Understanding Morning Hypo Charts

I wanted to get a post down tonight as I’m starting to get a larger number of questions on the Twits about the morning hypo charts and some of the terminology I use in them.  I don’t intend to make this a very lengthy post and only want to cover some basics so any further questions please leave them down in the comments.

Let me start as I often do with a comparison to sports:

A hoops squad (lets call them Da Bulls) has a big game coming up on Friday night.  To prepare for this game during the week they scout the other team’s players to identify their individual and collective roles, their strengths, and their weaknesses.  Da Bulls work to understand the opponents offense, and how they’ll defend it.  They work to understand the opponents defense and how they will run their offense against it.   Further time is spent on the fine nuances of the game and how they will respond to it.  As an example, the opponent in this game normally runs a man to man defense but they also play zone and they often run a full court press to start the second half and after scoring on a fast break.

Friday night rolls around and Da Bulls are in the locker room reviewing their week’s worth of preparation before they take the court and making any necessary game-time adjustments.  When the game begins Da Bulls players are in the zone.  They know what they are likely to face but they can’t know exactly what offensive play the opponents will run on their first two trips down the floor or which defensive scheme they will throw at them to start the game but they have prepared to react to those scenarios in real time…they’ve prepped enough that they don’t need to think about what to do while on the court they are doing it instinctively at that point.

This is the basic idea behind the Morning Hypos.  It is not to try to predict anything but to prepare for the game.  In my mind, every day is potentially a “big game” when it comes to the markets and as a result I think that preparation is key.  There aren’t many winning hoops teams that wing-it come game time and similarly there likely aren’t any professional traders that show up at their desk a little while before the open and then just sort of figure things out as the day goes along.

The market is the mechanism by which prices are advertised for the continuous two-way auction.  Due to the fact that the majority of my trading is conducted intraday and the fact that I can never know for sure which direction the market will move homework involves scouting both the buyers and the sellers participating in the auction.  As readers and followers know, for me that involves the same three tools on a constant basis:  automated price chart analysis with compliments from volume profile and usage of the RSI/RSI filter as I’ve previously discussed on the blog.  What you are essentially reading in the morning hypos is that locker room review I describe Da Bulls doing before they take the court.  Here are examples from the last two days:

11.12.14 42m Wheat

11.13.14 Wheat snap

11.12.14 42m Corn

11.13.14 Corn snap


The Morning Hypos differ from the homework session because I can draw context from the overnight session to compare to my evening prep and make adjustments accordingly.  The big prep work was done the night before and the morning hypo is the final fine tuning to execute on that homework.  When you see the o/n used in the morning charts it is simply a reference to the overnight trading session.

If you open the first chart posted above for Wheat let me explain some of the terminology.  First of all in almost every morning chart I’m going to list off a few basic things that will be providing me key context once the market opens for the regular trading hours,  or what is sometimes referred to as RTH in the morning charts.  Here are the basics:

  • Where is the market now?
  • What is the o/n high and the o/n low?
  • What is the o/n range and what is the o/n volume?
  • What does the overnight volume profile look like and does o/n inventory appear long, short, or balanced?

The first chart is the Wednesday game plan for Wheat.  Let me stress that I am not drawing any lines on these charts in the morning.  The chart on the left is automated so those charts are never drawn and the levels that are mapped out on the aggregate volume profile chart on the right are done the night prior or they’ve already been on there for several days or weeks.  I don’t want to be analyzing in the mornings or to be having my brain operate in that kind of intellectual state.  I want to be focused on final prep and then on execution.  I’m trying to think about what it’s going to feel like to execute these trades, to feel how the tape is moving, etc.  I try to do very little analysis at all during the day.  Ideally I do none because that’s what homework is for.  There are times when I’m done with a trade or perhaps coming back from an afternoon break when I’m briefly assessing a market during the day but I never want to be doing that while I’m in a trade.

From there you can see some of the nuance I’ll look for within the basics listed above and then I get to the hypos.  If you have any questions about these feel free to ask but in the interest of post length I’m not going to spell out in fine detail what all of these figures are used for.  Every day I try to come in with 2-3 key ideas that I will look to execute that day depending on what the market does.  It’s extremely simple:  one for the market going up, one for it going down, and one for it going sideways.  I’ll also often mention something called a MATD (Morning After Trend Day) which I believe is a term I first heard used by Don Miller.

A couple other things worth noting here in terms of terminology.  I mention an upside target for the primary hypo in the first Wheat chart and refer to it as a “naked aggregate poc from 10/30”.  You’ll see this term or the term “aggregate poc” on a regular basis in the morning updates.  First, the volume profile that I use in TradeStation is an aggregate instead of the granular tick by tick data you see many using volume profile operating with.   The term “poc” or point of control refers to the most traded price on these profiles that I use.   I’ll mark the poc in orange, some highs or lows are marked in red and gaps are marked in yellow on the profile charts.  The use of the term “naked” is in reference to a point of control that has not been tested again since it formed.  If you look at the 542 level that is referenced in the first Wheat chart you can see that it formed on 10/30 and it has not been revisited since then:  naked aggregate poc.

I’ll often given price objectives within the hypos and these represent levels where I’d want to scale out of a portion of my position.  If a position is working I want to take some profits as soon as possible.  The whole purpose of putting together the hypos is to try to position in reaction to the market in a way in which I think I have a much greater chance of getting my first scale than I do of getting stopped out.  If I can get the first scale if the trade then moves against me it can be more effectively managed for risk.  There might be times that I scale into a position or even add to a position but that’s too much detail for this post.  For the most part I am an all-in/scale out trader.  On the automated charts the channel objectives I list are actively moving levels when the channels are trending up or down.  The sideways channels objectives such as the one you see in the second Corn chart (last chart) above don’t move throughout the time frame on the chart like the up/down channels do.

I think this should cover all of the terms I commonly use that you might not be familiar with and hopefully it gives you a better idea what these morning hypos are for.

As always, good luck in your trading.



About Fat F1nger

Full time futures trader.
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8 Responses to Understanding Morning Hypo Charts

  1. Stalwart says:

    Thank you fat finger , that is well written. Could you pls explain the fraction terms you use in your charts for eg ” o/n high is 534 and o/n low 522 6/8″

    Also o/n vol 11 2/8 range what do that mean?

    Wishing all success BTW ,

  2. Fat F1nger says:

    Hi Stalwart,

    The prices given in the charts are how you are going to see them in TradeStation so for example the Grains trade in price increments like this: 522, 522 2/8, 522 4/8, 522 6/8, and 523. You may see others quote them as 522.25, 522.50, 522.75. Doesn’t really matter how you quote them though, each tick in the grains is worth $12.50 per contract or $50/per point.

    In the 11/12/14 chart posted above for Wheat I mention 11 2/8 as the overnight range. There I’m looking at the total range that was covered in the overnight session from the high to the low. I keep stats on the size of the overnight ranges in each market in a “normal” session as well as the volume traded in the overnight session. An 11 2/8 total point range range for Wheat in the overnight (o/n) is not a normal overnight range. That size move in Wheat it is well above the average range so these are things I’ll draw clues from in order to finalize my trading plans for the day. You can use this information combined with the opening type on the day and monitoring things like the initial balance in order to get confirmation from the market in real time that you should be executing on one of your hypos. In the case of 11/12 it was confirmed for me very early in the session that hypo 1 was in play and so the trade was long and we ended up hitting the extended target above at 542 on that session.

    Hope that helps.

  3. Ptolemy says:

    Thank you, FF. If you have a few minutes could you explain the chart timeframes you use, I haven’t seen them used elsewhere. Best wishes.

  4. Fat F1nger says:

    Hey Ptolemy,

    with regard to the time frames all markets are broken into 1/5 increments based on an entire trading session including globex hours so for this post as an example I’m looking grains and the four time frames I’m usually going to look at in grains are the weekly, daily, 210 minutes and 42 minutes. If I am trading intraday or trying to scalp a position I’ll go as low as 9 minutes/roughly 1/5 of the 42 minute time frame (rounded up)

    I discuss this a little bit here where I review the overall process for my trading: https://fatf1nger.wordpress.com/2014/08/29/process/

    • Ptolemy says:

      Thanks for taking the time.
      I have a methodology. My 2 key challenges have been discipline (to follow it in trade execution and journaling – I live in Europe and I’m too tired after the US sessions close) and uncertainty about what time frames to use (since ‘it works’ on all time frames – to an unknown extent).

      Is the 1/5 rule something that works for your style, or is there some reasoned basis for it?

      I had missed your Process post previously when reviewing you blog, so thanks for pointing me to it.

      PS I hope you’re waking up earlier to do cardio in the morning!

      • Fat F1nger says:

        ha…thanks on the cardio…truth be told I’ve been dealing with some health issues for the last few months and haven’t done any cardio at all since December…hopefully once I get this resolved I’ll start running again in the summer …its been freezing here this winter so it will be nice to get outside.

        The 1/5 time frames are used based on the channeling systems that are generated in my charts…all the charts you see posted here and on my twitter feed are automated and there is a specific way each channel is created based on multiple time frame analysis so that’s why I use the times I do. At the end of the day I’m basically of the mind that it really doesn’t matter what you use to trade and instead I think what you said is true…what matters is having the discipline to execute consistently whatever it is that you are using.

        I have seen great traders use market profile, volume profile, quant strats, macro, fundamentals, classical charting patterns, harmonics, cycles…there are too many things to list. Whatever the strategy is it seems there is someone out there that is using it well.

        The journaling is also something a lot of traders seem to skip but I’m not sure why…if you treat this like a business you have to keep good records….there are no good businesses that don’t. I don’t journal quite as much as I used to but when I’m dealing with a drawdown I’ll tend to pick up more on that to document where and how I’m entering trades mostly looking for instances of monkey errors rather than simply focusing on the P&L in the journal. I would bet if you start doing this more consistently the discipline will also improve.

        Best of luck in your trading.

  5. Pingback: What Books Should I Read? | FF Trading Blog

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