How To Trade Market Profile Poor Highs In WTI Crude Oil Futures

September 2, 2020 07:06 AM
Axia Futures

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Imagine there are 2 pie shops. the first shop sells pies for $10.00 a pie and the other sells them for $3.00. Assuming that they sell identical pies, a sensible buyer wouldn’t be willing to pay $10.00 if they can get a pie for $3.00 at the other place. If demand is high, and people enthusiastically line up and pay $3.00 for a pie, prices may rise. However, if the pie shop owner doesn’t raise their prices, in market profile terms, this creates a “poor high." Effectively, some people are willing to buy pies that are priced higher than $3.00, but the market hasn’t yet been able to explore these prices. If prices were allowed to rise to $4.50, and the queue of customers disappeared, then there would be no more buyers and the auction process would be complete with the market discovering the highest price anyone is willing to pay for a pie.

The same thing recently happened in WTI Crude Oil futures, specifically within the price range of $43.22-$43.28. Every time the market reached this price range there were plenty of buyers but the sellers were able to prevent prices from moving higher.

How does the market profile create a poor high?

A poor high shows up in much the same way as a market profile ledge but is much more obvious. The flat top of the profile as can be seen in the image below which indicates that on multiple occasions during a trading day, a price was traded but prevented from trading through. This reference point becomes even more noticeable when hit over multiple days. The implication is that the highest price in the current move hasn’t yet been found, and therefore the poor high becomes a target to break.

WTI Oil Poor Highs

Market profile trading strategy

The difficulty with creating a trading strategy based on this market profile reference is that you have a target and no clear entry point or stop loss. In order to find these levels we need to dig a bit deeper. The most important element, and something we teach in all our trading courses is access points and where you can enter a trade. By looking into how the pit or cash session (14:00-19:30 BST) has traded as well as the full session, we get more clarity around a potential area to execute.

In the above image of WTI futures, the last 3 days have stalled at $42.89 just below the poor highs at $42.94. If the market rises into this area then a continuation trade can be approached as the risk can be defined with your stop loss back below $42.89. A potential target also becomes clear with a break of at least $43.20-$43.28.

Once an entry zone, stop loss and target have been established, the next thing to consider is the nature of the move. As sellers have been preventing a move higher at the same prices and have been waiting a long time for a drop lower, but not getting it, it is likely that they will have their stop losses placed just above this defended level, which on a break higher should result in a smooth, fast move higher as those sellers run towards the exit.

Pit Session Entry Zone

The trading strategy execution

The execution of this trading strategy was something discussed at length during our current career course before the trade materialized, considering not just the order flow needed to be seen to enter the trade but also what might happen at the breakout point, along with the potential risk of the trade failing at the poor highs, thereby creating a false break.

So let's break down how the trade could be executed.

  1. Volume and delta increase at the pit open (a gap up). A test down to $42.94 and failure to continue is the indication to enter on a move through the open at $43.00.
  2. Minimum expectation is a break of $43.20 and an exit of shorts that have stop losses placed higher up. This creates a fast move to the next target at $43.49.
  3. Risk can be defined: a stop below $42.89 (11-15 ticks) and a target of $43.20 as a minimum with 20 ticks of upside. If the market doesn't stop there a second target is $43.49 (49 ticks). In either case the payout for the 15 ticks of risk is acceptable particularly when considering that the expectation of a break is higher than the expectation of a drop below $42.89 based on the rejection of $42.94 on the opening move down.
  4. The importance of having a target is very evident here - volume and delta (indicators at the bottom of the chart) fell away quickly so a further break of $43.49 was unlikely, especially as the order flow had changed compared to the original break of $43.20. Watching the price ladder gave a further clue that $43.49 should be an exit. Large sell orders of 180 lots were placed every 5 ticks on the way up showing willingness still from sellers. This could be compared to the pie shop owner selling their first 10 pies for $3.00 and the next 10 for $3.10 and so on until no one buys the last 10 for $4.50.

Oil Poor High Breakout Execution

Not every market profile poor high breakout will provide the same access as we saw last week in WTI, but the general trading strategy and principles remains the same and is replicable across all markets: Map the area to find an entry zone, then within the zone the order flow and a smaller time frame pattern should provide the necessary access points, and finally the expectation is for a smooth fast break as short positions rush for the exits and create a liquidation-type move.

 

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About the Author

Axia Futures is a proprietary trading firm in London. They offer global trader training education to financial traders of all levels with the aim of helping futures traders trade more successfully and profitably.