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Market Profile Exploring the Auction Theory

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  #21 (permalink)  
Old 02-06-2009, 05:05 AM
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I FOUND ITS INTERESTING TO LEARN SOME NEW CONCEPTS THROUGH VIEWS AND COUNTER VIEWS. Here is one copy pested from other site ( answer was from owner of traderslab forum )

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Q. What is so valuable about MP and what are you using it for? Please be specific. For me, MP doesn't even make any sense from a logical point of view. Why does it matter at what time interval volume was formed? Isn't it completely arbitrary?


A. This is because you have not studied mp well enough to be able to use what mp is providing. More than the strategies revolving around mp... you need to first grasp the mp concepts. As traders use candle patterns to trade... mp can be used in the exact way. Familiarize yourself with it and you can see what type of profile we are likely to develop. If you can see the type of day we are likely to have wouldnt this be a tremendous edge? You can easily build strategies around it.

MP also helps show participation by the longer timeframe. This is critical information as the longer timeframe traders are the ones that create trends. Compare Trader A who is familiar with mp and Trader B who is not aware of it.

Trader A sees a narrow initial balance and plans a trade based on range extension. So basically he is trying to play a momentum of the IB breakout. Trader B is not aware that a narrow IB is easily upset. Hence he tries to fade the test of the low/high only to see price blow right past his entry point to breakout of the range.

Another example.... lets say the markets rallied strongly into the close. However Trader A spots that value placement is still lower compared to the previous day. This offers him warning signals that the late afternoon rally may have just been short covering. Hence, the following day he focuses on the short side as he thinks price is weak. On the other hand, Trader B assumes that the late afternoon rally is bullish can continues to trade from the long side the following day just to see price make small bounces and right back down.

These are just simple examples of what market profile can show a trader. However, knowing mp will not make you profitable. It is how you develop strategies around mp which will put the odds in your favor. A trader without a plan and strategy is destined to fail. MP simply allows me to create a roadmap for the trading day.... its like having a map in a new location. You can guide yourself alot easier than the person without one.

None of this will make any sense if you do not understand mp to begin with.

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Last edited by alex; 02-06-2009 at 05:10 AM.
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Old 02-06-2009, 09:27 AM
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Originally Posted by alex View Post
I FOUND ITS INTERESTING TO LEARN SOME NEW CONCEPTS THROUGH VIEWS AND COUNTER VIEWS. Here is one copy pested from other site ( answer was from owner of traderslab forum )



nice stuff alex..thts wht ive been asking u why u have shifted to MP..
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Old 02-06-2009, 12:19 PM
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Alex,

Can you post some early charts of anticipation of how the day would pan like,then that would indeed be extremly heplfull.

Asish
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Old 02-06-2009, 12:22 PM
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Originally Posted by uasish View Post
Alex,

Can you post some early charts of anticipation of how the day would pan like,then that would indeed be extremly heplfull.

Asish

I Will surely do that EOD Asish da
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Old 02-06-2009, 01:17 PM
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Originally Posted by alex View Post
I Will surely do that EOD Asish da

Waiting...
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Old 03-06-2009, 12:03 AM
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Normal Day
The first and most basic day structure is the Normal Day. It is characterized by a wide-ranging initial balance, or first two time periods of the day. It is thought that the initial balance was the pit locals trying to establish value for the day. On a normal day the bell curve will develop generally within the range of the initial balance, with little outside influence to tip the market much beyond the initial balance. When a market extends beyond the established range development up to that point in the day, it is called range extension. On a normal day there is often limited range extension, that is the market may extend beyond the initial balance by a small amount, and then return back into the value area. Some days will show little or no range extension. In current markets that often have around-the-clock trading with much of the trading activity from computer terminals rather than in a trading pit, some concepts seem to require some updating. However, the trading implications of these concepts, even if not precisely accurate in the current market, still seem to be valid. I wide range in the first hour of the day session still seems to imply a normal day.


Normal variation day.
This day structure is characterized by a still wide, but somewhat smaller initial balance. In this case the initial balance represent closer to half the finished profile, with range extension early enough in the day to create a fairly normal bell curve. When watching this day structure develop, it is not known that the day will result in a normal variation day until it is well into development. But there are some clues.. opening A period is well below the value area of the previous day and prices quickly rejected those lower prices. The range of the A period and subsequent B period was fairly wide, however there was little rotation and development, as prices were quick to reject the lower prices and prices started to build value in the range of the previous day value area. When range extension occurred in the D period prices quickly moved to the upper range of the previous value area and began rotating, thus building a value area encompassing the initial balance as well as later time periods. In fact in this case the value area was built without any of the prices from A period. The rejection of the lower prices and the building of value higher in the day structure and slightly higher than the previous day value area had implications for continuation higher the next day. Again, not a prediction of higher prices, but a reason to be watching for continuation.

Neutral day
This appears similar, at first glance, to the normal day structure. However, there are differences that make this a neutral day. The main difference is that the initial balance is somewhat smaller, similar to the normal-variation day. However, the range extension does not extend far enough to allow development of the bell curve above or below the initial balance. Instead, prices return into the initial balance, and most often will try a range extension on the opposite end of the developing structure. Again prices will fail to extend far enough to allow rotation to change the developing value area. Thus, a normal shaped bell curve begins to develop in the middle of the range, with only moderate range extension on either side. This example is quite symmetrical. No two profiles are the same, so there will always be some variations and possibly overlap with other types of day structures. Another characteristic of the neutral day is the close proximity of the open and the close. A candlestick chart would often show a doji, perhaps with similar implications depending on where the doji occurred within the price trend. However the market profile graphic contain much more useful information than the candlestick. One more important characteristic of the neutral-day is that quite often the value area will overlap with the previous day. In this example the value area of the following day also overlapped, which would not have been apparent by looking at a price bar. As the name would suggest, there is little forward price implication from the neutral day.

Non-trend day
This is characterized by a narrow range day with a fat profile. There seems to be random rotation with little price movement on either side of the profile, thus developing a short and fat profile. These days can occur prior to a fed announce, prior to long weekends or holidays, or at market exhaustion points. Most traders will simply complain that the market is choppy and untradable on these days. They will often look for excuses to leave the market alone and focus on something else. This is often a big mistake. On non-trend days the Market Profile trader, in other words, the aware and astute trader, should be on the lookout for clues and ready for a breakout. It is when the market is making a narrow range that a large range, and possibly trend day, will occur in the next day or two. If you study enough charts it will become evident that small range days often precede large range days, sometimes with major trends following. And conversely, large range days often exhaust the buying or selling power, and smaller range days are seen the next day. Often the direction of the breakout of the non-trend day is difficult to anticipate. However, since a range expansion is likely, it is best to be ready with a plan for when the breakout occurs, which is often the very next day.

Trend day
A trend day will usually begin with a small initial balance, much the same in appearance to the non-trend day. However, early in the day structure range extension occurs. This range extension does not allow a value area to develop in the initial balance, and the range extension continues throughout the day. There are often periods of single prints on the profile. Most important, there is very little rotation from time period to time period. In other words, each half-hour segment drive prices further in the direction of the trend. Sometimes one of the time segments will have a bit of rotation in the opposite direction, but price usually will resume the trend. The range of a trend day is wide and the profile, absent rotation, is thin. Obviously the open will occur at one end of the trend day, and the close will be near the opposite end. Often a bar on a candle or traditional bar chart will appear to resemble a trend day, but often these days, when viewed with the Market Profile, will actually not be a true trend day. An example would be a day that rotates back and forth all morning, developing a fat profile, and then some news enters the market late in the day extending the range. This type of day would have a different implication than a true trend day.

It is easy to spot a trend after the fact. But during the early stages of development, it is often difficult to determine whether the developing structure is that of a trend day or a non-trend day. A non-trend day wills often have range extension, with what might look like the start of a trend day, but prices fail to extend and return back into the initial balance. If enough rotation occurs and the profile begins to become wide, especially with small range extensions on either side, a non-trend day is usually forming. But one clue to anticipate the greater likelihood of a developing trend day is to look at the prior days. If range has been contracting, and the prior day is a neutral day, or even a non-trend day, range expansion is a likely consequence. Range extension following such contraction should be monitored closely. The market may have been in balance, but it is possible new information is causing the balance to be upset. The market will then drive to a new price level to facilitate trade. That drive to a new price level can often be persistent, thus causing the one time frame price movement, and the long, thin profile.

On the other hand, if a narrow initial balance begins to form after a large trend day, the power behind the move may have exhausted or overshot. The developing price structure could be one of pause and regaining balance. In that case a non-trend or neutral day could develop. The are no specific or mechanical rules to follow. There is an art to trading and much study and experience should improve ones ability to judge the developing day structure.

Double distribution trend day
A variation on the trend day is the double distribution trend day. This day starts off much like a trend day, however there begins to be rotation with a bell curve beginning to develop during much of the day. It appears that more of a normal variation day will result. But then new information enters the market and range extension occurs and drives prices to a new area. At some point the move is shut off, usually overshooting, and then another bell curve begins to develop. The resulting profile will have two areas of price rotation, which are usually separated by an area of single prints. These days can often occur on surprise announce or event occurs. The market goes from balance, to imbalance as the news drive the market to a new level, and then back to some sort of balance as the news is digested.

P.S. will post relevant charts after little break :smile:
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Old 03-06-2009, 12:08 AM
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Gr8,will go thru this after 10 mins (rushing to complete dinner).
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Old 03-06-2009, 12:38 AM
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Is there any study available ,say out of 100 days how many days are 'Neutral' or 'Non-Trend' Day.
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Old 03-06-2009, 02:24 AM
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Originally Posted by uasish View Post
Is there any study available ,say out of 100 days how many days are 'Neutral' or 'Non-Trend' Day.

No asish da, because market profile considered as thinking process rather than given set of rules.
Whether one should built system/give set of fixed rules based on market profile and is it going to possible, sir JJ may through some light.
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Old 03-06-2009, 02:27 AM
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Last edited by alex; 03-06-2009 at 02:34 AM.
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