Market Profile Basics Tutorial

So you are an off-floor trader and live with the notion that you can never compete against floor traders. Obviously, they are the one viewing all the action in the market, and making trading decisions on the basis of the events. At times, you may find yourself lacking information to make fruitful trading decisions. However, making trading decisions is not that complex, once you start using Market Profile. Market profile basics will help you find harmony in the price movements and observe the order in the markets. This article will introduce you with basic Market Profile concepts, once you are comfortable with it you can take one step ahead to understand it in depth.

Market profile is not a typical indicator, as, it offers no buy/sell predictions. Rather, it is a data-organizer which works in decision-support. The data-organization helps analyze the market movements and find the dominating share in the market, through the price movements. Market profile definitely helps extract ample information to make trading judgments.

Analyzing Market Profile for your Trading Decisions

Market profile, in its true sense, is made up of TPO’s (Time Price opportunities). The first hour of the trading session sets the temperament for the day. This period can be used to predict the movements of the floor traders. The market participants are primarily categorized on the basis of:

  • Day-timeframe traders
  • Other-timeframe traders

The floor traders come under the classification of Day-timeframe traders while other traders are under the class of the latter. POC, or Point of Control defines the price at which the majority of TPO’s have an occurrence in the Market profile chart for the previous day. When the trades occur within a narrow range of prices, the market is relatively balanced. The prices of other stocks follows the pattern of the balance area, also known as value area, where markets update their value estimates constantly.

A wide initial balance signifies a normal day and indicates that the trader made an early entry in the market. The primary reason behind the early entry would be some major news, bringing in a short-term bullish or bearish trend. However, the remaining day remains relatively balanced where, other-time frame buyers and sellers make a trade.

Below is the Market Profile chart for Nifty from Marketcalls:

Market profile Basics

Realizing usability of market profile

Once you possess ample experience by analyzing market profile, the next step is recognizing the price directions and different types of days. While a tick chart is a simple data representation technique, market profile offers an additional insight by combining price, volume, and time to reveal a recognizable form. A tick chart offers relation between price and volume of shares traded. Market profile helps visualize the price levels, for which the market is at a relative equilibrium.

When a trader compares the current day’s profile to the one for the previous day, it enables him to recognize the changes in the price or volume. The trader can also observe the divergence of price from value by effectively analyzing the through the market profile basics. Additionally, the trader can locate a trend by observing the movement in the value area. When value area moves unidirectionally, it is an indication that the price movement is being accepted in the market.

Market profile reveals several attributes of the market and helps monitor the trading activity of the markets. The market action when monitored, offers an insight into the type of day which is developing, and the start of a price trend. Combine market profile with moving averages and analyze the volume traded. It will turn out to be one of the best trading moves indeed.

I hope you got a clear insight on Market profile basics. If this suits your trading style and there are plenty of youtube videos out there which explains Market profile descriptively. We would also try to post a strategy based on Market profile soon.

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