Random Musings on Market Profile

Last week a few tweets of mine on Twitter at @Am_ Shai created some interesting discussions and a chain of email conversations, so I thought I’ll blog on some of the points I raised and responded to and am open to your feedback and reactions on the same.


But first a clarification and a bit of background- I trade my belief system and have been fairly public on my views of the market in all time frames especially the shortest one. I do this blog up every day on Market Profile and my colleague RM helps to fill up information on OpenInterest and Holdings of participants at the end of the session which along with the MarketProfile graph helps us to understand the end of the day situation better. Also, I express my views on twitter as also am available with charts at our private Omnovia account where we discuss and trade setups whilst analyzing the information realtime. I am doing all 3 of the above Live in the Public eye for the sixth year now and am still passionate about it and don’t like to be away from the screens for even 30 minutes at a stretch.


My belief is in Market Profile though have differed from TPO only based traders from 2006 and use Volume analysis including vwap and OrderFlow from 2008, so would like to be categorized as an auction market theory based trader and not just a Market Profiler. So the hashtag #AMT on most of my tweets. I’m also not just a discretionary trader but consider myself to be a DRB – or a discretionary rules based trader. So unlike a system trader who will follow all the signals of his system and take credit for it’s success (and blame the system for it’s failures), I like to follow an Open system of rules which are subject to a context for it’s implementation. A discretionary trader operating without a set of rules is a train without a motorman and we know what the dangers can be. Being a DRB I’m neither a system trader nor a discretionary trader so I feel I have more control over the interpretation of the market data that way.


Now with this background, allow me to explain. You see all of Market Profile rather Auction Market Theory can be explained through behavioral parameters which we like to fondly call Setups in our Trading Room. These behavioral parameters are the same across all instruments and markets subject to the context being the same. An example of a behavioral pattern would be buying at a Buying tail in a profile and movement to the POC (which is the largest) above or the start of selling at a selling tail which targets the POC below. Again when Pete says trend days show little continuation the next day, it is a behavioral parameter and we look for trade opportunities around it. The same goes for a Neutral Extreme day which generally does not show a follow up the next day. Alos we have the 80% rule which would tell us that if the markets enter the VAH then 80% of the time it will go to VAL and vice -versa. This is a behavior of the auction. A similar behavior is a failed auction which after being completed – (I trade the FA based on only the IB or initial balance) – tends to go 2ATR’s away from the FA point and has been known to be back to the FA point in 5 sessions or lesser. This is again a  behavior. Like wise an auction in a trading range tends to find selling at the top of the range and buying at the bottom. This is again a behavioral parameter.At a POC of a composite price tends to stagnate and float around that POC. Again another example of behavior.


The truth is that these patterns are recurring and the market knows that and we who trade the market everyday know about it too. In fact, I keep saying that there are no failed traders only inexperienced ones and the Vtrender Trading Room is an effort to utilise our experience to help your decision making in the process moulding you into a better trader. I’ll touch a bit more on that later. But allow me to add here that just recognising the behavior of the auction is not enough. You have to know the context too. For me, the context in which a pattern shows up is more important than the pattern itself. This is the single biggest advantage of a DRB trader against a system trader  and even a data- mining algorithm, allowing us a lot more freedom in choosing our trades and especially the entries and the exits.So to give you an example an 80% rule trade will not work to VAL when the previous day was a trend day but will give you an over 95 % success rate when the context was a Normal day. Like wise a Failed Auction at the extremes of a trading range has no technical value as the range gives us that information anyway but put that failed auction in the middle of an auction and the new information is enough to give your account a big trading edge. When you put context and the behavior together, you arrive at an almost perfect destination trade which simply is our target and the exit for the setup you took. So If you have used the FA in the correct setup your initial target of the move is 2 ATR’s of the instrument with stops at the FA point and then you can also reverse the trade at the ATR objective with SL below the lows for a target of FA . Likewise, a smaller setup is an entry into the value area (VA)  and the profile gives us a target which is the other extreme of the VA. A Buy from a buying excess has a Stop loss below the Buying excess and the target is the POC. We also have what we call the IB setup with a fixed stop loss and a target. There are many more and I can elaborate at length. We know cos we trade them live. And we have been doing it live for many years with traders who understand the process and know the edge that Market Profile can provide.


I credit Pete for turning my trading around and for bringing me to an understanding of what Market Profile is. I also value Jim for the fantastic insight he provided through his books. But the market profile community has moved beyond the basic TPO structures years back and even I have been using vwaps and OrderFlow for almost 10 years now, both not considered to be an integral part of MarketProfile. I remember a conversation with a fellow trader who shunned my blog cos I used vwap and said I was not a Profiler. That trader now is using vwaps in all his charts. When Pete moved to Volume in 2012 I was the happiest, as it meant to me an acceptance of a view I held many years earlier. Apart from these 2 legends, there are many more torch bearers today in Market Profile and the worst thing a trader can do is discredit someone else’s work only cos he understands a part of the whole. Ignorance, in my opinion, is about rejecting something you know nothing about!


Back at Vtrender, I told my community that we will work all the setups we know. We don’t need to fix anything till it is broken. And when it breaks and stops working, we surely will have something better to do even use the broken setups to fix ourselves a counter trade. We live at the edge of this growing field constantly probing the market for behaviors and context and with an open mind to new concepts we intend to keep that edge.


Our work at Vtrender starts with the previous session. On the daily blog, you would find a profile along with the day type and the day range and day volumes along with the vwaps of the session. The day type is important to understand the continuity or the lack of it and different day types will give us different plans or hypos for the next session. Next, we understand from volume and range whether new money has come into the market or not. An expansion in range and volumes can confirm this. We also get a double confirmation from RM who posts the data for us every session. We try to see from this data who is holding positions- whether the institutions are heavily biased or not. Again as we know from Market Profile, not every session is connected to the next and there will be days when the movements will be random and data would show the same about larger time frame biding away their time in the market. We categorize this information as old business versus new business, again a key component of Market Profile. This activity resembles the LDB – or liquidity data band which Pete and Jim talk about in their books. This is our homework and is posted as free content on our blog every evening for you to plan your day ahead.


Besides this – I also host a live community at our Omnovia Trading Room which is a daily seminar on the markets. There are live charts to understand the context and entries/exits. We use OrderFlow for the edge and the context for the trade is provided by the information from Market Profile. Again to emphasize, Market profiles gives us the rules to trade or not, OrderFlow is our trigger to enter or not. This is a closed group and private and we intend to remain that way. We stick to the index and have followed all the regulations including the discharge of service tax etc. I do understand that there is a growing intolerance on paid services of the market. But a closed group allows us to regulate entries of individuals as also ensure a healthy environment where all traders can stick to the job at hand – which is to trade. I learnt all of my Market Profile in a trading room based in the US back in 2005- 2007 and hence feel that this is the proper way to understand this method of the market. I also paid USD 3000/- for my first Market Profile conference and have long understood that if you want to get some serious education on the markets, it ain’t free. There are lots of individuals who provide free content on their time. I’ve also seen some of these individuals disappear from the “learning” they provide for long periods of time, leaving your schooling interrupted.In our live seminars, we talk about the market and the developing profile with the Orderflow. I trade every day and have been Live with my Room every session except when on a break. I share my charts and views and the platform allows us to talk with each other real time.



It’s been a long post and hopefully, I have been able to articulate a few things I wanted to. Our beliefs come from the knowledge we own based on the experience gained seeing these setups work in the past. Would they work in the Future? About that, I don’t know. Market Profile is not about knowing the future. It’s just about a better understanding of the present. Once that understanding is clear the rest is simply trading.