The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Market Profile

and responsive action with respect to the initial balance is not affected, as it does

not change after the first hour, being fully defined.

initiative and responsive action based on an

Objective reference point

Initiative or responsive action should therefore be based on a reference point that

has already been established for a more consistent, objective, and reliable deter-

mination of:

■ (^) The market participants’ buying and selling behavior
■ (^) The market’s trend
The previous day’s value area is the most logical choice for a fixed and abso-
lute reference point for such a determination. Once market participants perceive
a disagreement between price and value, they will respond in any of the four fol-
lowing ways:

1. Initiative Buying: Initiative buying occurs above the previous day’s value area.
   The participants buy if they believe that prices are going higher in a rising
   market and that the market is currently undervalued. Initiative buying drives
   prices away from the previous day’s value area and in the process gives rise to
   uptrends in the markets.


2. Responsive Buying: Responsive buying occurs below the previous day’s value
   area. Participants buy if they believe that prices are too low or cheap and that
   the market is currently undervalued. Responsive buying reverts prices back
   toward the previous day’s value area and in the process promotes balance
   between price and value in the markets.


3. Initiative Selling: Initiative selling occurs below the previous day’s value area.
   Participants sell or go short if they believe that prices are going lower in a
   declining market and that the market is currently overvalued. Initiative selling
   drives prices away from the previous day’s value area and in the process gives
   rise to downtrends in the markets.


4. Responsive Selling: Responsive selling occurs above the previous day’s value
   area. Participants sell or go short if they believe that prices are too high or ex-
   pensive and that the market is currently overvalued. Responsive selling reverts
   prices back toward the previous day’s value area and in the process promotes
   balance between price and value in the markets.

Upon closer observation, one can see that both the longer‐term activity of ini-

tiative buying and responsive selling occurs above the previous day’s value area.

Similarly, both initiative selling and responsive buying occurs below the previous

day’s value area. See Figures 17.13 to 17.16.

Trend followers try to decipher the actions of the longer‐term participants,

looking for signs of initiative buying or selling, which include breakouts from

both the current day’s initial balance and value areas, as well as from the previous

day’s value area and range.