VOLUME or TPO's ???

[JohnE 10]

This is my first or second post so a hearty "Thank you" for a fantastic forum. So much great information here.

 

My question is regarding the "correct" method for calculating the Value area numbers specifically for the Emini S&P... Some days they are quite different. I'm trying to eliminate lines on my screen and not add more price levels.

 

Does anyone know of any studies that have compared the two methods to determine which numbers are "best " to use? Volume or TPO's.....which do most feel are watched by the "pro's"......thanks for any guidance/direction you may offer....

 

JE

[omni2006 11]

This is my first or second post so a hearty "Thank you" for a fantastic forum. So much great information here.

 

My question is regarding the "correct" method for calculating the Value area numbers specifically for the Emini S&P... Some days they are quite different. I'm trying to eliminate lines on my screen and not add more price levels.

 

Does anyone know of any studies that have compared the two methods to determine which numbers are "best " to use? Volume or TPO's.....which do most feel are watched by the "pro's"......thanks for any guidance/direction you may offer....

 

JE

 

Hi John and welcome to the forum

 

regarding studies on Vol vs. TPO POCs, i did see a study a few years back that suggested the calculation was generally of marginal consequence. Usually, volume, ticks (trades), and TPOs line up pretty closely.

 

here is my answer: it depends. i am sure it will not be a popular response, but there it is.

 

context is more important to me than mathematical specifics. btw, i don't think you could have picked a better day to post your question. today our Volume POC was 12pts lower than our TPO based POC. so which is it? when we take a contextual look at the profile here's what stands out to me: an elongated profile and no prominent POC, regardless of calculation method.

 

something else that stands out to me is what didn't happen. ideally, volume will correspond to time, so that both POC's would be within the same general proximity. that didn't happen today. the unexpected happened. we spent more time than volume at our TPO POC. that means even though we were in that area for a while today not a lot of business was actually taking place. and, late in the day, we did a lot of business much lower.

 

i know that doesn't give you a very tidy response, but i really think taking into account market context trumps any level or area. for days like today, it just may be that neither POC is very important. but it is useful to be aware of both areas and the circumstances surrounding each.

 

i hope this helps.

Edited February 27, 2009 by omni2006

[NoSquigglyLines 10]

Don't want to add confusion but it's all relevant I think and adds weight to the 'it depends' answer.

 

It also depends (at least for me) how you configure your Market Profile software. I've thrown together a quick image to demonstrate this. I often look at MP in a 1 pt scale for the ES, but of course the ES moves in 0.25 increments. The chart shows the 0.25pt scale on the left and the 1pt scale on the right ... note the difference.

 

Which is correct? No idea. Omni I see you are doing the DLC course so are probably much more qualified than I to answer that. One could argue that using 0.25 increments will be more accurate and thus is 'correct'. If I was doing a big merge I might be inclined to do it on a 0.25 point scale.

 

However, I think at the end of the day it doesn't really matter. What's important, as Omni pointed out, is the context. Most likely you would note both High Volume nodes in your analysis anyway. We've also had a number of overlapping days in a row, so many would be inclined to merge those into a composite profile.

 

IMO, It's all about the context.

 

Edit: FWIW, I tend to pay more attention to volume.

 

Disclaimer: I'm not an expert, only my opinion. Still very much a developing new trader.

Edited February 27, 2009 by NoSquigglyLines
Addition of FWIW point on Vol.

[JohnE 10]

I'm certainly no math wizard but doesn't those 4PM (est) cash close volume spikes mess up the volume profiles each day? thanks for the responses....

 

JE

[TraderBG 10]

I myself don't use arbitrary numbers for support and resistance but from what I've observed the TPO VAH and VAL will usually produce a bounce while the volume POC usually holds price and chops around more so than the TPO POC.

 

But as others have mentioned, it's all about context as to whether the bounce off the TPO VAH and VAL will actually produce a tradeable reversal. If one is not reading the market correctly one could easily get drawn into the temporary bounce the VA levels cause only to get ran over when the auction resumes its course.

 

Personally, I find the current day's levels of more use in my trading but not for support and resistance.

 

Hope this helps.

[darthtrader3.1beta 10]

TPOs were an obvious fudge for volume by Steidlmayer because that kind of volume information was not realistic at the time. The only good thing left with TPOs IMO is that they are better still on very long profiles if you don't have more granular volume data. IE, I would rather look at the price range of 30 minute bar data on a 60 day profile than a volume profile that only takes one 30 minute snapshot of volume on OHLC data, the TPO is just smoother in that case.

I do agree though that there is no reason to take an arbitrary number at this point like "value area" whatever. If you look at enough profiles and mark off the value high and low by hand(easy once you see enough profiles) then TPO vs volume becomes pretty much the same because of how you will use that information(ie. to find ranges to trade against)

[JohnE 10]

Omni, I know somewhere it was mentioned that you are currently involved in Daltons training so I'll aim this question at you but obviously it is open for everyone.

 

In Mind over Markets Dalton writes at great length of the open price in relation to the previous days Value area and how to measure/estimate ranges for the day. He also writes about double TPO acceptance above/below value. It seems that having the two key ways to get at a value area ( TPO's and Volume) adds even more subjectivity to Market profile and the specific topics I just mentioned. I was wondering if those concepts are still valid or does Dalton not address the days open anymore?

 

We may have an open outside of Value using one method but inside value using the other for example. Perhaps Dalton can elaborate for us on this and you can report back. Thank you.

 

JE

[omni2006 11]

Omni, I know somewhere it was mentioned that you are currently involved in Daltons training so I'll aim this question at you but obviously it is open for everyone.

correct, John, i'm currently enrolled in DLC Profiles' CL/CES course. i'll put my $0.02 towards your questions and, as you noted, leave it open for others to chime in on as well.

In Mind over Markets Dalton writes at great length of the open price in relation to the previous days Value area and how to measure/estimate ranges for the day. He also writes about double TPO acceptance above/below value. It seems that having the two key ways to get at a value area ( TPO's and Volume) adds even more subjectivity to Market profile and the specific topics I just mentioned. I was wondering if those concepts are still valid or does Dalton not address the days open anymore?

btw, good questions John. the shortest answer will be this: yes, subjectivity is a constant in discretionary trading, be it through a Market Profile lens or any other perspective. that being said, Dalton still uses those data points in his analysis and teachings. however, he makes a concerted effort to frame concrete levels in a more abstract view. it's too easy for a trader to find a level, any level, and fall in love with it, completely disregarding any discernible context. if i have a range estimate and multiple TPOs, yet the market blows right through my levels, Jim doesn't want me overweighing old information. the market has provided me new information and deemed my previous information as currently irrelevant. and, of course, even that could change with new information. it often comes down to monitoring expectations. if something unexpected happens, that is powerful information that i need to incoporate into my market view.

We may have an open outside of Value using one method but inside value using the other for example. Perhaps Dalton can elaborate for us on this and you can report back. Thank you.

interestingly, Jim discussed something along these lines a week or so ago. and, without divulging proprietary course material, the answer here is context. a TPO based Value Area is more visually derived (i.e. TPOs above/below POC) than a Volume based Value Area, so it is easiest to use TPOs for visual reference. but, again, if volume paints a different picture, that information needs to be processed and evaluated. the expected is that volume and TPOs closely resemble each other.

 

regardless of any method to calculate anything, Jim is never advocates buying/selling any level or price without putting things into context. understandably, traders want to be able to distill everything down to mathematical recipes, but that's not what Jim or DLC or Market Profile is about. i've come to accept that there is more art than science to this game. and, since there are a lot of very technical discussions within our forum, i am compelled to reiterate that this is: 1. my perspective 2. related to discretionary trading. i'm not trying to step on any toes or discredit any method, strategy, or system.

 

i sincerely hope this helps.

 

take care and have a great week -

 

omni

[steve46 12]

I'd like to offer a comment here if I may

 

I like to incorporate additional data into my decision making when using MP whether it be TPO based or Volume based.

 

For example, I find that refering to $DVOL and $ADD (Esignal indicators) adds value. These indicators show me where which way volume is trending, and in the case of $ADD I can see whether participants are "selling into a market" anticipating a reversal.

 

Other data elements that help me include Market Delta's footprint chart. That perspective is helpful to break any deadlock because I can see the "turning points" as the market cycles from bid to offer and back. In my opinion it can't be used in and of itself, but when I am near an entry or exit, it lets me pinpoint my execution.

 

I realize these are not directly related to MP, but frankly as was mentioned in previous posts, there an art to trading this way, and in my opinion, one has to be able to integrate additional data elements if they want to improve their decision making abilities.

 

If we switch back for a minute to MP, I would suggest looking carefully at "singles" (confirmed singles). Traders tend to overlook this. Singles are either potential reversal points, or if they fill in the both the pit and the ES market, can inform the trader that a run to extremes is possible. This in concert with range extension tells the trader that "other" participants are active and looking for a specific kind of move. Also look at the size and range of the Initial balance. Small IBs tend to be easily "overturned" creating the conditions for a directional move. Wider IBs in contrast tend to accomodate rotational days, and inside those days we can see further nuance when for instance specific brackets range and test other brackets. Let me just say that this is all market specific as I specialize in trading the S&P contract, and while I certainly respect Dalton and others who authored this concept, most of what I am talking about is based on observation. In other words you can learn it yourself by simply keeping your eyes open and spending time on the screen. I think these comments relate to both TPO and Volume based MP.

 

I hope they provide you with some workable ideas for your research.

 

Best Regards

Steve

[JohnnySDG 10]

I often notice a difference between TPO and VOL on my DTN MP.

[JohnnySDG 10]

I usually go with the volume.

[clmacdougall 11]

I've found that a TPO based value area is an excellent measure of price comfort and popularity in a price range. Because it is formed only when price rotates back to a specific tick value it proves an accepted price range on the day. In essence it graphically displays price popularity.

The drawback to a volume based value area is that it's POC is derived only through a, "point," of greatest purchase action, instead of a constant rotation through it throughout the day. In essence you are choosing action over popularity when deciding the most important point of measurement when figuring your value area.

[ant 10]

As others have stated, TPOs are usually a good proxy for actual volume. However, if the value area differs between a TPO and volume-based profile (e.g., during a trend day), I would defer to the volume profile. Volume always rules. If the value area differs by a tic or two, I wouldn't sweat it since trading isn't an exact science anyway. Having said that, I think most traders that use MP use TPO-based profiles. Volume-based profiles are very CPU intensive to run and many volume-profiles in charting software are just an approximation. For example, charting software will take the volume of a minute bar chart and then divide the volume across all the prices that traded during that minute interval.

[clmacdougall 11]

I am in no way trying or meaning to be disrespectful towards the accepted understanding of a value area as everyones opinion is valuable. But I think that volume vs tpo when calculating the value area is truly apples and oranges.

Imagine how important this measurement is to many traders. A measure must be proven worthwhile in order to be leaned on when trading.

There is no way that the central point of your bell curve when measuring your value area could simply be an elongated volume spike at a singular particular price tick. This could simply be the result of an institution choosing to buy or sell with no thought of price, in fact that could simply be a time based decision.

The value area has one definition, "acceptance," and the only way to prove this is through price rotating across a range over time. This graphically demonstrates acceptance and value.

No disrespect meant, simply my opinion.

[ckait 10]

Both work equally well. If your tring to pinpoint to the tick where things are going to happen you will dissapointed. Having said that the two are usually not that far apart, and if you are concistant in doing the same thing (provided it is a good stratagy) you should do ok. If your bouncing back and forth between the two and looking too close for entries it can be frustrating. using a filter such as tape or delta or some type of order flow at you level could help as well.

[qewcool 10]

I think macdougall answers shows understanding of the MP concepts the most.

 

The key goal of MP is to find indeed balance and acceptance of a price level that will facilitate trade (rotation).

 

A spike in volume not confirmed by time cannot be a control price that will serve as trade facilitator. It is in fact a symptom of imbalance which is the opposite of the idea of a POC.

 

I also find it funny that the answer from the dalton course is the most cryptic and convoluted answer of the thread while macdougall answer is straight-forward, simple and efficient.

[NoSquigglyLines 10]

I also find it funny that the answer from the dalton course is the most cryptic and convoluted answer of the thread while macdougall answer is straight-forward, simple and efficient.

 

I don't mean this to be inflammatory but I believe you may have missed the point of Dalton's writing and teaching.

[qewcool 10]

I don't mean this to be inflammatory but I believe you may have missed the point of Dalton's writing and teaching.

 

Not a problem. We all have different opinions and I respect all of them

I am not saying I dont appreciate Dalton books. I read the second book , appreciate it a lot for learning market profile, and would recommend with no problem.

 

Im just saying that sometimes some answers seems convoluted when it could be more straightforward, succinct or efficient if you prefer.

 

Maybe you can detail the point that I overlooked in the context of the subject of this thread as constructive criticism.

[BlowFish 10]

I think macdougall answers shows understanding of the MP concepts the most.

 

The key goal of MP is to find indeed balance and acceptance of a price level that will facilitate trade (rotation).

 

A spike in volume not confirmed by time cannot be a control price that will serve as trade facilitator. It is in fact a symptom of imbalance which is the opposite of the idea of a POC.

 

I also find it funny that the answer from the dalton course is the most cryptic and convoluted answer of the thread while macdougall answer is straight-forward, simple and efficient.

 

Just because price languishes within a bracket for a long period of time does not mean trade is being facilitated. There is a good chance that is being but who knows? Time is a proxy. If you have heavy volume within a bracket you know trade is being facilitated.

[NoSquigglyLines 10]

I was more picking up on what you wrote to be honest. You stated that Omni's answer was cryptic and convoluted and you preferred the simple straightforward and efficient.

 

From what I read on this board and others, many traders are looking for simple concrete rules to help them understand/trade the markets. And when those rules 'fail' they begin a further search for 'better' rules. Throughout Markets in Profile it is stressed that context is paramount, and the example given that a fish flopping around the dock looks ridiculous until you see the same movement in the context of water.

 

I believe that is the point Omni was making when describing Dalton's approach. You can use TPO or Volume or whatever method you like, and you can ascribe some rules to them, but you must be aware of the bigger picture and view everything in context. And when the market does not behave as you anticipated, you should view that as important information that you need to process and make sense of, rather than simply a rule that has failed.

 

I've attached an image showing the NQ from 15th/16th June and the Globex session between them. In the Globex session (white TPOs) the green value area is TPO based and the pink value area is volume based. Is it better to use TPO, Volume, or be aware of both?

 

I guess this is probably a cryptic and convoluted answer ... so please accept my apologies for that. I hope this answers your question but I suspect it may just highlight our different views. My basic point is that throughout both his books Dalton frequently opines that, in his view, trading is rarely simple and straightforward and those who treat it as such will probably fail. So when you write that his way of looking at things seems cryptic and convoluted, and you prefer simple straightforward and efficient, I think you are placing yourself in that majority he describes.

 

Disclaimer: Many times I read posts on forums that are written as if they are from the perspective of a highly experienced millionaire trader, imparting their wisdom to all whilst sipping cocktails from the deck of their sunseeker. In most cases another thread tends to reveal that the writer in fact just took up trading last week. I am no millionaire trader, and I don't own a yacht. Just trying to make sense of all this like most others on this forum.

Edited June 22, 2009 by NoSquigglyLines
Attached image

[BlowFish 10]

 

Disclaimer: Many times I read posts on forums that are written as if they are from the perspective of a highly experienced millionaire trader, imparting their wisdom to all whilst sipping cocktails from the deck of their sunseeker. In most cases another thread tends to reveal that the writer in fact just took up trading last week. I am no millionaire trader, and I don't own a yacht. Just trying to make sense of all this like most others on this forum.

 

The 'truth' is the truth Sadly quite a few people regurgitate opinions (usually read somewhere) as 'facts'. Really the best thing to do is use what appeals to you using your own (empirical) research. Things like VAH and VAL 'work' even though you can challenge some of the premises that there construction is based upon. I guess this suggests that if enough people believe in something it becomes that thing

[clmacdougall 11]

I find it helpful to think of the value area as a place where price is most likely to return to or trade through, but it's value is in it's proven magnetic ability.

Using a volume spike to determine it's center would be akin to deciding that because a man spent $30,000 at a car dealership that he would return to that spot the next day as he had spent so much money there the previous day.

It's far more likely that he would in fact be at Wal Mart the next day as the pattern of rotation between his house and Wal Mart is a proven rotation based upon his historical back and forth pattern between those two points.

The discovery of the power of "price rotation," to display future probabilities of where price may next be is in my mind what Market Profile is all about but I am still a student and do so appreciate both the Dalton books, the Steidlmayer book and the little known gem "Value Based Power Trading" by Jones father, Donald Jones of Cisco.

[BlowFish 10]

It's more like if a man looks in a car dealership window for an hour but does not buy a car it tells you nothing about 'value'. If he buys a car (and other buyers do as well) at a price that does tell you something about value. Without trades taking place (volume) you have no consensus on value.

 

I agree with your first statement the VAH VAL are very important because so many traders watch them. However I believe they are self fulfilling. They are 'bogus' due to a couple of assumptions made in there construction that are just not true. Despite that they are very useful heuristics. In short they still 'work' so who cares right?

[clmacdougall 11]

Blowfish, you have a good point, here's how I worked around that issue. I came to the conclusion that trading had two major principles, the first is, "only play follow the leader," the second is, "never trust minor league stats."

I may be wrong in this next statement but so far I have found that commodities are follower markets. No matter the talk about how far they've come, they are ruled by the movements of either the dollar or the stock market.

So I avoid the commodity markets on the premise that you cannot trust them to fulfill moves which they start as they are closely watching the bigger markets instead of trending on their own merit.

Of the markets left to trade I've so far found currencies hard to apply MP to so I avoid them. Leaving me with only the stock market of which when trading futures contracts the ES most resembles the leader.

The next question is inevitably, "between what hours do I trust the MP development to most represent the concensus of the day?" The answer is simple and that is 8:30 - 15:15 cst. Volume proves this the only reliable time of the day to draw the MP from. This falls under my second rule. The stats of a minor league pitcher can look great until that same pitcher faces major league batters and is quickly torn to shreds. I think the overnite market is the minor leagues, so I pay no attention to it for any MP info at all.

In this way volume does play a part, but only as the starting and finishing pistol for your reliable MP formation through price rotation during the hours where the major league players are clearly visible.

Just my opinion so far, I'm open to learn otherwise.

[qewcool 10]

Nice discussion going at least we put some new posts in the market profile section

 

I guess we are all saying almost the same thing but in different ways.

 

My point on the subject of Volume or TPO is that you have to go back to what POC and value area are supposed to mean or represent in Market Profile theory. And it is pretty much a core idea in MP.

 

Like I said, from what I understand, it means acceptance ie a price level where market participants are comfortable to trade at as a consensus of value.

 

And how does one recognize it on an MP chart ? MP is composed of price, time and volume. Acceptance shows up as rotation with time and volume being accumulated at the accepted value price level. so yes I completely agree that both volume and TPO is used to confirm an acceptance level.

And the more time you spend trading at a level, the more volume there is going to be at that level.

 

And here is I think the important point that explains the confusion : The rotation trades at the value area where the market is balanced are being done by the short term market participants whose notion of value is again short term.

 

When you see a spike in volume with no time spent (yet) compared to an earlier price area where there seems to be less volume but with a high tpo count. What you see is longer term market participants entering the market and displacing the balance area being established by the short term market participants. Their notion of value is different because it is longer term value.

It is why i say that the described picture is a symptom of imbalance.

 

So where is the new value area ? We dont know yet. You again need rotation (which over time adds volume) that shows that near-term market participants are willing to trade at a new level and has accepted it as a new consensus of value. If they dont accept it, they will again trade back at the old consensus of value. For the longer term market participants, it does not matter because their value consensus is different. And the volume associated with the trades that they made that day must also be taken into account with a longer term perspective ie that spike in volume may not be a spike at all if compared to volume on the longer term time-frame (composite MP chart) that they operate in. That is why I dont think that the day volume spike (if not accompanied by tpo count showing rotation) can be the POC until we see further development.

 

So the confusion comes from the fact that we are comparing longer term activity with short term activity. Macdougall said apples and oranges and I agree.

 

As for convoluted or cryptic answers, I am not under the illusion that interpreting market activity is a simple endeavour. But I do appreciate the ability to explain such complex subjects in a succinct and straightforward fashion such as MacDougall did. And I think that a lot of people agree that Dalton books are not the most straightforward texts that have been written although the ideas are certainly valid. But hell, we dont have that many books on MP so I would love it if Dalton (or anybody else) wrote another book on the subject.