Market Profile Notes

Market profile is a style of plotting "Price" on the Y-axis and "Time" on the X-axis, which most of the
time form a bell-shaped image as the body of the profile.

It helps day traders identify Other Timeframe Participants (Big players) who have money and
information power. Our job as short-term traders is to follow these big sharks which give direction to
markets.

What is Market Profile Trading?

➢ Market profile assists the short term traders to read the current market trends as it unfolds. It
considers the latest market data as it comes and provides an excellent price, time, and volume
analysis to give the best of the best information about what it wants to do next.

➢ It provides an X-ray vision about the market as Value Area represents 2/3rd of the day’s activity
(or 70% in some cases), and this will give a clear picture of the current state of the market as it
unfolds.

➢ It works in all market conditions. Usually, a trading system or indicator works in certain market
conditions like a trending or sideways market. There is no such restriction to Market Profile as it
clearly shows the balanced and imbalanced market conditions in both directions all the time.

➢ The marketplace is full of different players like big buyers, big sellers, scalpers, intraday traders,
swing traders, and positional traders. The combined action of these players together is the main
reason behind price fluctuations.

➢ Big buyers and Big sellers will execute their plans at different price levels, and they cannot trade
with each other at the same price level. Others act as a bridge between these two payers by
providing liquidity.

➢ Let's say a script is trading at 100. Big Buyers will have a plan to buy this script only below 50,
and Big Sellers will have a plan to sell this script just above 150.

➢ If we restrict the trading activity in this script only to big buyers and big sellers, the price will be
stuck at 100 as both of them don't have plans to trade at this level.

➢ If we allow other players such as scalpers, day traders, swing traders, etc. then they provide
liquidity to the market. Their participation will take the price to either 150 or 50 depending on
all other traders' combined effort except the big players. If the price reaches 50, big buyers will
pitch in, and if the price goes to 150, big sellers will pitch in to initiate their trades.
 ➢ This interaction between big players and short-term players distributes trading volume in a bell-
shaped curve.

➢ The primary purpose of any marketplace is to facilitate trades. A script's price will go up until the
last buyer has bought, and there are no more buyers at a higher price, which is recognized as
Unfair High.

Similarly, it moves down until the last seller has sold. There are no more sellers at a lower price, which is
identified as Unfair Low.

The end of the upside auction is the beginning of the downside auction and vice-versa. Hence, we can
say the marketplace facilitates trades with the "Dual Auction" process.

Once the market defines a range with an unfair high and an unfair low, it negotiates within the range to
establish a "Value Area."

Market Profile Charts

➢ Let us understand, how a #marketprofilesoftware plots the chart, Each half an hour of the
trading day is designated by a letter, which is also called Time Price Opportunity (TPO).

➢ We denote the first 30 min range with the letter ‘A,’ next 30 min range with the letter ‘B,’ and
we continue this procedure until the last range of the market.
 ➢ The above chart is of Nifty, and hence the last range is denoted with ‘M’ as the Indian markets
currently trade from 9.15 am to 3.30 pm with the last session ‘M” is for only 15 minutes from
3.15 pm to 3.30 pm.

➢ ‘O’ in the first session indicates the open price level, and ‘#’ in the last session indicates the
closing price level.

➢ This charting in Market Profile is called ‘Split’ profile, and pushing these TPOs (letters) on the left
side (wherever space is present) will create the ‘Un-Split’ profile.

➢ Point of Control (POC) is the price level in which maximum time was spent (Price Profile) or
maximum trading activity (Volume Profile) occurred on any day.

➢ Value Area (VA) is the 70% price range around POC. It is the fair price of the Nifty on this
particular day

➢ By the end of every trading day, the market profile chart shows not only what happened on that
day, but also who is responsible and when it happened.

Market Profile – An Indicator or Not?

➢ Most of the technical indicators which are available in the stock market are derived using
different types of calculations from the price - Open, Close, High, Low, and Volume.

➢ All these indicators assist traders with Buy/Sell decisions either directly or indirectly.

➢ For example, an RSI reading of 30 indicates an Oversold situation and advises the traders to look
for a long trade.

➢ Similarly, short-term MA (5 DMA) crossover above long-term MA (50 DMA) indicates the end of
the downtrend and advice traders to plan a long trade.

➢ Whereas, Market Profile assists the traders to read the current market trends as it unfolds. It
provides a 3-Dimensional view as compared to the traditional 2D view in Candlesticks charts.
The prominent feature of the market profile is it enforces the traders to study the market
dynamics and don’t generate any buy or selling decisions.

Hence, Market Profile plays a different role as compared to any traditional indicators in the market.
Does a Market Profile Work in Intraday Trading?
➢ Market profile helps short-term traders identify the activities of Big players who have money
and information power.

➢ Many traders don’t understand the importance of TIME on both the price and opportunity at
the day trade level. In day trading, the opportunity is inversely proportional to time.

➢ An attractive opportunity to buy below value or sell above value will not last long as big players
act very quickly, and their position size pushes the price very soon to the other side.

➢ Another simple example of the importance of time is a price that is not accepted over time is
the sign of rejection of that price level.

➢ In a candlestick chart, Price variations are plotted in the “Y” axis against the Time “X” axis. In this
type of chart, time remains constant throughout the price variations, which means we are not
using the time parameter effectively.

➢ If most technical charts consider only Price and Volume with a fixed time point (thereby ignoring
the effect of time).
 ➢ Market profile considers Price and Volume, along with TIME, which helps to identify the good
trade opportunities in day trading. The above image shows the same unit of TIME is allocated
for both 42 points move and 120 points move. This indicates we are not using the time
parameter effectively.

Now, look at the same day in a market profile chart in the below image.

It is evident that the time has been allocated effectively based on the price variations. It gives a 3D view
of the price auction with respect to time. Also, you can see the Value Area, unfair high, unfair low, and
even point of control (POC).

As an intraday trader, one should try to identify the activities of big players who have money and
information power. Our job as intraday traders is to follow these big sharks who give direction to
markets.

'Market Profile' is a simple technique that helps you to identify the movements of these big players.

Hence, there is no such thing as the market profile that does or does not work. It is only a trading
concept that provides an extra edge for day traders and short-term traders.

If you apply it properly, you make money, and if you don’t apply in the right way, then you lose money.
Day Structures in Market Profile

If you think of all the big players as a single personality, it is possible to estimate their activity based on
their conviction.

Market Profile, with its unique features, identifies a few readable patterns in the daily time frame based
on the level of participation of big players.

IB Range is the first one-hour range in the market created by retail traders (most of the time).

Retail traders can only provide market depth and liquidity, but they fail to give magnitude and direction
to the price.

Based on IB range and price variation around IB range, Market Profile identifies 6 important day
structures:

Normal Day

Normal Variation Day

Trend Day

Double Distribution Day

Non-Trend Day

Neutral Day
1- Normal day

➢ In normal day: Most of the price auction will be inside the IB Range due to a 2-sided price
auction. all TPOs auctioned for the entire day happens within the initial balance i.e. ‘A’ & ‘B’
range.

➢ Normal days are characterized by a very wide initial balance range and the whole day the price
auction happens within the IB Range.

➢ IB range is subjective for every stock or index to declare few points as wide IB or small IB (as
every script/index comes with a different price level and price range). As a thumb rule, one can
take the average of the last ten day’s price range (Low to high) and if the IB exceeds that
average range, then it can be considered as wide IB. For example, if Nifty last 10 days average
daily range is 100 points, any initial balance range above this average of 100 points can be
considered as a wide IB range.
2 - Normal Variation Day

➢ As the name suggests it is similar to a Normal Day, but with a slight variation in it. The price can
move outside of IB in any one direction (either up or down). This movement of price outside of
IB range (range extension) generally will be equal to the length of the price range in the IB. For
example, if the IB range is 50 points, the price will move outside of IB approximately by 50
points.

➢ IB range will be a moderate range which is comparatively smaller than the normal day IB range.
About 50-60% of ten days daily average range of the asset class. For example, if the average 10
days daily range in nifty is 100 points, the moderate range is 50-60% of 100 which is 50-60
points.

➢ It is because OTFs don’t participate at open, they will watch the market for some time, and then
they enter after the formation of the IB range to create a range extension on any one side of the
IB.

➢ In normal variation day image, ‘C’ fails to create a range extension on the upside, but later OTF’s
enter in ‘D’ print and their action results in range extension on the upside.
3 - Trend Day

➢ In Trend Day OTF Participants will act from the very beginning of the day right from the Open.
We can see two types of Trend Day – Bullish Trend Day and Bearish Trend Day

➢ In a Bullish Trend Day (above example), OTF buyers will be active from the beginning. Hence
price moves on the upside, and generally will not come back to open price level (or IB low)

➢ Similarly, on a Bearish Trend Day, OTF sellers will be active from the beginning. The price moves
only on the downside, and generally will not come back to the open price level (or IB high)

➢ Usually, trend days will have a small IB range (30-35% of the last ten days' daily average range).

➢ The profile will be very thin during a trend day with only 4-5 prints at most of the price level.

➢ Smart money (OTF) is in control throughout the day with price auction just in one direction with
high conviction.

➢ Usually, make an Open-Low or Open-High formation and swiftly moves in one direction only.
4 - Double Distribution Day

➢ It is another variation of a trend day. As compared to Trend Day, in Double Distribution day,
OTFs are not very active right from the beginning.

➢ Similar to a trend day, this day will also have a small IB range formation

➢ Usually, OTFs will gain confidence after IB range formation (after ‘D’ or ‘E’ print formation), and
they will drive the price in one direction

➢ The big move happens with some pause, and generally, two (rarely three) distributions of the
price will occur in a DD day as shown in the above image. These two distributions are usually
separated by a few single prints (or sometimes by very few double prints)

➢ DD day does not display the steady confidence of OTF participants right from the open as shown
in a Trend Day, but it presents aggressive participation of OTF participants after IB range
formation generally after the D or E session.
5 - Non Trend Day

➢ It is similar to a Normal Day, but with a small or medium IB range. A lack of directional
conviction characterizes this day.

➢ This day type usually occurs before a particular event like RBI Qtr Results, Fed meeting,
corporate action, or election results. Because the market (or OTFs) is waiting for some
fundamental information to come and they want to react only after that information is out.

➢ Sometimes it shows small IB and traders might get confused with a trending day. However, the
absence of extremes and also the knowledge of ‘Open-Types’ will prevent the traders from
being wrong.
6 - Neutral Day

➢ On a Neutral Day, the IB range will be moderate, and the price will break the IB range on both
the sides.

➢ The market shows a lack of direction clarity on a Neutral Day as both OTF buyers and OTF sellers
fight with each other to gain control of the price. In other words, both OTF buyer and OTF seller
are active, because if one is active, it would have created an imbalance situation resulting in a
Trend Day or a Normal Variation Day.