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Soultrader

Market Profile Trading Concepts

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Sometimes I wonder about some of the terms that MP folks make up. For example, the concepts of "initiative buying" "initiative selling" "responsive buying" and "responsive selling". See p.46 Dalton's Mind over Markets.

 

For those of you who don't have the book, what you do, if I've got this right, is compare the current day's market activity with the previous day's value area (VA). If the market is currently trading above VA, then you say that this activity is either initiative buying or responsive selling. To quote Dalton, "The initiative range extension and the responsive tail were one and the same activity."

 

So, bottom line, does this help the trader? Or not? How's he to know if he's looking at buyers initiating a new leg up in the market or sellers responding to higher prices and selling above yesterday's Value Area?

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I view it in the following manner:

 

1. If price breaks out of a value area or congestion and you fade i.e go short or long depending on the dir. of breakout, then you are responsive

 

2. However if you enter on a breakout or just before, then you are initiating.

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Thanks, rigel. My initial thought was that this information would be useful for trading, but it doesn't seem to be. The idea, in my mind, would be to discover some way to tell whether the inititators were going to have any follow-through or whether the faders were going to push price right back down.

 

Mixing styles here for a minute, there's a term in Wyckoff analysis called "joc" which stands for "jump over creek." This same idea (minus the cute term) appears also in VSA analysis--sometimes we see price "jump" over a resistance barrier in one big candle. The idea, apparently, is to keep the longs from selling ("hey, I'm in the money, no need to sell now") and to force the shorts to cover ("what the hell, oh my god I'd better get out").

 

Traders who use candles or bars can see this activity and they recognize it for what it is---fresh buying power, in other words, inititative buying. Traders who use Market Profile, however....how do they know from their profile that this is intitiative? I guess what I'm asking is whether there is something within the market profile, some detailed structure of the profile, that distinguishes between intitative and responsive?

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Tasuki,

yes it can get quite complicated if we try to figure out all that you mention in realtime intraday trading, by that time the trade would have gone and we would end up with a nasty headache. perhaps you can put this question on wyckoff forum where MP concepts are incorporated into boxes.

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perhaps you can put this question on wyckoff forum where MP concepts are incorporated into boxes.

 

MP Value Areas can be represented better by circles or ellipses than boxes.:missy:

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"The initiative range extension and the responsive tail were one and the same activity."

 

correct. so if we have established a balance area, a push outside that balance is initiative and we get range extension. the responsive tail means that the initiative effort was shut down. there wasn't enough power behind the move to sustain it, a more powerful responsive movement came in, and created the tail. back into the balance we go. we had a nice example of this today in the ES. at point #1, higher prices would be expected to shut down selling, but it didn't so someone was trying to initiate an upward move. after we got range extension up, sellers responded at point #2 and the upward movement failed. the area that sparked responsive selling lined up with yesterday's VAH (point #3).

 

How's he to know if he's looking at buyers initiating a new leg up in the market or sellers responding to higher prices and selling above yesterday's Value Area?

though i realize there is more complexity to the market and its behaviors, i use a very basic lens for this scenario: did the expected happen? if we reach the upper portion of a visibly recognizable balance area, did higher prices shut off the buying? if not, that is unexpected and therefore not responsive. it is initiative. that's only for the direction.

 

keep in mind how many different agendas are at play in the market at any given time. if, like we described above, the initiative move is weak and overtaken by responsive sellers then that initiative attempt failed. not only has this upward move failed sending us back down into balance, this can easily generate downward momentum and spark an initiative downward move at the bottom of our balance area.

 

i think understanding the market through Market Profile simply takes a lot of time and practice. remember that MP is not a strategy, nor is it a trading system. of course, that's not to say people can't create trading systems based off of MP.

 

i sincerely hope that helps.

 

thanks and take care -

 

omni

marked-up_ES_MP.2-18-2009_006.thumb.png.43201ff2b399795e07cc55eaa09d02b8.png

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i use a very basic lens for this scenario: did the expected happen?

omni

 

Sheer brilliance, omni. You obviously have an excellent grasp of Market Profile principles. Thanks very much.

Tasuki

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You obviously have an excellent grasp of Market Profile principles.
thank you, but I too am a perpetual learner :)
Thanks very much.

Tasuki

you're very welcome, i hope it was helpful.

 

take care and have a great weekend -

 

omni

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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.

 

Please let me know if the attached chart visually represents what is being said above.

 

This is a chart of todays action on ZNM9.

 

Thx in advance.

ZNvalue.thumb.png.d80b459673ea007861083c0a417df9e4.png

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Isee this thread has not been really active a long time.

Anyhow, will give it a try:

 

i am trading mainly european markets using market profile intraday "mini LVN/HVN" area's to define S/R. Trading from typically 10tick charts. # of trades on Eurex instruments can be between 5-10 per day.

 

Anybody here using comparable techniques?

 

TR

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...

Traders who use candles or bars can see this activity and they recognize it for what it is---fresh buying power, in other words, inititative buying. Traders who use Market Profile, however....how do they know from their profile that this is intitiative? I guess what I'm asking is whether there is something within the market profile, some detailed structure of the profile, that distinguishes between intitative and responsive?

 

Tasuki,

Rather than soley rely on the profile graphic, I use Order Flow Foot Print chart to observe COT/Cumulative Delta setups to give me a final execution comfirmation heads up on whether to fade or follow the trend.

 

:cool:

DowIndexTrader(DIT)

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itradepod orgainsed mine, you can purchase the MP for $249 (no monthlys),but you have to email them to sort out the order flow.

 

Hope that helps.

 

How long have you been studying MP?...Have you read Mind over Markets?

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Regarding Market Profile concepts, I think that the role that time plays in understanding market structure and development is critical factor. Furthermore, the role that time plays within the concept of tempo in terms of market development and structure gives the trader a supreme edge for consistent profitability, imho.

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Feeling the market tempo is extremely helpful in trading, although this concept may be a bit hard to understand. For those trying to understand what tempo means, try relating it to music, where tempo plays an important role. Below is a video of a pianist playing Beethoven's Appassionata (3rd Movement of Sonata). What type of day would this be and where would you initiate a trade based on the tempo of this piece? It's Friday and I'm just having fun with this. Enjoy and have a great weekend! :)

 

[ame=http://www.youtube.com/watch?v=xz7usUEPWsc](In HD) Beethoven Sonata Op 57 "Appassionata" Mov3 - YouTube[/ame]

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. What type of day would this be and where would you initiate a trade based on the tempo of this piece? It's Friday and I'm just having fun with this. Enjoy and have a great weekend! :)

 

I'd say this market was range bound just prior to a minor news release. Being the conservative trader that I am, I'd limit my trades to short scalps. Entering short each time the lower SMA (left hand) crossed above the higher SMA (right hand) and take profits quickly at the VWAP (middle C). Another nice trade might be (but I haven't back-tested it yet) go long on the previous low when the spread between the bars high and low exceed 70% of the sessions daily range, with a target on the previous high. I wouldn't hold any positions overnight/weekend because if the FED decides to implement the Bösendorfer Scale (a Bösendorfer 225 has 92 and a Bösendorfer 290 "Imperial" has 97 keys) or something similar you'll probably get stopped out just under the lows. :)

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Thanks for playing $5DAW, but I see it a little differently than you do. :)

 

This piece (Appassionata) is very fast and starts off with momentum and a high confidence opening like an open-drive. Entries are difficult, if you're waiting for a pullback. A minute into it the tempo is still quite fast! This market is one-timeframing higher (or lower, but let's assume higher) and this is showing signs of being a strong trend day. Most traders will wait for a pullback or pause for entry, but an aggressive entry would be to just get long while the market is trending higher early in the day and volume is still increasing, and then monitor for continuation, but most traders won't do this. Believe it or not, the risk is actually lower if you try to catch a trend move early on increasing volume, but it is counter-intuitive to most. But let's assume that you don't initiate a trade this way because it doesn't suit your style, that's fine. So where can we initiate a trade with a more conservative entry? Well, let's wait for the pullback or pause. And what do you know, as fast as this market (or piece) is, the first pullback or pause starts 2:30 and ends at 2:55, after that, you missed the entry and the market is off again. Your first potential long was no later than 2:55, but the market has already been moving up without you. So now what do you do? Well, I can tell you, do not fade this market, whatever you do, don't fade this market, because it can end the day on near its high given the way it's moving. And if you did get long early in the day, this is an easy day for you. You want to hold this trade until the end of the day, if possible, and add to your long position on pullbacks. The previous pullback/pause was a good place to add to your long. On a trend day up, the market usually encounters an inventory imbalance in the afternoon when the market gets too long (i.e., an inventory imbalance to the upside). So what does it do? Well, it has to correct that imbalance before it can move higher. That inventory correction came in the form of another pullback that started at 5:00 and ended at 5:32. This is a high probability trade on a trend day (i.e., the inventory correction that normally ensues). That is your second long opportunity. After 5:32, the market resumes the trend. And then towards the end of the day, everyone is now seeing the trend and all the momentum traders are jumping on board. And we start to get a huge bar, a spike, starting at 7:09 and it indeed ends with a climax. So what do you do now? Sell and take your profits, the tempo at the end of the piece is too fast, and unsustainable, this is a spike and a "gift" from the market. You want to see good tempo, but you don't want tempo that is too fast. That is usually the sign of forcing action like long liquidation or short covering.

 

So if the Appassionata is a fast tempo piece indicating a strong trend day, what would be a more rotational type of day. Well consider the following piece instead. This for me is more of what $5DAW described in his post - a rotational day. This is Beethoven's Pathetique (2nd Movement of Sonata). Can you hear the difference?

 

[ame=http://www.youtube.com/watch?v=n2nG1bt7IBM]Freddy kempf - Pathetique Mov 2 - YouTube[/ame]

Edited by ant

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Oh, and here is the 2008 market free-fall when the credit crisis hit. Sorry, I couldn't resist. :)

 

[ame=http://www.youtube.com/watch?v=nHBuKmyhbtQ&feature=related]Hardest song on piano ever! (Circus Galop) - YouTube[/ame]

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