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Knowledge Hub 2018-10-21T12:58:23+00:00

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Basics of Market Profile Technical Analysis

Market Cycle

It is the cycle in which the markets move up and down through various stages such as Accumulation – Mark Up – Distribution – Mark Down and sometimes the intervening stages of Re-accumulation and Re-distribution.

AMT

Auction Market Theory proposes that all financial markets work like an auction. That the price will move higher in search of sellers and price will move down in search of buyers.
Once the price has move low enough to uncover buying strong enough to stop the down auction, a new auction up will begin.
Market Profile Charts can be used effectively along with AMT principles to trade low risk opportunities in financial markets.

Market Profile

Market Profile is a way of organizing data. It organizes data in such a way that it reveals various AMT principles in real time.
In a MP chart the regular bars and candlesticks are replaced by letters (one letter for each 30 min bar is the most common setting). These letters are then collapsed on to the price axis to give it a distinct shape, which sometimes resembles a bell curve.

Normal

When price stays within the initial balance the whole day the day type is called as a Normal Day.

Normal Variation

When price moved outside of initial balance in subsequent periods, but does not create a range greater than twice the initial balance the day is called a Normal Variation Day.

Trend

When prices consistently move in one direction and create an elongated profile then it is called a trend day.

Double Distribution Trend Day

When price forms a narrow balance to begin with and then BO/BD from that balance and then form a second balance in the same day, the day type is called a double distribution trend day.

Neutral

When price extends range beyond the IB in both directions and closes within the value area, it is called a Neutral Day.

NEX

When price extends the range in one direction and then moves in opposite direction and extending the range at the other end, as well as closing on the extreme, is called a Neutral Extreme day.

Open Types

OIR
  • When prices open inside yesterday’s range, we call it Open Inside Range.
  • The range development potential is limited.
OOR
  • When prices open outside yesterday’s range, we call it Open Outside Range.
  • In this scenario the range development tends to be wide, and dynamic moves can be expected.

OTD

  • Market opens and test beyond a known reference to check for any unfinished business, if not found we resume the drive.
  • Second most confident opening.
OOD
  • Market opens and drives confidently in one direction.
  • Price seldom returns to the opening level.

ORR

  • Market opens and moves in one direction till it loses momentum and interest.
  • Spotting this opposite party enters and moves the prices confidently in the direction opposite to open.
  • But this early confidence is often short lived and range development is often not very wide.

OAIR

  • Market opens inside previous day’s range and auctions in a narrow range.
  • Weakest open.

OAOR

  • Market opens outside previous day’s range and auctions in a narrow range.
  • Even though the initial range is limited there is always a chance of a dynamic move later in the day.

Excess

  • When a tail occurs outside of a recently accepted area of acceptance it is called an excess.

PH/PL

  • When price trades at one of the extremes in more than 1 time period it is called a PH/PL.
  • It indicates exhaustion of the current auction, and may result is adjustment of the inventory.

Structural details

Initial Balance

  • The range of the first 2 bars or first 2, 30 min periods form the initial balance.

Tails

  • When price probes a reference and get rejected in the same time period we get a tail.
  • Tails show end of one auction and start of another.
  • Sometimes tails are also classified as excess.

Spikes

  • When price moves away from established value especially near the close the development is called a spike.
  • Spikes can be because of old business or new business.
  • In later case we get continuation and former case we get retracement.

Old Business

  • When a dynamic move up/down subsequently takes a ‘P’ or ‘b’ shape respectively, we call if old business.
  • ‘P’ shape denotes short covering.
  • ‘b’ shape denotes long liquidation.

New Business

  • More often than not ‘P’ shape and ‘b’ shape denotes old business.
  • To extend the range above ‘P’ or below ‘b’ we need new business, that is new traders coming in and extending the range further.
  • This is often seen on a trend day.
  • New business is not necessarily smart money.

PPOC

  • When at a price level most of the time periods trade for the day, we get a wide POC.
  • Such wide POCs are called as Prominent POC and act as a magnate to prices.

VPOC

  • The widest point of a volume profile shows the Volume POC.
  • It also acts as a magnate to prices.

Value Ares

      • The 70% of days trading clustered around the POC is called the value area.
      • It denotes where majority of days trading took place.

VAH-POC-VAL

  • VAH – Value Area High – Upper limit of the value area.
  • POC – Point of Control – The price level about which Value Area is calculated.
  • VAL – Value Ares Low – Lower limit of the value area.

Anomaly

  • Sometimes the profile is not smooth and has ragged edges to it.
  • These ragged edges are called anomalies.
  • Anomalies denote forcing action.
  • Forcing Action
    • It means that every time the opposing activity increases the traders with the original trend over power them.
    • This leads to anomalies and multiple distributions in a profile.
    • Forcing action is liable to retracement.

One Time Framing

  • When each subsequent bar makes a higher low in a trading day we say that market is one time framing higher and vice versa.
  • It is an indication of strong presence of OTF buyers or sellers.