Market profile Classification

Failed trend days

Failed trend days start as trend days and then reverse direction or simply stop moving in one direction. If there is no new price print in the direction of the move for 2-4 periods then horizontal activity has probably shut off the directional, vertical, activity.

A reversal day, on the other hand, often results in single price prints being filled, which is a great indication of a failed trend day. The volume is often quite high on these days.

3R days

3R days are not always test days. They consist of three forms of responsive activity indicating that the commercial activity is all on the same side of the market. They are responding to price in a normal fashion, they are either selling higher prices or buying lower prices.

3R days will often be testing a previous price extreme or a significant support or resistance level. If the open of the following session is in the same direction as the 3R day then the market is respecting the established level of support or resistance. That is then likely to promote continuation of the same activity, in the same direction as the 3R day.

If on the other hand the following day opens against the 3R day, that is, below the previous value area in the case of a 3R buying day, there’s a high probability that down will be the underlying direction for the session.

3I Day (Tomorrow Failure)

This type of activity is abnormal and it therefore generally corresponds to an outside influence. If the outside influence is strong enough to sustain a move to a new value area, the following day should continue in the same direction. Quite often however the next day fails to continue in the direction of what is normally a strong signal.

The opening of the following day’s session and the initial balance period will often provide an indication of whether a directional move will eventuate or fail. If the open is outside the previous days value area, in the direction signalled by the 3I day and not immediately rejected, there’s a high probability that the day will evolve into a directional type of day. Even if an open within the value area is quickly rejected in the direction of the 3I day, that direction should prevail.

If the market opens against the direction of the 3I day, outside the value area of the previous day, then it’s probably going to fail and the subsequent reversal could be quite viscious.

Three more rows of information have been added to the long term auction chart above. They are the Buy and Sell rows, which represent a running count of the number of buy signals against the number of sell signals. The best place to start this count is at a test day. In the above example, the count is for the complete sample, but it could have been restarted on the test day, a non-trend day, on the 15th.

The next row is the day type and it should make it easier to identify a test day. It can also provide insight into what type of day to expect next. The location of the activity on the day, relative to the recent activity over the past couple of days especially if the market is trading in a bracket, is also significant when determining what type of day to expect next.

The above diagram starts from an assumed balance point. If we simply count the number of buy and sell signals, a selling bias starts to emerge in a rising market on the 14th. This is normal activity and the test day, a non-trend day, following on the 15th adds to that selling bias. It should be no surprise then to see the market fall away to lower prices over the next couple of days. By the 18th however the move has been all one way and the market has shifted to imbalance on the sell side. The 3R day completes the move and tests the imbalance, which is no doubt subsequently brought to balance over the next few days.

Balanced moves seem to continue, both vertical moves and horizontal, sideways moves. Whereas imbalance tends to indicate the market is stretched and approaching its limits. We should therefore try and ascertain what the limits are with respect to price and volume, as well as its buy/sell ratio limits.

The last row is the volume for the session and a running on-balance-volume count. High peaks and low peaks should be marked and if they correspond to similar price peaks and troughs, the on-balance-volume index can signal a potential break out or break down. If the on-balance-volume breaks its range prior to price breaking its range it signals a price break in the same direction.

You’ll notice the on-balance-volume indicator has move to a new high on the 20th. The buy/sell signal ratio is almost back at balance and yet there’s a volume imbalance that is indicating a price breakout is imminent.



ASX Charting Course
Chapter 58 Market Profile
Fundamentally the market moves from imbalance to balance and then back to test imbalance. The market wants to go where it will facilitate trade, according to market profile theory, that’s its purpose. If and when the market is in balance, we can look for a test day to provide an indication of the next likely direction. A test day is a good place to start a long term auction chart. If the market is trading in a bracket, then it’s good to include as much of the recent activity as possible.
Test Days
Non trend days These are the days when the market is not really facilitating trade very well, which is evident from a rather narrow trading range and generally light volume. Neutral days Commercials are apparent on both sides of the market on these days. The direction is unclear and the price action is often rotational. The market often doesn’t really facilitate trade very well on these days either, although that is not necessarily a prerequisite. Failed trend days Failed trend days start as trend days and then reverse direction or simply stop moving in one direction. If there is no new price print in the direction of the move for 2-4 periods then horizontal activity has probably shut off the directional, vertical, activity. A reversal day, on the other hand, often results in single price prints being filled, which is a great indication of a failed trend day. The volume is often quite high on these days. 3R days 3R days are not always test days. They consist of three forms of responsive activity indicating that the commercial activity is all on the same side of the market. They are responding to price in a normal fashion, they are either selling higher prices or buying lower prices. 3R days will often be testing a previous price extreme or a significant support or resistance level. If the open of the following session is in the same direction as the 3R day then the market is respecting the established level of support or resistance. That is then likely to promote continuation of the same activity, in the same direction as the 3R day. If on the other hand the following day opens against the 3R day, that is, below the previous value area in the case of a 3R buying day, there’s a high probability that down will be the underlying direction for the session. 3I Day (Tomorrow Failure) This type of activity is abnormal and it therefore generally corresponds to an outside influence. If the outside influence is strong enough to sustain a move to a new value area, the following day should continue in the same direction. Quite often however the next day fails to continue in the direction of what is normally a strong signal. The opening of the following day’s session and the initial balance period will often provide an indication of whether a directional move will eventuate or fail. If the open is outside the previous days value area, in the direction signalled by the 3I day and not immediately rejected, there’s a high probability that the day will evolve into a directional type of day. Even if an open within the value area is quickly rejected in the direction of the 3I day, that direction should prevail. If the market opens against the direction of the 3I day, outside the value area of the previous day, then it’s probably going to fail and the subsequent reversal could be quite viscious.


Fig 110
Three more rows of information have been added to the long term auction chart above. They are the Buy and Sell rows, which represent a running count of the number of buy signals against the number of sell signals. The best place to start this count is at a test day. In the above example, the count is for the complete sample, but it could have been restarted on the test day, a non-trend day, on the 15th. The next row is the day type and it should make it easier to identify a test day. It can also provide insight into what type of day to expect next. The location of the activity on the day, relative to the recent activity over the past couple of days especially if the market is trading in a bracket, is also significant when determining what type of day to expect next. The above diagram starts from an assumed balance point. If we simply count the number of buy and sell signals, a selling bias starts to emerge in a rising market on the 14th. This is normal activity and the test day, a non-trend day, following on the 15th adds to that selling bias. It should be no surprise then to see the market fall away to lower prices over the next couple of days. By the 18th however the move has been all one way and the market has shifted to imbalance on the sell side. The 3R day completes the move and tests the imbalance, which is no doubt subsequently brought to balance over the next few days. Balanced moves seem to continue, both vertical moves and horizontal, sideways moves. Whereas imbalance tends to indicate the market is stretched and approaching its limits. We should therefore try and ascertain what the limits are with respect to price and volume, as well as its buy/sell ratio limits. The last row is the volume for the session and a running on-balance-volume count. High peaks and low peaks should be marked and if they correspond to similar price peaks and troughs, the on-balance-volume index can signal a potential break out or break down. If the on-balance-volume breaks its range prior to price breaking its range it signals a price break in the same direction. You’ll notice the on-balance-volume indicator has move to a new high on the 20th. The buy/sell signal ratio is almost back at balance and yet there’s a volume imbalance that is indicating a price breakout is imminent.



Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.

ASX Charting Course

Chapter 58

Market Profile

Test Days

Non trend days

Neutral days

Failed trend days

3R days

3I Day (Tomorrow Failure)