The most important concept to understand for Market Volume Profile traders is Acceptance and Rejection. If only more traders understood the simplicity of this concept and how it can help them improve the odds in almost every trade that they take.
Trading “Auction Market Theory” and “Market Volume Profile” has always been for me about gaining an EDGE. As a discretionary trader I don’t believe or have faith in percentages and statistics alone. Therefore I like to trade what MAKES SENSE and is more likely to happen just because it makes more sense than if it were not to happen. Quite simple really. With that in mind I know these opportunities are more likely to happen, but at the same time remain humble enough to understand that doesn’t mean always, as nothing always happens in the market!
By viewing the markets through the lens of an understanding of Auction Market Theory principals, and the concept of Acceptance and Rejection, you may begin to use a Market Volume Profile more effectively.
So what is Acceptance and how is it perceived? – It is defined by areas on a volume profile where MORE trade was facilitated by market participants. Visually its the bumps\peaks on your profile (See Below). The fact that more volume was traded proves the acceptance has taken place at those prices in the past.
So what is Rejection and how is it perceived? – It is defined by areas on a volume profile where LESS trade was facilitated by market participants. Visually its the pockets\valleys on your profile (See Below). The fact that less volume traded proves that rejection occurred at those prices.
I believe that the market and its participants have a memory, the Market Volume Profile represents that memory as the mind of the market. The areas that were previously accepted have a tendency to be accepted again and the those that were rejected to be rejected again. Of course this doesn’t happen for ever, but as the market references those areas time and time again, MANY opportunities are presented around these levels. Quite commonly the market will spend more time at areas of high volume that have shown acceptance, and lesser time at low volume areas that define rejection.
As I am looking for the market to move rather than just chop, I use areas of Rejection for potential Entries and Areas of Acceptance as potential targets. Therefore in both theory and practice I look to trade from Rejection into Acceptance, then back towards another area of rejection. This is the natural flow and rhythm of the market and you will see it repeating time and time again. Just bring up a Composite Profile on any market covering a significant period of time (i.e. 3 -6 months or even more if required) next to a price chart and you will see how the market constantly moves from low volume areas to high volume areas and back to low volume areas again.
We can see evidence of this playing out around areas of Balance (Sideways Market) as volume dries up and rejects above and below the range of development. As well as when we are getting ready to break outside of the range as further acceptance takes place when volume builds at price outside of the range. Then of course we see further evidence of this when the market begins to trend and further acceptance and rejection areas begin to form and trade around.
Understanding this concept of Volume Acceptance and Rejection is extremely essential so that you may become creative with your level of understanding, and begin to apply the Auction Market Theory and Market Volume Profiling techniques in ways that provide unlimited potential. Of course these concepts are also applicable to the way that I read and trade Order Flow using the MarketDelta Footprints.
To learn more from Kam, be sure to check out his blog.