Market profile charts
Market Profile is a charting technique used by traders to analyze the price and volume activity of a financial instrument in a specific time period. It displays the distribution of trading activity over a price range for a given time frame, typically one day or one week.
The Market Profile chart is created by plotting a histogram of the volume traded at each price level during the time frame being analyzed. The resulting chart consists of a series of horizontal bars that represent the volume traded at each price level. The bars are stacked on top of each other to create a profile of the trading activity for the period being analyzed.
The main point to keep in mind when trading with Market Profile is to focus on the areas of price where the most trading activity has occurred. These areas are known as the "value area" and are determined by calculating the price range that contains 70% of the trading volume for the period being analyzed.
Traders use Market Profile to identify important levels of support and resistance, as well as potential areas of price breakouts. They also use the chart to identify price levels where there is a high concentration of trading activity, which can serve as a guide for entering and exiting trades.
Advantages of Market Profile charting:
1. Provides a visual representation of the market structure: The Market Profile chart provides a visual representation of the market structure, allowing traders to quickly identify areas of value and areas of excess supply or demand.
2. Identifies key price levels: The chart identifies key price levels that are likely to act as support or resistance, making it easier for traders to plan their trades and manage their risk.
3. Provides insights into market sentiment: By analyzing the distribution of trading activity, traders can gain insights into market sentiment and identify potential shifts in market direction.
Disadvantages of Market Profile charting:
1. Requires a good understanding of market structure: Market Profile charting requires a good understanding of the market structure and how the different price levels relate to each other.
2. Can be time-consuming: Creating a Market Profile chart can be time-consuming, as it requires the trader to collect and analyze data for the period being analyzed.
3. Can be subjective: Interpreting the Market Profile chart can be subjective, as different traders may have different opinions on the significance of certain price levels.
In conclusion, Market Profile charting is a useful tool for traders to analyze the market structure and identify potential trading opportunities. However, it requires a good understanding of market dynamics and can be time-consuming to create and interpret. Traders should use Market Profile charting in combination with other technical analysis tools to gain a better understanding of the market and make more informed trading decisions.
Here are some of the main terms used in Market Profile charting and their explanations:
1. TPO (Time Price Opportunity): TPO is the basic building block of a Market Profile chart. It represents the time and price at which a trade occurred.
2. Volume: Volume is the total number of shares or contracts traded at a particular price level during the time period being analyzed.
3. Value Area: The Value Area is the range of price levels that contain 70% of the trading volume for the period being analyzed. This area is considered the most important area on the Market Profile chart and is used to identify areas of support and resistance.
4. Point of Control (POC): The Point of Control is the price level at which the most trading activity occurred during the time period being analyzed. It is the price level with the highest volume and is often used as a reference point for identifying support and resistance levels.
5. Initial Balance (IB): The Initial Balance is the range of prices that are traded during the first hour of the trading day. It is used to identify the range of prices that are most likely to be relevant for the rest of the trading day.
6. Range Extension: Range Extension occurs when the market moves beyond the previous day's high or low. This is seen as a sign of strength or weakness in the market and can be used to identify potential trading opportunities.
7. Single Print: A Single Print occurs when a price level only has one TPO. It is often used as a reference point for identifying support and resistance levels.
By understanding these terms and how they relate to the Market Profile chart, traders can gain valuable insights into market structure and potential trading opportunities.