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Market Profile Strategies 2


Every now and then I get questions from people learning Market Profile asking for strategies that they can use in their trading. Some people are prepared to put in hundreds of hours trying to learn why the strategy may or may not work and will back test and study the strategy until they are masters at it - that's great. Other people are not interested in the why or where of the strategy but just want something that works - that's great as well. With each comes advantages and disadvantages.

First off there are a number of strategies listed here: Market Profile Strategies

Secondly here are 3 standard Market Profile Strategies that you can learn and use to trade. Will they bring you fantastic profits? Personally I don't think that they will if you use them in isolation. I think that they should be used as a basis for decision making and the context of the market taken into account before you take the setup. If, for example, a large economic report is about to be released (like Non Farm Payroll or FOMC minutes) then it is probably not a good idea to enter the setup but wait until the action after the report has died down.

Here they are:
1. Range Extension on far DVA Pullback
After we have seen Range Extension (RE), trade in the direction of the Range Extension from the Developing Value Area extreme furthest away from RE.
Example: We have RE down. Short the market from Developing Value Area High (DVAH).
Notes: Appears to work better when the IB is average sized. (This has not been empirically tested by myself.)
Appears to work better when RE is at least 3 to 10 ticks in size.
Usually the "far" DVA is the place to enter but sometimes the market doesn't make it there or overshoots it - we have to expect that and this will continue to happen in the future and should be no surprise when it does. In order to improve your performance (i.e. profits) you need to anticipate the times when it will need to be front run and times when you need to wait for a greater pullback. Do this by studying price action. If the market is sluggish and showing an unusual strength in the direction of RE and resistance to pulling back to your entry level then you may need to front run it. If the market quickly retraces to the entry point then you may need to using a timing device to enter the market. A timing device can be an oscillator but I believe that something that shows market capitulation would be better. For example, looking at the value of the NYSE TICK (called $TICK on some systems) or the volume being traded in a short time frame. High/low NYSE TICK values and high volume readings often give a lower risk entry point under these conditions.

2. Double Initial Balance (DIB)
Fade the DIB area.
Notes: Works best on average and larger IBs and fails most often on small IBs.
Once the IB has been established, compare the DIB to the average day's range for the instrument that you are trading.

3. Single Prints
Use a previously created Single Prints as support or resistance.
Notes: Examine the 3 months of forward (backward) testing done on the Single Prints Strategy here:
May 2005
June 2005
July 2005
Do your own forward testing and paper trading of this strategy for at least 3 months as well to refine and define your entry points and stop and profit targets.

And finally:
ALWAYS USE STOPS

Define your exit point before you enter a trade, do not make it any wider during the trade and get out regardless when your stop is hit.

Some of you having read this may want to dive in and trade these strategies without first paper trading them, studying them, or understanding them. I highly recommend that you don't. Take the time to get to know them in the market that you trade and see how they work out.

Just like I ran the 3 month Single Print Strategy forward test, you can run a similar simulated test. If you think that running it on this forum will make you more disciplined into doing the test then do that. You may also elicit ideas and suggestions from other people like I did and this may point you in other directions that turn out to enhance the strategy and make it more profitable.

Doing those 3 months of tests I found made me sit down and study the strategy every evening for 60 trading days. It took me about 5 to 30 minutes each evening and was a fantastic learning experience. I am sure that you will find that doing this will have an enormous impact on your understanding of the market and each strategy that you study and ultimately lead to greater profits. Don't underestimate the power of 5 to 30 minutes of study each evening. Remember that once you have finished testing and refining a strategy and changing it so that it works with your trading style and your money management methods and your stops and targets it becomes your strategy. No one else in the world is using this strategy except you.

Good luck and keep me posted...
Hi do you have any charts with notations you can show us? I'm new to MP and new with the terminology so I'm not sure where is what is. Thanks.
Take a look at this page and follow the links on that page: ToolPack
Although the pages talk about the ToolPack indicators they are mostly Market Profile indicators and most of the charts will show the Market Profile concepts such as Value Areas and Initial Balance. Once you've checked them out ask some more specific questions and I'll see if I can help.