The Evolution of Market Profile Theory

[Frank 10]

this post has prompted much thought but before commenting, I wanted to first make sure I more fully-understand your post.

 

1) The chart for overnight moves - the one with the red lines -- is that a) the entire globex session b) the four hours prior to the pit session open (ie, 5:30 to 9:30am EST) or c) something else

 

2) For a given block of volume --- say 4000 shares -- do you divide the buying/selling activity based on activity on the bid/ask, the last trade vs previous trade, or some other way? This is a baseline question that could also be posed as 'what do you think of what Market Delta is based upon?' --- are there too many games with the bid/ask spreads or is that as reflective of activity as anything?

Edited August 16, 2009 by Frank

[UrmaBlume 10]

1) The chart for overnight moves - the one with the red lines -- It is an overlay of both sessions.2) For a given block of volume --- say 4000 shares -- do you divide the buying/selling activity based on activity on the bid/ask, the last trade vs previous trade, or some other way? None of the above it is the EXACT balance of trade in both percentages and number of contracts for the most recent trades that total that amount. This is a baseline question that could also be posed as 'what do you think of what Market Delta is based upon?' --- are there too many games with the bid/ask spreads or is that as reflective of activity as anything? I know what market delta is based on and don't think much of the process - as to bid/asked spreads or the depth of the market - I have posted a thread on why I think it is usless as an indicator of anything

 

 

Whether it is the HUD or any of the other indicators I have posted here, they are mostly derrived from my experience with market profile and reflect some of my ideas of how to develop trade decision support technologies that more fully and more precisely fulfill the early promises of the profile.

 

From your questions I must ask that you please not get too bogged down in unimportant, very finite, detail and only see the trees and no forrest.

 

My indicator of commercial intensity spots the commercial whether he is on the extreme of in the middle of value - impossible for the profile graphic. My Harmonic of buying and selling tells the precise measure of imbalance while in value - again impossible for the profile. Whether it is the pie charts on the HUD or the measure of commercial net new trade they both precisely, down to the contract, define the balance of trade in multiple time frames, again impossible for the profile graphic. Yet, still, all of this work is based on the early market profile theory.

 

I present all of this not to dump on market profile theory which is the basis of most of what I do but to present how I have tried to use some of today's methods and technologies to advance the theory and to challenge others to take a more forward looking view and utility of some great theoretical work from a very smart man, Peter Steidlmayer.

 

As the markets are constantly evolving - so must our efforts to deal with them be constantly evolving.

 

Before Peter, I had another mentor. He was the founder of an international brokerage and trading house and bought me out of a small retail broker dealer that I had co-founded. His message was always that this is not a last trade business it is only the next trade that matters and how to make it better.

 

For us traders, developers and technologists its not about what someone else has done in the past or what someone else is doing now, it is about how or what we can do/invent something new or dramatically improve something old to facilitate trade going forward.

 

Again as Peter said many times that for all of us it is ALL about the facilitation of trade. Whether we be brokers, exchanges, system developers, or traders - the more the trade the better it is for all of us.

[asauler 10]

I know you were directing this at someone else, but your question seems applicable to something I read recently that I found thought provoking:

"That is to say, the change of price reflects the average change in traders’ beliefs, while volume reflects the extent of the differences in their beliefs."

 

Some things that come to mind:

1) Overnight there is less efficiency, less people to disagree, more difficult to find an equilibrium. Kind of like in statistics, it's the noise/confusion/inaccuracies that happens when you have insufficient data points.

 

2) Fewer people involved in the market (and potentially similar types of participants?) thus they tend to agree, so price moves according to how they all agree without much volume

 

3) Due to the lack of volume, people react more to what little there is.

 

4) Simply less liquidity, so anyone doing any ordering at all moves the market more.

 

Perhaps 'it is the occurrence of trade that motivates price' might be reworded to: the occurrence of trade provides insight into other agents' motivations.

 

It's interesting that "the market" (meaning bid/ask) could move all over the place without any transaction ever occurring.

 

The large volume in the session is because there are lots of people that "disagree". That disagreement moves the market to a place of temporary and precarious equilibrium: the sideways market.

 

Sorry, slightly incoherent post, it's late, but this just sparked some thought.

 

Aren't the spreads larger with less volume?

[Kiwi 16]

I've watched the dow and es overnight.

 

The motivator for both price and perceived value is usually what's happening in the Asian Markets (represented by Nk, HSI, Shanghai) followed by what's happening in Europe (represented by DAX and ESTX say). The puppy is following its overnight masters and little volume is involved because most ES/EYM people are asleep.

[become 10]

2) For a given block of volume --- say 4000 shares -- do you divide the buying/selling activity based on activity on the bid/ask, the last trade vs previous trade, or some other way?

 

None of the above it is the EXACT balance of trade in both percentages and number of contracts for the most recent trades that total that amount.

 

UrmaBlume,

 

Just to be clear, are you saying that you do not use any method to divide ticks into buy and sell ticks? I.e., you determine "balance of trade" by some other means altogether?

 

TIA

[LS_Chad 10]

I don't necessarily have any insight into this subject, but I can share a tool that might be useful in the analysis. Our Zig Zag indicator has been enhanced with an option to label each leg with a variety of statistics including Volume (that traded during leg), Delta (of volume traded during leg), and Delta Per Price, among others. I think Delta Per Price might be especially helpful as it takes the delta of all volume that traded in each leg/trend, and divides it by the price change of each leg/move. So for instance, 100,000 contracts may have traded during an uptrend/leg that moved up 5 points or 20 ticks/prices (on ES)...with a delta of +10,000. So the delta per price would be +10,000/20 or 500.0. It essentially measure the average positive delta required to move the price up one tick.

 

Here is an example using a Zig Zag with minimum price change of $3 (each leg/move is at least a $3 move):

 

Images | ChartHub.com

 

 

It may also be interesting to further normalize these labels/stats to divide delta by (Prices * Volume).

 

Chad

[UrmaBlume 10]

2) UrmaBlume,Just to be clear, are you saying that you do not use any method to divide ticks into buy and sell ticks? I.e., you determine "balance of trade" by some other means altogether? TIA

 

The 2 most common methods used to determine buy and sell volume by most data vendors are 1) "Up and Equal and Down and Equal" - that is if the most recent price is higher that the previous or equal to a price previous price that was equal to a price that was higher than the previous price it is designated as UpVolume 2) Bid and Asked - Trade on the asked/offer is designated as buy volume and on the bid as sell volume.

 

While we do not deal with or divide ticks, we do, indeed, designate volume as either buying or selling and yes we do use a different means/method.

[rigel 10]

UrmaBlume,

Your efforts are very much appreciated,

 

I have a question, does this all suggest that in today's markets, reading price and volume relationships as per Wyckoff is no longer relevant.

ie. Supply/Demand, Cause/Effect, Effort/Result, Support/Resistance, and Trends.

[UrmaBlume 10]

UrmaBlume,Your efforts are very much appreciated,I have a question, does this all suggest that in today's markets, reading price and volume relationships as per Wyckoff is no longer relevant.ie. Supply/Demand, Cause/Effect, Effort/Result, Support/Resistance, and Trends.

 

Thank you rigel,

 

I don't think it is so much a matter of relevance as it is a matter of efficacy.

 

For us the approach I have described makes more sense and has proven to be more effective accross all markets and all time frames. The technology for both has existed for decades.

 

To me, increased volume on a move means the move was opposed - higher total volume on an up move means that selling was encountered. We believe that the power of a move, in any time frame, is derived from the extent of the imbalance and NOT the total volume in the move.

 

I was taught that moves in price are but advertisements for opposing activity and until that opposing activity begins the move is likely to continue. Further, that oposing activity slows/ends moves and adds volume. It is all in how you break down the balance of trade.

 

This graph shows a harmonic of our measure of the balance of trade. From this graph it is easy to see when the opposing activity over powers and ends the move to mark a new begining - notice how the change in color in the X's on the bottom graph comes BEFORE the change in direction in price.

 

 

cheers

[rigel 10]

Thank you rigel,

 

I don't think it is so much a matter of relevance as it is a matter of efficacy.

 

To me, increased volume on a move means the move was opposed - higher total volume on an up move means that selling was encountered. We believe that the power of a move, in any time frame, is derived from the extent of the imbalance and NOT the total volume in the move.

 

I was taught that moves in price are but advertisements for opposing activity and until that opposing activity begins the move is likely to continue. Further, that oposing activity slows/ends moves and adds volume. It is all in how you break down the balance of trade.

 

This graph shows a harmonic of our measure of the balance of trade.

 

cheers

 

Thanks, back to more constructive exchange:)

Yes agree with you, anything which provides an extra edge in today's markets.

 

What you state about volume is also right, think Dbphoenix on the Wyckoff thread has also pointed out a number of times that:

1. Volume is just activity and not intent

2. It is selling that makes up volume, no matter what the demand.

 

Personally do not have the tools that are at your disposal but am well versed in Wyckoff as well as Taylor and find great benefit in reading Effort (volume) v/s Result (price range) on any particular time frame.- am not into big swing trading, strictly intraday and that also focus for an hour or two (morning and evening)looking for the main play of the day as per Taylor only, if no trade, there will be another day;)

[Frank 10]

Just catching up on this thread and got a nice chuckle. But I think I want to change the metaphor...

 

The market is like a nightclub in Hollywood and we are strategizing in the mens room here at traderslab. Outside sits sits the prize - the young Hollywood actresses and we are sharing tips - but not ALL the tips. Only thing you can do is perhaps 'enhance' your approach.

 

Dittmar is the old-school grizzled veteran who was around when it was all much easier - when 'they' were just giving it away. But these days, you need to adapt -- the principles are still the same. -- imbalance is the time to get in involved - attempting to bag Jessica alba or Kate bosworth when stone sober is just too tough.

 

So, don't expect too much here, a few tips here and there should be plenty good for a playa with some existing game.

[Soultrader 12]

Closing this thread temporarily and pending review. Would like to keep this thread on topic.

[Soultrader 12]

Moderated Message:

Re-opening this thread. Off-topic comments have been removed. Please keep this thread on topic and refrain from personal attacks. The easiest thing to do is simply use our ignore feature if this thread does not benefit you. Thank you for your understanding.

[Kiwi 16]

On topic: We keep seeing regurgitated advertising charts posted in thread after thread. Same ones again and again. It would seem reasonable to expect that we would see new charts from time to time. Evolution in action.

[paolfili 10]

The 2° method is the right one for the definition of asked/offered ( on hypothesys that the price and bid/ask feed are syncronized).

Your post let me suppose that you consider the two feed unsyncronized (by most data vendors that use the 2° method).

Am I wrong?

 

 

 

 

The 2 most common methods used to determine buy and sell volume by most data vendors are 1) "Up and Equal and Down and Equal" - that is if the most recent price is higher that the previous or equal to a price previous price that was equal to a price that was higher than the previous price it is designated as UpVolume 2) Bid and Asked - Trade on the asked/offer is designated as buy volume and on the bid as sell volume.

 

While we do not deal with or divide ticks, we do, indeed, designate volume as either buying or selling and yes we do use a different means/method.

Edited August 23, 2009 by paolfili

[UrmaBlume 10]

The 2° method is the right one for the definition of asked/offered ( on hypothesys that the price and bid/ask feed are syncronized).:confused:Your post let me suppose that you consider the two feed unsyncronized (by most data vendors).Am I wrong?

 

Thank you paolfili,

 

Your question brings to light a little known dynamic that occurrs on many local extremes.

 

We feel that the bid/asked approach to designating buying or selling volume is flawed in several ways and the synchronization, or not, of these feeds is not part of our calculations.

 

To demonstrate one of those flaws, please consider the situation where a very large buyer places a limit order at the current asked price - the order is larger than the asked size so he is partially filled at the asked and as the order took all the asked size the asked moves up and so does the bid. Now the remainder of this large buyer's order is on the bid and trade that fills this large buyer, on his bid, is recorded as selling volume. Thankfully there are intelligent agents capable of sorting all this.

 

The formation of many local extremes, especially in the futures and options on the equity indexes, is a result of the bid or asked being replenished by auto placement at a rate faster than the market can absorb. Thus action at the top would not reflect this selling and show a top/reversal made on buying instead of the selling that is represented by this auto replenishment of the asked.

 

Anyone with direct experience with the application of such systems will verify that great lengths are taken to 1) disguise this trade and 2) increase the effectiveness of the buy or sell by making both buys and sells - as they used to say in the past - "sometimes you can sell a few to help you buy many at a better price." When when backed by unlimited resources and done by very smart code executing in the microsceond time frame, this approach can be very effective indeed, plus it confuses the competition.

 

This is an example of a strong move up that runs into opposing activity and demonstrates one of the main flaws in VSA - it shows in at least one instance that a move up on dramatically increasing volume is not bullish - it means that rising prices have found the seller and the volume recorded at this extreme is shown as buying when it is the opposite.

[paolfili 10]

Thanks a lot to you UrmaBlume.

Your post always spread light on some interesting high frequency trading aspects.

A new question arise from your words.

"The intelligent agents capable of sorting all this" (apart from any trade intensity indicator)

in a (impossible?) "perfect feed world" is a kind of a DOM analyzer?

 

i.e 10000 limit buy on 7000 first level asked lift bid on 3000 remaining with (more or less) the same (milli/micro second) timestamp on contract and DOM bid uptick?

 

 

 

 

Thank you paolfili,

 

Your question brings to light a little known dynamic that occurrs on many local extremes.

 

We feel that the bid/asked approach to designating buying or selling volume is flawed in several ways and the synchronization, or not, of these feeds is not part of our calculations.

 

To demonstrate one of those flaws, please consider the situation where a very large buyer places a limit order at the current asked price - the order is larger than the asked size so he is partially filled at the asked and as the order took all the asked size the asked moves up and so does the bid. Now the remainder of this large buyer's order is on the bid and trade that fills this large buyer, on his bid, is recorded as selling volume. Thankfully there are intelligent agents capable of sorting all this.

 

The formation of many local extremes, especially in the futures and options on the equity indexes, is a result of the bid or asked being replenished by auto placement at a rate faster than the market can absorb. Thus action at the top would not reflect this selling and show a top/reversal made on buying instead of the selling that is represented by this auto replenishment of the asked.

 

Anyone with direct experience with the application of such systems will verify that great lengths are taken to 1) disguise this trade and 2) increase the effectiveness of the buy or sell by making both buys and sells - as they used to say in the past - "sometimes you can sell a few to help you buy many at a better price." When when backed by unlimited resources and done by very smart code executing in the microsceond time frame, this approach can be very effective indeed, plus it confuses the competition.

 

This is an example of a strong move up that runs into opposing activity and demonstrates one of the main flaws in VSA - it shows in at least one instance that a move up on dramatically increasing volume is not bullish - it means that rising prices have found the seller and the volume recorded at this extreme is shown as buying when it is the opposite.

[Frank 10]

I am not tape-reader extraordinaire but I have seen so many games with bid/ask movement -- combined with fact that algorithmic shops have fiber optics and state of art systems that are just plain faster such that no matter what rule I write to try to capture if the last trade was a buy or a sell, their systems will continue to fool my rule.

 

That said, there is only so much you can do with those games if there is 'real' buying or selling -- so I propose this idea: is the bid/ask spread ticking up or down as a % of total bid/ask moves within a given time period? If there are 60 trades within a 1-min period, and the bid/ask moves up twice and down once, then there was net buying. Over multiple rolling periods of aggregated bid/ask movement, real buying or selling will have hard time fooling this 'frequency' rule...

 

comments appreciated

Edited August 23, 2009 by Frank

[taotree 10]

To demonstrate one of those flaws, please consider the situation where a very large buyer places a limit order at the current asked price - the order is larger than the asked size so he is partially filled at the asked and as the order took all the asked size the asked moves up and so does the bid. Now the remainder of this large buyer's order is on the bid and trade that fills this large buyer, on his bid, is recorded as selling volume.

 

Interesting. However... After the bid/ask moved up, someone else had to hit the bid in order to fill that large buyer. So... couldn't it still be considered selling volume--but from a different participant?

 

So, you're not measuring naive aggregate buying/selling trade volume, you're measuring buy/sell volume for specific participants or behaviors.

 

 

The formation of many local extremes, especially in the futures and options on the equity indexes, is a result of the bid or asked being replenished by auto placement at a rate faster than the market can absorb. Thus action at the top would not reflect this selling and show a top/reversal made on buying instead of the selling that is represented by this auto replenishment of the asked.

 

I have been watching exactly this recently. It's fun to see huge bid intensity right before the market turns up and vice versa.

[taotree 10]

I am not tape-reader extraordinaire but I have seen so many games with bid/ask movement -- combined with fact that algorithmic shops have fiber optics and state of art systems that are just plain faster such that no matter what rule I write to try to capture if the last trade was a buy or a sell, their systems will continue to fool my rule.

 

From what I understand UrmaBlume is saying, it doesn't really matter so much. Whether it hits the bid or ask is not the whole picture to determine buy/sell sentiment. So much is done at the bid and at the ask by replenishing and canceling of orders.

 

I wonder if we need a different term or something. Buy at ask happens: that's "buying", but we recognize that it doesn't necessarily mean overwhelming long sentiment. Because 100 more people might buy at that same ask price but there's a big buy replenishing the ask absorbing it all. So... although, yes there is "buying", the likely future is short because there are some deep pockets who are accumulating short (or exiting long).

 

 

That said, there is only so much you can do with those games if there is 'real' buying or selling -- so I propose this idea: is the bid/ask spread ticking up or down as a % of total bid/ask moves within a given time period? If there are 60 trades within a 1-min period, and the bid/ask moves up twice and down once, then there was net buying. Over multiple rolling periods of aggregated bid/ask movement, real buying or selling will have hard time fooling this 'frequency' rule...

 

Umm... I'm going to assume I don't understand what you're saying because it sounds like: if the price goes up then there was net buying. If in any period bid/ask moves up 5 times and down 10 times, that means price has now moved 5 ticks lower (assuming one tick per move).

[BlowFish 10]

All V@B or V@A really shows is who is prepared to buy/sell aggressively/passively or put another way who is patient (limit orders) and who is anxious (market order). People seem to assume that anxious participants are the ones who know where price is going.

[Kiwi 16]

I think Anxious may be a choice of word that has too strong a meaning. Active might imply a more positive view.

Although perhaps taking both views helps one to remove biasses in thinking. Genius, Blowfish.

 

 

Reading taotree's post reminds me that when the king was naked the peasants and merchants clothed him depending on their own assumptions about what he might be wearing.

 

 

 

Interestingly the OP decided to dump some of his pictures over at ET. The response was exactly what one would expect to such reused material. I renew my plea that should more threads be started we be treated to new pictures.

[MidKnight 12]

So, you're not measuring naive aggregate buying/selling trade volume, you're measuring buy/sell volume for specific participants or behaviors.

 

What UB is saying makes perfect sense to me, I just cannot understand (yet) how it is detected as a large participant.

[paolfili 10]

The picture is almost complete when you can consider that some (big) "anxious" partecipant can be an insider between the "patients".

From the rest (in the price) after some big blocks transit I suspect that

sometimes the "active" buyer that hit the "lazy" seller are the same fellow, also with

different size in the tape (but similar trade intensity).

 

 

 

All V@B or V@A really shows is who is prepared to buy/sell aggressively/passively or put another way who is patient (limit orders) and who is anxious (market order). People seem to assume that anxious participants are the ones who know where price is going.

[MightyMouse 12]

While this is waaaay off topic, I can appreciate your poker analogy. You should, however, input a couple more basic poker concepts - the style of play you advocate is called "weak tight" and the players you mention eat weak tight players as appetizers. It should also be noted that in spite of your mention of pot-odds, the odds most operative in the games the guys you mentioned play are not pot odds, they are the implied odds. While you have mentioned one situation where it MIGHT be profitable for you to put in your chips against the best in the world you might note that the best in the world are masters at manipulating the situation and manipulating the implied odds that will ultimately be your undoing when playing against such as those.

 

Funny you should mention poker - we recruit our new traders almost exclusively from the poker community. Our best model so far is a young (20-30), male or female, from one of the Scandanavian countries that while successful in poker, never finished college. We quants build the trade decision support gear and young, bright people that are experienced in processing multiple online variables in online risk/reward situations execute the trades.

 

And yes, of course, I agree that "a small nimble shop of quants is a good place to be" unless the quants in that shop can't see or get beyond a 30 year old concept/technology that fails to take advantage of today's data, processing, concepts and intelligent and sometimes automated agents.

 

Again, thanks for your input. What I would rather see is how you have taken your study of Market Profile Theory BEYOND the traditional.

 

Wow! I have to ask whether one has to be Scandinavian from a Scandinavian Country or would being any nationality and living in a Scandinavian Country be good enough as long as you are foolish enough to not finish school and try to make money with a deck of cards? Yes, they are foolish. Just as foolish as an NBA player who does not complete his degree.

 

I am sure if someone where willing to waste their time reverse engineering your indicators, they would be rewarded with a new set of squiggly lines that tell you either nothing or as much as a 10 period moving average. But, of course, your indicator can see into the future for those willing to play hide and seek with you. Cute mixture of silliness, mock arrogance, and potential bigotry.

 

I apologize to anyone taking this thread seriously, but I am embittered because I am a degreed Hispanic living in Africa and I hate it when job opportunities at quant firms close up because I do not live in a Scandinavian Country.