8:32, May 18th, 1980. Mount St. Helens finally blew. The blast took out the mountain’s north face, sending ash and hot stone at speeds of 300 mph. The cloud of ash went 16 miles into the air and eventually covered three states.
After laying dormant for over 120 years, signs of an impending eruption surfaced for nearly two months prior to the explosion. The advance warning saved thousands of lives and mitigated what could have been a tragedy.
Like a volcano, you can spot market eruptions in price by watching the profile each day’s volume takes. Impending volatility can be spotted simply by taking a minute to look at these profiles as part of your daily planning routine.
It can be the difference between pro-like profits, or amateur-like catastrophes.
Smoke signals that tell you the mood of the market
If you could ignore those signs, the crater at the top with smoke billowing out of it was probably the final giveaway. The market has its way of blowing steam in advance of big price moves. The steam you’ll want to watch is fueled by volume.
As each day plays out, a volume profile takes shape across all the price levels touched. When it’s complete, you have a snapshot of the day’s activity. Look at one profile and you’ll know what went down. Look at 5 and you’ll know what’s coming.
Shapes that signal an eruption may be coming
Smoke plumes from volcanoes take all shapes — reflecting the nature of their source and the substance of what’s burning below.
In any market, each day’s volume profile takes a shape that reflects the source and nature of the activity. You can quickly and easily classify the type of activity once the profile has emerged — and the impact it may have on your trading day.
There are four core profiles to watch for:
- ‘P’: A short covering day. The sellers are taking their profits and this is usually found as a pause in a downtrend.
- Normal: A bell curve with a standard range and most of the activity taking place in the middle – or height – of the volume’s apex.
- ‘b’: Long liquidation. The direct counterpart to the ‘P’, except this time the buyers are taking their profits and this can be found as a pause in an uptrend.
- ‘B’: Double distribution day. Two volume ‘peaks’ at the top and bottom of a price range. This signals indecision.
Turning potential disaster into calculated profits
Looking at candles heading in one direction or the other is one thing. Millions of traders start their day by looking, guessing and praying. Understanding the volume behavior that’s taken place along the way is another altogether.
Reviewing daily volume profiles reveals the market’s — and really, the institutions’ — attitude towards particular price levels. This puts you in a position to visualize what’s happening and locate your opportunities — instead of attempting to predict (guess) what’s about to happen.
The capital ‘B’ is your best indication that an eruption is about to take place. With peaks of activity taking place at both ends of the pricing range for the day, buyers and sellers are pushing back and forth.
When buyers or sellers grab their profits — ‘b’ and ‘P’ respectively — the trend may be winding down and you could be facing a reversal.
The classic bell curve is your sign that the market is willing to entertain that particular range.
Reviewing our chart — you can see how this played out — capital ‘B’ and price shot up. Another capital ‘B’ and price shot up again. Price then grinded along pretty much within that range, and then the buyers took their profits.
After the buyers left town, you can bet that price would respond — and indeed it did with a ‘B’ double distribution day. Seeing this allows you to digest the market’s stance going into the coming day and prepares you for what to expect.
Simply taking advantage of the ‘B’s, and respecting the ‘b’, would have made you a nice profit in this scenario.
How do you make safe entries when conditions seem unclear?
Although the signs that something was coming seemed clear, nobody could guess the ultimate day or time of Mount St. Helens’ eruption. Despite high volume levels a clear volume profile may not appear every day.
For those of you wondering where you should retreat to — head for the trusted high ground of prior levels. Specifically, previous value area highs, lows and points of control. When these come together to form a spot of confluence — you’ve got locations you can lean on.
These levels, in conjunction with your macro analysis, create a solid support system — whether you have a clear profile or not.
Profit from eruptions while others run for the hills
When the ash fell to the ground, it came in the form of black rain. It coated the residents of Washington, Idaho and parts of Montana with fine gray powder. The force was so powerful that some 200 square miles of trees were destroyed.
Price eruptions can either be a disaster or an opportunity. Simply taking a look at the day’s volume profile will tell you quite a bit. Looking at a week’s worth will paint a picture you can’t ignore for your intraday trading strategy.
Start your day by looking back at a week’s worth of daily profiles. Note the shape they take as an indication of how the market is responding to price at that range. Anything out of the norm should catch your attention and signal a move for the coming day.
Pauses in uptrends and downtrends will be in plain sight. Big movements will be preceded by double distribution capital ‘B’ — buckle up for a move.
Monitor the movement of the value areas as an indication of the levels the market is willing to entertain, or protect. Profit from each eruption with a calculated calm, while others run for the hills.
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