Auction Market Theory / Market Profile | Trading & Education

A lot of traders never actually understand the importance and value of Auction Market Theory (AMT) due to a lot of gate-keeping and FF thread's (and other place's) that do not explain what is actually going on, just screenshots and to newbies, vague and seemingly crypted explanations.

I intend this thread to serve the trading community and bridge that gap. Over the past year or two I’ve been slowly compiling good educational material, that's easy to digest even for beginner traders, on the subject as well as customizing and expanding on important aspects of the theory/tools.

I plan on structuring the thread like this;

 

1. I will start by posting the basic need-to-know educational material on AMT & Market Profile before;
2. Reposting some of my most well explained & labeled AMT trades and analysis, to give some context to how you can use AMT & MP together along with other essential and infinitely valuable tools like order flow;
3. A run-down of a strategy I currently trade, how and why it works;
4. Continue the thread with more new high-quality, explained examples, trade/market analysis etc on real-time markets and events. I also have many ideas and potentially valuable additions to AMT/MP in general as I briefly outlined in my last RFB thread post (not important for beginners).

This is going to be different to other AMT/MP threads, I will actually explain what it is and what’s going on! Because of this, while I start the thread I will restrict access to posters, to avoid any disruption of the first series of educational posts. This will be removed afterwards, to allow for free discussions and questions on the theory etc.

IMPORTANT: I do not find posting blank screenshots worthy enough of being here. When the thread is fully opened to discussion and trading, a rule such as; any screenshot of, for example, a Market Profile or a Footprint Chart, must be accompanied by at least some sort of explanation behind the process and what the screenshot itself was supposed to show/express. I too, will hold myself accountable of this thread rule!

Attached Image (click to enlarge)

Auction Market Theory / Fair Value Ideology

Auction Market Theory Explained:

At the heart of AMT lies the concept of imbalances between buyer and seller aggression. These imbalances arise due to various market events that influence participants' actions. As a result, the market experiences fluctuations in price levels as it seeks an equilibrium point.

Fair Value: Central to AMT is the notion of "Fair Value", the price area where trade is facilitated most efficiently. Here, buyer and seller aggression are closely balanced, resulting in stable trading within a relatively tight price range.

Unbalanced Markets: Imbalances occur when market events prompt either buyers or sellers to dominate the trading landscape. When markets are unbalanced, prices move directionally, and the market enters a discovery phase in search of new value areas.

Balanced Markets: Balanced markets represent a state of equilibrium where prices fluctuate near fair value. In this state, the aggression of buyers and sellers is harmonious, leading to steady trade volume and less volatility.

What is Auction Market Theory (AMT)?

J. Peter Steidlmayer developed the concept of Auction Market Theory (AMT).

Jim Dalton was one of the first to recognize the value of Steidlemeyer’s ideas and contributed to them in his book Mind Over Markets.
Auction market theory breaks down the market’s primary purpose and how market participants interact to fulfill this purpose.

The main idea (theory) lies in the fact that financial markets are no different from any other auction where buyers and sellers meet daily. AMT is a philosophy that financial markets move higher and lower due to imbalances between buyer and seller aggression, caused by market events significant or not, until price discovers a level where aggression dissipates and becomes balanced (equilibrium) and the most trade can be facilitated (fair value).

The purpose of any financial market can be broken down into two major factors to be achieved:

1. Facilitate trade in the two-way auction process
2. Seek fair value of the asset

Fair Value is necessary for the market to facilitate the majority of trade. Auction market theory translates this process through supply and demand dynamics and price discovery.

Two-way auction means that the end of the “up” auction is followed by the beginning of the “down” auction and vice versa.

This process is then represented by tools such as Market or Volume Profile.

These bell-shaped curves represent 68% as 1 standard deviation from the mean.

This is what we know as the Value area.

The theory is based on the simple premise of ‘fair value’. All free markets seek fair value and are determined by one of the pillars of economic theory: supply and demand. Fair value is the balance between what someone is willing to pay and what price another person is willing to sell. It is the price at which buyers and sellers agree.

Markets are complex and what drives price up or down depends on the constant shift in market sentiment or a fundamental change in market conditions. These conditions move prices in a seemingly random rhythm between trending price moves and consolidating sideways markets. It's our job as traders to understand these price moves. At the very least exploit some inefficiency in the market, through probabilities and good risk management.

As technical traders we use charts and graphical techniques to interpret these market rhythms. This is when the concept of auction market theory can assist us.


Balanced Market

When markets consolidate or are range bound, according to auction market theory the market is balanced.

In a balanced market price is trading in and around fair value.

Price trades within a range where the volume traded or time spent within this range is normally distributed.
The apex of this normal distribution or bell curve is described as the point of control (POC).

The point of control is interpreted to be the fairest price (value) for that market at that particular time.

Prices are normally distributed relative to time or volume.

Balanced Market – Range bound market where prices are considered to be of fair value.


Unbalanced market

When markets trend, according to auction market theory the market is unbalanced.

In an unbalanced market, price is ‘seeking’ to find fair value.

Price makes significant directional moves in one direction (disregarding rejections) until it once again reaches a state of balance. The market will then range sideways.

In trending markets volume is thinly distributed over the trending area and price moves quickly through these areas due to the aggression of either buyers or sellers.

Unbalanced Market - Trending market where price moves fast and volume/value is distributed thinly.



Examples of Auction Market Theory In The Real World

To further describe auction market theory in more detail let's use an example of petrol prices.

Lets say petrol is currently valued at $1.39/litre. We know that buyers are motivated to get a good deal on how much they pay for petrol at the pump. Whilst the petrol retailer wants to get as much per litre of petrol as they can. This is consistent with any market whether it be commodities, real estate or fruit and vegetables at the local market.

Sellers want to get the most they can and the buyers want to pay the least.

So what happens is a market will develop a price range. Prices tend to fluctuate above and below what is considered value. in this case $1.39/litre. It won't always trade at $1.39/litre but around this value.

Now, lets say petrol prices go up to $1.59/litre? At such high levels buyers become more reluctant to pay these high prices.

At these high levels consumers may decide to hold off on filling their tanks. They might even choose to not drive their vehicles so often. So, the volume of consumers willing to pay those higher prices becomes less and the demand for petrol at the pump dries up.

On the other hand, petrol retailers are keen to sell as much petrol as possible at these prices. The aggressiveness of petrol retailers to sell is at a high.

At these high prices and the combination of less aggressive buyers and more aggressive sellers, creates a situation of unfair pricing. As a result the market eventually reverts back to trading closer to $1.39/litre.

If for example a similar situation occurs but in reverse i.e petrol prices drop to say $1.19/litre. The same dynamic would apply. Price would eventually revert back to trading closer to $1.39/litre.

This range: $1.19-$1.59/litre is what can be defined as market value range or area. It is where the market at that point in time has decided that fair value lays.

These fluctuations in price above and below $1.39/litre creates a normal distribution of time spent or volume of transactions at prices being traded.

The apex of the normal distribution is referred to as the point of control or volume point of control. In this case lets say it is $1.39/litre. $1.39/litre is considered value.

The least time or volume is traded at the extremes of the value range. In this case $1.19 and $1.59/litre. These extreme prices are where petrol is considered unfairly valued.

A normally distributed bell curve of volume or time vs price is an example of a market that has established value.

Auction theory can be applied to various situations where resources are allocated through bidding mechanisms. Some examples of auction theory are:

1. Spectrum auctions, where governments sell licenses to use radio frequencies for telecommunications services.
2. Treasury auctions, where governments sell bonds or bills to finance their budget deficits.
3. Art auctions, where collectors bid for paintings or sculptures by famous artists.
4. Charity auctions are where donors bid for items or experiences to raise money for a cause.
5. Online auctions, where buyers and sellers trade goods or services on platforms such as eBay or Amazon.

Initiating and Responsive Activity

Although the market spends 80% of the time in fair value, it often tries to leave it, when this happens there are two possible scenarios.
There are two types of activity Steidlmayer called:

1. Responsive
2. Initiating

Responsive Activity

Responsive activity is the expected behaviour of market participants.

When the market breaks below the value, buying is expected.

When the market breaks above the value, selling is expected.

For example, if the market opens above the previous day value area, we can expect that prices are too high compared to the previous day’s fair value.

Therefore return back to the previous day's value is expected.

If the market opens below the previous day's value area, it’s too cheap, and we can expect the responsive activity to buy it back to the value.

Responsive activity is often seen in quick spikes and stop runs where the market reaches a certain level of liquidity and returns to the fair value.


Initiating activity

Initiating activity is unexpected.

When the market breaks below the value, selling is unexpected.

When the market breaks above the value, buying is unexpected.

These moves only occur when the environment shifts as a perception of the fair value changes i.e; significant economic news release, geopolitical outlook evolution, natural disaster etc.

We can spot these as price breakouts out of value and most importantly getting accepted.

Increased selling activity when prices are above the previous day’s value area, or buying activity when prices are below indicates that responsive activity is prevalent.

Conversely, if increased buying activity is dominant when prices are above the previous day’s value area, or selling activity prominent when prices are below, it indicates that initiative activity is prevalent.


Acceptance and Failed Auction

Initiative and responsive activity is more so a theory, but luckily we can pretty quickly determine if new prices are getting accepted or not.


Acceptance

When price breaks out of fair value on significant volume and convincing price action, we can expect new prices to be accepted above or below the fair value.

These are usually the support/resistance flips for more price action traders with enough time and space before the retest.

This tells us the market participants agreed on new prices, and we can expect the continuation once the old value area gets tested.


Failed Auction

The failed auction occurs when prices come outside of the value and do not gain acceptance.

There is no increase in volume on the breakout, and from a price action point of view, we can see long wicks and quick returns back to the point of breakout.

These are often the V-shape reversals to the levels.


How To Perceive Value From A Chart

The most objective way to see value from standard spot forex data is a standard market profile with the value area high (VAH) and low (VAL) highlighted. Value (the Value Area) is simply the place where 68% of price action took place, this is sometimes rounded to 70%.

The Five Auction Market Theory Rules (Not too important IMO)

1. If the price accepts into the balance area, it’s likely to revert to the other side. Price often retests the edge of the balance area before traveling to the opposite side.
2. Price inside a balance is expected to reject the edges and is choppier.
3. Once price accepts outside the balance, it is likely to become imbalanced and seek new value – often POC of older balance areas.
4. If the price reacts strongly from POC, it can disrupt the rule #1.
5. If time/volume builds at the edge of a balance, price is likely to push through.

AGGRESSIVENESS (MARKET ORDERS) IN MARKETS: WHY IT'S IMPORTANT

Limit (Passive) Orders And Stop Orders

The advertisement of limit orders is placed on the DOM and is executed against the incoming market orders.

These are often called the heavier hand in the market as large players can’t afford to use market orders because they would often incur more considerable slippage.

They use various advanced order types such as icebergs to hide their intentions and not get front-runned.

If you are putting a limit order to the order book, you are making liquidity.

Because limit orders are the heavier hand, they are the ones that stop markets in trending environments from advancing or declining as aggressive market participants (market orders) often hit the limit walls and get absorbed.


Market Orders

Market orders are executed “at the market”.

They show us the finalized transactions on the bid and the offer, referred to as the delta.

They are executed against the limit orders resting at every price level.

Market orders are required for the market to move.

Whenever market orders exceed the number or limit orders at a given price point, the price ticks up or down.

As you take liquidity from the order book, you are a liquidity taker every time you use the market order.

Although brokers offer a lot of different order types, these are still just market or limit orders.



These are very simple yet important concepts to understand.

If you have a high number of resting orders but not many traders executing them, you have a low volatility environment.

These are often cases of more liquid products such as Euro Stoxx 50, German 10-yr Bund, or treasuries.

The opposite would be the high volume with low liquidity.

In these markets, aggressive participants enter the market with a not strong counterparty at the order book, causing highly volatile movements.

This is the case for markets such as Dax, Gold, YM, or Bitcoin.

It is the aggression (amount) of market orders in comparison to limit (passive) orders that moves the market from one price level to another.

With tools like 'Order Flow' you can get a view into the market on this granular level, and observe this constant activity (auction process) unravel day-in day-out. If you want a super-quick intro to Order Flow / Footprint Charts, I (MakingMoves) have previously made a little intro-post explaining how you can use these tools. Going forward, I'll assume the reader has a basic understanding of Order Flow, although I will try to explain in detail the key factors in each scenario - in a way beginners can understand. As Order Flow & Auction Market Theory go hand-in-hand with each other.

How does this equate to Auction Market Theory?

Due to the fast one-way price movements that occur due to the result of large (aggressive) market orders you would expect this behaviour when either;

A) Price has turned after an ‘overshoot’ and is aggressively heading back to fair value. This is responsive activity.

Or

B) Perception of fair value has changed and initiative activity (also aggressiveness in this example) breaks through the old trading range/value range and quickly finds a new equilibrium/balance area.

Limit orders are for market participants who have conviction on a trade (or are required) at a certain price, they are stubborn. They will not let the price pass until they’re position is filled. They stop markets. Due to the large sized, stacked and strong nature of limit orders we can attribute this mainly to responsive activity, especially around value area highs/lows and trading ranges etc. However we can also expect to see the aftermath of limit orders via general heavy volumes around key levels/value areas if initiative activity breaks through it.


Key Applications of AMT in Trading

Armed with an understanding of AMT, traders can better navigate the financial markets and make more informed trading decisions. Here are some practical applications:

1. Mean Reversion in Balanced Markets: In balanced markets, AMT traders may look to fade moves away from Fair Value or when price reaches a fair price high/low. These mean reversion strategies capitalize on the market's tendency to revert to a stable price point we know as fair value.
2. Trend Trading in Imbalanced Markets: When markets are imbalanced, AMT traders may trade in the direction of the imbalance, capturing the market's directional momentum during the discovery phase.
3. Analysing Order Flow and Volume: Leads to a whole other discipline and avenue of meaningful financial market analysis: Market Participant Analysis! This analysis offers insights into market participants' actions and potential support and resistance zones. Using order flow we get a granular view into the market and see the orders of market participants and come to conclusions if they are aggressive orders, long or short etc.

How do you trade auction market theory?

To trade auction market theory, you need to understand the dynamics of order flow and price action in an auction market. You need to identify the balance and imbalance phases of the market, as well as the initiating and responsive activities of buyers and sellers. You also need to recognize the acceptance and failed auction scenarios, which indicate whether the market has found a new value area or rejected a price level. You can use tools such as market profile or volume profile to visualize the structure and behaviour of the market.

Right now, we are getting ahead of ourselves. We need to loop back and understand what a Market Profile is, and then how we can use it to implement these concepts/theories on actual markets.

Market Profile: An In-Depth Look

Market Profile is a unique charting tool that provides a detailed view of market activity by combining price, time, and volume data. It was introduced by J. Peter Steidlmayer, a trader at the Chicago Board of Trade (CBOT), in 1985. This tool helps traders understand market dynamics by visualizing the distribution of trading activity (value) over a specific period.


History of Market Profile

The concept of the Market Profile was developed to create greater transparency for off-floor traders and attract new participants to the exchange. Steidlmayer’s innovation allowed traders to see the market’s behaviour in a new light, focusing on the relationship between price and time rather than just price movements alone. This approach was revolutionary because it provided a more comprehensive view of market activity, helping traders make more informed decisions.

Key Features of Market Profile

1. Time Price Opportunity (TPO) Chart:
   1. The TPO chart is the core of Market Profile. It uses letters to represent specific time periods during the trading day. Each letter corresponds to a 30-minute interval, showing at what prices the market traded during that time. The following screenshot shows what this means:
      Attached Image (click to enlarge)

      
      
      
      We can also see I have highlighted the previous day's Value Area and the current day's Initial Balance (first circle) and the price activity after this balanced open; bouncing between the VAH & VAL - textbook scenario. If you are a beginner, don't worry, more explaining below.

2. Value Area:
   1. The Value Area represents the price range where 70% of the trading activity occurred during a specific period. This area is crucial for identifying the most significant price levels and understanding market sentiment.

3. Point of Control (POC):
   1. The POC is the price level with the highest trading activity during the period. It acts as a benchmark for market value and is often used to identify potential support and resistance levels.

4. Bell Curve Distribution:
   1. Market Profile charts often resemble a bell curve, indicating the distribution of trading activity. This visual representation helps traders identify the market’s balance and imbalance areas.

5. Initial Balance (IB):
   1. The IB is the price range established during the first hour of trading. It provides insights into the day’s potential trading range and helps traders anticipate market movements.

6. Auction Market Theory:
   1. Market Profile is closely tied to Auction Market Theory, which views the market as an auction process where prices move to balance supply and demand. This theory helps traders understand the underlying forces driving price movements.

Advantages of Market Profile

1. Enhanced Market Understanding: By integrating time, price, and volume data, Market Profile offers a deeper insight into market dynamics.
2. Identifying Key Levels: Traders can easily identify significant price levels, such as the Value Area and POC, which are crucial for making informed trading decisions.
3. Visual Clarity: The bell curve distribution provides a clear visual representation of market activity, making it easier to spot trends and patterns.

Disadvantages of Market Profile

1. Complexity: For beginners, understanding and interpreting Market Profile charts can be challenging due to the detailed information they provide.
2. Learning Curve: Mastering Market Profile requires time and practice, as traders need to familiarize themselves with its various components and how they interact.

Market Profile remains a valuable tool for both institutional and retail traders, offering a unique perspective on market behavior. By understanding its history and features, traders can leverage this tool to enhance their trading strategies and make more informed decisions.

Thus far, I have tried to keep this post as simple and clear as possible, removing some of the more complex but crucial concepts, we will now start to touch on them:

The Importance Of Single Prints

When a market profile has single prints (single-width TPOs) it signifies some sort of unbalance. There are different names for Single Prints depending on where they appear within the market profile:

 

1. Excess: Excess occurs when the market trends significantly out of balance (initiative activity), indicating prices are perceived as too high or too low. It is identified through market structure and helps traders recognize when the market is leaving/returning to a perceived area of value.
2. Single Prints: These are single TPOs (Time Price Opportunities) that indicate swift rejection of a price level. They are important reference points for identifying areas of strong buying or selling activity.
3. Tails: Tails represent day timeframe auction excess at either extreme (high/low) or the Market Profile. A buying tail indicates strong buying activity at lower prices, while a selling tail indicates strong selling activity at higher prices. They help traders understand market sentiment, timing and potential reversal locations.

What is common among all of these three aspects of excess is they are all just that, excess / single prints. They look like single prints wherever they appear within the chart but they are all important; they show an area of, ultimately, future support and resistance. If this is confusing then do not worry, I regularly talk about excess because it is so crucial to understand and have many other posts explaining it.

The Importance Of The Initial Balance (IB)

The Initial Balance (IB) is a crucial concept in Market Profile analysis. It refers to the price range established during the first hour of trading. Here’s how it relates to a balanced market:

1. Initial Balance within Value Area: When the IB is within the previous day’s value area (the range where 70% of the trading activity occurred), it suggests that the market is balanced. This indicates that the market participants are comfortable with the current price levels and are not pushing for significant directional moves.
2. Market Stability: A broader Initial Balance suggests a more stable market, while a narrower one indicates higher chances of range extension. Though this is to be taken with a grain of salt. What is more important is where the Initial Balance is located in relation to the prior day's trading range & value area etc!
3. Overlap with Previous IB: If the IB overlaps with the previous day’s IB, it further reinforces the idea of a balanced market. This overlap suggests that the market is consolidating and there is no strong directional bias.
4. Symmetry around IB: When the trading activity is evenly distributed around the IB, it indicates a balanced market. This symmetry shows that the market is in equilibrium, with equal forces of supply and demand.

These features of the Initial Balance help traders identify whether the market is balanced or if there are potential breakout opportunities. As you may have already got the idea, an unbalanced market simply has the opposite of these features such as: a small IB outside of value, a unsymmetrical Market Profile etc. I touched on the importance of the location of the IB in contrast to the prior day's Market Profile, here's some more bite-sized chunks of info on the topic:

1. Open within Value—Acceptance: When the market opens (IB) within the previous day’s value area, it indicates acceptance of the previous day’s range. This often leads to a balanced market with limited directional conviction. This type of opening indicates that the market is awaiting new information and is generally in a state of equilibrium.
2. Open within Value-Rejection (Breakout): If the market opens (IB) within the value area but then breaks out, it suggests a rejection of the previous day’s value and can lead to a more directional move.
3. Open (IB) outside of Value but within Range: This scenario indicates a potential for acceptance or rejection, depending on market activity.
4. Open (IB) outside of Range and Value: This is rare and the result of pure unbalanced/initiative activity, can be a dangerous market to participate in. Think of large week-open gaps and natural disasters etc.
5. Summary: The opening’s (Initial Balance's) relationship to the previous day’s value area helps estimate the daily range potential and market conviction.

Since we are now talking about (daily) Market Profiles, I think its time to, briefly, introduce how AMT traders can categorize each type of Market Profile. When AMT traders are experienced enough, they can begin to categorize the day-type - long before the closing bell! This allows an unparalleled and unique perspective on the market as well as key insights into the probability of certain scenarios playing out, and as such their trading plan/style can be adapted dynamically. This will be the subject of many future deep-dive/case-study posts but for now let's have a quick look:

 

1. Normal Day: Characterized by a wide initial balance due to swift early entry of other timeframe participants. Balanced, two-sided trade ensues throughout the day.
2. Normal Variation Day: Similar to a Normal Day but with less dynamic early activity. The range extends later as other timeframe participants enter the market.
3. Trend Day: Marked by high directional confidence and unidirectional price movement throughout the day, driven by strong other timeframe activity.
4. Double-Distribution Trend Day: Features two distinct areas of balance, often with a significant price move separating them.
5. Nontrend Day: Narrow initial balance with no range extension. The market waits for new information before making a directional move.
6. Neutral Day: Both other timeframe buyers and sellers are active, leading to range extension on both sides of the initial balance. It can close in the middle (Neutral-center) or at the extremes (Neutral-extreme).

Each of these profile types will have a distinctive look, the original AMT books on the subject I pull a lot of this education from has the pictures, but they are copyrighted, with time I will go over, explain and give my own examples of these types of Market Profiles. For now, feel free to google the day-types listed above! Let's go over an old post of mine which is perfect for this, here I explain what a Double-Distribution trend day is:


Hello fellow Auction Market Theory traders, I hope you are all well!

Today I don't have a post-trade analysis/rundown but I have something just as important! We are going to be talking about the last two trading days on EURUSD and how they relate to AMT and the Market Profile. All quotes and educational material referenced in this post are from the book Mind Over Markets, 2nd Edition, By James F. Dalton. I will expand/relate on some topics and will not use the original pictures used in the book, due to copyright, instead I'll use the relevant pictures of the EURUSD market profile(s) last week.

To start lets refer to one of the original books on Market Profile and Auction Market Theory, Mind Over Markets by James F. Dalton. To explain what has happened on the last two trading days (Thursday 1st & Friday 2nd February 2024) on the currency pair EURUSD.

“Trend Day

Dynamics

There are two types of Trend days: the standard Trend day and the Double Distribution Trend day.“

Skipping to the next discussion on ‘Double-Distribution Trend Days’.

“Double-Distribution Trend Day

Dynamics

The second type of Trend day, the Double-Distribution Trend day, is relatively inactive during the first few hours of the trading session. Market participants possess a low level of conviction, resulting in a narrow base. Later in the session, a change in events causes the other timeframe to perceive price to be unfair at current price levels, enter the market aggressively, and substantially extend the range. This later entry by the other timeframe drives price to a new level, where a second balance region develops. The Double-Distribution Trend day does not possess the steady confidence of a typical Trend day and must stop and reassure itself after a substantial move.

Structural Characteristics

A very small initial balance is the first indication of a potential Double-Distribution Trend day. Again, the more narrow the base, the easier it is to overwhelm this area and auction quickly to a new level. This new (second) trading range generally holds throughout the day, often providing useful reference points and good trading opportunities for day traders."


"The single prints separating the two distributions in a Double-Distribution Trend day become an important reference point near the end of the day. If price auctions back into the single prints during the latter time periods, in effect making them double prints, something has changed, and the second distribution is no longer accepted as value.”

The two distributions represent two price zones that the market has accepted as value. The single prints in between the ranges are price levels the market finds unfair. Take a look at this individual auction (30 min TPO's) chart of the same EURUSD example to see this in even more detail:




These areas of excess are just as significant as excess that is present in a buying/selling tail at either extreme of a profile. Here is some educational material on the topic of excess and its importance from the same book. He talks clearly about excess and the meaning behind it, I will quote some of it below:

"Excess

To achieve its primary goal of trade facilitation, the market auctions lower to find buyers and higher to attract sellers." ... "the market must auction too high to know when prices are perceived to be above value and too low to know which prices are considered to be below value. The potential for market excess occurs any time price trends significantly out of balance, or away from value. Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value."

...

"Let’s take a moment to look at excess from another, more conceptual, perspective. Any time a given price level is rejected quickly by the market, excess is formed. The single prints separating the two areas of a Double Distribution Trend day are a variety of excess. Just like a tail, they represent prices perceived as away from value by the other timeframe." ... "The importance of any type of excess is that it represents an area that should serve as support or resistance to price in the future. As long as conditions have not changed markedly, the other timeframe participant that drove price so vehemently should react similarly at those same price levels. This is why a tail can be used to estimate range potential, for it is a reliable benchmark by which to gauge future activity."



In the recent examples on EURUSD, both Thursday & Friday, had weak lows at the bottom of both profiles. An incomplete or failed auction is now apparent at the lower extreme of the market profiles, as is evident by the double TPO wide lows. According to Auction Market Theory, this is the result of minimal (if any) other timeframe buyer activity. In other words, other timeframe sellers are winning or have more control.

The standard double-distribution trend day strategy is buy the low of the 2nd range and sell the top of the excess area of the 2nd range however, this is where a greater knowledge of the market profile and auction dynamics is needed to successfully employ an AMT based strategy.

Knowing what we know about the day type, its characteristics and crucially now, its vulnerabilities we can now create a adapted trading strategy.

Buying at the low in this situation would be dangerous, for the market may complete a successful auction through the ‘weak lows’. A short position however, would benefit from this event taking place. Thus entering a sell order at the top of the second distribution, within the excess, would create a very high quality trade setup (risk-reward speaking).

If price rallies back up through the excess, something has happened and the perception of value has once again shifted. In that case, all trades based upon the second distribution strategy should be exited. Profit target in this situation is down to the individual traders risk tolerance. Either exit on the second distribution's lows or, the more risky, other targets would be under the weak lows, expecting the market to complete the auction lower.

This would happen because the market has a duty to facilitate two-sided trade and using our analysis we have concluded that other timeframe buyers are not present at the lows currently, so the market must move lower to find these buyers and facilitate their trade!

This is a great prelude to another aspect of market profile that allows us to monitor the markets continuous auction process. In the same example as the last, Friday 2nd February, the EURUSD profile’s value area completely engulfed the previous day’s value (and the days before that!). According to AMT, this is a market that is facilitating more trade. If the opposite happened and the value area was smaller then the last, the market is facilitating less trade:



“Third, when the value area is contained entirely within the previous day’s value area, it is known as an inside day. The market is in balance and is not facilitating trade with either participant. Finally, an outside day occurs when a day’s value area overlaps the previous day’s value area on both extremes, and represents greater trade facilitation.”

If the market is facilitating more trade it is logical to conclude that the next most likely extreme to be broken would be that of the closer and weaker one.

All that aside, using the Initial Balance & Opening range will help us instantly get a gauge of the days activity, its state of balance and if price is still being accepted within the lower (second) distribution - thus creating value down there, when the market opens this week.

That is all, as always, Trade Safe!

MM

Another relevant, old post of mine from the 14th of December 2023:


Hello everyone, I hope you all had a great Wednesday!

Looking at the market profiles on EURUSD of both yesterday and today, the power and undeniable forecasting abilities of Auction Market Theory and market/volume profile immediately jump out. Today was textbook responsive price action around VAH's / VAL's and predictable periods of balanced (equilibrium) and unbalanced price behaviour. I thought I'd briefly go over it here, as the ability to interpret these kind of days and setups, only stands to massively improve your AMT trading performance!

In the following chart screenshot, I labelled the most significant moments on the chart (1-4) and will elaborate on how we (Auction Market Theory traders) can take advantage of our deep understanding of price behaviour, in relation to value. I also highlighted the moments price gave us the best opportunities of the day.



Firstly before we go into the list, I interpreted the previous day's market profile as a balanced 'D' profile, by the end of the day. I know there is excess at the top of the profile (stacked single prints) however it was a one off occasion candle, no follow through and was immediately sold off back into value.

1) Price created an initial balance/opening range within Tuesday's value areas. I interpret this, according to Auction Market Theory, as a market that's balanced and as such will begin with a responsive activity mindset.

With this knowledge, the lower value area (VAL) and the higher value area (VAH) are to be seen as support and resistance respectively and we expect price to go back and forth in-between them. If price were to become unbalanced and breakout, the inverse could be true.

2) The grey rectangle highlights 99% of the trading range pre economic news/data release and it happens to be the previous days value area... Using price action with candlesticks alone, it would be impossible to anticipate the upcoming consolidation's price range.

 

1. The two red circles highlight the moment price came into contact with first, the value area low and lastly the value area high. We knew these specific levels in advance and expect to see responsive activity there as we have confirmed the market is balanced.
2. When price touches these areas and you see responsive activity, there is a high probability price will rotate, back into value and potentially the other side of the value area. I do however, recommend taking profit at the P.O.C of the profile your trading off of, as this is potentially the exact price level that market participants find has the most value and thus can be strong support/resistance.
3. In this specific scenario, as price sold off into the VAL. There was a multitude of really, really strong confirmations on order flow, all indicating responsive activity is prevalent. I'll attach the screenshot below but will not go into the confirmations for simplicity:

3) When trading Auction Market Theory and responsive activity more specifically, we can only expect balanced markets when all information is known and priced into the market creating equilibrium between buyers and sellers. When we do not expect balanced markets is when important economic news/data is released. Luckily for us, for the most part, all important news releases are scheduled and publicly available.

If we have positions that are based upon responsive activity, the trade should be covered just ahead of the release time, as we expect volatility and unbalanced price behaviour. This will save you time and time again and is the correct way to trade responsive activity.

4) The red rectangle I placed is to highlight why we exit balanced market, responsive style trades ahead of significant economic news/data. The pure unbalanced and aggressive price action that came after the event can be seen via single prints. Let me reiterate, while we did not know direction or extent, we knew it was coming!

So armed with an understanding of AMT and market profile, you could know the market was balanced, you could anticipate the upcoming price range and know the specific price levels where price has a decent chance of turning and know what activity to look for to confirm that. To top all that off, we knew exactly when to expect the market to become unbalanced again and to get out.

So that's it, just a brief discussion on Auction Market Theory, mainly about responsive activity and how it related to EURUSD today.

Lets now go over some other advanced features of the Market Profile! Specifically, the different types of market open, for this I will refer to the book Mind Over Markets, 2nd Edition, by James F. Dalton however I've removed the copyrighted examples and their references:


The Open

Experienced day timeframe traders start each trading day with a firm knowledge of recent market activity, much like Mike Singletary would study films and playbooks before each game. They have done their homework and watched the opening call to develop some idea of what to expect during the day’s trading. When the market opens, less experienced traders may wait for the initial balance to develop, thinking that there is little information or little to do prior to the development of structure. Seasoned traders, however, know that the first half hour of trade establishes one of the day’s extremes in the large majority of cases. As accurate as this fact may be, it is of little value unless a trader can identify which extreme will hold throughout the day. The activity occurring during the formation of the initial balance (many times, just the first few minutes) often enables a trader to identify which extreme has the greatest holding potential. This knowledge alone can play a large part in forming a trader’s day timeframe strategy.

The Open as a Gauge of Market Conviction

After the opening call, the first few minutes of the open provide an excellent opportunity to observe and evaluate the market’s underlying directional conviction. With an understanding of market conviction, it is possible to estimate very early on where the market is trying to go, which extreme is most likely to hold (if any), and even what type of day will evolve. In other words, the market’s open often foreshadows the day’s outcome. Four distinct types of opening activity provide a good indication of the level of directional conviction and which extreme is most likely to hold throughout the day. These labels are not carved in stone, however, and should be used only as a guideline for learning. Like the day types discussed in Chapter 2, the importance is not in the labels but in the level of market directional conviction that is displayed.

The four types of opens are:

1. Open-Drive
2. Open-Test-Drive
3. Open-Rejection-Reverse
4. Open-Auction

Open-Drive

The strongest and most definitive type of open is the Open-Drive. An Open-Drive is generally caused by other timeframe participants who have made their market decisions before the opening bell. The market opens and aggressively auctions in one direction. Fueled by strong other timeframe activity, price never returns to trade back through the opening range. In the majority of cases, the extreme left behind after an Open-Drive will hold for the entire day.

The market’s behavior during an Open-Drive open can be compared to a thoroughbred racehorse just as the bell sounds and the gates swing open. Both the market and the racehorse explode with confidence running high— their goals are obvious and their direction clear. If a trader expects to trade such a market, he must act quickly or be left in the dust. Open-Drive activity sends clear signals to the trader regarding the type of day to expect—a Trend or Normal Variation day.

The extreme established by the Open-Drive remains a reliable reference point throughout the day. If the market eventually returns to trade through the open and erase the tail, the trader is alerted to the fact that conditions have changed and trades should be exited.

Open-Test-Drive

An Open-Test-Drive is similar to an Open-Drive, except that the market lacks the initial confidence necessary to drive immediately after the opening bell. During this type of open, the market generally opens and tests beyond a known reference point (previous day’s high or low, bracket top or bottom, etc.) to make sure there is no new business to be done in that direction. The market then reverses and auctions swiftly back through the open. This activity, a failed initial test followed by a drive in the opposite direction, often establishes one of the day’s extremes. An Open-Test-Drive provides the second most reliable type of extreme after the Open-Drive.

...

'Oftentimes, participants need the security of knowing what is below the lows or above the highs before they can move the market with confidence.'

The strategy for Open-Test-Drive days is similar to that of the Open-Drive, with the understanding that the tested extreme has a slightly lower probability of holding. Again, look for a Normal Variation or Trend day to develop. The odds favor placing trades in the direction of the driving activity, as close as possible to the tested extreme. However, during this type of open (like the Open-Drive), placing the trade early is more important than the immediate trade location. If you wait to buy a pullback or wait to get perfect trade location, you will often miss the opportunity altogether.

Once price has driven in one direction, it should not return to the point where the drive began, because the participants who initially drove price should still be willing to act in that area. A return through the opening range often indicates that conditions have changed and the Open-Test-Drive extreme is no longer a reliable trading reference point.

In the Open-Drive and Open-Test-Drive, the initial extreme is established by the early entry of an aggressive other timeframe buyer or seller. Extremes created by such conditions are useful day timeframe reference points and indicate which way the market is trying to go. Unfortunately, these openings are not nearly as common as the Open-Rejection-Reverse and the Open-Auction, which lack clear-cut conviction. These final two types of openings are, however, equally important to day timeframe strategy.

Open-Rejection-Reverse

The Open-Rejection-Reverse is characterized by a market that opens, trades in one direction, and then meets opposite activity strong enough to reverse price and return it back through the opening range. The initial extreme is established when buying or selling in one direction dies out, the auction stalls, and opposite activity begins to auction price in the other direction. An Open-Rejection-Reverse type of open is less convinced of its direction when compared to the Open-Drive and Open-Test-Drive. Because of the lower level of directional conviction, initial extremes generally hold less than half of the time. This is not to say that opposite activity strong enough to return price back through the opening is insignificant. However, in terms of gauging the strength of an extreme and assessing the day type that will develop, the early entry of the other timeframe in the Open-Drive is stronger than the late entry of the Open-Rejection-Reverse.

It is important to remember, however, that Open-Rejection-Reverse activity conveys a much lower level of conviction. Understanding this lack of conviction, combined with the patience and discipline to wait for the market to rotate back to you, will come through experience.

Open-Auction

At first glance, Open-Auction activity reflects a market with no apparent conviction at all. The market appears to open and randomly auction above and below the opening range. In reality, the conviction reflected by an Open-Auction largely depends on where the market opens relative to the previous day. An Open-Auction open that occurs inside the previous day’s range conveys a different opinion regarding potential day timeframe development than an Open-Auction that occurs outside the range. In general, if a market opens and auctions within the previous day’s value area and range, then a nonconvictional day will usually develop. If, however, a market opens outside the previous day’s range and then auctions around the open, the conditions are markedly different. Here, the market has opened out-of-balance. In this case, while early Open-Auction structure may suggest nonconviction, the fact that the market is out of balance means that there is good potential for a dramatic price move in either direction. This type of Open-Auction activity often gives rise to Double Distribution Trend days. We follow with a discussion on both types of Open-Auction activity.

Open-Auction in Range

If a market opens within the region of the previous day’s range and auctions, market sentiment has probably not changed. Initial extremes formed by Open-Auction activity are not established by aggressive other timeframe activity. Rather, the market auctions in one direction until activity slows, then auctions in the other direction. The other timeframe is not present with any large degree of confidence. An Open-Auction in range generally sets the stage for a Nontrend, Normal, or Neutral type of day. The low market conviction suggests that any extreme established early on has a low probability of holding throughout the day.

Open-Auction in range strategy is straightforward. Patiently wait for the market to establish its extremes and perceived value area, and then look to trade the value area extremes. If a good trading opportunity does not develop and a Nontrend type of day occurs, it is often wise to simply stand aside and wait for new activity.

Open-Auction out of Range

When a market opens outside of the previous day’s range and then auctions around the open, one’s first impression is that there is no directional conviction present. In reality, the mere fact that the opening is beyond the previous day’s range suggests that new other timeframe activity has caused price to seek a higher or lower level. Given that the market has opened out of balance, there is a greater chance that directional conviction will develop than if the market had opened and auctioned within the range.


Summary

The labels we have given the four types of openings are designed only to make them easier to learn and remember. In reality, two openings will seldom look alike, and textbook examples are rare. What is important about the market’s open is the notion that it is possible to evaluate market directional conviction very early in the trading session.

The analysis of the day’s open should not be used in isolation, but as an integral part of understanding the big picture that gradually emerges as you learn and develop experience using the Market Profile.

There is still more intraday aspects of the Market Profile, and the trading philosophy as a whole, to cover. To keep it fresh, let's take a look at some longer-timeframe analysis, for this I will refer to the book Mind Over Markets, 2nd Edition, by James F. Dalton:

Directional Performance: Is the Market Doing a Good Job in Its Attempts to Get There?

...Relying solely on which way a market is trying to go can lead to financial disaster, unless you can also gauge the effectiveness of the market’s attempts to go that way. Monitoring attempted direction for directional performance—determining how good of a job it is doing—is the key to a complete market understanding and long-term trading results. Once attempted direction is known, three comparative factors are useful in evaluating a market’s directional performance:

1. Volume
2. Value-area placement
3. Value-area width

Volume

As we get deeper into the long-term forces behind directional conviction, one element stands high above the rest when it comes to evaluating directional performance—volume. Not surprisingly, volume is also the best measure of a market’s ability to facilitate trade. Once attempted direction is known, volume should be used as the primary means of determining directional performance.

Put simply, the greater the volume of transactions, the better trade is being facilitated. In our grocery store example, a larger store did not generate additional volume and consequently failed. Similarly, in the futures market, a price movement that fails to generate a fair amount of volume as it auctions through time will likely not continue for very long in the same direction.

Evaluating Changes in Volume

To determine whether or not volume is increasing, it is necessary to compare each day to previous volume figures. However, there is no standard number of day timeframe transactions in any market, for volume evolves with a market’s changing activity. The key to recognizing change is to think of volume more in terms of market share than in the actual number of transactions occurring (except, of course, when the number of transactions drops below that which signifies a liquid market). Therefore, a trader must keep a running record of volume to be able to detect any significant departures from the current average. This average will vary depending on your trading timeframe. - Keep in mind this is dated, and we have access to intraday order flow now and with it comes new techniques.

Volume as a Measure of Directional Performance

Suppose that a movie theater raises the price of admission. In the subsequent weeks, ticket sales drop substantially. At higher ticket prices, the theater is not facilitating trade for the moviegoer. If the theater is going to stay in business, it will have to lower price. Decreased volume indicates a rejection of higher prices. Volume plays the same role in evaluating the futures market’s directional performance. For illustration, imagine that the market’s attempted direction on a given day is up, based on a positive Rotation Factor and buying range extension. If the buying auctions are generating healthy or increased volume (relative to your determined norm), then the market is successfully facilitating trade with the buyer. Conversely, lower volume on a day attempting to move higher suggests that the market is not accepting the buying attempts.

Value-Area Placement

A structural indicator that helps us better refine the level of directional performance is value-area placement. Through an evaluation of the relationship of one day’s value area to the next, we can move beyond simply determining if the market is doing a good job, to how good of a job it is doing. In other words, if attempted direction is up and volume is healthy, what impact does that have on value? Were buyers successful in placing value higher? How successful were they? Was value unchanged, overlapping-to-higher, or completely higher?

Let us briefly describe the different relationships that can exist between two trading sessions’ value areas. First, value can form clearly higher or clearly lower, exhibiting obvious directional performance. Second, value can overlap to one side or the other, indicating a lesser degree of change. Third, when the value area is contained entirely within the previous day’s value area, it is known as an inside day. The market is in balance and is not facilitating trade with either participant. Finally, an outside day occurs when a day’s value area overlaps the previous day’s value area on both extremes, and represents greater trade facilitation. Much like a Neutral day, if an outside day closes in the middle of the range, the market is in balance. If it closes on an extreme, however, there is a victor in the day timeframe battle for control. A close on the highs, for example, would indicate directional performance favoring the buyer. Figure 4.54 (below) illustrates these common value-area relationships.



Evaluating Directional Performance through Combined Volume and Value-Area Placement

Arriving at a final evaluation of directional performance is like baking a cake—layer by layer. First, we must define attempted direction. Second, we evaluate trade facilitation according to volume. And finally, we must determine the relative success of that trade facilitation according to its impact on value-area placement.

In general, if attempted direction is up, volume is above average (or at least average) and value is higher, then the market is successfully facilitating trade at higher prices. However, if attempted direction is up and volume is lower, then higher prices are cutting off activity—the buying auctions are resulting in poor trade facilitation. If the buying attempts also result in lower value, then the other timeframe seller is still in control of the market, despite day timeframe buyer dominance. The market must then move lower to resume balanced trade, much like the aforementioned movie theater.

Listed in Table 4.1 are 30 different relationships based on volume, value-area placement, and attempted direction.

Let's go over the last need-to-know Market Profile / AMT intraday concepts! Again, I will refer to the book Mind Over Markets, 2nd Edition, by James F. Dalton however I've removed the copyrighted examples and their references:

Other Timeframe Control on the Extremes

Tails (or Extremes)

Tails are created when an aggressive buyer or seller enters the market on an extreme and quickly moves price. Generally, the longer the tail, the greater the conviction behind the move (a tail must be at least two TPOs long to be significant). A tail at the upper extreme of a day’s profile, for example, indicates a strong other timeframe seller entered the market and drove price to lower levels. In terms of other timeframe control, no tail may also be significant. The absence of aggressive other timeframe activity on an extreme indicates a lack of buyer or seller conviction.



Range Extension

Range extension is another structural feature that identifies control and helps gauge buyer/seller strength. Multiple period range extension is generally the result of successively higher or lower auctions. The stronger the control, the more frequent and elongated the range extension, resulting in a more elongated Profile (an elongated Profile is an indication of good trade facilitation). In a Trend day, for example, the other timeframe’s dominance is clearly evident through continued range extension and price movement throughout the day. - A range extension is simply the day's Initial Balance being extended, but will it hold?


Other Timeframe Control in the Body of the Profile

The role of the larger institutions and commercial participants in the marketplace is much greater than merely seeking to take advantage of price as it moves away from value (evidenced by tails and range extension). Many of the long-term commercial users of the futures exchange have a certain amount of business they must conduct every day. For example, General Mills must put boxes of cereal on millions of breakfast tables every morning. Therefore, they are constantly in the market as part of their daily business. This more subtle, involuntary other timeframe activity generally takes place within the body of the Profile. Nonetheless, it plays an important part in our evaluation of the competition that goes on between the other timeframe participants. The TPO count provides a means of measuring the activity of the other timeframe within the body of the day’s Profile.

TPO

Count the Time Price Opportunity as the smallest unit of market measurement. As mentioned earlier, TPO stands for Time, the market’s regulator, and Price, the market’s advertiser, together creating the Opportunity to buy or sell at a given price at a particular time. Monitoring the TPO count helps evaluate other timeframe control within the developing value area. Specifically, the TPO count measures the level of imbalance (when such an imbalance exists) between the other timeframe participant and the day timeframe (mostly local) trader.

The key to understanding how an imbalance can occur is to recognize that the other timeframe buyer does not deal directly with the other timeframe seller. Recall that the local, or scalper, acts as a middleman between these two long-term participants. Thus, the other timeframe buyer generally buys from a local, and the other timeframe seller typically sells to a local. Imbalance occurs when there are more other timeframe buyers than sellers or more other timeframe sellers than buyers, leaving the local with an imbalance. Before we can learn how to measure this imbalance, we must first gain a better understanding of how the locals conduct their business.

The locals position themselves between the flow of outside buy orders and outside sell orders (orders placed predominantly by off-floor, other timeframe participants). For example, suppose that a floor broker receives an order to sell 100 contracts at, say, $5.00 per contract. The locals would buy the contracts from the broker and then turn around and sell them to another floor broker who has an order to buy 100 contracts at $5.02. In this situation, the locals perform their role of facilitating trade and, in return, receive a small margin of profit.

The trade facilitation process is seldom so ideal, however. Often there are more other timeframe buyers than sellers—causing the local’s inventory to become overloaded. For example, if an usually large number of sell orders enter the pit, the local’s inventory begins to accumulate to a point where hegets “too long.” In other words, the local has purchased too much from the other timeframe seller. If the other timeframe buyer does not appear relatively quickly, the local must bring his inventory back into balance in some other way. One’s first thought would be that the local simply needs to sell off his excess inventory. However, this is not so easy, for reversing and selling would only serve to accentuate the selling that is already flowing into the market. Therefore, his first priority is to stop the flow of outside sell orders by dropping his bid in hopes that the market will stabilize and he can balance his inventory. If lower prices do not cut off selling, the local may then be forced to “jump on the bandwagon” and sell (liquidate) his longs at a lower price.

Viewed from another perspective, suppose you decided to try to make extra spending money by scalping football tickets. A month before the chosen game, you purchased 20 tickets from the box office at $10 each. In this case, the box office is the other timeframe seller and you are the day timeframe buyer. Over the ensuing month, your team loses every game and slips from first to fifth place. Not surprisingly, the attendance is dismal on the day of the game at which you intend to sell your tickets. Few other timeframe buyers (fans) show up. In order to get rid of your inventory and recover at least part of your costs, you are forced to sell your tickets at $8 instead of $12 or $15. In this example, there were more other timeframe sellers than buyers. Consequently, price had to move lower to restore balance.

The same concepts apply to the futures marketplace. If we can identify imbalance before it corrects itself, then perhaps we can capitalize on it, too. Tails and range extension are more obvious forms of other timeframe presence, but on a volatile or choppy day, much of the imbalance occurs in more subtle ways within the value area. The TPO count is an excellent method for evaluating day-to-day imbalance that occurs within the developing value area.

The TPO count is found by isolating the point of control (the longest line closest to the center of the range), summing (adding) all the TPOs above it and comparing that number to the total number of TPOs below it. Single-print tails are excluded from the count, because their implications are clear and have already been considered when examining activity on the extremes. Remember, the point of control is significant, because it indicates the price where the most activity occurred during the day and is, therefore, the fairest price in the day timeframe (price x time = value). The following chart illustrates the TPO count:

The total TPO figure above the point of control represents other timeframe traders willing to sell and stay short above value, while total TPOs below the point of control represent other timeframe traders willing to buy and stay long below value. The resulting ratio is an estimate for buyer/seller imbalance in the value area. For example, a ratio of 32/24 breaks down to 32 selling TPOs above the point of control, and 24 buying TPOs below. Note that a value area is not specifically calculated. Rather, the methodology of the TPO count (i.e., single-print rejections are not counted) implies value.

As the trading day proceeds, however, our concern is with discovering exactly who is more aggressive (who is in control) within the developing value area. Occasionally, activity reflected by range extension and tails will give us some clues regarding which participant is more aggressive on the extremes. But the value area battles are more subtle and often much slower to develop. Monitoring the TPO count through time helps us measure how the wins and losses are stacking up and gives some indication of who will be the victor in the battle for control in the body of the Profile.

Initiative versus Responsive Activity

Knowing whether the other timeframe participants are acting on their own initiative, as opposed to responding to opportune prices is also important to understanding their influence. Traders can determine if activity is initiative or responsive by comparing the relationship of the day’s structure to the previous day’s value area. The previous day’s value area acts as the truest, most recent indication of a level where price has been accepted over time.

Four types of potential activity may emerge:

1. Initiative buying
2. Initiative selling
3. Responsive buying
4. Responsive selling

Briefly, initiative buying is any buying activity occurring within or above the previous day’s value area. Conversely, initiative selling is any selling activity that takes place within or below the previous day’s value area. Initiative activity indicates strong conviction on the part of the other timeframe. Responsive activity is the opposite of initiative activity. Buyers respond to price below value, and sellers respond to price above value. Keep in mind that if price auctions down and finds buyers, that alone is not responsive. It is the fact that price is below value that makes the buying responsive.

A responsive buying tail is also initiative selling range extension. For example, when the grocer lowered prices in his peanut butter extravaganza, it created initiative selling range extension. Buyers responded to this price below value, returning price to previous levels in a responsive buying tail. The initiative range extension and the responsive tail were one and the same activity.

If a range extension occurs in the last period of the day, it does not indicate a tail as well. A tail is only valid when confirmed by a rejection of price in at least one additional time period - validating it. Range extension and tails occurring within the previous day’s value area are also considered initiative. If people choose to buy or sell within the area of most recently perceived value, their free choice to agree with recent price levels is really an initiative decision in itself, for they are not responding to excess price. Like all the information you are learning, the concept of initiative and responsive action is not just a random designation that should be committed to memory, but rather a logical characterization of price’s relationship to value.

The entire day’s value area can be classified as either initiative or responsive as well. As noted before, this identification is important because it gives the trader an indication of market conviction and confidence. In short, initiative buying and responsive selling TPOs occur above the previous day’s value area, while responsive buying and initiative selling TPOs occur below the previous day’s value area. Any TPO activity occurring within the previous day’s value area is considered initiative, although it does not carry as much confidence as initiative activity that takes place outside of the value area.

Trending versus Bracketed Markets

Understanding the dynamics of trending and bracketed markets, and the transition from one to the other, is one of the most difficult auction market concepts to grasp. In a very real sense, this could be due to the fact that such an understanding requires a firm grasp of overall market behavior, as well as the synthesis of a large part of all Profile knowledge. For this reason, we lay the groundwork of trending and bracketed markets here, with a more detailed discussion to follow in the Competent section.

Let us begin with a few common dictionary definitions of a trend and a bracket in order to form a basic mental image of the two. Webster’s New Collegiate Dictionary defines a trend: (a) “to extend in a general direction: follow a general course . . . to show a tendency,” or (b) “the general movement in the course of time of a statistically detectable change; also: a statistical curve reflecting such a change.” Unfortunately, there is no absolute way to define a trend, for it is a function of the market and your trading timeframe. A trend, put simply, is a divergence of price away from value. For our purposes, the price divergence in a trend is characterized by a series of day auctions (value areas) moving in a clear direction over a long period of time.

Webster’s defines bracket: (a) “to place within or as if within brackets,” or (b) “to establish a margin on either side of.” A bracketed market is a series of price movements contained “as if within brackets.” The market auctions back and forth between two price levels that serve as a margin on either end of the range.

Key Elements—A Brief Discussion

We have defined a trend as a divergence of price away from value. While the divergence may last for an extended period of time, it will not continue indefinitely—eventually price and value will reach equilibrium.

A trending market ends when price begins to auction back and forth between two known reference points, forming a bracket or trading range. A new trend begins when price leaves the bracketed area and is accepted over time.

Many knowledgeable professionals estimate that markets trend only 20 to 30 percent of the time. Failure to recognize this fact is one of the main reasons why a large number of traders don’t make money. Many of the popular technical systems are trend-following systems that require sustained price movement to be successful. As many traders are painfully aware, bracketed markets often move just fast and far enough to trigger these trend-following systems, then the potential move stalls and the market heads the other way.

It is evident by now that the trader colloquialism “the trend is your friend” is a misleading expression. It is true that during a trending market, a trader can make a substantial profit if positioned with the trend. However, if a trader constantly employs a trend-following system, his chances of success during a bracketing market are greatly reduced. Therefore, as the market evolves from trend to bracket and back to trend again, your trading strategy should change dramatically. Trends require a less active type of strategy;

They need to be left alone. Because of their strong convictional nature, profit expectations are relatively high. In a trending market, you put the trade on and then let the market do the rest of the work. Brackets, however, require a closer, more hands-on approach. The market moves in erratic spurts with no real long-term directional conviction. The prices that form the bracket’s extremes provide significant reference points by which to monitor future change (i.e., the start of a new trend, continuation of the bracketing process, and so forth). To successfully trade a bracketed market, you need to learn how to identify the outer reaches of the bracket and then take gains quickly instead of “letting them ride.” Monitoring how the market behaves around these points of reference helps you gauge your profit expectations and adjust your trading strategy.

Knowing if a market is in a trend or a bracket is an integral part of a holistic market understanding. It is vital to formulating, developing, and implementing your own trading timeframe and strategy.

Trending Markets - The key to capitalizing on a trend lies in the trader’s ability to determine if the trend is continuing—that is, if the divergence of price is being accepted or rejected by the market. A good indication of trend continuation lies in observing value area placement. If a series of value areas is moving in a clear direction through time, then the new price levels are being accepted and the trend is finding acceptance. If value areas begin to overlap or move in the opposite direction of the trend, then chances are good that the trend is slowing and beginning to balance. A trend is started by initiative action from the other timeframe participant, who perceives price to be away from value in the long term. In an up trend, for example, price is perceived as below value by the other timeframe buyer and unfair to the other timeframe seller. As price auctions higher, the trend draws in market participants from many different timeframes until virtually everyone is a buyer. At that point, the whole world believes the trend will go on forever, but there is no one left to buy. The upward trend ends, for there are simply no more buyers, and the responsive seller enters and auctions price downward, beginning the bracketing process. The other timeframe buyer and seller’s view of value has narrowed, producing a relatively wide area of buyer/seller equilibrium contained within the bracket margins.

Bracketed Markets - As mentioned previously, a trend typically ends in a balanced area, otherwise known as a trading range or bracket. Markets do not trend up, then turn on a dime and begin a trend down. An upward-trending market auctions higher, balances, then either continues up or begins to auction downward. Similarly, a down trend ends in a bracketed market, then either continues down or begins a trend to the up side.

In a bracket, both the other timeframe buyer and seller become responsive parties. As price nears the top of the perceived bracket, the seller responds and auctions price downward through the bracket or equilibrium range. In turn, the responsive buyer enters and rotates price back to the upside. This bracketing process indicates that the market is in balance and waiting for more information. Therefore, when price is accepted above or below a known bracket extreme, the market could be accepted above or below a known bracket extreme, the market could be coming out of balance. Monitoring such a breakout for continuation and acceptance can alert the observant trader to the beginning of a new trend.

To better illustrate the concept of balance and the dynamics of price rotation within a bracket, consider an everyday example—the car buyer. Imagine five different people who go to Rawley’s car dealership to purchase a car during the same week. They all have the same ultimate goal in mind: the purchase of the new Series Magma 8.9 automobile. However, the similarities end there, for chances are good that each is focusing on different aspects of the same car. One of the five wrecked his car on the day before and needs transportation immediately for business purposes. A wealthy college student likes the style of the Magma and wants all the extras—sunroof, stereo, power windows, and racing stripes. A suburban, middle-income family has been pricing cars for several weeks and has been to the Rawley dealership several times negotiating price. A woman who commutes to a nearby city is interested in the Magma because of its excellent gas mileage. The last of the five is a salesman who simply decides it is time he purchased a new car. All five view the same market from vastly different perspectives, and each has a certain price range in mind that he or she believes is value. The car dealer, too, has a perception of value that acts as a bracket in the negotiating process. His idea of value ranges from the lowest markup that will still clear a profit to the highest price he can get a buyer to pay. When dealing with each customer, price moves back and forth within his bracket until an agreement is reached. The college student would probably pay the most, for he is not worried about price and wants all the added luxuries. The family would probably get the best deal, for they are long-term buyers who have researched and bargained over a period of time. The point is that all five market participants will purchase the same car, but they will each pay a different price. The car dealer fulfills the status of middleman, facilitating trade at different price levels in his bracket by making the necessary deals to move the cars off his lot.

A bracketed market acts in a similar fashion. When the market is in a balancing mode, participants consider different factors in their perception of value. Price auctions back and forth as they respond to the changing factors that give rise to differing opinions. Technicians, for example, may monitor stochastic indicators, while fundamentalists look at economic figures and news. Still other traders may evaluate open interest, previous highs and lows, yield curves, and activity in other commodities. Because of this segmentation, one group of market participants may rule for a short period of time, accentuating the bracketing process.

A bracket provides less obvious information than a trend, where price movement and market sentiment are relatively easy to understand. In a strong trend, the direction of the trend is clear and all market opinion is generally geared with the trend. Except for entry and exit, a trader does not need the Market Profile to determine which way the market is trying to go. In a bracket, however, there is no clear indication regarding longer-term market sentiment. Because of the varied and often conflicting mixture of opinions that surface in a bracketed market, a trader must look harder to find directional clues. The diversity of these clues brings about the danger of overweighting any one piece of information and thus getting an incomplete (and often incorrect) view of the market. When market-generated information is organized using the Market Profile, otherwise segmented market opinions are brought together in one composite information source. In a sense, the Market Profile is a filter for all market opinions. By observing and understanding the Market Profile, it is possible to differentiate short-term bracketing activity from a potentially strong, sustained price movement. In other words, the Market Profile conduit is a powerful tool in evaluating bracket activity and control.

This concludes the basic concepts of trending and bracketed markets.

Now we'll start thinking about how we can use this information and these features/tools. For this I will continue to refer to the book Mind Over Markets, 2nd Edition, by James F. Dalton with my own example:

Day Timeframe Auction Rotations

Based on information we have covered thus far, let us review the process a trader might go through in developing his or her day timeframe strategy. The first signs of underlying market sentiment are formed during the succession of opening calls, which alerts the trader to possible directional conviction before the markets opens. He or she then monitors the conviction demonstrated by the opening, as well as the opening’s relationship to the previous day’s value area and range. At this point, which is generally within the first hour of trade, the trader should have a good feel for the confidence behind the market’s initial activity and the likelihood of its continuation. The next step in the day’s analysis develops as the market’s auction rotations reveal other timeframe activity and control.

Think of the marketplace as a game in which the other timeframe buyer and seller are vying for control. In the simplest sense, when the buyer is in control, prices tend to rise. When the seller is in control, prices generally fall, like a vertical tug-of-war. When only one participant (usually either the other timeframe buyer or seller) is in control, the market is referred to as a one-timeframe market. A one-timeframe market is characteristic of a Trend day. Interestingly, a Nontrend day is also a one-timeframe market. During a Nontrend day, control is also in the hands of just one participant— the local.

If neither party is in complete control, price fluctuates up and down as one side pulls and tires, then the other, and so on. When both the other timeframe and the day timeframe participants are sharing control, the market is in a two-timeframe mode. Two-timeframe market conditions are common during Normal, Normal Variation, or Neutral days. During a two-timeframe market, the trader must exercise greater patience, for more time is required before other timeframe control becomes evident (if at all).

Consistent off-floor trading results are most often achieved by trading with the control of the other timeframe participant. Obviously, this requires that one be able to determine who (if anyone) is in control, and second, when that control may be wavering or reversing altogether. Monitoring the development of the day’s half-hour auction rotations helps identify which participant is in control of price at a given moment in time. Before examining how day timeframe auction rotations help discern other timeframe control, let us first discuss the two basic forms of other timeframe market control in greater detail.

Two-Timeframe Markets

In a two-timeframe market, either the other timeframe buyer or seller (or both) share control with the day timeframe participant. Price rotates up and down without clear directional conviction, like a balanced tug-of-war. The resulting activity is similar to the formation of a day timeframe bracket. The Profile graphic in Figure 4.21 provides a good example of two-timeframe activity.

During two-timeframe market conditions, examination of the individual half-hour auctions (each time period viewed separately) does not generally reveal a dominance by either party. Successive time periods tend to rotate upon each other and fail to generate sustained price movement. Neither other timeframe participant is in control.

One-Timeframe Markets

In contrast, occasionally one participant gains the upper hand, causing price to auction (or trend) in one direction for a sustained period of time. The market is controlled almost entirely by either the other timeframe buyer or other timeframe seller. Such unilateral control is referred to as a one-timeframe market (a day timeframe trending market). A one-timeframe market is like an uneven tug-of-war in which one side is clearly stronger and steadily gains ground. The thin, elongated Trend day Profile is a good example of a one-timeframe market. (I, MM, made a simple graphic with an example from EURUSD yesterday):


Trend days signify a high level of other timeframe conviction and are characterized by range extension occurring in one direction during several time periods. Downward rotations (bearish TPO's) are generally stronger than the rotations up (bullish TPO's). One-timeframe seller control is evidenced by the inability of the buyer to successfully rotate price upward beyond the previous time period’s auction high during two or more successive time periods. Successively lower rotations translate into repeated selling range extension. The opposite is true in a bullish scenario.

Using Auction Rotations to Evaluate Other Timeframe Control

Determining which other timeframe participant is in control within the half-hour auctions, once again, falls into the two familiar categories: market structure and market time. Both play an important role in understanding and evaluating other timeframe control.

Structure

In the Advanced Beginner chapter, we discussed how to monitor other timeframe control using structural features such as the TPO count, tails, range extension, and initiative and responsive activity. In this section we take a closer look at evaluating other timeframe control through the market’s half-hour auctions and their offspring—tails and range extension. Our goal is not to simply identify control, but also to determine when it may be changing intraday. This concept, called timeframe transition, will be illustrated following a brief discussion of time.

Half-Hour Auctions

By now, it should be clear that the half-hour auctions provide a vivid picture of the market’s composure at any point in time. The half-hour auctions are illustrated in Figure 4.22 the above screenshot.

Not only does the relationship of one auction (time period) to another reflect the ongoing status of control, but the auction is often one of the first structural features to signal when control may be shifting. Subtle changes occurring within the auctions are often the precursor to dramatic changes that do not appear until much later in the form of tails and range extension. As we noted earlier, if you wait to enter a trade until after the market commits itself, you generally will not gain the favorable trade location that is so important to making objective, rational trading decisions. Tails and range extension are strong indicators, but if you rely solely on them to judge timeframe transition, you will often be too late, for they areby-products of the market’s auctions. Later, in the section entitled “Identifying Timeframe Transition,” we detail one approach to evaluating subtle changes in the day timeframe auctions.

Extremes

The extremes, or tails, often provide the most obvious evidence of other timeframe control. Tails are created when the other timeframe buyer or seller enters the market aggressively when they feel that price is away from value. Generally, the longer the tail, the greater the conviction behind the move.

In terms of other timeframe control, no tail on the extreme is also significant. The absence of aggressive other timeframe activity on an extreme indicates a lack of buyer or seller conviction. In terms of practical trading applications, consider a rising market that shows no tail on the day’s low. Such a scenario suggests that it may be wise to take gains earlier than one might if a tail were present, for the market is subject to a possible reversal.

Range Extension

Range extension is another structural feature generated by the market’s auctions that identifies other timeframe control and helps gauge buyer/seller strength. Multiple-period range extension is the result of successively higher or lower auctions. The stronger the control, the more elongated the range extension. If the range is extended in multiple time periods to the upside, for instance, it is apparent that the market is trying to auction higher and the other timeframe buyer is exerting a relatively high degree of control. It is important to monitor this attempted direction for continuation to determine the success of the market’s attempts to go that way. Like all structural features, range extension is most useful when taken into consideration with the rest of the big picture, such as the auction rotations and tails.

Time

The second and perhaps most important ingredient in evaluating timeframe control is time. As we have noted before, time is the market’s regulator and is responsible for creating the structures we later identify and interpret. Simply stated, the less time a market spends trading at a particular price level, the lower its acceptance of those prices. If the market moves very quickly through a particular price region, then there is strong other timeframe presence at those prices that they will generally serve as support or resistance in the future. For example, a selling tail is the result of swift rejection by the other timeframe seller at prices perceived to be above value. The quicker the rejection, the stronger the other timeframe presence at that price level.

Conversely, the more time spent at a particular price level, the greater the acceptance of that price. Greater time indicates that two-sided trade is occurring, and that both the other timeframe buyer and seller are probably active. It is important to note, however, that time can be a two-edged sword. If a market is not successful auctioning in one direction over time, control may reverse as the market seeks to facilitate trade in the opposite direction. If the market spends too much time at a given level, price will ultimately be rejected.

The ability to identify the difference between enough time and too much time is the key to anticipating a change in control. Understanding and interpreting market activity according to time—instead of relying solely on structure— improves one’s recognition and execution speed. Time provides the signal, structure provides the confirmation. An understanding of time allows the trader to enter the market when control first begins to change, rather than waiting until it is confirmed by structure.

Time, however, is an intangible concept and is therefore very difficult to learn through a derivative source. Not until you personally observe the effect of time in the marketplace and gain experience through trading will you come to realize and respect the overwhelming power of time.

In the first post, I briefly gave a quick rundown of what a Failed Auction is, this is important. It's worth understanding the concept in more depth, for this I will continue to refer to the book Mind Over Markets, 2nd Edition, by James F. Dalton:

Auction Failures

We have mentioned the term follow-through quite frequently—in our discussions of trends, breakouts, initiative activity, during the open, and so on. In fact, follow-through is essentially the answer to the question “How good of a job is the market doing in its attempts to auction in a certain direction?” Without follow-through to the upside during a bull trend, the market, in effect, fails to auction higher. Without follow-through in a golf swing, the golfer fails to successfully hit the ball. And without follow-through in a business negotiation, even the most promising deal will likely fail. The point is that failure to follow through is just as significant as successful follow-through when monitoring market activity.

When a market auctions above or below a known reference point, one of two scenarios will develop: (1) new initiative activity will fuel continuation beyond the reference point; or (2) the auction will fail to follow through. After an auction failure, price is often rejected in the opposite direction with speed and conviction. The magnitude of this movement depends on the significance of the tested reference point. Known reference points exist in many forms: daily high/low, weekly high/low, monthly high/low, a break or rally point caused by an important news announcement, bracket top/ bottom, and so forth. The greater the variety of other timeframe participants who are present at the tested reference point, the greater the potential magnitude of the auction failure. For example, if a selling auction fails to continue below a bracket low that has held for several months, day, swing, and other timeframe buyers will be brought into the market en masse, causing a high level of volatility. The resulting rejection of such a long-term bracket extreme could trigger a substantial rally and have a significant impact on the direction of the long-term auction.

Let us consider this example in greater detail. When price nears a bracket bottom, many traders wait to see if the previous support level will hold before entering the market. If the market should fail to breakout below the bracket bottom, these traders often respond quickly, causing the market to rally. Conversely, if price auctionsthroughthe bracket low and is accepted,the same traders may enter the market on the sell side, driving price lower, and adding fuel to a strong initiative selling auction. Such long-term auction failures are as important to the day trader as they are to the long-term participant. If a day trader is aware of long-term support levels and reference points, he or she is better prepared to capitalize on (or protect him or herself from) the dramatic daytimeframe price movement common during a long-term auction failure. In fact, the longer the timeframe that the failure represents, the greater the profit potential (and risk) that is often present in the market.
...
Auction failures at shorter timeframe reference points are generally more subtle and result in smaller price movements when compared to auction failures at longer timeframe reference points. However, the price rejection that follows a short-term auction failure can still be swift and substantial relative to normal day timeframe structure.


In the first post, I briefly gave a quick rundown of what excess is, it's crucial to understand it before trading AMT/MP. Let's dive into some education on the topic of excess:


Excess

To achieve its primary goal of trade facilitation, the market auctions lower to find buyers and higher to attract sellers. Ideally, the market finds a value range where both the other timeframe buyer and seller perceive price to be fair so that two-sided trade can take place. However, the market is effective, not efficient.¹ Consequently, in its attempt to generate trade with all participants, the market occasionally creates excess by auctioning too far in a given direction.

Suppose that a local baker produces 1,000 loaves of bread daily, which he sells for 50 cents each. Business is good at this price, and he consistently sells every loaf he bakes. Because the demand for his homemade bread seems to have been on the rise, one morning the baker raises his price to 55 cents a loaf and still sells every one. Pleased with the results, he decides to charge 60 cents the next week, but finds he sells just 800 loaves—higher prices began to discourage buying. The baker quickly lowers the price back to 55 cents a loaf due to decreasing sales volume and shrinking profits. The point is, he had to raise prices too far above value to be sure that he had found a price that both he and the consumer perceived to be fair. The baker’s pricing method created an excess of 5 cents, the difference between the 60-cent extreme and 55-cent value.

Similarly, the market must auction too high to know when prices are perceived to be above value and too low to know which prices are considered to be below value. The potential for market excess occurs any time price trends significantly out of balance, or away from value. Excess is created when the other timeframe recognizes an opportunity and aggressively enters the market, returning price to the perceived area of value. Evidence of the resulting excess, in both the day and longer timeframe, can be identified through market structure.



Signs of Excess

By definition, excess is useful only in hindsight analysis, for it is not identifiable until it has already formed. While this is, in fact, true, many of the structural characteristics reflected by the Profile help identify excess quickly. Tails, for example, are simply day timeframe auction excess. Day timeframe excess is illustrated in Figure 4.27 the screenshot's above and below.



Tails are perhaps the most common manifestation of excess, and they occur in a similar way in the long-term auction process.

Let’s take a moment to look at excess from another, more conceptual, perspective. Any time a given price level is rejected quickly by the market, excess is formed. The single prints separating the two areas of a Double Distribution Trend day are a variety of excess. Just like a tail, they represent prices perceived as away from value by the other timeframe. A gap is also a form of market excess, for it is, in effect, an invisible tail.

The importance of any type of excess is that it represents an area that should serve as support or resistance to price in the future. As long as conditions have not changed markedly, the other timeframe participant that drove price so vehemently should react similarly at those same price levels. This is why a tail can be used to estimate range potential, for it is a reliable benchmark by which to gauge future activity.

There will still be more education going forward, especially post's focusing on specific aspects of AMT/MP. I'm also going to start posting more old detailed AMT/MP and Order Flow trades of mine, as they give an actual real-world example of how you can use these tools. The following post is from earlier this year:

This week EURUSD has shown some really interesting timeless examples of market profile day-to-day categories/types and how they all relate to Auction Market Theory. After this I have a complete Auction Market Theory + Market Profile based trade breakdown that took place today!




Starting from Tuesday 6th February 2024, each day was in a balanced state, price was moving higher obviously in the first two days but on the third (Friday 8th February) this was less obvious. Price broke the prior day’s low but value was still higher, therefore buyers were slightly more in control!

To start let's refer to one of the original books on Market Profile and Auction Market Theory, Mind Over Markets, 2nd Edition, by James F. Dalton:


“Value-Area Placement

A structural indicator that helps us better refine the level of directional performance is value-area placement. Through an evaluation of the relationship of one day’s value area to the next, we can move beyond simply determining if the market is doing a good job, to how good of a job it is doing. In other words, if attempted direction is up and volume is healthy, what impact does that have on value? Were buyers successful in placing value higher? How successful were they? Was value unchanged, overlapping-to higher, or completely higher?

Let us briefly describe the different relationships that can exist between two trading sessions’ value areas. First, value can form clearly higher or clearly lower, exhibiting obvious directional performance. Second, value can overlap to one side or the other, indicating a lesser degree of change. Third, when the value area is contained entirely within the previous day’s value area, it is known as an inside day. The market is in balance and is not facilitating trade with either participant. Finally, an outside day occurs when a day’s value area overlaps the previous day’s value area on both extremes, and represents greater trade facilitation. Much like a Neutral day, if an outside day closes in the middle of the range, the market is in balance. If it closes on an extreme, however, there is a victor in the day timeframe battle for control. A close on the highs, for example, would indicate directional performance favoring the buyer. Figure 4.54 illustrates these common value-area relationships.”

Attached Image (click to enlarge)

“Evaluating Directional Performance through Combined Volume and Value-Area Placement

Arriving at a final evaluation of directional performance is like baking a cake—layer by layer. First, we must define attempted direction. Second, we evaluate trade facilitation according to volume. And finally, we must determine the relative success of that trade facilitation according to its impact on value-area placement. In general, if attempted direction is up, volume is above average (or at least average) and value is higher, then the market is successfully facilitating trade at higher prices. However, if attempted direction is up and volume is lower, then higher prices are cutting off activity—the buying auctions are resulting in poor trade facilitation. If the buying attempts also result in lower value, then the other timeframe seller is still in control of the market, despite day timeframe buyer dominance. The market must then move lower to resume balanced trade, much like the aforementioned movie theater”

Attached Image (click to enlarge)

That concludes the theory / education part of this post, now for a real trade breakdown that I placed today and am still currently In:


Today, Friday 9th February 2024, EURUSD created an Initial Balance and Opening Range within Thursday’s value area (the last profile on the far right in the first screenshot). This could be a market starting to balance out, in terms of price and value!

The following is from my trading journal for today:

Friday - 09/02/2024 - 2:20PM %



On Thursday 8th February 2024 EURUSD created a vague balanced ‘D’ distribution market profile. The following day, just after rollover, price went on to open and stay within Thursday’s value area. According to Auction Market Theory, this is a balanced market that has continued to show its balance into the open. Knowing this, we start the day off with a responsive activity mindset.



As the day progressed price remained contained within the prior day’s Value Area, auctioning back and forth between the Value Area High & Low. Eventually price broke the high of the prior day’s trading range. I believe this is the result of the ever increasing noise of today’s markets and not the result of initiative activity. So I start by looking to fade this move away from value, looking for responsive activity via Order Flow:



The first spike (too volatile due to CAD news) had no obvious confirmations to sell apart from the accumulation; heavy volumes on multiple levels. The 2nd reaction had limit sell orders at the top of the range, followed by a bearish engulfing candle with several inverted imbalances within and a negative delta. This met all conformations to enter a short position, expecting further responsive activity.

The Stop Loss was placed above the high with a fixed Risk-Reward ratio of 1:1.75

If neither the stop loss or take profit have been hit, I will cover the position just before market close because we are going into the weekend and as such there is significant gap risk when holding a position. I will update the post on the trade outcome.

Update: Exited at a very small profit, just over breakeven, at 9:55PM

Trade safe,

MM

Hello to everyone following, I hope you are all well! I have been very busy so, as you may have noticed, posts to FF have been very limited. I'll continue where I left off by re-posting previous AMT & MP related posts to give some context/insight into trading this way, hopefully making it less intimidating! Here's a quick, simple and easy to understand post:

Here is my current view (AMT based) on EURUSD as we start Tuesday. (OLD!)

Monday's (11/12/2023) trading range created a standard bell curve 'D' distribution profile, according to Auction Market Theory, that is a balanced market.



On Tuesday price created an opening range within Monday's, balanced, value area. I interpret this as a continuation of the balanced market state (equilibrium amongst buyers and sellers) and as such will start the day with a responsive activity mindset. As I said in the previous post, this translates to taking mean reversion trades only, until a catalyst happens causing a shift in the perception of value. In that situation, I flip to look for initiative activity.

The daily volume profile of Monday confirms a balanced 'D' distribution but also gives us potentially important support/resistance zones, those being areas of high volumes (volume clusters). This allows us to create powerful trading setups using a confluence of market profile value levels, significant volumes areas, price action support/resistance and order flow

Any responsive style trades have to be covered, or at least risk adjusted, ahead of any important economic news/data releases. Todays most important events:

Hi makinmoves

Another impressive thread, sorry for missing it.
This weekend, I will sit down & read the whole thread top to bottom.

Great work again