TraderNovice.com
The equity market trades higher day after day. You watch, knowing that there are a world of factors which suggest that price cannot continue to go higher and higher and higher. You want to short. But you have been trading now for several years and you know that you would be foolish to simply place a short as the market continues to rise. You have to wait for the right time. But when is the right time? How will you recognize it?
Market behavior cannot be predicted with certainty. Nonetheless, there are certainly times when the likelihood of one outcome over another is significantly greater. This is what trading is all about. Yet markets can behave irrationally for lack of a better word, and continue rising or falling far more and longer than anyone might have predicted (1999 for example). But when the time comes for a reversal, in any time frame (intraday, daily, weekly, monthly) the market will often give clues as to its reversal by showing EXCESS. This often comes secondary to a catalyst of some sort like a news item. Excess can be readily visualized with charts (Excess=A prints in upper yellow box on profile chart, left), and a properly placed trade can then use the perceived excess as a reference. If that excess becomes violated, then the idea for the trade is simply wrong and the trader needs to get out.
Retrospectively, recognizing excess is the easiest thing in the world. Too bad we cannot place our trades retrospectively, because in real time excess can be difficult to recognize
Recognition of excess in real time, will come from several factors. The trader must first be prepared and anticipate a change. This can be based on fundamental reasons, or technical like a lack of volume as his market continues to rise. Once that trader is mentally prepared, he then must assimilate the data in real time and assess if a pullback is part of the normal directional trend or an indication of a change. The ability to do this comes from intuition in the sense that through years of trading, the trader will have accumulated countless hours watching markets and he will have incorporated market idiosyncrasies into his mind. But there are specific things that a novice trader can look for as he tries to assess pullbacks:
Note that the same time period is shown on both the profile chart and the candlestick chart. This simply allows you to view the excess in different ways.
Excess can happen on any timeframe. We have here several days pictured using market profile and excess is noted on a daily timeframe. A bar chart is on the right of the profile chart, showing the high open, and low close. The implications with daily excess are the same as with intraday. This can be a great trade....especially if it is recognized at the proper time and a position can be obtained intraday, that will allow you to hold for several days. It can be quite profitable.
You may read about excess in books or hear about it in lectures. The pictures are so pretty. The excess is SO easy to recognize. There it is on charts from multiple time frames. It stands out like the sun breaking through clouds. Why didn't everybody take that trade? you think. But trading is not that simple. It takes time to recognize excess for what it is, and if you wait too long, the opportunity is lost. Retrospectively it takes no time to recognize, but you can't trade that way.
Traders need experience. There is absolutely no substitute. Recognizing excess comes with experience. But as you learn, you can look for the specific factors mentioned above to aid in your assessment.
You can also review our break from balance trade, and our across the box trade elsewhere on this site.