What Is Market Profile Trading?

Market Profile originated from the traders and brokers on the floor of the Chicago board of trade. Peter Steidlmayer a floor trader himself wanted a more useful way to observe and record price action so he created the Market profile graphic or time price opportunity chart. He was assisted by other floor traders like Steven B. Hawkins. I did a really cool interview with Steven on my Diary Of Trader Podcast series that is worth listening to for a deep dive into Market Profile.

So what is Market Profile?

In simple terms, it takes price, volume and time and organizes it into a bell curve or distribution curve making it much easier for a trader to visualize and understand the behavior of any market. Traders on the floor often traded multiple markets, so you can imagine how useful such a tool would have been.

So how does a Market Profile Graphic Work?

Market Profile first analyses price distribution. It does so by looking at how often the market traded a specific price level. It takes this information and puts it into a profile that resembles a Bell Curve. A trader can now see the price level where the highest amount of trading took place and the lowest.

In order to create this Bell Curve of price distribution it uses what's called TPO's. A good time to read What Is TPO Charting? These are auctions made up of letters, A,B,C,D...Z, a,b,c...etc. These letters are traditional 30 min auctions but they can be any time period, for example, A period represents 1 hour of trading or it could represent 30 mins. The entire profile will be made of 24 auctions that equals 1 day of price distribution. We call this a daily profile. See example below.

Once we have our bell curve distribution of price, the trader can now identify the value area or what is called the fair price. This is where 70% of all the trading took place. These are the prices that most traders considered fair to do business at.

The next step in TPO charting will be to break this down even further to understand where price spent the most time in other words where the highest volume of trading took place. This is also called the Point Of Control or POC.

The final step is to determine the tone of the day. This is normally set in the first hour of trading. So this period is called the initial balance.

You are beginning to see how powerful this would have been in the 1980's when electronic trading was still in its infancy.

How do traders use Market Profile?

There are a few ways that traders can use Market Profile to make trading decisions. The first is trying to determine the lowest and highest fair price to buy or sell from. This is often described as a value trade. Trade will sell value high (the highest fair value price) and buy value low (the lowest fair value price) and depending on direction will sell at value high or cover at value low in the case of a short. There is a lot of evidence to suggest that this type of trade works out 60% to 70% of the time.

Traders also look for price rejection in key areas when using market profile. A price rejection can be visualized as a single line of TPO's suggesting that competition at those prices was so extreme that new TPO's could not be formed at those prices. This is a sign a larger trader sometimes referred to as other timeframe trader has entered the market and is competing for the inventory.

Traders may also use market profile to trade mean reversion strategies. So for example, if prices are outside the value area, meaning they are unfair, a trader may decide to look for a return to Equilibrium by buying or selling the unfair price with a view that it will return to fair value or equilibrium.

Market Profile is an amazing piece of kit for a trader. It is largely overlooked and in many cases simply unknown to new traders. In my opinion a trader who starts with Market Profile as a way to organize price and volume data will shorten their learning curve by 12 months. That's because Market Profile is rooted in core principles that govern the market and less focused on abstract technical strategies. I am not saying candlesticks are obsolete, it just takes a lot more time and effort to visualize the same information.

If you want access to a Market Profile tool for MT4 join my discord server or just fill this form and I will send you free information on how to access this market profile for your MT4 platform. It's not available for MT5 at the moment.