Market Profile Strategies

[ant 10]

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!

[Soultrader 12]

Great post and thank you for sharing. I would like to ask a question regarding one trading setup you mentioned. I also use market internals to judge whether the price will hold or a breakout is likely.

 

However, all my breakout plays are entered at the pullbacks to the breakout point. There are cases where the pullback never occurs and I end up entering at a higher price.

 

You mentioned that you will enter before the breakout occurs. I am actually working on this technique but have trouble deciding where the stop would be. Do you use a tight stop for such setups?

 

The only time I actually enter before a breakout is when the TRIN breaks out of its range. I will then enter using a 10 points stop for the YM.

 

Thank you.

[ant 10]

Breakout entry is one of the areas that I hope to continue to improve on with time. In general, I try to enter a partial position on the breakout using a market order and enter the balance on a retracement, if there is one, using a limit order. For the record, I didn't get into this trend until much later, but here is how one could have played it. Also refer to the previous charts for the profiles.

 

On 9/11, the ES traded to the upper bracket limit at 1314.75 and formed a Volume divergence, as indicated on the chart. Volume was not confirming the breakout. One could have taken a responsive trade and shorted near the upper limit. The target would have been to the middle of the distribution (or the high volume node). Since we were trading above the high volume node (HVN), a bias to the upside would have been appropriate. So if a long trade were taken near the HVN, the target would be to the extreme of the bracket at 1314.75. (Note that volume decreased significantly as the ES approached the HVN, signaling that it is unlikely that the market would trade through the HVN.) However, since the ES was in a short-term balance area, imbalance was expected to follow. When the ES traded to the upper limit, its behavior should be monitored using market internals. In this case, the ES traded through the upper limit on high volume. It's important to know what constitutes high volume for the markets traded. I usually monitor internals on a 1 min and 5 min chart.

 

Soultrader, your breakout trade setup using TRIN is a good one and I will look for it next time. Thanks.

 

Stop Placement: Divide the ES composite range into octants (8 sections). The 8th octant at the upper and lower limits corresponds roughly to the 2nd standard deviation where approximately 95% of prices trade. The range of the ES composite from 9/7 to 9/11 was roughly 1302.50 to 1314.75 or 12.25 points. Dividing 12.25 by 8 yields 1.5 points per octant. A stop can be placed 1.5 points below the upper limit. Also, keep in mind volatility and use the greater of the two values. I won't get into volatility here.

 

There are many ways to trade a breakout and one just needs to find the way that works for them. Another example would be to wait a certain amount of time and if the market is still trading beyond the bracket limit, enter the trade.

[Soultrader 12]

Thank you ant.. very nice post. Volume divergences is a very powerful signal. I was taught this method early in my trading career from a trading buddy of mine.

 

I have two questions: is the volume indicator just a line chart of volume? I have never quite seen volume plotted that way but it makes alot of sense since I use a line on close TICK chart.

 

Also, regarding the stop loss placement I am still having some difficulties where you would actually place the stop. Lets say you were to buy right before the upper bracket limit breakout around 11314 on 9/12, you would use a 1.5pt stop from your entry?

 

The concept of time and breakout is something I use as well. Whenever I see price hugging the upper extreme bracket, I anticipate a breakout. I do not remember where I learned this concept but I picked it up about 2 years ago.

[ant 10]

The volume indicator is plotted as a line indicator in the chart instead of a histogram.

 

Putting volatility aside, the stop would have been placed 1.5 points (an octant stop) below the upper bracket limit or 1313.25 on 9/12. If the market trades below the upper octant, the long trade would have been stopped out and a responsive trade could have been taken. A responsive trade would mean entering a short trade at 1313 with a target of the middle of the distribution or the next key reference point (monitoring internals of course). The octant stop is one approach covered in the Cisco-Futures course.

[Soultrader 12]

I actually like the idea of a volume line chart and will add it on my charts to see how it goes.

 

This octant concept is new to me and I have trouble grasping. I may need to look into the Cisco-Futures course.

 

After reading the posts here, I spent some time thinking about breakout patterns and strategies to play them before they happen. One problem I have relying on volume when playing breakouts is that the breakout bar (tall green candle) occurs on high volume. Wouldn't this be a late entry because you are entering after a volume confirmation?

 

The concept of having a long bias if price is trading above the HVN is a similar concept when using pivot points. Traders hold a bias towards the long side when price is above the daily pivot or PP. Some traders base their pivot on the opening price as well.

 

I do feel comfortable applying time into a breakout strategy. If price is hugging the upper or lower bracket for some time, this could be a good signal for a breakout. However, I will need to create a stricter rule for this setup. Some people use a combination of bollinger bands and keltner channels to anticipate breakouts as well.

 

This topic has become fairly interesting... and I will try to research more on breakout patterns. This is a trading setup that can offer a tremendous edge when mastered because by getting in early, you can completely eliminate risk at the moment of the breakout. The first breakout bar tend to be quick and fast. Therefore, I would like to be in the trade beforehand to cut a portion of my position loose at this first bar.

[ammo 10]

i stopped using mrkt profil in 91 when i left the floor,the es daily range then was 3 points, s&ps around 245-250,i, recentley returned and found it much harder to use,one thing that still works is the wide spot,i used to call it the nipple, on major selloffs where you have a chart of the previous daily nips in front of u,the market uses those as magnets or temp support,say thurs day nip was 1320, fri nip 1346,monday nip 1364,tue1380, then wed opens at 1400 and begins to sell off,it'll stop at 1380 and bounce , not big if it's a trend day',if it keeps falling it,ll stop next at 1364. then tommorrow if dtrend continues it,ll stop at 1320 and so on. If there was a double distributionday or 2 nips then the cleavage btween the 2 also acts like a nip. i still hand chart it in one point increments just so i know where those nips are, .there is a trend day i would guess 3 times a month and it is very useful,those are my most profitable days ,i trade with a lot of confidence bcuz of those nips

[ckait 10]

Try splitting your profile into two preiod (1 hour sections), if your profile chart has volume distribution you will see several bal and imbal levels too play off. I find its a great way to use MP hope it helps.

[MPTrader 10]

Hi, i would like to know if u trade using the market Profile of the previous day or current day? i do know that Boltner uses previous day profile to trade and toally ignores the current day. Would u please enlighten me pls...

 

Btw, how would u monitor volume with respect to how its doing at the HVA or LVW ?

 

 

Many thanks

[Fox Kestrel 0]

Hi I use Volume Profile and use a LVN strategy identifying levels that I confirm with Bookmap and time based volume. I currently use a profile over visible range however do have a daily and a weekly profile up. The question is, do you have session Profiles or a Profile for a 24 hour period? I trade the ES

[Quantower 0]

TPO chart shows important zones (levels) like POC, singles, value area). With Volume profiles we'll get information about volume distribution

https://www.quantower.com/blog/tpo-profile-chart-and-trading-on-bitmex

https://www.quantower.com/blog/trade-with-alpaca-markets-via-quantower#tpo-profile-chart-got-more-features-and-improvements

also, we're discussing trading with TPO chart, VWAp, Volume profiles in Quantower Futures Trading group https://t.me/quantower_futures

Edited January 23 by Quantower