The definition of the Market Profile™ is a visual representation to evaluate fair market value in real time expressed in statistical distributions.
Market Profile™ helps traders organize market and price activity. Using the statistical bell curve display the Market Profile™ that forms visualize market value areas through an intra-day charting technique in accordance with the price/time relationship as Price + Time = Value. The distribution is developed through TVPs (time variable profiles). Traditional candles and bar charts develop on the Y axis in a linear fashion based off of time. The Market Profile™ develops both on the Y axis and X axis to form graphical representations of market activity in the form of distributions. Which inherently displays more information.
You will need tools to generate Market Profiles™ such as Capflow32 along with a datafeed. Other applications can be found on the web that vary from free to paid. Capflow32 is the original and still to this day remains the most well regarded Market Profile™ tool. This is because other Market Profile™ applications do not have all the features Capflow32 offers. See for yourself in a personalized demo.
Explanation of Market Profile™ Charting
Charting Market Profiles™ is traditionally plotted in 30 minute time intervals similair to a 30 minute bar or candlestick chart. Each plot,building block, or letter print is referred to a “Time Variable Profiles” (TVP) that represents the natural market auction process.
The graphical or visual representation traditionally forms a bell curve from statistics. The typical distribution is called a normal distribution and also technically known as gaussian distribution.
The Market Profile™ display shows a variety of curves in the present day that can be used to identify the point of control. The point of control is market activity that is included in the first standard deviation and is interpreted as fair value.
The distribution is developed through TVPs (Time Variable Profiles). Traditional candles and bar charts develop on the Y axis in a linear fashion based off of time. The Market Profile develops both on the Y axis and X axis to form distributions. Which inherently displays more information.
History of Market Profile™
Created by J. Peter Steidlmayer and introduced to the public in 1985 as a graphical feature to the CBOT product, the CBOT Market Profile (CBOTMP1). Mr. Steidlmayer pursued a way to evaluate fair market value in real-time. A charting technique that combines the concept of value investing by Graham & Dodd, the bell curve from statistics, and John Schults minimumum trend.
In early 1986 Mr. Steidlmayer and Kevin Koy started “Market Logic School” to teach profile trading. Coincidentally at this time Steven B. Hawkins took a job at a small boutique firm in Chicago. While working at the stock brokerage house Mr. Hawkins would go between floors trying to understand Market Profile™ when Mr. Steidlmayer would give class. Mr. Hawkins started working with the school and would help individuals with questions. Eventually helping larger participants and institutions gain an understanding of Market Profile™ methodology.
Since 1991 Steven B. Hawkins has been working with Mr. Steidlmayer on developing software. There has been two major iterations of the software with the lastest one called “Capital Flow 32”, also known as Capflow32.
How to Read Market Profile™ Charts
Reading Market Profile™ charts will come in two parts and will subsequently have additional parts which are:
- Identifying Current & Developing Market Profile™
- Identifying and Reading Foreground and Background Market Activity
Identifying Current & Developing Market Profile™
Developing Market Profiles™ have the possibility to form 321 or 313 distributions. Identifying these distributions on a day-by-day basis may be helpful for intra-day traders to avoid normal distribution days or “chop” and to really capitalize on trending days or 321 distributions. Below are some examples of possible distributions.
figure 1: Normal Bell Curve
Figure 2: 3:2:1 up
Figure 2: 3:2:1 down