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Auction Market Theory and Market Profile
- #24,263
- Edited 3:08pm Feb 4, 2024 12:56pm | Edited 3:08pm
- Joined Jun 2022 | Status: Evolving | 236 Posts
Hello fellow Auction Market Theory traders, I hope you are all well!
Today I don't have a post-trade analysis/rundown but I have something just as important! We are going to be talking about the last two trading days on EURUSD and how they relate to AMT and the Market Profile. All quotes and educational material referenced in this post are from the book Mind Over Markets, 2nd Edition, By James F. Dalton. I will expand/relate on some topics and will not use the original pictures used in the book, due to copyright, instead I'll use the relevant pictures of the EURUSD market profile(s) last week.
To start lets refer to one of the original books on Market Profile and Auction Market Theory, Mind Over Markets by James F. Dalton. To explain what has happened on the last two trading days (Thursday 1st & Friday 2nd February 2024) on the currency pair EURUSD.
“Trend Day
Dynamics
There are two types of Trend days: the standard Trend day and the Double Distribution Trend day.“
Skipping to the next discussion on ‘Double-Distribution Trend Days’.
“Double-Distribution Trend Day
Dynamics
The second type of Trend day, the Double-Distribution Trend day, is relatively inactive during the first few hours of the trading session. Market participants possess a low level of conviction, resulting in a narrow base. Later in the session, a change in events causes the other timeframe to perceive price to be unfair at current price levels, enter the market aggressively, and substantially extend the range. This later entry by the other timeframe drives price to a new level, where a second balance region develops. The Double-Distribution Trend day does not possess the steady confidence of a typical Trend day and must stop and reassure itself after a substantial move.
Structural Characteristics
A very small initial balance is the first indication of a potential Double-Distribution Trend day. Again, the more narrow the base, the easier it is to overwhelm this area and auction quickly to a new level. This new (second) trading range generally holds throughout the day, often providing useful reference points and good trading opportunities for day traders."
"The single prints separating the two distributions in a Double-Distribution Trend day become an important reference point near the end of the day. If price auctions back into the single prints during the latter time periods, in effect making them double prints, something has changed, and the second distribution is no longer accepted as value.”
The two distributions represent two price zones that the market has accepted as value. The single prints in between the ranges are price levels the market finds unfair. Take a look at this individual auction (30 min TPO's) chart of the same EURUSD example to see this in even more detail:
These areas of excess are just as significant as excess that is present in a buying/selling tail at either extreme of a profile. Here is some educational material on the topic of excess and its importance from the same book. He talks clearly about excess and the meaning behind it, I will quote some of it below:
"Excess
To achieve its primary goal of trade facilitation, the market auctions lower to find buyers and higher to attract sellers." ... "the market must auction too high to know when prices are perceived to be above value and too low to know which prices are considered to be below value. The potential for market excess occurs any time price trends significantly out of balance, or away from value. Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value."
...
"Let’s take a moment to look at excess from another, more conceptual, perspective. Any time a given price level is rejected quickly by the market, excess is formed. The single prints separating the two areas of a Double Distribution Trend day are a variety of excess. Just like a tail, they represent prices perceived as away from value by the other timeframe." ... "The importance of any type of excess is that it represents an area that should serve as support or resistance to price in the future. As long as conditions have not changed markedly, the other timeframe participant that drove price so vehemently should react similarly at those same price levels. This is why a tail can be used to estimate range potential, for it is a reliable benchmark by which to gauge future activity."
In the recent examples on EURUSD, both Thursday & Friday, had weak lows at the bottom of both profiles. An incomplete or failed auction is now apparent at the lower extreme of the market profiles, as is evident by the double TPO wide lows. According to Auction Market Theory, this is the result of minimal (if any) other timeframe buyer activity. In other words, other timeframe sellers are winning or have more control.
The standard double-distribution trend day strategy is buy the low of the 2nd range and sell the top of the excess area of the 2nd range however, this is where a greater knowledge of the market profile and auction dynamics is needed to successfully employ an AMT based strategy.
Knowing what we know about the day type, its characteristics and crucially now, its vulnerabilities we can now create a adapted trading strategy.
Buying at the low in this situation would be dangerous, for the market may complete a successful auction through the ‘weak lows’. A short position however, would benefit from this event taking place. Thus entering a sell order at the top of the second distribution, within the excess, would create a very high quality trade setup (risk-reward speaking).
If price rallies back up through the excess, something has happened and the perception of value has once again shifted. In that case, all trades based upon the second distribution strategy should be exited. Profit target in this situation is down to the individual traders risk tolerance. Either exit on the second distribution's lows or, the more risky, other targets would be under the weak lows, expecting the market to complete the auction lower.
This would happen because the market has a duty to facilitate two-sided trade and using our analysis we have concluded that other timeframe buyers are not present at the lows currently, so the market must move lower to find these buyers and facilitate their trade!
This is a great prelude to another aspect of market profile that allows us to monitor the markets continuous auction process. In the same example as the last, Friday 2nd February, the EURUSD profile’s value area completely engulfed the previous day’s value (and the days before that!). According to AMT, this is a market that is facilitating more trade. If the opposite happened and the value area was smaller then the last, the market is facilitating less trade:
“Third, when the value area is contained entirely within the previous day’s value area, it is known as an inside day. The market is in balance and is not facilitating trade with either participant. Finally, an outside day occurs when a day’s value area overlaps the previous day’s value area on both extremes, and represents greater trade facilitation.”
If the market is facilitating more trade it is logical to conclude that the next most likely extreme to be broken would be that of the closer and weaker one.
All that aside, using the Initial Balance & Opening range will help us instantly get a gauge of the days activity, its state of balance and if price is still being accepted within the lower (second) distribution - thus creating value down there, when the market opens this week.
As always, every trade I will confirm via the analysis of order flow to add more propensity to the trade. If your new to the term Order Flow, take a look at this post on my thread.
That is all, as always, Trade Safe!
MM
Today I don't have a post-trade analysis/rundown but I have something just as important! We are going to be talking about the last two trading days on EURUSD and how they relate to AMT and the Market Profile. All quotes and educational material referenced in this post are from the book Mind Over Markets, 2nd Edition, By James F. Dalton. I will expand/relate on some topics and will not use the original pictures used in the book, due to copyright, instead I'll use the relevant pictures of the EURUSD market profile(s) last week.
To start lets refer to one of the original books on Market Profile and Auction Market Theory, Mind Over Markets by James F. Dalton. To explain what has happened on the last two trading days (Thursday 1st & Friday 2nd February 2024) on the currency pair EURUSD.
“Trend Day
Dynamics
There are two types of Trend days: the standard Trend day and the Double Distribution Trend day.“
Skipping to the next discussion on ‘Double-Distribution Trend Days’.
“Double-Distribution Trend Day
Dynamics
The second type of Trend day, the Double-Distribution Trend day, is relatively inactive during the first few hours of the trading session. Market participants possess a low level of conviction, resulting in a narrow base. Later in the session, a change in events causes the other timeframe to perceive price to be unfair at current price levels, enter the market aggressively, and substantially extend the range. This later entry by the other timeframe drives price to a new level, where a second balance region develops. The Double-Distribution Trend day does not possess the steady confidence of a typical Trend day and must stop and reassure itself after a substantial move.
Structural Characteristics
A very small initial balance is the first indication of a potential Double-Distribution Trend day. Again, the more narrow the base, the easier it is to overwhelm this area and auction quickly to a new level. This new (second) trading range generally holds throughout the day, often providing useful reference points and good trading opportunities for day traders."
The two distributions represent two price zones that the market has accepted as value. The single prints in between the ranges are price levels the market finds unfair. Take a look at this individual auction (30 min TPO's) chart of the same EURUSD example to see this in even more detail:
These areas of excess are just as significant as excess that is present in a buying/selling tail at either extreme of a profile. Here is some educational material on the topic of excess and its importance from the same book. He talks clearly about excess and the meaning behind it, I will quote some of it below:
"Excess
To achieve its primary goal of trade facilitation, the market auctions lower to find buyers and higher to attract sellers." ... "the market must auction too high to know when prices are perceived to be above value and too low to know which prices are considered to be below value. The potential for market excess occurs any time price trends significantly out of balance, or away from value. Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value."
...
"Let’s take a moment to look at excess from another, more conceptual, perspective. Any time a given price level is rejected quickly by the market, excess is formed. The single prints separating the two areas of a Double Distribution Trend day are a variety of excess. Just like a tail, they represent prices perceived as away from value by the other timeframe." ... "The importance of any type of excess is that it represents an area that should serve as support or resistance to price in the future. As long as conditions have not changed markedly, the other timeframe participant that drove price so vehemently should react similarly at those same price levels. This is why a tail can be used to estimate range potential, for it is a reliable benchmark by which to gauge future activity."
In the recent examples on EURUSD, both Thursday & Friday, had weak lows at the bottom of both profiles. An incomplete or failed auction is now apparent at the lower extreme of the market profiles, as is evident by the double TPO wide lows. According to Auction Market Theory, this is the result of minimal (if any) other timeframe buyer activity. In other words, other timeframe sellers are winning or have more control.
The standard double-distribution trend day strategy is buy the low of the 2nd range and sell the top of the excess area of the 2nd range however, this is where a greater knowledge of the market profile and auction dynamics is needed to successfully employ an AMT based strategy.
Knowing what we know about the day type, its characteristics and crucially now, its vulnerabilities we can now create a adapted trading strategy.
Buying at the low in this situation would be dangerous, for the market may complete a successful auction through the ‘weak lows’. A short position however, would benefit from this event taking place. Thus entering a sell order at the top of the second distribution, within the excess, would create a very high quality trade setup (risk-reward speaking).
If price rallies back up through the excess, something has happened and the perception of value has once again shifted. In that case, all trades based upon the second distribution strategy should be exited. Profit target in this situation is down to the individual traders risk tolerance. Either exit on the second distribution's lows or, the more risky, other targets would be under the weak lows, expecting the market to complete the auction lower.
This would happen because the market has a duty to facilitate two-sided trade and using our analysis we have concluded that other timeframe buyers are not present at the lows currently, so the market must move lower to find these buyers and facilitate their trade!
This is a great prelude to another aspect of market profile that allows us to monitor the markets continuous auction process. In the same example as the last, Friday 2nd February, the EURUSD profile’s value area completely engulfed the previous day’s value (and the days before that!). According to AMT, this is a market that is facilitating more trade. If the opposite happened and the value area was smaller then the last, the market is facilitating less trade:
“Third, when the value area is contained entirely within the previous day’s value area, it is known as an inside day. The market is in balance and is not facilitating trade with either participant. Finally, an outside day occurs when a day’s value area overlaps the previous day’s value area on both extremes, and represents greater trade facilitation.”
If the market is facilitating more trade it is logical to conclude that the next most likely extreme to be broken would be that of the closer and weaker one.
All that aside, using the Initial Balance & Opening range will help us instantly get a gauge of the days activity, its state of balance and if price is still being accepted within the lower (second) distribution - thus creating value down there, when the market opens this week.
As always, every trade I will confirm via the analysis of order flow to add more propensity to the trade. If your new to the term Order Flow, take a look at this post on my thread.
That is all, as always, Trade Safe!
MM
Seeking Fair Value
- #24,264
- Feb 4, 2024 1:05pm Feb 4, 2024 1:05pm
- Joined Jan 2018 | Status: Trader | 17,298 Posts
Hello fellow Auction Market Theory traders, I hope you are all well! Today I don't have a post-trade analysis/rundown but I have something just as important! We are going to be talking about the last two trading days on EURUSD and how they relate to AMT and the Market Profile. All quotes and educational material referenced in this post are from the book Mind Over Markets, 2nd Edition, By James F. Dalton. I will expand/relate on some topics and will not use the original pictures used in the book, due to copyright, instead I'll use the relevant pictures...
nice
- #24,268
- Edited 7:54am Feb 5, 2024 7:18am | Edited 7:54am
- Joined Jan 2018 | Status: Trader | 17,298 Posts
- #24,274
- Feb 5, 2024 10:01am Feb 5, 2024 10:01am
- Joined May 2010 | Status: Trader | 2,693 Posts
GBPUSD {image} {image}
- #24,275
- Feb 5, 2024 10:04am Feb 5, 2024 10:04am
- Joined Jan 2018 | Status: Trader | 17,298 Posts
{quote} Nice trade GU
Hello
best regards.
you are also doing well
- #24,279
- Feb 6, 2024 12:02am Feb 6, 2024 12:02am
- Joined Apr 2010 | Status: Today is my first trading day! | 9,452 Posts
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