Wed 27 Feb 2008
The Power of the Market Profile
Posted by ray under Written Plan
Today I want to show you the power of the Market Profile. It adds a dimension to my trading that would not otherwise be available. This is especially so when the market is in congestion and/or in a transitional phase.
In Figure 1 we have a candlestick daily chart of the cash S&P.
The chart provides a lot of information.
- The 18d is in a confirmed downtrend. In the jargon of the Nature of Trends, we have an Upthrust Change in Trend pattern, with confirmed time and price filters (WPC, LCC and acceptance below the Maximum Extension).
- The market formed a possible sideways market with “2 Extreme Rejection Pattern”: A rejection of the 1270 low was followed by a rejection of the 1369 high. The market then formed a value area.
FIGURE 1 S&P Daily
Since the Profile works off futures data, let’s turn to the ESH8
FIGURE 2 ESH8 Daily
The ES formed the Value Area and on completion gave a ‘failed mid-point break’ buy signal to then move above the top of value. What ought to have occurred was a move to the 1269 to 1270 Primary Buy Zone rather than a break above 1368 (based on the retracement areas).
On last night’s price action, we could say that:
- There is MIDAS resistance (FIGURE 1).
- But apart from that, the market looks strong. Last night’s range was not much below the previous two days (24 to 29) and the candlestick showed bullish conviction.
What does the profile tell us? Figure 3 is a composite profile since the 1269 low.
FIGURE 3 Composite Market Profile
- Once the market crossed above 1363.50 (Market Profile top of Value - Blue Vertical Line to right of composite), we could expect the market to move to the Primary Sell Zone ‘1395 to 1390′. Given that we had negative development by moving above value rather than below value, we should see a break above 1395. HOWEVER, if the market is in the grips of the bear, we should see the upside breakout above 1395 hold below the Maximum Extension (1418 basis March 08).
- This break above value was a sign of strength that was in conflict with a bearish view of the market. We need to assess this in any analysis.
Last night I was long from 1350.75 and looking for a break above 1395 to exit. The market got to 1388 and backed off.
Let’s turn to yesterday’s day profile to see what that tells us.
FIGURE 4 Market Profile 30-minutes
A few points to notice:
- We see that in the third 30-minute bar (’C'), the market started an IPM and formed a bull pattern. If we join ‘A’ and ‘B’ to ‘C’, yesterday was a double distribution trend day. Trend days ought to finish in the top 25% of their range. Instead the market closed below the Point of Control.
- In addition, notice that there was no volume between 1386.5 and 1388.5.
- Added to this we have MIDAS resistance coming through and you have a possible top. All these are signs of weakness.
Given those factors, I exited longs and I am looking tonight to see if:
- Selling comes in and if it does,
- The quality of that selling. I define good, quality selling by looking at the average selling Delta volume and its standard deviation. Market Delta does colour code the buy/sell Delta volume but I prefer to keep my own statistics. I also keep the total volume per 30 minutes so I can form an idea if the buying/selling volume is taking place within the context of healthy/normal/unhealthy total volume.
It’s impossible to show the ideas in a blog; but I find that by having a context and knowing:
- The type of opening,
- It’s location relative to the previous day’s Value Area
- The Normal Range of the Initial Balance
I can determine most times if we’ll have a rotational or a one-timeframe day.
Based on this analysis, I formulate the entry strategy.
- In a rotational strategy, I look to sell above the Value Area and buy below it; I look to sell new highs and buy new lows. This means I let the market come to me - patience is the key.
- In a one-time frame market, I sell new lows, buy new highs. Here, impatience is the key - I act swiftly on any volume break.
That’s it folks. I hope I was able to at least arouse your curiosity in the Market Profile.
February 27th, 2008 at 1:27 pm
Ray
AN ASIDE, as this insight into sussing up an interlocuter at trading seminars is rather accurate:
http://www.traderfeed.blogspot.com/
QUOTE
Blogger Anatrader said…
Brett
Quote
… filter system
1.) beginners are interested in the entry
2.) progressing traders are interested in the exit
3.) experts are interested in position size (Money management) and Portfolio risk (Risk management). Unquote
I find this an interesting insight on the part of Pierre.
At the next ATIC in Singapore, I shall use this insight to test at what stage an interlocuter is as a trader from his very questions to the presenters.
6:53 AM
UNQUOTE
Could be a tool to evaluate your interlocuters this weekend at ATIC.
February 27th, 2008 at 1:32 pm
Hi Ana
Pierre is a smart man. Let me know the results of your spot check at ATIC.
February 27th, 2008 at 2:42 pm
Hi Ray,
I really appreciate what you have written so far. In your post, you mention you could determine whether it is a rotational or direction day by the below, could you elaborate?
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
Derrick
February 27th, 2008 at 3:06 pm
Hi Derrick
Love to; but I would need to write a chapter of a book and having done that I’d find that Jim Dalton has already done a much better job.
Read Mind Over Markets Chap 4 Section I, pages 59 to 176.
What is not covered in Dalton’s book, is the idea of identifying the Normal Range. I’ll do that in tomorrow’s blog.
Thanks
February 27th, 2008 at 6:25 pm
Ray-san
Piqued my interest a few weeks ago actually.
Read Daltons ‘Mind Over Markets’. Just finished Alexanders ‘practical trading applications of market profile’. Subscribed to ‘balancedTrader.com’. Got a live feed with E-mini into Ninja that has a Market Profile add-on. Been a busy few weeks.
Now the obligatory Q’s
1 why use 3 periods for IB when most books seem to use 2?
2 Is there any practical value in collating data averages on IB size for the basic 6 day types? Or are other characteristics more discerning in early identification.
3 Is it possible to place the KRA’s (key reference areas) in an order of strength? ie POC is higher support/resistance than single print extremes, which are stronger than VA boundaries and so on….
4 For a complete picture, I fear I may have to wait for your book. Any ETA?
Regards Stuart
PS With regards to Toms new book.
Interesting sections. Good writing style, very casual and converstional. Not quite complete. I will re-read it this week, but I get the feeling he was rushed to finish it, or failed to tie it together in a cohesive format. SOrt of like its missing the last chapter. It is a topic that will require broad reading to absorb useful bits from varous sources. Maybe he leaves a bit out to entice you onto his website/chatroom.
February 27th, 2008 at 6:29 pm
PPS
Is it normal to use one letter (tpo) per 1/2 point or 1/4 point?
February 27th, 2008 at 7:03 pm
Hi Stuart
The questions would take a couple of A4 pages to answer. I’ll post a video to the STC ftp site to answer them.
I have Tom’s book and find it OK. It’s worth its place in my library.
But I have a major disagreement with him.
On a few pages he throws out the idea that categorising the day type is next to useless: (page 7 e.g.) ‘Day Type cannot be predicted in advance and is of only marginal use in real time….etc”.
In fact Day Type use is of immense value and we can have a good idea of the likely type of day within the 1st 30 mins.
The reason why he says this is because of a fundamental misunderstanding of what Pete meant when he talked about a Normal Day’s range.
I’ll post a blog on this tomorrow.
Re scale for ES is I use 0.50 for Day Profiles.
February 27th, 2008 at 7:26 pm
Hi Ray
Thanks. Please paste a link when you have it completed.
I gather (but have not defined) that the useful info from the first 30mins is:
Relationship to privious VA
Relationship to higher time frame context
Direction
Reversal
strength
open/close position within the bar
any gap
It sounds like it may be more useful that I first thought to nail these charateristics to each of the six basic days.
Looking forward to watching it.
Don’t get me wrong, I enjoyed the book, I jsut think it will take a second reading to work out the real take-away bits that I need.
Stuart
February 27th, 2008 at 7:33 pm
OK will send you link. It will be after ATIC and I’ll make it available to all STCers.
But, as a heads up:
The info for Type of Day is Context, Open relative to previous day’s Value Area; whether ranges have been contracting or expanding and finally type of open.
February 27th, 2008 at 11:05 pm
Stuart,
I’m new to Market Profile. What was the reason for going with Ninja Trader for their MP plugin?
Regards,
Jeff
February 28th, 2008 at 1:32 am
Ray
Another ASIDE: Following my post about interlocuters, our two pilot friends, Stuart & Jeff, show their characteristic traits , all right! Very precise and certainly not neophytes from their ways of posing questions to you.
Coming back to trading, last night we witnessed another Humphrey Hawkins testimony by Chairman Bernanke in front of Congress.
Going back to 2005 Humphrey Hawkins session, the day Greenspan testimony began, the S&P 500 was positive 44% of the time. However, once the markets began to digest his words was when there was trouble.
While I was listening to Bernanke’s 3-hour session on Bloomberg, I tried to trade the ES while monitoring my positions on GC and BPJY.
Reading the charts on my MarketDelta as well as studying MProfile charts prepared by you, Ray, I was poised to enter ES short after one hour of opening; but the market reversed trend and stopped me out within 20 mins.
After 5 mins, ES was at 1388 but with no bullish conviction from my reading of MDelta; so I short again at 1388.25, and with the habit of putting stops, I hit stop Sell instead of Stop Buy, not only once but twice, when I became disoriented from my mistakes (must be taking analgesics lately that slow and numb my brain-boxer!). On the third attempt, I finally got it right with a Stop Buy order. Those mistakes cost me a little.
The market did not do much thereafter, except it was obvious the locals were trying to push the market higher just before and during their lunch break, as the volume was thin.
Listening to Benanke kept me awake and by 3am my time (2pm ET), the market finally moved and my exit order at 1378.75 was filled as expected from my readings.
My GC was going my way although on a rotaional basis. ES turned out to be on a rotational day rather than a one time-frame down market as predicted by you. Much appreciated for the heads up, Ray.
February 28th, 2008 at 3:05 am
Hi Ana
You did well. Mistakes will happen. You corrected the errors immediately upon discovery and you were to able recover.
Pete used to say most traders think they can trade at 110% effectiveness; actually most us trade at 60%. The important thing is to learn and to continue striving for ‘constant and never-ending improvement’ (CANI)
Well done
February 28th, 2008 at 3:50 am
Hi all
Thanks Ray. I need to mind map those day types.
Jeff. I just got Ninja software for ‘market profile’
http://www.ninjatrader.com/webnew/index.htm
http://balancetrader.com/1/index.php?option=com_wrapper&Itemid=63
Its free, no monthly charge to use it. It needs an add-on from
http://www.fin-alg.com/tpoandvolumechart.html
for a one off payment of $249
All others seem to be a monthly charge. Then you need a data feed. The only monthy fee then is data. Here are some choices
http://www.marketdelta.com/kb/article.aspx?id=10028
I am mainly interested in using it for identification of sup/res levels for my option trading. Speaking of which…
Ana
I remember once, when I was a local, having my beeper go off at a price level one night. I rolled over in bed, speed dialled, ordered, and went back to sleep. Next day entering the pits I was told my position, Completely reverse to what I had thought. Cut losses, lick wounds, sulk. Very easy to do. Pilots when they recieve orders in multiple parts(clearance) write it down first, then read back what they wrote to the tower. Too many errors occur if you readback first, then write down.
Try options for error potential….
(qty)x(month)x(market)x(strike)x(put/call)x(order type) each of which has variables.
stuart
February 28th, 2008 at 6:31 am
BREAKING NEWS
FRIDAY MORNING 8:10 AM LIVE TELECAST ON CHANNEL NEWSASIA featuring our mentor ray on interview.
There should be repeat broadcasts thereafter for a week, I believe, if you miss the live version.
http://www.channelnewsasia.com/tvshows/tvguide.htm
HAPPY VIEWING
February 28th, 2008 at 11:32 am
That’s right, the last thing you want to hear from Air Traffic Control is “Where exactly are you going?” The rejoinder of “Where you told me to go!” won’t stick.
… like the market itself, ATC NEVER makes a mistake!!! The term “controller error” is not as popular as “pilot error”.
Thanks for the links, Stuart.