Market Profile Basics
Wednesday, January 4th, 2012We appear to have piqued the interest of a few of you this week by adding the Market Profile charts to our reports. Market Profile is a charting method owned and copyrighted by the CME Group and developed in the 1980s by a chap called Peter Steidlmayer.
Steidlmayer was a trader in the Grains Pits and realised that the market was an ordered “auction” process made up of a number of different players, all of whom had various levels of interest in the short or long term direction of the market. The “Locals” like himself weren’t too bothered by long term moves and merely traded “in and out” over the course of the day. It was the “Commercials” or long term players such as Banks, Funds and (in the case of commodities) End Users, who had an interest in moving markets, and keeping these moves going in their favour!
Market Profile attempts to track this auction process on a daily basis to discover which group is running the market at any moment, and therefore whether price moves are likely to be sustained or reacted against with opposite trade. It is a popular tool with day traders in Chicago, and increasingly well utilised by London’s Prop trading community.
We have long used Market Profile as an additional tool to our daily, weekly and intra-day Candlestick analysis, but have steered away from talking about it for the sake of keeping the reports simple.
Now let’s look at a Profile and some of the terminology:
The Profile (see the graphic below) is made up of a series of letters, each letter representing a half an hour period over the course of the day. Instead of spreading across the chart from left to right like a traditional (30 minute) Bar or Candle chart the letters, known as “TPOs” are pushed as far to the left hand side as they will go, and this produces a distribution curve, effectively showing what price most trade has gone through at.
The longest line of letters closest to the centre of the day’s range is known as the “Point of Control” (D on the chart below) and is, effectively, the “mean” average price, sometimes known as the volume node.
If you move 1 standard deviation either side of this price you get the “Value Area”, so we’re not just talking about a price at that the market gravitated towards, but a “comfort zone” for price. Traders watch the previous day’s value area extremes (C and E on the chart below) carefully and this is one of the reasons we are now going to post the previous day’s Market Profile in our reports.
This means there are three more levels (on top of the previous day’s high, low and close) that active day traders will watch out for.
Another thing to watch for on Profile charts is occurrences of “Single Prints”. The chart below shows a “Single Print vacuum” in yesterday’s “K” period, when the market spiked higher and sustained the bid. This gave us support at 111.58 today in the Feb ‘12 Brent Crude, and as it turned out we spent very little time below here before rallying smartly.
The market tried unsuccessfully to “raid” yesterday’s Value Area, but this was rejected and we “accepted” the new higher valuation.
We did write a Blog about this a few years back. Here is the link:
http://www.futurestechs.co.uk/blog/2010/01/06/technical-analysis-tutorial-market-profile-1/
We will also expand upon our interpretation of the Market Profile in our daily reports from now on, as we have the charts to illustrate what the heck we’re on about!
In the meantime please do drop us an e-mail if you have any questions (if you’re a client, of course!!).
