Market Profile™ is a unique charting display that visualizes market activity by combining price and time that allows traders to visualize and evaluate fair market value in real time expressed in statistical distributions as it relates to market activity for both foreground and background perspectives.
It is the product of a professional floor trader’s ability to communicate the pit trading experience symbolically in chart form. Mr. Steidlmayer’s pioneering work with the futures markets in the 1980’s found the natural organization of the market in accordance with time price/time relationship. It is the foundation for the Market Profile™ charting technique that is used by traders to analyze the markets. It is a time price opportunity tool that is used to identify potential trade opportunities through the use of statistical bell curves.
Using the statistical bell curve to generate displays for market activity. Market Profile™ units visualize market value areas or the Point-of-Control (POC) based off of the price/time relationship as Price + Time = Value. The distribution is developed through TVPs (Time Variable Profiles) on the standard 30 minute interval. 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. This allows traders to trade with Market Profiles™ in a variety of ways and through a reliable framework that one can use to measure market activity objectively.
In other words, the standard 30 minute bar chart automatically moves to the right to start a new bar every 30 minutes. The horizontal dimension of this chart is automatic and dicated by chronolitical time, not market activity. The involuntary nature of this action inhibits the ability of the bar chart to communicate market activity in the horizontal. This limitation is analogous to trying to communicate detail or nuance using only nouns and verbs but no adjectives or adverbs and is less than adequate communication.
The Market Profile™ has no chronological restriction. It expands horizontally only when prices repeat. Horizontal expansion of the chart reflects only market activity, never chronological activity (the passage of time). Market Profile™ more clearly illustrates to the trader a new directional move beginning in a dead market or a directional move losing momentum. The feel of the market is objectively illustrated using the horizontal dimension.
You will need tools to generate Market Profiles™ such as Capflow32 along with a data feed. Other applications can be found on the web that vary from free to paid. Capflow32 is the original Market Profile™ software 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. Capflow32 is well supported and continues to be refined in both software technicals and market measurement methodology. 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.
caption: Split vs composite Market Profile™ showcasing a typical bar chart and how it is overlayed to create the Market Profile™ visualization.
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.
caption: Normal 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 which represents 68% of market activity and volume and is interpreted as fair value.
The distribution is developed through TVPs (Time Variable Profiles) that are generated by market activity from price at time. Traditionally, it was based off of John Schultz and the minimum trend units. The key idea is Schultz defined the minimum trend as the smallest unit of meaningful market activity. This does not mean focusing on each and every tick. It means the smallest unit of time and price activity that could develop into a vertical move.
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 minimum 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 latest 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™
- Reading Foreground and Background Market Activity
Identifying Current & Developing Market Profile™
The developing Market Profiles™ have the possibility to form 321 or 313 distributions. Identifying these distributions are key to identify opportunities for trade and on a day-by-day basis are helpful for intra-day traders to avoid normal distribution days or “chop”. Capitalizing on trending days or 321 distributions is important. Below are the classic examples of 313 and 321 distributions.
caption: 3:1:3 Normal Bell Curve
caption: 3:2:1 Up
caption: 3:2:1 Down
Reading Foreground & Background Market Activity
To read foreground and background market activity with Market Profiles™ you will need to have some understanding of Auction Market Theory. Understanding the four steps of market activity is possibly the most important skill a trader must learn and apply to be successful. The four steps are:
- Series of prices in one direction
- Trade to a price to stop the market
- Develop around that stopping price
- Move to efficiency (retracement)
With this knowledge we can better read foreground and background Market Profiles™ to make better trading decisions by understanding the limitations of the foreground and possibilities of the background. Learn how to measure foreground and background market activity with a personalized demo today.
That concludes what Market Profile™ is and how to initially read Market Profile™ charts. If you have any questions please feel free to contact us.