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Identifying Market Participants and Institutional Activity

All traders share a different perspective, relative to their timeframe. For instance, the scalper sees the market at the "cellular" level; the Day Trader sees the last 24hrs; the Swing Trader sees the last few weeks etc... You have many different timeframes, with a variety of lenses and intentions impinged upon the market at any given point. Part of becoming a successful trader is identifying which timeframe is dominating the market, and adjust our decision making accordingly. We will discuss how to identify which timeframe is dominating the landscape, and what to do under each circumstance.

Within the auction process, the variety of participants includes Scalpers, Day-Traders, Short-Term Traders, Swing-Traders, and Long-Term Traders. Scalpers are generally only in for a few minutes, down to a few milliseconds; Day Traders are in and out within the same day (often due to margin requirements); Short-Term Traders typically hold 3-5 days; Swing Traders hold a week or two, and Long Term Traders generally hold a month or longer. Concurrently, traders only look at key levels that are relevant to their timeframe, and timeframes higher than them, so we can assume that a 6 month reference point will attract far more interest than an intra-day level. Additionally, major changes tend to occur at higher-timeframe reference points, thereby bringing in more volume with greater volatility.

When the market is being dominated by the Day Timeframe, it's typically low-volume, with a compacted range. Day Timeframe traders like trading within "containment" meaning they game intra-day and previous-day levels, such as yesterday's close, yesterday's high/low, VWAP, the open, mid etc... When the Day Timeframe is in control, you generally have an easier time leaning on key levels, as the participants are more likely to adjust their inventory (meaning take profit) when reaching an intra-day milestone, such as VWAP, the POC, or the initial balance high/low. In Futures, many retail traders are unable to hold overnight because most brokers offer lower intra-day margins, and their account sizes may not be big enough to accommodate holding overnight. With equities/options, there are lower instances of day trading because the pattern day-trade rule.

When the Day Timeframe is in control, you generally will not see the market breaking new ground and creating new highs (breaking out of balance). Trade will often take place within the previous day's range. Thus, the Day Timeframe will often look to buy the low of the previous day, and sell the high; if they DO take out the previous day's high or low, it is typically only to take out the stops, and fade it back into the previous day's range (creating a false-breakout). In general, the Day Timeframe is more prone to false-breakouts.

The most common day-types when the Day Timeframe is in control are those of lower confidence, and lesser volatility. One will often observe balanced days (otherwise known as neutral or non-trend days). Opening types often include an open-auction in-range (where the market opens within the previous day's range, and price will trade back and forth through the open several times), or open-auction out-of-range (gaps and then auctions back and forth). Other opening types include an open-rejection-reverse, where the market will trade directionally for a time, stall, then reverse - trading back through the open. At its essence, Day Timeframe activity is rotational in nature.

Because the Day Timeframe has low confidence, low volume, and a narrow range, it's important you allow the market to come to you. Whereas confident markets act aggressively en masse and must be engaged upon immediately, the Day Timeframe will be far less forgiving. Therefore, one must compensate by achieving optimum positioning. Activity is more likely to be slow and grindy, whereas higher timeframe activity will be strong and swift. In lieu of that, you're more likely to struggle at intra-day levels, and have many auctions-within-auctions. Whereas it may take a full day (or several days) for the Long Timeframe to reach an inventory imbalance, the Day Timeframe will incur multiple inventory imbalances throughout the day.

To elaborate, if you don't know what I mean by "inventory imbalances" it occurs when the market has either gotten too long or too short (by accumulating too large a position) and unloading it's inventory (otherwise known as accumulation & distribution). This is a natural psychological response, as the longer the someone holds onto a position, the greater the anxiety. Moreover, retail traders are particularly subject to these forces, as they often have less experience managing their own trading-psychology, and have smaller accounts, funded with their own money.

The difference between the Higher Timeframes and Day Timeframes are often the difference between outside-in (Day TF) and inside-out (Long TF) days. An outside-in day is where the market is in balance, and one generally wants to trade from the outside of the range, back toward the middle (or the other extreme). One possible strategy is to fade the extremes, waiting for the market to breach two standard deviations of VWAP, and fade it back toward the POC. This method works best on Balanced Days, when VWAP is relatively flat. It's also important to manage one's expectations, however, and utilize smaller targets, anticipate false-breakouts (especially at the prior day's high/low), and more frequent inventory re-balancing. To the contrary, inside-out days are typically where the market is breaking out, and therefore you want to trade with momentum. The market will generally remain imbalanced until it finds a new level where two-sided trading can take place.

When one is attempting to position themselves within a much larger move, one must look to the Long Timeframe. When the market is breaking new ground on high volume, it's generally the Long Timeframe that is responsible. Concurrently, there are correlations behavior around key levels, and the timeframe that is responsible for doing so. When it comes to intra-day levels like VWAP, pClose (prior-close), IBH/IBL (initial balance high/low) etc... the Long Timeframe could care less; concurrently, their massive size allows them to breach minor/intra-day levels with ease. Their trading decisions are primarily made on fundamentals (with structure being secondary), therefore they are unlikely to look at intra-day levels. However, if the market is testing a 6 month high/low, you can rest assured the Long Timeframe (as well as everyone else) has it in their sights.

Whereas the Day Timeframe demands patience, the Long Timeframe bodes getting in early; failure to do so risks missing the entire move. Although we are sacrificing our positioning, the high momentum associated with the Long Timeframe should bring us to breakeven relatively quickly. Common opening types under these conditions are the Open-Drive, or the Open-Test-Drive. Frequent day types include the Primary Day (otherwise called a "Normal" Day), Trend Days, or Variations of the Primary Day (otherwise called a "Normal-Variation Day." The Long Timeframe may take a full day, or multiple days to scale into a position. Because of that, one will often see behavior where the market is "buying every dip" so one should look to enter on the pullbacks and sell into the rallies. Concurrently, 2i-to-1R Days (as described in Mind Over Markets), as well as 3i Days - which are often indicative of Long Timeframe activity - may benefit from holding overnight.

Establishing which timeframe is in control is an essential part of successful trading. It allows us to see which participants are most active within the market, and adjust our trading style accordingly.

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