AUCTION
SPIKE
HIGH VOLUME NODE
MARKET PROFILE
AUCTION FAILURE
Example : Nifty on 3rd August tested the lows of 31st July, but were unable to auction below the said level, and the opposing Bulls, auctioned prices higher.
SPIKE
Spike - a breakout price probe that occurs towards the latter part of the session such that it cannot be confirmed as having been accepted or rejected as either a Selling Tail or a Buying Tail. If the spike was accepted, value/balance would be established within the range of the spike. However, the trader has to wait until the next RTH session open to determine whether the spike has been accepted or rejected.
Upward Spike
High Volume Node (HVN)
High Volume nodes (HVN's) are a volume profile concept. HVN's are areas where there is a peak in trade volume on a volume at price histogram.
HVN's are initially created as a result of areas of consolidation. During this period both sides of the market are actively involved and the period of time spent at this price level is usually high as a result. During this time period the market has "found value" and trading at this level is sustained.
Because there is a lot of business done in that area, HVN's imply "fair value." When price approaches a previous HVN, the typical behavior is to spend time in this area and not rush through because this was a previous "fair value" area.
RESOURCES AND RELATED READING Dalton, James F., and Eric T. Jones [1995]. “Market Logic And The Market Profile: An Introduction To Technical Applications,” Robert Dalton [1990]. Mind Over Markets: Power Trading With Market Generated Information
SPIKE
HIGH VOLUME NODE
MARKET PROFILE
AUCTION FAILURE
Auction Failure - market participants test a key reference area extreme, such as the prior Low of Day (LoD) or a Virgin POC, but fail to auction prices in that direction. Subsequently the opposing market participants overwhelmingly auction prices in opposite direction with speed and determination. This typically results in an outside day candle.
We witness overlapping value area regions, auction failures, breakouts and the resulting outside days happening over and over again and is a reliable combination for generating consistent profits.
SPIKE
Spike - a breakout price probe that occurs towards the latter part of the session such that it cannot be confirmed as having been accepted or rejected as either a Selling Tail or a Buying Tail. If the spike was accepted, value/balance would be established within the range of the spike. However, the trader has to wait until the next RTH session open to determine whether the spike has been accepted or rejected.
Upward Spike
- Setup I: market opening price below an upward spike. How to trade: this is a Bearish indication since the spike was rejected leaving a Selling Tail. The trader ought to be looking for shorting opportunities.
- Setup II: market opening price within a spike. How to trade: setup indicates price acceptance and confirms the upward move. The trader should look for opportunities to Buy Long the lower extremes of a bracketed market.
- Setup III: an opening price trading above an upward spike. How to trade: this setup indicates that odds are in favour of even higher prices until buying is stemmed in order that two-sided trade can be facilitated. The trader should be prepared to take a go-with approach to profit from this set up.
- Setup IV: an opening price with the bottom of the spike acting as support. How to trade: with trade entry close to the bottom of the spike, this setup provides a KRA to lean against for a stop loss order and entry based on market structure.
- Setup I: an opening price above a downward spike. How to trade: this is a Bullish indication since the spike was rejected leaving a Buying Tail. The trader ought be looking for Long opportunities.
- Set up II: market opening price within a spike. How to trade: this setup indicates price acceptance and confirms the downward move. The trader should look for opportunities to Sell Short the upper extremes of a bracketed market.
- Set up III: an opening price trading below a downward spike. How to trade: this setup indicates that odds are in favour of even lower prices until selling is stemmed in order that two-sided trade can be facilitated. The trader should be prepared to take a go-with approach to profit from this set up.
- Set up IV: an opening price with the top of the spike acting as resistance. How to trade: with a trade entry close to the top of the spike, this setup provides a KRA to lean against for a stop loss order and entry based on market structure.
High Volume Node (HVN)
High Volume nodes (HVN's) are a volume profile concept. HVN's are areas where there is a peak in trade volume on a volume at price histogram.
HVN's are initially created as a result of areas of consolidation. During this period both sides of the market are actively involved and the period of time spent at this price level is usually high as a result. During this time period the market has "found value" and trading at this level is sustained.
Because there is a lot of business done in that area, HVN's imply "fair value." When price approaches a previous HVN, the typical behavior is to spend time in this area and not rush through because this was a previous "fair value" area.
An HVN at 4905 Spot and how it was protected on 11-05-2012
Market Profile
J. Peter Steidlmayer developed Market Profile in the 1980s in conjunction with the Chicago Board of Trade. Traders who use it say that they get an in-depth understanding of the market, contributing to improved trading. Many factors can be monitored from Market Profile.
Market Profile is not an indicator in the typical sense. It doesn’t provide buy/sell recommendations It organizes the data so that you can understand who is in control of the market, what is perceived as fair value, and the direction of the price move. It is possible to extract enough information from Market Profile for you to position your trades more advantageously.
Market Profile Basics
The concept of Market Profile stems from the idea that markets have a form of organization determined by time, price, and volume. Each day, the market will develop a range for the day and a value area, which represents an equilibrium point where there are an equal number of buyers and sellers.
In this area, prices never stay stagnant. They are constantly diverging, and Market Profile records this activity for traders to interpret.
Market Profile Structure
The structure of Market Profile follows that of a normal distribution curve of price occurrences.
Market Profile is based on the normal distribution curve, wherein approximately 70% of the values fall within one standard deviation of the average. If you rotate the normal distribution curve so that price is along the vertical axis and time on the horizontal axis (as shown in previous figure), you have the structure of Market Profile.
A normal distribution curve assumes that the number of occurrences follow a bell-shaped curve. Anyone who has traded in the markets, however, knows that prices never follow a definite pattern; in fact, you rarely see a normal distribution.
What you do see are skewed distribution of prices, which makes it possible to see the price at which most of the trades actually took place. This provides significant clues about the direction of prices and is the groundwork for understanding Market Profile. In theory, this helps the trader identify where prices are in relation to values.
Monitoring price distribution over time gives insight into what levels are considered fair and unfair. You may take advantage of this information and identify good trading opportunities.
Volume is the key to understanding Market Profile. If prices move away from the value area but volume starts to dry up, it is likely that prices will move back to the value area.
Such a movement indicates that sellers are not happy that prices are below value and buyers are not happy that prices are above value. Trading activity may increase only when prices return to the value area.
If, on the other hand, prices diverge from the value area with increasing trading activity, that indicates market participants are re-evaluating their idea of value. By observing market activity through Market Profile, you can get a grasp of who is in control of the market and determine which way the market is likely to move.
Watching it Develop
The development of Market Profile can be seen during the course of the trading day in Figure. Market Profile is made up of time price opportunities (Tpos), which are represented by letters. Each letter represents one half-hour of the trading day. In the example in Figure the periods are represented with letters A to J, with A being the first half-hour.
Market Profile Range
- The first hour of trading sets the general pattern for the day and is your first opportunity to view market activity. It is known as the Initial Balance.
- The height of the entire profile that is, the high to the low is known as the Price range.
- On occasion, prices go above or below the initial balance. This is known as a range extension. In this example, the range extends below the initial balance, indicating a seller range extension.
- The price range where 70% of the trading activity takes place, one standard deviation from the mean, is the Value area.
- The point of control is the longest line of Tpo’s closest to the centre of the range.
- When you have a series of single letters on either extreme, it is known as a single-print buying/selling tail.
Value Calculation
Value area can be calculated using either volume or time price opportunity (TPO) count. Here’s the calculation using the TPO count:
- Count the total number of TPOs, including single prints.
- Calculate 70% of this number.
- Identify the point of control (the longest line of TPOs closest to the center of the range) and note its TPO count.
- Add the TPOs of the two prices above and below the point of control. The TPOs of the two with the greater number should be added to the TPOs of the point of control.
- Continue this process till the total number of TPOs counted reaches 70% of the total number of TPOs. The same methodology can be used to calculate the value area using volume. See sidebar for the application of the calculation.
Total TPOs = 131
70% of 131 = 91.7
TPOs of the point of control = 11
TPO count: 11 + 20 + 18 + 16 + 14 + 9 + 6 = 94
Value area = 2148 to 21.59
Buying and Selling
Traders react differently to prices at different times, so it is important to recognize the type of activity that is taking place. There are two broad categories of buying and selling activities known as initiative and responsive. Differentiating between the two is important, and the structure of Market Profile will provide clues to the type of activity taking place.
To determine which activity is taking place, you must compare the current day’s profile to that of the previous day (Previous Figure). If traders take the initiative to move prices higher or lower than the previous day’s value area, the action indicates that the activity is initiative. If, on the other hand, selling activity is dominant when prices are higher than the previous day’s value area, or buying activity prominent when prices are lower, you conclude that responsive activity is taking place.
Comparing the current day’s profile to those of previous days enables the market participant to recognize the changes from one day to the next and observe changes in market participation and attempted divergence of price from value. Such an approach will provide clues about whether the market action is occurring in a trending or bracketing (trading range) market and reveal whether movement is likely to be met with acceptance or rejection.
You can spot a trend by looking at the movement of the value area. If it moves in one clear direction, either up or down, you know that the market is in a trend. A range market is one in which prices move back and forth between two price levels that act as support and resistance. When the value area steadily moves in one direction, this means that the movement in price is being accepted. If, however, the value area is overlapping the previous value area, you can conclude that the trend is slowing down and starting to find balance. In a ranged market, both the other- timeframe buyers and sellers are responsive. When prices reach the top of a bracket, the seller enters and pushes them down. Conversely, when price reaches the bottom of the bracket, the buyer responds by driving them up.
Conclusion
Market Profile reveals several factors that provide you with an idea of the trading activity taking place in the markets. Monitoring the market action will enable you to determine the type of day that is developing, whether a price trend has started, what the value area is, the type of activity (initiative or responsive) taking place, whether the activity is continuing or changing from the previous day, and whether the market is trending or ranged. Combining Market Profile with indicators such as moving averages can help you create a successful trading strategy.
RESOURCES AND RELATED READING Dalton, James F., and Eric T. Jones [1995]. “Market Logic And The Market Profile: An Introduction To Technical Applications,” Robert Dalton [1990]. Mind Over Markets: Power Trading With Market Generated Information
