{"id":70557,"date":"2019-06-01T13:12:14","date_gmt":"2019-06-01T11:12:14","guid":{"rendered":"https:\/\/ftmo.com\/?p=70557"},"modified":"2024-05-17T15:01:09","modified_gmt":"2024-05-17T13:01:09","slug":"market-profile-volume-profile-and-auction-market-theory","status":"publish","type":"post","link":"https:\/\/ftmo.com\/en\/market-profile-volume-profile-and-auction-market-theory\/","title":{"rendered":"Market Profile, Volume Profile and Auction Market Theory"},"content":{"rendered":"

Auction Market Theory tries to breakdown the main purpose of the market and how the market participant interacts to fulfil this purpose. The only purpose of the market is to facilitate trade through what is known as dual auction process.<\/em><\/p>\n

One of the thing what traders often say and it’s completely wrong when the market go fast one direction is it happened because there were more buyers versus sellers. This is not true since for every buyer there has to be a seller and vice verse.<\/p>\n

When the price is going up or down, there is no supremacy on either side, but the amount of aggressivity or willingness to buy\/sell for higher\/lower prices.<\/p>\n

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In other words, the market is always seeking value based on supply and demand dynamics. This doesn’t count only in trading financial markets but with other markets as well.<<\/p>\n

Using this logic, stock prices are easy to see an example.<\/p>\n

Let’s say that right now Apple stock is trading at $100.<\/p>\n

New iPhone comes out and it is disaster, the battery is not working, it keeps shutting off etc.<\/p>\n

Because of this event, Apple stock starts to dropping on its value until it finds new buyers at lest say $80 per share price.<\/p>\n

This is where is the new value area created.<\/p>\n

Sometimes pass, iPhones get repaired which means that buyers start to step back in the market.<\/p>\n

Where is the market likely to stop? Previous value area around $100.<\/p>\n

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This is eventually what every market does as Market participants negotiate prices between balanced and imbalanced values.<\/p>\n

Auction Market Theory defines an area where 68% of the volume has traded as a Value Area.<\/p>\n

There are 3 key components of Auction Market Theory:<\/h2>\n

Price<\/strong> \u2013 Advertise opportunity in the market<\/p>\n

Time<\/strong> \u2013 Regulate price opportunity<\/p>\n

Volume<\/strong> \u2013 Measure the success or failure of the auction. Volume is variable and represents the interaction of market participants at different levels.<\/p>\n

To sum the Auction Theory up you always have to understand the context of a given market.<\/p>\n

Is the price in balance or imbalanced?<\/p>\n

The general rule of thumb is once the market is inside the value it will more likely stay in balance and explore inside the range of the value.<\/p>\n

But if the market is an imbalance, it will often drift higher\/lower until it stops which is usually inside a previous value area.
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Introduction to Market Profile<\/h2>\n

Concept of Market Profile was created at Chicago Board of Trade (CBOT) by trader Peter Steidlmayer<\/strong> and first published during the 1980s as CBOT product.<\/p>\n

Market profile by itself is not a stand-alone strategy, but a different way how you can view the market and make better trading decisions.<\/p>\n

They have seen a market as an auction process which is affected by supply and demand the same way as every other auction, for example, development of prices of food, gas etc.<\/p>\n

The price goes up as long there are buyers in the market who are willing to buy at higher prices. The price goes up until there is at least one buyer who is willing to buy at a particular price level.<\/p>\n

The opposite scenario is happening when the price is going down, the market is trying to lure in sellers willing to sell at lower price levels which are attractive for buyers.<\/p>\n

With this simplified description, it is important to realize that in each transaction, there has to be one trader buying and one selling at the same time for the market to move.<\/p>\n

When the price is going up or down, there is no supremacy on either side, but the amount of aggressivity or willingness to buy\/sell for higher\/lower prices.<\/p>\n

The next factor which creators of Market Profile consider is the fact that the market is lead by repeating patterns in the behaviour of market participants, which are the same at all different markets such as stocks, futures or forex.<\/p>\n

This means that Market Profile is applicable to every market of your choice.<\/strong><\/p>\n

Because of that, Market Profile doesn’t have strict rules. We are looking at Market profile as the principal approach and it is up to every trader on how he\/she is going to use this technique.<\/p>\n

Since the first release in the 1980s, the Market Profile evolved itself in a way to be able to react to changes in the trading environment.<\/p>\n

The ongoing globalization and electronization in the markets caused the lower impact of pit trading sessions as major factors of profile distribution, and the reason behind that is the fact that people can trade from anywhere in the world at any time of the day.<\/p>\n

Market Profile – Graphic Representation<\/h2>\n

Market Profile arranges separate trading sessions to the so-called profiles, instead of classical charts representations.<\/p>\n

The picture below shows an example of how the screen of Market Profile trader can look like.<\/p>\n

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Y-axis represents a price while X-axis represents time.<\/p>\n

This is something which we can also see on our candlesticks charts, but on Market Profile, time is represented in the form of separate distribution, in this case, sessions by regular trading hours of the product.<\/p>\n

Representation of each session is made from TPO<\/strong> (Time Price Opportunity) on the left side and VPO<\/strong> (Volume Price Opportunity) on the right side.<\/p>\n

What we can see is a three-dimensional chart displayed on two-dimensional space.<\/p>\n

Let’s discuss TPO first.<\/p>\n