Market Profile Strategies

	Quote:	Piptrader
	I would like to ask a question regarding your market analysis. Your methods seem very interesting. How do you analyze to determine whether tomorrow will be a trending day or a consolidation day? Do you look for high volume price levels in either direction? For example, if a high volume area is close to the current price, would you expect prices to reverse at these points? If the current price is trading between two high volume areas that are relatively close to each other, would this be enough information to consider a consolidation day? Thank you.

Piptrader,

As you alluded to, it is critical to determine market condition (consolidation or trending, or in Market Profile parlance, balance or imbalance). You would then adjust your trade strategy accordingly. In a trading range, you would sell the top of the bracket and buy the bottom of the bracket. I stay away from trading in the middle because it offers poor trade location and that's where a lot of the noise is, unless the bracket is getting mature and imbalance is expected, then I would enter at the high volume node with a target to one the extremes of the balance area. If the market trades near the bracket limit, I will then monitor market internals to see if a breakout is likely. You never know what the market is going to do until it reaches a key level and then the market is monitored for strength/weakness. That's one main reason why I don't believe in mechanical systems. You can't follow these guidelines blindly, like fade the POC all the time, you won't be a consistent trader IMO.

Once a market breaks out of a balance area, adjust trading strategy again. Follow the trend and buy pullbacks in uptrends and sell rallies in downtrends. Do not fade anymore. The composite Market Profile looks quite different for balance vs imbalance. See attachment. Of course, we have all experienced false breakouts and that's the way the market extends a trading range. How you enter a breakout depends on your personal trading plan, but we will always be wrong at some point and that's where our stops help.

In the first attachment, you will see two profiles. The first one is of the ES in a trading range and the second one is the ES trending. My definition of a balance market is one that has at least 3 TPOs at each price level and the market is trading within the upper and lower limit. When the profile starts to look like a well-defined bell-shaped curve with a high volume node near the middle of the distribution, I will be alert for a breakout. That means, I will monitor the extremes of the bracket using market internals and I will also try to enter at the high volume node to try to get into the market before it breaks out, hopefully. When the market starts to trend, I will start to get alert for consolidation again. The markets repeat this cycle over and over again. Notice in the chart what the profile looks like when a market is trending. It is thin and long with low volume areas (single prints) from the range extension. Again, this is not a mechanical system and it takes practice. This trading style will not give you green/red lights and you have to consider the context of what the market is doing. Too many traders do the same thing regardless what the market is doing, and that's a tough way to trade, I think. The key is to enter at "unfair" prices (i.e., away from value). That will give you the best trade location and excellent risk-reward. There are many trading strategies/tactics that one can develop trading market structure and market development using the Market Profile graphic. I gave a just a few ideas.

By the way, you can see consolidation and trending on any chart (see second attachment). I know I have oversimplified things quite a bit and some of it is apparrent, but I hope it helps. Good Luck!