Updated: Oct 24, 2022
Market Profile is a technical concept with a unique charting technique developed by Peter Steidlmayer when trading at the Chicago Board of Trade (CBOT), and it was open to the public in 1985.
Market profile is a style of plotting "Price" on the Y-axis and "Time" on the X-axis, which most of the time form a bell-shaped image as the body of the profile.
It helps day traders identify Other Timeframe Participants (Big players) who have money and information power. Our job as short-term traders is to follow these big sharks, which give direction to markets.
We do share live intraday options trades (based on market profile and open interest) on our Telegram Channel, to know more, you can join here - Traders Group Run by Indrazith
Table of Contents
What is Market Profile Trading?
Market profile assists the short-term traders in reading the current market trends as it unfolds. It considers the latest market data as it comes and provides an excellent price, time, and volume analysis to give the best of the best information about what it wants to do next.
It provides an X-ray vision of the market as Value Area represents 2/3rd of the day’s activity (or 70% in some cases), and this will give a clear picture of the current state of the market as it unfolds.
It works in all market conditions. Usually, a trading system or indicator works in certain market conditions like a trending or sideways market. There is no such restriction to Market Profile as it clearly shows the balanced and imbalanced market conditions in both directions all the time.
The marketplace is full of different players like big buyers, big sellers, scalpers, intraday traders, swing traders, and positional traders. The combined action of these players together is the main reason behind price fluctuations.
Big buyers and Big sellers will execute their plans at different price levels, and they cannot trade with each other at the same price level. Others act as a bridge between these two payers by providing liquidity, as shown in the below image.
Let's say a script is trading at 100. Big Buyers will have a plan to buy this script only below 50, and Big Sellers will have a plan to sell this script just above 150.
If we restrict the trading activity in this script only to big buyers and big sellers, the price will be stuck at 100 as both of them don't have plans to trade at this level.
If we allow other players such as scalpers, day traders, swing traders, etc., then they provide liquidity to the market. Their participation will take the price to either 150 or 50 depending on all other traders' combined efforts except the big players. If the price reaches 50, big buyers will pitch in, and if the price goes to 150, big sellers will pitch in to initiate their trades.
This interaction between big players and short-term players distributes trading volume in a bell-shaped curve, as shown in image 2.
The primary purpose of any marketplace is to facilitate trades. A script's price will go up until the last buyer has bought, and there are no more buyers at a higher price, which is recognized as Unfair High.
Similarly, it moves down until the last seller has sold. There are no more sellers at a lower price, which is identified as Unfair Low.
The end of the upside auction is the beginning of the downside auction and vice-versa. Hence, we can say the marketplace facilitates trades with the "Dual Auction" process.
Once the market defines a range with an unfair high and an unfair low, it negotiates within the range to establish a "Value Area."
How to learn market profile (MP)?
Understand MP charts are different compared to candlestick charts
Study previous day MP chart and mark VAH, VAL, and POC levels
In the case of balanced open, these levels act as support & resistance
In case of imbalanced open, PDH & PDL acts as support & resistance
Free Market Profile Charts
It is effortless to plot a market profile chart using an excel sheet. First, let us understand how a #marketprofilesoftware plots the chart, then it is easy to construct in an excel sheet.
Each half an hour of the trading day is designated by a letter, which is also called Time Price Opportunity (TPO).
We denote the first 30 min range with the letter ‘A,’ the next 30 min range with the letter ‘B,’ and we continue this procedure until the last range of the market.
The above chart is of Nifty, and hence the last range is denoted with ‘M’ as the Indian markets currently trade from 9.15 am to 3.30 pm with the last session ‘M” is for only 15 minutes from 3.15 pm to 3.30 pm.
‘O’ in the first session indicates the open price level, and ‘#’ in the last session indicates the closing price level.
This charting in Market Profile is called ‘Split’ profile, and pushing these TPOs (letters) on the left side (wherever space is present) will create the ‘Un-Split’ profile, as shown below.
Point of Control (POC) is the price level in which maximum time was spent (Price Profile) or maximum trading activity (Volume Profile) occurred on any day.
In the above image, 9980 is the point of control (POC). Value Area (VA) is the 70% price range around POC. It is the fair price of the Nifty on this particular day. So range from 9958 to 9992 is the Value Area (VA) on this day.
By the end of every trading day, the market profile chart shows not only what happened on that day but also who is responsible and when it happened.
There is much software that can plot the market profile chart in the live market automatically. Traders can use any of this software or use Excel to write the MP chart manually.