Market Profile Trading A to Z | Order Flow | Auction Market Theory | Value Trading | iTradePod

Market Profile Trading A to Z

Market Profile Trading Glossary

Glossary assembled by Andrew Hall, iTradePod. If you have any feedback or would like to see a term added or amended please leave a comment below or contact us.

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Daily Range - measured from the High of the profile to its Low. This may coincide with the HoD and LoD if it is a daily profile. We display RTH Pit session profiles and 24-hour ETH profiles as well as Composite and Derivative Profiles.

Delta - in terms of Order Flow it is the difference between the bid and offer volume for a given candle. So if the [Selling] volume on the Bid is 5000 and the [Buying] volume on the Offer is 3000 then the Delta is -2000. In such case it is expected that price would auction lower to cut-off Sellers and attract Responsive Buyers which is often indicated by COT Divergence.

Delta Divergence - occurs when new High in price occurs when the Delta is negative, or when a new Low in price occurs on positive Delta.

Derivative Profile - arrived at by splitting a day’s profile starting at point where TPOs show a structural change in price activity (such as a reversal, failure, breakout, trend timeframing etc).

Destination Trade - visually conspicuous key reference area levels that are highly probable to attract price activity.

Diffusion Model - the Everett Rogers Diffusion of Innovations Theory; helps us to understand the Auction Market Development process as it highlights the psychological nature of human beings as they react in an auction market. The five categories of product adopters are:

  • Innovators - proactive independent decision makers, educated, multiple quality financial info sources, Long at the very early Accumulation stage of a trend, Short at Distribution stages, fading the laggards; hedge funds and smart money. This group falls between the 2nd and 3rd standard deviation, buying at discount wholesale prices and selling as expensive premium prices.

  • Early adopters - social leaders, popular, educated, in at the early stages of the trend; hedge funds and smart money, prop traders. This group falls between the 1st and 2nd standard deviation, buying at wholesale prices and selling at premium prices.

  • Early majority - calculated, many informal social contacts; celebrity traders, disciplined and well informed private traders, smart money, prop traders. This group is what shapes the Normal Distribution Curve of the profile, buying below and selling above retail prices.

  • Late majority - skeptical, traditional, lower socio-economic status; typically the home-based day trader, private buy and hold investor who enters Long (or closes Short) positions above retail prices and enters Short (or closes Long) positions below retail prices. The exact opposite of Smart Money.

  • Laggards - neighbours and friends are main info sources, fear of debt; speculative members of the public entering the market when new price extremes attract media attention. Typically going Long at the Distribution Stage.

Distribution Stage - "When the ducks quack, feed them", a famous Wall Street saying regarding the Distribution Stage which is the selling of large amounts of an instrument bought at lower prices to potentially late misinformed Buyers (typically laggards) who enter the market as new price extremes attract media attention. Selling large volume of an instrument bought in the lower parts of the trading range cannot be done overnight. The professional traders cannot just sell, at will – they have to distribute on surges of buying from latecomers and laggards. They will then have to take advantage of opportunities that arise, such as good news, or the excitement of crowd behaviour after a long bull move. Once these lines have been transferred, Bids are lowered as price auctions lower.

Divergence - where two indicators are not confirming each other. Usually warns of a trend reversal.

Dominant Timeframe Participant - If the longer timeframe participants are not active during the day timeframe, the shorter term participants are more likely to dominate the intra-day auction. Contrarily, significant activity by the longer timeframe participant (commercials) will cause them to dominate the price direction on the shorter time frame increasing the likelihood of a breakout from Balance (or Trend Day). Part of your accumulated experience is discerning who is participating in the auction by understanding the expected behavior of these multiple timeframes. More importantly, we emphasise that the trader should focus their analysis on the migration of value across the multiple timeframes ahead of attempting to figure out who are the market participants.

Dow Theory - Buy signal is given when the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) closes above a prior swing high. A sell signal is given when both averages close below a prior swing low.

Dual Auction Process - an auction market that moves from balance to imbalance and back to balance again.

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