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Behind Market Profile

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  #1 (permalink)
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Hello,

I couldn't find the answer myself, so would like to ask people who actually use Market Profile concepts (in any form) in their trading. Will appreciate any input.

My question is: what market principle/characteristic does MP use in its core?

I read Steidlmayer's original book and researched stuff here on the forum, but from what I can see, the original idea of fair price and its determination techniques have been changing since 80s.

Does MP help to present people's positions assuming that majority of traders keep them overnight and hold/accumulate for multiple days?
Does MP provide analysis framework to simply determine levels many traders watch?
From what I've seen, some people build hypotheses for the day about possible market direction, reaction and turning points. Why are those hypothesis expected to be useful? Are they based on statistical patterns (like probability of gap fills, test of overnight levels, etc)?

I understand there will be no definitive answer, but if someone could explain what they see as an "edge" it'll be greatly appreciated.

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  #3 (permalink)
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You often find that traders who use market or volume profile in their trading follow auction market principles, or at least are aware of them. You might be able to incorporate profile analysis into your trading without any interest in auction market theory, but personally I would battle to see the point. They go hand in hand for the most part.

So with that in mind, profile analysis provides an excellent way to determine how the auction is developing. This is all about adding structure to the way you view the market. It's not about adding a moving average to your charts or any other indicator. It's about framing the way you approach markets (ie: auction theory).

In my opinion it is hugely beneficial to have some sort of belief system or structure to how you believe markets move. Initially this is not about creating a trading system. It is about asking questions like: 'How do markets move? What are they trying to accomplish? How do they accomplish it?'. Personally for me these questions are answered by approaching markets as an auction, just like as if I was sitting at an art or antique auction. The only difference being that financial markets move both up and down, but the general principles are identical.

For me personally this is a better approach than simply adding indicators and running a million tests to try and figure out which combination of indicators result in a profit.

Hope that makes sense? Not sure if that actually addressed any of your questions.

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  #4 (permalink)
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DarkPoolTrading View Post
You often find that traders who use market or volume profile in their trading follow auction market principles, or at least are aware of them. You might be able to incorporate profile analysis into your trading without any interest in auction market theory, but personally I would battle to see the point. They go hand in hand for the most part.

So with that in mind, profile analysis provides an excellent way to determine how the auction is developing. This is all about adding structure to the way you view the market. It's not about adding a moving average to your charts or any other indicator. It's about framing the way you approach markets (ie: auction theory).

In my opinion it is hugely beneficial to have some sort of belief system or structure to how you believe markets move. Initially this is not about creating a trading system. It is about asking questions like: 'How do markets move? What are they trying to accomplish? How do they accomplish it?'. Personally for me these questions are answered by approaching markets as an auction, just like as if I was sitting at an art or antique auction. The only difference being that financial markets move both up and down, but the general principles are identical.

For me personally this is a better approach than simply adding indicators and running a million tests to try and figure out which combination of indicators result in a profit.

Hope that makes sense? Not sure if that actually addressed any of your questions.

I guess there may be confusion in terminology. I did refer to the auction theory principles, just called it MP (for some reason thought they were interconnected).

So thank you for your comments!

I do agree it's better to work within a "belief system" rather than tweaking patterns and indicators. But as the saying goes "the devil is in the detail". I can understand basic examples with car sales or any other auction. What I am struggling with is how one can use these principles in day-trading. How often can an asset be under/overvalued? It is practices that go beyond just buying below and selling above the value that I am not clear with.

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  #5 (permalink)
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Once you've got a framework in which to approach your trading, then it really comes down to personal preference as to what actually triggers a trade. The entry is just one very small aspect of trading.

As an example, lets say your profile analysis has resulted in your belief that the market is currently in a multi-day balance. Yesterday the market traded down to the mcvpoc and closed in the lower portion of the balance area. A possible plan for the day would be to see if the market opens and continues down to the lower end of balance and find buyers, or perhaps breaks out lower.

If you're a price action trader your plan could be something like this:
- When market opens wait to see if yesterday's down move continues. Do not trade at the mcvpoc because I may get chopped up
- If the market reaches the lower end of balance, wait for a bottoming formation in the price action, eg: higher low/high combination
- If the market breaks out of the bottom of the balance area, wait to see if there is acceptance below. If there is acceptance, get short on a retrace

The above is just a basic example of how you would first determine the market state using profile analysis, then you would use price action to execute. You could do the same thing with any indicators or orderflow tools you choose. Or you could even enter based off of the profile (eg: get short off an lvn pullback). The actual choice of what enters you into the market is not important. What is important is understanding what the market is trying to do.

For me personally I trade mostly off of prior day/s profiles. I don't care very much what happens intra-day other than where the market is showing acceptance. When the market trades to an area i've defined pre-market, I look at the orderflow and price action in that area (along with if the market is showing acceptance), which triggers me into the trade.

So basically, profile analysis tells me WHERE to trade. Then I use several other techniques to tell me WHEN to enter.

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  #6 (permalink)
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Thank you for explanation.

I've always approached markets in a different way. To me it's just about matching buyers and sellers together. Sometimes there is more buying, sometimes more selling. With speculation in the middle of all this. This is why it's hard for me to understand/trust bigger picture calls. Looking to buy or sell at a predetermined level simply goes against my intuition at the moment.

I would like to get more insight into trading with auction theory, but I guess it's another case of doing work on my own.

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  #7 (permalink)
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Could you please advise a resource for learning the basics?

Thanks

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isla View Post
Could you please advise a resource for learning the basics?

Thanks

Countless webinars on futures.io (formerly BMT) cover profile and auction theory.

Also this main thread:



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I try to take practical approach and this is why asked my original question. I understand that if you see everything through auction theory lenses all can be fit into it's framework (at least after the fact). If it is similar to price action principles in a way that it suggest positive expectancy outcomes, then in my view it's just gaming randomness and it's not for me.

Please correct me if I'm wrong. I'm only expressing my opinion not implying someone is incorrect.

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  #10 (permalink)
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I think you need to put market profile in the content of open outcry in the 80s.
"Other time frame participants" makes more sense if you view "current time frame participants" as the guy next to you in the pit.
Without a computer the time price opportunity stuff was a really clever way to build a dirty volume profile. Trading open outcry against a guy with a volume profile while I have nothing would have sucked.

Most the ideas lose their meaning though IMO in modern electronic markets.

I can see there being some value of using a volume profile as a filter though and then using something else for the forecast.

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