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Simplifying Some Basic Auction Market Theory / Market Profile Concepts Part 1

Excess/Non-Excess

A Time-Price Opportunity chart (TPO) is that funny looking chart with all the letters and is characteristic to Market Profile. Letters? Seriously? Is this scrabble? We’re trading prices not the alphabet. And again, where are the candles?? I’m of course kidding, as Market Profile has been rather revolutionary to trading. Still, perhaps you aren’t ready or interested in adding more to your chart and your foundational trading. The goal of this section is to introduce perhaps two of the most important market profile concepts that you can see just fine from candles.

Here’s a sample from SierraChart.com

I’ll let you read up on your own about TPO if you’re interested, but the short version is that the letters correspond to 30 minute periods within the day. It is showing you in which 30 minute periods a given price traded.

The three concepts from Auction Market Theory/Market Profile that I believe are the most important are “excess” (or lack thereof), “spikes” and “single prints.” In this section we will cover “excess” and “non-excess” (or poor) lows and highs

You may have heard the terms excess low (or high) and poor low (or high) and wondered what that was or why we needed such terminology in the first place. While I’ll give a brief definition, what is more important is understanding what they represent in terms of participants’ behavior and perception of value.

I’ll start with an analogy this time. Let’s say you’re at an auction buying some land. All the parcels are pretty similar, roughly 1 acre. There are thousands of acres and so the auction has been running for many days. In fact, previous buyers or sellers can return to auction and buy or sell what they had previously bought or sold. An acre has been selling in the range of $50k-$60k and you’ve decided you want some land. You pull together your 60,000 $1 bills left over from the club over the weekend, stuff them in a briefcase, and head to the auction. Things are going about as expected once you’re there. You’ve made a few bids in the $52-$53k range as you’d like to spend closer to $50k and there are plenty of parcels after all, but you haven’t closed a deal yet. Just as you’re working up to some higher bids for the next parcel, someone new walks into the auction. He’s an older heavyset Colonel Sanders looking guy wearing a bunch of flashy jewelry and has two supermodels on each arm. The bid is currently at $53,300 and you go for $53,500. The new guy looks over at you and winks and says, “$60K.” You roll your eyes as he immediately wins the parcel and look forward to the next. The next parcel becomes available, and the same guy immediately says “$62K.” Your neighbors start looking at each other frustrated. The next parcel come up and the same guy immediately says “$69,420” as he looks at you and mouths the words “suck it.” You and the other prospective buyers simply get up and leave the auction completely, unwilling to participate in such nonsense. Those that are sellers at this auction on the other hand are firmly planted in their seats looking to unload their inventory on Colonel Sanders. This is an excess high. Some jackass pays up way more than seems reasonable to the remaining bidders and they walk away. Once he’s done “buying the top” there are no buyers left participating in the auction at prices anywhere near what he paid. You would see this as a large upper wick (or tail) on your chart. An excess low would simply be the opposite.

The market profile definition of excess traditional refers to 30-minute periods. For an excess high you would have the high of day occur within a given 30-minute period, and all subsequent 30-minute highs would be significantly lower than that high. Thus, there would be a number of prices with only a single letter in that row (corresponding to the only 30-minute period during which those prices traded) on your TPO chart, which you don’t even need in order to see it (candle examples below). The word “significant” is somewhat subjective and depends on the market you are trading. For our purposes, let’s just say you know it when you see it. If highs (or lows) are relatively equal, then it is not excess. It would be classified as “poor” or at least “non-excess.” An equal low/high are the perfect example of a “poor” low/high. Within a couple ticks (on ES for example) or let’s say 5 cents on SPY would be considered poor. The bigger the excess the more convincing that a given direction is done. If a high or low is “poor” it is generally expected that it will be revisited and the move higher or lower is not complete. There are, however, some exceptions that are beyond the scope of this section. As many of you are simply adding these concepts to your existing technical trading system it is less important to understand the exceptions.

Here’s an example of a nice excess low on SPY from 2/29/24 during the 11:30 EST (30-minute) candle:

That low was $505.35 and the next lowest low in any 30 minute candle was $506.51 (a full $1.16 difference). Good lord that $505.35 seller had to feel like an idiot. Price rallied all the way to $514.20 before finally reversing. In this example sellers walked away, and buyers stepped in as both sides agree that $505.35 was an unfairly low price.

An excess low (or high) is assumed to mean the end of a directional auction or directional move. In this case price was done going down. They occur on all time frames, and keep in mind there can be a short term down “auction” that is occurring within a longer term up “auction” and vice versa.

While we’re at it let’s look at the 5-minute candles from that sequence. 

The 5-minute excess here was $505.79 – $505.35 or $0.44.

While traditionalists may only look at 30-minute periods in defining excess or non-excess, others accept that it occurs on all time frames. From my perspective I often say “excess carries forward.” It doesn’t always, but a large 5-minute excess very often translates into a 30-minute excess. 

*Interesting thought experiment*:

This will of course depend on when within a 30-minute candle the 5 minute excess occurs. This is where the flaw in only looking at 30-minute excess comes in. If this 5-minute candle had occurred at 11:55 instead of at 11:40, then the next 5-minute candle (low $505.79) would have occurred in the next 30-minute candle and the excess would be smaller even though the price action is the same. Is that somehow less conclusive?