The market profile way of looking at the markets asks us to incorporate some new reference words and meanings.I have done an earlier post on the subject and this is an attempt to add some more meaning to the same and introduce a few more. We would be using the profile language in all of our references to market profile. So I ask of you to get familiar with the following terminology. A copy of this post will be available for future reference under Glossary on the right hand side.
Auction : The bid-ask process of the market is described as an auction.The purpose of an auction is to facilitate trade and the byproduct of the two-way auction process is market-generated information.The auction represents in the formation of the value area which the buyers and the sellers agree as the fairest value for the day. As the auction moves away from the value area, buyers and sellers change their definition of value. If higher prices are agreed in the auction, value is supposed to move higher and consequently the market moves up.
Timeframes : The market profile recognizes five distinct types of individuals who operate in the markets. These are a) Scalper, b) Day trader, c) Short term player, d) Intermediate term player, e) Long term player. Each of these individuals have a perception which they bring to the market and this perception helps move the markets. The scalper and the day trader are responsible for maintaining the liquidity of the markets.
Value : The perception which all of the above mentioned players bring to the markets after the bid-ask process helps build what we call "value". Value is different for each of the mentioned players and they will move price up or down depending on this perception. For example if the intermediate term seller thinks that the market is overpriced he will jump in to move price down.On a daily timeframe, the period where 70 % of the volume action takes place is defined as the value area.Similarly we have a weekly and a monthly value area.
Point of Control ( POC) :This is the longest line of TPOs closest to the center of the daily range. This is the price where the most activity occurred during the day (based upon time); it is therefore the price considered to be the fairest during any trading day.The migration of the fairest price at which business is being conducted is of great importance in monitoring longer timeframe activity (greater than day timeframe) in any single day.
Buyers : Individuals of any timeframe who feel that the present market is underpriced and therefore less in value. These individuals will move price up.
Sellers : Same role as the above except they think that the market is overpriced and will move price down.
TPO's : The basic building blocks of the Market Profile® are called Time Price Opportunities, or TPOs. Each half hour of the trading day is designated by a letter. When a certain price is traded during a given half hour period, the corresponding letter or TPO is recorded next to the price.
Selling tail : The failure of the auction at higher levels to attract new buyers results in the sellers swiftly moving in forming what is called a selling tail. The selling tail is a failed upwards auction.The greater number of single TPOs that form the selling tail the more aggressive the sellers’ reaction.
Buying tail : The same activity as above, but in the opposite direction.
Close : The final auction of the day
Open : The first auction of the day.If there is a large difference in the open and the close then again the perception of value in the market has changed.
Initial balance : The first 60 Minutes of a trading day are called the initial balance. As the name suggests, the IB tries to set up the day's balance or define value for the day.
Range extension : The movement away from the initial balance is called the range extension.Success or failure of the range extension gives us an indication of the type of day unfolding.
Initiative activity : Control by the buyer or seller in the first few minutes of the trading day is called initiative activity.As the name suggests, the action determines conviction on the part of the players to move the market.The strength of the initiative activity is useful to determine which party will have a role to play in the day
Responsive activity : This is a response to Initiative activity, the strength of which can determine changes to the trend of the timeframe.
Excess: Excess marks the end of one auction and the beginning of a new auction. It is visible within the two-way auction process via buying and selling tails. Excess occurs in all timeframes; it completes an auction
Gap :Is another form of excess. Price moves rapidly away from a prior trading level or reference; a gap signifies a total reordering in market thinking. NOTE: In profile, we measure a gap from the previous day’s high or low—not from the settlement price/ close. A gap signifies a market that is out of balance and presents a large opportunity.
Long Liquidation : It is a process in which "old business" reverses earlier positions.Long liquidation is a process that adjusts inventory that has gotten too long. It occurs within every timeframe; day timeframe long liquidation may be over quickly while longer timeframe long liquidation may last for much longer periods of time.
Short Covering : Opposite activity of the Long Liquidation. What's important to understand here is that it is again "old Business" which is covering.These become violent and misleading if you don’t understand the difference between old and new business.
One time framing : A trending sitauation where in value is built successively higher in an uptrend or lower in a downtrend. One timeframing is applicable to all timeframes, from a monthly chart to the shortest timeframe Market Profile® auctions intraday.Recognizing a one-timeframing mode can keep a trader from fading a market at inopportune times while also enabling a trader to employ the most appropriate strategic and tactical plan for the current market conditions.
Poor Highs/ Lows : Auctions, within the market’s natural two-way auction process, end in one of two ways: 1) Most commonly the auction ends through a more aggressive counter auction that creates a buying or selling tail; or 2) The auction ends through simple exhaustion.We refer to the exhaustion as poor high/ low.the poor high/ low is a temporary halt in the ongoing auction. What is noticeable is the lack of opposite auction in such cases and hence the original auction has a higher possibility of restarting.
Reference levels : These are points in time which hold information.That information may simply be available for very short periods of time or for extremely extended periods. Larger reference levels are of great importance to the long term player.Successful trading is about managing change and taking advantage of it.
Pullback low/Rally high: Applicable to trend days and is a late afternoon price migration against the prevailing trend. During a trend day there is usually one afternoon inventory adjustment; the pullback high or low is the extreme of this inventory adjustment. On the following day the pullback high or low is used to determine if there has been any meaningful change relative to the previous day; if the pullback high or low is not violated, there has been no meaningful change in the opposite direction of the prior day’s trend.
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I've tried to put in as many terms as I remember. Will keep updating this post from time to time.
Auction : The bid-ask process of the market is described as an auction.The purpose of an auction is to facilitate trade and the byproduct of the two-way auction process is market-generated information.The auction represents in the formation of the value area which the buyers and the sellers agree as the fairest value for the day. As the auction moves away from the value area, buyers and sellers change their definition of value. If higher prices are agreed in the auction, value is supposed to move higher and consequently the market moves up.
Timeframes : The market profile recognizes five distinct types of individuals who operate in the markets. These are a) Scalper, b) Day trader, c) Short term player, d) Intermediate term player, e) Long term player. Each of these individuals have a perception which they bring to the market and this perception helps move the markets. The scalper and the day trader are responsible for maintaining the liquidity of the markets.
Value : The perception which all of the above mentioned players bring to the markets after the bid-ask process helps build what we call "value". Value is different for each of the mentioned players and they will move price up or down depending on this perception. For example if the intermediate term seller thinks that the market is overpriced he will jump in to move price down.On a daily timeframe, the period where 70 % of the volume action takes place is defined as the value area.Similarly we have a weekly and a monthly value area.
Point of Control ( POC) :This is the longest line of TPOs closest to the center of the daily range. This is the price where the most activity occurred during the day (based upon time); it is therefore the price considered to be the fairest during any trading day.The migration of the fairest price at which business is being conducted is of great importance in monitoring longer timeframe activity (greater than day timeframe) in any single day.
Buyers : Individuals of any timeframe who feel that the present market is underpriced and therefore less in value. These individuals will move price up.
Sellers : Same role as the above except they think that the market is overpriced and will move price down.
TPO's : The basic building blocks of the Market Profile® are called Time Price Opportunities, or TPOs. Each half hour of the trading day is designated by a letter. When a certain price is traded during a given half hour period, the corresponding letter or TPO is recorded next to the price.
Selling tail : The failure of the auction at higher levels to attract new buyers results in the sellers swiftly moving in forming what is called a selling tail. The selling tail is a failed upwards auction.The greater number of single TPOs that form the selling tail the more aggressive the sellers’ reaction.
Buying tail : The same activity as above, but in the opposite direction.
Close : The final auction of the day
Open : The first auction of the day.If there is a large difference in the open and the close then again the perception of value in the market has changed.
Initial balance : The first 60 Minutes of a trading day are called the initial balance. As the name suggests, the IB tries to set up the day's balance or define value for the day.
Range extension : The movement away from the initial balance is called the range extension.Success or failure of the range extension gives us an indication of the type of day unfolding.
Initiative activity : Control by the buyer or seller in the first few minutes of the trading day is called initiative activity.As the name suggests, the action determines conviction on the part of the players to move the market.The strength of the initiative activity is useful to determine which party will have a role to play in the day
Responsive activity : This is a response to Initiative activity, the strength of which can determine changes to the trend of the timeframe.
Excess: Excess marks the end of one auction and the beginning of a new auction. It is visible within the two-way auction process via buying and selling tails. Excess occurs in all timeframes; it completes an auction
Gap :Is another form of excess. Price moves rapidly away from a prior trading level or reference; a gap signifies a total reordering in market thinking. NOTE: In profile, we measure a gap from the previous day’s high or low—not from the settlement price/ close. A gap signifies a market that is out of balance and presents a large opportunity.
Long Liquidation : It is a process in which "old business" reverses earlier positions.Long liquidation is a process that adjusts inventory that has gotten too long. It occurs within every timeframe; day timeframe long liquidation may be over quickly while longer timeframe long liquidation may last for much longer periods of time.
Short Covering : Opposite activity of the Long Liquidation. What's important to understand here is that it is again "old Business" which is covering.These become violent and misleading if you don’t understand the difference between old and new business.
One time framing : A trending sitauation where in value is built successively higher in an uptrend or lower in a downtrend. One timeframing is applicable to all timeframes, from a monthly chart to the shortest timeframe Market Profile® auctions intraday.Recognizing a one-timeframing mode can keep a trader from fading a market at inopportune times while also enabling a trader to employ the most appropriate strategic and tactical plan for the current market conditions.
Poor Highs/ Lows : Auctions, within the market’s natural two-way auction process, end in one of two ways: 1) Most commonly the auction ends through a more aggressive counter auction that creates a buying or selling tail; or 2) The auction ends through simple exhaustion.We refer to the exhaustion as poor high/ low.the poor high/ low is a temporary halt in the ongoing auction. What is noticeable is the lack of opposite auction in such cases and hence the original auction has a higher possibility of restarting.
Reference levels : These are points in time which hold information.That information may simply be available for very short periods of time or for extremely extended periods. Larger reference levels are of great importance to the long term player.Successful trading is about managing change and taking advantage of it.
Pullback low/Rally high: Applicable to trend days and is a late afternoon price migration against the prevailing trend. During a trend day there is usually one afternoon inventory adjustment; the pullback high or low is the extreme of this inventory adjustment. On the following day the pullback high or low is used to determine if there has been any meaningful change relative to the previous day; if the pullback high or low is not violated, there has been no meaningful change in the opposite direction of the prior day’s trend.
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I've tried to put in as many terms as I remember. Will keep updating this post from time to time.
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