Today I’ll be covering the idea of Normal Range. Derrick raised this on February 27 and it is a topic not understood by many. Indeed, many authors on the Profile take the view that: ‘Day Type cannot predict in advance and is only of marginal use in real time” (Tom Alexander’s ‘Practical Trading Applications of Market Profile’).

It is my view that this one is one of the best of Pete Steidlmayer’s contributions to trading. Understanding, no later than the completion of the Initial Balance, whether a day profile is likely to be rotational or 1-timeframe, has a major impact on the strategy I shall employ for the day. I covered this in the “Power of the Market Profile”. Keys to being able to doing this are:

  1. The type of opening,
  2. It’s location relative to the previous day’s Value Area,
  3. The Normal Range of the Initial Balance

(1) and (2) are covered in Mind Over Markets (Chapter 4, section 1). Let’s turn to the “Normal Range”.

Peter classified the Day type into 6 types: two were 1-timeframe and 4 were rotational. The 4 rotational days depended on the idea of the ‘day’s normal range’ for classification. Now here’s the problem - we don’t know what the day’s range will be until after the end of the day. So of what use is it?

Most newbies to Market Profile trading fell at this point and concluded that Day Type was not useful to trading.

I saw Peter work with this idea and knew he made successful trades with it. It finally dawned on me that part of Peter’s unconscious knowledge was an idea of how large a Normal Day’s range was. Armed with that, I classified two types of statistics:

  • The ATR and normal range of an instrument; and
  • The average Initial Balances and average 30-minute ranges for the last two hours of trading

Armed with this information and knowing the Day types allows me to ‘guess’ if a day is likely to be rotational or 1-timeframe and provides another means of estimating the day’s range.

Let me give you an example.

 02-28-2008-sp-day-4.jpg

FIGURE 1 Market Profile 

I have divided yesterday’s Profile into 3 stages. The first section covers the “A” to ‘D” period.

The market gapped down and opened below the previous day’s value area. At the open we knew:

  1. If the market remained below value, then a 1-timeframe day was probable.
  2. If it returned to value, the probabilities favoured a rotational day.
  3. If the market failed to accept above 50% of the gap in the 1st hour, we could expect a trend day on breach of the 1st hour’s range.
  4. If the market accepted above the 50% or closed the gap, we could expect a rotational day.

At the end of the “C” period, we added to our information:

  • Based on the above, the probability was for a rotational day.
  • We had a test opening and a probable Normal Variation Day. The Initial Balance was about half of the ATR range.
  • The test opening favoured a range extension to the upside and the Normal Variation Day suggested a double of the Initial Balance projecting a high of 1388.5 (roughly a double top with Feb 26).

So without looking at context by the end of the ‘D’ period, I had a possible price for the top and I knew that I’d be a buyer below Value or at least the lower end of value: 1374 to 1372.5 Context provided 1393 to 1388 as a target for the high for the day.

Whether you are a day trader or position trader seeking to optimise your entry, the Market Profile in general and the Type of Day (including type of open), provides immense value.

Related Posts