|
|
What is difference between VPOC and POC?VPOC is the Volume Point of Control (volume based) POC is the Point of Control (time based) The VPOC relates to volume and POC relates to time. Both represent where the most trading occurred. VPOC is where the most volume occurred for the specified session or time frame. POC is the price at which trading spent the most time at. Very often people confuse time with volume and think that the price the market traded at the longest would have the most volume, but this is a misconception. Especially when looking at 24 hour charts, the POC does not necessary mean the highest volume price. If only viewing the day session, many times the POC and VPOC are very close or the same, but not always. Which is more important? – That is up to you. Some traders prefer the VPOC because it is more exact when inferring how much interest a particular price was for traders, both buyers and sellers. If you use Market Profile, it often references the POC. Our software, MarketDelta, can use both the VPOC or POC when viewing a Market Profile chart. If you visit www.marketdelta.com and search VPOC at top search box, you will get all sorts of good informtion. The Market Profile add on is required in order to plot the POC and VPOC. If you have any questions please comment or contact us. How to Plot the Developing VPOCThere is new piece of functionality in 10.5 that could easily be overlooked, but it is an important improvement for those who rely on the VPOC (Volume Point of Control) as a reference point. The new functionality allows for the plotting of the developing VPOC. The developing VPOC plots a line and shows the history and progression of how the VPOC has adjusted based on price and volume activity. Think of it as the history of where the high volume price has been over time. To add this to a chart first add a Profile indicator to a chart. Once added, make sure the top most setting in its preferences is set to “Price and Volume”. Then just check off the “Dev VPOC” box to add it to the chart. This will plot based upon what is set in the Time Per Profile section in the preferences. In the screenshot below it was set to 2 days, meaning the developing VPOC is plotted for the past 2 days.
Market Profile for StocksMarket Profile charts are famous in the futures industry, as that is where they were born and remain essential tools for many futures traders. A question we often receive is: “Can you use Market Profile for stocks?” It is important to understand that Market Profile is nothing more than a way of viewing financial auctions. In this regard, there is no difference between futures, options, stocks, bonds, commodities or other financial instruments: they all follow the same basic auction process. Thus, Market Profile is perfect for understanding where the value areas are in any particular market, whether it is the ES future or the stock of Apple. Here are a couple examples. First, when setting up a Market Profile chart, it is a good idea to change the price range of each letter. A stock trades in pennies and may sway by many dollars a day. Depending on the stock, 1 dollar may represent a small part of its range, while for others it is a large part of its range. You will probably want to find a letter size between 10 cents and 1 dollar, which you can do in the Custom Letter Range box:
Enter 0.1 or 1 or whatever you feel is appropriate. Here are some examples of AAPL stock using a Market Profile set to 10-cent letter ranges.
Here is a classic example of Market Profile value areas in action. The market broke above value, and then rejected efforts to fall back inside that value. This confirmed that new value was successfully established. Here is another one:
The market falls and trades below value for an entire day. On the following day, the market attempts to push back up in to this prior value, but the value area low stops it cold. Market Profile charting is an extraordinarily powerful tool, and we recommend that anyone serious about it give those charts a try. You can learn a lot about Market Profile concepts, theories and strategies in the books by James Dalton, Markets in Profile and Mind Over Markets. Two-month Market Profile since August BreakdownFor two months, the market has received much attention for its high volatility, dramatic drops, increased risks and uncertainty. We’ve brushed with “bear territory” as the news media like to often repeat, and have had significant intraday declines reminiscent of 2008. What’s a trader to do? Here is a very simple chart with two useful long-term indicators added to it. This is a daily chart since the August “crash” that shows two trend lines and a volume profile of all trades during the last two months.
The first notable event on this chart is the triangle pattern with lower highs and higher lows over many weeks. Most traders understand that on any timeframe, a contraction of volatility precedes a notable move in one direction or the other. You can clearly see on this chart when the breakout of the triangle occurred, offering strong reasons to expect further declines. In fact, selling the bounce back into the triangle was a good short setup with good risk-to-reward. Now we are at today, October 5. The market has enjoyed a good rebound yesterday and, as of 1:40pm Central, another nice rebound today. But where do we put this in context? One of the immensely powerful and unique features of MarketDelta is the ability to create custom volume profiles over any period you wish. Using the Profile tool, we can build a distribution starting at the August breakdown to the present and clearly see where the value areas lie in today’s market environment. We can clearly see that, at the time of this writing, the market is touching the Value Area Low of this last period of rotation over two months. In fact, in the last few minutes while writing this article, the market sold off 5 points from this level, so anyone shorting this Value Area Low would have enjoyed a decent scalping opportunity. But when looking at the bigger picture, it is easy to see that, despite all the dire predictions among the analysts, the actual market activity is telling us something: The point of control (POC) is at 1157.25, making that a very reasonable and probable trading price, and the top of the Value Area isn’t until around 1200. To demonstrate how successfully Value Areas capture and predict market rotations, here is another graphic of the same chart, but the Profile is drawn to end at an earlier date:
By only showing what the Profile looked like at the time you might have traded it, you can see very clearly how the Value Area Low at that time effectively captured the market reversal that moved from around 1130 back up to 1200. And actually, the distribution has been so normal that the value area did not change much over the course of the following two weeks, showing just how predictable all of this volatility actually is. These are volatile times, but you can often simplify all the uncertainty with some basic views of the greater auction taking place over many days.
TPO Indicator, or Profile Indicator?While Market Profile charts are powerful and popular tools that appeal to many traders, MarketDelta also provides two indicators for viewing profiles on candlestick and Footprint charts. These are the “TPO Indicator” and “Profile Indicator.” The features of these two indicators at first seem similar, so you may find yourself wondering which to use. For example, with both indicators you can show information for the current day profile, or the previous day profile, or both. So what is the difference? The TPO indicator always shows data and profile levels based on 30-minute TPO letter durations. Thus, it closely matches what a true, traditional Market Profile chart shows. If you want to monitor Market Profile levels on your intraday chart, no matter what periodicity your chart is set to, use the TPO indicator. It will show the same value area and POC data as a Market Profile chart, no matter how your chart is organized. The Profile indicator draws value area and POC levels as well, but it uses the periodicity of the chart to determine the information. This primarily applies to time-based profiles, as opposed to volume-based. The cumulative volume for a price is going to be the same, whether you look at a 5-minute or 1.25 range or 1 minute or 233 tick chart. But the number of bars, and thus the number of times a specific price was charted, will widely vary depending on these periodicities. Thus the time-based profiles in the Profile indicator will not look the same as Market Profile charts unless you are using 30-minute candles or Footprints. Additionally, the Profile indicator offers many other features that are not available in the TPO indicator, such as long-term composites, the ability to split a session into up to three different profiles, and more. So it really depends on your needs and the type of precision you want to see in your profile results as to which of these two indicators you should use. Composite Volume ProfilesOne of the most popular features in MarketDelta is the ability to see volume distributions over a long period of time. For example, over the last 2 weeks or 2 years, where were the most-traded prices? Here is a quick tutorial. Using the Profile indicator, you can see this information easily. However, you must have access to good minute-based historical data, such as from DTN Market Access or IQFeed. If you do not have the price history on file, then you cannot view the composite volume profile. First, download as much minute data you need for the period you wish to study. In this example, I will look at the composite for the last year for the ES, so I start with a minute download:
Then, I look at any ES multi-pane chart, such as a footprint or candlestick chart, and change its view period to time period I wish to study:
After you are done, look back to the beginning of your chart to make sure it starts at the time that begins your study period. Finally, add an instance of the Profile indicator. One way to do this is to use the Insert button on your keyboard, then find the Profile indicator in the list. You will want to structure your Profile settings as follows:
You can also use the “auto peak” option if you want to have the indicator automatically create horizontal reference lines at the high-volume and low-volume nodes in the profile. You can adjust the sensitivity for this setting as well. Both options are near the bottom of this window:
When you are done, depending on your stylistic preferences, you will have a volume composite for the last year, like so:
Two Good Trade Examples From TodayReaders of this blog will note some interesting charts we have posted in just the last week that provide good insight into the market. Today, the market reversed at two key levels perfectly identified on two charts we discussed in earlier blog postings. One of these reversals is based on the chart of the week from just this last Friday. The other reversal comes from the 200% IB Strategy we demonstrated in our new RTL blog series. Both of these patterns appeared beautifully in the market today, and they help reinforce the value of both Footprint charting as well as Market Profile strategies. Click the image to see a larger version.  Today's trade examples. “Initial Balance” Rotation Strategy: Part 1 – ConceptOver the next few weeks, we are going to demonstrate how you can chart, signal, and backtest a simple but popular trading strategy based on the “Initial Balance” levels made famous by Market Profile charts. Today we look at the concept itself. Check back with this blog regularly to see the additional installments in this series. ConceptAll trading systems must begin with a concept, or expectation of market behavior. Without a solid idea for a trading methodology, you can’t easily build trading signals and create backtests to determine historical profitability. Except for trending days, when price tends to move consistently in one solid direction for the course of the entire day, the market usually “rotates” on most days by reversing at price extremes. Traders who accurately predict where these reversals occur can be quite successful. One way to estimate where rotational extremes may appear is by looking at levels created by the Initial Balance. Market Profile traders are familiar with Initial Balance (IB) levels on their charts. The IB is most commonly defined as the range of prices during the first hour of trading. From this range we get additional price levels that could hold as reversal points on any given day. Some common price extremes are the Double IB High and Low. These are simply the full range of the IB extended above and below the High and Low of the IB to get the 200% IB High and 200% IB Low. For example, if the Low of the first hour was 1200, and the High was 1210, the IB is a 10-point range. Add this range size to the IB High and IB Low and you get 1220 for the 200% High, and 1190 for the 200% IB Low. (150% IB extensions would be halfway between the IB and the 200% IB levels.) By default, the Market Profile charts in MarketDelta automatically chart these levels:
Notice how the market came close the 200% IB Low and then reversed, or “rotated,” back up towards the center of the distribution. This is part of the idea behind Market Profile methodology. You may hear traders talk about “reversion to the mean” or a “return to value.” This is often the mechanism behind reversals at price extremes, such as the Double IB High or Low. Look at these examples as well:
Though you could create signals and backtests for both 150% and 200% IB levels, or any other level you choose, we will start with the 200% in our tutorials. The goal of this blog series is to ask the questions: How often can we reasonably assume that a 200% IB extension will hold? How many points away from this IB level is optimal for taking a trade entry? How profitable would I have been if I only traded 200% IB reversals for the last several months? What’s the best stop to have for this trading strategy? How long should I hold a trade to maximize my profit potential? All these questions can be answered within MarketDelta using the Professional Complete version of the software, which allows you to build custom RTL algorithms to enhance your trading. Stay tuned for our next installment, in which we build a custom RTL indicator to see these levels on a multi-pane chart, such as a bar or candlestick chart. This is the first step in generating an accurate RTL system for this concept. We hope that through these tutorials you will see how relatively straightforward RTL programming can be. Custom Sessions and Viewing Historical Opening RangesThis week, a user asked how to best view and study historical opening ranges. Market Profile users, in particular, are used to seeing the Opening Range on every profile chart. The opening range’s duration may be customized, but it often refers to just the first minute of trading of the RTH session that starts at 8:30 am Central Time. Some traders place great emphasis on the opening range, and devise trade setups around it. Since the first 30 minutes of the session is often the most active, highest-volume part of the day, it makes sense to gain insight into these first moments of the session. If you wish to analyze opening ranges for the past several months, you would simply build a 1-minute multi-pane chart that starts at 8:30 am each day, and set the Period to “Last 200 days” or whatever you wish. Then you could scroll through the price history and observe the beginning of each day. But if you want to really focus in on just the first minute, there is a more elegant solution that benefits those looking to study just these first few minutes: Create a custom session. Visit the Setup menu > Preferences > Sessions. Click “New” and type a name for the new session you are creating, such as “Opening Range.” After you press OK, you are presented with a normal Session settings screen, which you can modify as follows:
A few points about this:
After you press OK, you can apply this session setting, and other necessary settings, to any chart, by right-clicking the chart and choosing Preferences > Chart:
To see the opening range, it should be a 1-minute chart, noted at the top under Periodicity, set to “Last 100 days” if you wish to see a few months’ worth of opening ranges. The session is set to your new session. After you press OK, you will see:
The first 5 minutes of every trading day. Need more granularity?The example above is easy to setup, and you can easily view several months, hundreds of days of opening ranges in this way, since all it requires is minute data. But if you download Tick data, you can really see what is happening during the opening range by choosing bars based on seconds, not minutes. For example, a 10-second setting will divide the opening range into 6 bars. To change the Periodicity to 10-seconds, set it to the following:
At which point, you will see this on your chart:
If you want to get particularly fancy, you can use the Paint Bars indicator to highlight just the opening range so it is easily to distinguish from the following minutes and seconds. You would need the Professional version of the software to highlight the bars based on time, using a simple RTL signal like this:
This signal simply requires that the affected bar be before 9:31am Eastern Time. (For more about creating custom signals, please click here to see another recent article.) Now you can add a Paint Bars indicator based on this signal, as follows:
In the below example, I use the “Paint Background” setting in the Paint Bars indicator to highlight the opening range, based on 10-second bars:
You could then scroll through many days’ worth of opening ranges to see how they behaved and affected the following minutes. Remember, this second-based chart periodicity requires Tick data, and the Paint Bars implementation shown here requires Professional. Heat Mapping the Profile IndicatorIn the most recent version (download here) we have added heat map functionality to the profile indicator. Heat mapping is very useful and is sure to be a hit with many of our users. The 4 minute video below shows how to add it to a chart and modify the settings. To change the width of the heat map just edit the pixel width as show below. This option is only active for single profile configurations of the profile indicator (all data, custom, etc) One idea on how this can be used would be to add 2 or more heat maps to a chart and see how the high and low volume levels relate. Below is an example of a daily ES chart showing a 30 day and a 100 day heat map profile. Here is the chart definition. Here is another example of a Footprint profile chart showing a heat map of the last 2 days. Note how the heat map is also showing the value area high and low, as well as the the POC. Another benefit of using heat maps instead of normal volume distributions would be that the heat map provides a better visual of volume activity and can help reinforce the idea of high volume and low volume. |
