Market Profile Trading A to Z
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.
Tempo - describes how effective an auction is proceeding in its attempted direction. Requires a degree of proficiency and trading experience to internalise and profit from the concept of tempo.
Time - is responsible for bringing order to the auction market and opportunities therein and, thus, the Market Profile structures we eventually identify and interpret. Time is the most important factor used to assess timeframe control: acceptance (value, balance, horizontal dev.) is time spent at a particular price level and typically indicates that the day/shorter timeframe market participant is in control at those price levels; whereas rejection (excess, imbalance, vertical dev.) is when a sparse amount of time is spent at price, the swifter the rejection, the more apparent it is that the longer timeframe market participant is in control at those price levels.
Note, however, that time can be a double edge sword. If market participants fail to auction prices with sufficient tempo in one direction the then the opposing market participants will reverse the market in order to facilitate trade. Likewise, a breakout (rejection) will ultimately be the result when a market spends excessive time at particular price levels. Rather than depend exclusively on the structure of the Market Profile ®, an understanding of the difference between adequate time and excessive time give the trader an edge of entering the market, ahead of the ensuing structural confirmation which indicates a shift in Order Flow.
TPO - Time Price Opportunity. Respresented by a letter of the English alphabet that corresponds to each 30 min candle of the trading session. When a certain price is traded during a given 30 min period, the corresponding TPO is recorded next to the price on the Market Profile® graphic. As trade transactions occur at different prices on the chart, a picture of corresponding TPOs illustrates the statistical distribution of these trades. The Market Profile® graphic is not an explicit measure of the amount of business being done by volume (this can be obtained from a volume profile chart). Rather it represents where a market has spent time; time at price implicitly indicates volume, hence, the term Value Area.
Trade Location - analysis of the key reference areas spawned from the Market Profile® graphic assists the trader to identify optimum trade location i.e. where to do business on the chart. This is the area where a trader enters or exits a position in relation to market structure.
A trader needs to determine what is the market perception of value, relative to his or her timeframe, in order to have a high probability of identifying good trade location; a day trader determines value based on the current Market Profile® grapihic while an intermediate-timeframe trader may consult a weekly bar chart to determine value on that timeframe.
The idea is to locate areas on the chart to do business that provides us with asymmetric setups; employed in this manner, trade location is one of the best risk tools available. Larger timeframe context is essential and can help internalise the importance of what is occurring in the shorter time frame. There are only a limited number of optimum trade opportunities to be had, so giving weight to trade location in the trade selection process can prevent a trader from including poor trade locations and, thus, over-trading.
Trend Timeframing - during vertical development in an uptrend over multiple candles it is a requirement that, the low of the previous Market Profile® TPO or 30min candlestick Low is not breached to the downside by greater than 2 ticks. Simultaneously, ideally but not a requirement, the high of the previous Market Profile® TPO or 30min candlestick High is tested or exceeded. The inverse applies in a downward trending market. When a market is auctioning in such a vertical development, the previous day’s value area (pVA) extremes are important key reference areas.
Trend Timeframing is fractal and recognising it can prevent a trader from depleting their trading account in a futile and dangerous attempt to fade a trending market controlled by the Longer Timeframe Market Participant instead of taking a ‘go-with’ approach. Ultimately, the migration of value gives the most accurate interpretation of trend.
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