At the top, we have a Market Delta chart of the overnight session in the ES futures up to about 5:30 AM CT. Note on the left axis how we are now accumulating volume at lower price levels over the course of the morning, which tells us that value is being accepted below 1520. Very often I will use the overnight range as an initial reference point for the morning trade. If you think of the overnight range as the consensus re: value, given all overnight events (including how overseas markets have traded), a move out of the range in early morning trade represents a potential breakout trade. We can then use volume at the bid vs. volume at the offer (the numbers inside the Market Delta bars) to see if prices away from the overnight range are attracting significant participation.
If we do get a break out of the morning range, what would be potential price targets? Here is where it's valuable to observe markets at a larger time frame. The second chart shows how we've been trading from the premarket on Tuesday (yesterday) through the present. We can see that the ES market made an attempt at a downside break (that failed) and an attempt at an upside break (that also failed). This has kept us in a trading range over the entire period. It makes sense that we would test the top or bottom of this range on any break from the current overnight session that attracts solid participation.
Very often we can get clues as to which way the ES market will break by tracking specific sectors and how they're behaving relative to their ranges. Sectors such as the semiconductors (SMH), energy issues (XLE), and banking stocks ($BKX) have been theme leaders of late. We can also use the new day's distribution of NYSE TICK values to see if buying or selling interest is dominating, leading us to potential breakout moves. And, of course, we can track the emerging day's volume relative to average volume for that time of day to see if we have enough interest from large traders to sustain volatility and potential breakout moves.
All of these things go into my homework before a day's trade. From my observations I frame hypotheses--"what-if"scenarios--about the market and how I would like to trade those. The more clearly I frame my actions in advance, the more automatic those decisions will be when the time comes to execute.
Preparation, I find, is a key to consistency.
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Using Market Delta in Trading
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