Market Profile: Creating Composites

Alright, so in this video we're going to talk about the what and the why, rather the when and the why of creating composites. So what you'll see is that we take multiple days and we'll compress them into one distribution structure. And we do this not when the market is trending, but when it is falling into balance or when it is consolidating. So again, when a trend begins to show overlap with our value areas. So where we have a trend coming from the bottom left, moving upward, we have value migration on the way up, and then we begin to have overlap and a loss of a previous day's value area low, which signifies a definite sign of weakness, at least an intermediate term for this trend. This is when we begin to create a composite. So when we start to see there's a level of overlap, when we start to see there's a level of balance between two structures. One of the more obvious signs of balance in this case is that we have an inside day. So we have an inside day here, this day, the high and the low. So the high and the low is completely engulfed by the prior day's candle. So this day spent most of its time, or rather all of its time within the previous day's candle. This would be a case when we would form a composite. So what we're doing is we're not changing anything, we're just compressing both sessions and getting more actionable feedback as to rather visual feedback as to where we spent the most amount of time and where the most amount of volume was transacted. So we treat this the same way, whether we're creating, you know, two day composite, a four day composite, or two weak composite. Obviously, if the composite occurs over a longer period of time, and we've been balanced for a longer period of time, a break from this composite is much more significant because we're likely at that point building up a lot more potential fuel to the upside or to the downside. So in this case we have a two day composite, but the same rules that apply to a single day session still apply to this composite. Okay. If anything, they gained a little bit of substance. So we get a break from this move, so we get a break from this composite on the third day. And where does price come back down to after making a move above the highs? It comes back down and retests the value area high of the structure successfully before moving upward. So this is still showing that the trend does have strength. So in this case we have back to back days, back to back days of Balance. And this is when we create a composite. The move to the downside, we have an impulsive move to the downside. It takes out all these levels. And what do we do? Again we begin to form a balanced area. So, so we see that the market does this. It goes from impulsive trending environment to a balanced, more range constricted environment. So on the first day that we have this, where we have again a very compressed day within the low portion of this distribution, this is a double distribution and you have essentially two balanced areas within it. The market responds to new information or just has a lack of conviction and violently moves liquidating any positions to one direction. We fall completely within this structure. And, and again, what we're looking for is that similar situation where we're going to be creating composite to have a more detailed idea of what the trading environment is within these structures. So from here we get a more weighted idea rather of where we need to pay attention to, to look for either mean reversion, signs of shift in momentum at the lows, or at the highs for continuation back to the mean, or a mean reversion, rather reversion back to the mean. Or if we have this composite formed over multiple days, the low and the high that we're looking to see acceptance gained within, rather gained through. So finally on that fifth day, so we'll undo this. So finally on that fifth day we have acceptance outside of this level, which ultimately looks like presence without any kind of real kickback. You get a retest and you get continuation out of this zone. So this is a case where we have very tight days where all of the value was pretty much overlapped. So in this case we have value area within value area within value area. Only here do we have a slight deviation. But the move that follows, it actually gains acceptance to the downside and something we'll cover further gains acceptance through an area where we had single prints. When we start to gain that acceptance and the market stays outside of this level, we see a pretty violent move in the opposite direction. So we form composites when we are in a relatively balanced state. So relatively balanced state over time. You could do this with monthly consolidations, with weekly consolidations, it doesn't really matter. The idea is that the market has stopped trending and has formed in rather has fell into some level of balance. And what this does is it gives us more a more visually obvious cue as to where the important levels are within the range.