Market Profile: Intro to Ranges and Balances Part 2

Alright, so let's talk a little bit more specifically about ranges again. So ranges otherwise known as bracketed markets or consolidations or balanced areas, we could talk about them on the individual level or we could talk about them over time. The same ideas hold true, okay? The same conditions hold true, the same assumptions hold true, regardless of whether or not we're looking at a single day that is balanced. So this is a relatively balanced day, or if we're looking at what is over the course of multiple days, prices that are in relative balance. So we're looking at four days right here where we spent the majority of our time confined to a $200 range that took place between these value areas. Whereas in this case, we're looking at a single daily session down here that was balanced on its own. So the assumptions and the approaches are still the same. Okay, so again, there's a whole lot of agreement here. In a trending market, when we've moved from a trend and started consolidating, we go from a period of, again, value migration, where value is being redetermined at new levels, whether it's upward or downward, to one of the first signs of a range forming or a trend stopping. Is we have these inside days with value. So we see that value area is up here, and then this next day is completely inside of the previous day's value area. And this is when we begin to sort of auction sideways and come into a period of relative neutrality between buyers and sellers. So it's important to understand the same concept within the individual day occurs within the range over the period of days. So while the highs and lows are different, we again are focusing most of our attention within the value area. And the point of control, the high volume, the high participation zone within this is where we assume is fair value, because this is where the most participation occurred. This is where we spent the most amount of time. So since the point of control is the most fair value level within an individual structure and within a composite, and by composite, I mean what we do when we see a range forming, we start to form a composite. Since the point of control is technically the fair value area, we could make one assumption about getting into position off the point of control. Okay, for one, there's a lot of liquidity available in the center of ranges, and more often than not, the point of control will be near the center, and the center is often an area where traders get trapped. Okay, this makes a lot of sense when you think about how the point of control is fair value. This is the most agreed upon Level. When you're getting into position towards the center or around the point of control, this is more often than not a coin flip because this is the most agreed upon level by buyers and sellers. Whereas if we're at either extreme, it's more likely we are to revert back to this level or return back to the mean. So around the point of control within a range, the center of the value area, this being the most agreed upon level around the point of control, this is often an area where price will chop and it's not really the best area to get into position. So if we combine both of these positions, what we're looking at is right around here. We can see this is the TPO point of control right around here. This is not necessarily the best area to get in position. You know, we'll go into in trending markets when this will be, but this is the most agreed upon level. Whereas when price approaches an extreme, we start to see an imbalance. And this is where we potentially set up for this reversion to the mean back to this level. So there's a few things that we know about ranges, since they're in relative agreement or they signify agreement. And one of them dictates our response as to how we will operate when we gain acceptance back within a range. So when price gains acceptance back into a previous balance area, so when I say range, I'm talking about a balanced area. When price gains acceptance back into a balanced area, we're more often than not going to cover this distance. So whether we're talking about a composite or a single day, so whether we're using this composite or we're looking at this day in this value area, what we're saying is that when price approaches this from either the high or the low, if we gain acceptance back within it, and acceptance in terms of TPOs means two TPO prints inside of this, we're more often than not going to auction from either the low to the high or the high to the low. So just as an example, we'll combine this composite and this Also is an 80% rule example which we'll get into. Price is on the outside of the value area of the structure. It gains acceptance back within the structure. We have these two TPO prints and what we do is we end up covering the high to the low of the structure. So when price gains acceptance into a previous balance area, we are more often than not going to, excuse me, cover the distance of that level or cover the distance of that range or that area. So the Area where price is most likely to first stop is also going to be this fair value area. Remember, if we're approaching this from a distance, and this was a previously agreed upon level, where does it make sense for price to stop the most. The most agreed upon level, the area where we spent the most amount of time. And that's the point of control. So the point of control when we're re approaching is likely the area where price is going to be slowing down. Okay, so the point of control being the area where we spent the most amount of time. In this case, we'll talk further about the volume point of control and how we integrate these both at the same time. So this is the first area that price is likely going to slow down to after moving back to a previous balanced area or gaining acceptance rather within a previous balanced area. So we'll close this. We're going to open this. And this balanced range right here is actually this period of price action. So we're looking at this in the candlesticks, and when you're looking at this in the candlesticks, you can't really see. You can only sort of surmise where the value area would be. But again, this is why it's beneficial to use something like the TPO charts because we get an immediate idea of where most of this focus and where most of this activity occurs. So the next thing to talk about is if price is accepted outside of balance. Okay, so when we're talking about this range, what we're talking about again is the market being in balance. Right? Being in balance. In balance. So it's in balance, it's in agreement. This is fair value right here. If price gains acceptance outside of this level. So if we gain acceptance outside of about a value area. So we'll use. Now we'll move to a different example. We have an inside day over here. So we have a very balanced day. Within another day. Within another day. So this is a good example of again a tightening range. So here's your value area. Originally there's your high. Then there's your high. Then same story at the bottom. We have a range that's compressing. Now what we'll do is we're going to combine these because we have a composite that's forming even though you can more often not go off the last day if it is that tight. So we'll combine this and this is the area where buyers and sellers agreed upon price is the most. Right. So this is the most balanced area within the structure. So if price gains acceptance outside of this level, meaning to the upside in this case or to the downside, this is considered an imbalance, meaning price has gotten away from balance. If price maintains acceptance outside of balance, in this case, we see that it moved outside of initially and then re approached, which is a sign that is likely going to break it. If price maintains acceptance, it'll lead to an imbalance and it'll more often than not have us move to a next previous level of bounce. Okay, so if we have a naked point of control, if we have a previous structure, it will more than likely lead or price will more than likely move from this one area of balance to the next area where we were balanced, where in this case we did not have anything prior. But you'll see how when you look at individual sessions, this works. We run into naked points of control all the time. And after gaining acceptance and falling into imbalance after falling outside of balance. So if price is accepted outside of a balanced area, this imbalance will often lead to the next area balance point of control. So that's another point that I should mention. So for example, let's look at this composite down here. Price in this case is a prime example. Price in this case, we're looking at individual session that is balanced. And we're looking at a structure that you auction from high to low, from low to high to low to high. We are ranging within this structure, price finally gains acceptance outside of this structure over here, we see that in this case. Let me draw this better. We have a very clear value area. Price again moves gains acceptance above this value area. So this is a new area for price where it was mostly confined over here within this range, we finally have started contesting at new prices. And the next area that we go to in this case is a previous levels point of control. So the previous high volume level within the structure, we're looking at initially the high volume point of control for price over here or for volume and then the point of control for the TPO chart. So more often than not, price will seek out these previous points of control and these previous balanced areas after breaking from balance. So remember, if price is accepted outside of balance, this imbalance often leads to a move to the next area of balance's point of control. Now, more often than not, within a range, we're going to expect mean reverting behavior. So you're going to look for the behavior that gives you the indication within order flow that one side might give over the other. Or rather than, you know, mean reversing, mean reversion taking place but normally price is going to mean reverse. Okay. And what this means is price is going to spend time auctioning within. So it's going to be covering the range of price movements. We're going to see some behavior at each level that'll indicate whether or not it is going to be turning or more likely to gain acceptance through. So you might look within price Action to see if there is a sign of strong price action at the highs or at the lows. In the case of looking at microstructure, you might look at something like microstructural highs and lows forming. So we'll let this chart load. But you are ultimately going to be expecting that prices are going to mean revert. So more often than not, you'll see that prices are bid up very quickly at the range low, the range low of the value area. And again, prices are offered down at the high. So more often than not, balanced areas are going to be environments where we do have this mean reverting behavior. And when you see a range forming, you should ultimately assume that we are going to maintain the range. Okay. Until you see that we have some type of breakout and some type of acceptance outside of it, you should be playing it in the anticipation of mean reversion. So we'll look at this price chart. Now. Some of the signs you would obviously look for if you're just looking at price action, if we were moving up to a previous day's value area. So what we'll do is we'll combine this and look at how we auctioned with respect to the line on the point on the value area.

Okay, so now we'll go back to this chart that's actually not the same structure. What am I doing? Let's go that go for that again.

Well, that is the seventh, so we'll just go to the seventh. Instead.

What you're going to look for is the signs within price Action that one side is beginning to shift in terms of control. So if we know that this is our value area low, this is our value area high, what kind of signs and price action might you look for? Well, for example, you might look for microstructural highs and lows beginning to form. You might look for an immediate response on part of buyers. So you see this wick right here? So we lose this structure and we'll get into this. When we talk about trap traders, we lose this structure and we're able to reclaim it and retest it successfully. So if you're looking at micro structure, in this case just Price action, you're going to see that a story is told in terms of advance. And finally when we begin to show a sign that we are reversing, you know, this is an indication that likely the level is being respected. Okay, so there are things obviously within order flow that we're going to go over to substantiate this and to sort of build the case for either it breaking or for it mean reverting and acting as support again, or acting as resistance. And this failed breakout. It's important to understand that when we do have a failed breakthrough level, so this gets us to our next point, this failed break through the level is often an opportunity that sets up for a trap. So when you have something like a value area forming or an area of balance forming, what doesn't happen? Meaning when we gain acceptance to the low and we don't continue to break down to the next area, what doesn't happen is worth paying attention to. So instead we gain acceptance through this low, we're able to reclaim this level. And at that point we treat this as if it's a new auction. And, and then we're looking at covering the distance of this range again. So we're looking at this mean reverting behavior continuing. So these are just some more basics added to the previous range video. It's really important to understand that when we're treating a range like it's going to continue, like it's going to result in continuation rather than change, our entries should be outside of the balanced area. So our entry should be on the border of the balance area, as we said, rather than, for example, adjust my chair rather than within the structure. So this is the most accepted area. This is the fair value area. There's a great deal of liquidity here, but again, it's the most agreed upon level. So getting into position here doesn't make sense versus getting into position at the extremes, anticipating a mean reversion back to the center. So when we're getting into position within a range and we see that a range is beginning to form, our entries are often in the best position, slightly outside of the value area. Because what we're looking to happen is for price to come outside of value. And this will go back to the auction market theory for low prices to come outside and for these opportunities to be bid up immediately. So we're looking to sort of fish for these opportunities that deviate from this balanced area. And for that reason, when you're trading something like a balanced area or even just an individual range, if we see That a range is forming over time. And there are plenty of ranges on this chart. So we have a range over here that formed. We have a brief range that formed over here at the high down here. In a single day we had this rotation moving upward over time. This ultimately resulted in a trend. But when we see that any kind of composite is forming, so say, for example, we are just trading this structure that we were just going over. When we see any kind of composite forming, if we're trading within the structure and we're trading the lows and the highs and taking advantage of this range, our stop should absolutely be outside of it. Okay? So our stop should always be outside of this balanced area. Because remember, the balanced area is where we are in most agreement. So it makes sense for price to move within this balance area in any regard, meaning, or rather in any way that it wants not, you know, that we place our stop within the structure, anticipating the most tight stop possible to put on the biggest position. No, this is the area where we're in agreement. We could expect, you know, a great deal of choppy behavior within here. The area to have our stop is outside of this range. It makes sense to have your stop outside of not just a structural stop, not just getting arbitrarily stops placed from highs or lows, or rather using that to arbitrarily place stops. But we're taking, and it's not arbitrarily, I understand what that sounds like. We're actually taking into consideration the range of price values over time to determine what where this level should be. So it might not be necessarily this structure or this structure. Again, this red line is the value area. It would be somewhere outside of this level, outside of our original entry. So if our entry is going to be, for example, outside of this value area, in this case, our stop definitely needs to be, and we might incorporate something like an ATR stop or any kind of other volatility stop to make sure that we are not prematurely stopped out to a position that's going to just mean revert back to the center of the structure. So stop should always be placed outside of this area of balance. So when we're looking at a composite, if we're forming a composite, and this is not the best example because we ultimately have a lot of presence to the downside. But you could see within the beginning of the structure. So if we look at, we'll undo this if you see the beginning of the structure before ultimately favoring the lows. And the last point will be with regards to that, the Opportunities that we had were very quickly bid up. So we're looking at that. We're looking at ultimately, we'll open this. The opportunities that we had within the structure did not have much time to spend at the low. We had that fake out to the downside that ultimately resulted in a good trap setup. But what you should look at is a very quick response by buyers. Okay, again, as I said, this is not the best example, but we're going to use this to make the next point, which is if price continues to stay at a given area. So when price, let's say, favors the high or favors the low. So we're looking at this range right here. When price begins to favor one area over the other, it's more likely that that's going to lead to an imbalance break. Okay. So more likely that this leads to acceptance outside of this range. We're looking at price fail to move up again, lead to acceptance outside of this range, and then break down. And ultimately what we do is we come to the next sticky area within structure. So the next sticky area within structure was a previous range. So again, just to drive home that point, when price leaves one area of balance, it returns to a previous area of balance. So we're looking at this prior area of balance over here. Price returns to this level, and even though it moves back and forth multiple times, it ultimately makes it all the way to that point of control. So remember, we talk about the point of control being sort of, I should articulate it, that the point of control is sort of a magnet. So when we lose an area of balance, the next area we seek out is a next or the prior consolidation or balance range point of control.