Market Profile – Key concepts (These zones are the zones "above VAH…
Market Profile – Key concepts
Value area -
This is the central part and the most important and observable area in a Market Profile.
Statistically, this area is where the market spends 68% of the time or 68% of the time price in this zone is spending time.
What that means is players are coming and are open to trade here in the value area most of the time. So, trade facilitation is superb in value area. That means you can do any type of business in this zone without friction.
Value area will have more player participation and that is the reason why you can get your business done easily in value area. This is what real money focuses on.
In value area, you will get all kinds of players accepting prices at every level within the value area.
A value area has three components - Point of control (POC), value area high (VAH), and value area low (VAL).
The POC is the line of price where maximum business occurs for the day, in terms of time (time spent), volume (number of players) and value (business done).
At a point of control, both responsive and initiative players are active.
Value area high is the high of the value area. Here, initiative buyers and responsive sellers are active.
Value area low is the low of the value area. Here, responsive buyers and initiative sellers are active.
Non-value area is the zone that is beyond +/-1Sigma. That is the zones in +/-2Sigma and +/-3Sigma
These zones are the zones "above VAH and below" day high" and "below VAL and above day low"
Initial Balance (IB) -
The first one hour (two half hours) of trading is called the Initial Balance. Here the market is supposed to run haphazardly due to trading by upstairs players and then settle down after one hour. This is usually important for US markets during the olden pit days. But now this is not that important, especially in the Indian context.
Range extension -
Any movement outside the IB range is called the range extension.
A TPO is a time price opportunity. The three important components of a Market Profile graphic are Time, Price and Volume. Price advertises all the opportunities available. Time regulates those opportunities and Volume determines the success or failure of the advertised opportunities.
Volume areas -
We will use volume also as an important concept in Market Profile, which uses time as the primary concept. Why? Because volume is the fuel on which the price runs or stagnates.
Range and Range Extension
- The range in terms of Market Profile can be the IB Range or Day's Range. The high of the IB is called IBH (IB high) and the low of the IB is called IBL (IB Low). Now in terms of Market Profile, IB range is the real range, and we should track IBH and IBL formation every day. However, we should also keep day's range in play while tracking the market.
This is price going in one direction and each candle of half-hour time frame not breaking the previous candle's high or low.
Single prints -
These are the TPOs that are lonely, at any place in the profile. They can come in between the value area or mostly at the edges near the day highs or lows. These generally occur in a trending market. Single prints have only one TPO at a price. That is the indication.
Tails - A single print coming at the day's high is called a "selling tail". A single print coming at the day's low is called a "buying tail".
Minus development -
A single print coming in the middle of a profile, anywhere in the value area or in the non-value area is called a minus development.
Long liquidation and short covering -
A long liquidation or a short covering are the sudden changes in sentiment that give a drift to the market on the opposite side. For example, the market is slowly rising, and it will see a long liquidation if players adjust their inventory. Similarly, the market is falling and suddenly it will rise to adjust inventory.