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MENTORING - Market Profile - Basics ((1) We have discussed that the stock…
MENTORING - Market Profile - Basics
(1) We have discussed that the stock market has its behavior rooted in a Normal Distribution.
(2) Extending this logic, we will try to observe the random behavior of the prices through a Normal Distribution.
(3) Bar charts or other form of charts do not collect so much data generated by the market. Even if they collect, they do not visually give out in such a way that a trader can look through the bar.
(4) Steidelmayer felt that there is a better way to look at the market, which is a complex adaptive system.
(5) The market has three dimensions, though there are many variables that control the complex process. These three dimensions are: (1) price; (2) time; and (3) volume.
(6) The market generates so much random data that we should observe them through the lens of a Normal Distribution.
(7) For this, we use a graphical tool called Market Profile. This tool gives us a different view from a normal technical chart.
(8) Through a Market Profile chart, we can see the market's organising mechanism or distribution across prices and time/volume.
(9) Since we are observing prices as the main tool for trading, we will reorganise a Normal Distribution verticall (as prices are always on a vertical scale).
NOTE: A stop loss is a function of time. That is how much time a trader has to wait for his move.
(10) Steidelmayer brought the concept of 'value' to trading differently, after understanding the concept of 'fundamental value' from Graham and Dodd.
(11) He postulated that price that occurs over time is 'value'.
(12) Price that occurs over time becomes 'value'
.
(13) Price * Time = Value (not a math equation)
(14) A value that is accepted over time increases (decreases) price, and a value that is rejected over time decreases (increases) price.
(15) Value is different for different people.
(16) To observe value better, prices are organised in a Normal Distribution. Though they are not organised as a perfect Normal Distribution (but returns are always), Prices are never perfectly fit into Normal Distribution, but they tend towards Normal Distribution.
(17) Traders (investors) with different perceptions of value are organised or spread across a Normal Distribution curve. So here the data we are using in the set is prices in that time frame.
(18) Now value (prices) is distributed over a Normal Distribution curve in the given time frame. In this, there is a section that is called value, and there is a section that is called non-value.
(19) The area that forms 68% or +/-1SD (standard deviation) is called the 'value area'. This 68% is of prices or of time.
(20) The area that is beyond this 68% is called non-value area. Where the rest of the standard deviations lie (+/-2SD, +/3SD, et al)