Futures trading: market profile in practice
In the last article we have considered two main groups of bidders. I would like to briefly remind you that these two groups include:
- Short-term tradersThe following table summarizes the results of the study.
- Long-term merchantsThose who have sufficient funds for prolonged exchange operations and hold their large positions for a longer period of time, carrying them from day to day, waiting for the market to reach the most favorable price.
We've also been introduced to two of the four trading day types according to the classification introduced by Peter Steidlmayer, the creator of the Market Profile. Let me briefly remind you of the first two types of trading days.
- The first type is called normal dayThis is a day when long-term traders are not very active. On such a day, mostly short-term traders are active tradersand the market finds some acceptable, fair price, after which the prices in the remaining periods are distributed around it.
- The second type of trading day is called normal variation day and is observed when long-term traders start to show their activity on the market, further expand the range of the trading day and thus leave the initial area behind. However, the maximum range extension in a normal variation day only approximately doubles the initial balance area.
Trend Day
Now let's look at the next, third type of trading day, which is called a trend day. Day trend - is such a trading day, when the range expansion is much larger than a simple doubling of the initial balance area, which we have seen in a normal variation day. In other words, we are dealing with a case of a significantly expanding range.
Figure 1. Example of a trend day on the grain futures chart.
Notice in Figure 1 where we see futures on grains. The initial market balance in this case was found at the first hour of trades. In our figure these are the periods denoted by letters D and E.
The initial balance area was formed between 502 and one fourth and 505 and one fourth. This initial balance is approximately one-third of the entire daily range and the observed further extension from 505 and one-half to 511 shows approximately the remaining two-thirds. We can see with you that overall the market has been moving in the same direction all day. As you can see from the analogy of a normal variation day, this is a variation of the pattern where the long term trader continues to expand the range by first positioning in the area labeled G and then moving into the areas labeled I, J and K respectively.
What is the specialty of this type of trading day?
The main feature trend day will be that the market moves in one direction and closes at the very top of the day's range. In this case, the long term trader is in control of the market and the market moves unidirectionally in search of a fair price.
Neutral day
The fourth type of trading day Peter Steidlmayer called the neutral day. This type is observed when there is a trading range extension but there is no net impact of the long term trader.
Figure 2. Example of a neutral day.
In Figure 2 we can see this type of trading day. Long-term traders first expanded the range downwards. The result of this expansion can be seen in the period labeled F on the chart. Then, obviously, the long-term traders changed their behavior and moved the range upwards, which can be seen in the period marked with L literals.
Neutral days indicate uncertainty and uncertainty prevailing in the market at the moment. Quite often the market uses these days to change direction.
Let's formulate the feature of a neutral day
The main feature of a neutral day will be this range extension, which occurs in both directions.
A little practice
After we have considered the four types of trading days, let's see how we can practically apply the knowledge we have gained. All of the above can significantly help us to choose which trading strategy, short-term or long-term, we should use at the moment. The choice of strategy will depend on which traders currently control the market situation.
- So, when there is no range extension in the market, the market is controlled by the short-term traders.
- We can also say that control is in the hands short-term traders and in the case when long-term traders expand the range in both directions. In this case, there is a situation where one range extension counterbalances the opposite one. In such a case, the long-term traders have no net influence on the session and therefore control shifts to the short-term traders.
- When did long-term traders set a new high or low at one end of the range, this shows us that they have more influence.
- The same situation is observed in the market when the range extension significantly increases the initial balance area. In this case we can also conclude that long-term traders control the market situation.
- Finally, if the range expansion roughly doubles the initial balance area, control is, roughly speaking, evenly distributed between short-term and long-term traders. And we can conclude about approximately equal activity of both groups of traders.
Thus, by conducting a careful study and thorough classification of each trading day, we can determine with reasonable certainty which group of traders (long-term or short-term) currently have an advantage in the market. The obtained information will allow us to choose the most adequate strategy of our actions in the market.