Post on 14-May-2021
Market Profilefrom Theory to Practice
Gonzalo PeresApril 17, 2019
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Disclaimer
Today’s Agenda
● Theory and Definitions● Standard Deviations● Single and Multiple Distribution Areas● Balanced vs. Unbalanced Markets● Time Profile vs. Volume Profiles● Compound and Consolidated Profiles● Areas of Acceptance and Rejection● Value Areas ● Points of Overlap● Rules and Patterns● Skew and Kurtosis● Examples and References
Market Profile is endorsed by the CME (Chicago Mercantile Exchange), and is based on the laws of statistics, and is the best way to frame the market activity.
Early complaints that Market Profile was too complicated, suitable only for large institutions and it took too long to understand and to master it. Today, rules and trading strategies have been developed within the trading community over the last 25 years, which simplifies its use, and eliminates noise to current trading methods.
Market Profile History
Peter Steidlmayer joined the CBOT (Chicago Board of Trade) in 1963, as an independent trader.
Peter served on the board of directors of the CBOT from 1981 to 1983. While a director, he created a revolutionary concept in data arrangement and trading information: Market Profile and Liquidity Data Bank.
Market Profile is not a trading system, and it will not give the trader a buy, sell, entry, exit, overbought or oversold indicator. Market Profile is a approach, a methodology that provides traders the ability to identify the market's underlying dynamics and structure. Aiding traders to initiate, manage and exit trades accordingly.
Market Profile definition:
• A structure for organizing a developing market• A horizontal and vertical display of the dynamic
process of the market activity• A visual display of the market’s “fair value”• A graphic reflection of all market participant bias
Price vs. Time vs. Volume
Market Profile Principal
Volume
Time
Price
Components
PRICE: Is simply the auction means of advertising opportunity. It is the most volatile variable and the fastest moving market element
TIME: Regulates each opportunity. It is the constant around which all the auction data is organized
VOLUME: Measures the success or failure of each auction high/low. Volume is also a variable, but it changes much more gradually than price, an it represents the interaction of players.
Standard Deviation (Normal Distribution / Gaussian Distribution)
Standard Deviation measures the distribution of a set of data from its average. The more spread apart the data, the higher the deviation.
Standard deviation is also known as ‘Historical Volatility’ and is used by investors as a measure for the amount of expected volatility (Implied Volatility). In statistics and probability theory, the standard deviation shows how much variationor dispersion from the mean.
Carl Friedrich Gauss a19th century mathematician inventor of the Gaussian Distribution
Market Phases
Accumulation(Oversold)
Distribution(Overbought)
Re-distribution
Re-accumulation
Single Structure (Balanced Market)
Return to the Mean
1 STD (68%)
2 STD (95%)
Seve
ral A
reas
of D
istr
ibut
ion
Price Levels
Acceptance Area
Rejection Area
Seve
ral A
reas
of D
istr
ibut
ion
Support and Resistance
Volume Profile vs. Time Profile (Price x Volume) (Price x Time)
VPOC TPOC(Volume Point of Control) (Time Point of Control)
Compound Profile(Volume Profile + Time Profile)
------------------------ Asia and Europe ---------------------- ------------- USA ------------
OTH (Overnight Trading Hours) RTH (Regular Trading Hours)
POC Re-Test
---------------- Asia and Europe ---------------- -------------------- USA -------------------
POC Area(Point of Control)
Scenario #1
When the market opens above/below the Value Area, and is able to hold outside, it is a strong bullish/bearish signal.
Scenario #2 (80% Rule)
When the market opens above/below the VA and it begins to trade for two consecutive 30 min bars inside VA, there is a strong tendency to fulfill the VA
Scenario #3
When the market opens inside the VA, it is showing signs of a balanced market
Value Area Rules
VAH (Value Area High) & VAL (Value Area Low)
Resistance
Support
Value Area Overlap(yesterday into today)
VPOC Overlap(yesterday into today)
Consolidated Profile(Weekly Profile)
Mon Tue Wed Thr FriTue Wed Thr Fri
● Weekly● Monthly
B & P Patterns(Dovish Bias)
bbCombine...
B & P Patterns(Hawkish Bias)
pCombine…
References
NOTE: These are not investment recommendations sources,but rather source of reference for you to check
James Daltonwww.jdaltontrading.com
Charles Cochranwww.cnfuturestrading.com
ShadowTraderwww.shadowtrader.net
CME Groupwww.cmegroup.com
Thank You!
Contact Info:
Gonzalo Peres
gonzalo@tradersmeetup.net