both are good pointers to the downside but if the sell side
liquidity is thickening up, then that's a stronger signal in my opinion. Short term - market will likely go down

This is enough to get you started. Just remember that you are reading a story which will be slightly
different every time.

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Part 14 - Using "Levels"
You have probably noticed that my charts have a number of horizontal lines on them. The lines I have
on the chart are:

1 - Overnight High
2 - Overnight Low
3 - Yesterdays Close (4:15pm close)
4 - Todays Open (9:30am open)
5 - Yesterdays High
6 - Yesterdays Low
7 - Week Open
8 - Month Open

I also mark off significant swings that occur. I do this by pulling up a 4 hour chart once a week and
marking off the significant swings highs & lows. There's a feature in Ninja that makes these lines 'global' so that
these then appear on my intra-day chart as we approach them.

I'll go through the rationale of marking off these levels on the ES:

Overnight High/Low - The high and low of the Globex session that precedes the 9:30 am open marks
out a high and low that can act as reversal points. On low range days, you can expect price to stay within this
high and low.

Yesterdays High/Low - Again, these are very common reversal points

Yesterdays Close - This is an interesting level. There are a lot of people that play "Gaps". The gap is
the difference between yesterdays close and todays open. The Gap closes at yesterdays close and again this
can make it a level at which we see a reversal as people close their trades when the gap closes.

Todays Open - Again, this can be a reversal level but less so and for different reasons. Obviously, if we
are really going to move up on the day, then this is an area that needs to be defended. If it drops through the
open, people might start biasing the downside.

Week/Month Open - Areas where longer term institutional players may be looking to put in some sort of
defense based on the way they get paid. If someone is net long for the month and their bonus relies on them
remaining in profit, then they will not want to see price dip below the opening price for the month (and to some
extent, the week).

The interesting thing about horizontal lines is that you can put them on a chart at random and those
random lines will appear to 'hold' the market. On the ES, 20 point days are not unusual. 20 points = 80 ticks.
The week/month open may not be within that 20 tick range, so let's discount that. Still, the other 6 numbers may
be within the range. Let's say we draw 6 lines in and we also give 2 ticks either side of each line because we
don't expect an exact bounce. Each horizontal line is at a tick and the 2 ticks tolerance around them makes that
5 ticks of coverage per line. 5 multiplied by 6 is 30, so we now have 30 out of 80 ticks potentially covered or
37.5% of the range covered in lines. If the ES puts in 4 intraday swings, what is the chance that one of them will
NOT occur at one of our lines?

Lines can be very deceptive and that is why it's best not to trade off horizontal lines on their own. Still,
there is a good reason I put these lines in. If I see a bounce off one of these lines, I will be more inclined to think
the market has put in a short term reversal. For example, if the market is moving down and we bounce UP off
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the overnight low, I will not expect this to be a pullback. I will not play it as a pullback and I will start to consider
longs. Of course, if it's a Day Trader day, I will still want to see the Cumulative Delta on my side. This does not
override anything you have read so far. It just adds weight to the decision.

For other lines, those ones I draw on a weekly basis, this is where many traders are looking at "Support
& Resistance". When you reach a support/resistance point, you have three groups of people that are looking to
make a play:

a) Reversal Traders that expect price to 'bounce off' the support/resistance level.
b) Breakout Traders that expect price to continue if it breaks a few ticks beyond the support/resistance
level.
c) Savvy traders with deep pockets that 'game' traders a & b

I look at a 4 hour chart to mark out these "Support & Resistance"' levels. Mostly because the higher you
go the more people will be looking at the level as it will be a level on that chart and all lower timeframe charts.
My plan of action at these support/resistance points is:

DO NOT ENTER A NEW TRADE

Seriously, there's too much messing around in these areas. It'll move up to a resistance level, move
down off it to get the reversal traders in. Next it'll move up to get the breakout traders in and stop out the
reversal traders. After that it'll move down to stop out the breakout traders and then it'll do whatever it was going
to do in the first place before all the gameplay started. It's worth watching these areas and drawing your own
conclusions about them. If you wait out the gameplay AT the level and wait for the market to break one way or
the other, you should be a little more confident in taking a continuation trade IF you see sheep coming in on
board.

In theory, you could use any method of drawing horizontal lines on a chart (Fibonacci, support &
resistance, value areas, points of control etc.) and then use the order flow as a confirming factor to trade the
level. Personally, I don't see the point. These areas are very well known and they give larger traders the
opportunity to game the people that play these well-known levels. There's too much risk there in my opinion.
Mostly it's a risk of getting wiggled out of the trade even if you are right. There's plenty of movement in
continuations away from these levels to make decent profits.

Here is an example from yesterday. If you look at this chart from left to right, you can see that from the
Globex open to the regular session close - price ended up pretty much where it started. Delta ended up about
10k higher but that's fairly insignificant. There were plenty of chances to make money but the overall move for
the day was + 4 ticks.

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We can see that the overnight high was also the month open, which is why the colors are a bit unusual.
When the day opened, we took a move up without any real shift in cumulative delta. At around 10am, sellers
jumped on board and we can see this gave us a nice move down, through the overnight low, with the first real
sign for the day of traders jumping on a move. We then pulled back up to the overnight low, without much shift in
the delta. We then moved down to that solid blue line just below 1264. Let's look at that blue line in context.

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We can see that for the past month, this area has been one that we have failed to push up through a
number of times. Over on the right we can see that we gapped up above that area when the markets opened at
the start of 2012 (the orange line is the January Open). We had an area of 'resistance', we gapped up through it
over the New Year and now it has become 'support'. I don't play the level but if a reaction occurs around the
level, then it's going to add some weight to a continuation trade. Even without the level, we could see the move
up in delta and we had plenty of reason to get long on the first pullback.

There would have been a lot of people watching this level. Still, look at what happened when it got
there:
1 - Reached 1263.75
2 - 'Bounced up' to 1265.25 - At this point, how many traders would be long?
3 - Moved back down through the level to 1262.75 - How many of those longs stopped out? How
many breakout traders entering?
4 - Then reversed back up for most of the rest of the day - Breakout traders stopped out!

For me, it's not really worth entering at a major level like this but once the direction becomes clear, you
can lean on the fact it was a major level and have confidence that the subsequent move will be an extended
one.

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Part 15 - Setting Up NinjaTrader & Other Products
This section details how I set up NinjaTrader.

Some of the tools I use were created by me and some came from the elite section of
http://www.bigmiketrading.com/

The producers of the tools such as GOMI CD have decided that these tools should only be available on
the elite section of the forum and there is a $50 charge for that. I'm not going to reproduce those tools here. I am
a software guy and I don't like people pirating my software, so I'll treat those guys as I'd like to be treated myself.

General Setup

In terms of general setup, I do the following:

1) Set my PC to Eastern Time. I've been doing this for years now, since well before I was using
NinjaTrader. I set my PC clock to Eastern Time so that I don't have to bother about trying to remember the time
differences between Bangkok and New York. I know that if my PC says it's 9:30am, then it's open time in New
York.

2) I always have a clock application open to display a digital clock somewhere convenient. I am
currently using DS Clock. The reason for this is that sometimes the market pauses and no trades go through. Or
maybe you have a filtered time and sales with trades over 50 contracts that hasn't updated for a while. When
this happens, I am usually looking at the clock to see how much time has elapsed since the last print. If I see the
last print was a 500 contract buy market order it's bullish. If it's been 10 minutes since that order, it's irrelevant.

3) I set up my horizontal line properties so that any horizontal line I add goes onto all charts with the
same symbol. To do this, go to a chart and hit "F6" to go to horizontal line mode and click on the chart. Once the
line is added, right click on it. You will see the following window.

Ensure that in "Attach to:" it says "ES nn-nn (All Charts)" and then click on "Set Default".

All horizontal lines you add will now appear on all charts for that symbol.

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4) Create a new session in NinjaTrader Session Manager (NinjaTrader Control Center -> Tools ->
Session Manager). Create a new Session Template with the following times:

You can use any name, you don't have to use mine!
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Main Chart

I use a tick chart for my main chart. I do not use candlestick charts. You don't have to use the same
charts as me but my charts look like this:

The white on black colors I do think are important. Any light colored backgrounds is going to play havoc
on your eyes as is working in a poorly lit environment. I set my chart up as follows:

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The Session Template is important. This is used by the JTLevels indicator to draw the levels in. It is also
used by Ninja to show the 2 session break lines. One at 16:15 and one at 9:30.

There are 3 indicators on this chart:


1 - JTLevels - Shows the levels that I use (see lesson 14)
2 - GomCD -Cumulative Delta - absolutely mandatory
Installation File is available on the Big Mike Trading forum here - http://www.bigmiketrading.com/elite-
circle/6802-gomrecorder-2-a.html (elite access required)

3 - PriceActionSwing - shows the swing sizes for each swing high/low


Installation File is available on the Big Mike Trading forum here -
http://www.bigmiketrading.com/ninjatrader/1272-priceactionswing-discussion.html (elite access required)

I use the default settings for the JTLevels indicator. If your PC is are not on EST time zone, then change
the "Day Start Time" to the time the US day session starts in your time zone (9:30am EST).

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For GomCD, I use the following settings:

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Note that the "Write Data" is important. It'll write historical CD data to your "My Documents" folder so
that you have historical data when Ninja restarts. If you do not set this, then there will be no history.

For PriceActionSwing, I use the following settings (basically, switching almost everything off):

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Secondary Chart

I use this chart to hang the Jigsaw Indicators off. I don't watch the chart at all. I do this because
sometimes I want to refresh the main chart but I don't want to re-start the Ninja indicators.The chart settings I
use are as follows:

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The most important factor is the Session Template which is CME US Index Futures ETH. I want my high
& low on the Depth & Sales/Recon Tape to be defined by the session since 16:30 the day before, not just the
day session.

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As you can see, for the ES I am focused on Depth & Sales and Reconstructed Tape. I do actually have
Summary Tape open but that's just going to be overload for most people. I like to glance across at Summary
Tape to keep my eye on the delta number. My advice is that if you use Depth & Sales, then open Summary
Tape and keep it minimized but with the alerts on. You will notice that I use the split volume profile and this is
something that I clear out once we bounce off a key area. I like to do this so that I can see what's happening for
the current move. I have found little use of the Consolidated Volume Profile on the ES but I do use it on the
treasuries.

Depth & Sales Settings

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Reconstructed Tape Settings

Summary Tape Settings

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Relative Volume Chart AKA The Cumulative Sheep Index (CSI)

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This is the chart we use to show relative volume. This chart has 3 panels, the top panel shows the price
and as you can see, that has been compressed. The chart settings are as follows:

The key elements here are the "Days to Load" - you can set this to any value and that will be how many
days we look back for average volume. The other is the Session Template. I prefer to use the Full session
including the Globex.

There are 2 indicators on there, one is the Volume and the other is JTRelativeVolume. Add this indicator
with the default values.

The indicator is here: JTRelativeVolume.zip

Browser

I set my browser (Opera) so that it always opens on the Forex Factory calendar page & the Talking
Forex page.

The first thing I do before I start is take not of the news times and then put the headphones on so that I
get the news as it comes:

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The Forex Factory calendar is an excellent free resource.

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Part 16 - July 2012 Update
Well - it's been 7 months since I first put fingers to keyboard and started writing this course.

I think it's worth pointing out a couple of other resources for ES traders that will work very well with the
methods in here. As you know, I'm not a fan of trading reversals; I'd rather get in after the reversal.

Still, I do take trades off the open and they are reversal/pure 'order flow' trades. I have been taking
these trades for a while now, not really understanding (or caring) why the opportunities occur.

Enter Jim Dalton.... One of the Jigsaw Customers put me onto these Webinars, he felt they gave a
different perspective on the type of trading I do and I agree. This complements what is in this course.

Jim has a number of free Webinars on this page : http://www.jamesdaltontrading.com/webinars.php

Specifically, I would recommend you take a look at the Webinars with the following titles:

The Importance of Understanding Overnight Markets for Short-term Traders - Will give you an idea
of how the overnight action can impact the early action
SFO Magazine Webinar: Identifying Day Timeframe Trade Opportunities - touches on the 'early
trades' above but also goes over how you can identify other opportunities.

At this point, it's worth considering how you could go about taking larger chunks out of trends. How
would you approach that? In my opinion, that is a long term project. Your short term project is to get profitable
and that is what this course is all about. Once you are profitable, you suddenly free up a lot of time. That is time
you can spend looking at how to analyze the markets for larger moves and move from being a reactive trader
(which is what this course is all about) to being a little more pro-active.

I think the approaches of FT71, Kam at L2ST, Jim Dalton are all based on common sense. The common
theme is that you establish value and then trade around that. They all provide a discretionary framework for
analyzing and understanding the action. Whilst I don't think you should run before you walk. There is always
room for further development as a trader.

The first priority though is to start generating some revenue, not to become a walking trading
encyclopedia before you make your first trade.

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Lesson 17 High Liquidity 2 Sided Days/Summertime Chop
This course has been mostly about price action so far. I intended to completely omit anything related to
order flow because this really is about trade location. With the action we have seen on the ES in early 2013, it
really is an omission to not discuss this sort of activity.

As at the time of writing this section (March 13th 2013), the S&P e-Mini (ES) futures market has slowed
down considerably. For those trading off the charts, there will be a different feel to the market but based on
price action alone, its difficult to define what is different about the it, apart from the fact the range of each day is
really narrow.

The volume is pretty reasonable, around 2 million contracts a day but some days it just feel like the
market doesnt get anywhere. So what is the market doing right now?

According to market auction theory, the market is usually in one of two modes Price Discovery and
Price Acceptance. Price rejection occurs when the market isnt in balance, where market participants dont
agree on price. If lots of sellers think this is a good price to sell but there are no buyers that think its a good
price to buy, then price will move down to discover where the buyers are. This is essentially what Price action
traders call a trend.

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Those that have been trading for a while will know that often the market will trend up and then violently
reverse down with little warning. This sort of price action is familiar to day traders as it happens most days. This
uptrend to downtrend violent switch is known as Price Rejection. Price moves up to a point looking to find
balance between buyers and sellers but instead it finds too many sellers or too few buyers as it moves up and
the price is rejected. This is typically a rapid reversal with very little volume traded at the top. This lack of volume
also makes it something known as an LVN or Low Volume Node and explains why people that use volume
profiles look for LVNs to tell them where the market may again reverse.

What we have now (March 13th) is a market that is moving up and trading a lot of volume. The volume
traded makes it an HVN (High Volume Node). Buyers and sellers seem to agree on the price. This is known as
price acceptance. This agreement in price will not be at a single price but over a range of prices. Whilst this is
agreement on price, it does NOT mean that this is the top of the market and that price will now move down. Its
simply that for whatever reason lots of buyers AND sellers want to trade here. Its normal to have a 40-60 point
range after a good up move and this can last days, weeks or even months. That is not what is happening right
now. Right now, we are moving in little baby steps with a lot of volume going through but very little move. To
those day trading, this can cause some very narrow range days and it will often cause their existing trading
analysis methods to fail.

The important thing to watch for on these days is value. Value is the range of prices that is deemed
acceptable. Price will rotate around value. As it gets to the top of the range, it can be seen as expensive and
that will make sellers more inclined to sell and buyers less inclined to buy. As prices get to the bottom of the
range buyers will become more interested and sellers less interested. Some days will stay within the previous
days value, others will mark out their own value range (often overlapping the prior day) and trade around that.

So how do we identify these days? The title of this topic contains the term 2 sided trading which is a
term that is often used but not really explained. Two sided trading simply means that both buyers and sellers are
active at around the same prices. Both sides seem to agree on price and the price itself doesnt really move
around much. This is often accompanied by higher than normal volume. On a trend day, we also see higher
than normal volume but the difference is that a trend day is more one-sided, we have something driving a move
and one side is dominant over the other.

What you will tend to see on two sided days is this:

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If you look at the depth above, you will see it is thick on both sides.Those that watch the ES on a regular
basis will know that the volume of limit orders on both sides of the market is quite large. Most of the time, you
just have a few levels where we are in excess of 2000 contracts. This is close to the high of the day and of
course, we do expect the offers to be stacked there but still this picture is exceptional.

The other exceptional thing is that most of these bids and offers are real. Normally, as the market
moves through a level well see on average 5-600 contracts to eat through that level. We may see 1500 bid but
600 trade and 900 get pulled. On the 2 sided days, we will see 3,4,5,6 or even 10,000 contracts trade at a level.
Here is a footprint chart from 10:00am -> 11:00am on the 13th March, 2013.

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his is a 5-range chart, so it prints a new vertical bar when we move more than 5 ticks. For those that
dont know the footprint, the numbers in the red background represent sell market orders hitting the bid and
those with a green background represent buy market orders hitting the offer. As you can see we are moving a
few ticks, trading 1000s of contracts at a level and then moving a few ticks more, trading 1000s of contracts at
a level and so on. This is 2 sided trading.

In times where we dont have this 2 sided trading, we often see the market move through each level with
5-600 contracts trading. Of course it doesnt move one way and we see more than that on the footprint as price
stair steps its way up three steps forward, two steps backwards. On a day where we see 5-600 contracts
moving through each level, seeing 3000 contracts trade at a level is significant and represents absorption/a
change in behavior. This is often enough to give us a signal to enter a trade. When 3,000 contracts trade every
other level, we can no longer use that sort of absorption volume as confirmation, it is no longer exceptional. We
have to adapt.

So what is value exactly? There are 2 main measures of value that are commonly used. Value can be
defined as either where the bulk of trading occurred in terms of time or in terms of volume.

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This is the market profile from 14th March 2013. The letters are the market profile and represent the
trading range with one new letter per 30 minutes. The day starts with the letter D. The purple horizontal bars are
the volume profile and represent the number of contracts traded at each level.

The magenta vertical bar shows where 70% of trading occurred in terms of time, so 70% of the day was
in that range. The black vertical area shows where 70% of the volume was in terms of volume, so 70% of the
volume was in this range. The idea is that these Value Areas represent the location that most trading took

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place. As you move above value, those prices are considered expensive and as you move below, those prices
are cheap. To be honest, it does not really matter which of these you use in my experience.

This is also a volume profile:

This is the Depth & Sales. We can see that there is a step in the profile at 2696 and another up above
at 2707. Within that range there are a lot of contracts traded and outside of that range there is very little. This is
essentially what people talk about when they discuss value. POC or point of control is the level where most
trading occurred. Chances are that when price reaches this area again, there will be lots & lots of 2 sided action.
VAL is Value Area Low and VAH is Vallue Area High. These denote the extremes of value. We can have one
value area for the whole day OR we can trade around one area for a while, move up a bit and trade around
another area for a while.

Eventually, the market will become imbalanced again. Sellers or buyers will be out of proportion to each
other and the market will move elsewhere and the volatility will increase. If we want to still trade this 2 sided
action, we need to adjust our strategy.

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On these days, you have to presume that breakouts are fake. If the market is trading around value, then
of course value can move through the day but unless something drastic has happened fundamentally, why
would a breakout on these days cause a 10 point run? As prices move away from value, sellers should be more
inclined to sell and buyers less inclined to buy.
Your targets for trades on these days should be smaller. It might also be wise to consider an all in/all out
strategy if on ordinary days you scale out, especially for pure range trades.
There will be breakouts but they will be less frequent and will more than likely result in more churn in
another area.
The market can still grind up overall and you can still use measured moves to enter on a retracement,
you just need to have a really good entry off the order flow to do that and you need to manage the first 4 or 5
ticks of the trade very tightly. When it churns up on these days, itll be move-range-move-range-move-range. It is
still safer to play the ranges but if you suspect it will churn up, just take a trade off the bottom of the current
range and try to hold till it moves out again. This will be easier if you scale some out on the opposite end of the
range to give the trade some buffer. This is not a break out trade as you are entering at the bottom of a range,
not the top.
The prior days value area, prior days range are key on days like this. If we open within yesterdays value
will there be any move outside of it? If we open outside of yesterdays value will we be able to get back into it?
These will be the points at which reversals occur.
Do not enter long trades directly under the POC or short trades directly above it. Chances are this area
will be very slow and painful to get through. If you scale out, at least you want to be out some of your position by
the time you get to this level.
Keep your eye on the profile as it develops but still keep an eye on the swing sizes.

The one strategy that can also be used on these days is DONT TRADE. We will see more days like
this in September when we go through the Summer Dolldrums. if you have not yet experienced this, you will
see a lot of 2 sided trading with extremely narrow ranges. It doesnt last forever and it really is a good time to
book a vacation.

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