Market Profile Basics

and Components
by Jaychandran
A Market Profile is an intra-day charting technique
(price vertical, time/activity horizontal) devised by J.
Peter Steidlmayer, a trader at the Chicago Board of
Trade (CBOT), ca 1959-1985.
Steidlmayer was seeking to evaluate market value as
it developed in the day time frame.
Steidlmayer's charts displayed a bell shape, fatter at
the middle prices, with activity trailing off at the
higher and lower prices. In this structure he
recognized the 'Normal', gaussian distribution he had
met with in college statistics.

Source: Wikipedia
Introduction
Market profile is not a trading system,
follow/make your trading system based on
that.
There is no greater indicator of what the
marker is doing then the market itself.
Its a decision making tool to support your
system and signals.
Courtesy : Linda Raschke
Market Profile Terms


Initial Balance- IB (Price range developed at first 60 Min range i.e 1st hour high & low )

Value Area VA ( Area where 70% of TPO's present on any given time frame )

Value Area Low VAL ( Lower range of VALUE AREA current Profile)

Value Area High - VAH (Higher range of VALUE AREA current Profile)

Yesterday's Value Area Low - YVAL (Value Area Low of previous day profile)

Yesterday's Value Area High - YVAH (Value Area High of previous day profile)

Point Of Control - POC (Price at which Highest TPO's occurred. In simple where buyers
and sellers agreed the price. )

Developing Point Of Control - DPOC (Price at which Highest TPO's developing for the
current Day)

Virgin Point of Control - VPOC (POC which is not touched in following sessions. Usually
Provide strong Support/resistance )

Range Extension - RE (Market activity which happens above/below the Initial Balance
i.e first hour range)

Opening Types and Day Types
Opening Types Open Drive (OD), Open
Rejection Reverse (ORR), Open Test Drive
(OTD), Open Auction In Range (OAIR),
Open Auction Outside Range (OAOR).
Day Types Normal Day, Normal
Variation Day, Double Distribution Day,
Neutral Day, Neutral Extreme Day, Trend
day.
Open Drive
Price opens above/below previous day value area and
proceeds in a unidirectional way without any
retracements.

Open Rejection Reverse
Price Opens outside the previous days value area the
move outside value is rejected and the marker reverses
sharply back into the previous days range.

Open Test Drive
After the market opens, the price tests in one direction
and then sharply turns around and drives in the opposite
direction.

Open Auction
OAIR - Price opens inside the previous day range and rotates
around the opening price.
OAOR Price opens outside the previous day range and rotates
around the opening price.













Normal Day
* Initial Balance will be wide

* Bell shaped Distribution

* No Range extension above IB ( Some times we have small RE )

* Price trades at value area (even if trades outside it will come back to VA
again)

* Price looking to trade in this zone for sometime.

* Happens mostly at Stage 3
Normal Variation Day
This type of day does not have as wide a first hours range as a
normal day
The Initial balance or base is upset as the other time frame player
pushes price out of first hours range.
The rest of the day is then spent forming a new value area outside
of the early base.


Neutral Day
The Price tests on both sides of the initial balance. Price
continues to rotate.
Both the buyers and sellers are active but no one is in control
This type of day tends to form a broad value area or trading
range. A breakout from this range must be accompanied by
an increase in volume to indicate that the other time frame
player has gained control.
Neutral Extreme Day
The Price tests on both sides of the initial balance. Price
continues to rotate and closes at extreme near days high
or low.
Both the buyers and sellers are active but one will get
control around close.
Neutral extreme day show a sign
of top or bottom
Double Distribution
A double distribution trend day lacks the strong
opening drive and instead has a narrow initial balance.
Single prints then market move out of the initial
balance and the other time frame player remains firmly
in control
Trend Day
Uni-directional movement fueled by high volume without
major retracements.
Other time frame player in in control from the opening
price.
Happens mostly at stage one


Judging Markets using Value Area
Value area placements are used to judge about
price movements.
Value area higher, value area lower, value area
overlapping of previous day value area gives
good hindsights of what market is doing.
Price opening above previous day value area
high is a bullish sign.
Price opening below previous day value area low
is a bearish sign.
The 80% Rule
When price opens above or below previous day
value area and then gets into the value area for
2 consecutive half hour periods. The price has
80% of chance of filling the previous day value
area.

Buying Tails
Single prints (time spent less) left at the bottom of the
profile by the action of the long time buyer.
Fast price rejection at bottom.

Selling Trails
Single prints left at the top of the profile by the action of
the long term seller.
Fast price rejection at top.
Distribution Shapes
Price distribution shapes suggest what kind of market activity
took place.
b shaped profile suggest a long liquidation activity in the
market.
p shaped profile suggest a short covering activity in the
market.
Virgin Point of Control (VPOC)
The VPOC is a POC that has not been
revisited.
VPOC acts as strong support / resistance
going forward.
VPOC can be used as a target.
Often reversals happen at VPOC.

Responsive Activity
Responsive buying - When the traders
decide to buy below the value area.



Responsive selling When the traders
decide to sell above the value area.
Initiative Activity
Initiative Buying When the traders
decide to buy above the value area.




Initiative Selling When the traders
decide to sell below the value area.


Questions ?