What Is TPO Charting?

In this post I am going to explain to you what TPO charting is and why as a trader you should be using TPO charting, at the very least to qualify every trade you make. As always, I am not going to waste time, let’s get straight into the post. 

What is TPO charting? Explained.

TPO is short for time price opportunity. You may also hear TPO referred to as Market Profile. If you have not watched my video on “what is market profile?” then now will be a good time to bookmark it and watch it straight after reading this. 

So, what does TPO (time price opportunity) mean? Let me explain. Markets are effectively auctions, buyers want to buy the lowest bid and sellers want to sell the highest offer. Depending on the overall interest in the asset being traded, sellers will be able to achieve their price or buyers will achieve their price. 

If the market spends a lot of time filling offers from sellers to buyers then we can assume that there is a lot of demand for the asset and this is reflected by the amount of time the market spends at the highest offers. This is the time part of the equation. 

By the same token if buyers are willing to pay the offer, then we expect that future sales will be done at higher prices. If this is not happening then we can assume that at the very least the number of buyers are equal to sellers, this is keeping price steady, in other words prices are considered to be fair or trading a fair value or in a range in the auction period. This is the price part of the equation. I hope I have not lost you, if I have then don’t worry here comes an example. 

Let’s take the SPX or S&P500 daily TPO chart or daily collection of TPOs represented as letters. These don’t have to be letters, they could be blocks or anything else you want them to be. Peter Steidlemayer, the creator of the TPO chart, thought it was a good idea to make them letters. If you want me to do a video or post on who Peter Steidlmayer was and his impact on floor trading then let me know in the video comments. Back to the example.

You can see that when the TPOs are collapsed they form bell curve shapes representing the total distribution of price within a specific day. We can tell very quickly where the market spent the most time by thickness or bulge in the profile. The longer the line of TPOs horizontally, the less price movement there was at that given time. 

This is a super cool observation, right?! The kind of depth that most traders can only dream of visualizing if you are using candlestick charts alone. In the below example we can see we have one major bulge in the distribution and price closed above the bulge. So what does this mean?

Since, price is higher than the bulge, then the bulge has to buyers achieving bid prices, in other words absorbing all sellers and eventually pushing price higher as demand exceeds supply. So the opportunity lies in buying because the market spent the most time filling bids and price moved higher extending the range. This is why Steidlmayer called it time price opportunity charting. 

So a TPO in essence is one letter representing a unit of price movement for example, in a 1 hour auction of the S&P500 Emini futures, let’s say A period, each A print represents a quarter increment price change. So for example if price moved from 5400.00 to 5400.25, then we have one TPO letter of A since we are in the first hour of trading. Once that first hour is complete we will move to B period and start to print Bs. It’s pretty simple. 

So what does a TPO chart tell you that a regular candlestick chart can’t?

Well, it’s a question of how much market depth you can see. If you want to see just basic high low close price data, in other words a snapshot data, then candlesticks are perfect. This kind of data rarely gives you information on the best prices to place bids or offers, there isn’t enough data or depth to do this. This means your error rate will be higher especially if you are trading with leverage and require tight stops. So you may want t consider using TPO charting.

On the other hand if you have a TPO chart you have a lot more market depth. You can visualize volume by observing the bulges in the TPO chart. This extra depth will help you with trade location. If you have been following so far or you are a genius, you would have noticed that the daily profile is actually a daily candlestick and the TPOs are telling you what price did in that profile period, so you have enough depth to see where each side was most active given you execution reference points. 

This is represented by what happened the next day in our example. You can see in S period the price auctioned lower into the bids from the previous day and then rebounded off that price area and ran straight up to the offers from 2 days prior and then auctioned back down again. A savvy trader with this depth information would naturally place orders in and around the bulges in the profile. This additional information would not be available on a candlestick chart. 

It will be healthy to remember that successful trading is not about being extra smart. The most successful traders are never the smartest, they are the traders with the most market depth. Professional traders within market making institutions have book depth, transaction data from credit and debit card purchases and margin data from bank deposits, so with all this information how can they lose money? 

So if you can build a trading tool stack based on how much market depth you want to achieve, then your trading will get more successful over time. That's why as a trader TPO charting is very important to me.

So ask yourself, like Morpheus asked Neo in the Matrix. "How did I beat you? Do you think it has anything to do with my muscles in this place? Is that air you think you are breathing? "

That scene is my favorite scene because it personifies losing traders in a nutshell. Till my next post Adios!