Market Profile was pioneered by Peter Steidlmayer a local trader from the Chicago Board of Trade. Market profile attempts to bring the information a local hears and sees to a chart. The Market Profile is not a trading system, but rather a way to present data. It’s another way to display market information that can be used as a tool to make better, more informed, trading decisions.

Not all prices are equal. Some prices do attract more activity than others and this is clearly displayed when using Market profile charts.

The basic data for constructing the market profile is normal half hour data. Each and every half hour range is assigned a letter corresponding to a particular time period. It’s no coincidence that it is the same lettering system the CBOT use to represent the half hour trading segments. It starts with the letter A at 8:00 am and changes to B at 8:30, C is 9:00 and so it goes. Some letters that can confuse, such as “O” are left out and now that we have 24 hour trading we use the lower case for the evening trading starting at 8:00 pm with a lower case ‘a’.

Market profile was designed in a day when most commodities traded one session per day and that session lasted for between 6 and 8 hours. It can still be used in today’s markets, especially in the markets that still don’t trade on a 24 hour basis. Market profile was adapted in the late 1980’s to suit the new 24 hour markets, but the original principles are still sound.

Fig 95

The chart above is a normal half hour bar chart, except the usual lines which represent the range traded during that half hour segment have been replaced with letters.

The profile chart is constructed by plotting everything defaulted to the Y axis, the vertical axis, as in the example below.

Fig 96

This chart is an example of a daily profile covering a six hour time frame. It demonstrates how the market distributes, quite normally, against price over time. A normal distribution curve is beginning to emerge, even though there’s a slight skew to the high side. In fact we can use that skew to build a case for higher prices.

Point of Control

The median price at 4193 is referred to as the point of control. It represents the most traded price, which tends to imply the market will return to this price quite often.

Value area

If we refer to the point of control as best value, then the first standard deviation of the curve is referred to as a value area. The value area is made up of 70% of the price points, which are called time price opportunities or tpo’s. The value area is determined by counting progressively away from the point of control until 70% of the price points are counted.

Volume

At the end of the day the price profile will look almost the same as the volume profile. The highest volume is generally recorded at the point of control for the session and the lowest volumes are recorded at the extremes.

Time Price Opportunity

Each letter at each price is a time price opportunity or a tpo. It doesn’t matter whether the market actually traded at that price or not, as long as it traded at the high and the low for the half hour period, then every price in between records a tpo, a letter.

Initial Balance

The initial balance is the opening range of the market and although it varies from commodity to commodity, for stock indices it generally refers to the first hour of trading.

Fig 97

The yellow horizontal line is the point of control.

There are 8 tpo’s at the point of control.

The blue vertical line is the value area.

The red vertical line is the initial balance.

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Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.