Where is the market likely to close? – Part 1

Calculating the close

This article assumes a basic understanding of Market Profile and the terms used in Market Profile. No attempt is made here to explain those terms.

Open Trade Close Market Profile

The purpose of this study is to determine where the market is likely to close and trade given one of three Market Profile positional openings. The market can open above, in or below the Value Area. We want to know by the end of this study (1) where the market is likely to close (given its open) and (2) where the market is likely to trade (given its open).

The types of questions that you will be able to answer at the end of this article and studying the tables in it are:

• If the market opens above the Value Area then what is the chance that it will close (1) above the Value Area, (2) in the Value Area, and (3) below the Value Area? (and all other combinations of this question)
  
• If the market opens below the Value Area then what is the chance of it trading (at some point during the day) in and/or above the Value Area? (and all other combinations of this question)
  

This article does not attempt to suggest or give trading recommendations as no calculations have been done on Value Area size and/or distance the market may open from the Value Area. The data calculated for this article was calculated with the intention of producing tables of probabilities which will eventually lead to back tests being run using Market Profile to help develop strategies.

Fair Data

The first question I ask myself when back testing a strategy is: What was the back drop to the period in question when the strategy was run? If, for example, our strategy was to buy the open and sell the close and our back test showed this to be a fantastically profitable strategy I would be less impressed if I was then told that the period over which the test was run saw the market rise by 50%. I would also want to know how many days of data went into the back test.

It's no different for creating statistical tables. You need sufficient data over a period which has seen a good cross section of market conditions.