Category Archives: Volume Profile Guides

Trading the LVN Strategy with OTM Butterfly

Step 1: Set Up Your Chart

Chart Configuration:

• Use a trading platform with volume profile analysis capabilities (e.g., TradingView, ThinkorSwim)
• Apply the volume profile indicator to your futures chart (e.g., ES futures for the S&P 500).

Choose Time Frames:

• Use higher time frames (15-minute, 60-minute) to identify the overall market trend.
• Use lower time frames (1-minute, 5-minute) for detailed entry points and LVN identification.

Step 2: Identify Market Direction (Pre-Market Analysis)

Analyze the Trend:

• Analyze before the market opens, using the 15-minute and 60-minute charts.
• Identify the overall market trend using moving averages (e.g., 50-period, 200-period).

Confirm Market Sentiment:

• Look for higher highs and higher lows for bullish trends and lower highs and lower lows for bearish trends.
• Use additional indicators (e.g., HullMA, SMA, MA Crossover) for trend confirmation.

Step 3: Identify Low Volume Nodes (LVNs) on the Volume Profile

Analyze the Volume Profile:

• Identify significant price movements within the session volume profile.
• Look for Low Volume Nodes (LVNs) where a noticeable drop in volume indicates a potential price gap.

Validate LVNs:

• Ensure the LVN aligns with key support or resistance levels and significant price action points.
• Confirm the LVN with volume spikes before and after the LVN, indicating a sharp price movement.

Step 4: Plan the OTM Butterfly Trade

Select Strike Prices and Adjust Width Based on Volatility Regime:

• Zombieland (VIX < 17): Narrow width (e.g., 10-20 points wide). Set the middle strike price near the anticipated target level based on the LVN.
• Goldilocks (VIX 17-32): Moderate width (e.g., 20-30 points wide). Set the middle strike price near the anticipated target level based on the LVN.
• Chaos (VIX > 32): Wide width (e.g., 30-50 points wide). Set the middle strike price near the anticipated target level based on the LVN.

Ensure Sufficient Asymmetry (Debit ≤ 10% of Width):

• Calculate the maximum acceptable debit for the butterfly trade, ensuring it is at most 10% of the width. For example, if the width is 20, the maximum acceptable debit is

Step 5: Enter the Trade (Valid Entry Time: 9 a.m. to 10:30 a.m. for Futures, 9:30 a.m. to 10:30 a.m. for Indexes)

Wait for Price Confirmation (Based on Silver Bullet Strategy):

• Monitor the price action as it approaches the identified LVN during the valid entry period.
• Look for a swing high/low violation and subsequent reversal: For bearish trades, wait for the price to move above a recent swing high and then reverse downward. For bullish trades, wait for the price to move below a recent swing low and then reverse upward.

Confirm Reversal:

• Use a 1-minute or 5-minute chart to confirm the price reversal after the swing high/low violation.

Place the OTM Butterfly:

• Execute the OTM Butterfly trade once price action confirms the direction near the LVN.
• Ensure the debit is at most 10% of the width to maintain a favorable risk-to-reward ratio.

Set Stop Loss and Profit Targets:

• Place a stop loss beyond the LVN to protect against adverse moves.
• Set initial profit targets based on the expected move within the LVN range and overall market trend.

Step 6: Dynamic Exit Strategy

Monitor Position Relative to Profit Tent:

• Continuously monitor the price action to see if it moves into the profit tent of the butterfly spread.
• If the price is within the profit tent on a 0DTE day, the positive theta decay will accelerate, increasing profitability.

Inside the Profit Tent:

• If the price is inside the profit tent, hold the position to maximize the benefits from rapid theta decay.
• Monitor the gamma risk as expiration approaches, adjusting the position to lock in profits or reduce risk.

Outside the Profit Tent:

• If the price is just outside the profit tent, use a trailing stop to manage the position.
• If the price moves toward the profit tent, allow the trade to continue, giving it a chance to enter the high-profit zone.
• If the price moves further from the profit tent, tighten the trailing stop to protect against losses.

Gamma Risk Management:

• As expiration approaches, gamma risk increases. Be prepared to adjust or close the position if the price movement becomes erratic.
• Use a trailing stop or manually adjust the butterfly wings to manage gamma risk and protect profits.

Example Scenario

Bullish OTM Butterfly Setup (Valid Entry Time: 9 a.m. to 10:30 a.m.)

Identify Market Direction:

• The market is in an uptrend on the 15-minute chart, confirmed pre-market.

Find LVN:

• On the futures volume profile, identify a Low Volume Node (LVN) at $4050-$4070, indicating a potential price gap.

Confirm with Price Action:

• Price is currently at $4020 and moving upwards.

Plan the OTM Butterfly:

• Volatility Regime: Goldilocks (VIX 17-32), moderate width (20-30 points).
• Middle strike (short strikes) at $4100.
• Buy one $4050 call, sell two $4100 calls, buy one $4120 call.
• Ensure the debit is at most 2 points (10% of 20 points width).

Wait for Price Confirmation:

• Between 9 a.m. and 10:30 a.m., monitor the price as it approaches the LVN at $4050-$4070.
• Look for a swing low violation and subsequent reversal upward.

Confirm Reversal:

• On a 1-minute chart, see the price move below a swing low at $4030, then reverse upward.
• Switch to a 30-second chart and confirm the reversal near $4050- $4070.

Place Trade:

• Enter the OTM Butterfly with the middle strike at $4100.
• Ensure the entry is within the valid time window and the debit is ≤ 2 points.

Set Stop Loss and Initial Profit Targets:

• Stop loss at $4025 (below the LVN).
• Initial profit targets at $4100 (middle strike) and $4120 (upper strike).

Dynamic Exit Strategy

Inside the Profit Tent:

• The price moves into the profit tent and stabilizes around $4100 by mid-afternoon.
• Hold the position to benefit from positive theta decay, monitoring the price closely.
• As expiration approaches, manage gamma risk by adjusting or considering closing the position if the price remains stable within the tent.

Outside the Profit Tent:

• The price is just outside the profit tent at $4080.
• Use a trailing stop to potentially allow the price to move into the profit tent.
• If the price starts moving away from the tent, tighten the trailing stop to protect against losses and close the position if necessary

Harnessing Market Memory: A Novel Approach to Volume Analysis for Day and Swing Traders

Abstract:

This article explores a unique method for analyzing trading volume in financial markets, grounded in the concept of ‘market memory.’ Market memory, a term rooted in the works of Benoit Mandelbrot, serves as a metaphor for the lasting impact of trading events, similar to how a scar provides a record of past injury. We investigate how market memory influences price movements, aiding traders in predicting real-time price trajectories for both day and swing trading.

Introduction:

Like living organisms, financial markets bear the scars of their history. These scars are not visible on the surface but are subtly etched into the fabric of the market, leaving indelible marks known as ‘market memory.’ As Mandelbrot’s theory posits, the market doesn’t forget; it carries the memory of past events, influencing the future in a fractal, non-linear fashion. The ‘volume profile,’ an often-overlooked analytical tool, serves as a prism through which we can perceive and analyze this memory.

Volume Profile and Liquidity:

Volume profiles visually represent trading volume distributed across different price levels. High-volume nodes indicate areas of significant liquidity where the price tends to consolidate, akin to a battlefield where bulls and bears vie for supremacy. Low-volume nodes, or ‘volume wells’, represent areas of lower liquidity where the price tends to move more freely, trending in a particulardirection. Understanding these dynamics of consolidation andtrending is crucial in predicting price movements.

Persistent Volume Profile Features and Their Strength:

The strength of a volume profile feature—be it a high-volume node or a volume well—is determined by its size, longevity, and the degree of volume change at its edges. Large, well-established nodes act as robust consolidation zones, their edges representing significant support or resistance levels. Their relative strength can be visualized using color coding and line thickness on the chart. Furthermore, the relationship between parent (large) and child (small) nodes offers crucial insights into market structure and potential price movement.

Interpreting Market Memory Through Volume Profile:

A volume profile allows traders to decode market memory and develop predictive scenarios for price movements. Price behavior around volume nodes and wells provides insights into the market’s path of least resistance. Steep edges of high-volume nodes signal inflection points in the market, while the absence of volume (in volume wells) often precedes accelerated price movements. Thus, interpreting market memory through a volume profile aids traders in anticipating market behavior, arming them with a reliable tool to navigate the often-turbulent financial markets.

Conclusion:

By integrating Mandelbrot’s theory of market memory with volume profile analysis, traders can better understand market dynamics.

This innovative method provides a unique perspective on historical trading activity and a powerful predictive tool for future price movements. As traders and analysts, recognizing and understanding these ‘scars’ of the market, we are better equipped to anticipate, navigate, and ultimately profit from the intricacies of financial markets.

The final article would be much longer, with detailed sections on each topic, including practical examples, further elaborations on the theories involved, and potentially some empirical evidence of its effectiveness in real-world trading. This is an outline that broadly covers the key topics.

Here are the topics that would benefit from further detailing, along with the suggested empirical evidence:

• Market Memory Theory: An introduction to Mandelbrot’s theory of market memory, explaining how markets, like living organisms, retain a memory of past events. Empirical evidence could include comparing past and present market events and demonstrating recurring patterns underlining the theory.
• Understanding Volume Profile: A detailed explanation of volume profiles, including their creation and interpretation. Empirical evidence could involve presenting a volume profile chart, labeling key elements (high-volume nodes, lowvolume nodes), and explaining their significance.
• High-Volume Nodes and Liquidity: In-depth analysis of high-volume nodes and how they represent areas of significant liquidity, influencing price movements. Empirical evidence could include specific examples of charts with highvolume nodes dictating price consolidation.
• Low-Volume Nodes (Volume Wells) and Liquidity: A comprehensive explanation of low-volume nodes or volume wells and how they lead to more free price movement. Empirical evidence could include charts illustrating situations where price has moved freely due to low-volume nodes.
• Strength of Volume Profile Features: An explanation of how the strength of volume profile features is determined, focusing on size, longevity, and the degree of volume change at the edges. Empirical evidence could involve charts highlighting these factors, correlating them with the strength of the price movements.
• Parent-Child Nodes Relationship: Discuss the concept of parent (large) and child (small) nodes and how their relationship can influence price action. Empirical evidence could include charts illustrating parent-child node relationships and subsequent price action.
• Market Memory through Volume Profile: A section on how volume profile can decode market memory, predicting price movements. Empirical evidence could include past trading charts where volume profile analysis has successfully predicted price action.
• Real-world Case Studies: These could be a series of charts taken from various markets (equity, commodities, forex, etc.) showing how the volume profile analysis has been applied in real-world situations and the outcomes.
• Concluding Remarks: The final section should wrap up the key findings, reinforcing the potential of this approach for traders.

While charts and case studies provide concrete examples, they should be supplemented with a robust theoretical framework to explain the concepts and validate the approach adequately