Stock trading and Market Profile

The concept of Market Profile has been promoted most effectively by J. Peter Steidlmayer. In his excellent work 'Mind Over Markets', Steidlmayer explains why he thinks Market Profiling is so unique. I have found it useful myself, of course, and offer here a quick overview in case you find the topic stimulating.

Central to Market Profile theory is the concept of the 'Value Area'. This is a continuous slice of the days's action that holds a standard deviation of the market activity (i.e. roughly two thirds of the day's action is confined to within this area). The Value Area is determined in advance based on yesterday's action, and can be large or small, depending on (upon other things) volatility. Markets have 2 kinds of stock trader - the short term (locals or 'day frame' participants) and long term (other frame) participants. To consistently make money, it is usually wisest to prepare to align with the other-frame buyers/sellers, no matter which side is actually winning the battle on a particular day. On a day when there is no strong other-frame conviction present, price is likely to rotate up and down in an essentially random support/resistance mode. The trick is to be able to determine who (if anyone) is in control, and when that control is faltering or even reversing.

There are 6 'types' of day identified by using the Market Profiling technique.
* Normal Day - Not as common as the name might suggest. Typified by early entry of other-frame buyers or sellers creating a large initial price range. The action then wanders back and forward during the day in standard auction fashion as buyers and sellers struggle to get the upper hand.

* Normal Variation on Normal Day - Less extreme initial price action, as if the other-frame buyers/sellers are waiting and watching in order to build their conviction. Then the market mnakes a more dramatic move followed by standard 2 way auctioning to the close.

* Trend Day - One side of the other-frame is in control right from the open, and for the whole day. A succession of higher highs/lower lows forms. Experts at www.traders101.com have determined that this day type shows a high level of directional confidence throughout the day. The initial range is often narrow.

* Double Distribution Trend Day - This is a variation on a trend day. Looks similar to a normal variation on a normal day, except more time is spend wandering in the first range while the other-frame buyers/sellers build up conviction to make the market move. Something 'changes' mid session to cause a change in conviction - perhaps insider news or a report.

* Non Trend Day - Often looks like a Trend day at start (narrow range). Then meanders with no conviction in a range bound area. Often seen before a big news announcement as the market waits to see whether it should jump up or down.

* Neutral Day - Like a non-trend day, except other-frame buyers and sellers are active, they just happen to agree on value (broadly speaking). Traders at www.traders101.com say this day type is characterized by range extension beyond the initial balance during the session as the two sides test the edges of each other's tolerances. Has 2 variations - "Neutral Center" in which price closes near the open (no resolution between buyers/sellers), and "Neutral Extreme", one side wins, closing either up at the top of the range, or down at the bottom.

Market Profiling thus opens up an interesting possibility - using the Open to estimate the strength of Market Conviction, and therefore where the market is actually going. Opens of 4 types are commonly held to exist - the Drive, the Test Drive, the Rejection/Reverse, and the Auction. The relationship of the Open to yesterday's range also falls into this area. Space prohibits discussing this topic in any detail here, although www.traders101.com has more information on this aspect of profiling, as on rules for non-trending markets, and the types of day to avoid. Like all theories, extensive practice is required to turn it into hard stock trading profits!