Anomaly: An anomaly is a single price or price levels that lack symmetry, an unusual structural arrangement in the Market Profile®; they represent structural weakness. Learning to spot anomalies is the first step toward understanding the information that anomalies provide.
Asymmetric opportunities: An asymmetric opportunity is present when the risk of a trade is exceeded multiple times by the profit opportunity. Asymmetric opportunities are not to be confused with market symmetry. Risk is measured from the location of a structural stop (as the stop relates to the Market Profile® two-dimensional structure) with the potential profit being calculated using an exit at a potential visual market destination.
Auction process (two-way): The purpose of an auction is to facilitate trade. Prices constantly auction from low to high and from high to low to fairly distribute the bids and offers presented by the market participants of all timeframes. This is the fairest way to allocate prices and contracts among competing bids and offers; the byproduct of the two-way auction process is market-generated information.
Balance: This refers to trading ranges, brackets, balance areas, congestion areas, and consolidation ranges—all synonymous terms. They define price ranges in the market that are containing trade. Within these containment ranges reversion to the mean trades are the favorite of short-term traders. We often refer to these containment ranges as “paradise” for short-term traders. Bigger opportunities occur as price auctions outside of these containment ranges. Balance occurs in all timeframes. For shorter term or day traders balance may be an inside bar or multiple periods of price containment. Balance and excess are the two most important concepts you will be introduced to because they signify change or the potential for change to take place.
Balance area rules starting with inside days:
- Market may slightly extend the range in either direction, stays in balance. Patience is in order.
- Market explores upside breakout and is met by aggressive sellers; prices fail to be accepted above the breakout. Fade the price probe failure—the potential target is for rotation to the opposite end of balance.
- Market explores to the upside; higher prices receive the unexpected response and attract even more buyers. Higher prices are accepted, breakout is successful. Go with price acceptance in the direction of breakout.
- Market explores downside breakout and is met by aggressive buyers; prices fail to be accepted below the breakout. Fade the price probe failure—the potential target is for rotation to the opposite end of balance.
- Market explores to the downside; lower prices receive the unexpected response and attract even more sellers. Lower prices are accepted, breakout is successful. Go with price acceptance in the direction of breakout.
Buying tail: This is formed bysingle prints (single TPOs) on the bottom of a profile; a gauge of buyers’ reactions to a lower advertised price opportunity. The greater number of single TPOs that form the buying tail the more aggressive the buyers’ reaction.
Carry forward: Simply means that you record market-generated information and incorporate it into your market perspective and analysis going forward. This practice helps you maintain a bigger perspective and helps you avoid getting caught up in the day. It is market-generated information that you employ to understand the auction process, the odds, and helps you formulate an effective strategy and tactical plan for the current session.
Clean: A term we use to identify the age of a trend. If the breakout was to the downside, we consider a breakout of balance “clean” when there is distinct spacing between the bottom extreme of the upper balance area and the top extreme of the next lower balance area that develops after the breakout. By observing the distance between balance areas we can develop a sense of a trend’s strength and the likelihood of a further price move in the direction of the trend. A wide distance between balance areas signifies that a trend is still young. An upside breakout would be the mirror image. See example:
Similarly “not clean” occurs when balance areas are overlapping. In an upside breakout, the lower extreme of the upper balance area is inside the prior, lower balance area. This signifies that the trend is maturing and finding it more difficult to push higher. A downside breakout would be the mirror image. See example:
Cognitive dissonance: The anxiety we feel when we are experiencing two simultaneous conflicting thoughts or ideas; for example, the monthly jobs report is very negative or “bearish” while market-generated information is equally positive or “bullish”. This is a constant and ongoing issue with us as traders.
Completion: The most common two-way auction completion is identified via “excess”: a rapid counter auction that fades the most recent auction high or low. It is not uncommon to see an auction that has not yet completed itself; this would be identified via “poor” or “unsecured” highs or lows. The concept of “completion” is applicable to all timeframes; there could be completion of the day timeframe while still having an uncompleted short-term auction.
Daily range: The height of the profile from high to low. While trading occurs in the electronic markets for most of a 24 hour period, when we refer to daily range we are referring to the time that a market is open—the traditional “pit session” hours.
Destination trade: A term that applies to a very visual level to which the market may trade. A typical destination trade would be from the top of a five-day trading range to the bottom of the range. On an upside break out of balance, the destination trade may be to the bottom of a previous trading range low or to a yearly or monthly high. Once again, markets are very visual.
Diffusion model: Information is the driving force of all markets; information has no power until someone acts on it. Understanding human nature is key to understanding the totality of the auction process. The following behavior is applicable to all independent timeframes: (Chapter Two and Chapter Seven of Markets in Profile and Chapter Six of The Tipping Point offer further elaboration on this topic.)
- The innovators are the first to act and the hardest to detect; they are mostly individuals and hedge funds that are not driven by committee decisions. They are generally very low-keyed and shy away from publicity.
- The early adopters are next and climb aboard a trend early in the process. (Remember: these concepts are applicable to all timeframes independently.) They are also less likely to be driven by communal decisions. They can become very aggressive.
- The early majority are generally the more astute larger organizations and individuals. This group represents the heart of the bell shaped curve.
- The late majority is led by the larger, slower moving institutions and individuals; those who require substantial information prior to making a commitment or decision. They tend to be more committee based if they are institutional.
- The laggards are those that are extremely late to the auction; they enter just when the innovators are packing up to go home or have already faded the current auction.
Dominant timeframe: Some background is necessary before you can begin to incorporate this concept; however, once you understand our use of the term timeframe you will also understand that each of these timeframes behaves differently. You will also appreciate that they may act separately, jointly, or counter to each other. It is important in our trading decisions to understand which timeframe or timeframes are dominant on any given day. For example, if the longer timeframes have little interest during the day session, the day timeframe may be able to dominate the daily auctions. On other days, there may be a great deal of interest by the longest timeframe, who then takes control; this is often why we experience trend days. Part of your accumulated experience is discerning who is participating in the auction by understanding the expected behavior of these multiple timeframes.
Dynamic references: References are static and dynamic; static references are preexisting while dynamic references are created during the pit session (or overnight) auction. Examples of dynamic references include buying and selling tails and POCs. If these dynamic references are not taken out during the current session, they become static references for following sessions. Dynamic references are the most current references that develop in real-time.
Elongation: The simplest definition for an elongated profile is one that is lengthening; a profile that is elongating represents a market that is proceeding directionally on a convictional course; a non-elongating Profile represents a market that lacks directional conviction. See below:
Excess: Excess marks the end of one auction and the beginning of a new auction. It is visible within the two-way auction process via buying and selling tails. Excess occurs in all timeframes; it completes an auction. There are always multiple two-way auctions at work; one could be completed while another is still active. Excess occurs in all timeframes. As was stated earlier, balance and excess are the two most important concepts you will be introduced to because they signify change or the potential for change to take place.
Exogenous event: An unexpected event that wasn’t considered within anyone’s model of expected market moving events; these events occur more than most mathematicians anticipate. They contribute to market uncertainty.
Exponential effect: As we accumulate either negative or positive information we can’t simply assume that each new piece of negative information, for example, can be added or incorporated into our analysis by simple mathematical addition. As the negative information begins to accumulate, each new piece of information may have the effect of very rapidly multiplying the possible outcome of risk or opportunity. We have experienced this effect as we build sand castles where finally the last grain of sand collapses the castle. Graphically the effect would look something like the following graph.
Gap: Is another form of excess. Price moves rapidly away from a prior trading level or reference; a gap signifies a total reordering in market thinking. NOTE: A gap, as it is employed in the Field of Vision video, Mind over Markets, and Markets in Profile, is measured from the previous day’s high or low—not from the settle. A gap signifies a market that is out of balance and presents a large opportunity.
Gap Rule: If the gap is filled and value cannot at least be similar value to the prior day, odds of a later day move in the direction of the gap are likely.
Go with trades: Go with trades are required to benefit from breakouts from balance, trading ranges, etc. To benefit from these breakouts, traders will be paying ‘10’ for something that may have been priced at ‘6’ prior to the breakout, for example. These trades, very often, represent a dynamic change in market thinking as well as risk and opportunity. These trades are high risk if you are positioned against the breakout; but large opportunities if you are going with the breakout. With successful breakouts, structure and value will follow. The opposite of go with trades are reversion to the mean opportunities
Half back: This reference is usually reserved for day and short-term timeframe trading and is most applicable when the day or short-term timeframe is dominating the market. It is also most applicable during the market’s initial auction; if there are day or short-term timeframe buyers below the initial rally high, or day or short-term timeframe sellers above the early auction decline, they tend to surface on a 50% pullback or 50% rally of the initial auction range (high to low). Throughout the day the half back reference ”floats” as there is range extension; however, it is still a day and short-term timeframe reference. We stress day and short-term timeframe because when the market is dominated by longer timeframes they pay no attention to these very short-term references. It is always important to know what timeframe is dominating since the trading behavior will change.
Initial balance: The price range resulting from market activity (generally) during the first two periods. The actual definition is far less important than the concept; when the initial base of trading is narrow (reading from high to low) it will be easier to knock over or experience “range extension”. A wider base will be more stable and better able to contain price.
Some days have no initial balance as the market begins to trend immediately from the opening range with constant range extension.
Long liquidation break: We refer to long liquidation as “old business” because it is reversing earlier long positions. Long liquidation can actually strengthen a market because it removes potential sellers; you liquidate an existing long by selling.Similar to short covering rallies, these breaks are against the prevailing trend and can be sudden and sharp. The old trading adage is that a market may be too long to go any higher, i.e. “a market has to break before it can rally”. Long liquidation is a process that adjusts inventory that has gotten too long. Itoccurs within every timeframe; day timeframe long liquidationmay be over quickly while longer timeframe long liquidation may last for much longer periods of time.
Market-generated information: This is what the Field of Vision video is about.We require objective information to perform our analysis of the market in order to arrive at the trading decisions we make; that information may come from news reports, fundamental or technical sources, or governmental officials, for example. These sources may or may not actually be putting money to work in the market. If they are not, they have little at stake; if they are, their opinions or views may be too biased. In other words, we cannot depend on this information being objective. MGI is derived only from real positions taken in the markets by real people with real money. The lack of commitment or placement of real orders with real money is also MGI. Examples of MGI are buying or selling tails or lack thereof, points of control, volume, Profile elongation or lack of elongation, and overall market structure.
One-timeframing: A trending situation where in an uptrend, the low of the previous bar is not broken to the downside by 2 tics or more.
Conversely, in a downtrend, the high of the previous bar is not exceeded by at least 2 ticks or more. As these upside and downside situations occur over multiple bars we identify them as “one-timeframing’. One timeframing is applicable to all timeframes, from monthly, weekly, daily charts to the shortest timeframe Market Profile® thirty minute periods intraday.
Recognizing a one-timeframing mode can keep a trader from fading a market at inopportune times while also enabling a trader to employ the most appropriate strategic and tactical plan for current market conditions.
Overnight inventory: Refers to trading after the “pit session” close and before its opening the following session. If the overnight session trades above the settle of the most recent day session, the overnight inventory would be considered “long”. If overnight trading is below the settle of the prior day session, the overnight inventory would be considered “short”.
Overnight inventory is an important consideration when formulating your strategic and tactical plan for the current session. Successful trading is extremely dependent on understanding inventory positions, both in the overnight session and even more so in the broader auction process.
Point of control (POC): This is the longest line of TPOs closest to the center of the daily range. This is the price where the most activity occurred during the day (based upon time); it is therefore the price considered to be the fairest during any trading day.
The migration of the fairest price at which business is being conducted is of great importance in monitoring longer timeframe activity (greater than day timeframe) in any single day.
Poor or unsecured highs or lows: Auctions, within the market’s natural two-way auction process, end in one of two ways: 1) Most commonly the auction ends through a more aggressive counter auction that creates a buying or selling tail; or 2) The auction ends through simple exhaustion. Exhaustion is similar to running up a steep hill and continuing to lose pace or momentum until we just stop and begin to slowly turn around and gradually walk back down the hill. The only thing that stopped us was the loss of our own momentum. By far the most reliable and information packed ending is through aggressive counter action. We refer to an auction that terminated through exhaustion as poor or unsecured because of the lack of counter action; the original auction, after getting a rest, is more likely to make another attempt to crest the hill. The more attempts that are made, the more likely the auction will finally succeed. Poor highs or lows are often the result of excessively long inventory (with regard to poor highs) or excessively short inventory (with regard to poor lows). These inventory imbalances often involve longer-timeframes and therefore take time to balance before continuing in the direction of the prevailing trend.
Pullback low/Rally high: Applicable to trend days and is a late afternoon price migration against the prevailing trend. During a trend day there is usually one afternoon inventory adjustment; the pullback high or low is the extreme of this inventory adjustment. On the following day the pullback high or low is used to determine if there has been any meaningful change relative to the previous day; if the pullback high or low is not violated, there has been no meaningful change in the opposite direction of the prior day’s trend.
Rally high/Pullback low: Applicable to trend days and is a late afternoon price migration against the prevailing trend. During a trend day there is usually one afternoon inventory adjustment; the pullback high or low is the extreme of this inventory adjustment. On the following day the pullback high or low is used to determine if there has been any meaningful change relative to the previous day; if the pullback high or low is not violated, there has been no meaningful change in the opposite direction of the prior day’s trend.
Range extension: A price probe outside of the established range that indicates that more aggressive participants have entered the auction.
Repair: We employ the word “repair” when we see an area of the profile or a specific anomaly that doesn’t contribute to the symmetry of the Profile that we are accustomed to seeing. For example, the poor low in the crack spread shown below didn’t have symmetry, on the following trading day, the symmetry was “repaired” when the low was taken out.
Selling tail: Single prints (single TPOs) on the top of a profile; a gauge of sellers’ reactions to a higher advertised price opportunity. The greater number of single TPOs that form the selling tail the more aggressive the sellers’ reaction.
Short covering rally: We refer to short covering as “old business” because it is reversing earlier inventory. Short covering actually weakens a market as it removes potential buying interest; you cover a short by placing a buy order. The old adage is that a market may be too short to break any farther and that it has to “rally before it can break”; another way to view short covering is an adjustment in inventory. Short covering rallies can be very violent and misleading if you don’t understand the difference between old and new business. Short covering occurs within every timeframe; day timeframe short covering may be over quickly while longer timeframe short covering may last for much longer periods of time.
Short-in-the hole: Trader slang for traders who are short at bad prices; this usually occurs when emotion takes over and the herd instinct is in full effect. Understanding market structure and volume is, very often, a defense against getting caught “short in the hole”.
Spike: A spike is a late price probe either to the upside or downside during the market’s two-way auction process. It happens too late in the day to be verified as having been accepted or rejected. For example, if an upside probe was rejected we would be left with a selling tail. Similarly, if a downside probe was rejected a buying tail would emerge. If the spike was accepted, price would trade within the range of the spike over time. We are forced to await the market’s opening during the pit session of the following day for the market’s verdict.
Spike Rules: Without placing the spike within any context the simple rules are:
- A price opening below an upward spike would be considered negative since the price probe or spike was rejected leaving a selling tail.
- Opening within a spike shows price acceptance and keeps the rally in tact; price has found a level where two-sided trade is taking place—the price discovery dream of all businesses.
- Opening and trading above an upward spike reveals that price has not auctioned (probed) high enough to cut off the buying allowing for two-sided trade. The auction is not over.
- The bottom of the spike is “support”; as you begin to think in terms of spikes you will see how visible this reference is.
- A price opening and trading above a downward spike would be considered positive since the price probe or spike was rejected leaving a buying tail.
- Opening within a spike shows price acceptance and keeps the break intact; price has found a level where two sided trade can take place.
- Opening and trading below a downward spike reveals that price has not auctioned (probed) low enough to cut off the selling allowing for two-sided trade. The auction is not over.
- The top of the spike is “resistance”.
Structure: A building has structure; if you know anything about construction you can observe the structure as it is built and are able to comment on the quality, strength, and what pressures it can withstand. You arrive at these observations by noticing the arrangement of the parts along with the interrelationships of the parts in the construction. If you have observed the entire construction project, layer by layer, the structure is very visual to you at multiple layers. Some structures are very sturdy requiring a tremendous force to move them, while others are made of inferior materials and poorly assembled without interlocking joints or strapping to bind them together; these will require little force to change them.
The Market Profile® captures the building and development of each auction (structure) within the market’s natural two-way auction process; learning to understand the quality and strength of each auction and at each level is one step in creating a trading edge.
Market-generated information (MGI) that comprises structure: accumulating poor highs or lows and wide points of control (POCs) that are not revisited; accumulating, anomalous—non symmetrical—profiles over time; strung out profiles that are asymmetrical in shape showing no healthy elongation; and, daily (or even longer timeframe) bar charts that are strung out and show no balancing—no ‘elevator stops’—that reflect healthy balancing as a market trends up or down. The accumulation of various MGI—its cumulative effect—increases poor structure exponentially. This is to say that as more suspect MGI develops, the structure is worsening at an increasing rate and factors into our market perspective accordingly.
Suspended auction: Baseball games can be suspended because of darkness or weather; a suspended game would be completed at a later date. It is not uncommon to experience suspended auctions within the market’s two-way auction process. For example, the long-term auction might take a breather as an intermediate-term counter auction balances or adjusts the long-term inventory. The long-term auction hasn’t ended; it is simply suspended until the inventory adjustment has been completed. It is not uncommon to observe the same process as a day timeframe or daily auction experiences a similar correction. An uncompleted daily auction would structurally lack a buying or selling tail and would leave an “unsecured” or “poor” high or low. Suspended auctions occur in all timeframes.
Symmetry: A helpful way to describe symmetry starts with this definition from dictionary.com: “The proper or due proportion of the parts of a body or whole to one another with regard to size and form; excellence of proportion.” For example, the Profile of a solid, healthy trend day has parts that are relatively proportional to each other and the Profile as a whole; even though it is an elongated Profile it has symmetry. This is quite different than a Profile that is too stretched out where the proportion of the parts is not normal relative to the body as a whole, such as a double distribution or triple distribution day; these Profiles lack symmetry. Anomalies are another example of Profiles that lack symmetry. They are by definition not proportional to the Profile shape and depending on contextual considerations, have higher odds of being revisited or repaired.
Most important to understand is what symmetry represents in the auction process. It is not static; there is symmetry in different environments. In a trending market, symmetry suggests solid trade facilitated by confidence and a certain order, or flow, throughout the pit session. If it is a trend day up, trade is being facilitated for the buyer; a trend day down, for the seller. In a rotational environment where balance has formed, symmetry depicts an agreement of value, at least for the short-term, between buyers and sellers. Inversely, a lack of symmetry reveals, through Profile structure, emotional trading, low confidence, and hesitancy in the auction process.
Market Profile shape has traditionally been described as a bell-shaped curve or ‘normal’ distribution turned on its side. However, over the years our use of symmetry has become more sophisticated and has advanced beyond this foundational principle; the bell-shaped curve description is somewhat oversimplified. We have a brief article describing symmetry available to our clients.
Tempo: Dictionary.com defines tempo with regard to chess “as the gaining or losing of time relative to one’s mobility or developing position.” That definition is applicable to trading; for example, if the market is attempting to auction higher, you can ask, “How effective is the auction?” Once you begin to think in terms of tempo you will be on your way to internalizing this important concept. Tempo is a market term rather than a Market Profile® concept; although it is certainly applicable to the auction process. Many successful day traders, who consider little else, are successful because they understand the market’s tempo. Tempo precedes market structure; in this way it is a leading indicator of what structure will eventually look like.
Timeframes: Market activity is influenced by a wide variety of participants operating under a wide variety of timeframes and motivations. The way each of these participants combines and employs information is different. For learning purposes we have segregated the markets into 5 timeframes: (Chapter 3 of Markets in Profile expounds on this topic.)
- Scalpers are very short-term oriented, trades being completed possibly in seconds; they rely primarily on intuition and order flow. Today most scalping is done via computer.
- Day traders come to market each day flat (no position) and leave the day flat. Their behavior is very short-term and often emotional. They depend almost exclusively on market-generated information because fundamental information is too slow and cumbersome; fundamental information can actually be counterintuitive for the day trading process.
- Short-term traders’ timeframe is usually 3-5 days or slightly longer under the right contextual conditions. They supplement market-generated information with an awareness of recent fundamental information and the effects this can have on market movement. They love to trade from the top to the bottom (or bottom to the top) of multiple-day trading ranges—5 to 10 days is ideal.
- Intermediate-term traders’ timeframe covers weeks or months of market activity; they rely on a blanched mix of fundamental and market-generated information. This timeframe prefers to trade from the top to the bottom or vice versa of large trading ranges or balance. When the intermediate-term traders begin to dominate a market, their behavior is aggressive. While they tend to dominate markets far less frequently than the short-term timeframe discussed above, when they are dominant they are usually very aggressive and move the market substantially. Shorter-timeframe traders who are unaware of their entry into the market often suffer substantial losses.
- Long-term investors/traders may hold positions for months or even years; they are far more attached to the securities and investments they own. They tend to follow fundamental information first, followed by market valuation, and finally market-generated information to supplement their understanding of market activity. When they become dominant, markets can move out of the more traditional contained ranges of the other timeframes. They move markets; and when they do, the other timeframes “pile on”.
Timeframe trading behavior: The Field of Vision video covers the behavioral aspects of the various timeframes. Determining who is in the market on any given day and understanding how their participation will affect the auction process is crucial in determining one’s trading strategy and tactical implementation.
TPO: The basic building blocks of the Market Profile® are called Time Price Opportunities, or TPOs. Each half hour of the trading day is designated by a letter. When a certain price is traded during a given half hour period, the corresponding letter or TPO is recorded next to the price. Any time period may be selected.
Trade location: This is the area where a trader enters or exits a position in relation to market structure. Trade location is relative to the timeframe one trades; a day trader may use trade location based on the current Market Profiles® while an intermediate-term trader may reference a weekly bar chart. We are continually looking for trade location that provides asymmetric opportunities; employed in this manner trade location is one of the best risk tools available. Considering trade location in the trade selection process can keep a trader from over-trading; when trade location is considered there are a limited number of prime trade opportunities available.
Unchanged: Is simply the close, or settle, for the prior pit session. It is an important day timeframe reference.
Value area: There is always price and value; they are not necessarily the same. The value area is where approximately 70% of a day’s business is conducted (roughly one standard deviation). This is logical for the middle part of a bell shaped curve is where most activity occurs and indicates where two-side trade is taking place. Many of us were graded on the basis of a bell shaped curve; the majority of students place in the middle range. We want to trade value not price. Appendix 1 in Mind over Markets provides a sample calculation.
Volume: The three auction principles are: price advertises opportunity, time regulates all advertised opportunities, and volume measures the success or failure of those advertised opportunities. Discussions of volume are, in real world application, more complex and ambiguous; it has to be used on a relative basis. For example, volume during holiday seasons can’t be compared to more normalized trading periods.
Volume must always be interpreted in context; for example, higher prices on lighter volume are suspect whereas higher prices bringing in more volume suggests the opposite. Volume is a lifetime study that requires the correct focus and approach; however, applied properly, volume is data that clearly separates successful traders from their competitors.
Volume which occurs in a market that is within a trading or consolidation range would be expected to be much lower than during a period when the market is breaking from the same trading range with the birth of a new trend. If, however, the volume on the breakout is not stronger then you have gained value market information.
Measuring and comparing volume is tricky because you can only measure volume accurately if you know in what direction the market was attempting to auction. Once armed with good volume figures you then compare volume on rising days against volume on declining days, for example, to begin to sense the market’s underlying strength or weakness.