Day Traders show up each day to fight for profit, start the day with cash, and end the day with ideally more cash.

This involves some kind of plan of attack, rather than just showing up and seeing what happens. This would be what we can describe as discretionary trading, a discretionary trader just comes in each day and reacts to what the price is doing.

However, there is a way to break down a trade plan on a day-to-day basis that is to be used as your map to navigate the markets.

The trade plan shows us where we’re going to trade, what kind of trades we’re going to take, and where the market is expected to go.

Now, we don’t want to confuse this with a bias, saying either market has to go down or markets have to go up, rather understand how the market participants have created imbalances to dictate market levels, direction, and areas to trade.

Throughout this we’ll be using auction theory, volume profiles & delta profiles to help us break down a day trading plan for futures and how to create one each day.

 

  1. What do you need to create a trade plan?
    1. Market Direction
    2. Market Levels
  2. Using the Volume Profile
    1. Understanding Auctions & Market Participants
    2. Understanding overnight sessions & prior sessions
    3. Using levels & distributions to find the direction
  3. Using the Delta Profile
    1. What is Delta?
    2. Imbalances created by market participants
    3. Understanding trade areas & market direction

Throughout the explanation of the above we’re going to break down a 6-step process to create a trade plan.

 

1.  What do you need to create a trade plan?

A trading plan involves understanding what the market has done in recent sessions, is there bullish momentum, bearish momentum?

Ask yourself, where will that momentum continue and where will it stop? We’re going to use distributions and profiles to answer these questions.

The next thing we need, market levels, these are the areas we’re going to trade off. The market moves based on imbalances, and finding where trades are imbalanced is going to allow us to find levels to enter and exit trades.

 

2.  Using the Volume Profile

Volume is what moves markets, and if we can read where volume is imbalanced, where it’s heavy, and where it’s light, we can get an understanding of where the market would want to go.

The volume profile is a good visual representation of auction theory and where auctions sit, as well as a visual representation of where market participants are imbalanced.

We’ll be using a 100-day cumulative volume profile as well as a session-by-session profile for our futures analysis on the S&P 500 futures.

The gray profile on the right is the 100-day cumulative where we’re going to get our main auctions from, these are called distributions or balanced areas.

Volume Profile

We can divide market participants between strong-handed traders and weak-handed traders. The strong-handed traders are the ones that create the trend moves and large moves, the weak-handed traders are late to the party and trade in the chop.

So we want to follow the strong-handed traders, they create the imbalances known as the volume profile ledges which are at each end of a distribution, auction, or balance (all 3 of these are synonymous).

The auctions or the balances can be divided by the areas where the volume drops off the hardest, which is where we can assume the strong-handed traders are active.

The yellow boxes below identify the large distributions on the 100-day cumulative profile.

 

Step 1: Identify the large auctions.

Identify the large auctions

These large auctions will tell you where price is balanced, and everything outside is imbalanced.

The theory is that price would want to remain in balance if it is in balance and remain imbalanced if it is outside of balance.

Step 2: Where is the price in relation to the balance?

If prices close within the large distribution and re-open in that area, we would expect the balance to hold, meaning play the ledges of the distribution.

When we trade the top of the distribution we would want to remain within meaning we would look for sell pressure, the opposite holds true into the balance lows.

The balance on the S&P500 can be deemed “broken” if we run through the area over 8-10 points.

 

Step 3: Wher  e did the price come from?

If the price accepts into a balanced area into the close of a session and reopens, from above, there is downside pressure in the market, or a bearish direction.

If price accepts into balance from below, there is bullish pressure in price. Where we would look for the long direction.

In the example below, the blue arrow tells us that price is coming from below the current distribution, meaning it’s trying to accept back above.

The red circles are where the price on the prior day closes (within the balance) and the other where the overnight closes (within the balance) meaning the current day price will open within the balance.

The purple box tells us that this distribution low should be the support to buy into for prices to continue the move higher, from around 5524 on the S&P500 futures, which later results in a rally to 5540.

S&P500 futures

Step 4: Other levels

We can use the 100-day profile distributions to identify other levels that price might trade off and hold so that we can get more confirmation for the trend or where the trend may fail.

 

Step 5: Individual sessions & the Overnight session

The individual sessions, both overnight and the regular trading hours sessions are the individual profiles that have multiple different colors.

The sessions are split up based on the background of the chart, the dark blue is the RTH or regular trading hours and the lighter background is the ETH or extended trading hours.

We use the colors as a percentage of the point of control volume. Meaning in relation to the heaviest point of volume.

The point of control will have blue coloring around it. Then the second highest volume is green, it goes down to yellow, orange, and red being the least amount of volume.

We would want to understand where volume is heavy and is NOT the point of control. These allow us to find key support/resistance areas and where prices is expected to turn around.

So if there is heavy green or blue volume at the bottom of a distribution that would help us with the long idea.

In the image below, we can see the blue box which tells us there is heavy volume at lows on the overnight session, so that area on the next session open should hold for the upside continuation.

This is how we can create confluence in our plan.

Individual sessions & the Overnight session

 

3. Using the Delta Profile

What is Delta?

Delta is an order flow concept that helps us identify imbalances in prices where there are pivotal areas where price can expect to hold or turn.

Delta is the concept of market buyers minus market sellers, the net is either positive in favor of market buyers or negative in favor of market sellers.

It’s at the ask traders minus at the bid traders.

We use a delta profile for these concepts to help us visualize the levels.

When we see heavy red delta, or negative delta into a low, that tells us at the bid traders are shuffling in aggressively without follow through to the downside, which tells us traders are getting trapped into lows.

When we see heavy buy delta, or positive delta into a high, this tells us at the ask traders are aggressively buying but getting trapped, where price can turn.

Another rule of thumb is if prices are under red delta, this is a resistance if above, a support.

If prices are above blue delta, its support, and strong buying is holding prices up. If prices are below, then buyers are getting trapped, and can be used as resistance.

Generally, we look for red delta into lows and blue delta into highs.

Take a look at the example below. We have heavy red delta into the lows, right at the key distribution low, this allows us to find support for the continued move higher in prices.

Delta Profile

 

Step 6: Look for clusters of delta.

We want to identify where there are large clusters of delta that are created at key distribution levels. We know that ledges in the larger profile are areas where strong-handed market participants are active and imbalanced. This is where we expect clusters of delta to appear to confirm the imbalance.

 

If we tie EVERYTHING together, this is what we come up with as a trade plan:

Step 1: Large distribution is found between 5522 and 5542.

Step 2 & 3: We have accepted back into this distribution from prices rallying, we have 2 closes within the auction, meaning I want to directionally be long from the lows of the distribution to move into the top of the distribution.

Step 4: Are there other levels we can consider? Yes the 5534 area on the ES futures, if we can move above that the buyer will take control.

Step 5: Does the overnight session have heavy volume created at a key distribution ledge? Yes, at the lows where support should hold for the continued move higher.

5534 area on the ES futures

 

Step 6: Identify the Delta Clusters. A lot of negative delta into the distribution lows at the distribution area of 5522 for the longs side to persist on stuck sellers.

Should this analysis fail, well it’s simple, the longs are no longer alive and we can look for the sell side to take control of price.

distribution area of 5522

There you have it, we’ve completed a trade plan for the S&P500 futures and we can do this for any futures asset that we want!

This can be done each day to get a better understanding of where prices are and how the day is expected to go!

You can find our trade plans daily in our Live Trading Room and our Discord, you can join our FREE Discord to get an understanding of how we trade and view the markets.

 

It’s right here!