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I actually use Volume Profile instead of Market Profile. It helps me understand the supply/demand curve of a stock's movement over a particular time frame.
I don't care about intrinsic values of stocks, the news, or any other nonsense. All I'm looking for is an imbalance in that curve and take a trade in the direction of the inevitable correction back to "value" or the "auction". Typically this helps me identify trades at the extremes where-in keeping my reward far more favorable than my risk.
IMO it's strictly math. Pretty much everything else is "speculative" where traders are hoping other traders are thinking the same thing they are in order to bring enough volume (force) to push the stock in a direction that's favorable.
Does auction theory help to predict market moves?
"Prediction is an attempt to quantify and systematize relationships among variables that we believe to be causal.
...
While much prediction is quantitatively driven, a qualitative form of prediction occurs when experienced traders recognize recurrent market patterns and base quick decisions on the occurrence of these patterns. Because such intuitive pattern recognition can look so much like superstition, it can be challenging to differentiate skilled intuitive discretionary traders from superstitious amateurs."
Or does it actually support better understanding of the market? If so, what market mechanics does it describe?
"Understanding is quite different from prediction. We can predict when the sun will rise in the morning, but not necessarily understand the reasons for the sun's apparent movement. Understanding addresses the why" behind prediction.
...
A very useful brake on the overfitting of trading systems and models is the use of input variables that make sense within a plausible theoretical model."
I've been sim trading using auction theory concepts last couple of weeks and I can see that one can anticipate and exploit larger market moves. I will continue my work further.
Could someone please clarify one last point. Does auction theory rely on a couple of principles (like balance/imbalance, value) and it's trader's task to identify opportunities that fit the context; or does one need to experience multiple market states (range, failed breakout, trend, exhaustion) in order to know what information to use.
I know that after 6 months or so I will be able to answer this question myself, but knowing what more experienced traders think on this matter would help me to get to that 6 months mark
So it's been roughly two years since I got into studying auction theory and I believe it was a turning point in my development as a trader. I started a blog a couple of weeks ago with daily updates, which is not a trading journal but more of a collection of my thoughts based on current day's session.
Today's post is more about dealing with losing trades than analysing markets. I noticed that all information on trading psychology only became relevant to me after years of transforming and adjusting my old attitudes and beliefs about work and life generally. To a certain degree, it is impossible to simply read yourself into becoming a new person, one has to go through a long and sometimes painful process. Now I know that the difference between a beginner and an experienced trader lies in their attitudes and especially in how they view losses.
Today I did everything "right" but had two losing trades in CL. This is why I make a strong emphasis on looking only for trades with positive risk/reward characteristics, as there are periods when losses accumulate what seems without a reason, but one still needs to have confidence to take the next trade. I tried many styles of trading which rely on high win rate but found them to be too short-term oriented to perform well under different volatility regimes. Since then, I only look for opportunities where I can make at least twice as much as I risk, which allows for much less precision.
On the daily chart we left a two-day balance above today's open which made me look for shorting opportunities:
I didn't see any resistance on the way down and I thought that recent low (around $43) was pretty weak and could be revisited soon.
My first trade was a breakout from the range of the first 30min of trade which resulted in a quick loss. With gap so large I still expected a lower value for the day relative to recent balance. When I saw that the gap was still open after the first hour of trade, I decided that fading break of initial balance would be a good trade allowing for a tight stop loss placement. There was a reaction off yesterday's low and I entered on the move back into initial balance area. The trade looked promising and went to approximately 1:1 risk/reward, but I was expecting a larger move and got a second stop out.
I know there will be the next trade and all I can do is to keep my journal and learn from my mistakes over time. I will always be thankful to Dr. Steenbarger for all his work and strongly advise to read his blog: TraderFeed
I'm sure everyone experienced a feeling of being lost and not knowing what's ahead in their trading. This video talks about different types of problems and ways of thinking about their solution: