Commercial Activities

Commercial activity versus day traders

The principle of horizontal data and distribution theory, commonly referred to as market profile, is to try and ascertain what the market perceives as value and then allow us the opportunity to take advantage of any deviation from value. More often than not that translates into sell above and buy below value. This value area is implied from the recent activity and closely approximates volume dispersion over the same range.

Now while day traders contribute to the bulk of transactions everyday, it is really the group referred to as commercials that determine the true value. This group is made up of legitimate hedgers, institutional players and long-term position takers. They project value into the market from their collective appraisal of outside conditions. As a group, using the market as their tool, they will determine whether price will remain within its current value area or be allowed to move to a new value area.
They tend to trade infrequently and while their orders may be large, they are seen as low volume of transaction traders, who look for a high mark up, a big profit. Day traders on the other hand trade more frequently for a lower mark up, a smaller profit and often trade a small clip size.

So how do we know when commercials are present in the market and which way they are placed?

There are a few revealing signs of commercial activity.

Tails are perhaps the best and most obvious sign of commercial activity. They exist as a probe above or below value that is quickly rejected by price usually reconnecting with the same value area. This type of activity is typically responsive activity and can only be seen after the event. That's not too late for a day trader, however as it is trading the rotation about the value area that they will make most of their money. A tail tends to eliminate that direction.

Extensions are probes outside the value area that don't get rejected, instead they are accepted and that will become clear, after a period of time. This is initiating activity, another sign of commercial activity. Even though it may be the day traders stopping themselves out that actually forces the move. It is the lack of responsive commercial activity that allows it to occur in the first place and continue. Instead of responding to price aberration as they would normally, by doing the opposite activity. They actually exacerbate the move, by going with it and facilitating trade in the same direction.

Flat tops are pretty obvious as they are forming, yet they are unusual. They are also the result of commercial activity and while price may back away from them in the short term, price will inevitably push through later. To be efficient, and I believe it is, the market needs to advertise to all participants, in all time frames.

Now I'm not saying all commercials are on the same side, coming from the same direction. But rather it's the net result of the commercial contingent, is what I'm referring to. If we know how this group thinks, how they act, then we have a lot more knowledge of what's going on. Who's long, who's short and in what time frame? Day traders close to the market have always thought they had an edge because they knew who (which broker, which local) was doing what. They knew that guy was at his limit and he would have to bail soon and that could push price far enough for you to make a couple of ticks. Now you don't need a screen with who's on the bid and offer or who's done what. We should be able to see it in the market activity as it is occurring.

If you would like to discuss any of the concepts presented here or if you have any questions, points you'd like clarified, please contact me