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Methodology

What is Auction Profile?

Auction Profile is not just another software trading tool. The software is an integral part of a comprehensive and systematic approach to trading. You will get the greatest benefit from the software if you take the time to understand and follow the Auction Profile methodology, which I hope you will find to be straightforward and elegant.

Auction Profile is a complete, logically consistent system that includes specific trade setups and trade management rules. You will know at a glance when to trade and, equally importantly, when not to trade. You will not need thousands of hours of screen time and experience to master Auction Profile, but you will not master it in 10 minutes either. It is simple and elegant, but not simplistic.

Who is Auction Profile for?

Auction Profile is for active traders with adequate risk capital. It is suitable for day traders and swing traders alike and can be used for longer term position trades too. It works on all instruments (stocks, futures, currencies) and in all timeframes.

Auction Profile was developed especially with one type of trader in mind: the losing or break-even trader struggling to find a logical, valid method of trading that promotes consistency of execution and profitability. In other words, I developed it for myself. I am a recovering losing trader and my recovery would not have been possible without the Auction Profile charts I use every day. I built the software to simplify trading. I have a trading plan (finally) that is straightforward to follow, that promotes good trading habits and removes as much as possible of the biggest impediment to profitability: me.

I can’t guarantee that you will be successful using Auction Profile, but I invite you to try it out (paper-trading it I hope) and decide for yourself if this is, as I believe it to be, a better way to trade.

How does Auction Profile work?

Auction Profile focuses on balancing markets. All markets have a tendency to seek equilibrium, even though equilibrium is unstable and temporary. Markets alternate between periods of stability (balance) and instability (trend). A balancing market has well-defined boundaries and may be characterized as a price region of general disagreement between buyers and sellers concerning future market direction. The perception of buyers is that price will rise in the future allowing them to profit from this expected movement; the perception of sellers is that price will fall in the future. While the market remains in balance, these opposing convictions generally cancel each other out resulting in little to no net price movement. Until the balance breaks – when the general perceptions of the future change and one side gains strength at the expense of the other – the market tends to oscillate from one side of the balance to the other in order to test that the extreme high and low prices are still considered to be unfair. A picture is worth a thousand words, though I’ll probably use both, so look at the diagram below.

APXOpportunity1

This idealized chart captures the essence of Auction Profile. The goal is to either buy in the unfair lows or to sell in the unfair highs of a balancing market. The edge in this comes from the non-random aspect of price movement within a balance: that, if the balance continues, price will tend to move to test the opposite extreme. If you enter long in the green oval, your stop will be quite close – the stop is where the probability that the balance has ended exceeds the probability that it hasn’t, i.e. some small distance beyond the first low. Let’s call this distance 1R. The reward in this trade is in the unfair highs of the balance which is a move of greater than 1R – I use a reward to risk ratio of 3:1 in my own trading. If the balance ends, you lose 1R. If it continues and moves to test the highs, you win 3R. So long as the probability of the balance continuing is greater than 25%, you will profit in the long run. And, just to be clear, the chance of the balance continuing versus breaking IS greater than 25%. This is not a random roll of the dice.

The Auction Profile edge does not derive from predicting that the balance will continue; it derives solely from taking trades with excellent trade location from which a greater than random price movement may be expected to result. Prediction is not necessary. If you consistently take trades from the extremes of a balance, it is like counting cards at blackjack. You cannot predict the outcome of any single trade, but the probabilities are in your favor and that’s all you need.  Las Vegas was built on tiny edges.

Auction Profile Charts

Auction Profile charts are designed to be simple to use.  The goal is to make trading decisions as objective and definitive as possible so that creating a Trading Plan is a straightforward process.  All aspects of trade management from entry to exit can be specified exactly including when and where to enter a trade; where to place an initial stop loss; where to take profits; when and where to move stops, etc.  This promotes consistency and discipline in your trading, encouraging good trading habits and helping you avoid trading emotionally.

Let’s start with a naked bar chart and build it up step-by-step with the Auction Profile chart elements.

Below is a 30 minute chart of the S&P e-mini (ES) showing over 4 days of trading.  Click on each of the charts below to view in full size.

APSlide0

From the idealized diagram shown earlier, you will recall that Auction Profile focuses on balancing markets.  The first thing we need to know is when a market is balancing, so the first Auction Profile chart element is the Balance Area.  Let’s add this to the naked chart.

balance arrow

The big gray box now visible on the chart is the Balance Area.  Balances are color-coded.  A gray balance indicates that the balance has ended and is no longer active.  You can see that this balance ended 7 bars prior to the last bar on the chart.  There are three other possible colors that a balance can have: a blue balance is a balance that has also ended but is still active because price has not yet reached the target zone (see last Auction profile chart element below); a yellow balance is a current balance; finally, an orange balance is a potential balance that is not yet confirmed.  In the chart above, this balance would first have appeared on the chart on the close of the bar indicated by the blue arrow.  At this time, it would have appeared as an orange, unconfirmed balance.  After another 11 bars (the short bar at end of day on the 10th), the balance would change to a yellow confirmed balance.  It would become a blue completed balance on the first bar after the end of the balance box. Finally, the balance became a gray completed balance at the close of the penultimate bar on the chart.

Note also the three small white balances within the large gray balance.  These are minor balance areas that occurred within the larger balance.

The bread-and-butter Auction Profile setup is to trade when the market is balancing.  When the balance box pops up onto the chart at the end of the bar marked with the arrow, you would immediately be aware of a potential trade setup.  Our goal is either to buy within the unfair lows of the balance or to sell short within the unfair highs.  In this example, I would be looking to buy because the balance occurred within the context of an uptrend.  The second Auction Profile chart element lets us know which prices represent the unfair highs and lows within the balance.

In the chart below, the Value Area is now superimposed onto the balance area.

 

va arrow

The two lines within the Balance Area represent the limits of fair value.  Above the higher line, the Value Area High (VAH), are the unfair highs of the balance; below the lower line, the Value Area Low (VAL), are the unfair lows of the balance.  Now, we have a potential long trade setting up and we know to look to buy below the VAL, which is at 1624.25.  If our trade works, we expect the balance to continue and we expect that price will move up to test the unfair highs.  At a minimum, we should have a target for our trade of 1 tick above the VAH, which is shown at 1630.25, so our minimum target exit should be at 1630.50.  We also need to know where to exit our trade in the event it is not successful.

The updated chart below shows the third Auction Profile chart element, the breakout prices, which provide guidance on where to place stops.

stops

The green line above above the balance and the red line below the balance are the prices that define the limits of the balance.  If price exceeds either of these limits, Auction Profile will consider the balance complete.  You can now see why the balance ended where it did: price breached the green line above the balance.  These lines are good guides for stop placement.  If we were considering a long trade in the unfair lows after the balance popped up on the chart, we could place a stop one tick below the red line (1618.50).

We now have enough information to plan a trade with a single target.  The target for the trade is 1630.50 (one tick above the VAH).  The stop on the trade will be at 1618.25 (one tick below the red line).  All that remains is to determine our desired entry price.  The entry price will be a function of your desired reward:risk ratio.  My trading plan requires a 3:1 reward:risk ratio so I would place a limit order to buy at 1621.25, which would have been filled on the 3rd bar after the balance first appeared – the 10:30 bar.  This trade would have achieved its target on the final bar of the regular trading session, the 16:15 bar.

At some point, the balance will break.  If you decide to hold a portion of your position in the hope that it breaks in your favor, or if you have a setup that trades breakouts, it’s good to have an idea how far price might travel so that you don’t take profits too quickly.   On the chart below, the green boxes below, and the red boxes above the balance are the Target Zones.  These provide a reasonable expectation for a breakout based on the attributes of the balance.

tz

And that’s it.

There is no useless information on an Auction Profile chart; everything on the chart has a purpose and everything extraneous that serves more to confuse than enlighten is deliberately omitted.  Why clutter your charts with a dozen or more indicators?  All that does is make it exponentially more difficult to create a trading plan and trade with any consistency.  Auction Profile makes it easy to trade consistently and unemotionally.  You will always know what the market is doing and won’t be confused by whatever happens, which helps you to maintain an emotional equilibrium at all times.  Setups are obvious: either there is a balance on the chart or there isn’t, which will help to curb overtrading.

If you have been struggling to trade profitably or consistently, or you find that you often trade impulsively or panic during a trade, Auction Profile may be the answer.  It promotes good discipline by highlighting trade setups, and providing exact prices at which to place stops and targets. Trade management is mechanical.  You will focus on trades that provide a minimum of 3:1 reward to risk, which will reduce the importance of any particular trade so you will not fear a losing trade– it’s just not a big deal.  The Auction Profile chart elements – and the trading plan that you will find easy to create — will help to keep you in trades longer so you don’t cut your winners short.  Trading with Auction Profile is satisfyingly straightforward.  I hope you will agree, but if you need more convincing, please fill out the Contact Form to arrange a demo or to ask questions.