Thread by @njkiran

Weekend learning on basics of #MarketProfile -
Why does Market Profile fascinate me?-In contrast to what candlesticks offer,MP gives a 3D view of looking at price action - Price, Time & Volume. Is this a holy grail? Well, absolutely not! Here are some basics #MPPaatshaala- (1/n)

When prices are regulated by time and are arranged in Gaussian normal distribution, it forms a nice Bell shaped curve that shows statistical probability of 68% of price range where they spend most of the time, called 1SD (Standard Deviation σ) - (2/n)

Basic building block of a market profile is TPO - Time Price Opportunity. As shown in the picture, 30 min chart is represented by plotting letters.Each letter denotes TPO. This helps to get to intricate details of how price gets plotted that a candlestick may not offer -(3/n)

Once a day's profile is built with a nice bell shape curve, zone at which prices spent majority of the time(~70%) is called Value Area(1SD as shown above).Fairest price at which business is conducted is called POC (Point of control),price with maximum TPOs (orange bar) - (4/n)

First hour of trading is named as 'Initial Balance' with a Blue-Red line to the left shown in the picture above. Basically, first two 30 min alphabets. This is important as it forms a base for the rest of the trading day and how prices could deviate/breakout from this - (5/n)

Do we always have a nice bell shaped profile as above? Absolutely not! Markets don't move in a straight line. Essentially the move can be classified as Balance - Imbalance - Balance - Imbalance. - (6/n)

Beautifully represented by Wyckoff where accumulation/distribution can be attributed to 'Balance' phase whereas as mark up/down to 'Imbalance' phase. As per diffusion model,Innovators & Early adopters enter the balance phase who eventually drive the markets into imbalance - (7/n)

Two types of market participants define the distribution/day type -
1) DTF - Day time frame traders
2) OTF - Other time frame traders
DTF are intraday, short term players who has short term interests in the market while OTF have intermediate/long term view on markets - 8/n)

OTF are often termed as 'Smart Money'. Absence/little interest of OTF often result in balanced day types -
1) Normal Day
2) Neutral Day
3) Non-Trend Day
- (9/n)

1) Normal Day - Typical wider IB(Initial balance) with rest of the day trading within IB. OTF may set the IB while Short term traders, scalpers get active within the IB for rest of the day not having enough strength to extend range beyond IB - (10/n)

2) Neutral Day - Similar to normal day, we have an extended IB. Buyers attempt to extend range above IB high, fail and sellers take over control to extend range below IB low, fail and eventually close within IB. This action shows lack of confidence & conviction - (11/n)

3) Non-Trend Day - Represented by very tigh IB generally happens ahead of a big event event where market tries to wait for more market generated information. Again lack of confidence/conviction in the markets - (12/n)

Now that we are done with balance day types, let's move on to Imbalance day types -
1) Trend Day - Very high confidence
2) Normal Variation Day - Good confidence
3) Neutral Extreme Day - Decent confidence
- (13/n)

1) Trend Day - OTF take control of the market from open to close with high confidence doing One Time Framing higher - making HH-HL in 30 min periods. Slightly lower confident trend day is double distribution day that forms with single prints separating them - (14/n)

2) Normal Variation Day - With a normal size IB formed by DTF; OTF enters the market to drive prices out of IB in one direction making it a good confidence market - (15/n)

3) Neutral Day Extreme - IB gets broken on both sides but market gets closed on one of the extremes for the day. This means that OTF are not aggressive enough. Decent confidence day - (16/n)

Understanding and anticipating day time in the early trading session helps in avoiding unnecessary trades. For example, fading a trend day is suicidal. Likewise buying options in a non-trend day is just giving away premiums - (17/n)

I hope,this thread provides basic direction on where to start with Market Profile exploration & obviously, there is a lot of content out there to take your learning to next level by digging deeper into each of these topics. Shall continue with other topics in next thread - (n/n)

22-FEB: Measuring market confidence is important aspect of day trading & different opening types provide that ability to judge what the confidence is likely to be for the rest of the trading day. This helps to set your bias and works great deal in avoiding unwanted traded - (1/n)

Open-Drive (OD) - Price starts running one way immediately after the market open. This marks high confidence/conviction in auctioning that fair value of the price is changing rapidly creating a trend. These are typical days when one should avoid looking for mean reversion - (2/n)

Open Test Drive (OTD) - Type of open when market tests a significant level from previous day before making a directional move. As shown below, prices test previous day's value area low and get rejected to drive prices lower. This denotes change in the market - (3/n)

Open Rejection Reverse (ORR) - Opens in one direction, sees sharp rejection to head in the other direction. This occurs likely when markets attempt to make a swing. Ex: Opens with VA, looks above weekly balance high, gets rejected rapidly to head in the opposite direction - (4/n)

Open Auction (OA) - Opens with a balance between buyers, sellers with no serious money/conviction in making a direction. Market participants agree on fair value and price generally trades around that for rest of the day - (5/n)

Spotting open types is really important in setting bias.But, how do we anticipate the probable open types? Well, that depends on where the market opens! This helps in judging whether market is likely give a trading opportunity at open or having to wait for prices to settle- (6/n)

Open Auction in range within Value Area (OAIR & VA) - This is a low confidence open where market thinks the fair trade still remains to be same as yesterday. With this open, odds are high for an OA/OTD. Prices are likely to chop early entries in this type of open - (7/n)

Open Auction in Range outside VA (OAIR) - This is good confidence open where prices reject previous day's VA and opens either at one of the extremes that suggest odds for OD/OTD. This kind of open provides early trading opportunities with traders showing some confidence - (8/n)

Open Auction Out of Range (OAOR) - This is a very high confidence open that gives the high odds of OD/OTD and early trading opportunities. Never attempt to fade the gaps as bigger the gap, odds are high for gap to not get filled, often forming a trend day - (9/n)

Having looked at different open types, zones where market is likely to open & different day types. Now lets look at different profile shapes.This is important in making trading decisions during the course of day. Helps in avoiding some commonly made mistakes - (10/n)

Long liquidation ('b') shape - denotes liquidation of weak longs from the previous day & doesn't show serious money selling into market. Happens when opposite pressure steps in after IB. Second half of day provides nice scalps within the 'b' loop rotations - (11/n)

Short covering ('P') shape - denotes weak shorts covering from previous day & doesn't guarantee serious money buying into the market.After IB formation,higher prices attract sellers to stop weak hands from buying. Second half provide nice scalps within 'P' loop rotations - (12/n)

Balance ('D') shape - denotes low confidence markets waiting for more market generated information. Forms ahead of events and days that favor mean reversion trades within the 'D' loop rotations. - (13/n)

Elongated / Trending shapes - Markets stretch forms a trending profile shape constantly one time framing higher or lower that essentially means forming Higher Highs-Higher Lows or Lower Highs-Lower Lows. High confidence markets that you never should fade - (14/n)

Let's take a pause here for the week to review the basics of days, open types, shapes and confidence of markets based on these building blocks. We shall look at different trading rules like - Gap rules, Balance rules & Spike rules and probable trading setup next week - (15/n)