Primer on Market Profile

Everything you wanted to know about Market Profile Trading and more...

After graduating from college in 1960, J. Peter Steidlmayer moved to Chicago to become a pit trader.  He made his living as an independent trader at the Chicago Board of Trade.  He was a respected trader in the bonds and commodities pit.

While trading in the pit, Mr. Steidlmayer developed a feel for the markets and began formulating his views on how to trade the commodities markets.  His ideas later on became known to the trading community as "Market Profile" in 1984.

Steidlmayer sees the markets as a dual auctioning process.  Prices moves up and down in search of value.  Steidlmayer sees price and value as two different things.  He developed a way to gather market information and displayed it in a bell curve format but with a twist.  The bell curve is turned sideways.

On a Market Profile chart, price is plotted on the vertical axis, and time is plotted on the horizontal axis.

Market Profile Bell Curve

Market Profile, Meta Profile and Volume Profile charting can be used on any electronic Futures contracts and stocks where volume information is disseminated.  For Spot Forex and Pit traded Futures contracts where volume is not reported publicly, you can use Market Profile TPO to chart the potential trading activities.

Market Profile has been very effective in the past because very few traders knew about it or use it.  So this means, when you are wrong about a trade, you can exit gracefully and most of the time you can scratch the trades at break-even.  There is no mad dash by everyone trying to head for the exit all at once.

Market Profile trading has gained a wider exposure lately.  There are more market profile charting packages available now than before.  If you are selecting a market profile charting package, make sure that the underlying code for market profile charting package does not treat all prices as equal.  Sometimes translation is lost during the path from the trader's mouth to the programmer's ears.

There are also market profile chatrooms led by subscription-based moderator(s) displaying real time intraday trading using market profile techniques.  In addition to the two services above, there are also educational market profile newsletters published and delivered via the internet.  The market profile charting software, chatrooms, and newsletters usually offer some sort of trial subscription, so you can sign up and try their services or products.

The increasing prevalence of market profile information is both good news and bad news.  The good news is that resources for learning market profile have increased and the learning curve for market profile trading has shortened.  The bad news is that Market Profile trading is getting to be a more crowded trade.  There been more times than I care to count where other market profile traders step in front of my trades and I don't get fill.

Trading Insight:

I like using Market Profile when the market is in Horizontal Development.  The concept of Value Area lends itself to fading prices when it is trading towards Value Area High or Value Area Low.  In other words, selling it when it becomes expensive and buying it when it becomes cheap.

Auction Market Theory
The process where buyers and sellers find perceived value.  If price falls below fair value, it attracts buyers into the auction to bid up the price and vice versa when price rises above fair value, it attracts sellers into the auction to sell.

Double Distribution
Trading activity is shaped like a "B" in market profile.  Market participants posses a low level of conviction in the first few hours of trading.  Later in the session, a change in events causes the other timeframe to perceive price to be unfair at current price levels, enter the market aggressively, and substantially extend the range.  This later entry by the other timeframe drives price to a new level, where a second balance region develops.

Initial Balance
The price range resulting from market activity during the first two half hour time period.  It is designated as the A and B TPO periods.  The initial balance represents the period of time where two-sided trade can take place.  A range where both the buyers and sellers agree to conduct trade.

Long Liquidation
Long Liquidation is caused by old business, not by new participants entering the market.  It develops into a "b" shape in market profile.

Market Imbalance Profile
There is only one sided trading.  Either the buyers or the sellers are in charge of the market direction.  The market is moving directionally to seek a new fair price.

Market Profile
A way to gather market information and organize the data into a trading support system where traders can use it make a decision.

Meta Profile
It's a hybrid of Volume Profile and Market Profile charting.  However, instead of counting volume, you count the number of times it traded at each price.

Minus Development
Indicates the direction of capital flow.  Very little time is traded there.  This is the area of break-outs or break-downs.  Click on charting section of the navigation menu located in the left column of this page to see graphical representation of minus developments plotted on various Composite TPO Volume Charts.

One Timeframe Markets
The market is controlled almost entirely by either the other timeframe buyers or other timeframe sellers.  This cause prices to auction (or trend) in one direction for a sustained period of time.

Opening Drive
The other time frame participants has already made their trading decisions before the opening bell.  The market opens and the other time frame participants auction the market aggressively into one direction.  Fueled by the strong other timeframe activities, price never returns to trade back through the opening range.

Other Time Frame Buyers
The long-term market participants are actively accumulating.

Other Time Frame Sellers
The long-term market participants are actively distributing.

Point of Control (POC)
This is the price where the most activity occurred and therefore the fairest price.  The greatest amount of time was spend trading at that price, signifying greatest acceptance of value.

Range Extension
Price movement beyond the initial balance in the first hour of trading.

Running Profile
The market moves in one direction and reverse course and move in the opposite direction.  It can a intraday running profile or it can be a two day running profile where the market moves up the first day and reverses course the second day.  It would close near it low of the day and near of below the low of the previous day.  It traps all pullback buyers who were waiting at previous support levels and traps all short sellers who were waiting for a bounce to short at previous resistance levels.

Short Covering Rally
Short covering is caused by old business, not by new participants entering the market.  It develops into a "P" shape market profile.

Single Print Buying Tail
Buyers react strongly to price being undervalued and create a single TPO prints by rejected the price at the low.

Single Print Selling Tail
Sellers react strongly to price being overvalued and create a single TPO prints by rejected the price at the high.

Time Price Opportunity (TPO)
Each half hour of the trading day is designated by a letter.  The letter is marked next to price.  TPO is also known as "That Price Occurred".

TPO Count
A way to see where most of the trading is taking place.

Trade Facilitation
The ability to conduct trades without excess slippage between buyers and sellers.

Value Area
The value area shows price acceptance. This area develops sideways rotations around a fair price. This is a high volume because market participants view this range as a fair price.  It correlates to the first standard deviation of trading volume.

Value Area High (VAH)
The prices that is above the Value Area.

Value Area Low (VAL)
The prices that is below the Value Area.

Volume Profile
A graphical depiction showing volume on the x-axis and price on the y-axis.

Point of Control (POC)
The price that have the most trading activities.

Horizontal Development
Buyers and Seller are in agreement where the value area node should be located.

Vertical Development
Buyers and Sellers are in disagreement where value is located and are seeking to re-establish new value area node.


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