What is the Market Profile?
Market Profile offers a fresh, three-dimensional way to look at trading, going beyond the usual price-focused charts like bars and candles that most traders are familiar with.
It brings Price, Volume, and Time together on one chart, providing a richer, fuller picture of market activity.
Here’s how it works: Price moves up and down on the vertical (Y) axis, Time unfolds along the horizontal (X) axis, and their interaction reveals Volume directly on the chart.
Think of the market like a live auction, where buyers and sellers are constantly vying to get the best price. This tug-of-war helps determine the market’s true value at any given moment.
To really get the hang of Market Profile, it’s crucial to grasp three key ideas:
- Price signals potential trading opportunities—but remember, not every price point really represents true market value.
- Time gives these opportunities a context, helping us understand how long they might last.
- Volume shows us how successful those opportunities are by indicating how many trades are happening.
By understanding these aspects, traders can see beyond just the price movements to grasp the market’s actual dynamics, including who’s in control (buyers or sellers) and where the market might be heading next. This approach doesn’t just chart where the market has been; it helps reveal where it’s likely going, offering a strategic edge in decision-making.
Traditional Charts
In the chart to the left, we see minute bars which tells us about the movement of the underlying in the color of the bar and a few patterns of the bar called candlestick patterns
In candle sticks chart patterns we focus on 4 parameters- The Open, High, Low and the close of the bar. The body of the candle and the wick of the bar are important readings. The most important one is the close of the bar. If the close of the bar is higher than the open of the bar , then the candle color is chosen as green. If the close of the bar is lower than the open then the candle color changes to red.
MarketProfile Charts
In the Market Profile chart, we represent every 30 minute period of the day as 1 TPO or 1 Time Price Opportunity. Accordingly if the markets open at 09,15 am , then every 30 minute period will have an Alphabet attached to it. A would be for the period between 09.15 am to 09.45 am. B for the period from 09.45 am to 10.15 am, C for the period between 10.15 am to 10,45 am and so on.
As you can see in the chart above there is a lot more information available to trade and is more than the Open , High, Low and close of the bar. This is a truer representation of the process of the buying and selling which has occurred in the market. You can also now find out where the market traded the most and which part of the days were dominated by more Buyers that sellers or mor sellers than Buyers.
A more comprehensive write up is at – https://vtrender.com/what-is-the-market-profile/
Where do I get these chart?
At charts.vtrender.com
Terminology
Timeframes: The market profile recognizes five distinct types of individuals who operate in the markets. These are a) Scalper, b) Day trader, c) Short-term player, d) Intermediate-term player, e) Long-term player.
Each of these individuals have a perception which they bring to the market and this perception helps move the markets. The scalper and the day trader are responsible for maintaining the liquidity of the markets.
Value: The perception which all of the above-mentioned players bring to the markets after the bid-ask process helps build what we call “value”. Value is different for each of the mentioned players and they will move the price up or down depending on this perception. For example, if the intermediate term seller thinks that the market is overpriced he will jump in to move price down. On a daily timeframe, the period where 70 % of the volume action takes place is defined as the value area. Similarly, we have a weekly and a monthly value area.
Buyers: Individuals of any timeframe who feel that the present market is underpriced and therefore less in value. These individuals will move price up.
Sellers: Same role as the above except they think that the market is overpriced and will move the price down.
Auction: The activities of buyers and sellers recorded through the bid-ask process is called auction. The auction results in the formation of the value area which the buyers and the sellers agree as the fairest value for the day. As the auction moves away from the value area, buyers and sellers change their definition of value. If higher prices are agreed upon in the auction, the value is supposed to move higher and consequently, the market moves up.
Selling tail: The failure of the auction at higher levels to attract new buyers results in the sellers swiftly moving in forming what is called a selling tail.
Buying tail: The same activity as above, but in the opposite direction. The bigger the size of the tails the more aggressive is the action/ reaction.
Point of Control ( POC) – This is the region where the most activity occurs during the day and has a high volume around it as a result. This POC is also considered the fairest price of the day or the week. The POC is measured across daily, weekly, monthly and even yearly time frames.
Developing Point of Control – The POC of the current day developing
Excess: A buying tail or a selling tail is also called an excess . The excess is the end of one auction and the beginning of the other.
Poor Lows/ Highs: This is an area which puts an end to an existing auction through exhaustion rather than an excess. It is also called an unfinished auction and price returns back to this point for a fresh probe after a small pullback.
Pull back low/ high – This is a very important concept in a trending day especially where the market recovered from an initial probe midday to check on old inventory. Participants use the pullback to adjust positions for the trend of the day. The Pullback high/ low is important for the rest of the sessions also as it is associated with inventory.
Bell curve: The proper statistical distribution where the POC is placed in the middle of the profile chart and 68.7% of the day’s trading Volume is on either side of this POC. On the charts, it looks like a Bell kept sideways and hence called a bell curve
Different day types – Covered in detail here at – https://vtrender.com/market-profile-day-types/
Vwap – This is the weighted average price of the movement of the instrument. It is calculated by using the ratio of price multiplied by the number of shares divided by total shares traded
Close: The final auction of the day
Open The first auction of the day. If there is a large difference in the open and the close then again the perception of value in the market has changed. More types of open are at – http://vtrender.blogspot.com/2011/02/market-profile-glossary.html
Balance: A region where trade is contained and the price does not move vertically. This area is also called Value. A balance occurs in all timeframes. A balance is also the end of an auction. Excess and balance are considered opposite terms in an auction
Imbalance: The opposite of a balance. Price breaks away from a balance to form an imbalance. Either the Buyer or the seller is more aggressive when an imbalance happens
Initial balance: The first 60 Minutes of a trading day is called the initial balance. As the name suggests, the IB tries to set up the day’s balance or define the value for the day.
Range extension: The movement away from the initial balance is called the range extension. Success or failure of the range extension gives us an indication of the type of day unfolding.
Spike – The movement in the last hour of the day is called a spike. A spike is an auction which is not complete and hence unverified. This happens mostly due to exchange closing hours. The next day needs to be watched for confirmation/ rejection of the spike. More – https://vtrender.com/spike-rules/
Initiative activity: Control by the buyer or seller in the trading day is called initiative activity. As the name suggests, the action determines conviction on the part of the players to move the market. The strength of the initiative activity is useful to determine which party will have a role to play in the day
Responsive activity: This is a response to Initiative activity, the strength of which can determine changes to the trend of the timeframe.
One Time Frame behavior: A trending situation or an imbalance driven by Initiative activity
Exploring More on Market Profile
You may wish to check a few more writings on Market Profile on this blog. Look up for more Intraday Trading strategies and Other Market Profile trading strategies – http://vtrender.com/random-musings-on-market-profile/
There is also the newest information on the evolution of Market Profile at – https://vtrender.com/market-profile-the-evolution/
if you want to explore ways to utilise the MarketProfile in live market hours, we have a hand holding program for you at – https://vtrender.com/mentorship/