How to Trade Market Profile with Cumulative Delta

How to Trade Market Profile with Cumulative Delta

In my earlier post on Footprint charting or Volume Ladder charting, we discussed Trade Execution Based on Footprint Orderflow Charts and in this post we will discuss How to Trade Market Profile with Cumulative Delta. Trading based on Market Profile is not just limited to watching the Daily, Weekly, Monthly Profiles but has a lot more to it. The underlying concept of Market Profile stays the same across each and every time frame and we need to find a suitable time frame as per our comfort. Comfort here does not mean our likes and dislikes but trying to repeat trades in various time frames and noting those trades down in a journal ( Edgewonk has a pretty good journal with precise details required for a trader ) and doing some weekend homework to find out a particular time frame where we could take the best advantage of the move based on our system. If we are trading a 1 min chart and managed to get 100 points in a day does not mean that 1 minute is a suitable time frame for us and we will be getting 100 points each day and on the other hand, trading on 30 mins time frame and making 20 points a day also does not mean that every day we will have to get away with 20 points and hit wider stop losses. It’s a tedious process just to do a self-assessment of the Timeframe that suits out nature as well as the system but once we are able to figure that out, it makes our job easy and as mechanical it can be.

While trading Market Generated Information, we do not have to keep looking at every price move, we have to react when the price hits one of the reference levels after we get a clue from the Footprint / Order Flow / Delta regarding who is in control or who is trying to gain control at that particular level   

In the examples in this post, I will show the trade examples on a 1-minute chart, which I prefer next to a 60 tick Renko if I had to choose a time-based chart and then a 3-minute chart in order of preferences. Higher the time frame we use for trading market generated info, further the entry and later the exit. I may sound contrary to a commonly established view that me too learnt in the beginning that higher the time frame, higher the chances of picking up big moves but if we are watching the information that is being generated at the tick then we don’t enter after the break of day high or hourly high but enter at a reference level on the smallest time frame based on the references of a bigger time frame.

Before getting into the explanation of examples, I would like to particularly stress on this one point that Cumulative Delta also can be used in various different ways and the illustrated way is not the only way it can be used. It is one of the effective and advantageous ways of using it for day trading as I am a happy go lucky 16 pointer trader which I refer to as Sweet 16  which I like to take off a trade before I get ripped off and later wait for an appropriate exit either in a better profit or above cost. I do not fancy trailing SL each day as a day trader as that does not give me the kind of comfort I look for. The information on the chart is enough for me to react and exit rather than wait and hit the trailing SL.

Now this is becoming like endless Gyaan and I better stop and get on with the chart examples.

CUMULATIVE DELTA

Cumulative Delta ( CD ) can be plotted in any software that can plot tick based Ask and Bid Volume charts. Cumulative Delta is the Accumulated Net Delta of all Bars in any given Timeframe where each bar represents the Net delta (Volume at Ask minus Volume at Bid ) and is aggregated from a start point of choice, generally the 1st day of expiry or from the day when the Future contract starts trading. It can also be used on per Day basis where we accumulate the Delta just for that particular day. Like any other Indicator, there are divergences between the Price and CD which point to potential reversals from that point and at times the CD goes sideways while the Price keeps trending which is again a sign of weakness in the price move. When CD and Price are in tandem, the market tends to keep trending in that particular direction and offers the best opportunity to sit tight and ride the trade.

Points to look for as references for trading Market Profile with Cumulative Delta

• Opening Type

• Open is out of range or within range, out of previous day value area or within previous day value area.
• Is it an open drive in the 1st few minutes or is it an open and revisit of the open back and forth.
• The open difference with respect to previous day close, previous day high and previous day low.
• These highs and lows we are checking to see if price and CD are in sync or they are diverging.

• Size of Rotation

• The size of rotations tells us about the intensity of the move. If the price is going 10-12 points up and falling back 5-6 points, clearly indicates bullishness till we don’t see a large rotation down.
• We can also compare price rotations with Cumulative Delta rotations in this case as price going up with a larger rotation but Cumulative Delta going sideways or cumulative Delta going down
• with a larger rotation points to distribution at higher prices.

• Market Profile References

• As this post is all about How to Trade Market Profile with Cumulative Delta, the most important part is how price as well as Cumulative delta behave near the VAL, POC and the VAH.
• The references can be of the previous day or even a few days back or can be microbalances formed in the previous few days in that particular price range.
• Personally, trading on a very short time frame I prefer using Miro Balances with the Composite and Day Market Profile levels as a reference.

• Other Important References

• Day Mid – Day mid is simply the 50 of the entire developing range of the day. (Day Low + Day High ) / 2. Price often tends to fall back or rise back up to Day Mid to look out for buyers/Sellers
• VWAP – Price tends to fall back or rise back up to the Volume weighted average price to look out for buyers/sellers

For seeing high-resolution Images please Right Click on the image and Open image in a new tab and then you can Zoom into the Full resolution and see the markings and letters crisp and clear.

Nifty Futures Market Profile Micro Balance with Cumulative Delta – Example -01

Probable trade entries and exits in the above chart

1. Open is within range but out of Value and a break below the Micro Balance attracts more buyers with the Cumulative Delta going higher, we can enter longs when the price gets back into value with the protective initial Stop loss below the low of the day.
2. As the price is making higher highs above the previous day high, it’s attracting sellers and the buyers are not confident in the up move which can be seen in the Cumulative Delta diverging. By this time, part profits need to be locked in and wait for a complete exit. A complete exit is not always a short entry, though.
3. As the price approaches the Day Mid and near to VWAP, it tends to bounce off but the rotation down was bigger and the bounce off is getting smaller, while the Cumulative Delta is moving further down. Time to get out of the positions. Now we are in search for a fresh entry and we almost have a Micro Balance above so let’s plot that Micro Balance and look out for another entry.

Nifty Futures Market Profile Micro Balance with Cumulative Delta – Example -02

Probable trade entries and exits in the above chart

1. We got a fresh upper Micro Balance and the VAL of that Balance is within the previous day range and Cumulative Delta is not looking back at all and going down. A pullback to the Value low attracts more sellers and we can go Short with an initial Stop loss of the Day high.
2. As the auction hit the Value high of the Micro Balance of the previous day, it found buyers and we can see a rise in the Cumulative Delta. We still don’t have an exit as we have DAY Mid, VWAP, VAL of upper microbalance that needs to be conquered for an exit or flip of positions. And the tough time came as the auction hit the VAL of upper balance. We have to be prepared to get the Stop loss down to the previous rotation high and exit with a loss. Whoa !!! the SL gets saved by few ticks and now the SL stays there at the lower level.
3. A drop to the previous day’s Micro Balance VAL attracts more buyers but they are giving up at the pull back to Day Mid. Our Stop is still safe and we have a choice to book part profits when it hit the VAL and also have a choice to add the part back at the Day Mid.
4. The price keeps falling and there is a Halt at the previous day’s VWAP and Day Mid but again we see Cumulative Delta going down further from that point so could book part profits and ride the rest with SL shifted to the Micro Balance VAL and later get it down to the rotation high. After hitting a fresh Day low, the auction is getting buyers and we exit positions as the CD marches higher with the price breaking the congestion / rotation high.

Nifty Futures Market Profile Micro Balance with Cumulative Delta – Example -03

Probable trade entries and exits in the above chart

1. Open Within range and below the previous day’s value, finds buyers as it pushed below to the VAH of a prior Micro Balance. We do not have a Long entry point yet as it is trading below the Day Mid, but we do have a hint of responsive buying. The Auction pushes through the Micro Balance VAL and is trading above the Day Mid as well as VWAP. The opening swing high is very near and most often attracts sellers so I wait for the high to be taken out before entering.
2. The high is taken out with a WRB and we see Cumulative Delta also rising. Either we buy there or at the test of the VAH. This is a confusing situation where we can execute a sell as well as the price entered the Micro Balance with delta pushing down but here the context come into play that, we are above Day Mid, there is a tussle between buyers and sellers and have not broken the rotation low even though it entered the Microbalance. So a better trade would be to buy at that test when the Delta pushed up.
3. After the price making a Higher high and the Cumulative Delta pushing up, the price falls back to Day Mid and the Cumulative Delta still remains sideways. In next few bars, the price stays sideways while the Cumulative Delta starts rising. Early signs of more accumulation.
4. Price breakout and reaches the Upper Micro Balance which is also the previous day’s Day Mid and the previous day’s VWAP. Time to book part profits. The reason we cannot exit fully is that though we have hit a reference and the Cumulative Delta is pushing down, Price has not broken the higher low/Rotation low and also the rotations up are getting bigger and the rotations down are getting contracted.
5. The auction keeps pushing up and hits another Micro Balance VAH and rejects it swiftly and we exit when the Price breaks the VAL of that Micro Balance, breaks the Rotation Low as well as the Delta breaks the higher low. We do not have a short entry yet as we are still above all other references. There is no harm in trying out a short though but the odds are not in favour and high probabilities of Stop loss getting hit.
6. The auction is testing the Micro Balance VAH and the Cumulative Delta starts pushing higher but has not yet broken the high and even the Price is yet to break the rotation high. We get a confirmation of long entry when all the criteria meet when the price pushes thru the Higher Micro Balance VAH and the Cumulative Delta also pushes through the Higher high. The trend continues until the day end with the price as well as the CD never looking back. We book part profits where we are comfortable as there is no sign of a failure yet and book out completely at EOD.

These are just a few examples of how we can blend Market Profile reference levels with Cumulative Delta for intra-day trading. We can use any other method of supports and resistance as well and in the end, it boils down to personal choice and comfort.

Best regards,

Happy Trading !!

@ProAMTraider

Disclaimer :

The above charts are for educational & reference purpose only. Trading in derivatives has high risk involved and not suitable for all investors. The above levels are not a recommendation/offer to buy or sell any or all of the above derivatives. Any person trading or making buying or selling decisions on the basis of the above-mentioned levels should do so at their own risk. Justfintech.com / its affiliates / staff will not be responsible for any profits and/or losses arising from the trades executed on the basis of the above levels. It is advisable to consult your personal financial adviser/consultant before entering into a trade. The usage of the charts is subject to Terms of Use, Risk Disclosure / Disclaimer and Privacy Policy of Justfintech.com