Today I wanted to give a brief overview about risk and reward with one of my favourite setups.

I love it when price runs through the highs or the lows.

There’s a few reasons why I like it, but the main one is that it gives us a great risk / reward ratio with our trades.

Here’s an example of a good spot and how I trade it.

On the chart we can see that price has pushed up and made an early high, only to then pullback.

As it pulls back I’m immediately watching the volume profile (or market profile) to see where there are a lot of contracts trading – as that’s a sign that there is continued buying.

It is good to target the little “ledge”, that is created in the volume profile as that’s a sign of buying there in the past and we can see that on the chart.

The next thing I like about this spot is that when we run a high or low, we often get a stop run.

People like to target the highs and lows as places to pick tops and bottoms. As a result there are stops there.

So I know that if price can make it up to that point we will likely get a test of that level and it might just run through for even more “reward ” so to speak.

I use a set stop loss of 3 ticks for my market. So my risk is clear.

In this example if we hit the highs I stand to make 8 ticks, but more likely if it runs the stops I most likely stand to make 10+ ticks.

So as it stands I’m looking at a better than 3:1 spot.

And that’s pretty nice in my book.

In this case we had more than 100 contracts trading at the volume profile “ledge” so it was a good sign to get long.

And then after a few minutes we got price to run all the way back up to the highs – as we hoped it would.

A nice little high probability – solid risk/reward trade.

 

Good Trading.

As a professional trader, I like to trade the market open predominately as there’s the most volume and therefore the most opportunity.

However as we head into the close, at certain times there can be some nice easy trades.

Sometimes larger traders have to close out positions and this can give us a chance for some quick ticks if you’re ready.

This was the market headed into a long wend. This kind of thing is also good at the end of the month, end of the quarter etc, when there is more urgency for larger traders to exit their positions.

Today in the final 30 minutes there was buying starting to come in at 5516.

We had time to get set and the buying ran right up to 21 before it slowed giving us an exit.

The market fell away and the buying came back at 5518 and ran up to 5523 where is stayed for a while giving us another nice trade.

Overall 10 ticks headed into the close, just for waiting around all day.

Not too bad

 

Good Trading

When a market is actually closed before the open then there is the chance to look for a gap and the potential for that gap to close.

This gives us a trading opportunity.

In the era of 24 hour electronic markets, this isn’t going to work with all products.

However if your market is closed then keep an eye out for a gap.

Here’s a couple of quick tips:

If the market drifts on very little news then look for a test of the “gap level.”

If you’re headed in the direction of the gap – there’s a very high probability of a test of the level.

If the gap level is just outside the recent high or low – look for a break of the high or low and a test of the gap.

Gaps don’t always happen and they don’t always work.

Just keep this one up your sleeve in your trading toolbox.

Good Trading

You might know it as the depth of market, the DOM, the order flow, the order book, the tape, or just the book – but it’s all the same thing.

The DOM is just a way of showing all the buyers and sellers and their respective limit orders ready to be executed.

The buyers (the bids) are on the left hand side and the sellers (the offers) are on the right.

The way I remember it is buy low, sell high.

The idea of trading with the DOM is also a relatively simple one.

If there are a lot of buyers and not many sellers – logic would suggest that prices will then rise.
Conversely if there’s a lot of sellers and no buyers then price must fall.

Basic supply and demand.

However when new traders first take a look at a DOM, it’s quite confusing and many can get a bit overwhelmed.

One of the best things about charts is their simplicity – however by nature they are a representation of things that happened in the past.

And of course we’re interested in what will happen in the future.

So when we use the DOM to trade we are basically looking for places where there are more buyers than sellers or more sellers than buyers.

The simple way to do this is just look for a bid (in the case of buying) or an offer (in the case of selling) that stays there and can’t get taken out.

Sometimes it can be as simple as there being a large buy order (bid) sitting right there for all to see, however that doesn’t happen so much these days as people have wised up to it.
So you need to look a bit deeper.

For instance if price continues to trade at 5493 – where there are many market orders getting executing at the bid – but the bid keeps on refreshing – then you know there is a buyer there.
It’s really as simple as that.

However it does take a while for your eyes to get used to spotting all the buying and selling.

Practice for a couple of days and in no time you’ll be able to see all the price movements right down to the tick and then you’ll really be able to trade like the pros.

 

Good Trading.