We seem to be having an enthusiastic bunch of readers who want to know more about Market Profile. I am all for enthusiasm and never the one to put down will.So without further ado, let’s add to the classroom these notes on the different day types.These are important for you to understand if you are a serious day trader.
The most basic day structure is the Normal Day. It is easy to follow and understand as most of the day activity is in theInitial Balance or the first 60 minutes of the day session. On a normal day the bell curve also develops within the range of the initial balance( IB) , and does not go much beyond the initial balance. There is often limited range extension and the market returns into the IB for the close.
Normal variation day.
This is the most common of the different day auctions we see in Market Profile. On this day we will see a range extension outside the Initial Balance and often the market continues it’s probe on the same side as the break aboveInitial Balance and goes to complete it by extending to 2 times the Initial Balance Range ( high to low) and in some cases even 3 times.
On a Normal Variation day the first 30 minutes are often spent above/below the previous day’s value area and price seems to suggest a rejection of that value. We also see value built higher/lower on such days and is a pointer for continuation in the coming sessions.
In this day we find the the Initial balance is slightly smaller than a Normal day or a Normal Variation day. Price makes a move away from this initial balance early in the session but is not successful in creating a good range extension. It then comes back in the IB and travels through the IB and makes an attempt at a range extension on the other side of the IB.
Accordingly based on the second attempt of the range extension we have 2 types of Neutral Days
a) Neutral Center : In this type of day the second attempt of the range extension is also not successful like the first one and the market comes back into the IB and closes near the day center or midpoint or even Vwap or Dpoc. On such days we consider both the buyers and sellers as equal in strength and the close in the middle as a fair close.
b) Neutral Extreme : In this type of day the second attempt of the range extension is successful and the market finishes the day at one extreme which is often the day’s highs or lows as the case may be . In this day type either the buyer or the seller is considered more stronger than the other and gives us a very good context to watch for continuation.
Non trend day
This is characterized by a narrow range day with a fat profile. There seems to be random rotation with little price movement on either side of the profile, thus developing a short and fat profile.
These days can occur prior to important announcements, long weekends or holidays, or at market exhaustion points. Most traders will simply complain that the market is choppy and untradable on these days.
It is when the market is making a narrow range that a large range, and possibly trend day, will occur in the next day or two.
A trend day will usually begin with a small initial balance, However, early in the day structure range extension occurs. This range extension does not allow a value area to develop in theinitial balance, and the range extension continues throughout the day. These days are seen as having Higher Highs and Higher Lows ( OR LH/ LL) in every 30 minute period .
There are often periods of single prints on the profile. Most important, there is very little rotation from time period to time period. In other words, each half-hour segment drive prices further in the direction of the trend.
Sometimes one of the time segments will have a bit of rotation in the opposite direction, but price usually will resume the trend. In such cases we keep an eye for a pull back high or a pull back low to develop which is the afternoon adjustment of inventory.The range of a trend day is wide and the profile absent, rotation is thin. Obviously the open will occur at one end of the trend day, and the close will be near the opposite end.
Double distribution trend day
A variation on the trend day is the double distribution trend day. This day starts off much like a trend day, however there begins to be rotation with a bell curve beginning to develop during much of the day. It appears that more of anormal variation day will result.
But then new information enters the market and range extension occurs and drives prices to a new area. At some point the move is shut off, usually overshooting, and then another bell curve begins to develop. The resulting profile will have two areas of price rotation, which are usually separated by an area of single prints.
These days can often occur on surprise announce or event occurs. The market goes from balance, to imbalance as the news drives the market to a new level, and then back to some sort of balance as the news is digested.
So which day did we see today???