One of the most important things to do before entering a trade while trading intraday or swing trading is to determine the context.
Is the market in a balance area?
Is the market imbalanced to the upside?
Is the market imbalanced to the downside?
Knowing the context first makes it easier to get the entries and exits right and helps us avoid getting caught offsides as often.
Balanced market example (ES)
In the example below the market opened inside prior day value and stayed within prior day range the entire session.
It was also within a high volume area for a HTF profile. The best strategy is usually going to be to fade the extremes while the market is balanced.
There are many ways to determine the market context and to avoid being caught offsides, but I find that volume profile is one of the most effective.
I don’t look at price charts much at all. I mainly use volume profiles and the DOM to determine the context and how the positioning is panning out intraday.
The trapped inventory from moving outside of these volume distributions is a large part of what is fueling intraday moves. We want to take advantage of the positioning of these trapped market participants while avoiding being on the same side as them.
Imbalanced to the upside example (ES)
In the example below ES (S&P 500 futures) started out in a balance area mainly inside prior day value.
Later in the session the market left the balance area and started carving out volume higher before eventually forcing many shorts out.
When the market is imbalanced to the upside then we want to primarily be looking for longs.
Imbalanced to the downside example (ZN)
The example below is from ZN (10Y US Treasury Notes) and this move started shortly after the ISM Services PMI data release at 10 AM EST (Feb 5th).
After blasting through the micro balance area lows of 111’01.50 and showing strong bearish flows at the new micro balance area lows of 110’27.50, we expect to often see a bit more downside before putting in the low of day.
When the market is imbalanced to the downside then we want to primarily be looking for shorts.
As seen below, we ended up seeing a bit more downside. The market ended up setting the low of day 4 ticks lower than shown below.
Wrapping Up
In general we want to be fading extremes when we are inside balance areas and we want to be looking for longs/shorts when we break of outside of balance areas.
We don’t want to just rush into trading imbalances though. We want to see strong buying/selling flows when we break out of these areas, and it’s typically better to long/short the backtest instead of trying to catch the breakout early.
I plan on posting much more volume profile content in the future so be on the lookout for that. Volume profile is one of the main things I use, and it has been a game changing tool for many traders besides myself. I mainly use the DOM and volume profile above all else. I’ll also be posting DOM content in the future as well.
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