Market Profile

The information herein is taken from Jim Dalton's Field of Vision course

For more info and recommendations, visit www.jimdaltontrading.com

Refer here for terminology; www.jimdaltontrading.com/glossarypage

The first time most of you see a market profile it will likely look like this, and be very daunting.

Market Profile is a tool used to visualize the transactions/trades happening in the market. It records the net effect of the two-way auction process and is a way to organize data.

Here we have a standard normal distribution;

You can see that when you look at the Market Profile, it is very similar - turned on its side. If the market profile resembled a perfect bell-shaped curve, that would be a market that was perfectly balanced. What this allows us to do, is observe how far out of balance the market is in either direction.

In order to form a distribution curve, you need a constant and a variable. In the Market Profile, time is our constant (think; 30 mins is as long as the next 30 mins, 1 day is as long as the next day etc), and price is our variable. (for more info, search; Peter Steidlmayer)

More letters in a row represent more time spent at that price. How much time was the auction at the lower or higher prices? perhaps rejected pretty quickly.

Analogy; In business, if you raise the price of your product, and sales (volume) drops off, market share drops off etc, you lower the price of your product. People often forget this, and the impact of volume. You might sell something at that higher price, but the volume will often drop off. You need context.

Construction of the Market Profile

Each letter is called a 'Time Price Opportunity' or TPO. It is a way to record the data - don't get caught up with the letters. It doesn't make any difference whether it's an A, B, or a C.

Lets say our Market Profile is set up in 30 minute blocks (remember, time is the constant).

For the first 30 minutes of trading, we might use the letter A. Any time the market trades at a given price, we put a letter at that price.

Initial Balance - The first 2 periods of the day (roughly). What happens after the market opens. It is a foundation for the day. As the day goes on, we want to see if we are getting outside of that range.

Buying and Selling Tails - Shows that participants were aggressive at that level. If there is no buying tail, it can mean the auction isn't completed. Sometimes there's so many short sellers, that when the market goes down they're buying to cover their shorts. Sometimes the market has to rally before it can break.

Point of Control - The longest line of the period. It represents the fairest price to do business for that period. It takes time to raise or lower the fairest price (PoC) to conduct business. If you move away from the PoC on high volume, the odds are less of returning to that PoC price.

If the PoC is migrating lower throughout the day, you have sellers selling into the market - perhaps selling on every rally. You see the fairest price being pressured lower. Sellers will disguise their intentions and so their orders are spread out over time. You may see PoC migrate lower and then a sudden sell off due to the realisation from traders as to what's been happening.

When PoC doesn't migrate lower, but price goes lower, sellers get short in the hole - short at bad prices - the 'shorts are trapped.'

Value Area - Where 70% of the periods trade takes place.

We trade value, not price.

One Time Framing - When one TPO (i.e. if C does not take out the low in B etc) does not take out the low of the prior period - either stays within the range or takes out the high. don't fade the market if one time framing.