I have a very strong reason to use these words regarding context.

There are thousands

of technical tools that are available and hundreds of ways to use each one of them. But
still, none of them comes through all the time.

The markets change constantly and so should be the ways to analyze them. A
tool set in fixed rules and laws cannot perform equally well in a constantly changing
environment.

What you need is something which lets you have the flexibility and gives you
clear paths of action, not based on numbers and levels, but based on logic.

Market Profile achieves that because it has Context as an integral part of it.
Every action event on a Market Profile Chart is always weighed in on the context that
surrounds it, and if the context gives permission, we go ahead and place a trade. If the
context does not allow we just watch the auction develop. That is complete information!

How does Market Profile Incorporate the Context?

Market Profile does it in two ways,

1. It helps distinguish between different Time Frames

2. It differentiates between Smart Money and Amateur Money

[bctt tweet=”Understanding Different Time Frames helps us understand who is in control

of the markets.” username=”aniruddha4tew”]

Knowing whether Smart Money is behind a move will help us attach confidence to
our trading decisions.

What are the Different Time Frames in the Markets?

James Dalton has laid this out very well in his books. Borrowing the time frame names
here,

1. Scalpers or Very Short-Term Traders (VSTF) – Looking for small

but quick gains (eg: 5 pts on Nifty 10-15 on Banknifty). Active in the
value area. Can do a few or multiple trades in a day. Go home flat.
2. Day Time Frame Traders (DTF) – Looking for one-two trades in a
day, The meat of the 1 or 2 intraday auction rotations. Targets
depend on the setup as well as the average daily range for the
instrument. Active on the edges of developing value area. Go home
flat.
3. Short-Term Traders (STF) – Trade swings that last for 1 -2 days.
Looking for trades that go from one pivot point to another but on the
short time horizon. May or may not carry positions overnight.
 4. Intermediate Time Frame Traders (ITF) – These trade on the
fringes of the intermediate term brackets. Jim says IT time frame is
defined by the quantum of the move and not time (a crucial
observation). This helps immensely while taking medium term swing
trades.
5. Longer Time Frame Traders or Investors (LTF) – These are the
investors and are visible in markets at crucial inflexion points. Usually
when there is a sharp break in the markets driven by news or an event
(eg: BREXIT Low on 06-24-16). Very important to keep an eye out for
these players as they are the main drivers of big moves in markets.

These time frames and their interaction is what helps us understand the context in
which the current move is happening. Eg: If ITF sellers are active around a bracket high,
the high is more likely to be respected as against when the ITF sellers are not very
active and there is absorption going on around that level. We will see detailed examples
of this ahead.

Before we move forward let me give a big Thank You to James Dalton for giving us the
original differentiation of the time frames. This differentiation forms an integral part of
Complete Information revealed by Market Profile Charts.

Time Frame Matrix

Trader VSTF DTF STF ITF LTF

Time
Frame
Trader Scalper Day Trader
Short Swing Long Swing Investor
Type Trader Trader
Holding Few Few Minutes Few Hours Few Days to Few Weeks
Period Minutes to a few Hours to a Few a Few to Months
Days Weeks even Years

Smart Fade VA Use Use 4-5 days Defend IT Big Events

Money Extremes Yesterdays Ref of Market Brackets LT SnR to
Trades s as well as Range to Accumulate
Today’s Refs Fade or Play or Distribute
to Fade the BO/BD Holdings
Amateur Try to Run after Not waiting Expecting ev Buying
Money Scalp Very Every BO/BD patiently for ery BO/BD to without a
Trades Early or market get sign of
Very Late patterns to continuation Accumulatio
in the Day set up. n and
Chasing Compulsive Selling
 volatility Trades without a
sign of
Distribution
by SM

Smart Money (SM) vs Amateur Money (AM)

This distinction is probably the most important feature of Market Profile. Our goal as a
trader is to always be on the side of SM. No discussion on complete information is
complete without discussing SM and AM.

One important thing to remember is that a higher or longer time frame is not necessarily
smarter than the shorter time frame. There is always some amount of confusion
attached to this.

An STF trader can be part of SM too.

Another misconception is that SM always fades breakouts and breakdowns.

Nothing can be further from truth, SM does not buy all the BO and sell all the BD. They
are selective in their trades, and patiently wait for the right conditions to set up
for Buying Break Outs and Selling Break Downs.

So how does AMT and Market profile make that distinction between SM and AM?

It achieves this by giving us the concept of Value. Value is where SM is. Now it is not
that straight forward to under stand this. You need to understand a vital core principle of
Expected Behavior (EB) and Unexpected Behavior (UB).

Value combined with EB/UB gives us the much needed clarity. We can better
understand whether a move is caused by SM or AM.

This is a very crucial concept to successful implementation of AMT using Market Profile.
As we move forward in this course we will start getting grip on this important distinction
about SM and AM. So stick around and believe.