GCB,
As the trading session progresses, the developing profile adjusts itself as well. The
value area is derived by looking at the
POC.The
POC is the price level where the most activity has taken place. If the markets decide to sell off, the
POC will adjust itself lower and lower. For example:
Profile from A - D period:
A
ABC
ABC
ABCD (longest line of TPO: current
POC)
BCD
CD
D
Now as the day progresses and the markets sell-off.... Profile from A to H period:
A
ABC
ABC
ABCD
BCDEF
CDEFGH (notice how the
POC moved lower)
DEFGH
GH
GH
H
Dalton refers to calculating the
value area as this:
""First identify the price at which the greatest volume occurred. Then, sum the volumes occurring at the two prices directly above the high-volume price and compare it to the total volume of the two prices below the high-volume price. The dual price total with the highest volume becomes part of the
value area. This process continues until 70% of the volume is reached." - From
Mind Over Markets -
Here is a thread simplying this calculation:
http://www.traderslaboratory.com/for...-area-345.html
Indicators such as the the 5 period moving average will take plot a line of the average close of the last 5 bars. Now what this does not do is take into account the volume (supply vs demand) and time per bar. Therefore Dalton would refer to it as "incomplete". Market profile is based on time, price, and volume. Time can be seen with the number of TPO's that take place at certain levels.
When alot of TPO's are clustered up in one area, you can see that price is finding value and spending alot of time within this area. Buyers and sellers are in agreement. When price shoots through a known support or resistance point on high volume, we see price spending little time at these levels. Hence we get single print TPO's. For volume, let's say the market is in a trading range. If there is less TPO counts at the upper range of this bracket, we are seeing buyers drying up.
Hope this clears it up.