Price Acceptance / Value

[joshdance 10]

When a profile (volume- or time-based profile, whatever you like) develops in a certain area, we sometimes say that the market has "accepted" that price. Because a lot of volume was traded at a price, or time was spent, it is said that this distribution of prices has gained acceptance from the market.

 

Unfortunately, this says nothing about the future direction of the market from this area of acceptance or balance. Just as increasing volume or time over an area will indicate acceptance, increased volume over that range also means more participation and interest, from traders both looking for continuation and reversal of the market. So, while we can say that the market has accepted the price, we know that out of balance comes imbalance and this increased activity at some point fuels the market to move in some direction.

 

Somewhere you're probably expecting a question; however, I really just would like some general thoughts you have about value and acceptance. Does an area of volume or time building really indicate acceptance, or can this be thought of simply as a resting point for the market before it either rejects this area by moving back where it came from, or by moving on to develop new value elsewhere?

 

I look forward to your thoughts; I feel that my mental model of how I view the profile is ready to be challenged and perhaps upgraded, and looking to your comments to spur me on to new growth here.

 

EDIT:

Perhaps this video I just made will make it clear what I'm looking for (or perhaps not lol) ... when price accepts a new area, this does not really mean that the market plans to move in that same direction.

 

http://screencast.com/t/JZwrHtUd4CIN

Edited January 18, 2012 by joshdance

[BlueHorseshoe 10]

So, while we can say that the market has accepted the price, we know that out of balance comes imbalance and this increased activity at some point fuels the market to move in some direction.

 

Somewhere you're probably expecting a question; however, I really just would like some general thoughts you have about value and acceptance.

 

I'm making this statement in the same tentative vein as your original post . . .

 

I would typically expect a market to move back towards a prior value area once it has left it. I would tend to associate the increased volume of trading as signaling agreement between both buyers and sellers that this price level represents fair value. When price moves away from this level, it will more often than not gravitate back towards it - the market exists to facilitate trade and match buyers and sellers afterall, and the fair value level is the price at which thej most trade was recently facilitated.

 

There are obviously two ways that this can occur:

 

1) Price moves away from the value area and then there is a substantial reversal, taking it back through it.

 

2) Price moves away from the value area to begin a new trend, and then pulls back to the value area before re-comencing the trending action.

 

The third possibility, of course, is that price breaks out of the value area and never looks back! This would usually only happen when significant new information enters the market. If clean breakouts such as this occurred with any regularity then I'm sure we'd all be trading them.

 

From what you say in your original post, I think this probably confirms your current way of thinking about value though, and will be of little help in developing it. I suppose the useful thing to know would be how widely a particular price level is considered fair value - an informed guess could then be made about whether price movement has exhausted interest at that level and is unlikely to gravitate back towards it . . .

[Jthoma 10]

Josh,

 

Take a look at this video, may help answer some questions. Look for the very first video, this was a webinar conducted on Jan 11th.

Video Library

 

 

Hope it helps.

[peter100 10]

i mean, an "value" area or area of price "acceptance" is nothing different then a temporary equilibrium in the order flow in my eyes...when the order flow balance shift, you can see price "rejection" all allong the price discovery way...anyway the basic problem remains, this is all historical and if you choose to go into the market at some point, your trade depends on other traders supporting your trade after you got in...

[rcoolkarni 10]

whats the platform you are using?

[squishy 10]

The following link really helped me think about how markets develop:

 

"Trading with Market Statistics"

 

http://www.traderslaboratory.com/forums/market-profile/4803-trading-market-statistics-links.html

 

Understanding where VWAP is compared to the current Peak Volume Price (PVP) is a key component in defining whether the market is "in balance" or not (VWAP = PVP equates to an equilibrium point).

 

If VWAP is not equal to the current PVP, there are specific strategies to employ above or below the VWAP. Price advances often stop when VWAP moves to a newly established PVP.

 

Maintaining an awareness of the current relationship of VWAP to PVP has really helped with my understanding of how markets develop.

[BlueHorseshoe 10]

The following link really helped me think about how markets develop:

 

"Trading with Market Statistics"

 

 

Thanks for the link - a useful and interesting thread, by the looks of it!

[roztom 10]

Good Links for all who want a better understanding of VPOC Shift/VWAP interaction.. When these align with profile structure it can be a signifigent spot to position - subject to overall market structure..

 

Tom

[roztom 10]

i mean, an "value" area or area of price "acceptance" is nothing different then a temporary equilibrium in the order flow in my eyes...when the order flow balance shift, you can see price "rejection" all allong the price discovery way...anyway the basic problem remains, this is all historical and if you choose to go into the market at some point, your trade depends on other traders supporting your trade after you got in...

 

Before anyone gets a club out and beats me, I learned MP in the early 1980's from Pete Steidelmeir at the CBOT. The only thing important about that is I worked with it for about a year and then abandoned it - couldn't make a dime with it.. It was TPO based and even when the CBOT introduced volume - they called it Liquidity Data Bank (LDB) in T-BOnds I just couldn't use it but the auction theory resonated with me..

 

I had been using the auction concept myself but had never heard it explained that way..that was my major takeaway from it at that time. However, with the availability of volume it changed everythiing.. Today I wouldn't trade without it. It is not a system but price, volume and time at price is signifigent market generated information..

 

Some observations and how I use VPOC.. (I basically ignore the POC - time based)

 

It is true that a shift in VPOC is not a specific directional signal but a sign that high volume is taking place at a new price point in the current timeframe you are measuring.

 

What happens after the VPOC shift along with Delta can be a signifigent clue as to what the volume represents.

 

If the market has been trading higher and then churns at the high end of the profile then price is being accepted and the VPOC can shift up. this can mean the end of the upmove, temporarily if sellers are absorbing the buying at the higher level (responding to higher prices). This would basically shut off the market from going higher and it would rotate down to look for buyers.. If the buyers aren't there then it will go lower. On the other hand when the VPOC shifts the sellers can be absorbed at the high volume and after rotating in a tight range or balance area which can be seen on the profile the market will move higher.

 

Ofcourse context and where the market is in relation to the bigger picture is important. Eventhough I am now a daytrader I always put the daily profile in context with longterm profiles and Cululative High VOlume and Low Volume Nodes based on previous longterm swings. It fits together like a puzzle.

 

I hope this doesn't sound too vague but until you see the behavior of price and the shape of the profile and for me the Delta..you can't tell what it means but it is an alert to expect the market to set up for a move out of the area..how far?

 

This is another subject but volume nodes are inside the market from previous levels and the market typically goes back to visit those area thus targets are available to work with.

 

There are a number of excellent threads & videos that go into this. Like everything there are many ways to use the tool. I am not expert by any means. I have just found ways to use the information generated to fit my trading..

 

I hope you find this helpful.

..

 

Regards,

 

Tom

Edited January 20, 2012 by roztom

[Jthoma 10]

"There are a number of excellent threads & videos that go into this. "

 

 

Thank you Tom for explanation. helped me a lot. Can you please link the thread and videos you mentioned.

 

 

J.Thomas

[joshdance 10]

Josh,

 

Take a look at this video, may help answer some questions. Look for the very first video, this was a webinar conducted on Jan 11th.

Video Library

 

 

Hope it helps.

 

Thanks Jthoma, I am in the middle of watching it and some pretty good info, thanks very much.

[joshdance 10]

The following link really helped me think about how markets develop:

 

"Trading with Market Statistics"

 

http://www.traderslaboratory.com/forums/market-profile/4803-trading-market-statistics-links.html

 

Understanding where VWAP is compared to the current Peak Volume Price (PVP) is a key component in defining whether the market is "in balance" or not (VWAP = PVP equates to an equilibrium point).

 

If VWAP is not equal to the current PVP, there are specific strategies to employ above or below the VWAP. Price advances often stop when VWAP moves to a newly established PVP.

 

Maintaining an awareness of the current relationship of VWAP to PVP has really helped with my understanding of how markets develop.

 

Thank you squishy; I have read all of Jerry's threads before, but will go back and review these. My only issue with this approach is that it's based in "if X is below Y then only go short" ... and VWAP, while a valid statistical measure, is to me on par as effective as a moving average. However, I certainly want to go through Jerry's threads again with a fresh eye and see if I can find anything that will be helpful this time around. I'm not sure I really agree statistically with it either, but I'll have a look.

 

Thanks for pointing me in this direction.

[joshdance 10]

i mean, an "value" area or area of price "acceptance" is nothing different then a temporary equilibrium in the order flow in my eyes...when the order flow balance shift, you can see price "rejection" all allong the price discovery way...anyway the basic problem remains, this is all historical and if you choose to go into the market at some point, your trade depends on other traders supporting your trade after you got in...

 

Very good point peter, and very sobering in that it reminds me that all the technical analysis in the world is really meaningless unless we're going with the current "flow" of things... sometimes this is hard to really determine, market sentiment that is, but definitely true that the NOW trumps the past every time if they disagree on what "should" happen.

[joshdance 10]

roztom and BlueHorseshoe, thanks for your input very much, and I look forward to hearing more ideas. So far this thread has provided some very useful feedback and I will post thoughts and ideas as I consider what you all have said.

[clmacdougall 11]

Hi joshdance,

 

Why are you accepting the validity of MP in the first place? It's a misplaced endeavor whose science is meant for evaluating the average height of an american male, not for evaluating something so dynamic as the markets.

It is nothing more than the incorrect evolution of the point and figure methodology. Read " The Intelligent Chartist" by John W. Schulz, an incredible book! It becomes clear that you must make a decision concerning the validity of horizontal development in modern technical analysis.

To put it simply, horizontal development should either be seen as meaningful or not, whether it's overlapping price (point and figure) overlapping price at time / TPO (early MP) or overlapping volume at price (modern MP).

Why are you believing that horizontal development is in any way meaningful? Does it cloud your perception of the markets? Are there easier less confusing ways to look at the market? Contextually who says it helps at all, don't let your head be pointed in a direction without asking why!!

[roztom 10]

Hi joshdance,

 

Why are you accepting the validity of MP in the first place? It's a misplaced endeavor whose science is meant for evaluating the average height of an american male, not for evaluating something so dynamic as the markets.

It is nothing more than the incorrect evolution of the point and figure methodology. Read " The Intelligent Chartist" by John W. Schulz, an incredible book! It becomes clear that you must make a decision concerning the validity of horizontal development in modern technical analysis.

To put it simply, horizontal development should either be seen as meaningful or not, whether it's overlapping price (point and figure) overlapping price at time / TPO (early MP) or overlapping volume at price (modern MP).

Why are you believing that horizontal development is in any way meaningful? Does it cloud your perception of the markets? Are there easier less confusing ways to look at the market? Contextually who says it helps at all, don't let your head be pointed in a direction without asking why!!

 

I suspect that is the point of this thread... would you like to share your experience with MP and the shortcomings you found with it. I'm sure we would all appreciate your input.

 

Regards,

 

Tom

[clmacdougall 11]

I suspect that is the point of this thread... would you like to share your experience with MP and the shortcomings you found with it. I'm sure we would all appreciate your input.

 

Regards,

 

Tom

 

Finding a statistical mean is relevant when studying a stationary element. It is not relevant when trading the moving targets of a zero sum market. The reason the bell curve is not useful when studying the financial markets is because they are dynamic.

If the bell curve was useful in diagnosing the markets there would be no need for psychiatrists as we could all self diagnose ourselves based upon various bell curves available. But because we are each dynamic a personal diagnosis is always needed.

Too many elements, beyond what the market profile graphic can show, are at work in the market. For that reason I decided to abandon it as I felt it added no edge in understanding the true complex nature of the markets.

[BlueHorseshoe 10]

The reason the bell curve is not useful when studying the financial markets is because they are dynamic.

 

Surely although a gaussian distribution is not dynamic, the mean around which the distribution occurs IS dynamic, as the average value series changes through time?

 

I'm not saying that this represents a total justification for market profile though.

[joshdance 10]

Hi joshdance,

 

Why are you accepting the validity of MP in the first place? It's a misplaced endeavor whose science is meant for evaluating the average height of an american male, not for evaluating something so dynamic as the markets.

It is nothing more than the incorrect evolution of the point and figure methodology. Read " The Intelligent Chartist" by John W. Schulz, an incredible book! It becomes clear that you must make a decision concerning the validity of horizontal development in modern technical analysis.

To put it simply, horizontal development should either be seen as meaningful or not, whether it's overlapping price (point and figure) overlapping price at time / TPO (early MP) or overlapping volume at price (modern MP).

Why are you believing that horizontal development is in any way meaningful? Does it cloud your perception of the markets? Are there easier less confusing ways to look at the market? Contextually who says it helps at all, don't let your head be pointed in a direction without asking why!!

 

Excellent post 'mac and just the kind of conversation I'm wanting to have on this thread; all dissenters and believers alike from all sides join in!

 

In response, I really don't see profiling as a methodology at all, at least not how I use it (perhaps it should be more of one for me! ) I'll put it this way: in the same way that horizontal support and resistance of price levels based on past price gives a structure to the market and gives a context to where we are now, so does volume at price. I tend to use shorter term profiles, like the day or spanning several days to a few weeks, and only use the distant past if we are in new territory and I have nothing recent as a contextual reference.

 

What does a volume at price profile really represent? Well, speaking objectively, it only presents a view of volume traded at price. That's it. Anything beyond that is us inserting our own personal, subjective analysis. Notions of "value" or "unfair high" or anything of the sort are what we as viewers of the market project onto it; it says nothing about value, or fairness of price, or any of that. So, I try to keep this view and understand that a volume at price histogram is simply a presentation of data. I am still developing what exactly a profile "means" to me.

 

I don't know exactly how you trade but based on our prior interactions, you and I are probably more similar than different. I use a profile much like I use a 30 minute chart: where are we in relation to yesterday, this week, this month? But at this very moment, that really is not as important as what is happening NOW. Is sentiment bullish or bearish? Does this market at this time want to go up or down? That's my question always, and when I am on the wrong side of the market, in about 70% of those cases I was uncertain when taking the trade to begin with and need to simply be more patient.

 

Does Schulz reach any particular conclusion regarding horizontal development? I take it that you have rejected this, and would like some of your opinions as to why specifically, if you can concisely explain your thoughts. I will certainly pick up the book and give it a read. Sounds very interesting.

[BlueHorseshoe 10]

Anything beyond that is us inserting our own personal, subjective analysis. Notions of "value" or "unfair high" or anything of the sort are what we as viewers of the market project onto it; it says nothing about value, or fairness of price, or any of that.

 

I think that maybe I introduced the phrase "fair value" into this thread earlier, so sorry if that's muddied the waters - is "fair value" an MP term?

 

Nevertheless, I would assert that any price level at which signficant volumes of trading occur represent areas of "fair value". If prices weren't considered "fair" at these levels, why would so many buyers and sellers be willing to execute orders at them?

 

So whilst it perhaps doesn't say anything objective about fairness of price, I think that it does say something objective about other market participant's subjective assessment of fairness of price.

 

Does that make sense?

[squishy 10]

Thank you squishy; I have read all of Jerry's threads before, but will go back and review these. My only issue with this approach is that it's based in "if X is below Y then only go short" ... and VWAP, while a valid statistical measure, is to me on par as effective as a moving average. However, I certainly want to go through Jerry's threads again with a fresh eye and see if I can find anything that will be helpful this time around. I'm not sure I really agree statistically with it either, but I'll have a look.

 

Thanks for pointing me in this direction.

 

After viewing Jerry's thread I did some limited backtesting of VWAP trades and it appears, from my tests anyway, that there is a slight edge going long above VWAP and short below VWAP (simply using random entries). There is also a statistical edge using the "Shapiro Bar" effect (again tested using random entries). While neither is a trading system in itself, it's these little things that add up.

 

Thanks for starting this thread -

[squishy 10]

Hi Joshdance -

 

I'm attaching a screen shot of the 5 minute chart from 1/18 (the same day as your screencast). As it happens, this was a perfect example of how the VWAP / PVP relationship might have you into a good trade. (note: CST is shown on screen, so 8:30 is 9:30 ET).

 

When the PVP built in around 1287, it was about 3 point below VWAP (the red line). Price could go either way from here, but if it goes over VWAP you have a pretty good chance it'll go up at least to a 1 std dev profit target (the yellow line). There was a second trade opportunity above the 1st Std Dev (the yellow line) to the 2nd Std Dev (the blue line).

 

When the second PVP built around 1297, it was above VWAP, resulting in a negative skew. Again, this doesn't predict what price will do, but if price went below VWAP you have another good short opportunity. As it happens, price continued going up. If you followed the rule "don't short over VWAP" you would have kept yourself out of any shorts at this point.

[clmacdougall 11]

Surely although a gaussian distribution is not dynamic, the mean around which the distribution occurs IS dynamic, as the average value series changes through time?

 

I'm not saying that this represents a total justification for market profile though.

 

How does that make the mean dynamic? Simply because it moves? It moves almost no differently than a MA or an EMA. You are drawing your context of the market from the past and in my opinion you want as little of that as possible in order to define the predictable lean/nature of price movement in the near future.

[khamore1 10]

Josh your analysis about the market is the most accurate one. This is also how Steidlmayer. Don Jones and Tom Alexander see the market

 

Basically you got the 3 phases. 1. Vertical development. 2. Stop 3. Forming a balance

 

These phases were in the market 100 years ago 50 years ago and today it looks like it will be the same tomorrow

[roztom 10]

How does that make the mean dynamic? Simply because it moves? It moves almost no differently than a MA or an EMA. You are drawing your context of the market from the past and in my opinion you want as little of that as possible in order to define the predictable lean/nature of price movement in the near future.

 

Mac: I am a user of MP and would not trade without it... One of the things I have observed over many discussions re: MP is that in it's most stictest rule based definition I would also dismiss it. Notwithstanding when I first learned about it in the early 1980's that's how I tried to use it. I did not succeed with it and dismissed it. You mentioned the 70% Distribution, etc. for me that is not important.. I guess the best way for me to describe my interpretation of it is that I learned the tool and then deconstructed it and found the elements that integrated with my view of the market.

 

We all live at the right side of the screen and MP is another view... it is just another way to organize data.. It works for me and I'm sure if it fits the psycology of the individual and adds an element of realtime market generated information which can be integrated into an overall process then it is a good tool to have in the box. For me it is the horizontal view of price.volume and the integration of VOlume generated price information over Market Swings from most recent swing high to swing low to the March Crash Low... to current high. These swings with horizontal price/volume creates nodes of high/low volume. The market seems to come back to these volume levels which were signifigent in the past just like support and resistance but they are not price based but volume based... This part of the MP process is cumulative volume nodes and they were not part of what I learned originally - no volume was available at that time.

 

You did mention charts, etc. When I started out that was all I had... Studied Edwards & McGee, got a new chart book weekly, pencil and a ruler did them daily by hand. Charts still are important to me..I can't imagine anyone who uses MP not also having charts up. I especially like 15 minute candles along with other timeframes for the interday picture..let's me see where the stops are piling up and where the market will probably rotate to get them or in MP lingo - facilitate trade.

 

Good discussion..

 

Regards,

 

Tom

Edited January 21, 2012 by roztom