(£0 Theoretical buyers and selleis curve

(c5Day2 Voluine shins, sellers remain firm, buyers retreat

, Volume day 2 Buyers day Z Buyers day 1

(cO Day 2 Both buyers and sellers hokJ . volume increases at same point

Trending Markets

Trends spread volume out over price and are relatively easj to see. in the previous discussions, there is an early waming of a trend when prices move out of the value area or when there is a larger number of TPOs on one side of the center of the value area. Trends develop when the market attempts to probe a new price level causing the current price to diverge from the value area. The participants may reject this divergence and the price will rdum to the previous area causing a broadening formation, or they may accept the new price as fair value and generate a new value area by attracting volume (see Figure 18-8). The initial move that fails to find a new value area is called price frend; it usually begins and ends within a single time period (one TPO, which could be a half hour or a day). A price move that atfracts volume over a longer time period is called a value frend Daily charts, or a sequence of in- 30-minute charts, are easier to use than a single 30-minute chart when looking for a frend.

When comparing the Market Profile of successive daj-s, it is helpful to watdi the activity of the recent day compared with the value area of the previous day. When trading within

FIGURE 18-8 Market Profile for a frending market.

the previous value area, both buyers and sellers are considered equal. A move above the value area is considered as motivated by the buyer and reactive by the seller, and trading below the prior value is initiated by the seller and reactive by the buyer

Trends do not move in a fast straight line to their correct new level, instead, they move in steps, pausing to test whether a new value area can be formed that facilitates price. The trend continues in this way until prices to the previous consolidation area, where the volume is expanded and the area is broadened, resulting in a value area.

Some Points to Remember about Maiket Profile

One great advantage of using the TPO count, rather than traditional volume, is that the Market Profile can be created at any time on any market. All the necessarj information is available. The method is very different from fraditional frending approaches and offers insight into the current status of price action, whether it is in a consolidation phase or frending. Although the evaluation of Market Profile has been very interpretive, there have been important st s toward defining value areas and frends in a more objective way. Using the overlay method proposed by Jones, a very simple frend filter could be constructed so that new frend frades, based on fraditional moving averages, are not set until prices move out of the value area. During the past few years, there seems to be less interest in this technique; however, its underljing simplicity and clear distinction between other methods of analj-sis should keep its standing as a tool worth studjing.

19 Multiple! ime Frames

Although the use of multiple time periods for analyzmg markets has been popular for decades, few professionals have talked about it. It is only since better quote equipment has allowed this technique to he accessed by a wider audience that this approach has begun to appear in the public domain. The combination of multiple time periods allows the trader to time entries into the market using very short-term data, such as lOminute bars, while watching the longer-term picture for the daily or weekly trend. Because it is agreed that most trends are best identified over a longer time period, while choosing the entry point requires a much faster response, the combination of two, or even three time intervals is very sensible, if the trend can be identified profitably, then the trader can filter or select short-term trades that have a better-than-average chance of becoming winners.

For most traders, the use of any one time frame presents special problems. The very short term contains a high percentage of noise and obscures the market direction. The attempt to isolate pattems within charts of 5minute bars can divert Your efforts away from the big picture. Use of only weekly charts, although they clearly show the direction of prices, present higher risk and litUe opportunity for a good entry point. The obvious solution is to combine both charts into a program that uses each to its best advantage.

TUNING TWO TIME FRAMES TO WORK TOGETHER

Throughout most of this book, the individual sj-stems and methods have been discussed for their own merits. An analyst would look for the specific RSI or stochastic that somehow generated the most profits by showing a frend change or an overbought, oversold condition. That is not the optimal use of an indicator when it is expected to tell you the best time to enter a frend. instead, you will want the time period for the indicator to be much shorter than the time period used to calculate the frend. For example, if your frend sj-stem has a tjpical holding period of 1 month (about 23 business dajs), you may want your timing oscillator to have a good chance of giving you a better entry point within the first 5 dajs (20%) of that frade.

To get an indicator to reach overbought and oversold levels an average of every 5 daj-s. you will need to use less than 5 daj-s to calculate the indicator value, it doesnt matter if the indicator retums a loss when the results of all its bujs and sells are totaled, because the profitable part of the program comes from the longer-term frend component. It is most likely that the oscillator will generate five overbought or oversold conditions during the tjpical holding period for the frend frade, but only one of them will be used-the first one after the new entrj signal. It is only important to see how the timing helps to improve overall profits and rid;.

Figure 19-1 gives a TradeStation program that uses two time frames, a shorter one called -1 a t a 1 and a longer one, i a t a h These could be daily and weekly, hourly and daily or an), combination of shorter and longer time frames. The shorter one is used to calculate a fast stochastic (actually "oK-slow and the longer interval applies to the weekly data. This use of multiple time frames is at the root of the techniques in this chapter.

combining daily stochastic with weekly frend.