Market Profile Trading Concepts

[Soultrader]

I have created a list of market profile trading concepts. Please feel free to add more:

1. Opening Price: If the opening price is higher or lower than the previous days close this creates a gap on a price chart. In market profile, this gap represents a shift in market sentiment. Like all gap, the greater the gap the more its significant. For example, a market gapping up 80 points on a CCI economical news has alot more significance than a market gapping up on 30 points with no news and light premarket volume. The first gap has a chance of being a contiunation gap while the latter one has a high probability of a gap fill.

2. Opening Price in relation to the value area: Here is a rank of market balance vs market imbalance. If price opens above/below value and the previous days range, this creates a complete market imbalance. This offers a high risk but high reward trading opportunity. If price opens above/below value but within the previous days range this indicates a market imbalance but not as significant as the earlier example. This creates a medium risk and medium reward trading opportunity. If price opens within value and within the previous days range, this indicates a complete market balance. Unless price extends above/below value, this creates a low risk but low reward trading opportunity.

3. Previous days close in relation to todays open: Any late afernoon rally or decline can mean two things: either the longer time frame participant has stepped in to buy/sell aggressively or the short term traders are liquidating their position. To understand the difference is crucial. For example, let's say the previous days late afternoon market action was a rally and price closed at the upper extreme of its range. This could indicate a short covering which fueled a rally or actual longer-time frame buyers stepping in. The opening price action is crucial to understanding this. If prices can remain above the previous days high and value high, this means that the rally was valid and longer time frame buyers was present. The previous days high and value high will act as support. However, if the markets opened above the previous days high and was quickly rejected falling below value, this indicates short covering. Understanding price acceptance from rejection is crucial.

4. Look for market excess: Market excess exists when prices have extended too far above/below value. Other time frame buyers or sellers will enter aggresiviely to return price back into value. A single print tail below/above value is a good sign of market excess. On a price chart, this is where prices find support/resistance with a quick reversal never to test that support/resistace again.

"Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value." from Mind over Markets

Why are these levels important? They can as key future support and resistance points. These levels represent price rejection. No time = no acceptance.

5. Previous days close: If the previous days close remains in value, this indicates market balance. If the close remains above/below value this indicates market imbalance.

If the markets rotated above and below the opening price to close at its upper extreme, we have a temporary victory by the bulls. If the markets closed at its lower extreme, we have a temporary victory by the bears.

6. Understanding the POC: The Point of Control is the price level in which the highest volume occurred. This can act as a key support or resistance point. This is also commonly used as a level to place stops.

7. Value high and value low: These are two important pivots when using market profile. When prices are trading within value, the value high will act as resistance and the value low as support. If prices do break out of value, the VAH will act as support and VAL as resistance.

8. Opening Range: Also known as the initial balance. If the initial balance is narrow in the morning session, any break above/below willl most likely be the trend for the day. A wide initial balance can indicate a market rotation from the upper range to the lower range for the trading day.

9: Type of Days: Please refer to this thread.

[Reaver]

Thanks James, this helps out. I am still learning and many terms I come cross end up being disjointed by the context, so thanks!

[keymoo]

Great stuff, I'm reading Mind over Markets now, and this really helps.

[notouch]

I'm also reading Mind Over Markets. A question I have is, do you focus on the value area from the previous day, or do you also pay attention to the value area that develops during the day? Of course right at the start of the day you would use the value area of the previous day but as the day develops, the current day's developing value area becomes more useful than that of the previous day I've found. I don't know if that fits in with standard Market Profile theory.

[TinGull]

notouch, I dont usually pay much attention to the current days unfolding profile levels. I'll have to check it out though. I'm trying to get my profile based trades to fire off within the first hour or so, and then not worry about it. Maybe one of these days....

[Anonymous]

Originally Posted by notouch I'm also reading Mind Over Markets. A question I have is, do you focus on the value area from the previous day, or do you also pay attention to the value area that develops during the day? Of course right at the start of the day you would use the value area of the previous day but as the day develops, the current day's developing value area becomes more useful than that of the previous day I've found. I don't know if that fits in with standard Market Profile theory.

Enthios.com has done extensive work on the idea that price wants to go back and revisit the previous day's POC. This fact is the basis of his Universal Method. Also the 80% rule trade (see trading naked), which states that if price exits the Value Area and then re-enters, 80% of the time it moves to the opposite side of the Value Area. This is based on yesterday's Value Area not intraday value. Although it may be true for intraday. I would start out with yesterday's levels . Of course, timeframe traded could cause a need for a more "finite" look.

[notouch]

For intraday trading Mind Over Markets focuses on the TPO count but that was probably more useful in the days when intraday volume was not widely available. The developing intraday value area on top of a candlestick chart may not provide the same strict support and resistance levels that yesterday's value area does but it does give you a good idea of which prices the market is comfortable trading at.

[TinGull]

Originally Posted by notouch For intraday trading Mind Over Markets focuses on the TPO count but that was probably more useful in the days when intraday volume was not widely available. The developing intraday value area on top of a candlestick chart may not provide the same strict support and resistance levels that yesterday's value area does but it does give you a good idea of which prices the market is comfortable trading at.

Hi,

I wouldn't necessarily agree that TPO counts were more useful in days when intraday volume wasn't widely available. TPO counts still give you a good gauge of who is in control of the market by very quickly looking at the count. Yesterday, for instance, on the ER buyers had control looking at the TPO count of 95/192. On the NQ, however, sellers were in favor by 137/115. On the ES, 65/48 in favor of sellers, and YM 111/100, showing sellers with the slight favor. One problem with the TPO count I sometimes run into is on days like yesterday...when it seemed sellers were in control of the ER2 at the 811.0 mark. We had a HUGE 5 TPO ledge there showing sellers were dominating that level, and then it broke, only to break back down below 811 again. So while the TPO count favors the buyers, it seems to me that sellers had a good hand in things on the ER2 as well.

So often times its a very good gauge, as long as you take the days action into account. I never look at it as a pristine forcasting tool.

[Happyguy]

This is the way i look at the day's market:
I use yesterday's 'value area' and the profile (high, low, single prints etc) as a potential support or resistance;
I use today's profile development to determine the likely type of day it is going to be and an estimate of the day's range. This is useful for deciding types of trade and the profit target.

[Jakew]

Just an example from my latest session. A very clearly defined value area from 2 days before (not 1 day before which created a considerably less accentuated VA at around 3575) was 3545-3555 (the market spent hours in this range). 1 day before market closed at 3584 after a failed rally. As China broke down and international markets opened considerably lower, before my open I decided to enter a buy order at 3545 which was the low of a strong VA and more than 1% below last close. Safe point of entry. It was a very good decision but not a perfect one...the market opened 3549, reached 3546 and rallied fast to 3565. I did not get a fill. From this lesson I gathered that next time I will place my entry order closer to the middle of VA. Let's see what happened next - the market after reaching 3565 started a slow descent that finally broke the low of VA and I could see increased selling interest by those who perceived the situation as breakdown. But they acted too early - 3543 was the lowest the price got. Then it re-entered VA and, exactly as PivotProfiler writes above, started soon an agressive climb to 3584 (day close was 3579). I took part in this move although I entered a bit late - I did not know about the 80%! - waiting for momentum to occur. Cheers.