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The Top 5 Things that have Benefitted my Trading

1) Learn to use the Volume Profile.


If you're not using it already, the VP is the best tool for organizing information in a way that's easy to understand, and allows you to capitalize on short term imbalances. It lets you see when the market is in balance (denoting you should be trading outside-in) or when it's breaking out of balance (and should generally be trading with the breakout). It lets you identify tails on the VP (excess) and the end of the auction (and the start of an auction in the other direction). It also lets you see where there are high volume nodes (I call these "traffic jams" - because they infer price acceptance and slow price down) and low volume nodes (I call these "freeways" - because price rushes through them). All in all, learning the VP is the best damn thing you can do for yourself, and your trading.


2) Understand that losses are just the cost of doing business


Simply put, it's impossible to be a trader and not take any losses. Furthermore, the best opportunities are often only going to be there for a split-second, so it's inherent that - in order to get in on the best trades - you're probably going to take some losses along the way. The important thing is that the trades you do take have a reasonable risk/reward ratio, so even if you have an abhorrent win percentage, your winners vastly outweigh your losers.


3) Understand balance, and imbalance (and how to identify both)


When the market is in balance, it infers price acceptance. Under these conditions, the market has found value/fair prices, so you typically only want to trade outside-in (meaning fade the extremes). When the market breaks out of balance (i.e. a breakout from a trading range), it denotes imbalance, and you want to be trading in the direction of the breakout. You can also think of this in the larger perspective. For instance, when the market opens up within the prior day's value area, the market is in balance - therefore, prices are likely to chop around for a while before any decent sized moves occur. If the market opens outside the prior day's range, then it denotes imbalance, and the greater the likelihood that you will get a dynamic move (either in the direction of the imbalance - which is my "default" mode, or back to test - or break into - the prior day's range).


4) Understand the behavior of high volume nodes, and low volume nodes


As I previously stated, high volume nodes slow price down. Again, they denote price acceptance, so when the market breaks back into a HVN (a fat area on the volume profile) prices will likely consolidate before moving further. Low volume nodes are considered unfair prices, and the market will burst through them with ease. Furthermore, low volume nodes act as resistance/support (think of it like the skin of a balloon; the surface of a balloon provides some resistance, but when the balloon bursts, price rushes through). One strategy I like to employ is to put my stop just far enough into a LVN that the market is unlikely to hit it (please excuse the ghetto drawing, hah).


5) Learn how to identify the confidence level of a market


The best way to get taken to the cleaner's is to continually try to trade into a market that lacks confidence. I'm sure everyone has had the experience of trying to trade in choppy, low volume, and tight-ranged markets. There are things you can do to help protect yourself, however. For one, any time you are opening up in the prior day's value area, you are likely to chop; again, the market has found the fairest prices, so it won't move with any conviction unless something changes. Two, look at the volume vs. the average, historical volume for the week. Think of it like water coming out of a hose - if the water is turned all the way up (i.e. "high volume") it's going to shoot out of the hose with force. If the water is turned only 1/4 the way up (i.e. "low volume") the water is going to dribble out. The last thing I like to utilize is the opening type. It's important to be able to identify when you have an open-drive, because the market is unlikely to remain at good prices for long, so you have to get in - and get in quick. Concurrently, you want to be able to identify when it's in an open-auction, because the market is unlikely to sustain any directional moves, and will trade back and forth through the opening price several times. If you want more information about opening types and how to identify them, please see our Volume Profile/Auction Theory series, pt. 3.


Although there are a lot of things that have benefitted my trading, but learning to interpret market generated information, and using market logic are at the core. If you don't have good understanding, you cannot have strong convictions about your position; if you don't have strong convictions, you're more likely to be shaken out a winning trade, take profit too soon, and trade reactively. If you're unsure where to start, I highly recommend reading our Volume Profile series!

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