'Markets In Profile': Detailed Book Review

[Frank]

Auction Trend is a breakthrough achievment in Market Profile history I first developed in 1978............ uh, just kidding: 'Auction Trend' is a random name I gave to my indicator. Didn't know what to call it and spent a good 8 seconds thinking about it before I decided on that.

I defined the indicator in the above post -- here is the EasyLanguage code. it is nothing special and should be used in context with many other indicators.


value1=(vwap_h+c)/2;

value2=value1-average(c,40)[1];

plot1(value2,"value2");
plot2(5,"5");
plot3(-5,"-5");


if value2>=0 then
setplotcolor(1,green)
else
setplotcolor(1,red);

[winnie]

Dear Frank,
Thank you for sharing your idea, it is great and sound. How long have you been trading ? Are you trade everyday ? I am trading my trading system and it is my first time to learn discreationary trading.

Thanks again for your work

[Frank]

Chapter 6 Part 2:

In Part 1 of the Chapter 6 discussion was the concept that ‘excess’ (gap or tail) marks the end of one auction and the beginning of another. This is the more common and clear way to ‘mark’ the beginning of a new auction. But there is another. The less frequent way one auction ends is simply when volume in the direction of the auction just dries up. Its ‘as if the participants that were driving the directional move are ‘all in’ and there is nobody left [to drive further directional movement].’ That is, there may not be a significant tail on the day of the auction low.

No matter how an auction ends, you need to develop visual aids (indicators) such that you can judge order-flow and classify where you believe you are in the 2-way auction process. Where the ‘innovator’ and ‘laggard’ are interacting may be a grey area and you will need to make a judgment for when order-flow has changed to a degree that marks an auction has ended.

Chapter 7 is entitled ‘Short-Term Auctions’ --- so we are now into the overlapping area of multi-day and intraday auctions.

This is a good spot to layout a structure to the intraday market that will be of aid as the book continues. I find it a good way to think about the structure of order-flow by mapping out how a day unfolds. This topic might be thought of as another way to avoid being ‘the laggard.’

A market can close the day in one of 3 general ways. It can either make an afternoon high or an afternoon low relative to the morning high or low -- or it can close somewhat near the center of the range. Let’s classify each day by whether it trades from ‘high to low’ or ‘low to high’ and then think contextually about HOW the market did what it did based on which 30-min bar it made its high or low. (note each period is lettered such that the 30min period ended 10am = ‘B period’, 10:30 = ‘C’ etc…)

First let’s look at the most common intraday ‘structures’:

1. A day that makes a low early in the day and then trades up



2. A day that makes a high early in the day and then trades down



These are the more common structures and there is contextual information to be gleaned when the market does OR does NOT trade in line with the above ‘blueprint days.’

For example, a day that makes a low in ‘F period’ may be expected to have less range expansion to the upside than if the low were made in B or C. The fact that price did not reverse in one of the earlier periods may indicate less conviction on the part of higher-timeframe longs. On the other hand, a low made later in the day (H/I+) that then recovers strongly into the close could be indicative of an overcrowded short-side as all those traders playing for the market to trade down until the afternoon will be trapped as the market did not follow-thru to the downside. This idea will give you more contextual information to synthesize with other information.

A common way to discuss concepts in Markets In Profile is to discuss a concept and then think about what would be ‘expected’ to happen after XYZ occurs. The ‘expected’ does not always happen of course but there might be valuable information in the fact that the expected didn’t happen.

After a good ‘auction reversal’ – you would ‘expect’ that early in the next auction, the market will trade strongly into late in the day. New ‘daily’ auctions should show strong conviction. The profile should certainly elongate with a close that extends into periods M-P. This would be the ‘expected.’

A related idea in Markets In Profile is ‘Attempted Direction’. Using the B-E to L-P high/low framework, we can categorize days into something resembling ‘expected result from attempted direction’. For example, a market that opens (B-period) and auctions strongly lower is obviously ‘attempting’ to go down --- the expected response might be that it continues through L-P. If instead it makes a low in ‘E’, this is information related to the overall structure. Short-term momentum traders are likely loaded up on shorts in a market that they expect to continue down. If higher-timeframe innovators like this location and would like to adjust their inventories to the long-side, the momentum based short-sellers will eventually be forced to cover. (remember, a ‘E-low’ that violates the previous day low (possible ‘buying tail’) is an ‘innovator entry’). You of course do not have to take any entry you view as ‘possible innovator entry’. But you should be aware of the structures at work as they are giving clues.

Let’s look at a recent example:

[Frank]

winnie,

I am a relatively new trader trying to learn. I have been at it a little over 2 years. I find that putting trading concepts into my own words really helps me think about it as I relate these core trading concepts I am learning back to recent trading experiences.

[winnie]

Dear Frank,
Thanks for your detail ,clear and logical explain.

Best wishes for profitable trading

[Frank]

Today was good example of a market fitting into the framework I showed over the weekend. Thought I would share it for the concepts it shows.

1) 'Value Migration' -- Concept is to try to trade with 'value migration' until an auction has ended.

2) 'B to E' / 'L toP' Framework of a market choosing a direction and staying with it until the afternoon.

Friday saw 'value' form near 1390.75. Today, the market traded below the previous days value and below the previous days low. When value is migrating up on the higher timeframe (uptrend) and price is below recent value, the play is to look long (below value) and target a play back to previous value. You are getting asymmetric location because price is below value during an upward value migration.

Note also how the market made its low during the mornign (B-E) and its high during the afternoon (L-P). This was a very classic structure day.

[heretodaygone...]

Frank, can you explain why you chose the 40 sma? I've reread post 19 and I think you use it to approximate vwap but I just want to make sure. Thanks for the great thread.

[Frank]

	Quote:
	Frank, can you explain why you chose the 40 sma? I've reread post 19 and I think you use it to approximate vwap but I just want to make sure. Thanks for the great thread.

there is no magic with the 40 sma. I am using it only to 'represent' where current price has moved 'from' in order to gauge 'value migration.' It is being used as a 'reference point' to help guide me. As price and the moving average converge, you might say the current auction is 'aging' -- but not necessarily over. Remember, it's not over until you get a sign of 'excess.' I do not want to be looking for reversals ALL the time or else I would miss out on lots of good trades. The market will often auction one direction and then chop around while the moving average 'catches up' to current price. As this happens, you get closer to auction reversal and should be on the lookout for 'excess' -- as reviewed above. (also, note that occassionally -- the 'excess' signal is kind of grew -- using a moving average will act as a bit of a safety-net in case I missed the signal).

btw, 'vwap' measures todays average price. I never look at vwap for a period longer than current day. there might be use in such but I have not discovered such.

hope that helps a little bit,

frank

[winnie]

Frank., it is great ! I have watch the market today and looking for your setup, A-D looking for low ! it is just happen. However, I would ask you , in actual trading, how do you enter the trade , as B, C,D period all make new low, in real time, how do we actually know which one are the final low for the morning period ? Do you try to catch the low ,everytime the 30 minutes bar make new low ?
thanks.

[winnie]

Dear Frank,
what conclusion will you draw for tomorrow ?
Thanks for sharing your idea