The Market Profile is a unique charting tool that enables traders to observe the two-way auction process that drives all market movement—the ebb and flow of price over time — in a way that reveals patterns in herd behavior. Put another way, the Profile is simply a constantly developing graphic that records and organizes auction data.
Scientists from all fields analyze information using the time-tested “bell curve.” TheProfile is based on the same principles; it compares price (the variable) on the vertical axis to time (the constant) on the horizontal axis in order to create a distribution over the course of any trading day. Whether you’re trading ETFs, stocks, or futures, this time sensitive, ever-evolving database provides real‐time insight into the forces shaping market activity.
The basic auction building block recorded by the Profile is the TPO, or “time-price opportunity.” The three components of the TPO are:
- Price—advertises opportunity; there’s a clear distinction between price and value.
- Time—regulates all advertised opportunities.
- Volume—measures the success or failure of these advertised opportunities.
The Market Profile offers a charting approach that is markedly different than bar or candlestick charts, which have been used historically to graph market activity. The following graphic provides a visual comparison of the two methods to illustrate the vital differences in the way they portray market information. A conventional 30-minute candlestick chart is on the left; the Market Profile, presented in 30-minute periods, is in the center; and on the right is the Market Profile in its final composite form.
Candlestick Chart vs. The Market Profile
Notice the difference in the candlestick chart on the left, versus the composite Market Profile on the right. The Profile’s unique construction produces a display that contains structure. It reveals far more information than the one – dimensional view inherent in conventional candlestick or bar charts, which do not expose character of the market – where the majority of business took place, at what price levels, and for how long. The Profile conveys significantly more information that provides the experienced observer with clues about both the complexity and the nuances driving the ongoing auction.
The structure depicted by the Market Profile reflects market-generated information; it represents the actual buy and sell orders transacted in the marketplace. This allows us to interpret which time frames are participating, and provides insight into inventory conditions, completion, emotional trading, and other vital cues that are not apparent in conventional charting methods and price-derived indicator analysis.
The Market Profile is much more than a collection of individual data points. It graphically conveys complex information to reflect a composite, broad perspective of the market as a whole. As traders, we have the ability to more precisely observe the flow of the market’s auctions through this remarkably useful tool. The detailed examination made possible by the Profile is distinctive, and savvy traders who take the time to learn how to read its nuanced facets are able to decrease risk and improve the odds of success.