Market Profile - Understanding The Auction Process
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From : Jy Seb
at 07:08 PM - Jan 16, 2013
, 15 Bookmark Share it on Facebook
Trading activity on any exxchange is a two sided auction process. Understanding of this auction process is key in suscessfull trading. Market profile is a different arrangemet of price/volume and time data. Everyone is familiar with candlestick and other type of charts. The representation of market generated data in market profile format helps better in understanding the auction process. Here I am discussing the concepts of market profile and markets, this will help you in improving your market understanding and trading results. After this I am planning to show how to trade with this information realtime.
Now look at the chart below. It is a market profile chart of nifty futures for 3 days. each 30 minute period is represented by the letters A,B,C,D etc. The green area is called the value area. It is where 70% of transactions took place, where two sided autions took place during the day as buyers and sellers agreed on price. The single letters at the bottom of the third day in picture is called buying tail. Note the single lettere prints K at the bottom of the profile. Here buyers overwhelmed sellers and and excess low is formed. Selling tails also form in the same manner. The red lettered band in the middle of the value area is called point of control. It is where price spend more time during the trading session.
Now let us examine the 3 profile in picture. On the first day Value area was formed towards the upper part of the range and we say the value area is skewed upward. In the second profile, note that the value area is skewed upward but it is placed above the previous day's value area. This indicates that on the second day traders agreed on a higher level as value. But note the profile again, towards close, price break down below the value area and sold off rapidly, it went through the previous days value area rapidly. This is indicatin that there was some change in sentiment and as new information entered the market and the market is seeking new levels where it can find value, in this istance it is seeking value at lower levels. On the next day, market opened near the bottom of the previus day and thereafter formed value for the day. The process of value formation begins with a rapid vertical move and then two sided trading (trading range). The second image show the 30 minute bars that forms the mrket profile chart above.
This opening post just gives an overview of market profile. In the next post I will explain how the market profile can be used to understand the auction process aka market understanding and then how to trade with this information.