Trading on Market and Volume Profile

01/30/2014 10:00 am EST

Focus: TRADING

Tim Bourquin

Co-Founder, The Traders Expo and The Futures & Forex Expo

Ben Lee started out in the family business of real estate, but then quickly caught the trading bug and decided to make it his full-time job. In this Trader Talk Podcast interview, I talk with Ben about how he uses market profile and volume profile to spot good opportunities. We discuss how he monitors volume and price to find areas where price may be turning soon. We also talk about how he uses weekly options to write credit spreads for income. A good conversation with a trader about his journey to find success.

Tim Bourquin: All right. Thanks everybody for joining me today. My guest is Ben Lee, and we’re talking about trading. He’s from ThinkTradeThink, also a trader himself. So Ben first of all, my question is always what kind of trader are you? Are you a day trader or a swing trader? What do you like to trade in terms of markets?

Ben Lee: Well, that’s a great question. I actually trade a lot of different markets and it really depends on what particular account I’m utilizing. If it’s my trading account, I’m purely a day trader. You know, I like to be able to sleep at night, and don’t wake up in the morning, I don’t have to check the markets. I also trade the weekly and monthly options in a different account and then for my retirement accounts, I’m long term, you know, very, very risk averse, looking for quality stocks with dividends or debt so.

Tim Bourquin: Right.

Ben Lee: Depending on what particular account I’m in, that’s how I trade.

 
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Tim Bourquin: Do you recommend to people that they have different accounts like they have a strict day trading account and then maybe a swing trading account? Is there a reason why you like to separate them?

Ben Lee: Depending on the type of broker that you have. Obviously, not every broker is the best at all those different types of markets. So depending on who your futures broker might be, might be better than some of those for stocks or bonds or whatever it is.

Tim Bourquin: Right.

Ben Lee: So your transaction costs are a very important part of your trading so you really need to take in account getting the lowest transaction costs.

Tim Bourquin: All right. How did you get started in trading, what got you into it in the first place?

Ben Lee: Actually, I started in high school. You know, my parents had some extra money lying around, this is in mid’90s, and I did really well with it. Unfortunately, I got into college and basically you lose all focus in college. Mostly, it’s just classes and football games and drinking so I got away from trading. After I got out of school, my parents had a very, very big real estate business going so I decided to follow in the family business and living in Florida it worked great when I got out of college for five, six years. Then unfortunately after 2006, everything just stopped and I remember sitting in my office for two weeks and I hadn’t done anything in two weeks. So I said all right, I have to do something else and that’s when I started looking at how I could generate income. I said you know what, I was really good at trading stocks and that’s what I wanted to do in the very beginning. I wanted to work on Wall Street as a kid so I said it was a natural progression into getting into trading.

Tim Bourquin: Right. All right. Did you buy classes or did you just get out there and start making trades to see what would work or how did you get started there?

Ben Lee: Actually I started with an options course first, and what I did, I learned all about options, all the greeks—delta, theta. It’s very interesting and I loved it until I would put on a trade and then I’d have to wait a week, two weeks, three weeks or a month until it either expired or my exit or my close on the position was executed. So I was, okay, I can do that and let’s do something else, too, that’s going to be a little bit more—a little more action or a little more time consuming than just putting on a trade once every month so I looked into day trading.

NEXT PAGE: Ben Lee's Daily Trading Routine

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Tim Bourquin: All right. Describe first now what types of things you like to put up on a chart to see, find good opportunities; talk about your daily routine, too.

Ben Lee: Okay. From what standpoint, day trading, from options like…?

Tim Bourquin: Yeah. Let’s start from the day trading account.

Ben Lee: Okay. Well, the method that I utilized it’s called the PIVVOT point method and it’s P-I-V-V-O-T. That basically stands for price, value, volume and time frame. So I utilize all of those. You know, those are the four basic foundations of the PIVVOT method and I look at it from the top down angle where I’m looking at it from a monthly standpoint and then weekly and then I bring my focus down to the minute standpoint.

Tim Bourquin: Okay.

Ben Lee: And what I use a lot of is market and volume profile. So I use that. I use that basically anything that I can again an advantage over my competition in deciding who is in control of the market whether it’s buyers, whether it’s sellers. So I really take a look at the auction process and how they interact because if you think about it all the market is, is a two-way auction, right? So let’s say for this year’s Super Bowl, right, you have two tickets on the 50-yard line right on the field and there was going to be an auction for it, right? So if you think about it, if you’re to sell both of those tickets for $1 out of a room of 100 people you probably have 100 bids, right.

Now as price goes up, right, there’s going to be less and less buyers until you finally reach that last person that’s going to bid it. Let’s say maybe it’s 50 grand, right. So you see a diminishing, like a bell curve, almost half of a bell curve, right. You know, the only difference between that auction and an auction that we see in the markets today in any financial market is that it goes both ways. So one auction ends if it’s to the upside then the opposite auction starts. So that’s what you see back and forth.

Tim Bourquin: And how do you see that in the market? I know on Stub Hub, let’s keep using that analogy. On Stub Hub, I see the price there, I can see it going up and down there. In the market, you see prices move, as well, but how do you know who’s got more power—the buyers or the sellers?

Ben Lee: Well, what you can see the one thing that no trader or investor can hide is volume, okay, even the largest hedge funds in the world. You know, if Warren Buffet were to exit out of let’s say 100 million of Microsoft, right, you’re going to see that footprint no matter what, okay, you can’t hide it. So what you can see is if price is moving higher, right, and then you see more volume that means there’s more acceptance on the way up, okay. But if price is moving higher and you see volume coming out and then you’re maybe reaching an important level, let’s say maybe the high of the day or the low of the day or some reference point and then you see volume coming out, there’s a good possibility that the auction is ending to that direction and it might turn around.

Tim Bourquin: All right. Do you have a basket of stocks that you’re looking for either increasing volume on a price that’s starting to flatten, meaning maybe it’s going to turn around and head up or vice versa on coming down off a top? I mean do you have a basket that you see or do you look at the index, what do you do?

Ben Lee: Well, most of the time I only focus on the ES, which is the S&P 500 futures and also the euro/dollar. What I’ve seen is from a psychology and attention standpoint, it’s very difficult to utilize this system when you have 20 or 30 stocks all at once. I mean I’ve seen some guys that have 50 screens up, it’s amazing. I mean but they do something very simple like eight EMA, you know if it capitulates it’s very simple, very easy, if this happens you have to do this. You know, it’s 1, 2, 3—that’s it.

But when you’re reading the market with regards to this PIVVOT system, you really need to be a lot more cognizant of what’s happening minute by minute, moment to moment, second by second. Because every second that passes gives you additional information and market-generated information to make a better decision.

Tim Bourquin: So that means once you have a trade on, you have to sit in front of your computer then and be monitoring it the whole time?

Ben Lee: Yes and no. I mean I found personally that I trade better when I’m 100% into the market because I can see certain nuances that maybe a new trader doesn’t understand per se. So I easily spend over 10,000 hours in front of the screen so I understand when the market is doing or it isn’t doing something, then I make a decision based on that. There are times when you can just leave it and let it go, but again you’re allowing the market to dictate where you get in, where you get out.

NEXT PAGE: Ben Lee Talks About Volume

|pagebreak| Tim Bourquin: Okay. And then market profile of course many traders have volume profile though, talk about that. Is that what we’ve been talking about here where you’re looking for accompanying volume to spike or decrease on price?

Ben Lee: Well, the reason while volume profile isn’t as widespread as market profile is is because market profile was developed by Pete Steidlmayer in the ‘80s at the CBOT, right. Back then, they would use time as a proxy for volume. So the more time spent at a certain price, they believe that more volume should be there at that particular price, right. So the more TPOs or time price opportunities or the letters that you see grow out on a market profile that would be “more volume,” right.

But now with the Internet with our data connections and our computers and everything else, charting software, you can actually look at volume, direct volume. So you can utilize both those together to see, to give you more of a deeper view into if an auction is actually finishing.

Tim Bourquin: Is this pretty much the method you came across early in your trading or has this been an evolution that you’ve reached to this point saying I’ve tried a lot of different things, this is what works best for me?

Ben Lee: Well, it’s definitely an evolution. You know, I started out with just Fibonacci retracements. They worked great until it didn’t work, right, and I personally have purchased and researched over 12 different trading systems and I’ve spent easily six figures in trading education alone. It’s basically an evolution because every system had a weakness and I always tried to cover up the weakness with the next system. So I went from system to system to system and system and after I think it was like five or six, I realized I had to start working on myself because that was the only constant within the six systems. You know, I looked in the mirror and I said you know what, you’re probably the problem. So I started working on my trading psychology and looking for something where it made sense to me. If you look at it from the auction perspective, how buyers and sellers interact that made so much sense to me and it just clicked in my head. So, that’s how I fell into it so to speak.

Tim Bourquin: Let’s switch over to the options strategies that you use. Will you have options trades on at the same time you’ll have day trades on?

Ben Lee: Yeah, all the same and the way I do it, I just trade on the ES for my futures and then the SPX for my options. That way, I’m very intimate, my knowledge is very intimate with the ES so it makes it very easy to transition. So I understand where the market is going to be and I’m getting a two for one with research time and energy.

Tim Bourquin: So, will you ever have an option trade that is different in bias in than an ES trade?

Ben Lee: Oh, definitely.

Tim Bourquin: You could. So you may be long in ES, but you may be short a put or something or short on options?

Ben Lee: Yeah, definitely. Yeah.

Tim Bourquin: Why would that be just timeframe?

Ben Lee: Just because of, yeah timeframe, yeah. You know, one of the things that I think most new traders have an issue with is listening to too many people all at the same time, right. If turn on CNBC, there’s a hundred talking heads, they’re like “oh this is what’s going to happen, this is what’s going to happen” and they might be correct. But if you trade on a day timeframe, you can be completely wiped out before Cramer says something long term and it finally happens maybe a year later.

Tim Bourquin: Right.

Ben Lee: So, they really need to focus on whatever particular timeframe that they’re trading or investing and really decide what information is pertinent to their particular trading system.

NEXT PAGE: Why Ben Lee Likes Credit Spreads

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Tim Bourquin: All right. Let’s talk about your weeklies. How do you use weekly options?

Ben Lee: Mostly I just like credit spreads. It’s a lot less risk if you think about it. You’re collecting income on the way in and whether it expires, it’s great or if you’re just taking it off for minimal, for maybe a couple of pennies or five cents, it just makes it a lot easier instead of having to guess direction. So, I just like having a credit spread. It’s like having—on those days, in those weeks that have very, very low volatility it really makes sense to put on credit spreads.

Tim Bourquin: I was going to ask you if you have a hard time finding even a credit spread and low volatility that pays you enough that makes putting the trade on worthwhile in the first place because we had a lot of volatility although it’s starting to creep up now.

Ben Lee: Yeah. Well, again if you—another thing with the PIVVOT system—you could actually anticipate where price is going to go and the way it does that it’s called the volume composite chart. All it is, is volume on the vertical axis, right, at any particular price. So what you’ll see, there are some prices that are more transactive than others right. So you see—it’s almost like hills, so to speak—there’s high volume, there’s a low volume, high volume, low volume, right.

What price basically does is the market participants around like let’s say a higher volume area, they agree that’s a fair price, okay, right. So when there’s a lot of volume there, it’s going to take a lot more to get through that area if you understand what I mean, right? Because it’s almost like wading through water, okay. If you’re wading through water that’s head deep, it’s going to take you a lot longer to wade through. But if it’s only at your ankles, you can easily run through. So that’s the analogy that I use.

So what a price will do is, it will basically go through those distributions. It will hit a low volume area and one of two things will happen. Either a lot of volume will come and it will push through the next distribution or it will fail and then just fall back into that particular distribution it was in, does that make sense? So when you look at it from a longer-term perspective, you can decide where price is in relation to the distribution and if it breaks through to the other distribution, there’s a high probability that it continues to test into your direction.

Tim Bourquin: Talk about your strategies with your options that are outside weeklies. I’m assuming they’re monthly or do you do weeklies, what do you like to do?

Ben Lee: Yeah. Basically, I just like the monthly. The longest I go is monthly. Again, I use the same strategy it just really depends on volatility. If there’s higher volatility, I like to stick to weeklies. If there’s lower volatility I might go monthly just because it gives me a little bit more income than when I utilize monthlies.

Tim Bourquin: I had a discussion about this with another option trader recently, talking about whether or not you let a position like a credit spread expire or if it’s low enough, you just take it off and buy it back for pennies. But the problem comes in when it’s not pennies, yet but you’ve got some profit, do you wait it out and let it, hopefully, more time decay come in or take it off because you’re concerned that it may go against you?

Ben Lee: Well, that really depends on the way you trade and your comfort level, to be honest with you. There are some people that will only just let it expire. There are some people that will buy it out first before they actually allow it to expire. At that point, there should be a set of rules that you come up with that say, okay, if you make so much profit, then I should take the trade off or whatever it is. Now if you do close the position with another transaction, you also have to factor in your commission. So depending on where you are with regards to a broker, if they had very minimal fees to close a position, then it might make sense for you to just go ahead and close it and put your money in the bank. But if it’s going to cost you a lot more—$15, $20, $30 on one contract, one options contract, it might not make sense. So it might—

Tim Bourquin: Have a plan basically is what you’re saying.

Ben Lee: Yeah.

Tim Bourquin: Know what it is beforehand.

Ben Lee: Yeah. I think it’s much better to come up with that plan before you ever get involved in the market because at least at that point you’re unemotional, you’re not connected to the market.

Tim Bourquin: Right.

Ben Lee: And you can make a sound decision then.

Tim Bourquin: Right. Not after the fact, not after you’re already in.

Ben Lee: Yes.

NEXT PAGE: Ben Lee's Goals as a Trader

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Tim Bourquin: Yeah. All right. So as we finish up here, talk about your goals as a trader. Do you have a dollar amount in mind every year that you want to make? Is it a percentage of your account? How do you decide when you’ve had a successful month, week, day trading?

Ben Lee: You know what? I actually spoke with a student about this today with regards to focusing on results vs. the process. Now if you focus on a particular dollar goal per day, the challenge with that is it forces your hand into possibly entering the market when there’s not any high quality opportunities. If you say I need to make $200 a day, today would have been a great day, there’s a lot of movement. But let’s say when you’ve had a very, very tiny day, maybe like the six point days that we’ve seen in August, it’s going to be very difficult to make quality decisions in those type of markets. So do you focus on the results or do you focus on the actual process? I try to get my students to focus on a process and trading well. If you trade well and you execute your process to perfection then the results, the money will come no matter what.

Tim Bourquin: Yeah.

Ben Lee: So I focus on trading well more than any particular result and the way I measure it is by—I have a trading plan that I create every single day and it will give me a long-term view from a monthly, weekly, daily, into the day timeframe perspective. Now what I do, I actually write at least a minimum of three different scenarios. If the market moves higher, this is what I’m going to do, if the market moves sideways this is what I expect, and if the market moves lower, this is what I’m going to do. So at the open depending on if it opens in balance, in the middle of yesterday’s value area and range, chances are there’s going to be a very, very low probability of a large move. If it opens outside of yesterday’s range and value, there’s a higher probability because something in the market has changed in the overnight. So that’s how I base that. But I always have three different scenarios, and at which point I decide what I’m going to do. I basically have it on one of my screens and then I execute that plan. If I don’t execute it and I get it to trades that I don’t necessarily want to, then that for me is a mistake and that’s how I judge. I judge it based on the mistake that I make, on not reading the market correctly. That’s how I basically judge if I trade well or if I make mistakes.

Tim Bourquin: Do you have a journal? Do you mark down every single trade and what got you into it, out of it that sort of thing?

Ben Lee: You know, I used to do it a lot more than I used to do. I actually had detailed everything. But now I don’t do it as much as I should because I understand why I get in the trades and why I don’t. So just for time’s sake, I don’t do it as detailed as I used to.

Tim Bourquin: But it sounds like it got you to that point, though, so you don’t have to do as much anymore?

Ben Lee: Oh, definitely, definitely. And when I work with students, the most difficult thing to pass on is a thought process. So I make my students really get into the nitty-gritty of what they’re thinking and feeling at that moment because let’s say you got into a trade, you don’t really say much about it , so how can I say you did well or you didn’t do well? If they told me the reason why I got into this trade is because I saw this, I saw this, I was feeling this at this moment, I exited because of this, this and this, at least I can see where they’re coming from and then I direct them into the proper way to think about it.

Tim Bourquin: Well, we’re just about out of time here. If somebody wants to find out more about you and you talk about your students so you do some mentoring. What’s your website?

Ben Lee: It’s www.ThinkTradeThink.com.

Tim Bourquin: There’s probably a story behind ThinkTradeThink.com, why in that order?

Ben Lee: Well, it’s interesting. Actually, my girlfriend came up with it. You know, I told her what I do and it’s like do you have any ideas and she’s like why don’t you think of this. I was like okay. You know, the reason why I put those together is because you really need to think before you get into a trade. After you trade, you really need to think back and say, well, how did I do there? So having ThinkTradeThink all in one process is the idea behind the whole process.

Tim Bourquin: All right. Well, viewers and listeners, we will link to Ben’s website in the notes for today’s interview. Ben, thanks for your time today, I really appreciate it.

Ben Lee: Hey Tim, I appreciate your time as well and hope I was helpful.

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