Thursday, April 23, 2015

Market Profile as a Fresh Perspective on Markets: Useful Resources for Traders

Last year I wrote about Market Profile as a practical theory that helps traders achieve a fresh perspective on markets and trading.  Market Profile stems from the early work of Peter Steidlmayer, which was grounded in an innovative approach to charting.  (See this early manual for an overview).  This approach tracks the market's auction process by identifying where markets set value and gauging whether current trading is accepting or rejecting a given value area.  Markets rotate in and out of balance as they oscillate within value areas and create new ones.  

Since this early work, a variety of new tools for understanding the market's auction process have become available.  Market Delta is a unique charting format that helps identify when buyers and sellers are dominant in markets based upon whether transactions are occurring dominantly at the current bid or offer price.  This can be an effective way of visualizing how volume is behaving as we depart from a value area--a nice tell for whether we are likely to rotate back into a value range or trend and establish fresh value.

WindoTrader is an unusually flexible charting and analytics package that helps traders visualize value relationships at different time frames within a single graphic, as well as value relationships among different instruments.  (See their list of reading resources and trading blog.)  It is not at all uncommon to see a market move out of a shorter-term value range to the value area of a longer timeframe auction.  Visualizing this activity in real time is quite valuable.

I don't know of anyone who has done more to popularize Market Profile and educate traders in its application and interpretation than Jim Dalton.  He has archived a great number of articles and videos for his students and has developed training programs both by DVD and live.  I notice that he is conducting a summer intensive, in which he presents fresh developments in Market Profile application, including "signature trades" that result from an understanding of the auction process.  His current work builds on the excellent foundation of his Mind Over Markets book

Jim makes an important point:  when you look through the lens of the profile, you begin to think in terms of market structure and value, not price.  When we focus on price alone, we lose the context of that price movement.  Markets make sense as auction processes, providing us with a unique perspective on how markets move.  Many trading problems occur when we spend so much time and effort trying to predict the next market move, when it would be far more helpful to truly understand the market's movement to that point.

Further Reading:  Market Profile as a Best Practice