As mentioned last week on Twitter, I thought to provide some observations with TPO [time-price opportunities] and volume profiles. We will take a look on the WTI Crude oil market as it seems most traders are in love with this lovely beast. However, you can use this process on any other market as well.
Last week we discussed the importance of assigning a filter process in order to better understand what the larger picture is showing. By going through the periodicity hierarchy of Yearly, Monthly, Weekly timeframes we can understand the higher time frame (HTF) and figure out the path of least resistance. That said, you can use this filter process on TPO/Volume profile charts to find some nice additional levels in the overall macro structure that are confluent with your intra-day trading levels.
When looking at a Volume Profile, we are looking for areas of acceptance and rejection. In acceptance areas market participants are in agreement on price, while in rejection areas, one side of the market participation is not interested in a particular price and quickly rejects these levels. Actually, you could call acceptance areas balance, while rejection areas would be the extremes of that balance. Why identify these areas on a higher time frame now? The answer is quite simple: An intra-day level has less significance than a weekly level or a monthly level because the large market won’t recognize the day trader’s sh*tty little whatsoever level when the market rejects the monthly profile’s low volume area. This is why it’s important to figure out the path of least resistance on a macro scale.
Let’s try to visualize this now. Looking at the monthly profiles, we can observe that the market opened inside of the previous month’s balanced range and value. The conclusion would be a rotational behavior for this month and to trade the balance extremes of this profile. However, the previous month’s high got taken out and we broke out of that balance to trend higher. Here’s a screenshot with the mentioned acceptance/rejection areas:
