Whats up Tweeps? I've been getting lots of request/questions on twitter about this topic so I'm officially starting the blog back up to try and answer questions, help people with their trading, and (hopefully) make more money. I'm certainly no English major, nor tech expert so bare with me on the formatting/spelling/wording because their is a reason I went into a business where I deal with numbers & not words or grammar. So without further adieu, lets jump right in.
First off, before we go over examples, lets go over a few very primary things central to Market Profile.
1. "The" market, any market; whither it be a car dealership, grocery store, or the futures & commodity market, are in existence for one reason, to facilitate trade, to bring buyers & sellers together in the same place at the same time to "do business."
2. The market is always looking for balance. Why? Because when we are in balance the most trade is facilitated, creating hvn's (high volume nodes) & satisfying the sole purpose of the market. If the market is not facilitating enough trade, then it will move either to 1 extreme or the other in the hopes of facilitating the most amount of trade.
3. The market will continue to move in one direction until price is perceived as either unfairly too high or too low.
4. Price needs to go too far in one direction before value can be found. For example, lets take your hometown Starbucks; their selling cups of coffee as fast as they can make them for 2 dollars a piece, good price right? So to increase profits, Starbucks raises the price to 3 bucks, still a good price, and they still sell the coffee as fast as then can make it. The same thing happens at a price of 4 & 5, but now Starbucks starts to get a little greedy, & they raise the price to 9 dollars a cup, not such an artractive price, the customer (the buyer) no longer finds value in a 9 dollar cup of coffee, traffic in the store drops 75%, and where buyers used to lineup to buy, then no longer do. Starbucks (the seller) is forced to drop price back to where the customer found value in their coffee, all the way back down to 5 dollars. The point being that there was no way to know at what price the customer wouldn't find value in the coffee until the price went to high. This is a very basic & crude example, but you get the idea.
5. Time....one of the more forgotten aspects in trading, but it is the ultimate controlling factor. I could do a whole blog post on time, but the most important thing about it is its relationship to price rejections & auction failures. When you get a clean rejection of a price, or a clean breakout, esp in crude, price aint gonna stay there for long, usually not even a full second. When you hear me say something about a poor high or a poor low, this is the principle I'm referring to. It's usually because we fiddle-farted around, lazily walked up to an area of interest, then lazily moved away from the area, its because of the time factor that makes it a poor extreme. Buyers weren't standing in a line outside the door, clawing and scratching to get their 2 dollar coffee, because if they were, thats when u get the really fast moves, and the greatest opportunity. Highway to the Danger Zone!
http://www.youtube.com/watch?v=V8rZWw9HE7o
-Mav
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