Trading with Market Profile
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To calculate value area, you count the number of total TPOs for that day and find 70% of that. So, there are 100 TPOs (letters) for that day, you would look for the 70 TPOs that are closest to the middle of the bell curve ... on a normal day. It doesn't always work out to perfect numbers, nor will there always be a bell curve.. just make fit the best you can.
The POC is the longest line within the value area, or the one closest to the middle if there is a tie.
There are 3 possible openings to the next day:
1. Open within previous day value and range
2. Open within previous day range, but outside of value
3. Open outside of previous day range and value.
To me, I look for a "normal" (trading range) day similar to the previous day when we have #1. Fade the upper, lower and POC lines until they are broken .. then look to fade the next level of resistance. Any prices outside of the value area will likely be the highs or lows of the day.
For #2, look similar to the #1 method but it will often be displaced where only the previous day upper + poc or lower + poc are involved. One can project the current day's range by measuring the previous day range to the suspected current day high or low.
For #3, this is where most trend days occur. Basically throw out the poc and value areas, as they will likely not come in play. The value areas will instead serve as resistance to the trend and if prices hold, should not break through the previous value zone. What happens here is we have a full breakaway gap that doesn't get filled and is a precursor for a likely trend move. If we have a "normal" day here without violation of the previous day value area, it also bodes well for the new trend move ... as it shows acceptance and willingness to trade at the new levels. A quick rejection of the new gap and previous value area is basically LBR's "Ooops" trade.
For what it's worth, I don't know where the statistic of the next day touching the previous day's POC 90% of the time came from. I've found it to be more around 60% overall, with a higher percentage if we get a #1 type open.
[/B]To calculate value area, you count the number of total TPOs for that day and find 70% of that. So, there are 100 TPOs (letters) for that day, you would look for the 70 TPOs that are closest to the middle of the bell curve ... on a normal day. It doesn't always work out to perfect numbers, nor will there always be a bell curve.. just make fit the best you can.
The POC is the longest line within the value area, or the one closest to the middle if there is a tie.
There are 3 possible openings to the next day:
1. Open within previous day value and range
2. Open within previous day range, but outside of value
3. Open outside of previous day range and value.
To me, I look for a "normal" (trading range) day similar to the previous day when we have #1. Fade the upper, lower and POC lines until they are broken .. then look to fade the next level of resistance. Any prices outside of the value area will likely be the highs or lows of the day.
For #2, look similar to the #1 method but it will often be displaced where only the previous day upper + poc or lower + poc are involved. One can project the current day's range by measuring the previous day range to the suspected current day high or low.
For #3, this is where most trend days occur. Basically throw out the poc and value areas, as they will likely not come in play. The value areas will instead serve as resistance to the trend and if prices hold, should not break through the previous value zone. What happens here is we have a full breakaway gap that doesn't get filled and is a precursor for a likely trend move. If we have a "normal" day here without violation of the previous day value area, it also bodes well for the new trend move ... as it shows acceptance and willingness to trade at the new levels. A quick rejection of the new gap and previous value area is basically LBR's "Ooops" trade.
For what it's worth, I don't know where the statistic of the next day touching the previous day's POC 90% of the time came from. I've found it to be more around 60% overall, with a higher percentage if we get a #1 type open.[/B]
Thank you for the complete explanation.
When I count the TPO's (that is ALL the letters in the profile even the single line rows with just an A in them), I should probably multiply by 70% and "DIVIDE BY 2" to get the top(UVA) of the POC and the bottom(LVA) of the POC...Right?
I assuming that when I get the answer to this equation :
Total TPO's *70%/2
I then count the next line up from the POC from left to right advancing up the rows until I reach the number...then if I am more than half way through the line I use that line as the UVA....? right? opposite for LVA...right?
I find the scenarios very helpful in my understanding and you hit the nail on the head in answering my post and I thank you. I have a few more questions if I may?
In scenario #1. Let's say that the day opens gap down 2 points...but happens to be in the prev days value area which I am assuming is the LVA-POC-UVA range. So this confirms scenario 1? Assuming this is correct, I simply look at the previous days calculations and fade those lines, as obviously I do not have today's lines built yet as the day is just beginning.
Soooo, if the price rises up at the open towards yesterdays POC, I could enter in a sell limit order at the POC price and just wait. I am right or wrong....just pick my direction and trade the price. Would I use the UVA as my stop or just reverse with a tight stop of a 2 tick break above POC? (I understand my target would be LVA)
Do you evaluate how wide the LVA-POC-UVA range is? What if only 1.5 points range between POC and UVA...and POC and LVA? Do you have any rules you use there?
I think I get scenario 2. I like the range projection idea.
Do you trade scenario 3 by honoring s/r lines and trusting that they will hold and trading when price holds? How could we get a breakaway gap that did not fill ..if it actually reached resistance at UVA or LVA. This would mean that the previous day closed outside of its value area I guess. Anyways would you just not trade that day...or would you try and fade if the price touched a value area?
Michael B.
P.S. Sorry to be such a simpleton...I just like to tighten down every nut and bolt.
The POC is the longest line within the value area, or the one closest to the middle if there is a tie.
There are 3 possible openings to the next day:
1. Open within previous day value and range
2. Open within previous day range, but outside of value
3. Open outside of previous day range and value.
To me, I look for a "normal" (trading range) day similar to the previous day when we have #1. Fade the upper, lower and POC lines until they are broken .. then look to fade the next level of resistance. Any prices outside of the value area will likely be the highs or lows of the day.
For #2, look similar to the #1 method but it will often be displaced where only the previous day upper + poc or lower + poc are involved. One can project the current day's range by measuring the previous day range to the suspected current day high or low.
For #3, this is where most trend days occur. Basically throw out the poc and value areas, as they will likely not come in play. The value areas will instead serve as resistance to the trend and if prices hold, should not break through the previous value zone. What happens here is we have a full breakaway gap that doesn't get filled and is a precursor for a likely trend move. If we have a "normal" day here without violation of the previous day value area, it also bodes well for the new trend move ... as it shows acceptance and willingness to trade at the new levels. A quick rejection of the new gap and previous value area is basically LBR's "Ooops" trade.
For what it's worth, I don't know where the statistic of the next day touching the previous day's POC 90% of the time came from. I've found it to be more around 60% overall, with a higher percentage if we get a #1 type open.[/B]
Thank you for the complete explanation.
When I count the TPO's (that is ALL the letters in the profile even the single line rows with just an A in them), I should probably multiply by 70% and "DIVIDE BY 2" to get the top(UVA) of the POC and the bottom(LVA) of the POC...Right?
I assuming that when I get the answer to this equation :
Total TPO's *70%/2
I then count the next line up from the POC from left to right advancing up the rows until I reach the number...then if I am more than half way through the line I use that line as the UVA....? right? opposite for LVA...right?
I find the scenarios very helpful in my understanding and you hit the nail on the head in answering my post and I thank you. I have a few more questions if I may?
In scenario #1. Let's say that the day opens gap down 2 points...but happens to be in the prev days value area which I am assuming is the LVA-POC-UVA range. So this confirms scenario 1? Assuming this is correct, I simply look at the previous days calculations and fade those lines, as obviously I do not have today's lines built yet as the day is just beginning.
Soooo, if the price rises up at the open towards yesterdays POC, I could enter in a sell limit order at the POC price and just wait. I am right or wrong....just pick my direction and trade the price. Would I use the UVA as my stop or just reverse with a tight stop of a 2 tick break above POC? (I understand my target would be LVA)
Do you evaluate how wide the LVA-POC-UVA range is? What if only 1.5 points range between POC and UVA...and POC and LVA? Do you have any rules you use there?
I think I get scenario 2. I like the range projection idea.
Do you trade scenario 3 by honoring s/r lines and trusting that they will hold and trading when price holds? How could we get a breakaway gap that did not fill ..if it actually reached resistance at UVA or LVA. This would mean that the previous day closed outside of its value area I guess. Anyways would you just not trade that day...or would you try and fade if the price touched a value area?
Michael B.
P.S. Sorry to be such a simpleton...I just like to tighten down every nut and bolt.
Bone
If you want a complete answer to that question,
http://www.cisco-futures.com/
In the left hand column under the flag, read the "What's New" section.
The "Overlay Demand Curve" should be of interest to you.
Good Luck
If you want a complete answer to that question,
http://www.cisco-futures.com/
In the left hand column under the flag, read the "What's New" section.
The "Overlay Demand Curve" should be of interest to you.
Good Luck
Maybe I'm doing it wrong, but I just add up the rows nearest the middle and spread out until I reach roughly my 70% target number. The POC is somewhere within this value area and should be the longest line and normally in the center, but not necessarily. If there is a tie, I personally use the one closest to the dead center of the value area. Some people may use all the lines in the value area that are "tied" and look at all of them as POCs.
One thing you will notice as important are "single letter" prices where it only traded at that area for a single TPO frame and then moved out quickly. This is probably commonly seen as a "rejection" of price , or on say a 30 minute chart.. you may see it as a long candle pattern. Normally these will push trading in the other direction with considerable strength and you can safely assume it to be one of the extremes of the day. From there, you can project an estimate based on the previous day's range.
Breakaway gaps just means it doesn't fill that trading day. We had a breakaway gap on Tuesday, which actually got filled today. The type 3 is merely just a flag that there is a big imbalance and a potential trend situation may be occuring. The market works in funny ways, always striving to reach prices where there most volume will be traded. It isn't smart enough to know exactly where, so it goes out and "tests" prices to see what will happen.. sort of like sticking your hand in boiling water. If it rejects the tested price, you can expect a big reaction in the other direction. If it accepts the price by trading and holding prices there, it is often a precursor to continued movement in that direction (beginning of a longer trend perhaps).
So to answer your question, I'd look for a trend sort of environment in type 3 .. which may or may not materialize. Type 1 and 2, I'd only look to fade between support and resistance levels.
Market Profile is just another tool that you can use to see what kind of day we are having and figure out balances and imbalances within the market. As I'm drawing the current day's profile, for instance... I can look for single print prices that show rejection and a possible extreme of the day. Therefore, I'd look for a bell curve "fat" middle and then an equal single print prices on the other side of the curve as the other extremes. By doing this, I won't be trying to buy breakouts of new highs and so forth. Now, if I'm seeing skinny lines through the whole day, it would tip off a trend day and I would want to be looking for new extremes. Using in conjuction with pivot points and this "is" the holy grail.