Introduction

In the early 1980s, Peter Steidlmayer, who held a director role at CBOT, had the vision of increasing transparency and accessibility to financial markets. To this end, he devised the concept of ‘Markets Profile’ in a bid to invite new traders onto the exchanges and create an upswing in revenue. Steidlmayer was confident that more widespread access to these markets would lead to greater economic prosperity for all involved.

Steidlmayer’s proposition was met with resistance by those trading in the exchanges, worried that the information provided would only benefit floor traders. To counter these fears, he put forward a system which used the bell curve to display data from throughout the market and show what was occurring during active trading.

Retail traders often feel intimidated by the Market Profile chart because of how difficult it is to interpret distribution of letters. However, understanding this tool is far more simple than it appears. Tied closely with Auction Market Theory, a few building blocks will help you to quickly analyze market data once comprehended and explained in this article.

Evaluating markets swiftly is achievable by studying past distributions.

There are roughly two types of traders. One group, uses Market Profile as an additional instrument to help form decisions alongside price action and orderflow. The other faction dives much deeper into the profile, delving into minor particulars such as rotations and turning points that they use predominately when trading.

Peter Steidlmayer classified the market participants into two groups in addition to creating the market profile. This is essential because, as a result of Market profile opening and day kinds, we can now identify which market participants are in charge. Different market participants are trading on various timelines with various sizes and have different goals.

Rapid market assessment is achieved by studying past distributions.

There are fundamentally two types of operators. One group uses Market Profile as an additional tool to help make decisions along with price action and order flow. Another faction delves much deeper into the profile, delving into minor details such as rotations and inflection points that are predominantly used when trading.

Peter Steidlmayer classified market participants into two groups, in addition to creating the market profile. This is essential because, thanks to the types of opening and day of the market profile, we can now identify which market participants are in control. Different market participants operate on different time frames with different sizes and have different objectives.

Short Time Frame Traders (STF)

Traders that operate on shorter time sframes Steidlmayer referred to small, frequently retail, but even proprietary traders. These day traders and scalpers are unable to move prices because they lack the time and resources. Because they believe it to be a fair value, they spend the most time trading with one another at the Point of Control.

Long Time Frame Traders (LTF)

The actual market movers are Long Time Frame Traders, often known as Other Time Frame (OTF) traders. They don’t care about intraday price changes, instead, they hold open positions for a number of days, weeks, months, and even years.

Simply put, compared to STF, banks, hedge funds, and other institutions have considerably higher capital. They open sizable holdings that affect market momentum and affect price.

They require favorable prices in order to open a position, they cannot just do it at their discretion. They might easily be front-run and would incur significant slippage if they entered at any point. They must therefore wait and gradually strengthen their positions. Markets typically trend as a result of this.

recognizing these two participant types becomes important, when we consider different day kinds.

Introducing the Market Profile

Market profile is a method of organizing market data that professional traders use to understand the ongoing auction process. It is a powerful tool that provides traders with a clear picture of the market and helps them identify key areas of support and resistance. Market profile is not a trading system or strategy, it is a tool that helps traders see trends and ranges in the market, providing context for market activity. The market profile is based on the idea that prices tend to cluster around certain levels and that these levels are significant for traders.

One of the significant advantages of market profile is its flexibility. It can be applied to any market, such as Forex, Futures, Cryptocurrencies, or Stocks, making it a versatile tool for traders. The market profile uses TPO Charts to display the data, which stands for Time Price Opportunity. TPO is a building block of the Market Profile chart and represents a point in time where the market traded at a specific price.

TPO charts show traders the distribution of trading activity throughout the day, which helps them identify important areas of support and resistance. The default setting for TPO is in 30-minute intervals, and prices are only displayed on the chart if the market returns to them during another 30-minute period in the trading day. This allows traders to see the distribution of trading activity throughout the day, providing them with a better understanding of where the market has been and where it is likely to go in the future.

Overall, market profile is an effective tool for traders that provides a clear picture of the market, allowing them to identify key areas of support and resistance. It can be used in any market and uses TPO Charts to display the data, providing traders with valuable insights into the market’s activity.

Market Profile Point of Control

The Point of Control (POC) is a key concept in Market Profile that represents the price level where the most trading activity occurred during a specific period of time. It is considered as a significant price level because it is the price level that is closest to the center of the value area, which is an area that represents the range of prices where the majority of trading activity occurred. The greater the number of TPOs (Time Price Opportunities) that make up the POC, the more important it becomes and is often referred to as a prominent Point of Control.

POC is often used by traders as a key level of support and resistance. When the market is trading above the POC, it is considered to be in an uptrend, and when the market is trading below the POC, it is considered to be in a downtrend. Fresh and untested POCs are considered the most valuable, as they are key levels of support and resistance that have not yet been broken. These are known as the Naked Point of Control (nPOC). These points can be correlated with supply and demand areas' breakouts when plotted on a candlestick chart.

Traders also use the POC to identify the directional bias of the market, whether the market is trending up, trending down or ranging. When the market is trending up, the POC will typically be found at the bottom of the value area, and when the market is trending down, the POC will typically be found at the top of the value area. When the market is ranging, the POC will be found in the middle of the value area.

In addition, traders use POC as a key level to place their orders, either to enter or exit the market. For example, if a trader is looking to enter a long position, they may place a buy order near the POC, as it is considered a key level of support. Similarly, if a trader is looking to exit a position, they may place a sell order near the POC, as it is considered a key level of resistance.

Overall, The Point of Control (POC) is a significant concept in Market Profile that traders use to identify key levels of support and resistance, directional bias of the market, and to place orders. It is considered more significant when there are a high number of TPOs that make up the POC, and fresh and untested POCs are considered the most valuable.

Initial Balance

The Initial Balance (IB) is a range of prices that are established during the first hour of trading after the market opens. This range is determined by the first two Time Price Opportunity (TPO) periods of the day. The IB is a concept that originated from floor trading, where traders would observe the different ranges of prices after the market opened.

The IB can be used to understand the control of buyers and sellers in the market. If prices move below the IB, it indicates that large time frame sellers are in control. Conversely, if prices move above the IB, it suggests that large time frame buyers are in control. >

Additionally, the width of the IB can also provide early signals about the market’s potential for range-bound or trending days. A wide IB indicates a potential for range-bound days, while a narrow IB suggests that the market may be trending.

Initial Balance for Forex

In the Market Profile, the concept of Initial Balance (IB) is useful in the forex market, where trading hours are not as clearly defined as in futures markets. To determine the IB in forex, traders have a few options to choose from. One option is to use the range of the first hour after the new day starts at 00:00 UTC. Another option is to use the range of the first hour of the London session open, between 7 am and 8 am UTC. Lastly, the range of the Asian session between 00:00 and 7 am UTC can also be used. Each of these options has its own advantages and disadvantages. Using the first hour at the start of the day is universal, but trading volumes may be low during this time. Using the first hour after the London open may be more relevant due to higher trading volumes, but not taking into account the New York open may be seen as a drawback. The Asian session range may be the best option as it aligns with the popular London breakout strategy, which is a trading strategy that profits from breaking out of the Asian range, and the IB goes hand in hand with that strategy. The London breakout strategy is based on the idea that the London market is the most active market during the Asian session, and as such, it is more likely to break out of the Asian session range, leading to profitable trades.

Initial Balance for Futures

The concept of Initial Balance (IB) is a key aspect of Market Profile analysis, particularly in the futures market, where markets have clearly defined trading hours. In particular, for European indices like FESX, DAX, or German Bund, the IB is determined by the range of the first hour after the market opens, specifically from 8 am to 9 am GMT+1. This time is based on the open of the Eurex exchange in Frankfurt, Germany. Similarly, for US equity indices such as S&P500, NQ, or YM, the IB is determined by the range of the first hour after the market opens, specifically from 9:30 am to 10:30 am Eastern Time. This time corresponds to the Pit trading session. In the case of Crude Oil, the IB is determined by the range between 9 am to 10 am ET. Lastly, for Gold, the IB is determined by the range between 8:20 am to 9:20 am ET, taking into account the open at 8:20 am ET. By analyzing the IB within the context of Market Profile, traders can gain valuable insights into market sentiment and price movements.

Initial balance for crypto

In the Market Profile, determining the Initial Balance (IB) for trading Bitcoin or other cryptocurrencies can be done by using the range of the first hour after midnight UTC. This is because the cryptocurrency market operates 24/7 and the range at this specific time can provide a clear picture of the market’s behavior and potential areas of support or resistance for the day. It is important to note that some traders may use different methods for determining the IB in the cryptocurrency market and it is ultimately up to the individual trader to determine which method works best for them based on their trading strategy and goals.

Value Area

The value area in the Market profile is the range of prices where the majority of trades occurred during a single session. Specifically, it represents 68% of data within one standard deviation of the mean. This is the area where buyers and sellers agreed on prices, making it an important reference point for traders. The Market and Volume profiles provide a non-subjective way to identify the value area, which can be used to identify key areas of acceptance and failed auctions, as well as initiate and responsive activity, as outlined in the previously mentioned AMT rules. The Point of Control, or POC, is located in the center of the value area.

Failed Auction

In the Market Profile, a failed auction occurs when the Initial Balance (IB) is breached, but the market is unable to sustain the breakout. This can be identified when the market moves outside of the IB range, but is unable to maintain the momentum for more than 30 minutes and instead returns back into the IB. In such cases, it is likely that the opposite side of the IB will be tested.

Excess

In the Market Profile, excess refers to the presence of either buying or selling activity at the tops and bottoms of the market. It signals the end of one auction and the beginning of another. On a candlestick chart, excess is represented by a 30-minute candle with a long wick, also known as a buying or selling tail. The longer the tail, the more conviction buyers or sellers have. In the example provided, the market broke below a previous day’s value area low, and responsive buyers were seen stepping in. When trading with excess, it is important to consider the context of the market, such as key reference points such as previous day/week highs and lows, fixing poor high/low, or testing naked POCs or other key support/resistance areas. Additionally, monitoring Volume Imbalance on the Footprint chart is crucial when operating excess, as it provides an insight into the buying and selling pressure at different prices, allowing traders to identify areas of potential support and resistance.

Poor High/Poor Low

Poor high and poor low are indicators of a lack of excess in the market. These occur when traders have low confidence in the current direction and there is a lack of buying or selling activity, as seen by the absence of tails on candlestick charts. Poor highs and lows are often revisited and can be identified by two or more TPOs at the top or bottom of the profile on Market Profile chart, or short term double tops and bottoms on candlestick chart. Having liquidity resting above these levels can increase the potential for the market to move once poor highs/lows are repaired. The Footprint chart can provide insights into the volume and order flow of the market, and combining this information with poor highs and lows can help traders identify potential entry and exit points.

Single Prints

Single Prints, also known as “singles,” are similar to excess in that they are areas of intense buying or selling activity within the market profile. They are represented by single TPOs (time-price opportunities) on the Market Profile chart and are characterized by low volume nodes with liquidity gaps. This indicates that the market moved quickly through that specific area, creating an inefficient move. These single prints tend to get filled in the future, providing trading opportunities either by entering before they are filled or by using them as targets once they have been filled. By also using a candlestick chart, traders can see that these single prints often coincide with prior support and resistance levels, creating a perfect trading opportunity.

Ledges

Ledges, similar to poor highs and lows, are represented by single TPOs on the Market Profile. They are characterized by low volume nodes and liquidity gaps, indicating that the market moved quickly through the area. These inefficient moves tend to get filled and can be used as trading opportunities, either by entering before they are filled or using them as targets. In addition, when viewed on a candlestick chart, ledges can be seen as strong support and resistance areas, as price has been rejected at least twice at that level. Once broken, they can be used as entry points, similar to S/R reversals.

Types of Days of the Market Profile

Recognizing different types of market days based on the initial balance can provide insight into potential market behavior throughout the session. By identifying the day type early on, traders can make educated predictions about market movements for the remainder of the day.

Non-Trend Day Structures

When it comes to market profile structures, there are generally two types: trend days and non-trend days. Within non-trend days, there are several subcategories such as Normal Day, Normal variant of a normal day, and neutral day. While it may be beneficial to familiarize oneself with all of these categories, it is not necessarily essential. In this context, I will focus on discussing the normal and neutral day only, for those interested in learning more about the other subcategories, market profile books provide further information.

Normal Day

The term ‘Normal day’ may be misleading, as it is infrequently seen in the market. On a normal day, the initial balance is wide and any attempts to break outside of it are quickly rejected. This suggests that large-time frame traders (LTF) entered the market during the first hour of trading, but are no longer interested in participating.

Short-time frame traders (STF), however, are active in day trading or scalping, but they do not possess the strength to push through the initial balance.

Neutral Day

A neutral day is characterized by a smaller Initial Balance (IB) compared to a normal day. Unlike a normal day, it does not provide any clear direction for the market. During a neutral day, buyers and sellers may attempt to push prices outside of the IB, but these efforts are often met with counteraction from stronger market participants, resulting in prices returning to the value area.

As observed, the market opened with a broad initial balance (IB), but soon after, sellers pushed the price below the previous day’s value area low. This initial selling action was met with counter buying, resulting in the market closing the session back within the value area from the preceding day.

Standard (Trending) Day Types

Directional days, also known as trend days, are characterized by a clear direction and high confidence in the market. Identifying these days can be beneficial for traders as it allows them to join existing trades rather than trying to oppose them.

Trend Day

On a trend day, Large Time-frame Traders are in control throughout the day. They are indicated by a small Initial Balance that is broken, and the market begins to search for new fair value. Due to the strong movements, the market typically leaves single prints and low volume nodes that are often filled and act as support and resistance areas.

The market displayed a clear trend downward as it broke below the narrow initial balance and continued to decline throughout the day. The yellow circles highlight an occurrence known as one-time framing, indicating that there were no previous TPO highs or lows taken out during the move, signaling a powerful trend that should not be opposed.

Double Distribution Day

As depicted in the chart, the market attempted to break below the previous day’s Value Area Low (VAL), but buyers intervened and pushed the price upward throughout the day. The circles indicate one-time framing until the market’s momentum slowed and a second distribution occurred.

P-shape and B-shape

The P-shape profile indicates a short-covering event, where the market rises early in the session and then spends the rest of the day distributing, resulting in a profile that resembles the letter P. On the other hand, a B-shape profile signals long positions being exited, where the market falls early in the session and then spends the rest of the day distributing, resulting in a profile that resembles the letter B.

Market Profile opening types

By identifying opening types in the market profile, we can anticipate strong movements in the session and take advantage of them.

Open Drive

An open drive is characterized by a strong and immediate momentum at the opening of the market. The market tends to open (usually above or below the previous day’s value area) and moves in a particular direction with conviction. When the market opens with an open drive, it indicates that no prices were traded above or below the open. Though many market profile resources suggest never fading these moves, it is important to note that open drives often reach key levels such as the previous day’s high or low, before reversing course.

Open Test Drive

An open test is similar to an open drive, but before the rally or drop, the market first tests a significant level, such as the previous day’s VAH or VAL. Some taders consider this type of open is better than an open drive because it allows the market to test a key level before making a move in one direction.

Open Rejection Reverse

This open is characterized by a lack of significant momentum immediately after the open. The market opens and instead of trending in one direction, it tests a significant level such as the previous day’s VAH or VAL before rallying or dropping.

Open Auction

On non-trending days, the market often opens with little momentum and remains in a state of balance throughout the session. These are represented by bell curve-shaped profiles, where traders can scalp or day trade around the edges of the value area.

Composite Market Profiles

By analyzing multiple Market Profiles, we can create a composite profile that combines two or more sessions. This can include profiles with fixed periods such as weekly, monthly, or yearly, or can be customized by merging profiles as desired. When the market is in a balanced state and value areas overlap, merging profiles can provide a clearer picture of the market. However, it is important to note that merging profiles is a subjective process and requires practice to identify the most relevant overlaps.

Market Profile 80% Rule

The 80% rule, also known as the Dalton strategy, suggests that if the market opens outside of the previous day’s Value Area and then re-enters it within the first two 30-minute candles, there is a high likelihood of it reversing and moving to the opposite side of the Value Area. However, it is important to note that this rule should not be applied blindly, as every market is unique and may not conform to the rule consistently. It is recommended to use this strategy in conjunction with other forms of analysis and backtest it before applying it to your trades.