Market Profile: Intro to Ranges and Balances Part 1

Alright, so let's talk specifically about environment types. So there are two different categories that we could fall under. And even our individual session types or our day types, we talk about normal variation, neutral balance days, double distribution, a trending day. These day types still fall in one of two of these categories. Okay, so the first one we're going to be talking about is a ranging environment. This is also referred to as consolidation, a bracketed environment. And the market does spend a majority of its time consolidating in ranging environments. It goes from consolidation to impulse, out of that consolidation to trend back to consolidation. And this can occur with conviction over a long period of time in one direction, or this can be mean reverting within a larger range. Right. So ranges are marked by a few things on an individual basis. If we're looking at an individual day, it's marked by balance, it's marked by symmetry. But this is just an individual day. Right. If we're trading the following day after this, and we're looking at this structure and basing our trading decisions around this, we could say that we're coming out of balance or potentially going to be coming out of balance. This, for this individual session had more of a ranging behavior. But this is just one. This is just one session. What we're going to be talking about is a range that forms a range that is beginning, which might not be marked by structures that look exactly like this. The range might be marked at first by trending periods, followed by periods that look like they're consolidating and forming more balanced profiles, and then still by trending periods. But the greater structure will be balanced. If you were to look at the structure as a composite, it'll look like a much more balanced structure. So if we combine these last few days, you can see that as you combine these days, it begins to look more balanced, it looks more symmetrical. We have more of our volume, more of our participation towards the middle of the structure. And you see that there is a pretty even distribution. Now when we undo these, though, it doesn't really look like that under the surface. But this is going to get into one of the key features of ranges and how they begin. It is how trends end. When we're in a trending period, we are in a period of imbalance. We're in a period where value is constantly being determined at new levels. And if this sounds foreign to you, make sure that you watch the auction market theory roadmap, where we talk about the behavior within a ranging environment, we compare this towards, or rather to a Traditional auction, where we have this sort of behavior at high prices, behavior at low prices, and it forms sort of this reversion to the mean, this reversion to the mean behavior within the structure. But what happens that forms a range is we ultimately go from a period where value is shifting, okay? So value is being redetermined at new levels. So a range down here, an impulse out, higher value, higher value, to suddenly showing more signs of value overlap, right? So if we're looking at an individual day, so something like this profile, or this profile, or this one or this one, less of anything that looks more imbalanced like this, even though you could say there are two ranges within this, if we're looking at an individual day within the value area, that is the range of prices that were most accepted, that is the range of prices that were most close to fair value, where there is a great degree of evenness between buyers and sellers. For the most part, depending on if we're in a neutral day or a balanced day, this might be different than if we're hold looking at the value area on a trending day. But this is the most accepted area for price. So when we see that we go from a trending period which has value being determined at constantly shifting levels, to now having value overlap, that is one of the signs that we look for to set up for a potential trend that is forming, rather, excuse me, a potential range that is forming. So this is where one side of the market loses control, right? In this case, buyers are in control. They're constantly shifting value up. You're constantly looking at price extending to the upside, getting aggressive towards the upside. This is more substantiated by using order flow and then getting into this rotation factor as well. But then we begin to see value drop and then value begin to line up. So it goes from a period of imbalance to even though these individual daily sessions might not immediately be balanced, they're beginning to form a more balanced range. So typically at the high, you'll see a great deal of volume, a great degree of buying and selling volume, followed by a big spike to the downside. And you'll have this initial splash effect where you'll look as an anchor initially just to your low and to your high to form some type of extremes for what range will form within this structure. Now, the highs and the lows might be marked by certain behavior once a range formed. If we're looking to take advantage of a range transpiring over a longer period of time, we're expecting some type of mean Reversion, we're expecting potentially initially rather for continuation within this range, not change. So there are different ways to use the term continuation. If we're in a range, continuation means continuation in respect to the highs and the lows and that we're coming off the lows and mean reverting towards the center, coming off the highs and doing the same thing. So the highs and the lows are going to be an increase in presence by the other side of the market. So if we just form this as a composite right here. So after, let's say this trending day up, so we have a composite and we're imagining that none of these days have transpired yet. What we're going to do now is connect these to see how they transpired after this. What we're looking for is certain behavior after we see two levels are being respected. Okay. At the lows, we should see an increase in volume by buyers. We should see signs of absorption, and we should see signs of a shift in momentum. So towards the lows, you're hopefully going to see that there's a great deal of absorption. And we get further into this when we're looking at something like CVD or looking at delta. So you want to see that sellers are not, even if they are getting aggressive towards these lows, are not able to move price through this low. And then we'll see this mean reverting behavior where we get an initiative response, and then buyers are lifting this up again towards a high. And the opposite can be said for the range high, where we're looking for, again, a shift in momentum, buyers begin to dry up a little bit, sellers begin to take control, and it's the opposite effect. So towards the extremes of this range, we're going to see an increase in participation. Now, if we're just looking at structure, you might be looking at the highs or the extremes of this structure that is formed. The benefit of using market profile is that we begin to see where most of the value accrued. So where most of the value accrued, where most of the volume was transacted, this being at the high and where we spent most of the time. So now we know, okay. Specifically in the case of this composite, I'm looking towards these areas to see that sign of absorption and look for either an indication of change, meaning if we gain acceptance outside of this level and we have more participation coming through, or for continuation, if we're rotating towards this high, for example, and we're seeing signs of absorption, or we're seeing signs within something like delta or momentum, that buyers are just losing the initiative to kick it through this level. So what you'll see at the highs and the lows of ranges is, is typically a responsive activity. So when price comes up into this level, how long is it able to spend time at the highs? How long is it able to spend time at the lows? Are we seeing an immediate response by buyers or an immediate response by sellers? Once we start favoring one edge of the range, as you see, for example, if we open up this structure, once we begin to favor one side, so the market moves up, rotates towards a high, fails at the high, and comes violently back down to the low. Rather than mean reverting off of this low, which we had done multiple times before. So for example, the market made this move up, broke down again, started favoring the high, rather than mean reverting back up, the market begins to fail much sooner. So what we start to look for is a favoritism towards one extreme over the other, which in this case is the low. And then in this case we're looking for change which ultimately results in acceptance through this level. And by that we're looking for a change of participation through it. We're looking for buyers and sellers willing to do business at lower prices. But ranges are characterized by this sort of mean reverting behavior within the structure. And the benefit of using TPO is being able to identify this value area through the use of a composite like this, where we're able to, even if it is back to back days like this. So if we look at two structures like this, where we have overlap and it exceeds the previous structure. So this day is entirely inside this day. So now we could begin to form an idea of where most of our business occurred, where the balanced area was, and where we should look to for potential acceptance outside of. So if we look at this structure right here, we'll open this up, we'll see that suddenly prices are able to gain acceptance towards the top side of the structure. There is no major indication of rejection. So we talk about acceptance or rejection. And rejection would be something like this, right? A wick. We're looking for a large wick on a candle, or we're looking for a tail, in this case a selling tail at the high. What you don't see is that outside of this range we have any of that we're looking at rather than continuation within a range, we're looking at change occurring. So ranges are characterized by balance. They're characterized by an overall level of symmetry. And most Importantly, what we see with ranges is immediately we have this value overlap. So as we get into trending environments, this will make more sense in how we determine that a market is shifting from a range to a trend. And then, as we just said, how we determine it's shifting from a trend to range when we begin to have this value overlap. And you have to think about each of these individual days, the benefit of using TPO as this is its own range. This is compressed, though, in a way that immediately, in a very visual feedback way, gives us the indication that this was balanced. And we know that over time, individual days within a range might not be balanced, but the overall structure is showing balance between two extremes. So balance, symmetry, value overlap. That's one of the things that we look for to see that a range is forming, okay, and an overall level of agreement between buyers and sellers. Right? So we could begin to look at other ranges as well. So we'll just zoom out or zoom in, go back to other finding, or we'll find new ranges. Okay? So, for example, the market down here moves out of an area of balance. So temporary area of balance. We have a trending day, we have a liquidation structure, this double distribution. And the signs that a range is forming are when we have back to back days where we have inside structures. Okay? So we're looking at this entire range right here. That is an upward drifting consolidation. So we would say that that would likely have more of a chance of breaking upward than downward. But the same concept is over here. We're looking at multiple areas of value shifting, value being redetermined at a new level, a trending day upward, and then again, the indication of a potential trend at play is, is when we start having value overlap. Okay? Once we start having value overlap, that's when we're going to start forming composites. Okay? The benefit of using a composite is now I could piece together all of the data from these two profiles or three or four or whatever you want to use, depending on how many days we're in balance, to begin to get a more complete idea as to the context of the entire structure and to see, okay, we've been accepted within this value area 70% of the time. I know that I need to look for either that mean reverting behavior towards the high and towards the low, or the opposite start to look for potentially acceptance through these levels, which we ultimately, in this structure, finally get. Okay, and one sign, and we'll get further into this, is if you looked at this composite, it actually would have, in this case, a poor low rather than a more defined high. But this is ranging behavior, right? We're looking at balance, symmetry, value overlap, and within ranges. What we should expect initially is not that the range is going to break, but that the range is going to result in continuation. So the range would rather continue and will continue to have this mean reverting behavior within it. So look for shifts in participation towards the highs and the lows. As soon as we get further into order flow, this will make a lot more sense. And when we tie this all in together. But this is just a brief overview of one of the types of environments that we could find ourselves in, which is a ranging environment.