Appendix 2
TPO versus Volume Profiles
Humans have a fascination with numbers. We crave exactness and abhor ambiguity; if we can't comfortably comprehend a piece of information, we often discard it in favor of contrary indicators that match our preconceived notions. Yet it is precisely in moments of uncertainty that the experienced trader identifies opportunity, like the savvy angler who looks for a subtle ripple in the slow water below a snag.
Consider volume, which can serve to validate market opportunities. You must constantly ask yourself, “Is volume validating the current market direction?” Volume profiles (not to be confused with Market Profiles) show you exactly how much volume—including relative volume—occurred at each price, as well as the exact number of contracts for the entire session. See the example in Figure A2.1.
Figure A2.1 Volume Example
To reiterate, the three main components of the auction process are:
It's important to note that what the volume profile does not show is far more important to the way I trade that what it actually displays. I believe it is the more ambiguous combination of time and volume—rather than volume alone—that provides the most timely, relevant insight (when considered within the larger market ...
