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Auction Market Theory and Market Profile

  • #5,261
  • Edited 9:49am Jan 16, 2014 9:28am | Edited 9:49am
Quoting svengralla
{quote} Or use Bollinger Bands if that's what you want...
May I ask how does that apply to Auction Market Theory? or "Auction Market analysis"? or "Value"? Other than one price "variable", what does it tell you about the market? I'm not sure what bollinger bands have to do with trading "Value"?
Markets are not efficient, rather they are effective - Jones
  • #5,262
  • Edited 10:09am Jan 16, 2014 9:54am | Edited 10:09am
Quoting mzvega
{quote} May I ask how does that apply to Auction Market Theory? or "Auction Market analysis"? or "Value"? Other than one price "variable", what does it tell you about the market? I'm not sure what bollinger bands have to do with trading "Value"?
My comment strictly refers to calculating mean and SD.
As indicated by the quote ("collect the data of the duration (e.g. daily), calculate the mean of it and the SD's").
Nothing to do with AMT. Also notice the smiley.
  • #5,263
  • Jan 16, 2014 10:19am Jan 16, 2014 10:19am
Quoting svengralla
{quote} My comment strictly refers to calculating mean and SD. As indicated by the quote. Nothing to do with AMT.
I appreciate the clarification.............AMT requires recording, tracking & analyzing "Data". I don't want others to have the impression that by slapping an indicator on a chart as a substitute, for analyzing "real market generated" info is somehow more informative than the actual "data" itself. Using "price" as the only "Market" variable, no matter how you slice & dice, or code it into an indicator, can tell you the "condition" of the market. Thanks for the reply................
Markets are not efficient, rather they are effective - Jones
  • #5,264
  • Jan 16, 2014 1:47pm Jan 16, 2014 1:47pm
Its already about 1 year i am learning this theory and concept.. pewww =.="

what i miss the important part is

Mind over market page 325

thank you everyone
  • #5,265
  • Jan 16, 2014 3:26pm Jan 16, 2014 3:26pm
Quoting Nfp
Its already about 1 year i am learning this theory and concept.. pewww =.=" what i miss the important part is Mind over market page 325 thank you everyone
Not many people are willing to invest the time & effort. Its taken me several years. Its a learning process, you evolve as a trader, as your knowledge grows. You have to have an understanding of how each piece of market info, effects the market independently. Before you can use it to analyze the whole..............No many are up to the task.................Good Luck with your efforts
Markets are not efficient, rather they are effective - Jones
  • #5,266
  • Jan 16, 2014 3:41pm Jan 16, 2014 3:41pm
Quoting mzvega
{quote} Not many people are willing to invest the time & effort. Its taken me several years. Its a learning process, you evolve as a trader, as your knowledge grows. You have to have an understanding of how each piece of market info, effects the market independently. Before you can use it to analyze the whole..............No many are up to the task.................Good Luck with your efforts

thank you mzvega...i just want to share my first time learning this piece of market generate

i read Mind over market

1) first time i read...i dont understand what it all about..i dont know what it is..zero...nothing , then i leave this book again and go to other system
2) then i realize, they is something should i know about this book
3) i read again for 2nd time, still cannot grasp the idea behind it
4) i read again for third time
5) i read again
6) i read again
7) i read again
8) i begin to smile

i read over and over again about six time... 324page each time i read and begin to learn piece by piece..

i believe this tread is useless if we not read that book first..this tread only as a guideline to more deep application..

i read this tread..i dont know what it all about..zero zero and zero...until i read those book

its hard task..not easy...but as you said..it is learning process to become a trader..

thank myzega for great tread .. hope everyone can get the same benefit

knowledge is for everyone
  • #5,267
  • Edited 8:34pm Jan 16, 2014 8:22pm | Edited 8:34pm
Quoting mzvega
{quote} ....................that has nothing to do with auction market "analysis" Of course you can impose any mathematical calculation upon price and produce a result. I've done enough research on gaussian statistical analysis, to know that you need a gaussian data set. If your data set is not gaussian the analysis is invalid. And it’s already been proven that "gaussian distribution" does not adequately describe financial markets. Why would I spend any more time trying to pound a square peg in a round hole? I can impose an E=mc2 calculation to...

Has my answer something to do with auction market analysis, in order to solve a problem which occurs quite often? And since the thread is also about market profile, what is wrong about it?

Trading is all about probabilities. Everyone denying that is kind of foolish.


Let me answer part of that with something, that member Pipmeup wrote to me in another thread, as it is spot on:


I read somewhere that the market are ranging 80% of the time. I still don't understand if that means 8 minutes every 10 minutes or 8 months out of 10 months (makes a difference!). But for the sake of the explanation let's imagine that it implies the market is mean reverting MR 80% of the time. Well, let's even go as far as pretending that the market is MR 90% of the time. I feel generous today. Let's use Bayes' theorem and let's define

N the event "we are under a mean reverting market" and
S the event "We are at a price which corresponds to the 3 std dev".

We know
p(N) = 0.9 (we generously pretend it)
p(S|N) = 0.004, per definition of the 3rd SD under Normal assumption. (You can use another distribution that's won't change things too much.)

Using Bayes' theorem let's see what the probability p(N|S), the probability of being under Normal market given the fact that we are at the 3 sigma level.

p(N|S) = p(S|N) . p(N) / p(S)

We need the marginal probability of S. We can write it p(S) = p(S|N) + p(S|!N). Where !N denotes "we are NOT under a MR market"
p(S|!N) can be set to 50% for the FX because this market is symmetric and price is now free to go where ever it wants now we removed the MR assumption.


So we have p(N|S) = p(S|N) . p(N) / p(S) = 0.004 * 0.9 / (0.004 + 0.5) ~ 0.007143

My point is then that there is 99.28% chance that the assumption of mean reverting market simply doesn't hold any longer if we reach 3 sigma.


I should have said, that you have to calculate the mean and SD's of the last consolidation curve (which may be Gaussian, cauchy distribution, student-t-distribution etc.), but I thought it was self explanatory.


Another point:

You stated, that I postulated that the Gaussian distribution adequately describe financial markets. How can this be true, when in fact we see most of the time couchy distributions and I nowhere made this statement? Just curious......


To be clear: auction market theory and market profile are interesting stuff and I use some things out of them in my trading approach.

But since I am mainly a scalper and short-term swing trader those methods are simply not fast enough to be used by me.

Sometime ago you gave a list with the point to analyse and make conclusions from, which can be found here:

http://www.forexfactory.com/showthre...49#post6313549

I asked you then, that those are many topics to watch and if you are able to name 4-8 of the 40 (fourty!!!) topics which are most important. You told me, that all are important. So it is self-explanatory, that the auction market theory is only for the ones of us with much time on their hands :-)


Yes, you are right, and I stated it already over and over: markets can not be described by mathematical formulas all of the time. If we could, markets would stop working, since all traders were then at the same time short or long.

But statistical analysis can help us to bring the probability more to our favoured side.
  • #5,268
  • Jan 16, 2014 8:28pm Jan 16, 2014 8:28pm
Quoting svengralla
{quote} Or use Bollinger Bands if that's what you want...

For someone, who is keen to use a market profile indicator a somewhat strange remark, ain't it?

Heck, yes, why no Bollinger bands, when you calculate the mean by using a VWAP or VPO-based approach?

Since you felt qualified to make kind of sarcastic remark, I am keen to read your answer........
  • #5,269
  • Jan 16, 2014 8:38pm Jan 16, 2014 8:38pm
Quoting mzvega
{quote} May I ask how does that apply to Auction Market Theory? or "Auction Market analysis"? or "Value"? Other than one price "variable", what does it tell you about the market? I'm not sure what bollinger bands have to do with trading "Value"?

hint again:

when the VWAP, or for the sake of above argument, mean of the bollingers are 3 SD's below actual price, people may have decided with a high probability, that the value below is not anymore the value of today........
  • #5,270
  • Edited 2:20am Jan 17, 2014 1:34am | Edited 2:20am
Quoting infinitus
{quote} Heck, yes, why no Bollinger bands, when you calculate the mean by using a VWAP or VPO-based approach?
Under certain circumstances, trading the violation of a Bollinger Band is legitimate.
But is it a complete and consistent trading system? Likely not.
Also, it's legitimate to question trading the market profile.
JD himself is not a MP trader. There you go.

Myself, I won't participate in religious debates. Nor do I have a sufficient background.
However, I'm glad you started this discussion on statistic issues with a sound mathematical background.
It's very interesting. Please go on.

Have a nice day
  • #5,271
  • Jan 17, 2014 2:45am Jan 17, 2014 2:45am
Quoting svengralla
{quote} Under certain circumstances, trading the violation of a Bollinger Band is legitimate. But is it a complete and consistent trading system? Likely not. Also, it's legitimate to question trading the market profile. JD himself is not a MP trader. There you go. Myself, I won't participate in religious debates. Nor do I have a sufficient background. However, I'm glad you started this discussion on statistic issues with a sound mathematical background. It's very interesting. Please go...
Has never be, will never be.

As I stated in my first post, likelihood is, that it may even mean revert or partially mean revert, but that chance is very high, that it travels (after that) further into the initial direction.

Religious debates are most of the time, how should I say - academic.

Practice shows, that most of the time, comparable to medicine, interdisciplinary analysis/diagnostic works best.


Take Elliott Wave - using it alone, you will fail
Take naked S/R - without volume and momentum analysis, you simply will not get the best cake etc.


It is really really my firm bellief, that trading, in the end, equates to following the probabilities. Probabilities in risk, probabilities in money management, probabilities in price movements/direction.


If you like to read a bit about quant trading, probabilities, distribution curves etc. with many good articles, references, links, visit the following thread:

http://www.forexfactory.com/showthread.php?t=433728


Have a nice weekend and always green pips,


Markus
  • #5,272
  • Jan 17, 2014 2:55am Jan 17, 2014 2:55am
Quoting infinitus
{quote} If you like to read a bit about quant trading, probabilities, distribution curves etc.
Very interesting material. I will read it over the weekend. Thank you.
  • #5,273
  • Jan 17, 2014 4:09am Jan 17, 2014 4:09am
Quoting infinitus
{quote} For someone, who is keen to use a market profile indicator a somewhat strange remark, ain't it? Heck, yes, why no Bollinger bands, when you calculate the mean by using a VWAP or VPO-based approach? Since you felt qualified to make kind of sarcastic remark, I am keen to read your answer........
I'd be happy to indulge you. Someone who is keen to use the market profile obviously uses the “data” for auction market analysis. And what data is this? Let’s see, it’s called TPO’s. Not “price distributions”, not “tick volume at price”.

And what is a TPO? (Basic market profile fundamental) “Markets in profile” p 24 “30-minute intervals, each of which is assigned a letter. As the market passes through various price points, the letter designating the current time period appears beside those prices. Over time, the letters (known as time-price opportunities or TPOs) accumulate.” Again let me stress, nothing to do with tick volume, or distribution of price data.

Cisco futures
“A Meta-Profile replaces the volume of the Market Profile with tick data, generating TPOs (That-Price-Occured or Ticked). These TPOs are used as a surrogate for the volume of the CBOT Market Profile. Value is defined as those prices included within the central 70 percent of the TPOs. Meta-Profiles are generated in real time and are limited only to markets that produce tick data.”

It does not say “tick volume at price”. It said TPOs are used as a surrogate for the volume of the CBOT Market Profile, it did not say “tick volume” was.

"Markets in Profile" Page 24
“The value area mentioned previously, a fundamental element of the
Market profile, is defined as the range of prices that includes 70 percent of all TPOs in a profile”.

Again let me stress it says nothing about “tick volume”.
Why?, because anyone who’s "keen" on using MP indicator knows that you can’t determine buy volume from sell volume. That’s why TPO data is used in auction market analysis. TPO analysis solves that problem.

Cisco futures
“Profiles (Market and Meta) Identify Value
The illustration of the bikes at auction carries over to double sided auctions for stocks, bonds, futures, derivatives, etc. A Tick - TPO Profile or Market Profile (for CBOT futures) graphic similar to the bids for the bikes, combines price and time to track market development throughout a day. It locates value regions of price acceptance and rejection, and identifies the market's structure. The trader who uses profiles can learn who in the market is active at which prices (buyers or sellers) and those prices the market accepts and those rejected.”

Again let me stress “tick volume” & distribution of "prices" has nothing to do with TPO data used for auction market analysis.

TPO’s are used for auction market analysis. In markets absent of “cleared volume” uses the “volume of TPO’s”, not the "volume of ticks".

Auction market analysis has nothing to do with “price” distributions or “tick volume” distributions, or Bollinger bands, etc. All these are using “prices” or "tick volume" as the main variable & data set. Auction market analysis uses TPO’s as the variable. What does a “tick volume” profile have to do with TPO analysis?, Nothing. What does Bollinger bands have to do with the TPO data used for Auction market analysis? Nothing. What does a vwap have to do with the TPO data used for Auction market analysis?” Nothing............

All those reference points you pointed out in a previous post of mine, are found using the results generated and computed using TPO data. Not “price” data, or “tick volume “data. You need TPO data to produce Market Profile Reference points for auction Market analysis. To use distribution of “prices” or “tick volume” goes against Auction Market Principles & Theory itself………………….

Since all market profile literature always points this out in the first few pages. It should be common knowledge to all those “fascinated” with the Auction Market Theory…………………….

Again, what does any of that have to do with “Auction Market Theory or Analysis”? TPO data is NOT Price Data. As long as you’re analyzing “price” & “tick volume” and Auction Market Analysis analyzes & quantifies “TPO” data, it will always be “Apples” & “Oranges”…………………..
http://www.cisco-futures.com/marketp...analytics.html
Markets are not efficient, rather they are effective - Jones
  • #5,274
  • Edited 6:08am Jan 17, 2014 5:39am | Edited 6:08am
Quoting infinitus
{quote} hint again: when the VWAP, or for the sake of above argument, mean of the bollingers are 3 SD's below actual price, people may have decided with a high probability, that the value below is not anymore the value of today........
Here's a hint............Auction Market Theory doesn't analyze "prices" or "tick volume" it analyzes "Value" determined by TPO data.

Bollinger is a mean revision of "PRICE" data. Auction Market Theory doesn't calculate Prices. When compared they aren't even using data that is remotely similar. Yet somehow you think it has something to do with AMT analysis. Vwap (volume at price) assumes "cleared market volume" that distinguishes buy & sell volume. Tick volume does not. But AMT doesn't use volume at price in a market that consist of ticks. AMT doesn't use volume at price, so what does a vwap or a volume profile have to do with AMT Analysis?.............Nothing
Markets are not efficient, rather they are effective - Jones
  • #5,275
  • Jan 17, 2014 6:16am Jan 17, 2014 6:16am
Quoting mzvega
Remember, the basic premise of market profile, the foundation, is that the bell shaped profile forms a gaussian distribution and value can be found (defined) as the first standard deviation of that price-volume distribution.
Infinitus will speak up for himself, but if gaussian distribution is the common denominator,
why should it not be legitimate to compare mp with 'other' statistical approaches based on the same premise?
  • #5,276
  • Jan 17, 2014 6:28am Jan 17, 2014 6:28am
Quoting mzvega
{quote} I'd be happy to indulge you. Someone who is keen to use the market profile obviously uses the “data” for auction market analysis. And what data is this? Let’s see, it’s called TPO’s. Not “price distributions”, not “tick volume at price”. And what is a TPO? (Basic market profile fundamental) “Markets in profile” p 24 “30-minute intervals, each of which is assigned a letter. As the market passes through various price points, the letter designating the current time period appears beside those prices. Over time, the letters (known as time-price...
Wow, are you a bit religious about it now? Nice that you feel the need to lecture me........

Care to read carefully what I wrote. I clearly stated, that I use some parts of both auction market theory and market profile for my discretionary system. And since I am sure that you have seen some of my "profiles", you could have seen, that I do not use TPO's, but rather the calculation for VPO or tick-VPO (since we already have studies, I showed them, that tick-volume in Forex is a valid proxy for real volume).

The 30min intervall, used in market profile, is an absolute arbitrary value in TPO. The author could have even so chosen 10min or 5 min troughs to collect his data (would have certainly give better judgement). I think, and I mean what I say, he did choose 30 min, because there are to few letters in the alphabet to cover shorter time-troughs.

Since I do use VPO, even that is no hurdle for me, and by collecting the data, I take care, that the data troughs are not less than around 500 for statistical reasons.

You stated, that market profile uses TPO because one can not differentiate between buy and sell volume. Well, here one shortcoming is interchanged with another shortcoming. TPO does not see volume at all............ (in Forex markets, or as you say in markets without cleared volume)

Since you asked, what VWAP has to do with auction market theory (and answers the question with "nothing"), I have to say that you are right. But again you fail to acknowledge, that I use VPO. I even gave the hint, that I do not mainly use VWAP, but rather kind of VWAP, where the mean is derived by calculating the VPO's.

Has it ever come to your mind, that big institution players most of the time do not use an EMA, MA, TPO etc. on their charts, but simply do use VWAP on their charts to determine value?

I mean, as you already said: to each his own and never change a running team. If it is OK for you to work with at least 40 variables to come to a conclusion, then that is fine. But I suspect there is an easier way......

There is a distinction between "fascination" and "usability" of a system for me.

Since everyone of us has another background (education, profession etc.) and another personality, it seems out of psychological aspects the stupidest think of all to follow a trading system religiously. Read about some systems, take what you need, and build your own one.

You stated, that you have invested years of time, effort and certainly money to learn auction market theory, question is (judgement day): was it worth the effort? I do not need the answer. If the answer is a sounding yes, "I make daily money with this system, and are able to get all the money back I paid for learning (and that what I gave the market in-between)", then all is good. Because, that is right that reward I am reaping, too, with my "bastardized" version (so to say) of market profile.

If apples and oranges turn to yield, I take them......
  • #5,277
  • Jan 17, 2014 6:30am Jan 17, 2014 6:30am
Quote
Since I do use VPO

What's VPO, please?
  • #5,278
  • Jan 17, 2014 6:33am Jan 17, 2014 6:33am
Quoting mzvega
{quote} Here's a hint............Auction Market Theory doesn't analyze "prices" or "tick volume" it analyzes "Value" determined by TPO data. Bollinger is a mean revision of "PRICE" data. Auction Market Theory doesn't calculate Prices. When compared they aren't even using data that is remotely similar. Yet somehow you think it has something to do with AMT analysis. Vwap (volume at price) assumes "cleared market volume" that distinguishes buy & sell volume. Tick volume does not. But AMT doesn't use volume at price in a market that consist of ticks....

as stated in my prior post:

a) I use VPO
b) I said "when you use Bollinger, where the mean is the VWAP or VWAP derived through VPO analysis" (I even did not come up with Bollinger (even that you fail to acknowledge)
c)as said beforehand: there are studies that show, that tick-volume in Forex is a proxy for real volume
d) buy volume - volume on ask // sell volume - volume on bid? Isn't it?
e) if further questions: read all again.....
  • #5,279
  • Jan 17, 2014 6:38am Jan 17, 2014 6:38am
Quoting svengralla
{quote} What's VPO, please?

volume price opportunity

when you have an indicator, which can calculate both, then do it for some currency pairs or other assets:

you will find, that both are most of the time very similar
  • #5,280
  • Jan 17, 2014 6:47am Jan 17, 2014 6:47am
Quoting svengralla
{quote} Infinitus will speak up for himself, but if gaussian distribution is the common denominator, why should it not be legitimate to compare mp with 'other' statistical approaches based on the same premise?

Hehehe

I like that question

And since markets more or less seldom form the perfect Gaussian distribution (how many times do we see cauchy distributions, or distributions with two bells etc.), auction market theory seems to hold you most of the time out of the markets (even when there is money to be made).

Again: to each his own, and when it is OK to you to get a trading opportunity only every here and then, then all is OK.....
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