The Market Profile (MP) was developed in the early 1980’s by The Chicago Board of Trade and Peter Steidlmayer as analytical decision support tool to organize and display market generated information.
The Market Profile’s key components are time, price and volume which are then combined and displayed in a statistical distribution much like a normal bell-shaped curve to reveal pricing patterns and value. The trader makes trading decisions based on an independent evaluation of market price and value information.
The Market Profile Trader, through study and experience, can learn to identify the market’s underlying dynamics and structure (trending vs. trading range) and then initiate, manage and exit trades accordingly. This differs from typical technical analysis which usually measures price movement.
Market Profile-
- A structure for organizing a developing market.
- A horizontal and vertical display of the dynamic process of market activity.
- A visual display of the market’s current ‘value’ or ‘fair’ price range.
- A decision support tool to help traders better understands the ‘present’ condition of the market.
- A tool for recording the market’s activity through the organization of time, price and volume.
- A graphic reflection of all market participant opinions.
MP is a way of reorganizing price data in order to provide more information and deeper understanding of support and resistance. Support and resistance represent supply and demand in the market.
Lower prices attract buyers and support level below price is where we anticipate demand to enter the market.
Higher prices or resistance points above the current price is where we anticipate supply and sellers to enter the market.
Market profile theory suggested that the market is constantly shifting or rotating between these points of supply and demand, known as the Value Area. The Value Area is a bracket that represents an area in which 70% of trades took place.
The point of control (POC) is the price level at which the greatest number of trades took place.
