Busting the misconceptions about Point of Control (POC)

There are a lot of resources out there about how to use Point of Control. Most of them imply that because there's a lot of volume at POC that this would be the ideal place to enter a trade.

However, this is false. Most of the people who write these articles have NEVER actually tried using POC in live markets and never actually done any tests. So let me tell you this: POC for ENTRIES is a no-no.

Is it true that POC has a lot of volume? Yes.

But let's examine why that is.

 

As always whenever volume is mentioned, it is hailed as some Holy Grail of trading.

"Just read volume" they say.

"You'll be profitable in no time" they chirp.

Who are they? The wizards. Don't know.

So off you go, a noob volume trader, armed with watching a few youtube vids on volume trading.

Two weeks into your new experiemnt and nothing you do with volume seems to make much sense.

High churn high volume nodes – they don’t hold as support/resistance.

In fact, price whips through them as if they don’t exist.

Using POC as your entry – it doesn’t work.

You’re losing trade after trade after trade.

But but but. Volume. It’s supposed to be easy!
 Lots of volume = lots of momentum, right?

Not quite.

 

In case of POC specifically, there’s an element that NONE of the resources mention: TIME!

What is Point of Control in market profile, anyway?

It is the price with the highest number of Time Price Opportunities that exist in a single row.

Read that again.

In a single row.

That is NOT a crazy trending market with lots of volume.

Nope.

That’s a ‘lack of interest, we’re all down the pub’ lots of volume.

The kind that keeps printing candle after candle after candle, but not actually moving the price anywhere.

Therefore, using POC for your ENTRIES means that you’re trading the middle of the middle, the fair value of fair value - the widest point of the profile. DOH!

Sure, there’s a lot of volume there, but it’s stacked over an extended period of TIME.

In order for volume signals to be relevant for trading, volume needs to be paired up with other elements:

WHERE is the volume happening?

And in which TIME scale is the volume build-up occurring?

One single period (one or two candlesticks) or printing over 6-10 periods?

The longer the price STAYS in the same area, the less relevant the volume build-up.

 

So what is the POC good for then?

Well, it’s actually very good for targets. Whether you’re using a naked POC from yesterday’s trading (after the price meanders back to the value area from  yesterday) or you’re using a developing day POC after a large move in the opposite direction to fade the move – either of these are perfectly valid for POC usage.

Strategy backtest: RESULTS

But as an entry, here are some stats for you:

I created a quick, basic algorithm to confirm (or invalidate) my observations that POC is not a good area to enter trades and here are the results for a test on 12 months time period and 286 trades sample size on WTI crude oil:

 

The test had some basic price action parameters attached to it, rather than just blindly using POC as a key entry level.

Entry conditions:

- POC price reached AND engulfing pattern on M5 during COMEX hours (engulfing pattern gives the direction of the trade)

- Exit conditions: target at 1/3 average session range price movement OR early liquidation at market close, whichever comes first

No other optimisations or position/target scaling to avoid overfitting. No stop losses used either in these preliminary tests for the same reason. We’re only after some basic stats to figure out whether the strategy idea is statistically relevant at all.  

Results:

Bottomline:

For an entire year with almost 300 trades, this strategy has a loss rate of 70% and barely a 1.05 profit factor.

Furthermore, Sharpe ratio is a very negative -3.37. You would need to do A LOT of overfitting and optimisations to make this one work long term. And even then, it would be a painful, slow grind of mainly scratch trading.

Point of Control is the fair value of the fair value. As such, you can look at POC as a mean average. Therefore a strategy involving a return to the mean (using POC as a target) would be a valid trading idea, whereas using it as an entry key level is not statistically valid.

Conclusion: don’t use POC for entries!