I am a rule-based intraday and a passionate trainer trying to help budding traders to find their trading edge. Trained over 500+ traders in online and classroom programs. I believe a disciplined mindset and impeccable execution are the holy grail of trading.
 

I have been actively investing and trading in Indian markets since 2013. I use price action, market profile and options delta neutral concepts to analyze and opt for my intraday and swing trades.

I have published my book MASTERMIND OF DAY TRADING, which talks about how to succeed in day trading by adopting rule-based techniques of market profile, price action and money management.

Apart from trading and training, I also write blogs and actively answer the questions on trading and investing in my Quora profile.

Samantha
May

Marketing Executive

MASTERMIND OF DAY TRADING explains the rule-based ideas of market profile, price action, and various money management topics, especially for intraday trading. How to make Money with breakout trading is a part of price action lesson that discusses how to Make Money with trading the candlestick charts and trading the price action trends.

Market Profile — All you need to know about Market Profile trading and Market Profile Charts

Have you ever wondered how to read the Market Profile charts?

Are you a beginner to the concepts of Market Profile Trading?


If your answer is YES, this article will help you find many clues related to market profile trading.😀


Being as a Market Profile Trader in India from the past few years, I have gone through several phases of markets using this method. Market Profile Concepts are like an ocean. I will attempt to convey the fundamentals. At the end of this article, you will be able to get clarity on the questions like, What is market profile trading? What Does market profile mean? How to get a free market profile chart? & How to Read a Market Profile chart? Etc.

Well, Let’s begin.


Auction Process:

When I started my journey as a trader, I focused only on finding the so-called Holy Grail by hopping from one trading system to another and when my strategy was used to enter the drawdown phase. It was disheartening to see my old — Strategy work very well right after I stopped trading that system.😄


I have never asked the fundamental questions, like “What drives the market?”,” Why is the market moving up and down?” “What is my role in the market?” I was not sure about the very purpose of market existence. Commonly, most traders don’t take adequate time to understand the market’s basis that they are trying to conquer.

The only purpose of market existence is to facilitate trade between buyers and sellers. The auction process happens by auctioning from high to low and low to high to find the area where the trade can be facilitated comfortably.


Let’s understand this by taking an example of a supermarket. If the price of rice is too high, then the customers will avoid buying from that supermarket. The supermarket will sense that the price is too high because the inventory piles up. To clear this inventory, he will then reduce the amount to attract customers until they purchase back. However, if the supermarket slashes the rate too deeply, his inventory will rapidly reduce, and buyers will enjoy this lower price. They tend to accumulate rice. Finally, the price will balance between the two extremes of the trade, and value is established within these extremes. The same applies to the stock market.


Auction process in the chart

The auction process causes every tick movement on the chart.


Once the auction is started, competition and eagerness among buyers and sellers move the market up and down. Price would continue to go up until there is the last buyer. Similarly, the market would continue auctioning down until there is the last seller.


Market Profile is not an indicator that tells you where to buy and where to sell. It ‘sIt’s a tool that helps understand the dynamic market behaviour by which you will understand the context or the big picture of the market.


Well,


As per my knowledge, context takes the first place before making any trading decisions. You know that the market is very dynamic and random by nature. And to survive here, an active thinking process is required by a trader.


Market Profile charts and concepts are relatively new to the trading world. The idea for the market profile started in the early 1980s. It is a technical concept with a unique charting technique developed by Mr Peter Steidlmayer at the Chicago Board of Trade (CBOT). It was open to the public in 1985. Unfortunately, many traders were not interested in Market Profile concepts because they thought it was difficult and quite tricky to apply. But in reality, the market profile is relatively simple and easy to grasp. It just requires a different way of looking at the market. It provides a distinct view of market activity as and when it happens. It is far easier to recognize important market information through the Market profile.


Even though the Market Profile is easy to learn, becoming familiar with the methods and mastering it does take its own sweet time. The learning curve will inevitably vary from one individual to another. It requires live observation of the charts for at least 3–5 months to understand how the pro-traders and institutional traders drive the markets and position themselves. As a trader, we often see what we want to see and react based on this limited knowledge. Market Profile solves this perceptual ignorance to some extent :)


Peter Steidlmayer developed the Market Profile based on the statistical normal distribution to identify value in the market. The distribution analysis is a crucial analytical study in terms of gathering the data and understanding the statistics. It is a simplistic yet reliable statistical data distribution model. This distribution model occurs in almost every large group of data. If we examine the data for age, height, or weight of any large group of individuals, it results in a distribution curve.


The Normal Distribution curve

Fundamental Jargons of the Market Profile


TPO (Time Price Opportunity):

TPOs are essential elements of the market profile chart. In general, TPOs are visually represented as alphabets. When the trades take place at different price levels, it creates a trading range, and this range is denoted by the letters to represent the market activity.

TPO Charts along with candlestick chart.

Observe the above image where the TPOs are plotted alongside the regular 30min candlestick chart. We call this profile as SPLIT PROFILE.


And next to image A, we can see how different alphabets denote every 30min candle range. The first 30 min range is represented by the letter “A.” Letter “B denotes the next 30 min range,” The same continues till the closing candle of the market.

If we left-align the TPOs of the split profile, the result is a bell-shaped curve that we call it as UNSPLIT PROFILE.


Each TPO has its defined height, also known as “TPO SIZE,” which varies from one script to another concerning the chart visibility. There is no thumb rule to define TPO size. However, I’ve made a table for TPO size based on the price range of the instrument. Refer to the below chart to get more clarity on this.

TPO size table

For example, let’s assume NIFTY’s price is trading at 11700; this price falls in the range of 10000–20000. Hence, I will give an input of 500 (considering tick size as 0.01), representing the TPO size as 5Points, which suggests every 5 point move results in plotting one TPO ( Or one letter ).


In general Open price is denoted as O and Closing price as #.” This O and “# are also considered as TPOs.


IB Range (Initial Balance Range):


The initial balance is defined as the range of price movement during the first hour of the day’s trading. In general, the retail traders look for a fair price, and they tend to create a range in the first hour, which is called an IB range.

IB Range is the foundation on any trading day. It gives crucial information about the probable day structure and the possible trading range for that day.

55–70% of the time high or the day’s low is established during the initial balance period.

Initial Balanace (IB Range)

The initial balance is a crucial period for any trading day. It is essential for a trader to carefully monitor and examine the initial balance for their trade scripts. I utilize this information very often in our studies.


You can visit my YouTube channel named Nataraj Malavade to find many educational videos related to the Initial balance concept.










Value Area :

Without knowing the chart’s value area, My answer would never be complete. Value Area is the area where the price is most accepted on any given day.

There are three major parameters to it; they are POC (Point Of Control), VAL (Value Area Low), and VAH (Value Area High). In a market profile, these parameters are derived by calculating the TPO’s count. Since it is calculated by using price, we call it a Price Profile. I have seen some profile traders use these levels as support and resistance, but I don’t use them in such a way. These are the structural references, and I see them as a total value rather than particular levels. The below image shows the value area in the market profile chart.


Value area in market profile chart

Tails or Extremes:

Tails or extremes play a crucial role in spotting the footprints of OTFs(Other time frames) or Smart money.


These Market makers take advantage and accumulate positions aggressively in the lower or higher levels of the day. This OTF activity leads to plotting single letter TPOs on a market profile chart called extremes or tails. Extremes are a sign of aggressive action shown by the smart money, which can often happen at the top or bottom of the profile.

If we have single letters prints within the profile, we call it as single prints. A min of two TPO prints is required to consider the single prints as extremes or tails. The longer the tail, the higher the conviction of smart traders at that price level or zone. If the single letters are printed at the bottom of the profile, it indicates Smart Buyers' presence. Similarly, the single letters above the profile indicate the presence of Smart sellers.


Extremes in the market profile chart

Initiative and Responsive activities :


The market has its flow; the direction and range development of the market is caused by smart money. These Big players have their methodologies. They can initiate new trades even by buying at high prices or selling at lower costs. They can also respond to the price opportunities by selling at high prices and buying at low prices. In either way, they have a clear plan behind what they are doing. However, the tempo of the move and confidence level behind these activities differ.


Understanding the momentum and confidence level in the movement can help a trader for better position sizing and improve the trade conviction — these activities differentiated by comparing present-day activity with previous day value.


Initiative & Responsive activities

Balanced and Imbalanced markets :


Open price and placement play a crucial role in day trading as it is the starting price level of the auction on any trading day.


Once a new trading day begins, the open price will fall in one of the following three possible locations relative to the previous day’s activity.

  1. Open within the previous day value area.

  2. Open outside the last value day and within the range.

  3. Open outside the previous day range.

Each scenario reveals essential information in terms of market behavioural factors.


Day Structures:


How to get free market profile charts?


Well,


These are the fundamental understanding of the MARKET PROFILE.

There are many variations and methods by which a trader can make sensible decisions in day trading.


I hope this article helped you. If you like the content, please share it with your friends looking for similar information.


Wishing you MOST & MORE 🙏

Nataraj Malavade

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