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Auction Market Theory and Market Profile

  • #141
  • Edited 1:54pm Feb 6, 2011 1:38pm | Edited 1:54pm
read through the market profile handbook yesterday (available form the CME Group site - see previous post for link) and there are 2 statements that really stuck out. Quite obvious actually, but none the less they hit me.

1. Price auctions UP to STOP the BUYING
2. Price auctions DOWN to STOP the SELLING

those familiar with VSA should not be new to this concept, but still it struck me.

from the chart, we see responsive buying at the bottom of value area 1 and responsive selling at the top for most of the week of Jan 16 until initiative buying was found at the top of value to move price up and start establishing value area 2.

Value area 2 has been in development for 2 weeks, and if you merge the last 2 weeks of market structure (value area 2 & 3 combined), you basically have a "b" shape, with more activity in the last 2 weeks in the lower part of the structure. The fair value of EU during the last 2 weeks is roughly 1.3690 - established by having the most activity at that price in the combined structure, and then the value area is imbalanced lower with more volume in below the fair value than above.

So, over the last 2 weeks price was pushed down inside the merged value area and stayed in the value area. According to #2 above, price auctions down to stop the selling, and according to the book, the value area imbalance indicates where the long term activity is vs the short term activity. The long term activity will buy above the current fair price because higher value is expected and only trades small % inside the value area, while the short term activity will buy below fair value in order to get a better bargain in the short term. So according to market profile, this 'b' structure looks like absorption, implying higher prices to come. In fact if you look at the monthly structure for December 2010, it has a similar 'b' shape to it.

Needless to say EU may still get a shakeout and attempt to move into value area 1, but Friday was the 3rd time that was rejected. It will be interesting to see where EU opens in Asia today as we closed on Friday below last week's POC of 1.3620 but inside the 2-week value area. If EU opens in the value area and holds we should be looking for responsive longs, but if the value area doesn't hold we would be looking for initiative shorts.
Attached Image (click to enlarge)
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Change is the only constant
  • #142
  • Feb 6, 2011 1:43pm Feb 6, 2011 1:43pm
Quoting HiddenGap
I have been doing some study this weekend myself and you are correct.

Responsive buying happens at the low end of the value area and below and Initiative buying happens at the upper end and above. Of course the converse is true for Initiative selling and Responsive selling.
HG, what are your thoughts on initial balance for forex? The first hour of a session generally gives a good indication of how the day will unfold according to AMT. I've read in the market profile handbook that IB is less important with 24 hour markets, but that it can still serve as a guideline for the particular session, plus there are interesting multipliers (double IB in particular) that are seen as capping measures for a sessions's range. I've also read that a 2 hour IB for forex generally gives clearer indications given the 24hr nature of the market.
Change is the only constant
  • #143
  • Feb 6, 2011 2:04pm Feb 6, 2011 2:04pm
Here's a look at last week's profiles. We have two lower POCs in place, one more and I would call the trend down. I would note that since Wed. the VWAP is below the POC for each day.
Attached Image (click to enlarge)
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Without VSA, you're playing checkers while the Smart Money plays chess.
  • #144
  • Feb 6, 2011 2:10pm Feb 6, 2011 2:10pm
Quoting tgwhbb
HG, what are your thoughts on initial balance for forex? The first hour of a session generally gives a good indication of how the day will unfold according to AMT. I've read in the market profile handbook that IB is less important with 24 hour markets, but that it can still serve as a guideline for the particular session, plus there are interesting multipliers (double IB in particular) that are seen as capping measures for a sessions's range. I've also read that a 2 hour IB for forex generally gives clearer indications given the 24hr nature of the...
Becuase forex is 24 hours, it is really hard to use Initial Balance and Initial Balance extensions. I start my new day at 1700 (New York time) because that is the close used by a majority of the retail forex brokers. This makes the open pretty irrelevant because the open comes in the lowest volume/activity period of the day.

There has got to be a way to employ the IB, maybe we will be able to discover it together. I suppose one could do an "opening" range for the Asian open, the London open and then again for New York.
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #145
  • Feb 6, 2011 2:14pm Feb 6, 2011 2:14pm
Quoting HiddenGap
Becuase forex is 24 hours, it is really hard to use Initial Balance and Initial Balance extensions.
This is why I try to avoid daily highs/lows as well as other things that require you to define a day's open and close.

I do however feel that TPO POCs are still valid.

That being said, regarding Initial balance and VAH/VAL in forex we may want to consider weekly profiles.
  • #146
  • Feb 6, 2011 2:20pm Feb 6, 2011 2:20pm
Quoting HiddenGap
VWAP is below the POC for each day.
Interesting you should mention that, and tgwhbb also mentioned the market statistics indicator. I've brushed the dust off of an old indicator that shows VWAP and its standard deviations, I think it's the market statistics one.

There is an interesting thread here at traderslaboratory.com with videos on the topic.
  • #147
  • Feb 6, 2011 2:33pm Feb 6, 2011 2:33pm
Quoting frankkn
Interesting you should mention that, and tgwhbb also mentioned the market statistics indicator. I've brushed the dust off of an old indicator that shows VWAP and its standard deviations, I think it's the market statistics one...There is an interesting thread here at traderslaboratory.com with videos on the topic.
Here is a picture from Friday....
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Without VSA, you're playing checkers while the Smart Money plays chess.
  • #148
  • Feb 6, 2011 3:51pm Feb 6, 2011 3:51pm
Quoting HiddenGap
Here is a picture from Friday....
agree with you about the 3rd POC. Here's my concern though. There are 2 naked short term POCs up higher, thursday's and Fridays. If EU gets to Friday's POC, there was demand there, so it will be interesting to see how it reacts. If demand is still there, in theory price should make its way to the other end of value, which will bring it somewhere in the range of 3650, where we initially saw demand on thursday. If demand is still there, then its up to at at least 3800 to touch the other naked POC. Nice chain reaction, of course, if demand does not show up at any of those levels then indeed i believe we are in a downtrend. And there are 2 longer term naked POCs, one below at 3460ish and a cluster above around 3950ish.
Change is the only constant
  • #149
  • Feb 6, 2011 3:56pm Feb 6, 2011 3:56pm
testing the IB theory on forex, and wrote a quick and dirty indi for MT4 that plots lines for the IB and double IB at each session start (Tokyo, London, NY).

Still very early, but i've noticed the following in the last 2 weeks. If price makes it to the double IB low or high, it reverses there if hit early in the session. If price hits the double IB high or low late in the session, it will generally hang around there until the "new day" and which point it will reverse. "Early" is during tokyo or London session, late is US session.

Will keep working on this and post more as I get a better handle on it.

EDIT: just to clarify, when the double IB low or high is hit, a reversal occurs - always. Whether the follow through occurs in the same day or next depends on when the double IB is hit. Hit early and it reverses during the day. Hit late and it reverses the next day. "HIT" is obviously not exact, overshoots are possible.
Change is the only constant
  • #150
  • Feb 6, 2011 4:26pm Feb 6, 2011 4:26pm
More details on their use can be obtained from Stiedlmayer's book: Stiedlmayer On Markets or his other publications.

They are calculated by the following formulae:
OR = 60m High(ORH) - 60m Low(ORL)

use 0930 EST start for US Indices

A = OR/0.85
B = A – OR

Ext 1 upper: ORH + B
lower: ORL – B

Ext 2 upper: ORH + A
lower: ORL - A

The question would be if you simply use these calcs once at open, will they be "respected" throughout the rest of the sessions?
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #151
  • Feb 6, 2011 6:58pm Feb 6, 2011 6:58pm
EU opened within Friday's Value area, broke above the initial balance and held it. Double IB is now being tested. If it breaks above and holds, that is a sign of more upside for the rest of the asian session. I would then expect London to knock EU down to the IBL of the asian session at 3561 for a test during the session overlap.

Conversly it could fail to break and hold DIBH which should see price return to the IBL or DIBL. Interestingly enough, the DIBL matches Friday's lowest close at 3550.

EDIT: the AMT 80% rule states that if one 30 min bar dips into the value area and then the next bar opens in the value area then there is a 80% chance price will follow through to the value area low.. I wonder if that same rule can be asserted for initiative responses. So if price moves outside of the value area, let's say above, during 1 30 minute bar, and then the second 30 minute bar opens above the VAH, the we could assert an initiative response is likely 80% of the time.
Change is the only constant
  • #152
  • Feb 6, 2011 7:36pm Feb 6, 2011 7:36pm
Quoting tgwhbb
the AMT 80% rule states that if one 30 min bar dips into the value area and then the next bar opens in the value area then there is a 80% chance price will follow through to the value area low.. I wonder if that same rule can be asserted for initiative responses. So if price moves outside of the value area, let's say above, during 1 30 minute bar, and then the second 30 minute bar opens above the VAH, the we could assert an initiative response is likely 80% of the time.
We now have our first 30M open above the DIBH. Time to see if the assertion is valid. the DIBH is also the same as a high volume node from Friday, and the 30M and 1HR trigger number for VSA setups.
Attached Image
Change is the only constant
  • #153
  • Feb 6, 2011 8:20pm Feb 6, 2011 8:20pm
A bit too early to be trading for me (plus the Super Bowl is on people !!!!), but I was watching this beautiful set-up. Take note that this is the 6E not the Euro/USD spot.

As one Auction Market Theorist is found of saying, " You want to buy wholesale and sell retail".

This was a nice set up with so much going on. The first thing is the gap down on high volume that closed near its high. This is a sign of strength... I'm going to leave the VSA to the VSA thread.

Understanding the auction market tells us that as price is below the value area, we should see Responsive buyers enter to push price back into the value area unless they are overwhelmed by Initiative sellers who want to take the market down. It's still all about Supply and Demand.

Price was around the edge of the Friday's value area an moved out on no supply (no Initiative selling). At this same time we could see that we were at the lower developing value area low. The DVWAP moved above the DPOC giving a positive skew. We know that there is an 80% chance that if price moves back into the value area it will trade to the opposite end (the value area high). Our first obstacle is the Friday's VWAP (static white line) a.k.a. an HUP line.
Attached Image (click to enlarge)
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Without VSA, you're playing checkers while the Smart Money plays chess.
  • #154
  • Feb 6, 2011 8:27pm Feb 6, 2011 8:27pm
Quoting HiddenGap
A bit too early to be trading for me (plus the Super Bowl is on people !!!!), but I was watching this beautiful set-up. Take note that this is the 6E not the Euro/USD spot.

As one Auction Market Theorist is found of saying, " You want to buy wholesale and sell retail".
HG, did you write the DVAH/L/DPOCv indicator yourself? Been trying to figure out how to modify the market profile indy i have for Mt4 so that it shows DVAH/L/DPOC but haven't figured it out just yet and wondering if you could share your math?
Change is the only constant
  • #155
  • Feb 6, 2011 8:37pm Feb 6, 2011 8:37pm
Quoting tgwhbb
HG, did you write the DVAH/L/DPOCv indicator yourself? Been trying to figure out how to modify the market profile indy i have for Mt4 so that it shows DVAH/L/DPOC but haven't figured it out just yet and wondering if you could share your math?
No. In fact, I had to change from 30 min profile to a 5 min profile. Then I am able to hide it and just show the developing value lines. If I stayed with a 30 minute I could use global variables but the software doesn't store them so it would only show the last value.

**Edit** : plus I have spent the last week in The Trading Zone trading room and they use a 3 minute chart because it gives about 6 trades a day usually. I should say that I do not recommend them only because the trial is not free. It was free for me because I attended an infinity webinar and got a coupon code.
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #156
  • Feb 7, 2011 7:30am Feb 7, 2011 7:30am
Good morning!

looks like using IB/DIB can actually tell a tale of the day.

Starting with asia, a 10 pip IB was formed. narrow IB's are indicative of a trend type day. This quickly developped as the IBH was immediately tested, broke and held, opening the door for the DIBH. The DIBH was also immediately tested (more apparent on smaller TF) another sign of upwards continuation. The asia session then formeda higher POC.

then came london, immediately testing and rejecting the new asia value area high while forming its IB. When the value area high is rejected, price will normally follow through to the value area low. The london IBL was broken, opening up the DIBL. Price then was rejected at the DIBL. as mentioned in a previous post, if the DIBL is reached within the london session, generally price will revers to the DIBH during the same day. Time to see if that holds today. If it does, that means EU should reach 1.3666, which is also the range fill based on ATR14. If price gets there quickly enough, and stays there, there is a good chance of the POC forming there, meaning a higher POC than last Thursday and Friday is possible.

A lot of ifs...bare with me, just recording my thoughts at the moment while testing this AMT/IB theory in real time

UPDATE: 30 minutes left to the NY IB and IB is currently narrow at 17 pips. narrow IB means trend type day/session.
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Change is the only constant
  • #157
  • Feb 7, 2011 9:14am Feb 7, 2011 9:14am
Quoting tgwhbb
Good morning!
A lot of ifs...bare with me, just recording my thoughts at the moment while testing this AMT/IB theory in real time

UPDATE: 30 minutes left to the NY IB and IB is currently narrow at 17 pips. narrow IB means trend type day/session.
So the NY IB turned out to be 53 pips wide. Quite wide, and generally signals a range for the rest of the session, unless IBL or IBH are broken and sustained. IBL is now 3516, and we have a 30Min close 8 pips below. not sure yet when to expect a continuation or a retrace to the IBH...but the wide spread IB tells us range is the way to go for the rest of today. IF this bar closes below IBL however, we could expect continuation to DIBL, which is around 3463. And that level is a naked weekly POC! It would be a good place to end up today and interesting to watch reaction there
Change is the only constant
  • #158
  • Edited 11:30am Feb 7, 2011 11:11am | Edited 11:30am
looks like the wide range IB for the US session is playing out for now. on the chart - high vol test followed by NS like bar (VSA) right at the IBL. Then high vol narrow spread bar followed by upbar (reversal) again right at the IBL. Signal to go long, target the IBH. also notice how price crossed the DIBL form the London session, and tested it twice to the pip, additional confirmation for long. US IBH Target hit just before London close.

I would venture a guess now that if the london DIBL holds again we may see some initiative buying above the NY IBH with target of NY DIBH. Otherwise down to the NY IBL.

HG, can you post a chart of M5 around the same time period - my chart is GMT. I'm curious to see how the IB ranges compare to the developing VAH, VAL, and DPOCv.
Attached Image
Change is the only constant
  • #159
  • Feb 7, 2011 2:45pm Feb 7, 2011 2:45pm
interesting development today to support bulls. We've had initiative buying in asia and US session, and responsive selling/buying in london. This is the first time since last wednesday that we've had initiative buying. Plus today's initiative buying has been in Friday's secondary value area. Based on this tomorrow should be an up day IMO, even though today's POC is lower than the last 2 days. That said, we may just be getting a retrace back up before coming back down unless POC's start building higher.
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Change is the only constant
  • #160
  • Feb 7, 2011 3:03pm Feb 7, 2011 3:03pm
Haven't had any time today to check out charts, but glancing at the profile for today it looks like it could be a nontrend day which often precedes a trend change, even though we've had our third lower POC. Yep looks like responsive buying ... damn class in 7 minutes gotta go. Damn school and work
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