The Chicago Board of Trade® and

WindoTrader® Corporation present:

Market Profile® Keys for

Traders and Investors

Market Profile® is a registered trademark of the Chicago Board of Trade®

2003 - ALL RIGHTS RESERVED
The following information is offered as an abridged
edition of the Market Profile® Basic User’s Guide
available through the WINdoTRADEr® website at:

www.windotrader.com

WindoTrader® Corporation thanks the Chicago

Board of Trade® for it’s support in creating the
Market Profile® Basic User’s Guide.
 CBoT® Market Profile®

The Market Profile® was developed in the early 1980's by

The Chicago Board of Trade® and Peter Steidlmayer as
an 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.
 CBoT® Market Profile® (con’t)

The Market Profile® is not a trading system. It does not

give buy, sell, entry, exit, overbought or oversold
indicators. 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 versus trading range)
and then initiate, manage and exit trades accordingly.
This differs from typical technical analysis which usually
measures price movement.
What is the Market Profile®?

The Market Profile is:

• 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.
What is the Market Profile®? (con’t)

The Market Profile is:

• A decision support tool to help traders better understand

the ‘present’ condition of the market.

• A tool for recording the market’s current activity

through the organization of time, price, and volume.

• A graphic reflection of all market participant opinions.

The Market’s Auction Process

The market’s auction process translates countless supply

and demand factors into the market’s current price.

The market’s current price is determined through the

market’s own price discovery or bid-offer auction
process. Basically, the market auctions up until there are
no more buyers, and down until there are no more sellers.

This is known as a ‘dual auction’ process which means

the end of an ‘up’ auction is the beginning of a ‘down’
auction and vice versa.
The Market’s Auction Process (con’t)

More specifically, the market moves directionally seeking an opposing

directional response resulting in the initial directional move being stopped.

Understanding this auction process through the use of market ‘tools’ such as
the Market Profile® allows traders and investors to identify and effectively
respond to the market’s ‘continuation or change’ scenarios.

A key factor in identifying potential ‘continuation or change’ scenarios is

the Market Profile’s vertical and horizontal display of the market’s own
current activity and it’s current price / value relationships.

Following are several ‘Keys’ to understanding the benefits of using the

Market Profile® as a ‘tool’ in your trading and / or investing toolkit.
 Market Profile® ‘Keys’

Direction Tails/Single Prints

Initial Balance Trading Ranges

Point of Control Trends

Range Extension Volume

 Direction

•Understanding the market's

CURRENT directional bias and
STRENGTH of that bias.

•Auctions up until buying is

exhausted.

•Auctions down until selling is

exhausted.
Direction
 Initial Balance

•Range established during the

first two periods of trade.

•Above average Initial Balance

range projects potential trading
range session.

•Below average Initial Balance

range projects potential trending
session.
Initial Balance
 Point of Control

•Point of Control – Longest line

of letters (TPO’s) or most
common price.

•Highlights area of highest

market activity during current
trading session.
Point of Control
 Range Extension

•Price trading beyond initial

balance high and / or low.

•No range extension usually means

the short-term trader is in control
of the market.

•Range extension usually means

longer-term trader in control of the
market.
Range Extension
 Tails and Single Prints

•A Tail - Consecutive single prints at

either a high or low extreme.

•Buying Tail - Formed by market

moving lower and buyers entering
the market aggressively.

•Selling Tail - Formed by market

moving higher and sellers entering
the market aggressively.
Tails and Single Prints (con’t.)

• Spikes are tails occurring in the last period of the

session and are potential keys to trading the
following session’s open.

• Single prints are found between distributions in a

trading session.

• The length / range of the tail or single print is

usually an indication of the potential ‘strength’ of
the tail or single print.
Sell Tail and Buy Tail
Single Prints
 Trading Range

•A narrow range of prices that

persists through time.

•Initial balance range usually

greater than average.

•Confirmed balance edges create

risk and opportunity.

•A trading range is defined by

trader’s timeframe.
Trading Range
 Trading Range (con’t.)

• Primarily a short-term trader’s market.

• Usually characterized by little or no participation by

the longer-term trader.

• One key to trading a trading range is to be patient and

wait for the market to ‘challenge’ the extremes and
then enter on a failure to break-out of the range.

• More trading opportunities with limited potential.

 Trends

•A market moving with clear,

sustained direction.

•Divergence of price away from

value.

•Trends are defined by the

trader’s timeframe.
Trends
 Trends (con’t.)

• A trending market moves directionally until it finds

‘value’ or a ‘fair price’ and trade is shut-off by an
opposite response.

• Trends are usually ‘telegraphed’ by a narrow Initial

Balance or news.

• Trade location is usually secondary to trade execution.

• Monitoring Value Area changes is key to trading

trends.
 Value

• Value is identified by price acceptance, i.e., a price

zone where the market trades over time.

• Unfair or rejected price is where market spent minimal

time trading, i.e., tails / single prints.

• Price x Time = Value !

 Value Area

• The value area is that area / zone where approximately

70% (1 standard deviation) of the session’s volume
was recorded.

• The value area - where two-sided trade primarily

occurred.

• A key measure of overall current market activity.

• Value area range is one key to trading range activity

or trending activity.
 Value Area (con’t.)

• Market opening and trading above value area favors

higher prices.

• Market opening and trading below value area favors

lower prices.

• Many times the directional bias of the market can be

determined by the TPO count.
Value Area
 Volume

• A primary measure of the overall ‘quality’ of the

current market activity.

• Reading volume through volume relationships, i.e.,

greater than, less than, or equal to previous volumes.

• Convergence versus divergence relationships between

price and volume.
 Volume (con’t)

•High volume areas tend to

attract market activity.

•Low volume areas tend to reject

market activity.

•Volume is best interpreted over

time and in relation to average
volume.
Low Volume
High Volume
Market Profile® Trading Principles

• Know when the market is in a trading range or trending mode

and trade accordingly.

• Continually monitor value area development, value area

placement, reference points and volume.

• Understand what’s happening and why it’s happening!

• Understand what’s not happening and why it’s not happening!

Windotrader® Corporation, again, thanks the Chicago Board
of Trade® for it’s support in creating both editions of the
Market Profile® Basic User’s Guide.

To view the unabridged version and attend a narrated

presentation of the Market Profile® Basic User’s Guide,
please go to:

www.windotrader.com