I am really impressed after I read the book Just a Trade a Day: Simple Ways to Profit from Predictable Market Moves (Wiley Trading) written by Michael Jardine. I have tested the theory in the Indian stock market and will discuss my findings here. In this article, I’ll talk about three things. 1) The Price Histogram study, 2) The Virgin Point of Control or VPOC option for that study, and 3) How I use it in my day trading setup for trading with the Virgin POC.
Histogram of Prices
The Price Histogram is my favourite tool because it is easy to use and very good at what it does. There are no magic or math tricks involved, and you don’t need to use exponentials, smoothing, or weighting. The Price Histogram just shows what you should be able to see with your own eyes: where the market was most “comfortable” trading at any given time. It is also unusual among technical indicators because it leads instead of follows. It is a leading indicator because it tells you where the market is likely to turn a long time before it does. Moving averages and oscillators can’t tell the future; they can only hint that the market is overbought or oversold, but never in advance. A common problem with lagging indicators is that they can’t keep you out of the sideways chop.
The Market Profile
Traditionally, the Price Histogram study (or others, sometimes called a Market Profile) has been used on a 30-minute or lower time frame chart to create a histogram of market activity for one day. I like a 5-minute chart because it is more accurate unless I look very far back in time. A 5-minute Price Histogram study is there in the chart below.
The histogram on the left side of the chart is made in five-minute chunks throughout the day. The length of each horizontal line in the histogram shows how long the market was at that particular price. So, if the market spends a lot of time at a certain price, the line for that price will be longer on the histogram. The price where the market spent the most time is shown by the longest line in the histogram. It is also known as the Control Point or the Point of Control. Most traders shorten its name to “POC.”
Example of Point of Control
This chart of Nifty Future of 25/03/2022 shows that the POC is located at 17211. The great thing about the Price Histogram is that even if it wasn’t there, you could probably tell from the chart that most of the time was spent between 17154 and 17268.
What makes the POC important? Traders remember it, whether they are aware of it or not. So, that’s it. No need to do the math. And the memory is longer or stronger the longer the market stays at a certain price. The POC acts as a centre of gravity from a psychological point of view. The POC for March 21, 2022, as shown in the next chart, was 17259. Let’s look at what happened the day after March 21 by scrolling down.
This next chart shows what happened the day after March 21. It’s a great example of how powerful the Market Profile can be, even though it’s a bit of an ideal case. Don’t be afraid. I’ll also explain what could go wrong.
More Examples of the Point of Control
On March 21, the POC was 17259. Even without the histogram and the point of control line, you should be able to see that the market spent most of the day in the 17181-17337 band. At the end of the trading day, the market closed almost 100 points below the POC. Overnight, it went a little bit down, but then, for some reason, it started to go back up. We can’t tell if the market will go up or down, and that’s important to remember. We can only be pretty sure that as the market gets closer to a POC line, the “pull” of that line will get stronger. Just check the next day at the 13:10 candle the price touched the last day’s point of control despite opening much lower.
The Reaction at the Point of Control
When prices hit the line, what happens? When a heavy object hits the source of gravity, it does the same thing as any other heavy object: it bounces. If it bounces hard enough, like when a tennis ball hits a tennis racket, it will go back to where it came from very quickly. You can see that the market went back down on July 5 evening to touch the POC from the day before.
Bullish traders then tried to push it higher, and the rally sustained till the next day. Price rallied from the POC of 4th July till the POC of 5th July.
The Importance of Point of Control in a Day Trading Setup
That’s why the POC is so strong. This also shows that the POC is not exact. Most people who understand how prices move know that when prices reach a turning point, like a previous high, low, or congestion range, that point usually doesn’t act as an exact ceiling or floor. At that point, what happens depends a lot on who is in the market at that time, which means that what happens is random.
Some traders might buy to try to move the market up. If the market as a whole has the same “will,” the market will move past the POC. Not often does this happen. Because it doesn’t happen very often, smart traders can use this information to make a trading system that makes money. I have done that exact thing. Most of the time, the market will try to move past the zone, but the buyers will leave and the sellers will take over.
In the chart above, you can see that the same thing happened on July 5th. The market closed just above the POC, but it started back up the next day. When prices hit the POC, sellers turned into buyers, and the market went back up the next day.
Formation of the Point of Control
The histogram usually looks like a bell curve, but it isn’t always symmetrical. It looks more like a pennant because it is “turned sideways.” If the pennant has a sharp “tip” that sticks out to the right, it means that prices stayed in a narrow range for a long time. This means that the “gravitational pull” of the POC will be very strong. If the point of the pennant isn’t sharp, it means that the POC isn’t well-defined and should be treated as such.
A pennant can sometimes have two tips, one being a little shorter than the other. In this case, there are two POCs, even though the indicator only shows one. So, it helps to pay attention to how the histogram is actually forming and draw conclusions based on that. The figure below shows a pennant with two tips.
The default setting in the Properties dialogue box or AmiBroker Market Profile, shown below, is for a Price-based profile. You can choose between Volume-based and Price-based profiles. Most of the time, the POCs that are made by Time-based and Volume-based profiles are almost exactly the same. You can find out if this is true by doing two studies that overlap, one for Time and one for Volume. In the second study, I usually only show the POC and not the histogram. When the Volume-based POC and the Time-based POC are different, I will consider both as good options.
The Virgin Point of Control or VPOC
A “virgin” POC is one that hasn’t been tested by price till now. A POC acts as the market’s centre of gravity. As prices move toward a POC, the pull of that POC gets stronger. This makes it more likely that prices will move toward the POC, and it also makes it more likely that the market will bounce, or turn around, at that point. But what happens after prices hit the POC, move back, and then move through?
The POC is no longer a virgin in that case. From a psychological point of view, the market no longer sees it as an important point of support or resistance. Traders may still see the prices that originally made up the POC as a congestion zone, but they will also notice that prices moved through that congestion zone, which means it has been “broken” and is no longer “virgin.” It doesn’t work as well as a turning point. Again, this has nothing to do with magic; it’s just common sense.
Example of a Virgin Point of Control (VPOC)
The “Virgin POCs” option in the Price Histogram study moves the POC line to the right until prices hit it, at which point it is no longer “virgin.” The 30-minute chart (below) on TCS share price shows the Price Histograms for each day over the past month and shows how important the Virgin POC (or “VPOC,” as I call it) is. Watch how many times the virgin point of control or VPOC acted as the exact turning point.
The blue lines show how a virgin point of control was a clear price attractor and the turning point. Also, many of the other VOCs on this chart acted as support or resistance, but you would have to look at each intraday chart to see how the price moved. In the next section, we’ll look at a few examples of what happened during the day with a Virgin POC from the day before.
The Day Trading Setup
First and foremost if you want to use this setup you need Market Profile software. You can get a Market Profile on AmiBroker here or in GoCharting.
So how can we use this information to make money? If prices go up from below toward a Virgin POC, you could just sell at the Virgin point of control. If prices go down until they reach a Virgin POC, you could just buy the POC. I am a bit more cautious. I look for confirmation from things that come after the fact. In this case, it doesn’t matter that they are lagging indicators because they are used to confirm a leading indicator. I use an oscillator for this. No matter which oscillator you use, MACD, CCI, RSI, and Stochastic will all tell you when the market is overbought or oversold, or at least when it is starting to “turn.” However, they will not tell you with any certainty whether the market will turn. The Virgin POC gives them that confidence.
Using an Oscillator for the Day Trading Setup
My oscillator is stochastic. Instead of using the point where the per cent K line crosses the per cent D line, I look at the per cent K lines from two different stochastic studies: one of them is very slow and the other is very fast. For the slow stochastic, I use 81 as the moving average, and for the fast stochastic, I use 9. When the slow stochastic is above the 65 bands, a cross of the 9 stochastic from above means a short. When the slow stochastic is below the 35 bands and the 9 stochastic crosses from below, this is a sign to buy.
Buy and Sell Signal
This next chart shows a full oscillation of the slow stochastic and the buy signal and short sell signals that are made when the fast stochastic is crossed by itself.
I made an AmiBroker AFL that shows the 2 Stochastics Indicator on the chart and makes an alarm sound when the fast stochastic crosses the slow stochastic from below when the slow stochastic is below 35 or when the fast stochastic crosses the slow stochastic from above when the slow stochastic is above 65.
An Example of Virgin Point of Control (VPOC) Day Trading Setup
Let’s go over a trade that happened on October 20 so you can see how I use the Virgin POC with two oscillators. As with all of my trades, these were posted to my website as they happened and given a time stamp.
The Nifty Futures started trading on June 20th at 15650.10. The next chart shows what I call the “Natural Trading Range” (NTR), which is bounded by a Virgin POC above the open price (15696) and a Virgin POC below it (15573). It was put up at the start of the trading day as a kind of “road map” for the day.
We do not have any idea if the market will go up or come down. We only know that when prices get close to ONE of the two Virgin POCs, VPOC will act as a price magnet and pull prices toward it. Will the virgin point of control attract the price? Maybe. Maybe not. It could take up to two days. All we know is that if prices touch a VPOC, we should look at the lagging stochastic oscillators to confirm a trade entry. The Natural Trading Range made by the Virgin POCs is our leading indicator. It tells us to look for longs in the area around 15573 or shorts in the area around 15696.
The Outcome of the Day Trading Setup
Prices have hit the VPOC above on the first-morning candlestick. I didn’t go short when prices hit the VPOC. Instead, I looked to see if the slow stochastic becomes red and reached above 65. Then I waited for the fast stochastic (blue) to move down. I knew then that I should go on short selling. The trade is likely to be on the downside for me to book profits.
I am conservative as a trader. So, I simultaneously use various trade management strategies. One should pay attention to the Keltner Channel. Keltner Channel is just an average of the average trading range that changes over time. They tell you when prices are in the average range and when they are outside of it. When prices move to the opposite end of the average trading range, it seems obvious to me that I should take a major portion of my profit there, as shown below. This trade took only one hour and fifteen minutes and 59 points.
Then, I try to trail the rest with some indicator like SuperTrend or something like that. Remember I only use a trailing stop to exit my trades. If it wasn’t at a VPOC, I wouldn’t take a long or a reverse trade. Trade management is also important in any day trading setup. Once I make a profit on the major portion at the Keltner band, I will move my stop to break even. I have seen how the break-even stop can be useful.
I recommend you to read the following book written by Michael Jardine.
In a few words, that is the VPOC day trading setup. A smart trader will, of course, use good trade management. It’s important to keep track of all trades. Not just the trades themselves, but also what happens during a trade, such as the high and low points, the time of day, the Keltner band touches, and anything else that’s important. With this information in a spreadsheet, you can make sure that both your stops and your goals are the best they can be. You can also find out when the best times to trade are and when not to trade. You can also find out if some days of the week work better than others. It is very important to know where the best stop is. Here’s an example of how we can use this knowledge in real life.