I assume you are at the intermediate level in the market profile concepts and you are well aware of the day structures and it’s characteristics. If you aren’t, then you must study the basic concepts of the market profile to get the most advantage of this article. Learn the basics of the Market Profile: Click here
When I started my journey as a profile trader, I used to have a lot of confusion and conflict with the technical concepts of market profile. Slowly I started gaining the conviction on the trade setups that I was comfortable to trade. However, when I started monitoring my trade results, the reward factor was not that great.
Shockingly I found a pattern in my trade style and around 75% of the time I was opting trades only on neutral days or non-trend days. And when I reviewed the overall market moves in that period, I noticed that I had missed many normal variation days! Where the market extended the range in one side direction ( 80% of the IB Range ).
That’s the huge knock-on to my thought process. As traders, we are always demanded to think in probabilities. Just think about it, if I keep on opting the trades on low probable and low conviction day structures(Neutral or non-trend day), how can I increase my profitability factor? It’s certainly impossible. Profitability can be increased only when I get good rewards on what I am risking. Image 1.1 shows the Probability of occurrence and conviction level of day structures.
It was apparent for me that I must gain a conviction on Normal Variation days to improve y profitability factor. There are a lot of benefits in mastering NV days since it has a high probability of occurrence and a good conviction level. It really makes sense to work on conquering these days.
Here comes the challenging phase of my trading career, on the one hand, I need to find a way to trade NV Day and in another hand, my trading style which was inclined to Neutral and Non-trend days had to be changed.
I started Backtesting NV days for about 5 years and started observing it in the live market. I found patterns or information that were repeating in the past and the current market. And that’s it; I found a way to trade NV days with good conviction level. However, there are few cases where I am still missing trades on these days but the repeated patterns which I have observed generally offering excellent rewards for the risk I’m taking in each trade. In this article, I have attempted to present this information.
Well, let’s begin.
To succeed in this dynamic market one should have clarity and conviction on three important aspects of trading, and they are:
1) Direction. 2) Entry location and method. 3) Exit method.
Before discussing how to trade the NV days, let us understand the characteristics of it. Below checkpoints shall converge to consider any trading day structure as Normal variation day, and they are:
Medium IB (Initial Balance) range.
Range extension in one direction of the IB.
The range extends about 80% of the IB (Most of the time).
By keeping the above points in mind, we will proceed to the next steps. We will conduct this analysis after the formation of Initial balance. In our Indian market, which is at 10:15 am.
Step-01: Identification of Medium IB range.
We should be able to distinguish IB range as either medium-range, small range or large range. Market Profile concept describes that whenever there is a medium IB range, either Normal variation day or Neutral day can be expected. And this also explains in general that there will be a 100% extension of IB on NV days.
Now let’s take an average range of last 10-day’ s(Two weeks) for example the present Daily ATR of NIFTY is 126 (Refer image 1.2).
Now we know that the average range of NIFTY from the last two weeks is around 126 points. To identify medium IB in this range, we need to do the following. Firstly we divide 126 by 2, which approximates to 63 points. Secondly, we divide 126 by 3, which approximates to 42 points. Now any IB which falls within the range of 42–63 points can be considered as medium IB Range.
Step-02: Defining the direction.
Now that you have learned how to identify medium IB range. Let’s proceed to define the direction for the day.
Considering any trading day, at the end of the day, there will be an unfair high and unfair low. In general, the high or the low of the day occurs in the first 60min of the day (70% Probability) and the first 30min (50% probability). As we demand the highest probability, let’s consider the 1st case where the market makes high or low of the day within the first 60min.
Image 1.3 shows an example of Up-trend formation for the day, where the second 30min candle is broken the first 30min candle high hence the low of the day is formed and the market will not return to the low that formed in first 60min(70% probability). This established direction will be negated if the market breaks the low that is formed in the first 60min.
Similarly, Image 1.4 shows an example of Down-trend formation for the day, where the second 30min candle is broken the first 30min candle low hence the high of the day is formed, and the market will not return to the high that formed in first 60min(70% probability). This established direction will be negated if the market breaks the high that is formed in the first 60min.
There is another condition, if the second 30min candle is within the first 30min candle range, then the view will be neutral for the day (Refer Image1.5 )and the probability of Normal variation day is less on these days.
3rd step: Entry location and exit methods.
Here comes the important question “Where I should enter the market and exit the market?”. This question decides the fate of trading and the answer to this question is the ultimate goal of any analysis.
Well, Before entering the market, one should have clarity on entry location and method. In my view, I have observed the VWAP level acts as major support or resistance (Note: Only on NV days) for day trading. Click here to know about VWAP.
As per my understanding, VWAP(Volume weighted average price) is nothing but the dynamic volume POC, and it is the price level where a maximum number of transactions occurred. Generally, VWAP has a significant influence on day trading, and many professional traders and institutions use it.
VWAP becomes the best entry location for normal variation day.
Note: I use 15min timeframe in Intraday to time my entry and exits.
Once you know the IB is medium and direction is established in the first 60min, the next step is to wait for the price to retrace back to the VWAP level and take entry in the established direction based on (PIN BAR, ENGULFING or HARAMI Candlestick patterns). The entry candle low or high becomes the SL if its a pin bar candle, If its a harami or engulfing patterns, then the big candle low or high becomes the SL. Simple! Let’s understand this in charts.
Once we take an entry, the next step is to exit the trade. On Nv days, it becomes easy. We know that NV days IB will extend by around 80% (most of the time). And this becomes our first target. Whenever I anticipate responsive activity, I generally exit trades at 80% IB. But when I anticipate Initiative activity, then I remove 50% positions at 80% IB and remaining I hold till EOD with trailing to lower lows or higher highs. If it takes the SL, we exit by having a small loss(If you planned so).
Final Thoughts:
IB is medium on NV days.
IB extends 80% of the IB range.
The Direction of the day establishes in the first 60min(70% probability)
VWAP is the best entry location for NV days.
PIN BAR, ENGULFING or HARAMI Candlestick patterns for entry method
Whatever the information I have shared so far is based on my experience and observation. You don’t have to believe me and follow this blindly. Take the last few years intraday data and backtest it. If you find a good EDGE and conviction, then start trading in the real market. I hope this information will help you. Well, I hope this article was helpful and added value to your trading. If you like the details of this article, then please share this with your friends and hit like button:)
Wishing you MOST & MORE 🙏
Nataraj Malavade
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