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TheNegotiator

Is Market Profile an Outdated Tool?

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How did that pace of tape indicator look at 7 AM PST? Just want to compare notes...

 

Circled area is the area UB posted, at 7:34pst, with POT indicator.

 

UB, would love to see your chart at 7am PT, as well as 7:21am PT. Or is this screen shot as your web site says where you sell your indicators:

 

The screen captures/charts in this posting have been “cherry picked” to show the various indicators at their best and may not reflect average performance. Further the performance of these indicators can be greatly affected by market/instrument selection, time/volume frame and the setting of the inputs to the various indicators.

espot.thumb.PNG.49c95134f2d08f42de2228c10a3ece3f.PNG

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There were indeed spikes at 0700 & 0721 Pst but they were below the threshold of significance for the normalized rate of trade for that time of day.

 

The spike reposted below was not at 0734 but was at 0934 PST. The chart was not cheery picked as there was only 1 spike of anywhere near that magnitude on 5/31and that spike formed the session low. Only 1 low and only 1 spike like that on the day, nothing to cherry pick. On this particular indicator it was by far the biggest spike of the day.

 

You do not get such spikes every local or session extreme but when you do and when they are of such magnitude they are usually, like this one, very tradeable.

 

tpt492.jpg

 

Also you might notice that the spike is confirmed by the extreme selling exhaustion noted by the V94 window in the bottom sub-graph.

 

cheers

 

UrmaBlume

Edited by UrmaBlume

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The spike reposted below was not at 0734 but was at 0934 PST. The chart was not cheery picked as there was only 1 spike of anywhere near that magnitude on 5/31and that spike formed the session low. Only 1 low and only 1 spike like that on the day, nothing to cherry pick. On this particular indicator it was by far the biggest spike of the day.

 

Sorry, my typo, I circled and intended 9:34am PT, 12:34pm ET. What was the actual indicator value (highest reading) at the 7:21am PT time? (as 7:00 was news anyway) Your reading at 9:34 was 180K. Would love to compare the values.

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Volume has a skew in itself as it is high during open and close. I find TPO charts more beneficial. The gaussian distribution is an ideal situation we find rarely, however we analys each days distribution in its deviations from the ideal Gaussian distribution.

 

Firstly financial markets do not have a Gaussian distribution. Secondly TPO's assume that trade conducted at a price is proportional to the time spent at the level (sometimes true sometimes not) and thirdly the way of measuring deviations is just plain wrong, anyway 68% is only valid in normal distributions (which financial data series are not).

 

Knowing which direction and the magnitude of that skew is valuable in itself. If you find TPO charts valuable that is great!! Don't kid yourself that they are based on any real sort statistics. (and who cares if you find them useful) Very clever approach for the data that was available at the time though.

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Thanks again for posting this. The 7 AM pst spike seemed of similar intensity to me but I am using a quick and dirty POT indicator hence the request to compare. In any case the context was different as the earlier spike was with news.

 

Most of these seem to correspond with +/- 1K TICK prints, though in my case the TICK has a six second lag. But that rarely is an issue...

 

Cheers

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Knowing which direction and the magnitude of that skew is valuable in itself. If you find TPO charts valuable that is great!! Don't kid yourself that they are based on any real sort statistics. (and who cares if you find them useful) Very clever approach for the data that was available at the time though.

 

The fact that price spends more time around a level is a significant piece of information. At an extreme usually price spends little time. TPO charts arrange these information. I think reading a TPO chart has not much to do with statistics.

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The fact that price spends more time around a level is a significant piece of information. At an extreme usually price spends little time. TPO charts arrange these information. I think reading a TPO chart has not much to do with statistics.

 

Quite so. I thought that as you where talking about Gaussian distributions and standard deviations (which are tools of the statistician) that you thought otherwise :)

 

As I said before if you find utility in the tools that's all that really matters, I have nothing against heuristic methods in general or MP in particular.

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The Market Profile graphic captures the auction market process by organizing the data and allowing one to assess Price, Time, and Volume. Any market that is financial in nature responds to those three components. The volume and TPO profiles both have their place in market analysis - one measures volume and the other measures time. Volume and time together define value. To read the market, both are useful and I use them both throughout the day. I use Market Profile heavily as part of my trading and it is still an effective trading tool that provides me with more information than traditional charts. But as a trader, I use bar charts too because it gives me a bigger perspective by allowing me to see more price data in the chart. I agree with previous posters that Market Profile is not a system. It is a tool for understanding market behavior. However, it appears that most traders use it to trade off of, like fading the value area and single prints, which is far easier than using it for its intended purpose. I believe that most successful traders intuitively understand how markets/auctions work whether they use the profile or not, but the profile does a very good job of capturing the auction process. Using profile shape, value area placement, and volume with the attempted direction is incredibly useful for assessing market confidence, monitoring a trade for continuation and determining who is dominating the market on a given day. When short-term traders dominate the market, traditional technical analysis will work a lot better because the dominant timeframe uses technical analysis themselves. But if the longer timeframe is dominating the market, that's another story. The longer timeframe does not care about day timeframe references, and the longer timeframe will always trump the shorter timeframes. It's quite empowering as a trader to understand what the market is doing many times and then waiting for good trade location to align yourself with the market context.

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There's been some great input here....I agree with several of the different points that have been made the last couple of days.

 

"Volume and time together define value."

 

When I first started with MP it was with 30 min TPO charts that I hand drew on graph paper so I respect TPO based value zones having spent a long time using them.

 

The overall value area created by time and volume will often be quite similar so I've found tracking both to be redundant. Personally I've evolved into just using volume based profiles after noticing that volume profiles give me better reference points .

 

"However, it appears that most traders use it to trade off of, like fading the value area and single prints, which is far easier than using it for its intended purpose."

 

For me it's not a matter of being easier but more so a matter of effectiveness. Focusing in on previous value zones and single prints as possible areas to conduct future business is the main reason I use Profile charts. Not to imply I blindly look to fade these areas, but these areas are where I look for the most obvious areas of supply / demand imbalance. Imbalance that occurred in the past within these areas and imbalance in the present , as displayed in the real time order flow, when the market comes back into these areas.

 

Being able to identify the area where change in the order flow (the imbalance) occurred in the past and is occurring now , real time as the market re visits the area, is huge. These price zones are where change in auction is likely to occur.... and where change in auction occurs is where a trader has the most opportunity, the biggest reward potential with the smallest amount of risk.

 

 

"When short-term traders dominate the market, traditional technical analysis will work a lot better because the dominant timeframe uses technical analysis themselves. But if the longer timeframe is dominating the market, that's another story. The longer timeframe does not care about day timeframe references, and the longer timeframe will always trump the shorter timeframes. It's quite empowering as a trader to understand what the market is doing many times and then waiting for good trade location to align yourself with the market context

 

Agree 110% with that. Context of the higher time frame is king. Probabilities go higher when observing zones that are showing up on both the FG (fore ground) and the BG ( back ground)....areas of price where multiple timeframes get involved, not just day traders.

This translates to bigger reward potential.

 

By using a higher timeframe to frame trade ideas it becomes easier to operate on the smaller time frame and distinguish between what conditions provide opportunity and what conditions produce random noise.

 

Not to say I won't scalp off of an intra day based opportunity, but when I do I'm well aware of the longer time frame context and the fact that my best trades occur when my own time frame is in line with the time frame currently in control of the market at that point.

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Hi KeyToTheCastle,

 

thanks for your interessting chart.

 

One question: How do you measure Order Flow?

 

Thanks

W.

 

There are tons of different ways to measure order flow. Personally I'm very visual...I don't want to watch the dome, time and sales or foot print charts. I track trades going off at the bid as a sell and on the offer as a buy, organized in a visual, cumulative fashion.

 

In futures I organize this info in 2 ways; one to read inventory levels like a real time open interest, and the other as a real time buy pressure/sell pressure gauge.

 

In FX I only use the buy pressure/sell pressure gauge.

 

So effectively when the market is making a new low into a previous area of demand imbalance and I can see that real time sell pressure (supply) is diminishing, as buy pressure is picking up, I have a potential opportunity setting up.

 

In effect what's occurring as the market is selling off is sell stops are getting hit... longs are capitulating, and by watching the order flow I can see when that supply is drying up and demand is picking up. The demand comes in from shorts taking profit and new longs initiating. Then the same cycle repeats at the other end. :)

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I am new to Trading and came across Market Profile. I am about to start learning Market Profile, first by reading "Mind Over Markets" by Dalton and now suddenly came to this thread.

 

I tried to go through various posts of this thread so that I can decide if I should invest time in learning Market Profile.

 

Till now, I understood that if we use the volume information together with the Market Profile, then it gives good result and the Market Profile will not be considered as an Outdated Tool. Please correct me if I am wrong.

 

I would also like add one more thing. I also came across Futurestrader71 and his method. I read that FT71 uses volume together with Market Profile. So now can we say that if we follow FT71's method, we should not worry about Market Profile tool getting outdated as he uses the volume information.

 

I would like to request members to comment / guide new people like me.

 

Thanks.

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MP levels are good areas to do business at. Signals either derived from classical technical analysis, price action or tape reading etc. work better at MP levels than in the middle of nowhere.

 

That being said, you still have to be able to make the right decision at the MP level. So MP is only one part of the tool box.

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There are a couple of problems with MP and there always have been. Having said that many traders obviously find it useful. Clearly the VAH,VAL & POC are watched and traded by enough traders to make them significant. As good an example of 'self fulfilling' that I can think of.

 

It is not so much that it is 'outdated', it was always a heuristic method(rule of thumb). Not only that but one of the premises that it was built on was false (markets are not normally distributed (Gaussian)). Who cares if it gives you a framework to trade within ? Nowadays it is possible to use tools that are based on actual mathematical / statistical principles. Personally I think these tools provide a better framework and I guess strictly speaking that makes MP outdated. Not only that I find them much more 'elegant' and i think they frame price better in many varying circumstances.

 

Vintage cars still go from A->B, arguably in some style :). The Lexus practically drives itself.

 

 

Hi Blowfish,

 

which tools do you have in mind? Can yo elabortate on the usefulness of your statistical tools. I am really interested what you mean.

 

Thx

 

cbaer

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Yes Josh, the articles by Perls are good and if you understand the basis, you have a good way to proceed...it takes a while to get it however, since most folks are a bit math challenged.

 

Another simple way to proceed is to frame your trades around a standard ("normal") statistical distribution (notice I am not saying gaussian, but standard, there is a difference). You can use Bollinger Bands or you can simply create an indicator yourself if you have some programming skillls.

If you go one step further and combine the characteristics of a standard (normal) distribution with supply/demand analysis and time based pivots, what you get is a very high probability system for finding favorable entries...which is what its all about (that and managing risk).

 

So as you can see there are several ways to approach the problem, all you have to do is

THINK about it and approach it in a common sense manner.

 

Good luck

Steve

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Are you applying a "standard normal distribution" around the 24 hour or RTH VWAP or some other measure of developing value?

 

Tick or volume based moving averages, for example...

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When we talk about a segmented data series, the idea of a distribution stands independent of time. So all we want is a spread of data that approximates a standard distribution about a center point. Any centerpoint will do as long as it approximates a median value of that data. For example on an intraday basis you might choose a VWAP (I would not use that for many reasons) however I will often use a 20 period ema (this only one reason why John Bollinger's invention is so valuable). I realize that there are many who would argue, and yet what I find when I actually test (and I do the testing at intervals) is that this method is "close enough" so that when you get a test of the extreme values, you often see a high probability "reaction" or retracement that is tradable...the probability of obtaining favorable entry can be enhanced by using a couple of methods (confluence for one)...

 

By the way, the idea of "value" (for professionals) is much different than for retail traders. Unlike the concept from Market Profile, professional traders look at direction first and then location within a specific time frame, to determine whether a price or series is defined as wholesale or retail. This is why amateurs are willing to buy at prices where professionals are selling...and vice versa.

Edited by steve46

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Hi Blowfish,

 

which tools do you have in mind? Can yo elabortate on the usefulness of your statistical tools. I am really interested what you mean.

 

Thx

 

cbaer

 

Take a look at JPerls excellent threads 'trading with market statistics' (located here) A great starting point.

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Yes Josh, the articles by Perls are good and if you understand the basis, you have a good way to proceed...it takes a while to get it however, since most folks are a bit math challenged.

 

Another simple way to proceed is to frame your trades around a standard ("normal") statistical distribution (notice I am not saying gaussian, but standard, there is a difference). You can use Bollinger Bands or you can simply create an indicator yourself if you have some programming skillls.

If you go one step further and combine the characteristics of a standard (normal) distribution with supply/demand analysis and time based pivots, what you get is a very high probability system for finding favorable entries...which is what its all about (that and managing risk).

 

So as you can see there are several ways to approach the problem, all you have to do is

THINK about it and approach it in a common sense manner.

 

Good luck

Steve

 

One of the nice things about Jerry's stuff is they make no assumption about the distribution. They calculate the actual standard deviations around the VWAP. Perhaps not that big of a deal but it adds a warm fuzzy feeling that they give actual statistically significant values regardless of the type of distribution. To be honest it is not really necessary to fully understand the maths and a careful reading (particularly Jerry's posts of course) reveal a remarkable set of fairly simple tools that are robust, versatile and just plain 'elegant'. Of course tools alone don't make a trader but Jerry does a good job of describing how he uses them.

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To start with, I'd just like to say how valuable Jerry's knowledge has been for many guys here at TL. However, like everything and especially in trading, it's not for everyone. Personally, I feel rightly or not, that it is particularly suited to some products but not to others. But that's just how I see it.

 

What I've seen in this thread is what I have suspected for a while. People like and feel comfortable with MP and even VP but know there is more to what it was originally trying to achieve with more sophisticated technology and dare I say it, more sophisticated participants!

 

So what is the most important aspect that MP could improve upon? I think the heart of it is judging strong commercial activity and a complete lack of interest. These need to be more finely tuned.

 

But MP and VP to me offer an intuitive approach. One that works well with 'auction market theory' and one which doesn't lead the mind like say a standard bar chart may do. The eloquence and simplicity in the clarity of market structure is what I like. The 'shape' of the market and its distributions is something which is visible to all.

 

What I would like is to think of a way to accentuate the relative intensities of probably behaviours of certain market participants and not give a very useful tool the chop altogether.

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i have to ask myself, if im trading on the globex, an electronic market, and if hft = more than 50% to 70% of the volume am i really trading in an auction market??, is nt that what mp was made for back in the day, if i look at a congestion area on ccandles, well naturally most of the trades went off there, thats what makes the value area congestion??,

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Market profile is effective for intra-day trading and scalp trading. Experienced traders use it as a visual normalizer to identify extreme trading areas. These extreme trading areas enhance entry, stops and target analysis.

 

Leroy

Edited by MadMarketScientist
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