Tips on Using the Footprint Chart to Trade Spreads

What is a Spread

For anyone not familiar with spreads, it is the process of buying one futures contract and selling another usually at the same time. Long one and short another. The idea is to profit from the differential between the two. Complex spreads can consist of more than 2 contracts. Here’s a good write up from one of our broker partners about different spread strategies.

How to Plot On a Footprint Chart

Popular spreads are listed as a single symbol by the Exchanges and that is how we recommend viewing a spread on a Footprint chart. Just type the symbol and view the Footprint chart.  

IQFeed has a helpful symbol lookup where you can specify a “Security Type” of Future Spread and search exchange traded spreads by Exchange.

Another way to trade spreads is to “leg” into it by separately buying the one futures contract and selling the other but this won’t work for Footprints because there will be 2 sets of bid and 2 sets of offers because you are following 2 instruments.

Footprint Chart CL Spread Example

A very popular calendar spread that some of our prop firm trader customers trade is the Crude Oil calendar spread. Nymex crude oil has an contract for each month, so there are many combinations of this spread. A popular one is the current front month against the next month out. Currently that is September – October. So the October price is subtracted from the September Price. The IQFeed symbol is QCLU16-QCLV16.

Putting that symbol into MarketDelta will give a bid ask Footprint chart like this.

CL_Spread_U_-_V

Spreads don’t have a lot volatility but it is still vital to understand how they are trading. The Footprint allows traders to “see inside the chart” and have an acute awareness of volume and order flow for the spread or legs of the spread.

Probably the biggest advantage the Footprint chart provides spreaders is the ability to see exactly how much volume is trading on the bid and offer and track it over time.

Another key benefit is the ability to see this order flow (on the bid or the offer) over time and tally up the delta for each price to see which side is “winning”. In the screenshot below both prices (-0.70 and -0.71) had a negative delta, but -0.71 had a larger negative delta. This was reflecting the current battle very well and price proceeded to step lower.

CL_Spread_U_-_V delta profile

The Footprint chart can really help you know which side of the spread you should be working and provide visual confirmation of why.

If there isn’t an Exchanged traded spread symbol for the spread you trade, just chart the outright contacts symbols on individual Footprints to have a clue for which way it is leaning (see below). Try applying the Footprint Price Statistics indicator on the right side of the chart to give you the big picture of order flow.

Footprint Chart Notes vs Bonds Spread Example

The screenshot below shows just one example of how you might track a spread using the individual legs. We recommend showing the delta per bar at the bottom and then the delta profile and/or delta per price. Watch for areas of absorption in one or both legs and use that information to your advantage.

In talking with spread traders, there are many ideas and ways they approach trading spreads. The Footprint is a great tool that will help understand the market in more detail, giving you a “leg up” on your competition. 🙂

TY vs US

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Trade Example Using Intermarket Relationships and Footprint

One of the keys to trading profitably is knowing what to look for. One way to judge potential market direction is to look at markets that have a correlation. It doesn’t matter if the correlation is positive or negative, just that it exists and you understand it well. A second key is then judging when a trading opportunity is presenting itself and confirming this movement with the Footprint chart.

In this video Anthony from the MD Trading Room shows a great example and is calling the trade opportunity out before it occurred. This comes through practice and skill, but he then confirms the move with the volume imbalance footprint.

Here is another example of trading correlated markets.

Explaining the Meaning of “Delta”

This week we wanted to continue showing the valuable relationship between PRICE and DELTA. Everyone knows what price is, but delta is a new term for many aspiring traders. Here’s the definition and a video to explain.

Aggressive Buys – Aggressive Sells = Delta

One of the easiest ways to understand delta is to realize that volume is what fuels the market. Without volume price would not be validated. When a trade occurs at a price level a specific amount of volume is attributed. Price discovery is achieved by volume pushing price back and forth to find equilibrium and delta gives a way to see how good of job it is doing.

Delta measures the directional force of volume and provides a quantifiable measure to volume’s impact on price.

So what we encourage traders to do is identify the direction of delta, note recent highs and lows of it, and use it as proxy for where price may be going.

Continue learning about this topic by visiting this post. If you want to experience the software take a trial of MarketDelta Charts.

See and learn this in realtime in the MarketDelta Trading Room!

Tips for Using Cumulative Delta to Confirm Price

This week we had our annual online Summer Slam event and one of the themes that came out of it was cumulative delta. Since the “delta” concept is so central to the Footprint, we felt it appropriate to take a break this week and show some examples of cumulative delta.

Trading price alone can be a difficult task. Using correlated markets, market breadth, and order flow can be very helpful when confirming a price move. Cumulative delta shows order flow over time.

Cumulative delta plots the underlying order flow for a session or multiple sessions. It is computed based on each trade, so it provides a very accurate reading of order flow for the selected time period.

Cumulative Delta Concepts

Common uses of the cumulative delta would be confirm price direction. For instance, if price is trending higher, look for the cumulative delta to be trending higher each step of the way. If price trades a new high BUT the cumulative delta does not, then it may be a sign order flow is beginning to reverse and price will soon follow.

Below is a recent example from yesterday showing a divergence between the price of the S&P 500 (ES) and its cumulative delta. As noted in the illustration above, it is vital to see price and delta confirm each other. Otherwise, it is likely you are just witnessing a test of extremes and price will be rejected or rotate back.

cumulative delta 1

Another recent example from 2 days ago in the ES shows how cumulative delta was not confirming the breakout to new price highs. It is important to note that sometimes price will lead. When this happens, watch out for a violent “catch up” in cumulative delta, often producing a jump in price in the direction it was originally heading.

cumulative delta 2

If you want to add this to your chart see this FAQ: Volume Breakdown Indicator (VB). The settings I used in the screenshots used a “Result” of Delta Bars instead of Delta. It just draws them differently. Experiment with what works for you.

cumulative delta prefs

“Open Drive”, the Most Powerful Opening Type

Read more about opening types in this postthis onethis one, and this one.

In this post we focus on the Open Drive opening type pattern as described on page 63 of Mind Over Markets. The primary benefit of identifying the opening type is to evaluate potential market conviction early in the day. We then use the Footprint chart to qualify the trading opportunities that present themselves by gauging market conviction in real time.

RULE OF THUMB: Use the open type for market context and the Footprint to confirm and execute your ideas.

Open drive’s are very initiative in nature and happen because longer time frame traders have made up their minds before the open and are generally biased in the same direction. The market is “one sided”, meaning there is either very dominant buying or selling, but not both. The market quickly auctions in search of a price to draw in opposite response participants and find balance.

The strength of the open often sets the tone for the day.

By definition, open drive occurs when a market opens and immediately auctions in one direction and never returns and trades back through the opening range. The opening can serve as a solid reference point with this open type.

Open Drive (2)

The market moves quickly and in one direction, so act quickly. Otherwise, the market will continue to run away from where you wanted to get in. With this open type, it is usually best to enter with market orders so you don’t miss the opportunity to enter the market.

Often you will see this open type occur as a gap outside the priors days range, but it doesn’t have to be that way. It can occur inside the prior days range.  The Market Profile® chart below show how corn gapped outside the prior 2 days consolidation and quickly auctioned higher.

6-10-16 Corn open drive market profile

Now look at the Footprint® chart of the same move. This is a 2 minute chart to show how quickly the move developed. The Footprint helps keep you on the right side of the trade.

6-10-16 Corn open drive footprint

Here is what you want to look for on the Footprint® Chart.

  • If we are gapping open (outside prior days range) your radar should be up for a potential Open Drive event. Does initiative activity become evident on the open?  The Footprint makes this much easier to see because you can witness in real time what is happening.
  • Sometime it is not what you see, but what you don’t see. Do you see aggressive sellers selling aggressively into the gap higher (see below)? No, they didn’t show up. This can be a tell tale sign of the strength and the market will search higher prices until it encounters a big enough reaction to counter the initial move.
  • Watch the Footprint for immediate initiative behavior. Strong buying will be blue or green (typical colors) and strong selling will be red.
  • Use the Footprint to keep you in the trade longer. If you are fortunate enough to spot the move early and get in the market, let the Footprint tell you when the move in beginning to weaken or reverse.

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Use the Footprint Chart On “Open Test Drive” Opening Type

Read more about opening types in this postthis one, and this one.

In this post we focus on the Open Test Drive opening type pattern as described on page 65 of Mind Over Markets. The primary benefit of identifying the opening type is to evaluate potential market conviction early in the day. We then use the Footprint chart to qualify the trading opportunities that present themselves by gauging market conviction in real time.

RULE OF THUMB: Use the open type for market context and the Footprint to confirm and execute your ideas.

Open test drive’s are initiative in nature but don’t happen right at the opening bell like the Open Drive opening type.  By definition, open test drive occurs when a market opens and then tests beyond a known reference point to see if there is any new business. The market then reverses and quickly auctions back through the open and continues to drive opposite the initial move, exhibiting strong, initiative activity. Often the extreme price established at the reversal soon after the open holds for the entire day.

Open Test Drive (1)

Before the market can find its direction it needs to first test in the opposite direction to see if there is any “business” to do. There are a couple of common sayings in the market that sum this up:

Break to Rally – this means the market needs to test lower prices first, before rallying. If the test lower lacks volume and initiative activity, buyers can try the higher prices with conviction because lower prices didn’t draw in more participants.

Rally to Break – this means the market needs to test higher prices first, before breaking (selling off). If the test higher lacks volume and initiative activity, sellers can try the lower prices with conviction because higher prices didn’t draw in more participants.

This “testing” behavior provides traders the assurance of knowing there is no activity above or below (depending on the initial direction of the probe) before moving the market the other direction with confidence.

Often you will see this open type occur after a period of consolidation. Look at the Market Profile® chart below, and then how the Footprint® chart helped in confirming the open and kept you on the right side of the trade.

5-27-16 Open Drive ES Market Profile

After 2 days of a tight range and low volume, the market opened just above the consolidation range and very briefly tested inside the range to see if aggressive sellers would show up. When they didn’t it gave the initiative (aggressive) buyers the confidence to buy. Price quickly auctioned higher and never looked back for the entire day.

5-27-16 Open Drive ES 5 min Footprint

Here is what you want to look for on a Market Profile®

  • Market opens and probes beyond a known reference point to test participation.
  • Market reverses and quickly trades in the other direction, often establishing one of the extremes for the day.

Below are is a normal Market Profile® and the same one but split to show the 30 minute progression.

5-27-16 Open Test Drive ES Split Market Profile

5-27-16 Open Drive ES Split Market Profile

Here is what you want to look for on the Footprint® Chart.

  • Does initiative activity become evident on the open?  The Footprint makes this much easier to see because you can witness in real time what is happening.
  • Take note where the open is occurring – near overnight high, low, above/below prior day’s range, etc. Use this information to look for clues on the Footprint.
  • Watch the Footprint for failure and play for a trade in the opposite direction, recognizing the potential. Use the Footprint to keep you in the trade longer. 

Here the open with the initial move a few ticks lower. There was little interest from the aggressive traders to push price lower, therefore, participants take it the other direction to provoke a response to the upside. That did it! The Footprint confirmed this by showing buyers with conviction (green footprints).

5-27-16 Open Drive ES Footprint

Here is the same move but using a 5 min chart

This shows how quickly this move occurred and with very little pullback. It is very important to note, with this type of open you must be aggressive and get in early. This is not easy to do, but the Footprint will help give you the confidence to spot the setup sooner than you would otherwise because you can see the order flow.

5-27-16 Open Drive ES 5 min Footprint

 

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Using Thin Spots to Identify Trade Location

The ability to “see inside the chart” and observe what is happening in real time is very valuable for those who know what to do with the information. Something else that is just as important is being able to look back at the inside the bar Footprint data and use what others can’t see to your trading advantage.
THIN SPOTS: An area of prices where the trade tempo picked up and left very little volume behind.
For example, when a market’s price goes down fast the volume will appear thinner than the volume at prices around the “thin spot” level. If price moves quickly through a price or series of prices a “thin spot” is created because not much volume was transacted.
Watch this 30 second video and gain an edge on why Thin Spots are so valuable!

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Use the Footprint Chart On “Open Rejection Reverse” Opening Type

Read more about opening types in this post and this one.

In this post we focus on the Open Rejection Reverse opening type pattern as described on page 68 of Mind Over Markets. The primary benefit of identifying the opening type is to evaluate potential market conviction early in the day. We then use the Footprint chart to qualify the trading opportunities that present themselves by gauging market conviction in real time.

RULE OF THUMB: Use the open type for market context and the Footprint to confirm and execute your ideas.

By definition, open rejection reverse occurs when a market opens, trades in one direction, and is then met with an opposite response strong enough to auction back through the opening range (first few minutes of trading). The open rejection reverse does not exhibit as strong of conviction as other opens (open drive and open test drive), but the reversal often happens quickly.

Open Rejection Reverse

While the initial rejection can turn into something more, don’t be fooled into thinking the market has found its direction for the day. The initial extreme holds less than half the time. So it is vital to watch the Footprint for shifts in conviction AND keep the bigger picture in mind.

Here is what you want to look for on a Market Profile®

  • Market opens and initially trades in one direction.
  • Met with an opposite response and is rejected.
  • Market reverses and trades back through the opening range.

In the Market Profile® charts below, the market opened, traded slightly lower, met rejection, then reversed and traded 10 points higher. The primary reference points for the remainder of the trading day will be the 2 extremes (low and high). Fading (being responsive versus initiative) tests of the extremes would be the right approach until proven wrong. This is easier to see in the split profile.

Open Rejection Reverse Market Profile

Open Rejection Reverse Split Market Profile

Here is what you want to look for on the Footprint® Chart.

  • The initial buying or selling begins to end. The Footprint makes this much easier to see because you can witness in real time the initial conviction ending.
  • Watch the Footprint for the “rejection” and play the reversal for a trade back to the opening range (at least).
  • After the market has established its range, use the Footprint to qualify trades at the extremes. See examples below.

Here the initial move was lower and didn’t last very long before being met with buyers near overnight lows, a natural support level. The Footprint confirmed this by showing buyers with conviction (green footprints).
Footprint Friday Open Rejection Reverse 5-13-16

Re-Test of High after Open Rejection Reverse

With this type of open, the probability of a trend day is low. So as a trader, we would posture ourselves to fade moves that test extremes. Here the Footprint is pierced the high of the day by a few ticks (just enough to trigger stops), then was met with responsive sellers. The Footprint shows this with red Footprints.

Footprint Friday Open Rejection Reverse Test high 5-13-16

A similar pattern occurred on a retest of the low the same day. The chart shows how the low was pierced by a point or so (just enough to trigger sell stops) and then responsive buyers stepped in. See the green Footprints? They tell you everything!  We are showing the Market Profile® overlaid for context.

Footprint Friday Open Rejection Reverse Test Low 5-13-16

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Use the Footprint Chart to Qualify the “Open Auction” Opening Type

Read more about opening types in this post.

In this post we focusing on the open auction opening type pattern as described on page 70 of Mind Over Markets. The primary benefit of identifying the opening type is to evaluate potential market conviction early in the day and then use the Footprint chart to qualify the trading opportunities that present themselves by gauging market conviction in real time!

Use the Profile for market context and the Footprint to confirm and execute.

By definition, an open auction reflects a market with little conviction, so it randomly auctions around the opening range. There are 2 types of open auctions:

  1. Open Auction Outside Range – OAOR – This open auction outside range (OAOR) type has a lot more potential for a dramatic move in either direction than the OAIR type because the market opened out of balance and is trading outside the previous days range. So for this type a trader needs to be on guard it could develop into a more dramatic move.
  2. Open Auction In Range – OAIR – This open auction in range (OAIR) type typically lacks conviction and typically auctions within the previous days range, testing support and resistance levels. Typically it pays to fade the extremes on days like this.

Open Auction Outside Range – OAOR

The TPO Profile is provide for context and to help visualize the opening and how it played out. The first TPO chart was taken in real time and the day hadn’t yet finished trading. Nonetheless, the non-convictional (rotational) open provided a great trade right at the lows as shown on the Footprint. We got not 1 but 2 buy volume imbalances! This is valuable information we wouldn’t have had if just watching the TPO chart. The second TPO chart shows how the day ended, a perfect auction!

MP OAOR 1

FP OAOR 1

Here is how the profile ended the day. Perfect auction!

MP OAOR 2

Open Auction Inside Range – OAIR

Using the same format as above, we included a before and after TPO Profile chart along with the trading opportunity the Footprint chart provided based on the opening type.

MP OAIR 1

When you don’t see a lot of convicted buying or selling on the Footprint (green or red footprints) AND we open inside the prior days range, expect the market to auction. It is searching for direction and will most likely auction higher and lower trying to draw in participation.

Notice how each 5 min bar on the Footprint was bigger and bigger. They were simply testing beyond the high and low to draw in participants! When it doesn’t show up, the market auctions the other direction.

FP OAIR 1

Here is how the profile ended the day. Perfect auction!

MP OAIR 2

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Trading a Gap Open in Soybeans

The ag markets provide a lot of gap opens and these create opportunities for traders. When a market gaps, you know there are trapped longs or shorts from the previous session…all wondering what to do. The market is out of balance.

In the video I walk through one approach to trading gap opens using the Footprint and order flow. This example is using soybeans but the principle applies to any market. Additionally, I took the opportunity to explain other Footprint patterns that can help keep you on the right side of the market.

Gap Open

Here is a candle chart showing the gap referred to in the video above that walks you through how to trade a gap open. The million dollar question to ask (and try to answer) on a gap open is the market going to 1) continue in the direction of the gap open or 2) revert back towards the previous day’s close.

This is very difficult to impossible to judge using bars or candles alone.

soybeans candlestick gap open

Now look at the volume imbalance Footprint chart below. Because the Footprint allows you to see inside the bar, you can see much more than price. You can see volume and order flow. That is the key…being able to read if the gap open is being challenged and will revert back to close the gap, OR if the momentum is continuing.

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In a gap up or gap down scenario, the momentum will eventually end. You want to know when that happens so you can either take profits or reverse your position and play for a trade in the other direction. Having the ability to “see inside the chart” provides opportunities you wouldn’t have by just looking at bar or candlestick charts.

5 min soybeans footprint