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Market Profile and Auction Theory

Posted 05-27-2012 at 05:47 PM by robocod [Show Appreciation] What's This?
Updated 05-28-2012 at 05:08 AM by robocod

A few weeks ago I started looking at Market Profile. Actually I stumbled upon this sometime last year, but didn't have time to look into it then. Well, it came across it again recently, so here I am.

"Market Profile" is a 'view' of the market which was originally developed by J. Peter Steidlmayer in the 1980s. He developed the system whilst working for the Chicago Board of Trade (CBOT).

This is an excellent summary that I found here...
Market Profile is a tool for organizing time and price data, graphically representing how volume builds at various prices over time. When we see most trades occurring within a relatively narrow range of prices, we know that the market is in balance. Price will probe the edges of this balance area--called the value area--as markets constantly update their estimates of value. If prices higher or lower than value cannot facilitate trade (i.e., if higher prices don't attract buyers or lower prices don't attract sellers), we will tend to trade back into the value area. If these probes to the edges of the value region do facilitate expanded trade, we will break free of the value area in a trending move. That trend will continue until sufficient sellers or buyers perceive value in the new prices and take the other side of the trade, beginning the process of forming a new region of balance.
Market Profile is a trademarked product from CBOT/CME (Chicago Board of Trade / Chicago Mercantile Exchange). However, despite this system being developed for/by CBOT, and with obvious emphasis on commodity futures and options, it has wider uses, and can be used even when traded volume figures per price are not available.

It is also closely linked with Auction Theory.

I think we sometimes forget this, but financial instruments trade under some type of auction principle, i.e. buyers and sellers trying to agree on a price. The price will move higher trying to entice more sellers into the market, and it will move lower trying to entice more buyers into the market. Due to the nature of the auction this process is not instantaneous of course, and price tends to "randomly walk" up and down trying to establish value.

Traders often focus on trending environments, and often dismiss the sideways price movement as being "congested" or "stalled". These very words uses have negative connotations. However, in reality these sideways price movements are areas where the auction process has found value - it is balance.

The market usually lurches from balance to imbalance (breakout / trend) to balance again, etc.

Actually, from time perspective the market spends much more time in these sideways ( balanced) movements that it does in vertical development.

Market Profile tries to detect these areas of balance, and in doing so a) enables us to trade the value area, and b) gives some insight into when the balance area might break and in what direction.

I'm going to use this blog entry to collate my findings on Market Profile and Auction Theory.

FutureTrader71 is an active trader of E-mini using MarketProfile, and has a website and a number of very good recorded webinars on YouTube. For example this.

There are a number of other webinars and videso on CBOT/CME website.

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  1. Old Comment
    robocod's Avatar
    Here's some screenshots...

    Posted 05-27-2012 at 06:05 PM by robocod robocod is offline [Show Appreciation] What's This?
  2. Old Comment
    Posted 05-28-2012 at 06:00 AM by robocod robocod is offline [Show Appreciation] What's This?
  3. Old Comment
    Simit Patel's Avatar
    great stuff, robocod!

    there is a free ebook on market profile that was shared here some time ago that folks might find useful: A Six-Part Study Guide to Market Profile — Free eBook
    Posted 05-28-2012 at 08:33 AM by Simit Patel Simit Patel is online now [Show Appreciation] What's This?
  4. Old Comment
    robocod's Avatar
    The latest version of my MarketProfile indicator splits the price action into 3 intraday sessions (Asia, Europe and US). You can think of these a bit like 8H candles, but with the added bonus of being able to see what really happened inside those candles.

    I'm still looking for the right way to trade this. I think it has a lot of potential. The composite profiles are quite good at highlighting the important support and resistance levels.

    I'm also blogging this on my other blog.
    Posted 06-04-2012 at 05:23 PM by robocod robocod is offline [Show Appreciation] What's This?
  5. Old Comment
    robocod's Avatar
    I am developing my Market Profile indicators further. Added 2 new features (Naked POCs) and High Value Nodes (HVNs) and Low Value Nodes (LVNs).

    Latest screenshots are in my blog.

    Future work around this theme:
    1) Tick stream profiling
    I'm hoping that profiling tick data will give me help me optimize entries. So, basically using HVN/LVN to find important Support / Resistance levels, and tick profile to optimize entry.

    2) "Better candles"
    It occurred to me that I can create say a 1min or 5 min profile of say a 1 hour or 4 hour candle. So, I would get the long-time frame perspective of the larger candle, but be able to 'see inside the candle' (via the price / volume profile) in order to ascertain the real sentiment of the candle.

    Both these are in the development queue for now, but I want look into it at some stage.
    Posted 06-19-2012 at 05:39 PM by robocod robocod is offline [Show Appreciation] What's This?