Blog for Trading Success

Market Delta brought a new level of sophistication to Market Profile.

When Peter Steidlmayer introduced Market Profile, he substituted time for volume on the assumption that the greater the time spent at a price, the greater the volume. (Remember that when Peter introduced the Profile in the early 80s, real-time volume at a price level did not exist for non-exchange members).

Market Delta has made available real-time volume profiles which exhibit more accurate Profile Zones than the traditional time based model.

In this and Monday’s blog, I want to examine the innovative way Peter calculated the Value Area - the 1st Standard Deviation. Once a trader knows how that is calculated, he can proceed to calculate the 3rd standard deviations (my Primary Zones) as well as the 2nd.

But before I continue, let me introduce the Profile to the uninitiated. You can say that the Profile applies the bell curve to trading. In the modern version of the Profile, the normal Bell Curve presents congestion markets, the positive skew, bull patterns, and the negative skew, bear patterns (see Figures 1 - 3).  In the Profile, the horizontal Bell Curve has a vertical axis (see Figure 4).

Each pattern develops the same way:

1. a directional move I call the Initial Price Movement (IPM), then
2. start of Development, followed
3. by full Development, and finally
4. end of Development and the start of a new Initial Price Movement.

Each stage development has its own strategy.

In a sideways market (what Pete called a 313), the 3rd standard deviation represents unfair prices - for as long the market remains in a sideways phase, we expect the zones to act as rejection areas. It follows that in those areas, the strategy employed is counter directional - sell upmoves, buy downmoves. The Value Area is ‘the chop zone’ - we can expect the market to rotate i.e. exhibit up and down price action from support to resistance, resistance to support. (See Figure 5 taken from High Probability Trading).

So, by knowing the zone, you have a guide to the expected price action and a benchmark to future direction. For example:

• Q:  What direction is the market likely to take if in the upper 3rd standard deviation, instead of selling off, prices start to accept the zone?
• A:  At the very least we can expect the high of the zone to be breached.

That being the case the way the zones are calculated is of importance. On Monday, I’ll evaluate the 3 methods and show their relevance to the present ES price action. In the meantime for your weekend reading, I attach a document by Market Delta on the subject.

mkt-profile-va-cals.PDF

FIGURES

Figure 1 Normal Bell Curve

Traditonal Statistical Theory states that:

• Prices within Mean +/- 1 standard deviation are nomal (68% chance of occurrence).
• Prices within Mean + 2 standard deviation have a moderate probability of ending (95% chance of occurrence).
• Prices within Mean - 2 standard deviations have a moderate probability of continuation (95% chance of occurrence)
• Prices within Mean + 3 standard deviation have a high probability of ending (99% chance of occurrence).
• Prices within Mean - 3 standard deviations have high probability of continuation( 99% chance of occurrence)

Figure 2 Positive Skew

Figure 3 Negative Skew

Figure 4 30-minute Market Profile ES 10-03-208

Figure 5 Zones in 313s

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