Market News - 25 Aug 2009

U.S. and European Market Roundup

• The DJIA up 3.32 points to 9,509.28 points.
• U.S stocks ended the day barely changed on Monday as investors took a break from a four-day rally that lifted major indexes to 10-month highs. Wall Street initially charged higher, but a sharp gain in U.S Treasury debt prices, which drove benchmark yields lower, triggered a sell-off in stocks.
• European shares hit their highest closing level in more than 10 months on Monday, boosted by banks and miners, with recent economic data and positive comments from some central banks prompting investors to grab risky assets.

Macro and Corporate New

• Yesterday, Tan bought another 11.23 mln shares, or 18.14%, in GBH for RM16.84 mln, or RM1.50 a share. CIMB said those who had accepted the offer at RM1.25 apiece would be entitled to receive the revised offer price of RM1.50, up from RM1.25 before.
• RHB Capital said its second quarter net profit rose 11% to RM301.53 mln from a year ago, driven mainly by its Islamic banking business.

Market News - 18 Aug 2009

U.S. and European Market Roundup

• The DJIA down 186.06 points to 9,135.34 points.
• U.S stocks suffered their worst loss in seven weeks on Monday as weak data from Japan dampened hopes about the economy's growth.
• European shares fell to their lowest close in more than two weeks on Monday, as investors took profits, worrying that a recent rally was not supported by economic data.

Macro and Corporate New

• Pos Malaysia's net profit for the second quarter to June 30 this year eased marginally to RM15.9 mln from RM16.6 mln a year ago while revenue, however, rose to RM227.3 mln from RM223.2 mln in the same quarter in 2008.
• Alliance Financial Group's net profit dropped by more than half in its fiscal first-quarter, due to lower operating profit, higher allowance for losses on loans and higher provision for impairment on an investment security.

Market Profile's 80% Rule

The Rule

If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.

Using

1. Wait for the trade to close inside the VA.

2. Try and get best possible trade entry. If possible, enter from VA level that was crossed in order to close inside VA.

3. Target most of the position at the other side of the VA.

Notes

One trader noted to me that in testing the 80% rule using TradeStation the probability is actually 62% and not 80%. The trade supposedly gets its name from the probability of the outcome of the trade. i.e. There is an 80% probability that the market will trade to the other side of the VA.

Look at your risk/reward when taking this trade. If the VA is only 2 points wide and you use a 3 point stop then this trade is probably not worth taking when the VA is this small.

Where is the market likely to close? – Part 2

Open to Close

The following shows a cross tabulation of where the market closed given where it opened. Before looking at the result table I wrote down what I expected the results to be. I expected that if the market opened above the VA then it is more likely to close above the VA than in any other area etc. These are the results of around 1,700 trading days of the ES.

			Close
		Above	In	Below	Total
	Above	65%	19%	16%	34%
Open	In	35%	33%	32%	36%
	Below	14%	21%	64%	30%
	Total	39%	25%	36%	100%

 

Ignore the Total column on the right to start with.

The top row shows us that of all the trades that opened above the VA, 65% closed above the VA, 19% in the VA and 16% below the VA. The next two rows are self explanatory and follow the same pattern. These figures are pretty much what we would expect except that the middle row is slightly off but by little enough that we can ignore this.

The bottom row (Total) shows us that irrespective of where the market opened (i.e. ignoring where the market opened) the market closed above the VA 39% of the time, in the VA 25% of the time and below the VA 36% of the time. This is more skewed than I would have initially expected.

The Total column at the end shows the averages of where the market opens in relation to the VA. This is roughly split into thirds each which is what we would expect.

On subsequent inspection the closing averages (bottom row) are not as surprising as I would expect. The value area is a restricted area based on 70% of the previous session's TPO count. As such the area above and below the VA gives far more area to move in and therefore more opportunity for price to occupy. i.e. more data points which the price can trade at exist on either side of the VA (far more prices) and this I believe explains this apparent anomaly.

Open to Traded

This next table shows us the percentage of times the market traded above, in or below the VA given where it opened.

					Traded
		Above	In	Below
	Above	100%	66%	30%
Open	In	66%	100%	64%
	Below	27%	68%	100%

 

This just deals with the open of the market (one of above, in or below VA) and where it subsequently traded. Obviously if a market opens above the VA then it will trade above the VA so 100% of the times that the market opens above VA it trades above VA.

If we take a look at the first row we see that when the market opens above VA it will trade in the VA 66% of the time and below the VA 30% of the time.

Does this make fading a down move at the bottom of the VA a good trade if the market opens above the VA? I don't know yet, that is on my list of strategies to back test. That will be posted in the Strategies part of the web once I have tested it.

 

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.

Double Initial Balance

Calculating DIB in Market Profile

Calculating

Calculating Double Initial Balance (DIB) is easy:

1. Wait for the Initial Balance (IB) to form. This is usually the first hour of trading.

2. From this we get the IB High and Low: IBH and IBL. (The high and low during the first hour of trading.)

3. Calculate the IB Range (IBH - IBL) from these two figures. Let's call that IBR.

4. Add the IBR to the IBH and this gives us the Double Initial Balance High: DIBH

5. Subtract the IBR from the IBL and this gives us the Double Initial Balance Low: DIBL

More Calculations

Triple and Quadruple the IB can also be calculated. Add and subtract the IBR to and from the DIBH/DIBL to get the etc. to get the subsequent levels.

Using

DIB levels are used in Market Profile trading as support and resistance lines. We usually look for the market to turn at these lines which make them counter trend trades.

DIB appears to be more effective when the IB is normal to large in size and not as good with small IBs. (This has not been quantified in tests but is the general belief in Market Profile.)

What is Market Profile?

Market Profile is a graphical organization of price and time information. Market Profile displays price on the vertical axis and time on the horizontal axis. Letters are used to symbolize time brackets. Marketprofile is an analytical decision support tool for traders-not a trading system.

Market Profile reveals pricing patterns from any market as they develop. By effectively organizing price and time information, it is possible for traders to see which price areas the market is accepting or which ones it is rejecting…and adjust their trading style accordingly.

A price level that has been confirmed over time takes on added meaning. A price that is touched only briefly is just a price and little more. Confirmed by time, however, a price can reveal market value.

J. Peter Steidlmayer developed Market Profile in the 1980s in conjunction with the Chicago Board of Trade. Traders who use it say that they get an in-depth understanding of the market, contributing to improved trading. Many factors can be monitored from Market Profile.

Market Profile is not an indicator in the typical sense. It does not provide buy/sell recommendations but acts more like a decision-support tool. It organizes the data so that you can understand who is in control of the market, what is perceived as fair value, and the direction of the price move. It is possible to extract enough information from Market Profile for you to position your trades more advantageously.

Market Profile is useful for the pit trader as well as the off-floor trader. The indicator can help the off-floor trader get a better sense of the market; prior to the introduction of Market Profile, only floor traders had access to this information. Although all references here refer to using futures contracts, Market Profile can be used just as effectively for other tradables. Software vendors such as CQG and WindoTrader provide Market Profile displays for equities.

IN THEORY

The concept of Market Profile stems from the idea that markets have a form of organization determined by time, price, and volume. Each day, the market will develop a range for the day and a value area, which represents an equilibrium point where there are an equal number of buyers and sellers. In this area, prices never stay stagnant. They are constantly diverging, and Market Profile records this activity for traders to interpret.

Market Profile is based on the normal distribution curve, wherein approximately 70% of the values fall within one standard deviation of the average. If you rotate the normal distribution curve so that price is along the vertical axis and time on the horizontal axis (as shown in Figure above), you have the structure of Market Profile.

A normal distribution curve assumes that the number of occurrences follow a bell-shaped curve. Anyone who has traded in the markets, however, knows that prices never follow a definite pattern; in fact, you rarely see a normal distribution. What you do see are skewed distribution of prices, which makes it possible to see the price at which most of the trades actually took place. This provides significant clues about the direction of prices and is the groundwork for understanding Market Profile. In theory, this helps the trader identify where prices are in relation to values.

Monitoring price distribution over time gives insight into what levels are considered fair and unfair. You may take advantage of this information and identify good trading opportunities.

Some Key Term for Market Profile

Sometimes ago we have an expert trader who mentioned some key words related to Market Profile and I think it will be beneficial to share those key term. Hopefully it will be usefull if I managed to post any future articles related to market profile. Enjoy!

1. Initial balance - market activity in the first hour
2. Range extension - price action extending beyond the initial balance
3. Range - range from high to low
4. Single print buying tails - any single print TPO's at the lower extreme of the profile
5. Single print selling tails - any single print TPO's at the upper extreme of the profile
6. Point of control (POC) - price level of most volume. POC indicates an area of greatest market activity
7. TPO - stands for Time Price Opportunity. Letters are used to build the market profile structure. Each letter represents a half hour period. The letter is also known as the TPO.
8. Value are - price range in which approximately 70% of the market volume took place.
9. Value high - the upper pivot of the value area
10. Value low - the lower pivot of the value area