Market Profile Trading A to Z
Glossary assembled by Andrew Hall, iTradePod. If you have any feedback or would like to see a term added or amended please leave a comment below or contact us.
Accumulation Stage – Commercial (as opposed to Retail or Locals) money is buying in to [retail] weakness. Smart Money by no means enters the market buying in huge quantities since this action would lead to offer prices being auctioned upwards. Therefore, commercial/ Long Timeframe Market Participants have to accumulate stock over a period of time, buying when bouts of selling come onto the market. Having bought in the morning, they may have to depress the price by selling enough stock quickly to bring the price back down, but overall they are buying more than they are selling. This is accumulation and is the exact opposite to distribution.
Algorithmic Trading - A trading system that employs very advanced mathematical models for making fast transaction decisions in the financial markets. Algorithmic trading is most commonly used by large institutions such as Hedge Funds due to the large amount of shares they purchase daily. Complex algorithms allow these institutions to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs via Iceberg Orders.
Anomaly - abnormal profile structure, typically at a single price or level, recognised by its makeup in the Market Profile® graphic which is wanting the desired smooth symmetrical distribution.
Arbitrage - simultaneously buying in one market and selling in another for short-term gains.
Auction Completion - most commonly identified by ‘excess’ represented by a swift opposing auction in the opposite direction of the most recent auction high or low. Auction Completion is fractal and, thus, is observable on all time frames e.g. it might occur on the short timeframe whilst the auction structure on the longer timeframe has yet to complete.
Auction Failure - market participants test a key reference area extreme, such as the prior Low of Day (LoD) or a Virgin POC, but fail to auction prices in that direction. Subsequently the opposing market participants overwhelmingly auction prices in opposite direction with speed and determination. This typically results in an outside day candle.
We witness overlapping value area regions, auction failures, breakouts and the resulting outside days happening over and over again and is a reliable combination for generating consistent signals.
Auction Market Development - the purpose of an auction market process is to facilitate trade. It is directly influenced by Order Flow and the magnitude of Volume. Buyers and Sellers of all time frames continuously auction the price upwards and downwards evenly raising and lowering the bids and offers. The Market Profile® graphic is the derivative of this continuous auction process. The development has four (the 4th can be absent) stages:
- Vertical Price Activity; Imbalance; Rejection; Price Probing; Trend.
- Stopping price.
- Horizontal Price Activity, Balance, Acceptance, Trade Facilitation, Value.
- Retracement or continuation.
Read our Value Trading Basics article for further details and illustrations.
Auction Point - initial tick price that exceeds the price zone encompassed within the Initial Balance.
Abnormal Profile – the fundamental requirement for an ideal profile is a normal, equilibrium (balanced) distribution. A profile (i.e. an auction market) that is in equilibrium will produce a single wide distribution with a conspicuous POC at its head. On the other hand, an Abnormal Profile is the result of an unbalanced market that results in a day that may have more than two distributions where a TPO based POC is hard to define.
Asymmetric Setup - occurs when the profit potential of a trade manifold outweighs the structural based capital exposure.
b Shape Profile -occurs during bullish upward moves and develops into a shape similar to the letter b. The top half of the profile is long and thin, typically single prints representing low volume rejection. The lower half of the profile has a more wider distribution. This formation is typical of long liquidations signalling a pause as opposed to bearish sentiments caused by the entrance of Initiative Sellers reversing the market direction.
A b Shape Profile typically occurs as a result of a Long Liquidation where as a P Shape Profile usually occurs as a consequence of a Short Covering Rally.
Balance - commonly referred to as consolidation, wedge, flags, pennents, triangles, trading ranges, brackets, balance areas, congestion areas, and consolidation ranges etc which are all tantamount to the establishment of value and trade facilitation where rotational two-sided trade is taking place within a defined bracket. Balance is fractal, thus, it appears on charts in all timeframes from Tick charts to Monthly charts. These areas on the intra-day chart present fade-trade opportunity galore for the patient and informed day trader. How to trade Balance:
- Setup I: market participants extend price slightly beyond prior area of balance.
How to trade: we wait. In this our tools are order flow and time. We utilise our live Squawk Box feed to determine who is in control of the action on the S&P 500 Pit Floor, is it Commercial, Local or Retail paper. Is this confirmed on our Order Flow charts? We want to see how much time price spends beyond the balance area and whether there are signs of excess to determine whether we will fade this price probe or take a ‘go-with’ approach.
- Set up II: market participants extend the price probing beyond the balance area in an attempt at a breakout but is met by aggressive Responsive participants. In this case Initiative participants failed to overwhelm or even match the auction activity of the Responsive participants meaning two-sided trade facilitation beyond the balance area failed.
How to trade: monitor the order flow for delta divergence and a reversal in COT at the extended prices. Fade the price probe on order flow weakness with the opposite side of the balance being the target whereas structural stop loss is set in the region of the most recent swing pivot zone.
- Set up III: market participants probe prices beyond previously established value/balance zone. Price probing is met with the unexpected imbalanced response where aggressive Initiative participants overwhelm weak Responsive participants, initiating a trend. For now, the breakout has been successful since previous value has been rejected and prices beyond previously established value are being accepted.
How to trade: make a “go-with” approach in the direction of the trend timeframing auction with price acceptance in the direction of the breakout. A heads up is obtained when we identify demand and supply in the Order Flow for execution confirmation. We also have the edge of insider info fed to us via our Squawk Box partner service Traders Audio to discover whether ‘paper’ on the S&P Trading Pit Floor is supporting the breakout.
Balanced Days (including Non-trend days and Neutral days) - the Opening Balance range is short and prices stay contained and there is no range extention. These days tend to develop before the release of high impact market moving economic data or news announcements. Balanced days indicate a market where equilibrium/value region has been established, trade is being facilitated, two sided trade is taking place and/or market participants are awaiting more information.
Balance Area Maturity - the idea behind assessing the maturity of the balance area is so that the trader can recognise and be alert for the end of one phase of the dual auction market development and be prepared for the beginning of another. The 3 characteristics of a mature balance area are as follows:
- A prominent area of high volume
- A clean Bell shape of a Normal statistical distribution
- Value Area is centred
Black Swan Event - a typically random and unexpected occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. For example, the previously successful hedge fund Long Term Capital Management (LTCM) was driven into the ground as a result of the ripple effect caused by the Russian government's debt default; an event none of LTCM's computer models could have predicted and its subsequent effects.
Bracket - a very well defined trading price range containing market activity within its upper and lower limits such that it provides the disciplined trader with opportunity to timely deploy a Bracketed Buy Order or Bracketed Sell Order.
Bracketed Buy Order - allows the trader to exploit the high probability nature of trading a bracket, balance area, value area etc. A buy order on a long position that is complemented (bracketed) by a sell limit order above the buy long order's price and a sell stop order below the buy long order's price. These three component orders will all be set at a price determined by the trader at the time the order is entered. This type of order allows the trader to lock in profits with an upside movement and reduce the capital exposure of an unexpected downside loss. In some trading platforms, such as Ninja Trader, automatic bracketing can be deployed for emotionless trade execution.
Bracketed Sell Order - allows the trader to exploit the high probability nature of trading a bracket, balance area, value area etc. A sell order on a short position that is complemented (bracketed) by a buy stop order above the entry price of the sell short order and a buy limit order below the entry price of the sell short order. As the three component orders are based on set prices, this type of order reduces the trader‘s downside capital exposure whilst potentially locks in a profit. In some trading platforms, such as Ninja Trader, automatic bracketing can be deployed for emotionless trade execution.
Buying Climax - indicates the end of a bull market auction. It is characterised by Initiative Buyers auctioning the price higher into brand new territory after a substantial upward market rotation has already taken place. The Order Flow volume is always extremely higher than average and coupled with Delta Divergence or COT Divergence, the higher the probability it is to be a buying climax.
Buying Tail - a sign of buying excess that produces a minimum of two TPO single prints at the base of a profile; a gauge of buyers’ reactions to a lower advertised price opportunity. The greater number of single TPOs that form the buying tail the more aggressive the buyers’ reaction. When previously established value is above current price activity, the buying tail represents aggressive Responsive buying. Likewise, when previously established value is below, the buying tail represents Initiative buying.
Capital Exposure - otherwise known as risk. The potential cost (per unit, lots, contracts, shares etc) of discovering the probability of a successful trading decision outcome and is incurred in the event price that moves against the intial entry price to the initial protective stop loss price.
Carry Forward - a routine of making a note of day timeframe market generated information , (such as locations of VPOCs, CD etc) so that such information maybe used to place future market price activity into a wider timeframe context.
Cash Market - stocks and shares and the Interbank currencies. A future is known as a derivative since the real value lies in the cash market, where actual stocks are bought and sold for cash, or one currency is bought with another.
Clean - at the beginning a of breakout from a balance/value area, if there is no overlap between the two separate Values Areas and the distance that separates the two is wide then we describe this as being a ‘clean’ breakout. A wide distance between balance/value areas implies that a trend is in its early stages of market development and that a continuation in that direction is highly probable.
Closing Range - the price movement range of the last TPO on the Market Profile® graphic. We pay attention to the location of the closing range in relation to the session's Open.
COT - in terms of order flow momentum COT indicates the commitment of traders at new price extremes. It is especially power as a leading indicator when there is a divergence between COT and price.
COT Divergence - an order flow pattern that occurs during trending price activity when the current candle's price has hit a new intra-candle extreme but the volume bias does not correspond with that price activity. For example, this type of divergence between price activity and Bid/Offer transaction volume occurs during an upward trend the current candle's price has reached a new intra-candle High but intra-candle Selling volume on the Offer/Ask overwhelms the intra-candle Buying volume on the Bid. In this instance, it is highly probable that the Low of COT divergence candle will be tested and/or breached before the Close of the next candle. COT divergence also occurs during a downward trend when the current candle's price has reached a new intra-candle Low but the intra-candle Buying volume on the Bid becomes more more aggressive, hence, overwhelming the intra-candle Selling volume on the Bid. In this instance, it is highly probable that the Low COT divergence candle will be tested and/or breached before the Close of the next candle. We also have other high probability COT Divergences setups.
CTI1 - On-Floor Pit Traders, often simply referred to as Locals.
CTI2 - Commercial Clearing Member Traders e.g. agricultural hedgers, banking houses etc, often referred to as Commercials
CTI3 - On-Floor Member Traders executing orders for Off Floor Member Traders.
CTI4 - Member Traders filling orders e.g. for public and mutual funds, often as ‘retail paper’ or simply ‘retail’. Their activity is often faded by the Smart Money. Note: High Frequency Trading (HFT) is not accounted for although it is widely believed that HFT now accounts for a large percentage (over 70%) of the volume in Futures trading.
Commercial [paper] - Commercial Clearing Member Traders e.g. agricultural hedgers, banking houses etc, often referred to as ‘paper’. It is often their participation in price activity, whether it is via High Frequency Trading (HFT) or on the Trading Pit Floor, which moves the market with directional conviction.
Commercial Capping - often referred to as buffering or fading, occurs when commercial traders put a price cap on an instrument after an extraordinary breakout auction.
Composite Profile - merging separate profiles into one, especially when the value areas are over lapping. Once merged, the astute Market Profile® trader pays attention to key reference areas (i.e. extremes, excess, value area range, POC and High/Low Volume area) within the Composite Profile. The key is to recognise the maturity of a composite profile.
Cumulative Delta (CD) - often referred to as Cumulative Volume Delta or just CD, it is the accumulation of Delta across a single session or compound sessions. We regularly use it as a gauge of the underlying order flow to confirm price direction.
An important point is that CD is unlike Open Interest in that it does not account for volume adjusted to reflect the example where some of the volume (e.g. 5000) on the Bid may be Shorts closing their position matching volume (e.g. 5000) on the Offer which maybe Longs closing their position in which case the Open Interest would be zero, however, Cumulative Delta will display a value of of 10,000 and the trader would only realise the reality of what took place by simultaneously displaying a lower timeframe (3 Range Bar for ES) or waiting to see how the next candle reacts.
Cumulative Delta (CD) Divergence - for instance, if price is trending higher, the cumulative delta is expected to be trending higher accordingly e.g.when Buyers auction price to a new high whilst cumulative delta does not, we have CD Divergence; indicating that order flow is deteriorating and price may soon pause and/or reverse.
Daily Range - measured from the High of the profile to its Low. This may coincide with the HoD and LoD if it is a daily profile. We display RTH Pit session profiles and 24-hour ETH profiles as well as Composite and Derivative Profiles.
Delta - in terms of Order Flow it is the difference between the bid and offer volume for a given candle. So if the [Selling] volume on the Bid is 5000 and the [Buying] volume on the Offer is 3000 then the Delta is -2000. In such case it is expected that price would auction lower to cut-off Sellers and attract Responsive Buyers which is often indicated by COT Divergence.
Delta Divergence - occurs when new High in price occurs when the Delta is negative, or when a new Low in price occurs on positive Delta.
Derivative Profile - arrived at by splitting a day’s profile starting at point where TPOs show a structural change in price activity (such as a reversal, failure, breakout, trend timeframing etc).
Destination Trade - visually conspicuous key reference area levels that are highly probable to attract price activity.
Diffusion Model - the Everett Rogers Diffusion of Innovations Theory; helps us to understand the Auction Market Development process as it highlights the psychological nature of human beings as they react in an auction market. The five categories of product adopters are:
- Innovators - proactive independent decision makers, educated, multiple quality financial info sources, Long at the very early Accumulation stage of a trend, Short at Distribution stages, fading the laggards; hedge funds and smart money. This group falls between the 2nd and 3rd standard deviation, buying at discount wholesale prices and selling as expensive premium prices.
- Early adopters - social leaders, popular, educated, in at the early stages of the trend; hedge funds and smart money, prop traders. This group falls between the 1st and 2nd standard deviation, buying at wholesale prices and selling at premium prices.
- Early majority - calculated, many informal social contacts; celebrity traders, disciplined and well informed private traders, smart money, prop traders. This group is what shapes the Normal Distribution Curve of the profile, buying below and selling above retail prices.
- Late majority - skeptical, traditional, lower socio-economic status; typically the home-based day trader, private buy and hold investor who enters Long (or closes Short) positions above retail prices and enters Short (or closes Long) positions below retail prices. The exact opposite of Smart Money.
- Laggards - neighbours and friends are main info sources, fear of debt; speculative members of the public entering the market when new price extremes attract media attention. Typically going Long at the Distribution Stage.
Distribution Stage - "When the ducks quack, feed them", a famous Wall Street saying regarding the Distribution Stage which is the selling of large amounts of an instrument bought at lower prices to potentially late misinformed Buyers (typically laggards) who enter the market as new price extremes attract media attention. Selling large volume of an instrument bought in the lower parts of the trading range cannot be done overnight. The professional traders cannot just sell, at will – they have to distribute on surges of buying from latecomers and laggards. They will then have to take advantage of opportunities that arise, such as good news, or the excitement of crowd behaviour after a long bull move. Once these lines have been transferred, Bids are lowered as price auctions lower.
Divergence - where two indicators are not confirming each other. Usually warns of a trend reversal.
Dominant Timeframe Participant - If the longer timeframe participants are not active during the day timeframe, the shorter term participants are more likely to dominate the intra-day auction. Contrarily, significant activity by the longer timeframe participant (commercials) will cause them to dominate the price direction on the shorter time frame increasing the likelihood of a breakout from Balance (or Trend Day). Part of your accumulated experience is discerning who is participating in the auction by understanding the expected behavior of these multiple timeframes. More importantly, we emphasise that the trader should focus their analysis on the migration of value across the multiple timeframes ahead of attempting to figure out who are the market participants.
Dow Theory - Buy signal is given when the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) closes above a prior swing high. A sell signal is given when both averages close below a prior swing low.
Dual Auction Process - an auction market that moves from balance to imbalance and back to balance again.
Exhaustion Gap - a price gap that occurs at the end of an important trend and indicated that the trend is waning. Typically results in a Spike.
Elongated Profile - a profile that is expanding as a result of a market auction that is trending. Contrarily, a Non-elongated Profile is usually a wider profile which represents a market auction where the participants lack directional conviction.
ETH - Electronic Trading Hours. This is the electronic session trading hours before and after the RTH session but also includes the RTH session.
Excess - denotes the conclusion of one auction and the commencement of another, typically represented via buying and selling tails. Excess is fractal so it appears in multiple-frames i.e. a short term balanced profile could exist within the excess of a longer timeframe profile. Balance and excess are focal to Market Profile® Trading in view of the fact that they clearly indicate Order Flow adjustment and that the potential for change in price direction becomes a high probability.
Failed Range Extension - similar to bull trap or fake out. Market participants (usually Locals) auction prices near to or even beyond the Initial Balance range to probe for Longer timeframe market participant orders. However, a lack of conviction from the Commercial/Longer Timeframe market participants results in Order Flow - divergence or simply an Order Flow shift leading to prices being rejected beyond the Initial Balance. Thus, Responsive participants rotate the market back inside the initial balance.
Fair Value - the value price where the auction has discovered equilibrium Buyers and Sellers.
Fractal Price Action - price action that is so intrinsic enough to be observable within all time frames in similar way to the fractal nature of clouds, trees or even the controversial paintings of the infamous American painter, Paul Jackson Pollack.
Fulcrum - a pivotal line in the sand that denotes a pivot point at which price migration, against the prevailing trend, should not be violated particularly on trend timeframing days. During a trend day there is usually a retracement swing high or swing low as inventory adjustment occurs. On the subsequent day the retracement swing high or swing low is used as a line in the sand to determine whether sentiment has changed relative to the prior day’s price action; if the Fulcrum is not breached, there has been no meaningful change in market structure. This technique should be used in conjunction with an examination of real time Order Flow. Fulcrums are fractal so they can be observed on multiple time frames.
Fibonacci Ratios - a series of geometric and harmonic ratios including 0.382, 0.50, 0.618, 0.786, 1.00, 1.272, 1.618 and 2.618. We have a unique way of using the ratios that takes into consideration market developement i.e. whether the market is trending or balanced. We use one set of the ratio numbers for time analysis and another set for price analysis.
Gap - a form of breakout excess that indicates that the market is imbalanced and that the prior value area is being rejected. We consider two types of gap: a Full Gap and a Partial Gap; A Full Gap Up occurs when the opening price is greater than yesterday's High of Day (pHoD) price. A Full Gap Down occurs when the opening price is less than yesterday's Low of Day (pLoD) price. A Partial Gap Up occurs when today's opening price is higher than yesterday's close (pClose), but not higher than yesterday's High of Day (pHoD) price. A Partial Gap Down occurs when today's opening price is lower than yesterday's close (pClose), but not lower than yesterday's Low of Day (LoD).
Of the different types of gaps that we consider, it is the Full Gap that above all confirms that a market is trending out of balance. Well-timed trades in the direction of the Full Gap offers a high reward low capital exposure trade when used in conjunction with key reference levels derived off the Market Profile® graphic and Order Flow execution confirmation.
For more on how to trade gaps using Market Profile® and Order Flow please read the How To Trade Gaps (coming soon) article.
Hanging Auction - an uncompleted daily auction meaning it structurally lacks a buying tail or selling tail and would leave a poor extreme. Suspended auctions occur in all timeframes.
HFT - High Frequency Trading. This type of electronic Algo trading employs ultra fast super computers located close to the financial exchanges and rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day. By the year 2010, HFT accounted for over 70% of equity trades taking place in the US.
Iceberg Order - A substantial order that has been disguised by dividing it into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity. When large market participants, such as institutional investors, need to buy and sell large amounts of financial instruments for their portfolios, they often divide their large orders into smaller parts so that the public sees only a small portion of the order at a time just as the 'tip of the iceberg' is the only conspicuous segment of a huge mass of ice. By hiding its large size, the iceberg order reduces adverse price movements caused by substantial changes in an instruments' supply and demand.
Initial balance - see Opening Balance.
Initiative Buying - when Commercial/Longer Timeframe traders auction the market beyond the Value Area High.
Initiative Selling -when Commercial/Longer Timeframe traders auction the market beyond the Value Area Low.
Imbalanced Market - a trending market that is being dominated by Commercial/Longer Timeframe traders and lacks two-sided trading.
Intra day - a timeframe based on a single trading day session. Trading on an intra-day basis implies that any positions opened that day will be closed that day. In fact several (even thousands in the case of HFT) such positions can be transacted throughout that session. Also see day traders.
J Dalton Trading - a trading education company established by James Dalton, renowned trader and genius author of Field of Vision, Mind over Markets, Markets in Profile and other excellent publications on the topic of Value Trading and Market Profile®. His influence and contribution, within the Market Profile® trading community and beyond, has been phenomenal. The way in which he has disseminated his vast market knowledge in order to help his fellow traders cannot be emphasised enough.
KRAs - Key Reference Areas. These are pivotal areas that are indentified from the Market Profile® graphic or TPO Chart. Successful traders pay careful attention to KRA during the trade selection process as they help identify high probabilty setups and secure optimum trade location. KRAs include:
- pIBH - prior Opening Balance High established by the prior day’s upper extreme price activity within the first 60 minutes (first two 30 minute candles) of the RTH session.
- pIBL - prior Opening Balance Low established by the prior day’s lower extreme price activity within the first 60 minutes (first two 30 minute candles) of the RTH session.
- pPOC - Point of Control established by the prior day’s mean price activity.
- pVAH - Value Area High established by the prior day’s upper extreme price activity.
- pVAL - Value Area Low established by the prior day’s lower extreme price activity.
- pOpen - prior day’s RTH session opening price.
- pHoD - prior day’s extreme High established during RTH session market.
- pLoD - prior day’s extreme Low established during RTH session market.
- pClose - prior day’s RTH session market closing price.
- VPOC - see Virgin POC.
- Fibonacci Ratios - see Fibonacci Ratios.
The above list of KRAs is by no means complete. There are of course nuances in the skill of identifying certain KRAs.
Liquidity - the ability to enter and exit position quickly because the instrument has sufficient trading order flow volume. Liquidity is very important to intra-day traders.
Locals - active and informed on-the-floor traders who are a member of a stock or Futures exhange trading on the floor of that exchange for his or her own account. The floor trader must abide by trading rules similar to those of the exchange specialists who trade on behalf of others. A Local’s income is derived from two sources; liquidity and position-taking profits. Liquidity profits represent the income that arises (is forgone) from supplying (demanding) liquidity, whilst position-taking profits refer to the gains (losses) resulting from price movements subsequent to a Local establishing a position. The ability of locals on the floor to derive position-taking profits is positively correlated to order-flow related information, and negatively corelated to the presence of exogenous (e.g. fundamentals) information, local liquidity profits and the length of a Locals inventory cycle.
Long Liquidation - usually produces a b shape profile, a long liquidation takes place after an extended up move where some Long Buyers, who entered a lower price, decide to take profits by closing all or part of their position. This is opposed to a genuine Bearish fall that is caused by new Short Sellers taking control of the market. This type of price action is fractal so its occurrence in the day time frame may be coming to an end whilst it has only just begun on the monthly timeframe.
Mature Balance Area - see Balance Area Maturity
Market Profile® - charting technique (price vertical, time/activity horizontal) devised by J. Peter Steidlmayer, a trader at the Chicago Board of Trade (CBOT), ca 1959-1985. Market Profile is an analytical tool; analysis of the key reference areas spawned from the Market Profile® graphic assists the trader to identify optimum trade location i.e. where to do business on the chart.
Market Profile® Trading - a methodology based on using the information and key reference areas spawned by the Market Profile® graphic to consistently and impartially depict the market structure and market development across mult-timeframes and various levels of volatility and assists the trader to identify optimum trade location i.e. where to conduct business on the chart whilst minimising capital exposure.
Multi-Timeframe - observing the price activity of the larger timeframe (e.g. Monthly or Weekly charts) in order to execute trades on a lower timeframe (e.g. 30min or 5min charts). Price activity is influenced by a broad array of motivated participants functioning within multiple timeframes. The shorter timeframe market participants desire a fair price whilst the longer timeframe market participants desire an advantageous price. The multi-timeframe approach helps a trader to answer the question “How do I objectively identify trend direction?” and “Is the trend in the early stage or late stage?” It is a key factor to the trade plan that identifies high probability trade set ups with minimal capital exposure since that trader looks for the larger time frame reward with the lower time frame capital exposure.
The trader should focus their analysis on the migration of value across the multiple timeframes ahead of attempting to figure out who are the market participants. Nevertheless, the different participants have varying perspectives and be can labelled in the order of their perspective timeframe as follows:
- Scalpers - intra-day traders scouting for fast, small profits at regular intervals mostly relying on order flow momentum. Today most scalping is done under the banner of HFT.
- Day traders - intra-day traders who usually rely on technical analysis to open positions that they will close out by the end of the session. day trading can be an emotional rollercoaster as a trader constantly shifts from the left-brain role of analyst to the faster paced right-brain role of trader executing at the hard right edge with capital being exposed several times per day.
- Short Timeframe - short term traders perspective is usually 3 - 5 days up to a few weeks, subject to market context and volatility, allowing them to trade larger swing positions. They also differ from day traders in that they may rely heavily on fundamental analysis.
- Intermediate Timeframe - this perspective that entails weeks or months of price activity and their dominant entrance to the market can cause significant loss to the uninformed shorter timeframe trader; their analysis consists of a combination of fundamental and technical analysis.
- Long Timeframe - this perspective entails holding positions for months or years; they act sentimentally more like investors than traders. Their analysis is based primarily on fundamentals followed by valuations, and finally, if at all, technical analysis. When the Long Timeframe Market Participant enters the market with force, they move markets out of balance dragging all other timeframe participants along for the ride.
NCR4IC - Narrowest Inside-day Candle in Range of 4. within the most recent 4 candles we look for a candle that fulfils two conditions. Firstly that it is the narrowest candle. Secondly it is an inside-day candle. NCR4IC is like a micro value area that, when observed in the context of a multi-timeframe setup, often results in a coiled move that can be scalped of a few ticks.
Normal Distribution - a very important aspect of statistical analysis. All normal distributions are symmetric and have bell-shaped density curves with a single peak. The graph of the normal distribution depends on two factors - the mean and the standard deviation. The mean of the distribution determines the location of the center (i.e. the POC) of the graph, and the standard deviation determines the height (vertical development: VAH;VAL) and width (horizontal development, Balance, Value) of the graph. When the standard deviation is large (balanced), the curve is short and wide; when the standard deviation is small (elongated, imbalanced) the curve is tall and narrow.
Normal Distribution Day - wide Opening Balance which usually establishes and contains the HoD and LoD. These days are more the exception than the rule.
Normal Distribution Variation Day - the Opening Balance in the early session is less dramatic. Later in the day this shorter Opening Balance experiences range extension on one extreme as a longer timeframe market participant enters the auction.
Neutral Day - a Balanced day when both buying and selling range extension occurs. Neutral days are formed when both the Long Timeframe Buyer and Seller are actively participating within the same price range indicating their uncertainty. The day usually ends unchanged.
Open Auction - type of open where price rotates around the open price without any clear conviction. This type of open exists in two forms: Open-Auction-within-Range and Open-Auction-outside-of-Range.
Opening Balance - commonly known as the Initial Balance. Defined as the price range resulting from market activity during the first two TPOs (thirty minute time periods) on the Market Profile® graphic. This definition found its basis when early on particularly in a non-conviction session, Locals operating within the intra-day timeframe, would use their dominance to attempt to auction the market higher until they encountered the Responsive Longer Timeframe Sellers above. Having located the upper boundaries of their initial price probing, the Locals would then reverse course and begin to auction the market lower in an attempt to locate the Responsive Longer Timeframe Buyers below; similar to how a trader would trade a bracketed market. This usually took place within the first two TPOs and once this was achieved the opening balance (or bracket) was established. However, Auction Markets have evolved and, with the advent of the huge overwhelming volume presented by Off-The Floor High Frequency Trading, the days of Locals being able to exert dominance over price action appears to be in the past.
In light of this, we pay more attention to the height of the range of the opening balance and consider it within the broader market contextual conditions around it so as not to become compartmentalized and restrictive in using it to trade successfully. Longer timeframe context is essential in assisting the trader to crystalise the important market activity that is occurring on the shorter time frame.
It is also important to note that on Trend or Full Gap days there is no balance so the Opening Balance is of little use other than as a region to see that price finds support above it and resistance below it. The traders should avoid the distraction of waiting for an Opening Balance to be established in an attempt to fade what is an obvious trending market dominated by the Longer timeframe participants. This is why we emphasise the importance of understanding how value is migrating because it will then become clear which timeframe participant is dominating price action and, hence, determining the market’s structural behavior. The trader needs to determine what is the market’s perception of value in order to have a high probability of identifying optimum trade location at the extremes of the value area.
Outside Day - market participants test one extreme of the prior candle, fail to follow through and then initiate a breakout in the opposite direction. Thus, extention occurs beyond both the High and Low of the previous candle.
Open Drive - price moves directionally right from the open. Usually signifies the presence of the Longer Timeframe Market Participant who is dominating price action with conviction. However as with everything else, this needs to be considered within the broader context of where price is in relation to value.
Order Flow - refers to the nature of how market orders are entering into the market and where they are being filled; executing AT the offer or ON the bid. Order Flow reflects the dual auction process at the most micro-level. Assessing key aspects and patterns of Order Flow (such as Delta , Cumulative Delta, COT, Delta Divergence, COT Divergence and Cumulative Delta Divergence) in real time can inform the trader how well trade is being facilitated in any given direction, an important insight in Auction Market Theory. Tracking Order Flow allows the trader to determine whether it is the sellers or buyers who are more aggressive in the auction at a particular price and point in time. Aggressive Buyers buy at the Offer/Ask price and aggressive Sellers sell at the Bid price.
Open Interest - the total number of options and/or futures contracts that are not closed or delivered on a particular day and the number of buy market orders before the stock market opens.
Open Rejection Reverse - after the market opens, market participants rotate the price towards a nearby key reference area level, support/resistance, pivot, Virgin POC (VPOC) etc then the opposing market participants take control and reverses the price action and auctions into the opposite direction. This is usually an early indication of a low conviction day.
Opening Range - price range established within the first 2 minutes of trading.
Open Test Drive - after the market opens, market participants rotate the price towards a nearby KRA then the opposing market participants take control and reverses the price action and rapidly auctions price towards the opposite direction.
Overlapping Value Area Regions - a sign of balance or weakness in trend timeframing. Recognising such a hallmark provides the trader with the opportunity to construct a Composite Profile consisting of profiles whose value area overlaps by two or more ticks.
Overnight Inventory Gap - refers to that part of the ETH session which occurs after the RTH session close and prior to RTH open. If Buyers raise Offers above the pClose session during the overnight ETH session and prices remain above it until the RTH open then the overnight inventory would be considered Gap Long. If Sellers lower Bids below the pClose during the overnight ETH session and prices remain there until RTH open then the overnight inventory would be considered Gap Short. By eye-balling the chart, if the price activity enclosed above the pClose approximately equals the price activity enclosed below the pClose then the overnight inventory is neutral i.e. there is no Overnight Inventory Gap. When price activity is balanced during the overnight ETH session, the TPO Count or Volume Profile can be used to determine the underlying ETH sentiment. As a last resort a trader could use the Rotational Factor to gauge Overnight Inventory sentiment.
When devising a strategic and tactical pre-market plan for the session at hand, analysis of the Overnight Inventory Gap is an essential factor.
Pioneers - trader slang for uninformed retail traders who enter Short position near to retracement Swing Lows in upward trend (also referred to as a short-in-the hole trade) or enter Long positions near to retracement Swing High; this usually occurs when emotion takes over and the herd instinct is in full effect. Understanding market structure and Order Flow is, very often, a defense against being “scalped”.
The term is derived from the way many buccaneering early American pioneers would venture out on perilous expeditions, full of hope, only to have their heads scalped by the native Indians.
Poor Extremes - an auction whose order flow lost momentum rather than due to being overwhelmed by opposing market orders; after a pause, the original auction is likely to make another attempt at the price extreme. The more attempts that are made, the more likely the auction will finally succeed. Poor extremes are often the result of excessively long inventory (poor highs) or excessively short inventory (poor lows).
PMA - Pre-Market Analysis. A top-down, multi-timeframe approach to examine price action history in order to identify KRAs. Once identified and journaled, KRAs are used to assist visualisation of various scenarios that may unfold in prearation for the session ahead.
POC - Point Of control. This can either be the longest line of TPOs or the price level of most volume closest to the center of the daily range. This is the price where the most activity occurred during the day (based upon time); it is therefore considered to be the fairest price during the day timeframe and should approximately coincide with VWAP.
POC migration is of major significance in understanding the broader market context in an attempt to avoid becoming compartmentalised within the intra-day mêlée.
P Shape Profile - a profile that often occurs during bearish downward moves and develops into a shape similar to the letter P. The bottom half of the profile is long and thin, typically single prints representing low volume rejection. The upper half of the profile has a more wider distribution. This formation is typical of short liquidations signalling a pause as opposed to bullish sentiments caused by the entrance of Initiative Buyers reversing the market direction.
A P Shape Profile typically occurs as a result of a Short Covering Rally where as a b Shape Profile usually occurs as a consequence of Long Liquidation.
Price Thrusts - in any market, there will be stop-loss orders beyond the recent price action. As traders collectively think the same way, these stops will be within a close price range above or below the market. This is a little like putting the Fox in charge of the chickens – if professional traders have an opportunity to trigger your stop loss orders, by auctioning prices towards them with little cost to themselves, they will most definitely do it! Our clients also profit from these moves in the Trading Room using Order Flow divergences.
Range Extension - a price probe outside of the Opening Balance range that indicates that more aggressive [Longer Term] participants have entered the auction.
Random Market - a market lacking conviction and participation. The Longer Timeframe Market Participants are absent allowing price to ebb and flow randomly as Shorter Timeframe Market Participants battle it out within the balance area.
Responsive Buying - occurs when Commercial/Longer Timeframe traders Buy the market below the Value Area Low rotating price back inside the Value Area.
Risk - see Capital Exposure.
Rotational Market - a market confined by an upper price limit and a lower price limit and rotating back and forth from one side to the other. Also called a balanced or bracketed market.
Responsive Selling - occurs when Commercial/Longer Timeframe traders Sell the market above the Value Area High rotating price back inside the Value Area.
RTH - Regular Trading Hours. For futures indices this is usually 9:30 EST to 16:15 EST.
Running Profile - another term used for a Derivative Profile.
Selling Tail - single TPOs on the top of a profile; a gauge of sellers’ reactions to a higher advertised price opportunity. The greater number of single TPOs that form the Selling Tail the more aggressive the sellers’ reaction.
Short Covering Rally - usually produces a P shape profile, a short liquidation rally takes place after an extended down move where some profitable Short Sellers, who entered positions higher, decide to take profits by closing all or part of their position. This is opposed to a genuine Bullish rally that is caused mostly by new Long Buyers entering the market and taking control. This type of price action is fractal so its occurrence in the day time frame may be coming to an end whilst it has only just begun on a the monthly timeframe.
Single Prints - a column of single TPOs printed on a Market Profile Graphic which has prices both above and below it which have multiple adjacent TPO's. Single prints are unconfirmed while there is still a chance that the print will be filled in by the subsequent TPOs and are only confirmed to be Single Prints when the subsequent bracket has closed without entering the price range of the Single Prints. For example, a single print in the letter A TPO price range cannot be confirmed until the subsequent letter B TPO price range has closed and the letter C TPO price range has opened. During an Open Drive breakout, a series of single prints will be observable on the Market Profile Graphic. The single print that we are interested in is the first one created when the market breaks away. For an upward breakout, the trader focuses on the lowest price that has a single print and vice versa for a downward breakout.
Six Candle Count (6CC) - whenever there is a range extention on a day where pVA is overlapping we will count six 5min candles (i.e. one TPO) before placing a trade in the direction of that range extension.
Smart Money - smart money has the influence and ability to move the market directionally with conviction. Smart money trades based on the laws of supply and demand. Smart money appreciates and factors in all relevant market information and data.
Smart Volume - the volume footprints of smart money, as oppposed to the all inclusive volume that includes the volume retail traders. Volume is studied to identify volume of participants that have the ability to move the market. Smart volume is either Responsive or Initiative.
Spike - a breakout price probe that occurs towards the latter part of the session such that it cannot be confirmed as having been accepted or rejected as either a Selling Tail or a Buying Tail. If the spike was accepted, value/balance would be established within the range of the spike. However, the trader has to wait until the next RTH session open to determine whether the spike has been accepted or rejected.
How to trade the Spike
- Setup I: market opening price below an upward spike.
How to trade: this is a Bearish indication since the spike was rejected leaving a Selling Tail. The trader ought to be looking for shorting opportunities.
- Setup II: market opening price within a spike.
How to trade: setup indicates price acceptance and confirms the upward move. The trader should look for opportunities to Buy Long the lower extremes of a bracketed market.
- Setup III: an opening price trading above an upward spike.
How to trade: this setup indicates that odds are in favour of even higher prices until buying is stemmed in order that two-sided trade can be facilitated. The trader should be prepared to take a go-with approach to profit from this set up.
- Setup IV: an opening price with the bottom of the spike acting as support.
How to trade: with trade entry close to the bottom of the spike, this setup provides a KRA to lean against for a stop loss order and entry based on market structure.
- Setup I: an opening price above a downward spike.
How to trade: this is a Bullish indication since the spike was rejected leaving a Buying Tail. The trader ought be looking for Long opportunities.
- Set up II: market opening price within a spike.
How to trade: this setup indicates price acceptance and confirms the downward move. The trader should look for opportunities to Sell Short the upper extremes of a bracketed market.
- Set up III: an opening price trading below a downward spike.
How to trade: this setup indicates that odds are in favour of even lower prices until selling is stemmed in order that two-sided trade can be facilitated. The trader should be prepared to take a go-with approach to profit from this set up..
- Set up IV: an opening price with the top of the spike acting as resistance.
How to trade: with a trade entry close to the top of the spike, this setup provides a KRA to lean against for a stop loss order and entry based on market structure.
Squawk Box - a unique and descriptive audible way to receive price and Order Flow data as it unfolds on the trading pit floor and gain firsthand knowledge of information that was once only available to pit floor traders. The commentator will make you feel as if you are standing right alongside them in the pit. Traders Audio, our squawk box partner, was one of the first CME S&P 500 Futures Trading Pit Floor Squawk Box services available.
Symmetrical Profile - the profile of a model trend day has a distribution that is relatively even throughout despite it being an Elongated Profile. This is the opposite of a Profile where the distribution is uneven and disproportionate throughout and there is no prominent POC. Profiles that lack symmetry, such as a triple distribution day, display Anomalies. They are by definition disproportional to the Normal Distribution shape and are likely to require repair.
In a trending market, symmetry implies directional conviction accompanied with Order Flow. In a balanced market, symmetry implies establishment of value. On the other hand, the absence of symmetry implies anxious market sentiments are driving price activity.
Sideways Market - horizontal price activity developing accepted value in a balanced region allowing two-sided trade facilitation.
Tempo - describes how effective an auction is proceeding in its attempted direction. Requires a degree of proficiency and trading experience to internalise and profit from the concept of tempo.
Time - is responsible for bringing order to the auction market and opportunities therein and, thus, the Market Profile structures we eventually identify and interpret. Time is the most important factor used to assess timeframe control: acceptance (value, balance, horizontal dev.) is time spent at a particular price level and typically indicates that the day/shorter timeframe market participant is in control at those price levels; whereas rejection (excess, imbalance, vertical dev.) is when a sparse amount of time is spent at price, the swifter the rejection, the more apparent it is that the longer timeframe market participant is in control at those price levels.
Note, however, that time can be a double edge sword. If market participants fail to auction prices with sufficient tempo in one direction the then the opposing market participants will reverse the market in order to facilitate trade. Likewise, a breakout (rejection) will ultimately be the result when a market spends excessive time at particular price levels. Rather than depend exclusively on the structure of the Market Profile ®, an understanding of the difference between adequate time and excessive time give the trader an edge of entering the market, ahead of the ensuing structural confirmation which indicates a shift in Order Flow.
TPO - Time Price Opportunity. Respresented by a letter of the English alphabet that corresponds to each 30 min candle of the trading session. When a certain price is traded during a given 30 min period, the corresponding TPO is recorded next to the price on the Market Profile® graphic. As trade transactions occur at different prices on the chart, a picture of corresponding TPOs illustrates the statistical distribution of these trades. The Market Profile® graphic is not an explicit measure of the amount of business being done by volume (this can be obtained from a volume profile chart). Rather it represents where a market has spent time; time at price implicitly indicates volume, hence, the term Value Area.
Trade Location - analysis of the key reference areas spawned from the Market Profile® graphic assists the trader to identify optimum trade location i.e. where to do business on the chart. This is the area where a trader enters or exits a position in relation to market structure.
A trader needs to determine what is the market perception of value, relative to his or her timeframe, in order to have a high probability of identifying good trade location; a day trader determines value based on the current Market Profile® grapihic while an intermediate-timeframe trader may consult a weekly bar chart to determine value on that timeframe.
The idea is to locate areas on the chart to do business that provides us with asymmetric setups; employed in this manner, trade location is one of the best risk tools available. Larger timeframe context is essential and can help internalise the importance of what is occurring in the shorter time frame. There are only a limited number of optimum trade opportunities to be had, so giving weight to trade location in the trade selection process can prevent a trader from including poor trade locations and, thus, over-trading.
Trend Timeframing - during vertical development in an uptrend over multiple candles it is a requirement that, the low of the previous Market Profile® TPO or 30min candlestick Low is not breached to the downside by greater than 2 ticks. Simultaneously, ideally but not a requirement, the high of the previous Market Profile® TPO or 30min candlestick High is tested or exceeded. The inverse applies in a downward trending market. When a market is auctioning in such a vertical development, the previous day’s value area (pVA) extremes are important key reference areas.
Trend Timeframing is fractal and recognising it can prevent a trader from depleting their trading account in a futile and dangerous attempt to fade a trending market controlled by the Longer Timeframe Market Participant instead of taking a ‘go-with’ approach. Ultimately, the migration of value gives the most accurate interpretation of trend.
VAM - Value Area Migration. When a Value Area is set apart (without overlapping) from the prior Value Area(s) we say Value Area Migration has taken place. Depending on the wider context, Value Area Migration indicates market imbalance often resulting in a trend. Contrarily, balanced (sideways) markets have overlapping Value Areas which lack Value Area Migration. Unlike the average trader who is often intoxicated by fluctuating price action, studying how the Value Area is shifting (migrating) from one trading session to the next keeps the astute trader focused on trading value.
Value Area - at iTradePod we have a mantra: Dont’t trade price, trade value; price and value are not always the same. The value area is where approximately 70% of a session’s price activity is conducted (see Normal Distribution).
Value Trading - the art of trading based on the acknowledgement that price is only one of the three components of market activity with the other two being time and volume. The trader that understands market activity on the basis that Time spent at Price = Volume = Value can identify where to do business on the chart, trading at optimum trade locations relative to value, not price; Long below value, Short above value.
Volume - the number of contracts, shares or lots traded over a given time interval. For a directional move to continue it must be sustained by volume. There are two types of volume:
- Horizontal Volume: - see Volume at Price.
- Vertical Volume: - volume over a given time period. Vertical volume is usually displayed in a histogram or bar chart below a price chart. The trader usually has to wait for the candle chart's time interval to complete before interpreting the volume that occurred.
Volume at Price - this is the volume that occurs at an exact price as opposed to the volume commonly dispayed in the bottom panel of a price chart. This type of volume is displayed via a Volume Profile chart, often adjacent to the Market Profile graphic, and allows the trader to observe Order Flow at various KRAs.
VPOC - Virgin Point Of Control. VPOC is a POC that has not been touched by prices on subsequent days i.e. prices have never traded at that POCs price since it was formed. A POC that has been penetrated is less dependable as a pivot. VPOC is sometimes referred to as the Naked Point of Control (NPOC).
Volume Profile Chart - Display of horizontal volume traded at exact prices using a Market Profile® style chart. Volume Profile Charts are a primary component of VWAP.
VSA - Volume Spread Analysis. A very popular proprietary market analysis method that was conceived by Tom Williams (Chairman of TradeGuider Systems). VSA is utilised in the TradeGuider software to analyse a market by observing the interrelationship between volume, price and spread. This method is particularly good at highlighting imbalances of supply and demand and shares many concepts with auction market Order Flow principles.
VWAP - Volume Weighted Average Price. This is a simple average that adds up all the prices that were traded at during the day and divides by the number of price points that were observed.
WOC - Wisodom of the Crowd. Ask enough people to estimate something, and the average of their guesses will be surprisingly close to the right answer.
Weak Holders - traders who are on the wrong side of the Order Flow, and have become influenced by emotion, allowing themselves to become exposed to poor positions. They cannot afford losses so are immediately under pressure (stress) if the market turns against them.
WOW Index - Weiss Order Weighted Index. An Order Flow divergence monitoring indicator by Algo Futures.
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