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Market Profile - Understanding The Auction Process

From : Jy Seb at 07:08 PM - Jan 16, 2013 ( )

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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. 

In Reply to above Message (1 to 20 out of 25) - Latest Replies are put on Top | First | << Previous | Next >> | Last |

From : Jy Seb at 02:07 PM - Feb 19, 2013 ( )

As updted last tume, earlier price rejection from 265.4 failed, now key reference for todau is 264.80

From : Jy Seb at 12:26 PM - Feb 19, 2013 ( )

last price rejection from 265.40 turned into sideways trading, now chances of testing the day low diminishes

From : Jy Seb at 11:47 AM - Feb 19, 2013 ( )

Nice price rejection from days high, low is likely to be tested again

From : Jy Seb at 10:58 AM - Feb 19, 2013 ( )

See how it turned into sideways trading, we made a short near 262.40, but it does not turned into a big down move, and later we infered it is turning to sideways trading and exited, about 1.5/2 point profit is made in this trade.

Just follow what the market is doing, we can't force the market to do what we expect. Now we have an open picure confirmed, we look forward to next developemnt and act when opportunity comes.

From : Krishna Dj at 10:18 AM - Feb 19, 2013 ( )


From : Jy Seb at 10:18 AM - Feb 19, 2013 ( )

Price rejection from 264.40 is not turning into a downward drive as of now, it is likely to turn into rotations(sideways trading) now, so getting out of shorts is advised

From : Jy Seb at 10:17 AM - Feb 19, 2013 ( )

Price rejection from 264.40 is not turning into a downward deive as of no, it is likely to turn into rotations(sideways trading) now, so getting out of shorts is advised

From : Jy Seb at 09:36 AM - Feb 19, 2013 ( )

As ecpected price rejection is happening at 264.40, this to be suscessfull, price shold trade below open 263.25

From : Jy Seb at 09:31 AM - Feb 19, 2013 ( )

Sell around 264.4 with 2 point stop loss, if no immediate move down, then trade should be scrstched

From : Jy Seb at 09:24 AM - Feb 19, 2013 ( )

DLF Open above Value area, now key reference is 263.80-264.40, If it sustains above this levels, the uptrend is expected, if it fails to sustain this level short with 2 point SL 

From : Jy Seb at 10:09 PM - Feb 18, 2013 ( )

Here is the context and preperation for tuesday - DLF cash

Daily charts confirms a swing low on firday. Now todays Value area is important reference area for tuesday open together with the open bias. If open is strong expect trading in the higer value area. if open breaks below value area, then expect trading between the area of lower value area and today value area. The open can give clues to what is expected on monday.

I will follow at market hours on tuesday. 

From : Jy Seb at 05:28 PM - Feb 18, 2013 ( )

So far some concepts to understand the auction process is discussed. Now this post is on how to use this information in developing trading strategy.

It starts with analysing the market context with weekly and daily charts. DLF was in a nice up trend for quite some time earlier. It ended the uptrend and turned into sideways trading (bracketing) and the last 3 days not including today where down trend. The blue box shows the bracket and the red box shows the down trend, here down trend is simply defined as daily charts making lower low and not making higher high. However note that on friday it held the recent swing low, red support lin in chart.


Now examine the market profile chart for more details. Froday formed a nice balance below thursday low, it is down bias. However towards close it broke above this value and pulled bach into the value area at close. In the process it formed a nice price rejection at days low. This happens at a previous swing low, so we are concerned about the continuation of down trend today, but all indiactions point to weakness.

Now we examine today's open, note the first bar, it is an open drive and it went up by 3+ pints in the fist 5 minutes and open = low, if u obsever lower time frame charts, the up move is swift and it never traded back towards the bottom of this 3+point range. This information negates the possibility of continuation of down trend, rather odds favour an upward move in todays early session. Note that price broke above friday higha nd remainde within thursdays range. It continued to trade about an hour sideways near the top of todays open range, this indicates lack of selling pressure at  this level, taking the market context into account(it is bouncing from a swinf low). So long trades can be placed during this time placing a stop loss below today open. Target is thursday value area high 260.30 This makes a 2.5-3 point risk and 6 point reward trading opportunity. But if the rotations after open coninue till noon, then another scenario may develop in which those who are long in the morning will get trapped and they will neutralise the long trade which will result in a down move, but after one hour of rotations, it moved up sonsisteltly towards the target.

From : Jy Seb at 09:27 AM - Feb 06, 2013 ( )

An open drive (downward) is likely to develop in Nifty, In this case it should not trade above 5992 (SL)

From : Jy Seb at 11:19 PM - Feb 05, 2013 ( )

Forgot to add chart for open rejection reversal. Refer this chart while reading that portion.


From : Jy Seb at 11:13 PM - Feb 05, 2013 ( )

Kumbleji, It is different from traditional technical analysis, Market profile, best source is James dalton books, the terminolagy is quite different, and very difficult to grasp. I think the term reference point is confusing u, just take it as resistance support, but remember that it is not traditinal TA support/resistance. If u point out, I can explain them in more detail.

From : Jy Seb at 11:07 PM - Feb 05, 2013 ( )

Open Rejection Reversal

Open rejection reversal ia similar to open test drive but usually the rejection and reversal comes after some development in the direction of open. In the chart below, note that price traded down for some time, but it eventually got rejected fro previous day low and reversed. Usually this rejection reversal also happens at some reference point.

Open rotations

In open rotations price trades up and down through the open many time immediately after open. This type of open lacks any directional conviction. Depending on the relatiove location of the open, trading strategis t trade this type of open can be developed. In the image below see how price trades up and down through the opening rate many times after open, this type of open lacks directional conviction at market open. However in the image, eventually price got rejected from the low and a directional move emerged later, but thats another story


From : Kripakar Kumble at 10:54 PM - Feb 05, 2013 ( )

Jay Seb ji...

very informative article  and something new to learn. 

Lekin mujhe sab bouncer  chala gaya.... 

Kuch simple language ho saktha hai kya ?

From : Jy Seb at 10:39 PM - Feb 05, 2013 ( )

Open Test Drive

The second type of open is Open Test Drive

Ok, what does it tests, it may be the opening price or a nearby reference point, and buyers/sellers emerge fro that reference point and drives the price. When we analyse this with market context and indentify this development immediately after market open, good assymmetric opportunity is there. The key in identifyin this type of open is immediate price rejection from the reference point it tets.

Open test drive

From : Jy Seb at 10:15 PM - Feb 05, 2013 ( )

Types of Open

Open drive, open test drive, open rejection reverse and open rotations

Open Direve. It is a strong directional move at market open and it continues never returning to the open. This sort of open has a strong directional conviction for the day. However the relative position of the open and market context is important in analysing the possibility of open drive leading to the whole day develop as a strong directional move.

open drive

In the above chart two open drives are shown, note that price never returned to test the open again. Identifying the open drive at the early stages of market open is important in taking advantage of this type of open. I will discuss how to identify open type at market open after completing the 4 open types.

From : Jy Seb at 04:29 PM - Jan 20, 2013 ( )

So what's the importance of  Tails ? In the eariler post we had seen a nice selling tail, what information it carries, inventory imbalance at that level. Ok let us examine market development during that day. It traded down, formed value lower and towards close it break below the value and closed near low of the day. The picture below shows the next day, the suggestion of strong sellers continued for the next day and trend was down for the next day also, but this may not be the case always, next day open is important information for arriving at early bias for the day.

In the next post I am planning to cover different types of open.

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