7 Smart DOM Trading Setups for Your Trading
Every trader wants to find a setup they can rely on. We deliver your 7 such trading setups!
Here we discuss approaches for intraday trading where the chance risk ratio > is 1:3. These setups are based on real-life behavior patterns of buyers and sellers that you can identify using the innovative tools of the ATAS trading platform.
Trading these setups is most efficient in smart DOM. You can also use the Footprint or Range Chart.
If you’ve never worked with the Smart DOM or Footprint, focus on just one setup and then do the following:
- practice to identify the trading setup
- Analyze the frequency of occurrence
- try to trade it in your head or on paper
- practice trading on the Sim account
- Only then with the real trade and start with the smallest contract numbers.
These setups are not a holy grail, the market simply behaves more frequently in this way.
Markets are different, they can behave as follows:
- slow, with a large trading volume on any price – such as treasury notes;
- or wild and fast, with a much lower volume on any price – such as the FDAX.
Choose the market according to your temperament and skills. Always note that in markets where you can make a big profit, the price can move strongly against you and cause huge losses.
That was almost the exclusion of liability. From now on, we will be talking about the practice of efficient trade.
Which setups actually work?
Let’s think about what makes a setup profitable:
- Consistency and frequency – the more often we can identify and trade it, the higher our profit.
- Understand under what conditions it works better – for example, high volatility. If something that worked before stops working, look for the reasons, such as changing market conditions.
- understand why the price would move. For example, triggering stops at certain price levels. The more stops there are, the sharper the movement will be.
- The ability to clearly understand when a setup works and when it doesn’t. If a setup works, you are always using Stop Loss Orders in a trade. If a setup doesn’t work, quit it immediately and minimize the losses.
- a close stop and a wide profit, > that is, the chance risk ratio is 1:3. Only if this condition is met, the number of profitable trades can be less than the < number of loss-making trades, i.e. the winrate can also be 50. Check the calculation.
Interaction of chance risk ratio and low win rate:
|Winrate: 20, R:R: 1:4||Number of trades ||Profit in Ticks||Loss in Ticks|
|Loss-making business || 8 ||–||8 = 1 * 8|
|Profit trades ||2||10 = 4 * 2 ||–|
Sum in ticks = 0
Interaction of Chance Risk VReceivingnis and High Winrate:
|Winrate: 60, R:R: 8:4||Number of trades||Profit in Ticks||Loss in Ticks|
|Loss-making business||4||–||32 = 8 * 4|
|Profit trades||6||24 = 4 * 6||–|
Sum in ticks = -8
For this reason, you can afford a larger number of loss-making trades without stress for the trading account at an Opportunity Risk Ratio > 1:3.
A list of the trading setups we describe in this article:
- Pullback to Step
- Pullback to Iceberg
- Pullback with the pressure fading
- Pullback with the correlating markets
- Trading in the range
- False breakout
- Pure impulse
For convenience and time-saving reasons, we will only go through purchase scenarios in our setups. You can of course also apply these trading setups the other way around to sell.
Trading Setup 1: Pullback to Step
The price breaks through the range and returns to the top edge and rises with new force. The range can be a day range or a short range range.
- When does it work? – in the trend market.
- Why does it work? – the stops are triggered and traders close deficit positions. Traders are less likely to sell when the price returns to the same level because it is psychologically difficult after losses.
- Confirmation – Stop triggering when the range is exited, which means a sharp, focused movement. New purchase orders arise when the price returns to the edge. There is a new strong movement.
- What happens when the setup works – a strong price movement after a pullback over the previous high.
- What happens if the setup doesn’t work – a return to the range area. If no stops are triggered during the outbreak, setup would most likely not work.
- Rist – several ticks in the range
- Profit – above the previous high
Let’s take an example of a Mini-Russell 2000 futures (RTYU9) in the Smart Dome .
We marked the first area with point 1. The price has broken it to approximately the level of 1,567.5, marked with a black horizontal line and then withdrawn to the upper limit of the range. We marked the first eruption with a narrow green arrow and the retreat with a red arrow. The price reversed after retreating to the upper limit of the range and moved much higher – a thick green arrow.
Trading Setup 2: Pullback to Iceberg
All pullbacks look pretty similar, but in this setup there is an additional trigger for entering a position. The market grows with an eruption and opens slightly and we see a large volume at the end of the pullback. This volume could be formed at 1 or 2-3 price levels in succession. Sellers sell, but the price does not move lower as it is against the limit orders. The sellers are absorbed. An Iceberg Order is a partially hidden limit order. Managed Money does not want to show its intentions and frighten inexperienced traders. The formation of icebergs takes a few minutes. It’s a very obvious build-up. Anyone who watches the market closely can see it.
- When does it work? – on normal days with range extensions. Works perfectly with S & P 500.
- Why does it work? – because the sellers fall into a trap and hurry to close loss positions. They buy and drive up the price.
- What does the setup confirm? – Iceberg orders and absorption. The spread tape with Delta will help to see if the price does not reverse, even though the delta changes significantly.
- What happens if setup works? We should see how the stops are triggered when leaving the price level as loss positions are closed. And new buyers should be added.
- What happens if setup doesn’t work? – Prei movement below the iceberg level makes this setup ineffective. The price may fall by several ticks under the iceberg in some markets, but without the pressure of the sellers.
- Risk – several ticks under the iceberg.
- Gain – above the previous high. If the price does not rise above this high, it makes sense to exit trading.
The price broke through the range and fell to the level of 249,125, where the sellers entered the market. These new sales orders absorbed limited purchase orders and the price did not fall, it rose. Sellers rose again to 249,300 and buyers picked it up again! The open interest is growing, which means that new orders have fallen into a trap. We have marked these orders with blue rectangles on the tape. Attention, Intraday Open Interrest is not available on all stock exchanges.
The index performed positively that day due to the wild rise in Gazprom shares. Attentive traders could use this setup twice and significantly increase long positions with a risk of just a few ticks.
Trading Setup 3: Pullback to Fade
Now the situation on the other side of the Iceberg Orders. During the pullback, sales are reduced and cannot push down the price. Sellers lose interest. This setup is not obvious, so it offers great competitive advantages to those traders who can identify it and trade it accordingly.
- When does it work? – on normal days with range expansion.
- Why does it work? – because there are no more sellers.
- What does the setup confirm? – gradual appearance of buyers.
- What happens if setup works? – the price turns around and buyers show up.
- What happens if setup doesn’t work? Sellers appear and a large sales volume pushes down the price.
- Risk – multiple ticks
- Gain – above the previous high. The acceleration of purchases and the emergence of new orders should be at a high level.
For example: We will see this example in the footprint and smart dome of a silver future (SILVERU9).
The price broke through the range and rose to the point 1 where the sellers entered. We showed this movement in the Smart DOM with a thin green arrow. The pressure from the sellers did not last long – sales are therefore lower in points 2, 3 and 4. We showed this movement in the Smart DOM with a red arrow. As soon as the buyers noticed that there were no more sellers, they became active again and increased the price – a thick green arrow. The price rose and a new area was formed.
Trading Setup 4: Pullback Correlation
Experience in monitoring correlating markets is required to use this setup. For example, the S&P500 and Nasdaq or 5-, 10- or 30-year bonds. You trade in a slower market, but look at the faster one. As the faster market begins to move after a pullback, join the movement in the slower market. The movement speed varies due to the liquidity. As with all pullbacks, the movement should accelerate and new purchase orders should appear at the previous high.
- When does it work? – in the correlating markets in the event of trend movements.
- Why does it work? – due to arbitrage trades, because big players make money with spreads.
- What does the setup confirm? – the common consistent movement of markets in one direction.
- What happens if setup works? – Buyers come to both markets. But we’ll see the price movement on Nasdaq faster and only then in the S&P500. 1 S&P tick is roughly 4-5 Nasdaq ticks. You won’t notice 1 S&P tick, but 4-5 Nasdaq ticks are a remarkable move.
- What happens if setup doesn’t work? The correlating market is returning below the previous low.
- Risk: – multiple ticks. You can even close in the event of a reversal in profit, as you are working in the slower market.
- Profit: – higher than the previous high.
We show you the correlation of the futures E-mini S&P500 (ES) and E-mini Nasdaq 100 (NQ) as a clear example. It is impossible to tell with a candle stick chart which of these markets is moving faster, that’s why it’s so important to analyze the Smart DOM. First, however, it’s easier to see the correlation in simple charts.
Trading Setup 5: Range Fade
Ranges can be different, they could be as follows:
- short-term during a trend. Usually they are rather narrow and it is more efficient to act on an outbreak.
- intraday in slow and inactive markets. You can trade here from low to high and in the opposite direction. Psychologically, however, it is quite difficult to sell at the high.
In order to trade the range profitably, it should be quite wide, otherwise the chance risk ratio < 1:3 could arise. Do not trade this setup in tight ranges. Sometimes there are obvious absorptions at the extreme points of the range and it will help them to identify prices from which trades can be opened. Also use correlating markets to analyze a trading situation. Pay attention to the POC (Point of Control – the term comes from market profile theory). If the price cannot overcome the POC, it moves in the opposite direction, where the resistance is less.
- When does it work? – during the reduction of volatility and activity. For example, in summer or on the eve of holidays or important news.
- Why does it work? – because traders do not have a clear understanding of the fair or unfair price. No one is prepared to initiate the price movement. And “Managed Money” is taking a break.
- What does the setup confirm? – Volume and trade decrease as the range edges approach. Volume and trade increase near the POC.
- What happens if setup works? – a reversal near the range edges. Sometimes absorption can occur at extreme points.
- What happens if setup doesn’t work? – the price dynamically leaves the range.
- Risk: – several ticks outside the range.
- Profit: – ideally the entire range, but ideal situations are rare, therefore from 3/4 to 1/2 of the range.
Example of a wheat future (ZW) in the Smart Dome.
It is an intraday range, which was gradually formed. It is more efficient to trade from prices where the volume profile changes significantly. The profile increment is the difference in the number of contracts traded at the adjacent price levels. We have marked these prices near extreme points with black horizontal lines.
- You buy at the bottom; The price is rising and we have marked this movement with a green arrow.
- They sell at the top; The price is moving down and we have marked this movement with a red arrow.
The range in our example is not symmetrical and the POC is in the lower range. Therefore, it is quite possible that the price does not tend to fall significantly below the POC.
Trading Setup 6: Head Fake
Dynamic eruption of the range. The sharper the movement, the better as more traders consider the outbreak to be real. The market stops with a large volume, this could be an Iceberg, after a cascade of triggered stops. The price falls sharply back to the edge of the range. A symmetrical trade from the other side of the range takes place quite often.
- When does the setup work? – in slow and non-trend-oriented markets, after the extreme point of the range has been tested several times. In summer and on the eve of news and holidays.
- Why does it work? – Managed Money manipulates the market or sets traps for retail traders.
- What does the setup confirm? – Outbreak, stops and absorption.
- What happens if setupworks? – stop the purchases, the price reverses and reaches the lower limit of the range.
- What happens if setup doesn’t work? – the price exceeds the absorption or does not return to the range.
- Risk: – several ticks outside the absorption.
- Profit – the lower limit of the range.
Example. Let’s check the footprint and smart dome of an E-mini S&P500 Futures (ES) again.
We have marked the most important area of the day with the number 3. After this area is exceeded, several mini-areas are displayed in the Smart DOM. With point 1 we have marked an obvious absorption – a huge volume without significant price movement. The delta is positive in this candle, but with an upper wicket that doesn’t look good for buyers especially after absorption. Sellers appear in the next candle and the price moves outside the previous mini-range. We marked the absorption level in the Smart DOM with point 2 and the price movement with green and red arrows.
Trading Setup 7: Pure Impulse
The market is moving very fast for no apparent reason – this is a pure impulse. This is a “bread and butter” setup of the traders. A profit on such days could be much higher than on normal days. One position could be increased in the course of the price movement.
- When does it work? – under the influence of news, Trump tweets and trade wars.
- Why does it work? – because the market is inefficient, all traders are people and subject to emotions.
- What does the setup confirm? – News or macroeconomic events.
- What happens if setup works? The movement continues without withdrawals and the formation of large key areas.
- What happens if setup doesn’t work? – the price forms a range or reverses.
- Risk: – if you resist the impulse, you can lose a lot. If you go with the impulse, you immediately make a profit.
- Profit: – higher than the risk.
Example of a Moscow Exchange index futures in the Smart Dome (a small exception here, since this setup is intended for sale).
We have marked the opening of a trading session with the letter O. The price began to decline almost immediately after the opening. We do not see any significant volumes down to 276700. This is a pure impulse when the price falls or rises without resistance. Ideally, the momentum lasts longer and the price drops/increases by 2-5 depending on the market.
We have described 7 setups with a Chance Risk Ratio > 1: 3. We are sure that this article and the modern trading platform ATAS will help you to improve your trading results. Start ATAS and test how the setups work in your market.