Value Trading 2 | Market Profile® Trading | Order Flow | Auction Market Theory | Value Trading

Education - Articles - Value Trading Basics

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Facilitating the Trade
Feeling extremely pleased with his business prowess he decides to probe the market further and increases his offer to £2.50 per loaf. At this higher premium price, over the following week he finds that on average only 10-20 loaves of bread are being sold per day leaving surplus inventory.Order flow that previously supported higher value has now deteriorated. At these new higher prices demand has diminished and the buyers have effectively rejected the value of this price increase. For two sided trade to take place the baker must reduce his asking price to where the buyers are happy to buy and facilitate trade. This from past evidence can occur at £1.75 where the baker expects buying demand to return offering support to his bread sales.

Auction Market Trading
Trading activity can be viewed like an auction

Auction Market Structure
This scenario is being acted out in every auction market, every day. Price is advertised looking for where best two sided trade can take place. How do we see this taking place in the futures markets? Firstly, the trader must establish where the value has been previously accepted (calculated from the previous day’s activity). The high and low of this value area gives us the extremes of value. Any extension beyond these regions can present high probability trading opportunities depending on whether price is accepted or rejected. Our Trading Room clients are constantly reminded of the auction market nature of the Futures market as they listen to the noise from the S&P 500 Pit Floor streamed live from Traders Audio, our Squawk Box partner.

Trading Futures Indexes using the Wisdom of the Crowd
iTradePod traders use the Wisom of the Crowd

Wisdom of the Crowd
On 11th September 2011, The Telelgraph, a renowned British newspaper, published an article entitled "Twitter becomes latest tool for Hedge Hund managers". In essence the article was about how traders can leverage the power of the 'Wisdom of the Crowd' to gauge sentiment with a higher probability of accuracy, and, hence, make money. The wisdom of the crowd refers to the process of taking into account the collective opinion of a group of individuals, (e.g. futures traders in the pit), rather than the opinion of a sole individual (e.g. a single trader sitting alone in his office) to draw a conclusion.

In Fig 1 below, value was previously established (not shown) between 12, 482 and 12, 522. The day of July 5th 2011 was the second day of consolidation that was preceded by a five day bull rally. On July 5th 2011 we saw a market that had an Open Auction Out-of- Range (see the glossary on the iTradePod website for more info on the 5 different Market Profile® Trading opening types) type of open.

Fig. 1 07-05-11 E-mini YM ($5) Futures 5 Min Chart – NINJATRADER®
Value Trading in action using VWAP Chart
Chart courtesy of our trading platform partner, NINJATRADER®

The thick black line near the centre of the price activity is the Volume Weighted Average Price (VWAP). The thin inner green and outer blue lines are the 1st and 2nd Standard Deviation lines, respectively. The outermost red dotted lines are the 3rd Standard Deviation lines.

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