Organizing the day in market profile
We will see a typical day through a market profile, and we will explore how the price auction unfolds. Besides, we will also learn a few more concepts in the market profile.
⦿ The price range of the first one hour after the market opens is called (the “A” and “B” periods. Usually, the IB range is created by retail traders who can only provide market depth or liquidity, but not the direction.
Mostly only retail traders will be active in the IB range in most cases. OTFs rarely participate from the open and they will only do this when the price opens at their entry-level right from the market beginning, which is rare. (Called as Trend Day type). These short-term Retail traders attempt to find a range where a two-sided auction can take place resulting in IB range. IB range in this example is 10890–10950.
⦿ In the “H” period, the OTF buyer enters the market and extends the range upside up to 10975. It indicates that something has changed due to the presence of the OTF buyer. Any price extension beyond the IB range can only be created with money power, and it is called as Since these people have access to some information that is not available to the public at that moment (due to their extensive research team, technology, experience, expertise, and trading ability, etc.), they extend the price beyond IB. Range extension is always created by OTFs who can give the magnitude and direction. Usually, small players like scalpers and retail traders will not be able to extend the range, and they are not responsible for significant moves.
⦿ The responsive seller did enter the market in the “I” and “J” period and took the price back to 10920, and now the price is within IB again. Now, this is the time for OTF buyers to show their strength once again. If they are real OTF buyers with strength, then they will take back the price above the high of the “H” print (above 10975).
⦿ As expected, OTF buyers displayed their strength once again in “L” and “M” prints as they broke the high “H” print and were able to close the price above the IB range.
⦿ All activity above the IB range is OTF buyer range extension in this example (similarly all activity below the IB range is OTF seller Range Extension). In the above case, Range Extension is from 10950 to 10995.
⦿ The area where 70% of the day’s business (or 2/3rd of the entire day’s activity) is conducted is called the ”value area” It can be created using 2 methods. If the value area is calculated through TPO count, then it is Value Area based on Price Profile. If it is derived through volume traded at a particular price, then it is Value Area based on Volume Profile. I use Value Area based on price profile as time is the most important element of Market profile, which is ignored in Volume profile. It is the area that indicates the two-sided trade that took place today. It means OTF players did enter the market with little force/position, but their strength is not enough to create a one-sided trade.
⦿ The 3 single “A” prints at the bottom of the day’s range buying tail are called “extremes“ It also indicates the intention of OTF buyers, their strength, and conviction.
⦿ The longest line of TPOs closest to the center of the profile is called as “point of control.“ It is one price level in which most trading activities took place throughout the day. Hence this is the fairest price of that particular script on the day, which is accepted by most of the market participants. If you see 2 price levels with the same number of Highest TPOs on any particular day, then the price level that is closest to the center of the profile should be considered as POC.
The Source of this content is mind market and money book.