Market Profile -- who needs it?

I'm not surprised that many of the previous posters use a simplified (but nonetheless very effective I'm sure) approach to MP, using the S/R as guidelines. But my main point of contention was that there are few adherents of MP who can actually explain the philosophy/application of the technique in a way that is non nebulous and actually helpful.

I was wondering if any of the practitioners could attempt that?
I could give it a shot:

Basic Definition
i) Market Profile is a tool based on the inter relationship between Price, Time spent @ price and Volume @ price. Market Profile assumes that the trader wants to differentiate between trending and consolidating market behavior to either fade price or go with it.

ii) To know whether the market is likely to trend or is likely to consolidate, the trader needs a reference point to compare current price to. This reference point is known as the 'Value Area'. This is the Price area in which the market facilitates ~68% of trade/volume. For most of the analysis, the prior session's value area is used.

(iii) Other key metrics used are the first hour of trading, known as the 'Initial Balance', the mean price, or the Point of Control or 'POC'.

Philosophy behind the Method
Since the market trends only ~20% of the time, the majority of MP trades are counter trend in nature where the trader seeks to trade outside 'Value' with the goal of a return to 'Value'. Hence, 80% of the time, MP traders are buying low/selling high and vice versa. On the 20% days where there is a break above/below value coupled with range extension, the trader can then seek to buy/sell pullbacks in the direction of the breakout.

Strategy
The statistical facts/philosophy above have led MP traders to develop strategies to determine the bias of the market, whether it is likely to trend or consolidate. Some key ones seem to involve the analysis of (in chronological order)

A. The prior session's market profile/price/volume distribution. This reveals the prior session's Value Area, Unfair Prices and the general shape of the distribution (normal, trend day, double distribution, non trend day, neutral day etc)

A. The Open Price relative to the prior session's Value Area: this determines a positive or negative bias.

B. The Initial Balance, or first hour of trading to see if it leads to a return to the prior session's Value Area or the beginning of a new trend via a break away from the prior session's Value Area.

C. Unfair Prices created in the current session which tend to create tails or support/resistance which may or may not coincide with the prior session's unfair prices/support/resistance.

Application
Using the above, the MP trader will seek to buy support and sell resistance depending on what unfolds. For ex, if the prior session was a trending day, the following setup can be used:

"In an up trending market, when the current session opens below the previous days lower VA and above the DBY’s upper VA enter a long trade at the DBY’s upper VA and again at the DBY’s HVL placing a stop for both trades x points below the DBY’s lower VA" This is an example of buying support within the context of MP.

Conclusion
This above doesn't even skim the surface of what's possible. But I think it gets my point across that it is possible to get the gist of the approach if it is properly explained, in plain english and without resorting to vague concepts. I'm sure it takes time, but there has got to be a better way to cut down the learning curve by teaching/learning MP with the right framework.

Back to You
Can any of the fans of MP build upon the above, to cut through the clutter/noise? I've seen some of the other threads here on ET on MP but I'm pretty wary of anyone paper trading these concepts. Paper trading just encourages the 'oh I would have done this and that' mindset which is easily done with a method as open as MP. Any real traders out there with real concepts/trades to share?

P.S: It's obvious that I believe that MP has great value, so all my respect to those who actually use it in real time with real money.
 
Quote from Maverick1:

I'm not surprised that many of the previous posters use a simplified (but nonetheless very effective I'm sure) approach to MP, using the S/R as guidelines. But my main point of contention was that there are few adherents of MP who can actually explain the philosophy/application of the technique in a way that is non nebulous and actually helpful.

I was wondering if any of the practitioners could attempt that?
I could give it a shot:

Basic Definition
i) Market Profile is a tool based on the inter relationship between Price, Time spent @ price and Volume @ price. Market Profile assumes that the trader wants to differentiate between trending and consolidating market behavior to either fade price or go with it.

ii) To know whether the market is likely to trend or is likely to consolidate, the trader needs a reference point to compare current price to. This reference point is known as the 'Value Area'. This is the Price area in which the market facilitates ~68% of trade/volume. For most of the analysis, the prior session's value area is used.

(iii) Other key metrics used are the first hour of trading, known as the 'Initial Balance', the mean price, or the Point of Control or 'POC'.

Philosophy behind the Method
Since the market trends only ~20% of the time, the majority of MP trades are counter trend in nature where the trader seeks to trade outside 'Value' with the goal of a return to 'Value'. Hence, 80% of the time, MP traders are buying low/selling high and vice versa. On the 20% days where there is a break above/below value coupled with range extension, the trader can then seek to buy/sell pullbacks in the direction of the breakout.

Strategy
The statistical facts/philosophy above have led MP traders to develop strategies to determine the bias of the market, whether it is likely to trend or consolidate. Some key ones seem to involve the analysis of (in chronological order)

A. The prior session's market profile/price/volume distribution. This reveals the prior session's Value Area, Unfair Prices and the general shape of the distribution (normal, trend day, double distribution, non trend day, neutral day etc)

A. The Open Price relative to the prior session's Value Area: this determines a positive or negative bias.

B. The Initial Balance, or first hour of trading to see if it leads to a return to the prior session's Value Area or the beginning of a new trend via a break away from the prior session's Value Area.

C. Unfair Prices created in the current session which tend to create tails or support/resistance which may or may not coincide with the prior session's unfair prices/support/resistance.

Application
Using the above, the MP trader will seek to buy support and sell resistance depending on what unfolds. For ex, if the prior session was a trending day, the following setup can be used:

"In an up trending market, when the current session opens below the previous days lower VA and above the DBY’s upper VA enter a long trade at the DBY’s upper VA and again at the DBY’s HVL placing a stop for both trades x points below the DBY’s lower VA" This is an example of buying support within the context of MP.

Conclusion
This above doesn't even skim the surface of what's possible. But I think it gets my point across that it is possible to get the gist of the approach if it is properly explained, in plain english and without resorting to vague concepts. I'm sure it takes time, but there has got to be a better way to cut down the learning curve by teaching/learning MP with the right framework.

Back to You
Can any of the fans of MP build upon the above, to cut through the clutter/noise? I've seen some of the other threads here on ET on MP but I'm pretty wary of anyone paper trading these concepts. Paper trading just encourages the 'oh I would have done this and that' mindset which is easily done with a method as open as MP. Any real traders out there with real concepts/trades to share?

P.S: It's obvious that I believe that MP has great value, so all my respect to those who actually use it in real time with real money.
More...

Mav1'...

thanks for taking the time to distill it down to most of its bare essence...

cj...

:)
 
Markets transition from Balance (bracketing) to Imbalance (Trending) and repeat this cycle over and over again. The ES is currently in a 7-day trading range as seen in the composite profile in the chart attached below. The ES closed at 1374.75 so the key reference areas to the upside are the upper bracket limit and the low volume area between 1377.75-1380.25. To the downside, the key reference areas are the high volume node between 1373.25-1371.75, and the lower bracket limit and the low volume area between 1363.25-1361.75. There are key reference areas below the lower bracket limit from previous trading, but I will not get into those. So these are the levels that I will be monitoring with market internals as the ES approaches them. So what would be the trade plan for Monday?

If the ES trades between 1377.75-1380.25, I will monitor internals (volume, bid/ask, and Ticks) for weakness or strength. If internals are weak, such as volume and/or Tick divergences forming in that area, I will fade it and enter a short trade. My target would be the high volume node (or middle of the distribution) of the composite. I will then monitor price action and internals as the ES approaches my target. If the ES is showing strength, I will continue holding a portion of my position and will look for a test of the other extreme of the bracket, and possibly a breakout. Remember the market appears ready for a breakout. One of my favorite trades is to look for rejection at a bracket extreme and play for a test of the other extreme.

If the ES trades between 1377.75-1380.25 and price action and internals are strong, I would go with the market and play the breakout. I will then stop taking responsive trades and start buying pullbacks. The key point here is that trades initiated at the bracket limits offer excellent trade location and is a high probability trade. This is because this is where shorter and longer timeframe traders will enter the market (i.e., buying/selling away from value). The larger the trading range, the more swift the move at these extremes. The breakout offers a better opportunity over the responsive trade of course. Obviously this is discretionary trading. Similar trades can occur at the lower bracket limits.

My goal in general is to line up as many key reference areas, such as a bracket limit coupled with low volume as in the example above. I also look at daily profiles and try to line up the VAH, POC, and VAL with other key areas of the composite. But I always start with determining market condition from the composite, then identify key reference areas, then look at market structure from the daily profiles, and then develop a trade plan prior to the market open. I usually don't know what the market will do as it approaches a key reference area until it trades there and I monitor price action and market internals. Trading the VAH, POC, and VAL of daily profiles mechanically does not lead to profitable trading. It is 50/50 at best. Understanding market context is critical. And right now, we're in a mature balance in the intermediate timeframe and ready for a breakout. Prior to the market open, I'll check the Globex action to see if the market will be opening within value or not, etc...

Anyway, I hope this is helpful to some.
 
Quote from HispaTrader:

..... snip...

And right now, we're in a mature balance in the intermediate timeframe and ready for a breakout. Prior to the market open, I'll check the Globex action to see if the market will be opening within value or not, etc...

Anyway, I hope this is helpful to some.
More...

Thanks for taking the time for blow by blow color commentary...

cj...

:)
 
ditto on the nice MP summary by Maverick.

I use MP, MD, and T&S and do not use indicators at all, although I'm not a MP purist by any stretch. MP can be very complicated (e.g. the cisco site) and I've tried to simplify it for myself as much as possible.

What works for me is this: try to recognize the day type as early as possible; monitor internals (TICK, ADD) and order flow (volume at bid/ask via MD) closely as price approaches key MP levels such as IB, VAH/L, and DVA/H/L, TPO ledges and single TPO prints. I also keep a close on eye on the cash markets. I watch for responsive and initiative buying/selling and try to go with the flow. I also use a volume filter on order flow (MD and T&S), I have found that fading retail works nicely.

The above paragraph is my basic strategy, of which I have posted previously on ET, but not all in one post.

I also listen to a squawk box to hear what paper is doing on the floor of the big contract (I trade ES), however, I sometimes listen too much to the big contract and end up getting out too early or not entering when I should because I don't really know the true intention of the paper. I will probably stop listening to the floor as it has not improved my trading, it just makes me second guess myself more.
 
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