CBOT Market Profile

Nice find, Thank You.

Nice concise overview of MP here:
http://www.asx.com.au/research/chart...et_Profile.htm

This is a great one, my friends!

Contrary to popular opinion - the more I study MP, the more I'm seeing that Steidlmayer's writings provide a much better foundation than those of his students/colleagues. Looks like he's working on a new book, too!

Really good interview of Steidlmayer in this book:

Mastery - Interviews With 30 Remarkable People: Joan Evelyn Ames

The other interviews are really inspiring as well!

Anyone here ever play with merging profiles, at key points in sentiment change? One way to look at all this is, following the market from a swing low, as it auctions higher until there is no more demand, I would like to know the value created from that auction up. Knowing this information will give me a good idea of where price may pull back to, where we may see a return of demand.Essentially I am focusing on key points in sentiment change (swing highs and lows). Also focusing on areas of overlapping balance. Balance is essentially an overall agreement of price from both sides of the trade. The longer the market stays balanced, the bigger the move out of balance may be. Currently I mostly trade the Emini Nasdaq 100 futures, but looking to expand more into some forex pairs.

Hi TOG!

Wow. Great first post.

I'm new (but enthusiastic) with Market Logic and Market Profile but, it seems to me that your post points to some key points.

The overlap, shifting of balance and the weighing of sentiment...all key!

Most important IMO is your post shows that (in the spirit of Steidlmayer) you're using the auction theory and MP graphic to look into the actions of the market participants. Not just pattern trading using the graphic!

Please keep posting!

Nice presentation with this NT setup.

Where can I get that from?

In response to PM's:

Rolling window type MP Graphic "indicator" for NT
http://www.forexfactory.com/showpost...7&postcount=18

Attached is for MT4

Re-read Rabid's caveat above. I'm quite sure that trading with Market Logic/Market Profile will never be popular because no one will take the time to learn the theory and will only pattern-trade the graphic. Too bad for them - fine with me.

It's all about understanding supply and demand.

In a non-trend day the PoC and value area balance will naturally occur where the most trades occur, which is what both sides consider to be a fair price (or they wouldn't be buying and selling there, would they?). People will remember the price of their previous trades, so if they anticipate an increase in price why wouldn't they want to buy at a good price?

In a sharply trending day, the balance (or lack there-of) is obvious. For every buyer there must be a seller. Price rises because buyers have to raise their offer in order to attract sellers. If price isn't moving a lot (or moving up and down rather than directionally) it's because you've got both willing buyers and sellers, and people don't have to change their price much to attract a counterparty.

Otherwise there are certain concepts (like follow-thru and failure, initiative versus responsive traders) that define key areas of short term S&R. Today's high and low and yesterday's high and low being some big areas. Failure to sustain an advance past yesterday's high indicates a lack of initiatve traders. If nobody's buying, how can price rise any further? Naturally the price will then fall. That gives us patterns like "pin bars" that everyone here should already know. But really it's all just a root set of concepts being played out.

Basically this S&R is caused by traders who bought or sold earlier, have closed or are closing some of their lots and are waiting to see what the market does before entering again. Every time price pulls back and then rallies back to it's old high, you have a battle. Responsive traders closing positions and iniative traders opening new ones. He who wins determines whether price will range or trend.

Understanding that the current day high/low and yesterday's high/low will offer natural areas of support and resistance, you shouldn't be buying near yesterday (or today's) high. Instead you should buy at a better price, sell near the high, or atleast be prepared for a reversal by selling partial lots and moving the rest to break-even. That's also why when price closes very close to it's high it's telling us there's not a lot of responsive traders pushing price back (not as many people are closing their trades, the market is expecting continued action), thus it won't take nearly as much to ignite a directionalized day.

Outside of that, "the market profile" doesn't give us a clear "system" for determining whether price is going up or down. That's the failing many ppl will have when trying this for the first time, they expect way too much. Instead if gives us an area where price would be fair in an up move, fair in a down move, and clear clues whether price is failing to do as we've anticipated.

If you do not understand these things, you should not expect the market profile to make you a successful trader. You will need to continue studying until you do understand them, fancy graphics alone will not make you a better trader.

NICE POST.

I like the stuff about the long term sellers and buyers and how the day traders (short term buyers / sellers) are the middle men between the long term traders, so to speak.

I'm still trying to grasp the concepts of the initiative and responsive traders.

Even if I grasp all the concepts I still need to figure out how to apply it all, but what I like mostly is that it provides some insight as to why those bars do what they do where they do them and the market structure to some degree. This may sound dumb, but it gives me the 'human side' of what people are doing and not just looking at bars and numbers.

Let's say I want to buy a billion dollars in a currency. Well, who am I going to buy that from? Sellers, right? Well it's doubtful that anyone with that level of action will be selling at the exact time I want to buy, so I can either buy and raise my price to attract more sellers (aka running price against me, aka slippage) or I can go to shorter-term traders. These are people that buy and sell more frequently.

Since they sell more frequently, there's likely to be more sellers when I need them... so I go to these short term traders to buy, letting me trade larger lots more cheaply than if they hadn't existed. This is why short term traders provide "liquidity" even in an OTC market. These short term traders create a kind of floating pad that helps to buffer out the slippage of longer term higher-dollar trades. Many of these people do nothing but make a spread. Wait for some demand to emerge, buy at X, try to sell at X+1. Naturally that doesn't work in a large burst of supply, so being able to accurately judge demand is their edge.

Long term traders aim for directional movement to justify their risk of slippage. Shorter term traders don't, they look for much smaller intra-day movements and trade off intra-day levels.

Not difficult at all. Lets say I go long at a particular point, and I anticipate price will go to another level. When price hits that other level I sell off to close. That increases supply, it's a sell order in and of itself. I am responding to price reaching a level by closing some lots with a sell order, that's a responsive trade. An initiative, however, sees price breakout from a particular point and decides to buy into the increase. That person will then sell those lots when a particular event occurs, meaning they too will become responsive at some point.

To categorize a particular trader as "responsive" isn't really accurate, it's more of a particular set of trades is either responsive or initiative. Take for instance a pullback, price breaks out from a previous high... shoots up, then pulls back. A responsive trade would use the pullback to buy and sell at the nearest top, where-as an initiative trade would look for a breakout above the previous high.

Most initiative trades are long term trades. A buyer expects price will be up 2000 pips inside of 6 months, so they buy and hold for the duration and evaluate the trade then. These would be "fundamental" traders, and price is often ran by them as they tend to be fairly large trades placed at low leverage. Either for marginal returns or as a hedge.

Case in point would be someone who plans to build a factory in the US within a few years. They might see price as good right now, and start changing their currency into dollars to hedge against a possible increase in the cost of dollars (if all the inflation talk doesn't pan out, for instance). A transaction like that is not going to care if the dollar drops 500 pips in the next week as it merely offers a chance to buy more cheaply. The inverse would be true of US companies looking to build factories abroad.

Most of the successful traders on here, however, focus more on responsive trades. The entire J16 thread is nothing but patterns that work for responsive traders hopping into a longer TF trend. Responsive trades give you a short term high/low to hang your hat on for a stoploss, without that you can't use enough leverage to make it worth doing.

Application... it's impossible to focus on every little element of the market. People just can't, it's not humanly possible. Focus on a particular pattern or particular setup and use that. In "Mind Over Markets" the intro makes this pretty clear, the market profile concepts are best applied within a specific system, they themselves are not a system. Most traders don't try to trade every single thing, they just know 1 or 2 patterns and focus on those.

This is why I talk about yesterday's and today's highs and lows as often as I do. These are patterns I find particularly easy to see. Zoom out on an H1 chart, figure out the current market geometry, and watch for failures at highs and lows. In a down market, look for price to pullback and fail at a daily high, or consolidate and move sideways around one, and look to sell. Inverse in an up market. Or in a side-ways market look for failures around those spots and fade them.

Another pattern I like is where price forms a small range, contracts a little on one side and comes back to form a double bottom/top, but the 2nd has a "tail" to it. In the book "Mind Over Markets" they talk a lot about selling/buying tails. Use them. A tailed failure at a previous bottom means that more buyers, for instance, are entering the market and you're seeing more confidence in a particular direction. Increasing confidence is certainly tradeable.

Attached is an example of that. If you plot the previous day's low you'll notice that it fails to pull in new sellers, pulls in a sharp buyer response, all right at the battle line between traders (see my last msg). As it was clear that we were in an uptrend (indicating long term buyer confidence), it takes little to see that as a buying opportunity. But of course we should be aware that at that previous top there's going to be another battle, and we should watch for failure there too.

This is an example where the MP graphic would've failed miserably. You'd be trying to fade the PoC or something and getting blasted as a result. But taking a higher view of things, focusing not on the number or line of an indicator... but rather the underlying sentiment and story of supply and demand, keeps you out of those problems. This is also why you don't necessarily need volume (it won't hurt, but you don't need it) to trade this way, since the story plays out and tips it's hand in many different ways.

Go back thru your charts and see how often this pattern emerges. A long term trend, a shorter term retracement or small consolidation area (ie: double top or bottom), followed by a new burst of confidence in the trend marked by failure past yesterday's high/low. You'll see it all the time.

(Another)Great post, sir!

Here's something to add from Markets & Market Logic:

"Consider the other timframe trader's usual behavior. Other timeframe buying activity can be expected at prices below the previous day's value area. Buying price below value is a characteristic response of the other timeframe trader; this activity would be labeled responsive buying.
Other timeframe buying activity within or above the previous day's value area is not characteristic or even expected and is labeled initiative buying activity. Since it is not expected behavior by the other timeframe buyer, this type of activity provides significant information."

Here is a look at a more dynamic approach to viewing the market. I essentially want to focus on swing points, which are a rejection in the market. I like to watch how markets develop after there has been a shift in sentiment. Swing points are often the probes out of value where market then is rejected and returned to value.

Here we see a chart, the time frame and instrument are irrelevant. One has to remember markets are fractal in nature, you will see the same trends (high highs lower lows) on any time frame from 1 minute charts up to monthly charts.

Start.PNG

You can see by this chart, the trend came to an end and the market started to pull back. From the high created on this chart, I want to build a profile of the market, to track developing value. Knowing where the POC is a big help to me to determine where the market is accepting price.

Now lets look at how that chart looks in a profile graphic.

nq8.PNG

Now you may ask, what use is monitoring the developing profile from a swing high? Well lets zoom out a bit further and we find this particular market was in a nice uptrend.


start2.PNG



As you can see this market found a nice rally back, after it had been in a solid downtrend. With this information, I know up trends eventually end and there will a pullback. What I like to do is profile the uptrend and use that information to help me find where we may see supply withdraw. From market profile, we know demand is commonly withdrawn at upper value and supply at lower value.

Here is a picture of the market profiled from the low to the high.

nq9.PNG

Basically the point of all this is to monitor trends in the market, which allow you to see which side of the market is in control. Basically from those charts posted, we see market came off a low and eventually topped out. I isolated the uptrend, so I could monitor the pull back in context of the uptrend. You don't see it from the pics, but the market found a withdraw of supply and return of demand around the POC of that uptrend. The whole point of using highs and lows, is to eliminate the static time frame used. Starting and stopping the profiles at set times is limited. However, starting and stopping profiles at key points in sentiment change, can help you to better see the information. Look at it like this, the market moves off a low push up to make a high, then we have a pull back with a higher low and higher high. This clearly a market domninated by buyers, I would like to know where is the best spot for me to take advantage of a trade, by buying a pull back. This is where profiling these trends comes in. I know if the market pushing back and finds the buyers anywhere where within value, then the buyers are clearly stepping back in and defending the trend.

This all may be a rough presentation, but if anyone is interested, I will try to post more over time. One thing I like about all this, is you can do this on any time frame (from investors to scalpers) and you can trade the market the same for any of those time frames. Uptrends on the bigger time frames look the same on the smallest time frames. If I am buying a pull back in uptrend on daily charts, I apply the same rules as I would on a 5 second chart. This means proportioal sized stops and targets based on the time frame. Keep in mind, when I saw time frame, I mean waves in the market, not some time interval.

Nice posts and presentation, TOG!

I hope you will continue to post more. It's great to see how MP is applied by different people.

Can you scale down your pics some though?

Edit: Thanks! Much easier to see.

J. Peter Steidlmayer: In Step With The Markets

Hey Brent,

Ive got a genuine question about your opinion on Market profile. What does It actually show you of value? Im gaining a little interest In learning about it since I was directed to it by someone.

Leon