'Markets In Profile': Detailed Book Review

[Frank 10]

This book by Jim Dalton is among the very best books ever written on understanding trading concepts, in my opinion. I read this book when it came out and have it all marked-up. As I have re-read it, I realize that I really should do a full outline of the book. This thread is for that purpose.

 

I will present what I think are the main concepts for each chapter. If you would like to contribute, please do. But one request, which you may or may not choose to comply with, lets try to keep the thread to just this book review and not with lots of posts that aren't related to actually reviewing the concepts directly from this book.

 

If you would like to contribute along, please re-read the Preface and the First 3 chapters and we will begin shortly.

[Frank 10]

Top Concepts From The Preface:

 

1. The objective of investing is to identify asymmetric opportunities.

2. ‘Excess’ occurs at the end of an auction

3. Trade location is the key to controlling risk and taking advantage of asymmetric opportunities

4. Successful investing incorporates both sides of the brain. Pattern-recognition is how you use the right-hemisphere.

5. [The traders] with superior results over the longer-term are those that are flexible and adaptive to changing conditions. Specific trade strategies come and go. But the underlying auction structure is recurring.

 

Discussion:

Since this is just the preface, it is introducing concepts which will be developed later in the book.

 

The theme of the entire book, in my view, is that of using the market profile to give you context on determining asymmetric trade location opportunities.

[Frank 10]

Chapter 1 “The Only Constant”:

 

Remember the lead-in from the Preface: The objective of investing is to identify asymmetric opportunities

 

1. Once the majority recognizes that change is occurring, all asymmetric opportunity is lost.

2. An easy way to categorize an ‘auction’ is to classify the participants as either; the leaders (innovators or ‘early adopters’) or the laggards (the ‘late majority’).

3. Auctions complete when the laggards from the last auction are met by the innovators from the new auction.

4. ‘This book challenges you to be an innovator’

5. People change markets, markets change people

6. The fundamentals of market activity are just as they have always been: price and volume move over time to facilitate trade in the pursuit of value. It really is that simple.

 

Discussion:

Chapter One begins as a general discussion about ‘change’ in the asset management business. The authors challenge the reader to be innovators and not followers. Examples of ‘followers’ (ERISA implementers, relative performance/MPT/Style-focus school to the ‘absolute return’ focus) are reviewed. Dalton is setting the reader up here for why the Market Profile is enduring.

 

While change is always occurring in and around the investment industry, it is the pure and unbiased information that comes from the order flow of the market itself that is ‘the only constant’ (Chapter Title). “Despite the astonishing rate of change in the investment world, the fundamentals of market activity are just as they have always been: price and volume move over time to facilitate trade in the pursuit of value. It really is that simple.” (pg 13)

 

The title of the chapter ‘The Only Constant’ --- appears at first to be that of the cliché – ‘the only constant is change itself’. But I believe what he actually means is ~’the order flow of the market itself is the only constant.’

 

The only way to be sure you are in with the ‘innovator camp’ and not a ‘laggard’ --- is to effectively analyze the order flow of the market itself. Don’t try to out-think the market, just learn to recognize the patterns that accompany whatever ‘change’ is currently occurring.

[Bearbull 10]

Excellent Effort Frank, keep it coming, as SoulTrader has illustrated the MP concepts can be blended with those of Wyckoff to provide that extra edge in trading

so any further explanation of MP can only lead to clearer understanding.

[Frank 10]

Chapter 2 ‘Information’

 

This chapter is mostly an explanation for why the Market Profile is a powerful tool for capturing the structure of the market.

 

There is a tremendous amount of conflicting information flowing into the marketplace at any given time. Processing this mix of dynamic news-flow in a real-time environment is extremely complex. But what compounds the complexity further is that many different timeframes are digesting the data concurrently. ‘Good news’ might seem bullish to a trader who is not already long the market. But to a big institution with an extensive inventory of long positions, ‘good news’ might lead to aggressive selling. Thus, the nature of the news might very well be inversely-related to the next directional move. Thus, the market is being moved around not so much by the intrinsic nature of the newsflow, its being moved by the NET order-flow of the different time-fames in the marketplace. The patterns in Market Profile reveal which timeframe is currently in control of the market.

 

The Market Profile histogram shows the structure of order flow for a given time-period and the ‘value’ area. It takes strong ‘bidding activity’ for price to move away from an established value area. Thus, a move away from a value area is monitored for bidding activity (volume) and acceptance/rejection. Market Profile will expose the dominant timeframe during this process to the seasoned eye before it is reflected in significant price movement. Strong downward movement indicates that the dominant timeframe (whichever that is at the time) views price as unfairly high and is seeking a new lower value area.

 

Bracketing behavior vs Trending behavior is introduced in this chapter. This is seemingly unrelated to the ‘Information’ title of the chapter. But the point is that current price movement needs to be monitored in the context of a higher-timeframe bracket or trend.

 

A ‘bracket’ implies moves away from value will be retraced. Trend implies new directional movement will prove self-feeding (higher prices attract more buying/lower prices attract more selling).

[Frank 10]

Chapter 3 ‘Timeframes’

 

Chapter 3 explores the concept of the distribution of ‘inventory’ among various classes of market participants.

 

Every market that is financial in nature involves the transfer of inventory from one price-conscious party to another. Each party can be classified with regard to how they think about inventory. A long-term investor is by definition ‘committed’ to their inventory of stocks. A short-term scalper trades in and out of the market while targeting zero inventory over any reasonable measure of time.

 

The current price of the market reflects the current preferences of inventory among timeframes. Future price movement depends directly on how the various timeframes ADJUST their inventories. Adjustments to inventories are in turn dependent on how long or short each timeframe is relative to their ‘normal’ inventory situation.

 

Market Profile is intended to structure order-flow to enable the user to ‘read’ the state of inventory and the changes to inventory through pattern-analysis.

 

Dalton has at this point created a multi-dimensional framework to work with:

On the one hand, you have many different timeframes of investors interacting and co-existing, creating a complex and dynamic puzzle.

On another dimension, Chapter 1 laid out a scale that ranges from ‘early innovator’ to ‘laggard’.

 

I think one way to think about this framework is structured like this:

 

http://www.traderslaboratory.com/forums/attachment.php?attachmentid=5613&stc=1&d=1206416143

 

‘Order-flow’ depends on your existing inventory as well as how attractive you view current price.

 

Since the ‘higher timeframe’ (longer-term investors) wield the most buying and selling power in the marketplace, it is their order-flow that is most highly correlated to net incremental inventory changes. Innovators are the ones to figure out when the higher timeframe is actively altering their net inventories and aligning themselves with this order-flow.

 

~”When the longest timeframe becomes active, it is not uncommon for all other timeframes to eventually join in, which can result in a major trend.”

 

‘Performance’ depends on how often you are in the ‘innovator/early adopter’ camp vs in the ‘laggard/late majority’ camp.

 

Note the link between the ‘innovator’ and the ‘higher timeframe’ player here. These concepts exist on different dimensions in that the ‘innovator’ may or may not be a higher timeframe player and a higher timeframe player may not be an innovator. Dalton writes that no matter what your timeframe, it is good trade location that is key – and the innovator is the one that figures out good location by examining the inventory/order-flow puzzle of the various timeframes --- and acts on this analysis in real-time.

Edited March 25, 2008 by Frank

[BrandonLG83 10]

Excellent review for a excellent book!

[Frank 10]

Chapter 4: Auctions and Indicators

 

Up to this point, Dalton has discussed the need to focus on order-flow in order to interpret news-flow/information and the interaction of various timeframes. Dalton has effectively said ‘Be an innovator by finding asymmetric trade location.’ Chapter 4 introduces some specific indicators that help point you to figuring out where you are in the acution process. Once you know where you are, you can then begin to recognize reward-risk and asymmetric location. This chapter begins the real meat of the book.

 

Market Profile is an analysis of the ‘structure’ of the market -- where ‘structure’ is different than price movement. For example, any down day that doesn’t have the proper ‘down-day structure’ is likely to have just weakened the short-side and may have just strengthened the case for the innovator to go long. And vice versa, any up day that doesn’t have the proper ‘up-day structure’ will have weakened the long-side by removing buying power and may have strengthened the case for the innovator to soon look to short.

 

An up day with the right ‘up-day structure’ means that while timeframes have begin to come into agreement, the ‘late-majority’ (laggards) have not yet climbed on board. Since the market is said to reverse when the laggards of the last auction meet the innovators of the new auction, the innovator should ‘stay-with’ his position a while longer as the structure suggests continuation.

 

One of the more important aspects to market profile is a careful analysis of what the market did the previous day – and also what the market did in the ‘overnight market’. All of the indicators of market profile relate to one of the following questions:

 

1. Whatever the market was ‘trying’ to do yesterday – how much conviction did it show in this attempt?

2. Were there signs of ‘higher timeframe’ participation?

3. Given the end-of-day profile structure, is there a recognizable pattern apparent which determines the likely state of inventories across the various timeframes?

4. Did the various timeframes come together and ‘agree’?

5. What was the relationship of time and price for the day?

6. Did yesterdays action ‘weaken’ the market by inefficiently removing buying power (short-squeeze)?

7. Was yesterdays action ‘constructive’ for the market by removing selling power from the market?

8. Should the market trade lower overnight or in the early morning, will encouraged short-sellers be ‘weak-handed’ and subject to a squeeze?

9. Should the market gap-up overnight or in the early morning, will encouraged momentum players be ‘weak-handed’ and subject to a ‘liquidating break’?

 

Indicators #1 & 2:

Profile Shape (Symmetric or Non-Symmetric) and ‘Range Extension’

 

Every auction that is financial in nature is a process that is in search of ‘value’. Competitive forces come together and interact until they are satisfied with the position of their inventory and then they slow-down or stop. This is how ‘value’ is determined. The shape of the distribution (profile) summarizes this activity in its histogram form.

 

There are 4 basic profile structures – with many variations of the primary 4:

1) Elongated Histogram (skinny and long, the histogram looks somewhat like a vertical line ‘|’)

2) Symmetric Histogram (squat or ‘fat and narrow’, the histogram looks like the capital letter ‘D’)

3) The ‘b’-shaped Histogram (the histogram looks like the lower-case letter ‘b’)

4) The ‘P’-shaped Histogram (the histogram looks like the upper-case letter ‘P’)

 

 

Let’s take the most extreme example as a starting point. If long-inventories are ‘low’ and short-sellers are weak and price is viewed as low by all timeframes, the market profile histogram will ‘elongate’ to the upside, forming a somewhat vertical line (‘|’). Price and time will have a ‘brief’ relationship where price is moving quickly over time in search of satisfying the markets needs (innovators aggressively increasing long-inventories and squeezing the laggards). The histogram that results at the end of the day will be thin. The high-to-low range of the day will expand, called range-extension.

 

What does an elongated (non-symmetric) histogram with big range extension tell you:

1. The late-majority is not on board yet --- you are likely still in the early adopter/early-majority zone of the ‘leader-laggard’ framework

2. Inventories are in the process of adjusting to the various new preferences of the respective timeframes and this process is not yet over.

3. This is a ‘new-business’ led auction. That is, new longs are being established – it is not just short-covering (shorts closing out their ‘old’ positions).

 

The opposite of an elongated histogram is a symmetric distribution. This is when the market is in balance and any attempt away from balance in quickly met with ‘responsive’ buying or selling to push the market price back to value. The time/price relationship will be extended as the market is in agreement on fair value. The histogram will be fat in the middle. Inventories are in-line with how the various timeframes prefer them. Range will not extend far beyond ‘normal’ and may be materially less than normal (narrow range). This is often the case when the market is waiting on forthcoming information such as a fed announcement.

 

The 3rd and 4th profiles are simple but important distinctions from the extreme cases above: the ‘b’ and the ‘P’… I am not going to go into these in depth yet as they are just introduced in this chapter.

 

Other indicators are introduced as well including:

Value Area Comparison: Is value being built higher or lower and is value overlapping with previous day or is todays value area noticeably different than the previous day?

 

Initial Balance: this is the first hour range. What happened during the first few 30-min bars?

 

Volume: volume drives acceptance of value. Value can assume to be beginning to migrate if bidding activity is strong.

 

Attempted Direction: Did the market open on one end of the range and make a clear attempt to move directionally?

[mister ed 10]

This is a great thread Frank - thank-you for your summaries.

[Frank 10]

Will be continuing shortly...

 

Reminder of the key 'Innovator-Laggard' Framework from Chapter 1:

 

[Frank 10]

Chapter 5: Long-Term Auctions

 

This chapter is in some ways the lightest content chapter in the book, in my opinion. Nevertheless, there are a few good (inter-related) concepts in this chapter:

 

1) The market price only has to be ‘fair’ in the day timeframe.

2) On longer timeframes, markets do not go directly from Bull Market to Bear Market or from Bear Market to Bull Market. They enter intermediate term ‘Brackets’ in between bull and bear markets.

3) Longer-term players may disregard short-term balances that spawn short-term auctions. However, traders and investors of all timeframes should pay careful attention to higher timeframe breakouts as they include participants from all timeframes and can therefore bring large momentum moves

 

Long-term charts (auctions) are for context. You don’t act on indicators or patterns based off of long-term charts in reality but they give you an idea as to remaining cognizant of what can happen if and when all timeframes align at key points in time.

 

This is not from the book but is a good analogy I got from another trading book that fits here. This is like being at the ocean and the waves are going in and out. Imagine you are watching that little whitewash current that sucks the water in and out before a wave comes in. Well, sometimes that little current is running in and out and you think you understand the rhythm. But then occasionally that little current gets sucked out and it runs straight into a monster wave that shoots further up the beach than a wave has all-day. THAT is what can happen if you are not cognizant of what is going on with the long-term charts.

 

Major market ‘breaks’ are non-linear, they auction VERY quickly once underway. These will not happen very often if you are focused on short-term trading – but when they do – they will be extremely powerful.

 

A Bull market does not convert instantly to a bear market. An intermediate term ‘bracket’ forms first. The next chapter (chapter 6) is about intermediate-term brackets. Thus, this chapter is really about understanding whether you are in an intermediate-term bracket or in a major bull or bear trend. An intermediate term bracket will feel violent at times. A Long-Term non-linear break will feel stronger than that…

 

To me, the bigger issue here is watching the daily timeframe in context of the intermediate term trend or bracket (the next two chapters). There isn’t that much more in Chapter 5 regarding long-term auctions except to say --- expect extreme non-linear movement to occur from time to time and be ready for it. The next two chapters: Chapter 6 (Intermediate-Term Auctions) and Chapter 7 (Short-Term Trading) are probably the 2 best chapters in the book.

[Frank 10]

(Chapter 6 and Chapter 7: Intermediate and Short-Term Auctions/Trading)

 

Part 1.

 

Rather than keep this to just intermediate term auctions, lets use the extremely important concepts of this chapter and relate it to all timeframes. I cannot overstate how good this stuff is – thanks to Jim Dalton & Co for writing this book.

 

Let’s review again these statements:

“Recognizing where you are in the auction process determines your risk/reward relationship.”

“The end of an auction offers the moment of greatest opportunity… risk & return are asymmetric at this point.”

“Auctions complete when the laggards from the last auction are met by the innovators from the new auction.”

 

Ok, this is Market Profile at its core. Through all timeframes (intraday or longer-term) – you need to understand how an auction ends. By understanding the signs of how an auction ENDS, you will know not only whether to enter a new order --- but also whether to stay with the flow of the current auction (either through holding on or re-entering on a pullback). Later we can discuss how a bracket ends and a new trend begins. For now, lets focus on the former --- when one auction ends.

 

The market is a series of 2-way auctions. The end of one auction leads to a new auction in the other direction. If you can figure this transition out, you are entering an order with big reward as you are in on the ground floor of a new auction. When you get it wrong, you will know quickly because of how you are ‘marking’ the end of the auction. Let’s get to it.

 

What is it that marks the end of an auction? (perhaps the most important concept in the book, imo).

 

“‘Excess’ marks the end of one auction and the beginning of another”

 

‘Excess’ can be seen in 2 primary ways:

1) A key Buying or Selling Tail

2) A key Gap

 

Excess occurs when a market makes a dramatic price high or low on low/moderate volume and opposing buyers or sellers react quickly and aggressively by auctioning price in the opposite direction. Sometimes this is in the form of a tail (a strong volume-based rejection) and other times in the form of an overnight gap (a gap that catches a market that got too long or short into the previous days close and has now ‘trapped’ those traders).

 

Be on the lookout for these two key signs of excess: the tail and the gap. This is so important in understanding the entire auction structure, IMO.

 

If the recent auction is downward and an auction low has been established with a buying tail, the investor who correctly recognizes the low and buys has a low risk/high reward (asymmetric) position. Why? His risk is that the 1-bar tail gives way (or less risk if you can fine-tune entries and re-enter if necessary). The reward for being right is an entire auction in the opposite direction.

 

In a pure sense, the absolute ideal location for entry is precisely on the price bar where an ‘excess low’ or an ‘excess high’ forms. This is the price bar where laggard meets innovator and this is where you would ideally like to be.

 

This is not just from Daltons chapter now, this is my own experience inspired from this (excellent) Dalton chapter.

 

Much of the time, the key ‘innovator-laggard intersection bar’ will be in the first 2 hours of the trading day. The most often will be the opening 30-minutes of the day, especially if the market has reversed down (from up auction to down auction). In general though, be on the lookout for a key buying or selling tail in the opening 2 hours – with particular emphasis on the first 1-2 30-min bars.

 

Regarding the opening 30-minute bar, I should also point out that any strong movement off the opening price can be considered similar to a ‘tail’ in and of itself. Range Expansion off opening price is an important concept. Though not really a big part of Daltons book, think about this as you study 30-min bar charts of morning reversals.

 

Another thing is that a tail in the morning session is best if it has also exceeded the previous days high or low. That is, a good buying tail will rinse below the previous days low and create something of a double tail --- a 30-min tail AND a tail on the daily chart. Likewise, a good selling tail should go above the previous day high and get ‘rejected’ by higher timeframe sellers --- and most of the time this will occur early in the session. The previous days high and low are very important ‘reference points’ in market profile.

 

The second form of ‘excess’ after the violation/tail is that of a gap. : “A gap at the end of an auction that occurs in the direction opposite the most recent trend signals a reorganization of beliefs. Market participants have changed their perception of value so dramatically that they simply begin trading at a completely different price level.”

2 things with gaps.

1) Gaps represent ‘overnight inventory’ --- traders who have entered positions overnight will generally be ‘weak-handed’. If price does not move in their favor quickly, they will panic out. This is part of the reason the first 30-min bar marks the high or low of the day more than any other single price bar.

2) Gaps are a bit tricky to enter on. You will need to understand the bigger auction structure or else a key auction-reversal gap will leave you in the dust. A good deal of the time, the market will gap and auction in the direction opposite the gap. Thus, you cannot just chase gaps and label them all ‘auction reversal’. You should just be aware of the key auction reversal gap if the structure of the recent auction also suggests it is losing momentum or is otherwise long in the tooth.

 

Remember, you will not be looking for tails or gaps in isolation. You will have a lot of context from your other indicators. Essentially, you will be watching the auction accelerate and then mature and then look for your tail/gap reversal signal. Market profile consists of many things that you have to synthesize into a composite answer. What did the histogram look like over the last ~3-4 days? Has the market been soaked of its buying/selling pressure and now poised to reverse? Or is buying/selling pressure still strong? Was volume getting stronger or is it getting weaker? Is the last auction long in the tooth? How did the market close yesterday relative to what it was ‘trying’ to do? In the context of the overnight move with the other indicators, what is the likely state of inventories across timeframes? When you put together these concepts, you get a good idea of where you are in the auction. When you combine it with the tail/gap indicator --- you are now ready to enter an order as you will have located your asymmetric location (the ‘innovators entry’). Even if you miss your ‘ideal’ entry, you still could get something similar to a ‘early adopter’ entry (1 step removed from innovator but still good location in the context of a bigger auction). So long as you understand the structure of the auction and are making entries and exits within that framework --- you will be entering orders with the flow of the current auction.

 

I realize at this point that I am basically writing a rough draft of something that is no longer a pure book review. Oh well, will just wing it for a while. Eventually, this will get back to the original structure.

Edited April 2, 2008 by Frank

[Frank 10]

Let's looks at a recent 'Excess High' to demonstrate some of these concepts.

 

This is from March 12th:

 

March 11th was strong up day as seen in the hard afternoon buying which created an elongated profile. March 12th opened right on the previous days high. After a quick test down periods B & C (the first hour), buying came back in and pushed price materially above the previous day high.

 

Why would you consider shorting here?

 

Because:

1) You know that the first ~2 hours of the day are known to often show reversals (periods B-E).

2) Price trades above previous day high, creating the potential for a daily 'selling tail' to form. You do not KNOW at this point sellers will come in. But you know that this isn't a 'innvoator' or 'early majority' level for sure. This is 'asymmetric location' to short. If you are right, you will catch an auction down. If you are wrong, then risk is controlled.

 

On this day, laggards of the last auction met innovators of a new auction in period E. Period E is the 'Excess High'.

 

(it turns out that price pushed up into a resistance zone at 1336.50 and this was a natural 'reversal zone' to look for).

[shreem 10]

Hello Frank, thanks a lot for your great explanation of your resume of this book. In fact, I have like it so much that I have purchased the book and I have begin reading it and it is very good.

 

As you can see, I am a really big advocate and fan of market profile and how it can be used in trading.

 

I do really think that a deep understanding of market profile concepts along with a firmer understanding of the auction market theory and volume analysis is a great combination in developping a successful trading plan.

 

So, thanks a lot for your hard work in putting that for us on this thread

 

Sincerely

 

Shreem:)

[winnie 10]

Dear Frank,

Your book review is so great ! Thanks for your hard work. As a Market Profile trader, I would like to ask you in your example, do you need to wait for the Market Profile chart to shows a Excess before you short ? That mean do you need to wait for the F period complete before you go short ? However, if you do not wait for F period finish ? how do you know E period is an excess ?

Thanks again for your kind work !

[ckait 10]

dont get too caught up in what period your in if higher prices are not attracting new buyers the auction is likely nearing it end for the time.

[Frank 10]

<<how do you know E period is an excess ?>>

 

good question. you will never really know if sellers (buyers) will show up or not in advance. market profile is really more about understanding some core trading concepts and securing good location for your entries.

 

In this case, following a day of strong trending action -- the market has very high odds of exceeding the high of that day on the following day. 'Inside days' are actually pretty rare (~12%). Thus, you should not be shorting BEFORE the market exceeds the previous day high. But shorting AFTER the penetration of the high and in periods A-E is now a decent idea to consider.

 

Here is another concept unrelated to Daltons teachings but a helpful guideline. Once the market picks a direction for the day, it will often continue to go that direction for multiple HOURS. Many times (>50%), the market won't make its FINAL high or low until the final hour of the day. It will just chug and chug and chug directionally for hours --- away from the high or low it made in the morning. Thus, if it does make a high in B-E, you will be sitting on a good position that you can ride for hours.

 

There are many other concepts that can help gauge the odds. Oscillator divergences, Moving Average regression tendencies on certain days of the week, confirmation from other indices (Dow/Nasdaq/Bond Market etc...).

 

I will try to get some more of these important chapters (6 & 7) done soon.

[DbPhoenix 42]

Steenbarger addressed the subject of trend days yesterday in his blog. I suspect you will find it of interest: Bandwagon Effects

[Frank 10]

I was re-reading some of my earlier posts and wanted to explore one concept presented in context of some recent/current auctions. For now, let's just look at the gaps and ‘value migration’.

 

The market is a series of 2-way auctions where value migrates one way for a period of time and then auctions the other way. So ‘value migration’ and auctions are essentially one in the same.

 

You are gauging the intraday order-flow within the context of the order-flow occuring at a higher level. The gaps (and tails) signal 'excess' has occured and 'excess' is what marks the end of one auction and the beginning of another.

 

Of crucial importance is where the gap occurs. In this chart, I have tried to represent order-flow in terms of action relative to a higher timeframe value migration. Value migrates one way during one auction and then migrates the opposite direction. But value beginning to migrate up during a large value migration down is different than value migrating up after a good auction reversal. Separating these two similar situations is of crucial importance.

 

This indicator is based on what is happening with current order flow in context of a moving average, which will be a proxy for higher timeframe value migration.

 

'Current Value' is being defined as the average of intraday VWAP and the close of each 30-min bar. This will smooth out the calculation of ‘current value’.

 

The moving average is a 40-period simple moving average of just the closes of the 30-min bars and therefore is representative of the last few days average value.

 

Note how an auction changes directions, accelerates, then deccelerates and the moving average 'catches up' to current day 'value'. This signals that the auction is aging --- but not necessarily over. A gap or a tail will usually occur to signal the end of one auction and the beginning of another.

 

 

note: the current auction trend is still up. why? because Fridays 'value placement' is still well above recent days of value (as seen in the moving average). the market did not elongate to the upside on Friday but the overall structure is still generally constructive. a move lower on monday could be thought of as potential opportunity to buy in a constructive larger auction at a price below recent value.

Edited April 19, 2008 by Frank

[thrunner 10]

Congratulations Frank. You have achieved a first. The only Google search result for "auction trend" and "market profile" yielded this one and only URL: http://www.google.com/search?hl=en&rls=com.microsoft%3Aen-us&q=%22auction+trend%22+%22market+profile%22

which is this thread.

 

What is auction trend? aside from your current description of 'value placement'? Is it Market Profile based? Could you share a more specific description of your indicator? Thanks.

[Frank 10]

Auction Trend is a breakthrough achievment in Market Profile history I first developed in 1978............ uh, just kidding: 'Auction Trend' is a random name I gave to my indicator. Didn't know what to call it and spent a good 8 seconds thinking about it before I decided on that.

 

I defined the indicator in the above post -- here is the EasyLanguage code. it is nothing special and should be used in context with many other indicators.

 

 

value1=(vwap_h+c)/2;

 

value2=value1-average(c,40)[1];

 

plot1(value2,"value2");

plot2(5,"5");

plot3(-5,"-5");

 

 

if value2>=0 then

setplotcolor(1,green)

else

setplotcolor(1,red);

[winnie 10]

Dear Frank,

Thank you for sharing your idea, it is great and sound. How long have you been trading ? Are you trade everyday ? I am trading my trading system and it is my first time to learn discreationary trading.

 

Thanks again for your work

[Frank 10]

Chapter 6 Part 2:

 

In Part 1 of the Chapter 6 discussion was the concept that ‘excess’ (gap or tail) marks the end of one auction and the beginning of another. This is the more common and clear way to ‘mark’ the beginning of a new auction. But there is another. The less frequent way one auction ends is simply when volume in the direction of the auction just dries up. Its ‘as if the participants that were driving the directional move are ‘all in’ and there is nobody left [to drive further directional movement].’ That is, there may not be a significant tail on the day of the auction low.

 

No matter how an auction ends, you need to develop visual aids (indicators) such that you can judge order-flow and classify where you believe you are in the 2-way auction process. Where the ‘innovator’ and ‘laggard’ are interacting may be a grey area and you will need to make a judgment for when order-flow has changed to a degree that marks an auction has ended.

 

Chapter 7 is entitled ‘Short-Term Auctions’ --- so we are now into the overlapping area of multi-day and intraday auctions.

 

This is a good spot to layout a structure to the intraday market that will be of aid as the book continues. I find it a good way to think about the structure of order-flow by mapping out how a day unfolds. This topic might be thought of as another way to avoid being ‘the laggard.’

 

A market can close the day in one of 3 general ways. It can either make an afternoon high or an afternoon low relative to the morning high or low -- or it can close somewhat near the center of the range. Let’s classify each day by whether it trades from ‘high to low’ or ‘low to high’ and then think contextually about HOW the market did what it did based on which 30-min bar it made its high or low. (note each period is lettered such that the 30min period ended 10am = ‘B period’, 10:30 = ‘C’ etc…)

 

First let’s look at the most common intraday ‘structures’:

 

1. A day that makes a low early in the day and then trades up

 

 

2. A day that makes a high early in the day and then trades down

 

 

These are the more common structures and there is contextual information to be gleaned when the market does OR does NOT trade in line with the above ‘blueprint days.’

 

For example, a day that makes a low in ‘F period’ may be expected to have less range expansion to the upside than if the low were made in B or C. The fact that price did not reverse in one of the earlier periods may indicate less conviction on the part of higher-timeframe longs. On the other hand, a low made later in the day (H/I+) that then recovers strongly into the close could be indicative of an overcrowded short-side as all those traders playing for the market to trade down until the afternoon will be trapped as the market did not follow-thru to the downside. This idea will give you more contextual information to synthesize with other information.

 

A common way to discuss concepts in Markets In Profile is to discuss a concept and then think about what would be ‘expected’ to happen after XYZ occurs. The ‘expected’ does not always happen of course but there might be valuable information in the fact that the expected didn’t happen.

 

After a good ‘auction reversal’ – you would ‘expect’ that early in the next auction, the market will trade strongly into late in the day. New ‘daily’ auctions should show strong conviction. The profile should certainly elongate with a close that extends into periods M-P. This would be the ‘expected.’

 

A related idea in Markets In Profile is ‘Attempted Direction’. Using the B-E to L-P high/low framework, we can categorize days into something resembling ‘expected result from attempted direction’. For example, a market that opens (B-period) and auctions strongly lower is obviously ‘attempting’ to go down --- the expected response might be that it continues through L-P. If instead it makes a low in ‘E’, this is information related to the overall structure. Short-term momentum traders are likely loaded up on shorts in a market that they expect to continue down. If higher-timeframe innovators like this location and would like to adjust their inventories to the long-side, the momentum based short-sellers will eventually be forced to cover. (remember, a ‘E-low’ that violates the previous day low (possible ‘buying tail’) is an ‘innovator entry’). You of course do not have to take any entry you view as ‘possible innovator entry’. But you should be aware of the structures at work as they are giving clues.

 

Let’s look at a recent example:

 

[Frank 10]

winnie,

 

I am a relatively new trader trying to learn. I have been at it a little over 2 years. I find that putting trading concepts into my own words really helps me think about it as I relate these core trading concepts I am learning back to recent trading experiences.

[winnie 10]

Dear Frank,

Thanks for your detail ,clear and logical explain.

 

Best wishes for profitable trading:applaud: