Distinguishing Price From Value

[Dogpile 10]

I am continually looking for specific ways to convert the concepts of Market Profile into something tangible. Not necessarily in terms of a set-up – just a way to help understand what the market is doing through something visual. The best way to do this is to use current or recent price action for examples.

 

First the concept:

-----

“Perhaps the most important skill you must master to become a successful trader is the ability to distinguish ‘price’ from ‘value’.â€Â

 

Dalton (‘Markets In Profile’ – pg. 100)

-----

Last Wednesday September 5, the indices gapped down hard at the open. This must have been a ‘shock’ to many mainstream investors. We were coming off some good, hard sustained buying in previous days. Tuesday was a strongly bullish day (no trading on Monday b/c of Labor Day). Indeed, the gap down was somewhat surprising to me – but it wasn’t a total shock.

 

Dalton continually discusses the relationship between price and value as ‘price’ being volatile and ‘value’ being something that takes time. Sometimes, price just spikes and value never goes there. Price instead returns to value – or instead auctions in the opposite direction, through the last point of value, and in the other direction.

 

Take a look at the first attached chart. Let’s think of VWAP (‘volume weighted price’ for the day) as ‘point value’ and let’s think in terms of # of points above or below VWAP as a ‘value range’. This is different way of looking at ‘value area high’ and ‘value area low’ – but pretty much the same concept.

 

I am using an arbitrary 10 points for the S&P futures. This is not supposed to be a holy grail number – its just a point where it is a lot of points. The market can go 12 or 15 or 20+pts past VWAP – but 10 points is still a lot.

 

More examples to come…

[Dogpile 10]

This is an excellent example of a 'price spike'... yes it could gap down and blow-up the next day -- but it is higher odds that this is a price spike and is just bad location to be short. Getting long takes some guts here and I didn't do it on this day -- but you can 'feel' the emotion involved by investors on this move.

[Dogpile 10]

here is another case... you have a mid-day balancing -- and a 'break from balance' --- market is seeking a new level. This is a 'go-with' (the break from balance) -- or at least, don't fight it... Note how the context is different here -- it isn't a price spike at the end of an auction -- it is a price spike less than 2 hours after the initial 'break'.

[Dogpile 10]

here is one for fun -- this is clearly the exception to the rule -- this is absolutely wild action and should alert you to the fact that something highly unusual is occuring. the market trapped bears, then trapped early bulls. the market then made a final fake down in the final hour but formed a higher low. the market had dropped in the final hour of trading multiple days in a row prior to this. it looked like deja vu -- but the higher low was the key pattern here.

[jperl 11]

This is an excellent example of a 'price spike'... yes it could gap down and blow-up the next day -- but it is higher odds that this is a price spike and is just bad location to be short. Getting long takes some guts here and I didn't do it on this day -- but you can 'feel' the emotion involved by investors on this move.

 

This actually was a good example of a developing symmetric volume distribution. Notice in the attached chart the fact that the VWAP touched the PVP at 15:50 eastern time (light blue line crossing red line) and then 4 bars later crossed back above the 2nd Standard Deviation, the perfect long entry for a return back to the VWAP.

If you were willing to hold on till the open the next day you could have bagged 7 ES points.

[Dogpile 10]

thx jerry. good point.

 

in the past, I would have waited until the next day for a test of the low and then look long as there were many other reasons to think this was the end to an auction. we had weak volume on the down day and a taylor 'buy' bias going into the next day. indeed, a higher low was made and there was very good long opportunity the next day on this strategy.

 

but more and more now, I am trying to find ways to get in very late in the day and hold overnight just in case my 'next-day' set-up is screwed up by a large overnight gap. I am a short-term trader and love the minimal risk and low variance of my strategies. I will be working on such to add a set-up to my trading plan based on this sound market profile concept -- the 'symmetrical distriubtion with a price-spike' set-up --- a good concept in which to find 'set-ups' around.