By JaychandranMarket Profile Basics and Components

AMarket Profileis an intra-day charting technique (price vertical, time/activity horizontal) devised byJ. Peter Steidlmayer, a trader at theChicago Board of Trade(CBOT), ca 1959-1985. Steidlmayer was seeking to evaluatemarket valueas it developed in the day time frame. Steidlmayer's charts displayed a bell shape, fatter at the middle prices, with activity tailing off at the higher and lower prices. In this structure he recognized the 'Normal',gaussian distributionhe had met with in college statistics.

Source: WikipediaIntroduction

Market profile is not a trading system. Use it along with your your trading system.

There is no greater indicator of what the market is doing than the market itself.

Its a decision making tool to support your system and signals.

Courtesy : Linda Raschke

Key Market Profile Terms

Initial Balance- IB (Price range developed at first 60 Min range i.e 1st hour high & low ) Value Area VA ( Area where 70% of TPO's present on any given time frame ) Value Area Low VAL ( Lower range of VALUE AREA current Profile) Value Area High - VAH (Higher range of VALUE AREA current Profile) Yesterday's Value Area Low - YVAL (Value Area Low of previous day profile) Yesterday's Value Area High - YVAH (Value Area High of previous day profile) Point Of Control - POC (Price at which Highest TPO's occurred. In simple where buyers and sellers agreed the price. ) Developing Point Of Control - DPOC (Price at which Highest TPO's developing for the current Day) Virgin Point of Control - VPOC (POC which is not touched in following sessions. Usually Provide strong Support/resistance ) Range Extension - RE (Market activity which happens above/below the Initial Balance i.e first hour range)

Opening Types and Day TypesOpening Types Open Drive (OD), Open Rejection Reverse (ORR), Open Test Drive (OTD), Open Auction In Range (OAIR), Open Auction Outside Range (OAOR).

Day Types Normal Day, Normal Variation Day, Double Distribution Day, Neutral Day, Neutral Extreme Day, Trend day.

Open DrivePrice opens above/below previous day value area and proceeds in a unidirectional way without any retracements.

Open Rejection ReversePrice Opens outside the previous days value area the move outside value is rejected and the marker reverses sharply back into the previous days range.

Open Test DriveAfter the market opens, the price tests in one direction and then sharply turns around and drives in the opposite direction.

Open AuctionOAIR - Price opens inside the previous day range and rotates around the opening price.OAOR Price opens outside the previous day range and rotates around the opening price.

Normal Day * Initial Balance will be wide * Bell shaped Distribution * No Range extension above IB ( Some times we have small RE ) * Price trades at value area (even if trades outside it will come back to VA again) * Price looking to trade in this zone for sometime. * Happens mostly at Stage 3

Normal Variation DayThis type of day does not have as wide a first hours range as a normal day

The Initial balance or base is upset as the other time frame player pushes price out of first hours range.

The rest of the day is then spent forming a new value area outside of the early base.

Neutral DayThe Price tests on both sides of the initial balance. Price continues to rotate.Both the buyers and sellers are active but no one is in controlThis type of day tends to form a broad value area or trading range. A breakout from this range must be accompanied by an increase in volume to indicate that the other time frame player has gained control.

Neutral Extreme DayThe Price tests on both sides of the initial balance. Price continues to rotate and closes at extreme near days high or low.

Both the buyers and sellers are active but one will get control around close.

Neutral extreme day shows a sign of top or bottom

Double DistributionA double distribution trend day lacks the strong opening drive and instead has a narrow initial balance. Single prints then market move out of the initial balance and the other time frame player remains firmly in control

Trend DayUni-directional movement fuelled by high volume without major retracements.

Other time frame player in in control from the opening price.

Happens mostly at stage one

Judging Markets using Value AreaValue area placements are used to judge about price movements.

Value area higher, value area lower, value area overlapping of previous day value area gives good hindsights of what market is doing.

Price opening above previous day value area high is a bullish sign.

Price opening below previous day value area low is a bearish sign.

The 80% Rule When price opens above or below previous day value area and then gets into the value area for 2 consecutive half hour periods. The price has 80% of chance of filling the previous day value area.

Buying TailsSingle prints (time spent less) left at the bottom of the profile by the action of the long time buyer.Fast price rejection at bottom.

Selling TailsSingle prints left at the top of the profile by the action of the long term seller.

Fast price rejection at top.

Distribution ShapesPrice distribution shapes suggest what kind of market activity took place.b shaped profile suggest a long liquidation activity in the market.p shaped profile suggest a short covering activity in the market.

Virgin Point of Control (VPOC)The VPOC is a POC that has not been revisited by price.

VPOC acts as strong support / resistance going forward.

VPOC can be used as a target.

Often reversals happen at VPOC.

Responsive ActivityResponsive buying - When the Traders decide to buy below the value area.

Responsive selling When the traders decide to sell above the value area.

Initiative ActivityInitiative Buying When the traders decide to buy above the value area.

Zzzzzzzzzzzzz Initiative Selling When the traders decide to sell below the value area.

QuotesIf you CANNOT make money with $100 what in the world makes you think you can with $100,000. it will ONLY be 1000 times worse.

Those who think they know the most, really know the least. Humble and objective beats arrogant and close minded every time.

"The best traders have no ego. You have to swallow your pride and get out of the losses." - Tom Baldwin

Questions