Most Traders Chase Breakouts. Chris Drysdale Fades Them Using One Line.

[00:00:01]And what's going on Chris Drysdale?

[00:00:03]What's going on brother? We are excited to have you special guest of the day.

[00:00:06]I'm going to excited to talk through maybe a potential trade idea that you might have on the day. Well Chris, what do you got for us today? What do you What do you got an eye on?

[00:00:14]>> So we've been trading NQ. This is my chart here. We have four core setups that we look for every single day and they're related to very common occurrences that you will see on a volume profile.

[00:00:26]We'll use one standard deviations as well on the VWAP. So this orange line down the middle is going to be our globe globex VWAP starts at the 6:00 p.m.

[00:00:35]open.

[00:00:36]So we look for some very specific behaviors that we get very often with with futures markets.

[00:00:45]This trade when we trade outside of one standard deviation like this, we call this price discovery. If we are in price discovery, that is a directional trade.

[00:00:53]So we'll look to sell the pullbacks or buy the pullbacks in the direction of the of the momentum. If we return into the bands and back test, this will be a return to value trade. So we expect it to go back into a value area.

[00:01:08]This is one trade that we took this morning RTV. We had a huge rally out of the open as you saw and then we had this pullback right to the VWAP. That is what we call the VWAP bounce long and then as we break and hold above a deviation as well, we'll look to trade the the bands and when they line up with things like the initial balance or a low volume area on the profile, we call this a PDC long.

[00:01:34]So that's a break. We see acceptance on the profile volume building. So price is being accepted up here. We'll look to trade the pullbacks to the bands in a directional play.

[00:01:44]>> So for that. So we have four core setups.

[00:01:46]>> Okay. Okay. Now you broke that down really well. Anybody Anybody that's just watching that might not have too much experience with utilizing something like a VWAP.

[00:01:54]How How can somebody kind of frame up their their um their head space I guess you could say when it comes down to using a VWAP, right? I know it's volume-based, but how can somebody perceive that and use it themselves?

[00:02:05]>> Absolutely. So, the VWAP is you know volume weighted average price. So, it's price weighted by the volume. So, we consider it as a fair value area. So, price tends to come back to it like a magnet. So, if we actually trade around it like we are here, this goes back to Monday, this would be a balanced auction, right? So, price is spending time. The orange is VWAP, and these are one standard deviations. If we're clearly spending time and accepting in this area, we will fade the extremes of the value area. So, that's where we'll buy the bottom and we'll short the top.

[00:02:40]Okay? So, that's where the VWAP acts as a magnet. So, we will fade the extreme, so the deviations, and we'll target the VWAP usually with a partial profit, and then we'll see if we can get to the other side of the value area, the other deviation.

[00:02:53]Um however, if we can break and hold above a deviation on VWAP, that is sign of price discovery. We're we're we're trading directionally, and this is where you'll want to trade away from the VWAP.

[00:03:07]So, as it pulls back to like a one standard deviation, we'll try and get directional in the direction of the the break above the deviation area.

[00:03:16]>> Yeah.

[00:03:16]>> So, this is where we'll not look for the mean reversion trade back to the VWAP.

[00:03:20]So, in auction market theory, obviously we have two ideal market states where in balance or we're in price discovery. So, half of what we need to discover is using the context, the tools on our screen, which market are we in? Are we in price discovery or balance? And then we apply the proper setup based on the tools.

[00:03:38]>> Absolutely. And somebody just getting it because when you when you when you talk about this idea of fair value, how much does fair value or that idea of fair value play into your approach to the market in terms of building the narrative? Is that is that one of the first things that lets you know we have a potential trade idea on our hands? Is it Is it paying attention to see where the market is trading around VWAP? How crucial is that idea of fair value when you're building a trade idea or a trade thesis?

[00:04:05]>> It's absolutely crucial. In fact, it's a cornerstone of the entire trading system.

[00:04:09]Um if we are in a area of fair value, uh we tend to be rotational, we tend to be choppy, we tend to traverse from one side to the other.

[00:04:20]Um and that will be a completely different style of trade as it would be versus price discovery if we're trading away from a fair value area, which is where we get directional. So, most, you know, developing traders run into issues where they're trying to fade price discovery, they get run over, or if we're in fair value, they're over they're trying to get too directional.

[00:04:42]They're looking for big moves in one direction, and it's the market's just not giving it. We're in a two-way trade.

[00:04:47]Uh the big players are doing business, and that's why we keep chopping around a fairly narrow area. So, I would argue that it's almost everything. If I don't have that part down, uh it really doesn't matter what I do after that if I can't get that part right.

[00:05:00]>> Yeah, right. And And you you might have You might have already answered this indirectly just now, but I was going to ask, you know, somebody just getting into using VWAP, getting used to the idea of auction market theory, getting used to the idea of fair value, what is the most common, I I guess, misconception or mistake that you see people when they start to trade this type of approach in the market?

[00:05:18]>> Yeah, so the the the biggest thing is uh watching people trying to buy a market that's uh selling off pretty hard, feeling that it's cheap or underpriced, right? And it just keeps going against them. They don't realize that the market is is searching for a new fair value area. So, until it starts showing acceptance, um it's it it's likely going to keep going in in that direction, right? Right? So, a common uh mistake that most traders make is that when we are having that breakout, they're anticipating that reversal that's probably not going to come until it demonstrates that it's accepting at another price level. And then vice versa, you know, if if we're trading in a balance area or in fair value, always looking for that breakout, right? Expecting it, anticipating that when it gets to the top of the value range that it's going to break out. And as most people know, most breakouts fail, so that's where this idea of acceptance versus rejection comes in and how do we determine acceptance versus rejection? Well, we do it by time or distance. So, if we don't have time or distance outside the value area, our rules tell us that we're going to anticipate the rejection. So, everything is a rejection until the breakout proves itself. So, we are not breakout traders.

[00:06:35]>> Thanks, Chris. It was a pleasure having