Need explanation on TPO count

[tomdz 10]

Hello,

 

Could somebody, please, clarify for me the concept of TPO count

(i.e. buying/selling TPOs)?

In the CBOT's handbook (http://www.cbot.com/cbot/docs/handbook.pdf)

on MP there in a paragraph on the subject (p. 35-36):

 

"We're counting TPOs because they represent market activity.

In this example, there are 70 above and 89 below (POC)

The imbalance we are looking for is on the side with the

least amount of activity because the longer term trader

is only a small percentage of total trade in the value area"

 

What exactly is meant by the "imbalance being on either side"?

The dominating buying or selling participant? But in this

case, this would mean that, in the latter example, sellers

are the dominating force for there are fewer TPOs on their side.

Which is exactly opposite to the correct interpretation, isn't

it?

 

Later on, we read:

 

"To explain more fully, the value area is primarily for traders

seeking a fair price ...."

 

OK, that is clear...

 

"...Therefore, the side with the most activity has to be

short-term activity. That's where the price in the value area

will be fairest. In other words, no one is giving up an edge

there."

 

And here I'm lost completely... I just can't figure the concept

out. Does it mean there is no long-term activity in the area

of most activity (89 TPOs in the latter example)? But shouldn't

70/89 TPO count mean that it is the long-term buyer who's more

active in the value area?

 

"Returning to this example, the side with the least amount of

activity is above the fairest price. Since the market moves up

to shut off buying, the longer term buyer was most active in this

value area."

 

Now, this finally makes sense to me (because of active long-term

buyers, the POC moves up resulting in increased number of TPOs

below it and reduced TPO count above), but seems to contradict

what has been said previously.

 

Thanks in advance for your help.

Regards,

Noal

[Soultrader 12]

Hello Noal,

 

Let me try to do my best to answer your questions. I am sure other MP traders can help you out as well.

 

Regarding TPO count, a TPO count of 70/89 means 70 above the POC and 89 below the POC. This indicates buyer dominance or buying control. The TPO count above the POC represents sellers willing to short above value while a TPO count below the POC represents buyers willing to buy below value. Buyers below POC view the markets as undervalued while sellers above the POC view the markets as overvalued.

 

Imbalance is created when there is more demand over supply or vice versa. In other words the bulls or bears express more confidence. A market trading inside value is a balanced market. A market that trades above/below value is imbalanced and seeks balance.

 

I am still unclear about the long-term, short-term activity. I would need to read the entire section from the pdf file. Value area is simply an area where both buyers and sellers agree on market value. It is equilibrium. Is the author referring to activity as volume or the number of transactions?

 

EDIT: made a slight error regarding seller vs buying control. Fixed now

[tomdz 10]

I am still unclear about the long-term, short-term activity. I would need to read the entire section from the pdf file. Value area is simply an area where both buyers and sellers agree on market value. It is equilibrium. Is the author referring to activity as volume or the number of transactions?

EDIT: made a slight error regarding seller vs buying control. Fixed now

Hello and thanks for your reply. Actually, it's the same long- and short-term activity I'm mainly confused with. I just can't see how its analysis helped to reach the final conclusion.

The activity is measured here simply by the number of time periods (TPOs) used for trading a market at a given price.

I can paste the entire section, if you are willing to share your time reading it (it's not very long - just a page).

 

Noal

[Soultrader 12]

Sure go ahead and paste. I dont mind reading it... I may have something new to learn myself.

 

Short term buyers/sellers are traders like myself whose holding time is fairly short. In MP books, longer term buyers/sellers are usually referred to as the funds and insitutions.

[tomdz 10]

Now that you've seen how a value area develops, we're going to determine which longer-term trader-buyer or seller-is most active in the value area. Although they're both going to be active at various times in the session, we are looking for the net influence at the end of the day.

 

We are able to make this determination because the longer-term trader has a known behavior pattern when he trades in the value area.

 

The behavior pattern: the longer-term trader gives up an edge in order to make the trade. He's willing to do this because something that is fair in the day can be a bargain in a longer-term time frame.

 

In other words, when the longer-term trader makes a trade in the value area, he is buying low or selling high in relation to longer term value-not in relation to today's value.

 

The behavior pattern's effect: an imbalance in the value area.

 

If the longer-term buyer is most active, the value area is slightly too high because he is willing to buy at a slightly higher price. If the longer-term seller is most active, the value area is slightly too low because he is willing to sell at a slightly lower price.

 

How do you find the imbalance? Look at page 38 on the left.

 

Use the fairest price in the value area-the price that trades in the most time brackets-as your reference point. If more than one price trades in the same number of time brackets, choose the one closest to the mid-point of the entire range.

 

We're taking the one closest to the mid-point of the entire range because, as you saw in the example we just went through, the market uses the entire range to find value. It establishes parameters and then negotiates along the entire range between them.

 

Draw a line through the TPOs opposite the fairest price. Now count all the double prints above the fairest price and all the double prints below it. (Double prints refer to any row of TPOs opposite a price in the day's range with two or more TPOs in it.) We're counting TPOs because they represent market activity. In this example, there are 70 above and 89 below. The imbalance we are looking for is on the side with the least amount of activity because the longer-term trader is only a small percentage of total trade in the value area.

 

To explain more fully, the value area is primarily for traders seeking a fair price.

 

Therefore, the side with the most activity has to be short-term activity.

That's where the price in the value area will be fairest. In other words, no one is giving up an edge there.

 

Returning to this example, the side with the least amount of activity is above the fairest price. Since the market moves up to shut off buying, the longer-term buyer was most active in this value area.

[Soultrader 12]

Hi Noal,

 

At first I had trouble understanding it. Partly because I had always pictured insititutional traders or funds to be super traders and were never wrong. Well they may be right, but intraday traders who focus on small price movements certainly focus alot more on getting a better fill. While I may use a 10 pt stop on the dow minis these insitution can use a larger stop because of their holding period.

 

I'm pretty sure I have comprehended the page correctly but not 100% sure of this. Let me begin with a market profile chart below:

 

 

The chart above illustrates the value area, poc, and TPO count for the emini Russell contract. We have a TPO count of 183/193 slightly favoring the buyers. Now for an intraday or short term trader the value area is what we perceive to be fair. However, for an longer term buyer if he decides to buy in this value area he is buying because he thinks the market is going up. In other words from his perspective he is buying low because he is focused on the longer term holding period. If he decides to sell in this value area he is selling because he thinks the market is going down. In his perspective he is selling high in relation to his longer term market perspective. Hence the statement:

 

The behavior pattern: the longer-term trader gives up an edge in order to make the trade. He's willing to do this because something that is fair in the day can be a bargain in a longer-term time frame.

 

In other words, when the longer-term trader makes a trade in the value area, he is buying low or selling high in relation to longer term value-not in relation to today's value.

 

Now, the author also states that the side with the most activity has to be short-term activity.... in other words no one is giving up and edge there.

 

Basically short term traders perceive price to be fair inside the value area. Day traders, swing traders, pit traders, etc... view this area as fair and balanced. So the most activity is found amongst this crowd who perceive price to be fair at value.

 

On the other hand, the longer term market participant views the value area differently. He does not view it as fair or balanced, a longer term buyer would view the same value area as a bargain. A longer term seller would view the same value area as too high. Therefore the area with the smaller activity indicates the longer term market participant.

 

This concept is a little ackward for me to grasp... since I believe the author is referring to the chart on the .pdf file.

 

 

Now there is still one line which I can not fully understand.

 

If the longer-term buyer is most active, the value area is slightly too high because he is willing to buy at a slightly higher price. If the longer-term seller is most active, the value area is slightly too low because he is willing to sell at a slightly lower price.

 

Is this indicating that the longer term buyer is buying enough contracts to expand the value area?

[tomdz 10]

Is this indicating that the longer term buyer is buying enough contracts to expand the value area?

 

I see it in a little different way. A perfectly balanced value area should have a normal bell curve shape with the POC fitting perfectly in the middle. Now, because of the longer-term activity presence (but not strong enough to move the entire value area to a different level), this curve becomes distorted and the POC moves somewhat higher or lower (depending on who's driving it) while the value's limits remain untouched.

 

As for me, I don't really understand this line:

 

The imbalance we are looking for is on the side with the least amount of activity because the longer-term trader is only a small percentage of total trade in the value area.

 

How can the imbalance be on one of the sides? As my understanding goes, imbalance can be either on both sides (too much on one side and to little on the other) or there isn't any. But according to the text we are looking for imbalance on the side with the least amount of activity... What exactly does it mean?

 

Moreover, why would we focus on the side with the least amount of activity? I'm not sure if I'm getting this correctly, but it seems to me that the author divides the value area in two parts - the one with the smaller number of TPOs is assumed to be dominated by the long-term traders, and the other by the short-term traders. As this strict division wasn't awkward enough, if we applied it to the example, it would basically mean it's the long-term seller who's more active in the value area: 89 TPOs below POC are short-term trades and 70 TPOs above represent long-term participant (the one we are trying to analyse), hence it has to be the seller because he is doing his bussiness above the fairest price (the POC). Obviously, 70/89 TPO count favors the buyer if interpreted correctly, so there has to be some error in my logic (though I can't say where)...

[Soultrader 12]

As for me, I don't really understand this line:

 

The imbalance we are looking for is on the side with the least amount of activity because the longer-term trader is only a small percentage of total trade in the value area.

 

How can the imbalance be on one of the sides? As my understanding goes, imbalance can be either on both sides (too much on one side and to little on the other) or there isn't any. But according to the text we are looking for imbalance on the side with the least amount of activity... What exactly does it mean?

 

I spent some time thinking about that one... and honestly I was like "what???" over and over again. Did Steidlmayer write the packet? Because the writing is very unclear and hard to interpret.

 

From my own interpretation, I believe the author is saying that the majority of transactions take place among short term traders and floor traders intraday. Transactions or activity is different from volume. Which is why I believe when the author mentions activity, I think he is referring to transactions. Because these short term traders place most of the activity between price levels where the market is in value, the side with the most activity represents short term traders. The side with the least activity represents long term traders because their perception of value is different from short term traders. While a short term trader may see the value area as a price region of fair value, a longer term trader may see it as a bargain or overvalued.

 

Of course this is not to say I agree with the author. I do not fully understand why the author would need to include such a phrase in the book.. it seems to just confuse the heck out of me. It also seems extremely irrelevant in my opinion. Maybe someone can clear this up for us.

[tomdz 10]

Assume we've got 20 TPOs above the POC and 80 TPOs below (to make the situation clearer). Obviously, the majority of value is rested below the POC, hence we assume the short-time traders are trading on that side. The trades made on the other (top) side come as a result of the competition between the long- and short-term traders within the value area. The short-term participants don't trade on that side (the price gets too high for them so they withdraw from the competition and go back to their region), but the latter is concidered a bargain by the long-term traders. And because the prices auctioned higher due to the competition, it must have been the long term-buyer who was responsible for that move.

 

Do you think this is what the author could have in mind?

[Soultrader 12]

Noal,

 

That is initially what I had in mind also. But the thing I dont understand is how can one claim that the longer term buyer bought above the POC. How can one prove this? I guess if you stared at tape all day long you might be able to spot big lot buyers above the POC but this is not 100% guaranteed. There are plenty of big short term traders as well. This whole section in the .pdf file is very unclear to me.

[ant 10]

I didn't read through this entire thread, but think I got the jist of the discussion. I just wanted to add my understanding of the TPO count.

 

Floor traders seeks balance (or fair price) in a market to facilitate trade between buyers and sellers. Floor traders control the value area, because that's the price region that indicates fair price. When the TPO count below the POC is higher than the TPO count above the POC, that indicates that an imbalance exists with buyers being more dominant. When the TPO count above the POC is higher than the TPO count below the POC, that indicates that an imbalance exists with sellers being more dominant. When an imbalance exists according to the TPO count in a rotational day, I immediately start thinking about the inventory of floor traders, i.e. their short and long inventory. The imbalance in the TPO count tells me that floor traders are either too long (have too many long positions) or too short (have too many short positions). So the behavior I would expect from floor traders is to either start selling/buying in order to balance their inventory. Floor traders are expected to buy if they are too short and sell if they are too long. This is similar to a daytrader having a short position and needing to cover at some point during the day. Since the longer timeframe does not usually trade in the value area (it is not their expected behavior), their action in the value area is negligible. The TPO count is just one component of Market Profile and it needs to be considered within the context of the market.

[Reaver 10]

I didn't read through this entire thread, but think I got the jist of the discussion. I just wanted to add my understanding of the TPO count.

 

Floor traders seeks balance (or fair price) in a market to facilitate trade between buyers and sellers. Floor traders control the value area, because that's the price region that indicates fair price. When the TPO count below the POC is higher than the TPO count above the POC, that indicates that an imbalance exists with buyers being more dominant. When the TPO count above the POC is higher than the TPO count below the POC, that indicates that an imbalance exists with sellers being more dominant. When an imbalance exists according to the TPO count in a rotational day, I immediately start thinking about the inventory of floor traders, i.e. their short and long inventory. The imbalance in the TPO count tells me that floor traders are either too long (have too many long positions) or too short (have too many short positions). So the behavior I would expect from floor traders is to either start selling/buying in order to balance their inventory. Floor traders are expected to buy if they are too short and sell if they are too long. This is similar to a daytrader having a short position and needing to cover at some point during the day. Since the longer timeframe does not usually trade in the value area (it is not their expected behavior), their action in the value area is negligible. The TPO count is just one component of Market Profile and it needs to be considered within the context of the market.

 

Well put, Ant.

 

 

I can't bring myself to read the CBOT manual, because, as the saying goes....don't ask a barber if you need a haircut.

 

I may be wrong- but I don't like reading "official" material put out by a trade board (or brokerage for that matter) on how to trade. Conflict of interest.

 

They truly do not want the masses to succeed, because then the consistent winners who pay an arm and leg for their seats and memberships....would no longer be the winners...and wouldn't be members anymore....so that would cause a huge drop in revenue for the board of trade....

 

The individual, non-member trader is on their own...and we are expected by them to lose. We are expected to be marks in their shell game.

 

My opinion if course. Be advised-I am slightly cynical.

[Sparrow 10]

Slightly off topic:

 

Quite honestly i have no idea where most of CBOT's revenue comes from.

I guess though commissions are a big part of it. Probably also a bit from selling data and fees for brokers.

 

The longer a trader sticks around the more commissions he generates for the BOT.

 

How much the members contribute? I haven't got a clue, maybe so much that your argument is valid.