Using the IB Range in Your Trading

Stats are your friend. The stat that has seemed to come into play for me almost every day this week is the normal IB range. Statistically the normal IB range for ES is 6-8 points. The extreme for an IB range would be 10-12 points. To clarify the IB stands for Initial Balance, which is obtained from the 1st hour high to the 1st hour low of the cash session.

Ok great, now how do you use this information to your advantage? Regardless of what technique or system you use, you should have pre-defined levels of interest for the day’s trading session. Once the trading range starts to approach one of your levels, it is either a good time to close an existing trade that has been going in your direction and/or look for a counter-trend rotation.

Another analogy that I’ve heard applied to the IB range is that the width of the IB range is similar to a lamp base. The narrower the range, the farther it will tip over when it breaks. The wider the range, the more stable it is. With a wide IB of 8-10 points, one would look for signs of responsive buying in close proximity to the IB Low. I’ll use today May 20th, 2011 as an example. Today, the first hour high was established at 40.50. We had some negative news and ES started driving towards our first support zone for the day. The zone ranged from 32.50-30.50 which would put us at an 8-10pt IB range. I saw some positive tick divergence at 32.25 so I went long there. We got a 2 pt rotation from there which allowed me to scale out of most of my position. Given the internals and context at the time, I expected the IB Low to be tested and broken. Given the wide IB range I expected responsive buyers to be active below the IB Low. So I looked to my next support zone which was 29-27.50. Again I saw some positive divergence on the first test of the zone and even more divergence on the second test. Responsive buyers were clearly active below the wide IB.

Conversely on days that we have a narrow IB range, say in the 5-6 point range, you will typically see further extension and I wouldn’t look for counter-trend trades until typically 1.5x - 2x IB range has been achieved.

To summarize:

-Average IB range is 6-8 pts with 10-12 pts being the extreme in the current environment.

-Wide IB: responsive buyers below the IB and responsive sellers above the IB.

-Narrow IB: expect range extension once broken.

ES 1-Minute Chart for 5/20/2011



By Scott (@TWSS79 on Twitter)

Ask EP: How did you learn to trade?

Hi e-mini long time without an update. One question i have. How did you learn to trade? on your own, or you did take a course or something you could recommend?

Thanks a lot man

Daniel From Spain
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Hey Daniel,

I'm busy with work and school these days so don't really have much to post to the Blog. I post charts on Twitter, so if you're interested in how I'm viewing the market these days, follow me on Twitter. I still follow the markets actively and post my analysis on Twitter.

Now on to your main question; I discovered trading and the markets in early 2003, and based on a recommendation from a friend of mine, I began by purchasing a software program that essentially gave buy/sell signals. I funded a stock trading account with Ameritrade and began trading in 500-1000 share lots. It was the absolute worst way to get into the markets. I was basing my trades off a "system" that I didn't understand. I won't mention the software program because it's just embarrassing to admit that I spent thousands of dollars on this piece of junk. On the bright side, after a few months and small losses, I realized the program was junk and tossed it in the garbage.

I then started reading up on Technical Analysis and candlestick charts, and switched to using TCNet for charting. I also found a chat-room that taught stock trading using technical analysis. In hindsight, I didn't really benefit much from the chat room and it turned out to be a hindrance since they used technical indicators, which always looked amazing in hindsight, but didn't work so well in real-time. That's true for most chat room gurus; they look like rock stars after the fact, but don't provide any edge in real-time trading.

I discovered futures towards the end of summer, 2003, and that's when I ditched stock trading and the chat room. I funded an account with Interactive Brokers, ordered eSignal for charting and began trading the YM, ES, NQ, Dax, and Eurostoxx50. Since I was working full-time, I would wake up in the middle of the night to trade the Europe open (Eurostoxx50/Dax), then go back to bed; wake up again in a couple of hours and get ready for work, and trade the U.S. open (ES/YM/NQ) for an hour and then head into work. My office was 5 minutes from my home, so on some days I would come home for lunch and try to scalp over lunch as well. I went through thousands of Live/Real$ trades (I think Simulators weren't as good back in 03'-04'). It was pure trial and error. I started a trading journal on Elite Trader (link to trading journal if you'd like to see the train wreck). I also read books on technical analysis and trading psychology. By February, 2004 I had completely burned myself out and decided to close my trading accounts.

I then got back into trading in the summer of 2008. This time around, I began by reading books on technical analysis, and spending hundreds of hours analyzing charts in Trade Station. I also read a lot of information on the various forums and Blogs. Thanks to Blogging, there is so much more information available for free online regarding trading now as compared to 2003-2004. I also joined the Trade Pilot Pro trading education chat room. I took the ideas they provided and then modified them to suit my personality and style of trading. Joining the Trade Pilot Pro room with was definitely helpful but my focus was trading education. I would ask a lot of questions in the room, and even try to get some one-on-one time with the head traders/mentors after market-close to really understand the concepts. Joe Baker uses a few indicators, but is also very good at reading pure price action. David Dube used to trade for a large financial institution and is also an excellent trader and mentor. Both of them spent a considerable amount of time helping me get up to speed. On top of this, I spent a lot of time analyzing the charts in the evenings on my own, and still do that. It's a great exercise to enhance your pattern recognition skills. I spent a few months in the chat room and then left the room to educate myself. It's important that you not get tied into a trading room. Taking time away and personalizing and internalizing what you've learned is important. This time around I also switched on/off between using my live/real$ account and the Simulator. I think the Simulators these days provide a very realistic field to practice your trading skills. You don't need to risk real capital until you're ready, and I strongly encourage newer traders to fully utilize the Simulator. Just make sure you use the Simulator properly. Focus on POINTS; not the dollar amount since it doesn't matter if you make 2 pts on a 1-lot or a 100-lot on Sim, so forget the dollar amounts and focus on how many points per contract you can capture during the day. Utilize realistic stops/targets on Sim. Take every setup that meets your trading plan and don't be afraid to lose on the Sim. Losses are actually great since you learn more from them, so while you're on Sim, go full-tilt and take every setup. The next step is maintaining a journal. You must keep track of your performance; otherwise it's a waste of time. The other benefit you get is screen time. Screen time is KEY! Whether Sim or Real$; you're gaining screen time and that will improve your intuition and "market feel" over time. If you'd like feedback on your trading, start your journal online via a Blog (that's what I did). Read, read, and read some more! BUT question everything you read. Don't take the information as Fact. For example, 90-95% of the content posted on my Blog is my Opinion and Analysis. You can't accept it as fact. You must question any idea you come across and only accept it once you've performed your own testing/analysis, and internalized it based on your own personality. Really try to understand the concepts at their core. For example, if someone says "stay out of the market during the first 5-10 minutes of market open"; question yourself on WHY you should stay out of the market during that time? Formulate your own Logical answer that makes sense to YOU. If you decide to use a particular indicator, dig deep and understand how that indicator works (mathematically). A simple example is moving averages; if you're going to use moving averages, dig in and really understand what the moving average represents. Keep an open mind and never give your opinion so much weight that you can't change it. There's a fine line between having conviction in your trade idea, and being stubborn. If the market proves you wrong, you must be able to change your idea. Timing is critical in trading; you may think we're over bought/over sold, but if the market doesn't come to that conclusion at the same time as you, you must be willing to put that idea on hold, and trade what's in front of you.

Another great resource is Twitter and StockTwits.

It's getting really late here (past 3 AM now) so I'm going to wrap this up for now, but hope this post was useful to you. If you have any other questions or need clarification on something I wrote above, please post it in the comments. I'm writing this pretty late and hope the post makes sense (I'll review it in the morning).