MARKET PROFILE

Developed by J Peter Steidlmayer in association with the Chicago Board of Trade during the 1980’s, Market Profile is a fairly unknown but highly powerful method of acquiring an in-depth understanding of market behaviour. This is because it organises the same data shown in bar and candlestick charts in a way that allows the trader to identify whether buyers or sellers are in control of the market, what the market’s fair value is, and the direction of price movements – all vital information to enable traders to manage risk while maximising profits.

Market Profile charts are comprised of Time Price Opportunities (TPO’s) which represent prices which have traded within a particular 30-minute time period, each period having its own separate column of letters. Therefore, as the following chart below illustrates, Market Profile initially records the same information as a 30-minute candlestick chart, replacing the familiar candlestick image a column of letters from high to low:

However, the genius of Market Profile lies in the fact that it uses this same information, but presents it in a different way by condensing these columns of letters to the left-hand side, stacking them up on top of each other to form shapes such as the ones shown in the following chart below:

This generates a series of Normal Distribution or Bell Curves which is the specific shape upon which Market Profile is based – as indicated by the red outline shown in the chart above which shows the Market Profile for the EURUSD futures contract on October 3rd. What this implies is that together with identifying the day’s range of prices easily from the high to low, a Value Area is also generated – a range of prices in which approximately 70% of trades take place. This is indicated above by the vertical blue line on the right-hand side of each profile above.

However, this classic shape rarely occurs within financial markets. But the power of Market Profile lies in the fact that it uses the normal distribution to indicate how prices are distributed and skewed, and at which prices the market traded most – providing important information about what prices are doing in relation to value, and where prices may be heading in the future.