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(1)

The Chicago Board of Trade

®

and

The Chicago Board of Trade

®

and

WindoTrader

®

Corporation present:

Market Profile

®

Keys for

Traders and Investors

Market Profile® is a registered trademark of the Chicago Board of Trade®

(2)

The following information is offered as an abridged edition of the Market Profile® Basic User’s Guide edition of the Market Profile Basic User s Guide available through the WINdoTRADEr® website at:

d d

www.windotrader.com

WindoTrader® Corporation thanks the Chicago p g

Board of Trade® for it’s support in creating the

(3)

CBoT

CBoT

®®

Market Profile

Market Profile

®®

CBoT

CBoT

®®

Market Profile

Market Profile

®®

The Market Profile® was developed in the early 1980's by The Chicago Board of Trade® and Peter Steidlmayer as an analytical decision support tool to organize and display y pp g p y market generated information.

The Market Profile's® key components are time, price, y p , p , and volume which are then combined and displayed in a statistical distribution much like a normal bell-shaped curve to reveal pricing patterns and value.

(4)

CBoT

CBoT

®®

Market Profile

Market Profile

®®

CBoT

CBoT

®®

Market Profile

Market Profile

®® (con’t)(con’t)

The Market Profile® is not a trading system. It does not give buy, sell, entry, exit, overbought or oversold

indicators. The trader makes trading decisions based on g an independent evaluation of market price and value information.

The Market Profile® trader, through study and

experience, can learn to identify the market's underlying dynamics and structure (trending versus trading range)

d th i iti t d it t d di l and then initiate, manage and exit trades accordingly. This differs from typical technical analysis which usually measures price movement.

(5)

What is the Market Profile

What is the Market Profile

®®

??

What is the Market Profile

What is the Market Profile

®®

??

The Market Profile is:

• A structure for organizing a developing market. • A horizontal and vertical display of the dynamic p y y

process of market activity.

• A visual display of the market’s current ‘value’ or ‘fair’ p y price range.

(6)

What is the Market Profile

What is the Market Profile

®®

?

?

What is the Market Profile

What is the Market Profile

®®

?

?

(con’t)(con’t)

The Market Profile is:

• A decision support tool to help traders better understand the ‘present’ condition of the market.

• A tool for recording the market’s current activity through the organization of time, price, and volume. • A graphic reflection of all market participant opinions.

(7)

The Market’s Auction Process

The Market’s Auction Process

The Market’s Auction Process

The Market’s Auction Process

The market’s auction process translates countless supply and demand factors into the market’s current price.

The market’s current price is determined through the market’s own price discovery or bid-offer auction

process. Basically, the market auctions up until there are

p y, p

no more buyers, and down until there are no more sellers. This is known as a ‘dual auction’ process which means p the end of an ‘up’ auction is the beginning of a ‘down’ auction and vice versa.

(8)

The Market’s Auction Process

The Market’s Auction Process

i i ll h k di i ll ki i

The Market’s Auction Process

The Market’s Auction Process

(con’t)(con’t)

More specifically, the market moves directionally seeking an opposing directional response resulting in the initial directional move being stopped. Understanding this auction process through the use of market ‘tools’ such as U de sta d g t s auct o p ocess t oug t e use o a et too s suc as the Market Profile® allows traders and investors to identify and effectively

respond to the market’s ‘continuation or change’ scenarios.

A key factor in identifying potential ‘continuation or change’ scenarios is A key factor in identifying potential continuation or change scenarios is the Market Profile’s vertical and horizontal display of the market’s own current activity and it’s current price / value relationships.

F ll i l ‘K ’ t d t di th b fit f i th Following are several ‘Keys’ to understanding the benefits of using the Market Profile® as a ‘tool’ in your trading and / or investing toolkit.

(9)

Market Profile

Market Profile

®®

‘Keys’

‘Keys’

Market Profile

Market Profile

®®

‘Keys’

‘Keys’

Direction Direction Initial Balance Initial Balance Tails/Single Prints Tails/Single Prints Trading Ranges Trading Ranges Initial Balance Initial Balance Point of Control Point of Control Trading Ranges Trading Ranges Trends Trends Range Extension

(10)

Direction

Direction

Direction

Direction

U d di h k '

• Understanding the market's CURRENT directional bias and STRENGTH of that bias.

• Auctions up until buying is exhausted.

• Auctions down until selling is exhausted

(11)

Direction

Direction

(12)

Initial Balance

Initial Balance

Initial Balance

Initial Balance

R bli h d d i h

• Range established during the first two periods of trade.

• Above average Initial Balance range projects potential

trading range session.g g

• Below average Initial Balance range projects potential

range projects potential trending session.

(13)

Initial Balance

Initial Balance

(14)

Point of Control

Point of Control

Point of Control

Point of Control

• Point of Control – Longest

line of letters (TPO’s) or most common price.

• Highlights area of highest market activity during current market activity during current trading session.

(15)

Point of Control

Point of Control

(16)

Range Extension

Range Extension

Range Extension

Range Extension

P i t di b d i iti l • Price trading beyond initial

balance high and / or low. • No range extension usually • No range extension usually

means the short-term trader is in control of the market.

• Range extension usually means longer-term trader in control of the market.

(17)

Range Extension

Range Extension

(18)

Tails and Single Prints

Tails and Single Prints

Tails and Single Prints

Tails and Single Prints

• A Tail - Consecutive single prints at either a high or low extreme. B i T il F d b k t • Buying Tail - Formed by market

moving lower and buyers

entering the market aggressively. • Selling Tail - Formed by market

moving higher and sellers

(19)

Tails and Single Prints

Tails and Single Prints

Tails and Single Prints

Tails and Single Prints

(con’t.)(con’t.)

• Spikes are tails occurring in the last period of the session and are potential keys to trading the

following session’s open following session s open.

• Single prints are found between distributions in a

t di i

trading session.

• The length / range of the tail or single print is

usually an indication of the potential ‘strength’ of the tail or single print.

(20)

Sell Tail and Buy Tail

Sell Tail and Buy Tail

(21)

Single Prints

Single Prints

(22)

Trading Range

Trading Range

Trading Range

Trading Range

• A narrow range of prices that persists through time.

i i l b l ll

• Initial balance range usually greater than average.

C fi d b l d t

• Confirmed balance edges create risk and opportunity.

• A trading range is defined by • A trading range is defined by

(23)

Trading Range

Trading Range

(24)

Trading Range

Trading Range

Trading Range

Trading Range

(con’t.)(con’t.)

• Primarily a short-term trader’s market.

U ll h t i d b littl ti i ti b • Usually characterized by little or no participation by

the longer-term trader.

O k t t di t di i t b ti t d • One key to trading a trading range is to be patient and

wait for the market to ‘challenge’ the extremes and then enter on a failure to break-out of the range. • More trading opportunities with limited potential.

(25)

Trends

Trends

Trends

Trends

• A market moving with clear, sustained direction.

• Divergence of price away from value

from value.

• Trends are defined by the t d ’ ti f

(26)

Trends

Trends

(27)

Trends

Trends

Trends

Trends

(con’t.)(con’t.)

• A trending market moves directionally until it finds ‘value’ or a ‘fair price’ and trade is shut-off by an opposite response.

• Trends are usually ‘telegraphed’ by a narrow Initial Balance or news.

• Trade location is usually secondary to trade execution. M it i V l A h i k t t di

• Monitoring Value Area changes is key to trading trends.

(28)

Value

Value

Value

Value

• Value is identified by price acceptance, i.e., a price zone where the market trades over time.

• Unfair or rejected price is where market spent minimal time trading, i.e., tails / single prints.

(29)

Value Area

Value Area

Value Area

Value Area

• The value area is that area / zone where approximately 70% (1 standard deviation) of the session’s volume was recorded.

• The value area - where two-sided trade primarily occurred.

• A key measure of overall current market activity. • Value area range is one key to trading range activity • Value area range is one key to trading range activity

(30)

Value Area

Value Area

Value Area

Value Area

(con’t.)(con’t.)

• Market opening and trading above value area favors higher prices.

• Market opening and trading below value area favors lower prices.

M i h di i l bi f h k b

• Many times the directional bias of the market can be determined by the TPO count.

(31)

Value Area

Value Area

(32)

Volume

Volume

Volume

Volume

• A primary measure of the overall ‘quality’ of the current market activity.

• Reading volume through volume relationships, i.e., greater than, less than, or equal to previous volumes.

C di l i hi b

• Convergence versus divergence relationships between price and volume.

(33)

Volume

Volume

Volume

Volume

(con’t)(con’t)

• High volume areas tend to attract market activity.y

• Low volume areas tend to reject market activity.

• Volume is best interpreted over time and in relation to average volume

(34)

Low Volume

Low Volume

(35)

High Volume

High Volume

(36)

Market Profile

Market Profile

®®

Trading Principles

Trading Principles

Market Profile

Market Profile

®®

Trading Principles

Trading Principles

• Know when the market is in a trading range or trending mode and trade accordingly.

• Continually monitor value area development, value area placement, reference points and volume.

• Understand what’s happening and why it’s happening!

(37)

Windotrader® Corporation, again, thanks the Chicago Board

of Trade® for it’s support in creating both editions of the of Trade for it s support in creating both editions of the

Market Profile® Basic User’s Guide.

To view the unabridged version and attend a narrated presentation of the Market Profile® Basic User’s Guide,

please go to:

p g

References

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