This two-way auction process enables all market participants to express their opinions—no matter how those opinions were obtained—with real money; the auctions effectively establish a fair price where business can be conducted at any given time. This expression of the market’s collective will results in a constant flow of objective market-generated information.
In order to manage this information, as we mentioned in the preface to this book, we employ the Chicago Board of Exchange’s trader support tool called Market Profile. Market Profile is not a trading system, nor is it predictive. Market Profile simply allows you to observe the structure of the market as it unfolds, enabling a more accurate interpretation of which timeframe is in control of market movement. This concept of timeframe control will be a recurring theme throughout Markets in Profile.
The market, as we have said, is the manifestation of all possible influences, all news sources, all global and political events, and all market participants. As the market’s continuous auctions unfold, a market profile enables us to experience a composite of all available information (and opinions), because it is solely based on real order flow. Market-generated information, when properly organized and understood, can greatly demystify the endless complexity of the market. Such data can uncover vital information about what is driving change by providing clues that help unravel the strength or weakness of market momentum.
To establish the significance of an objective means of interpreting market activity, let’s revisit the potential pitfalls inherent in relying solely on fundamental information. Suppose that an analyst performs methodical, well-informed research on a company and comes to the conclusion that the company is well positioned for strong growth in the next quarter. But what this fundamental information may not reveal is whether the price of that company’s stock has already moved to reflect that fact. Or perhaps the industry within which the company operates is on the verge of collapse, and nobody is interested in the sector as a whole.
The positive report may be meaningless unless viewed in the proper context. Think of the numerous factors that must all line up to make fundamental information relevant. Even the slightest miscalculation can result over time in serious investment consequences. Of course, investors and money managers must be aware of fundamental indicators, but wouldn’t it make sense to employ an objective means of ensuring those indicators are actually resulting in the expected market activity?
Let’s say you bought shares of a good company that had an underpriced stock—you bought value—but the price has remained basically flat for an extended period of time. This is not uncommon, and is why many investors wait to invest until price momentum validates their buy decision.
By using the Market Profile tool, one can often discover confirming information (positive or negative) in the market structure before it is reflected in significant price movement. Securing good trade location—or being able to exit a bad trade earlier—is the advantage we were discussing earlier.
Before we provide a mechanical description of market profile construction, let’s first define “trading,” which in the context of this discussion is no different than “investing.” Trading is the anticipation, timing, and placement of orders to capitalize on change—no matter how short- or longterm the underlying investments.
Read More : Market-Generated In Information
