When I first started studying Market Profile a phrase came up that immediately stuck with me, “price is simply an advertisement to trade.” The implication of this is that the current price is just a point for you to decide whether it is good enough value for you to trade at. And just as importantly you don’t have to trade at the current price. Lets take a real life example: you want a new TV, the one you want costs £2000 and you think that is too much, here price is an advertisement to trade or in legal terms an invitation to treat – you don’t have to do anything but the option is there for you. Even a 10% discount may not be enough but if the price drops to £1500 you may deem this ‘good value’ and buy the TV.
Market Profile Value in Futures Trading
When looking at a Market Profile, the value area indicates where the majority of people perceive value to be, this then, is not an indication necessarily of the best price to trade at as a day trader. If you are a large participant and need to get a huge amount of business done, then inside value is ideal because there will be lots of other traders willing to trade both long and short, but for a day trader this makes establishing short term direction difficult. In the example below volume is distributed evenly across a small range of prices, created by choppy non-directional trade – the implication here is that everyone agrees that 1.2846-73 is a fair price to trade.
How Does Market Profile Value Help a Day Trader?
If ‘everyone’ agrees on what the fair price to trade is, any move away suggests a change in people’s perception of value and this creates trading opportunity. The first opportunity being a move away from value – this initiative movement provides direction and forces others to act either to exit positions held or to react to the change in PRICE. A short term break out opportunity is available with potential for continuation.
- Market Profile Caught In The Hole Trade
- Price Action Trend Day Strategies
- 2 Trades Using Market Profile Ledges
The second opportunity comes in assessing the sustainability of the initiative movement – whilst price has changed, has value been shifted? If it has then the move can be considered sustainable as the new Market Profile Value Area agrees with the preceding price change. Therefore continuation strategies can be played. Think back to the TV, if price rose to £2500 and stayed there eventually you would accept that anything near £2000 is now good value and likely be winning to pay more that what you originally believed to be too much. If, however value has not shifted then the move looks unsustainable and those who have traded a long way from value may begin to doubt their position and exit causing a reversal move. This is a similar principle to the overnight positioning reversal At best they will be hoping for a consolidation enabling value to catch up to the price move. This lack of value shift is illustrated below.
Market Profile Value Providing Trading Opportunity
Following the unsustainable move higher above, expectations for the next day(s) can be form: either a reversal back to value or a consolidation (accepting value higher) followed by continuation or move back to original value below. The least likely outcome is a continuation after a move without value shift. As can be seen below the consolidation and reversal sequence of event played out – buyers were willing to higher prices but only in the top part of the previous day’s range which shifted value higher on the consolidation day. But when put under pressure again the following day, there was not the willingness to keep buying and the reversal trade became available on the break of the consolidation day’s low. A clue to this reversal came from the tail in the consolidation but that’s a strategy for another blog.