In a market profile-based approach, we examine two fundamental foundations to enhance our trading effectiveness. The first is understanding the open type, which provides insight into what to expect and what to avoid during the day to facilitate better trades.
The second crucial aspect involves studying day types and their structures to grasp the market’s intentions and position ourselves optimally to capitalize on the day’s developments. We have compiled this information from basic definitions and incorporated our own observations during trading to clarify the various day types.
There are five major categories of day types:
A) Non-Trend Day
B) Normal Day
C) Normal Variation Day
a) B-Shaped Profile
b) P-Shaped Profile
D) Neutral Day
E) Trend Day
a) Double or Triple Distribution Day
A common factor we consider to determine day types is the Initial Balance (IB), which refers to the range established during the first 60 minutes of trading. The way the Initial Balance is extended or rejected helps define the day’s nature.
The following table provides a clearer understanding of the day types.
Now, let’s break down the day types in detail, using Nifty futures examples based on the current market price (LTP – 23750) and IB range.
Non-Trend Day:
Definition: Characterized by an extremely narrow range, low volume, and minimal momentum throughout the day, with no effort to extend the Initial Balance established in the first 60 minutes.
Structure and Characteristics:
- Initial Balance is typically 40-50 points wide.
- The entire day may see lackluster rotations of 10-15 points within the IB range.
- It’s common to observe poor highs and lows (multiple TPOs at day extremes).
- There is no attempt to extend the IB range, and trading remains within the IB range.
- The market exhibits no directional bias and awaits information from a planned major event, with day activity dominated by locals.
Practical Approach:
- Avoid chasing price.
- Fade price extremes.
- Exercise patience to secure even small rotations.
Normal Day:
Definition: A day marked by quick directional movement, either one-way or swift two-way action during the IB period, followed by trading primarily within the IB range, with minor fluctuations around the IB high and low.
Structure and Characteristics:
- Above-average IB range of 70-100 points.
- Price action during IB suggests a good momentum day, but that momentum fades after the IB period.
- The market often opens with conviction from OTF participants, who subsequently leave trading to locals who fail to create sufficient supply or demand to extend the IB range.
- Small swipes may occur around IB extremes, but they fade quickly.
- Normal days typically signify market acceptance of a new trend.
Practical Approach:
- After a trend day, be cautious of swift initial movements; if IB extension does not occur by the end of the D period, consider exiting the position and reassessing later.
- Upon confirmation of a Normal Day by noon, avoid trading around midpoints, as the market could oscillate between the day’s high and low.
- After a previous uptrend day, look for trade opportunities around the IBL of the Normal Day to probe for movement toward the day’s midpoint or IB high.
Normal Variation Day:
Definition: After the Initial Balance is established, one extreme of the IB range holds throughout the day, while the other extreme sees significant extension.
Structure and Characteristics:
- IB ranges from 40-60 points on average.
- Extensions typically exceed 20 points.
- This day type occurs more than 50% of the time on average.
- Range extensions often attract more players and continue until they encounter strong responsive participants.
- OTF participants typically enter at the conclusion of the IB period to extend the range.
Practical Approach:
- Avoid fading IB extensions after a significant uptrend; instead, seek pullbacks to ride the extension.
- Monitor auction behavior around IB extremes to better position and manage trades.
- Normal Variation Days that begin a new trend indicate increasing momentum, offering potential for positional trade entries.
B-Shaped Profile (a type of Normal Variation Day):
Definition: Characterized by a selling tail at the top, followed by rotation below this selling tail, creating a balance with a flat bottom around the day’s low.
Structure and Characteristics:
- Long positions are exited quickly, with minimal new supply appearing as prices bounce.
- This profile is generally bearish, but if it persists for multiple days, it could indicate bullish sentiment as selling momentum weakens.
- Locals dominate the day, leading to a persistent B profile after substantial upward movement.
Practical Approach:
- If the trend is upward and you identify a B profile, consider initiating long trades near the day’s lows with stops of 15-20 points, aiming for the daily Value Area High (dVAH) or testing the tail at the top. Typically, when the B profile is established, it does not extend more than 10 points from its established lows.
- Be cautious during the last two hours of a B profile day, especially if it falls within a composite structure, as it can lead to a collapse of the B profile and a potential spike either upward or downward below the B’s bottom. Spotting the B profile early and concluding trades before the I period can enhance your win rate.
- The quicker you recognize the B profile shape, the more opportunities you have for at least two significant trades aimed at returning to dVAH or testing the tail at the top.
- Avoid attempting to fade price after testing the lows three times.
- If you’re feeling aggressive, you may consider fading the first test of the tail at the top of the B profile to target returning to the daily Value Area Low (dVAL) or close to the day’s low.
- In scenarios where the market has been grinding for more than 4-5 days and breaks down, there’s a higher probability of a B profile forming on that breakdown day, as trapped longs tend to exit during any price rises. Such scenarios offer strong confidence for fading tests at dVAH or targeting the tail at the top to return to dVAL or close to the day’s lows.
- When probing for a test of the tail while fading, do not wait for the peak of the tail (the day’s high); instead, focus on the bottom of the tail to lock in profits.
- If a B profile occurs and the following day sees a downward movement, retesting the B’s lows or the Point of Control (POC) of the B profile is a good opportunity to initiate short trades, as trapped longs from the prior B profile may attempt to exit, which complicates upward movements.
P-Shaped Profile (Type of Normal Variation Day):
Definition: Characterized by a buying tail at the lows, the market rotates above this tail throughout the day, forming a clear balance with a flat top near the day’s high.
Structure, Characteristics, and Nuances:
- Shorts are squeezed from the outset, attempting to exit on any minor dips, yet there’s a lack of new demand at higher levels. This creates the P-shaped profile, often referred to as a short-covering profile.
- A single P day typically indicates a bullish sentiment as shorts exit the market. Conversely, two or more consecutive days forming a larger P profile may suggest bearish conditions due to the absence of sufficient demand.
- A significant bullish setup occurs when a new upward move initiates from above the P profile or composite P profile, indicating that shorts have exited and fresh longs are entering above the P profile.
- The P profile is frequently observed following substantial downward movements of 150-200 points, as profit-taking occurs, signifying a potential emergence of new balance.
- In a proper P profile, a tail forms at the day’s bottom, leading to a balance at the highs. However, if the day concludes with a spike down to form a P-shaped profile, it’s typically a sign of poor structure, often leading to a retest of the peak of the tail, and possibly probing the entire balance at the P profile high.
- This day is mostly dominated by local traders.
Practical Approach:
- If the trend is downward and you identify a P profile, consider starting short trades near the day’s highs with stops of 15-20 points, targeting the daily Value Area Low (dVAL) or testing the tail at the lows. Typically, when the P profile becomes more pronounced, it does not extend more than 10 points from the established highs.
- Be cautious during the last two hours of a P profile day within a composite structure, as it can lead to a collapse of the profile and potentially eliminate the tail at the bottom or clear the P highs and spike upward. Recognizing the P profile early and concluding trades before the I period can lead to a better win rate.
- The sooner you identify the P profile shape during the day, the more opportunities you have for at least two significant trades aimed at returning to dVAL or testing the tail at the low.
- Avoid attempting to fade price after the highs have been tested three times.
- If you feel aggressive, you can fade the first test of the tail at the lows to target returning to the daily Value Area High (dVAH) or close to the day’s high.
- When there’s an extended market grind lasting more than 4-5 days followed by a breakout, the likelihood of encountering a P profile increases as trapped shorts exit during any dips throughout the day. These scenarios are highly favorable for fading tests at the daily Value Area Low (dVAL) or the tail at the low to potentially return to the daily Value Area High (dVAH) or approach the day’s highs.
- While probing for a tail test during a fading strategy, don’t wait for the very bottom of the tail (the day’s low); instead, aim for the peak of the tail to secure profits.
- If a P profile is established and the market moves upward the following day, a retest of the P high or the POC of the P profile is an excellent opportunity to initiate long trades, as trapped shorts from the previous P profile will likely attempt to exit, complicating any downward moves.
Neutral Day:
Definition: A neutral day occurs when the initial balance comfortably extends on both sides of the IB range but is then rejected. In this scenario, responsive players neutralize the extension of the IB range, probing the opposite side. If the day closes around the mid-point, VWAP, or daily POC, it’s identified as a neutral center day. Conversely, if one group of players manages to gain control and closes at the day’s extremes, it is termed a neutral extreme day.
Structure, Characteristics, and Nuances:
- This type of day features a two-way auction, indicating that both OTF buyers and sellers are contesting control over the balance.
- The market is highly volatile.
- The IB generally spans an average to larger range of 60-80 points, with extensions of more than 10-20 points in either direction.
- Neutral days often occur around significant short-term or medium reference zones.
- After a series of days exhibiting one-time framing, neutral extreme days can signal the end or pause of the short-term trend, suggesting a return to balance.
- Neutral extreme days within a composite may indicate the start of a new leg outside of balanced conditions on the next day.
- The trading is dominated by OTF participants.
- If the IB extension surpasses two IBs on one side and moves to the other side of the IB by the closing hours, the odds increase for a neutral center close, as achieving an NE day after a two IB move in one direction can be quite difficult.
Practical Approach:
- Among all day types, neutral days can be quite challenging to trade. A successful strategy may yield significant gains, while a misstep can severely impact your account and emotional balance. Thus, when observing IB extensions on both sides, be prepared for a volatile day and adjust your stops and position sizes accordingly.
- The first 2-3 hours could be relatively quiet, followed by sharp price movements; expect at least one rapid move that travels the entire IB range (60-80 points) within 30-45 minutes. Early signs can help you plan your trades to capitalize on such movements toward the other side of the IB range.
- If you confirm a neutral day before the H period, you can consider fading the IB range extension to target the day’s midpoint or the opposite end of the IB. However, after the H period, be cautious of the potential for a neutral extreme day, as I to M periods may move in one direction, making it advisable to avoid fading the neutral day.
- Neutral extreme days often lead to strong follow-through, so focus on the acceptance or failure of NE day reference zones to find good trade opportunities for the next day.
- NE days typically indicate the victory of one group of participants after intense competition for balance throughout the day. Position yourself strategically to join the follow-through after a neutral extreme day.
- Neutral center days suggest that both groups of traders finish the day lacking confidence; thus, VWAP becomes a crucial reference for the following day. A failure to hold or significant move away from VWAP could prompt one set of players to exit.
- Neutral days at the beginning of a new trend can repeat, indicating strength if they close in the same direction.
- It is essential to note that in the last 90 minutes of a neutral day, the scenario can shift quickly from a likely NE close to a neutral center or vice versa. The worst-case scenario might transition from a probable NE down day to an NE upside day and vice versa. Quick shifts in the auction during the last 90 minutes warrant tight stops.
- After a neutral day, look for trade opportunities to align with gap movements, as one group’s inventory may become trapped by the gap, prompting them to exit when they see it is not closing but instead extending.
- Avoid attempting to fade when the neutral profile exhibits an elongated structure.
Trend Day:
Definition: A trend day starts at one end and concludes at the extreme opposite end. During the day, the Initial Balance (IB) remains at one end while the range extends throughout the day, typically characterized by higher highs and higher lows in an uptrend without significant pullbacks, ultimately closing at the extreme of the trend.
Structure, Characteristics, and Nuances:
- The IB range is generally small to average, around 40-60 points.
- A minimum of two IBs is expected, meaning if the IB range is 60 points, the total day range can be anticipated to be at least 120 points.
- This type of day exhibits strong directional conviction.
- OTF participants control the market from the beginning to the end of the day.
- Value is less significant during trend days, leading to a stretched profile structure.
- VWAP serves as a major reference point on trend days. On some days, the price may hover around VWAP for the initial 2-3 TPOs before diverging, while on others, it may remain distanced from VWAP after the A period until the close.
- Throughout the day, locals may attempt to fade the moves, but OTF participants absorb these efforts, leading to price spikes.
- Pullbacks are usually brief and limited to 15-25 points.
- A typical trend day pattern consists of starting slowly, experiencing a quick spike, establishing balance, spiking again, pulling back and grinding, followed by a substantial rally, then balancing, and finally spiking again to close at extremes.
- On an upward trend day, every third TPO typically makes a higher high, while a downward trend day sees lower lows.
- While there may be one or two instances of a time frame stopping, which is normal for a trend day to adjust inventory, consecutive stops across two TPOs can indicate a weaker trend day.
- There are two types of trend days: a) discreet trend days—which begin slowly and gain momentum later in the day; and b) violent trend days—which feature aggressive movements from start to finish, though these are quite rare.
- Based on my observation, a strong trend day is often discreet; its characteristics might not reveal themselves until the end of the D period or even into the G period. Most traders may not anticipate it as a trend day, making it a profitable one until close.
- If a trend day is evident to all traders from the beginning to mid-session, there’s a higher likelihood it will be disrupted before the close and potentially turn into a failed trend day.
- A good trend day typically does not exhibit overlap of more than three TPOs.
- The beginning of a new trend usually coincides with a trend day.
Practical Approach:
- Traders often seek trend days, but these only occur on less than 10% of trading days each year, and they can be challenging to identify early as they often start unexpectedly and mature into trend days. If you miss a trend day early, you have two options: a) skip trading for the day, or b) wait for a solid pullback during the G-H-I period and enter on the trend side with stops below VWAP.
- It’s crucial to manage the emotion of FOMO (Fear of Missing Out) on trend days, as it can lead to impulsive trading decisions. Avoid chasing prices; instead, look for good trade locations and enter during the mid-session if the first session entry is missed.
- A great method for anticipating trend days involves assessing correlations between the previous day’s close and the current day’s open. For example, if the previous day closed at a Neutral extreme followed by a gap open, the odds of a trend day increase. Similarly, if the previous day was a balanced day and closed at the dVAH, the next day could likely be a trending day. An open drive above a balanced day further enhances these odds.
- Significant gaps exceeding 40-50 points in uncharted territory often lead to trend days.
- A major misstep in trading is attempting to fade a known trend day. Quick spikes can devastate those positions. If you realize it’s a trend day later in the session and cannot join the trend, it’s best to stay out rather than fade it.
- Maintain a 10-20 point buffer around VWAP, depending on the day’s established range. Once that buffer is breached, do not remain in a trend-side trade with the expectation that it will end as a successful trend day.
- Trend days that occur outside of a balanced structure tend to have higher success rates than those within a composite; therefore, maintain some buffer if trading outside a trend day while keeping stops tight if trading within.
- If a trend day is initiated from one extreme of the short-term balance, the chances of that trend day failing—either on the same day or in the following sessions—are heightened. This insight can help inform reversal trades to correct any weak structures present in the trend day.
- A solid trend day that occurs outside of a balance can target three IB levels if the IB range is relatively small, typically less than 50 points for the day.
- It’s important to avoid getting caught up in poor structures, anomalies, spikes, and volume imbalances during trend days. While these may be repaired later, the primary focus should be on how OTF participants exert control over pricing and fill their inventory throughout the day.
- If you observe more than two periods of whipsawing within a single time frame, it’s advisable to refrain from making aggressive entries on the trend side, as more than two periods of such whipsaws indicate that it may not be a favorable trend day and could potentially fail before closing.
- Trend days generally conclude at the extremes for the day. Therefore, it’s wise to allow for some size to be maintained until the close or until the trend day is invalidated.
- More aggressive traders can concentrate on the size of the first one or two pullback rotations and then enter on each subsequent pullback until they reach invalidation below VWAP.
- Noting reference zones from the trend day can significantly aid in planning the next day’s trades.
Double Distribution (DD) / Triple Distribution Day (Type of Trend Day):
Definition: A double distribution (DD) day consists of two distinct balances separated by single prints in the middle. The price establishes a balance during the first session, then experiences a rapid shift from that balance with extension singles, followed by the acceptance of another balance. If there’s a further extension creating a third balance, it is classified as a triple distribution. Multi-distribution days are quite rare.
Structure, Characteristics, and Nuances:
- The IB range is generally smaller, typically between 30-50 points.
- Extension singles are a critical component of the DD profile. After establishing a balance, the market extends with singles and forms a new balance, meaning the extension should hold throughout the day to safeguard the initial balance created in the first session.
- The DD profile is often considered weak structure and tends to be repaired in subsequent sessions, as the market dislikes quick shifts in balance.
- A DD profile can indicate market exhaustion if it occurs within a composite, and it may signal the end of a trend if it happens at a new range.
- Extensions during the E-F-G periods typically result in a more favorable DD profile, while any extensions afterward have a decreased likelihood of success and may retract.
Practical Approach:
- When anticipating a DD day and observing one extension, the immediate target for that extension, whether from the IB or a swing reference, should be approximately 25-40 points as it moves away to establish another range and balance.
- Another trading strategy for DD days involves utilizing pullbacks to the extension singles to enter a trade with the goal of probing toward the extreme of the new balance, while maintaining invalidation below the extension singles.
- Once a visible upside DD profile is established, the price should ideally not retrace below the extension singles and into the balance from the first session; if it does, the entire balance will likely be probed.
- Acceptance of the extension singles from the DD profile on the following day provides valuable trade opportunities to explore the balance from which those singles emerged.
- Similar to trend days, avoid attempting to fade DD days, particularly when the DD profile continues with another extension, as this could lead to triple or multi-distribution profiles.
That concludes the discussion on day types. We have aimed to keep this straightforward, though we couldn’t help but include various observations collected from watching the auction. We have steered clear of overly theoretical concepts to ensure the information is easily digestible and practical. Please review these insights and try to link them with your own findings and trading system. We hope some of these points can assist you in making better trading decisions.