Market Profile Basics and
Components
By
Jaychandran
Introduction
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 19591985.
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: Wikipedia
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
Types
Opening 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 Drive
Price opens above/below previous day value area
and proceeds in a unidirectional way without any
retracements.
Open Rejection Reverse
Price 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 Drive
After the market opens, the price tests in one
direction and then sharply turns around and
drives in the opposite direction.
Open Auction
OAIR - 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 Day
This 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 Day
The 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
control
This 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 Day
The 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 Distribution
A 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 Day
Uni-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
Area
Value 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 Tails
Single 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 Tails
Single prints left at the top of the profile by the
action of the long term seller.
Fast price rejection at top.
Distribution Shapes
Price 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 Activity
Responsive buying - When the
Traders decide to buy below the
value area.
Responsive selling When the traders
decide to sell above the value area.
Initiative Activity
Initiative Buying When the traders
decide to buy above the value area.
Zzzzzzzzzzzzz
Initiative Selling When the
traders
decide to sell below the value
area.
Quotes
If 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
