Editor's Note:
The following is an article written by TradingMarkets member Paul Kirchhoffer.  I hope you enjoy and profit from it.
Brice
PS The photo on the home page is of me, just FYI.
 

How Old Salty Learned To Trade the Point of Control

In the days of his misspent youth, Old Salty searched the oceans far and wide for the perfect indicator. He dreamed of discovering that one condition or set of conditions that would turn the market into his personal ATM machine, yielding wealth beyond his wildest dreams. 
 

              Salty                                  Shorty

Years passed, and Salty had grown weary from the fruitless search. One day he perched next to Shorty the seagull and confessed, "You know, Shorty, I’ve spent a fortune on systems, bought the latest software and back tested every indicator, and I can’t find anything that works."

Shorty looked over and said, "Kid, you've been flying into the wind and swimming against the tide for way too long; let me tell you a little something about the point of control."

He told me my little seagull brain is far to small to understand how you plot time on one axis and price on the other to end up with a statistical bell shaped curve. You can go look it up here (http://www.enthios.com/charts/PriceHisto.htm) if you want, but all you really need to know is that the fattest part is where price has spent the most time. That’s called the Point of Control or "POC" for short.

Now, let me show you a chart of the Dow e-mini futures for Thursday 2/10/05  

See that white line at 10711? That’s Thursday’s Point of Control and here’s how some of us trade it. On Friday, the market opens lower and heads down to test the 10711 level.
 

Now there are some of us who believe that the POC is a likely level of support. There’s this guy over at TradersWire who trades support and resistance and this is what he posted in real time on Friday.

pk1014 (Feb 11, 2005 9:48:42 AM)
for the ym watch 10713 = yest poc

Melch (Feb 11, 2005 9:49:12 AM)
pk...poc?

pk1014 (Feb 11, 2005 9:49:39 AM)
point of control a market profile thingy.

pk1014 (Feb 11, 2005 10:09:29 AM)
long ym 10714

And here is how his trade turned out:

Salty looked at the chart and exclaimed, "Wow, Shorty, that POC thing really worked and that guy pk bought the market six ticks off the low of the day. Does this POC stuff always work that well?"

Shorty flashed a knowing smile and said "Nope. Like anything else kid, this is a summertime thing – some of the time it works and some of the time it don’t and that pk guy wasn’t very smart ‘cause he sold his entire position for a quick scalp. Someday, I’ll teach that boy to hold his positions a little longer."

"Just one more thing. Shorty," said Salty. "My software doesn’t have these volume histogram charts. How can I get them?"

"No problem Salty, you just go to http://www.enthios.com/carta_diem.htm and look at Carta Diem for the ES, ER2, NQ or the YM futures. It’s all there for you free."

Paul Kirchoffer (pk)