Market Profile Trading - Part 1 - Basics

welcome to the market profile education series this is a new initiative by poly investment comm where we will cover all the technical analysis aspects a market profile is the first topic we have chosen on the forum we were getting a lot of requests about dealing with this topic since the literature on this topic is limited and in a sense a little outdated we thought of taking up this topic first the second reason is that market profile in itself is is is market generated information if you the saying goes that follow the price wherever it goes

and traders do it in the form of trading breakouts or break downs or through indicators etc and while that method is also valid and I myself used those market profile is something that will give you information about what the market is doing right now it also gives you gives you an idea of what the market has done in the past and when you combine the past and the present you can get a get a look into the future the male the main idea about market profile is that a market profile is not a trading system

it is it is just a way to look at the market um if you if you want to take it extremely simply then you can put it this way that like we have a bar chart or a candlestick chart or point to figure chart we have a market profile chart but in but but when you want to view the market in depth that is where I feel market profile has an edge over all other charting mechanisms mainly because if you have a bar chart or a candlestick chart you never ne-never able to see amount of

trading that happens on a certain level or the implication of let us say Candlestick doji what is the rationale behind the doji forming and these are kind of intricacies that market profile exposes you to and it is extremely crucial in trading so let us begin a mock profile was developed by the Peter in in early 1980s peter and daltin these are the two guys who are known as fathers of market profile they have written some books on it while the books are fine they little limited in a sense that the book written especially in the

80s or 90s I won't say it's not applicable today but due to algorithmic trading and you know so many participants able to join the trading industry through internet some of the concepts should not be taken rigidly that is what I feel as we go deal into details I will ever let you know which though which of those particular concepts we don't have to you know go by the rulebook but anyway as of now what we know is that market profile is basically organizing data according to time and price in a statistical bell-shaped curve a normal

normal bell-shaped curve now those who familiar with statistics would know what a normal bell-shaped curve is and before moving forward let me just show it to you okay this is the statistical bell-shaped curve now seventy percent of market action happen with happens within this curve whereas rest of the percentage happens either outside or outside the high portion or outside the low portion and it is it is applicable to any field I mean even if if we go and attend a classroom or or take take participation in some sample size you know about calculating a height

so weight etc you'll see that majority of participants fall into the category whereas only few will fall in this category and rest will fall here so that is the main rationale behind market profile it's it's it's you you just have to take it as a tool with your present system to see what is going on what happens is let's say we're trading a breakout system and and we get a breakout how do we know whether whether the likelihood of breakout succeeding or failing is high or low once you have an idea of what is going

on in the market then those aspects should become much easier that is what I was saying if if you look at market profile at the core it reflects nothing but the auction process and the auction I mean when buyers enter the market they bid the price is higher the prices go up it goes up to the point where all the buyers have exhausted on the bits when there is no buyer left in then the seller comes in to market and he drives the prices down vice-versa this is what an auction processes in a way we

are just discounting demand and supply not before going into much detail of market profile we need to understand some some terms first terms like TPO initial balance who are the various participants in the market what is the range extension the value area concepts and and what is buying a selling tail let's start with TP o TP o is called time price opportunity now when market profile was originally written Peter laid emphasis on setting every you know letter that prints on the profile chart to be of 30 minutes into while this is this is a standard

set in which most of the people use and it's fine if you do that um but you can experiment the longer the profile you want the higher the initial time frame can be it can be 30 minutes 60 minutes or 120 minutes anything that you want now this is a this is a TPO time place opportunity chart I'll just give you a segmented fragmented view yep that is them see now what happens is I would I would ask all of you to get FEM rise with this this chart because most of the charts that I'll

you know put up on the forum or on videos will will look something like this so see what settings I have used have set the interval is 30 minutes the market opens here and trades from 58 42 58 10 in the first 30 minutes that is ay ay ay ay ay and a now why all these A's are being printed is because it is the first half an hour action of market and these are the levels that the market visits so so whatever level the market visits in the first half an hour a gets printed

on that so this is at EPO because this let's say this single a represents a price at a particular time so each each letter signifies a time price opportunity the green bracket that you see is value area I will come to that concept later but just get FEM where they'll just get used to the chart the star that you see on most of the charts is the price where the market closes the greater than symbol that you see here it is the price which is the point of control or the PUC again I will cover

that later the blue bracket that you see is initial balance initial balance is according to this chart that I have set for 60 minutes of trading so first 60 minutes of trading would be letter A and letter B so see it opens here then a goes on to here then B opens on this o and B goes on to here if you see the initial balance that is a blue bracket covers the period a and B all right so this is the initial balance now again this initial balance can either be 60 minutes or you

can keep it for three years or you can keep it only thirty minutes it is up to you to experiment but what I have used is 30 minutes tpo 60 minutes initial balance 70 percent of trading where happens its value area and these are self-explanatory initial balance like we talked about initial balance is usually the first 60 minutes of trading there is no hard and fast rule that it cannot be thirty minutes or fifteen minutes or one day or two day it's up to you entirely now what initial balance is to a trader it gives

an idea about the market trying to find the balance in the first 60 minutes let's say of trading like what happens basically and this is this this concept is particularly applicable to those who are extremely short term traders and if you take a longer term profile chart for those with respect to that time interval then that initial balance becomes important it is a initial balance primarily user is a tool to know whether market for that particular profile would be range-bound or would be a elongated long and thin trending type profile by profile I mean a

a single you know profile this is a single profile let's say this this is a particular day's action and it's it's called a profile okay so let's say the initial balance is extremely white so here the initial balance was about 24 points 1% and and once the market crossed that it just rallied it usually does not happen like this I have just steady picked an example show let's say the initial balance was about 3% wide then most of the action would have happened within that initial balance and hence you would know that it won't be

a trending day or a trending profile okay so it is usually used by the day traders to Gorge whether the day is going to be a trending day and are trending profile depending on the timeframe trader is trading closing range as such is not important but it does give you an insight into the summary of profile let's say for if if price within the profile closes in the mid range then you would know neither the Bulls were confident nor the Bears are confident whereas if the price closes towards the high of the profile you would

know that Bulls were more confident and vice-versa for the Bears okay we've covered see this blue bracket that we're talking about is the initial balance participants now I want to spend some time out here because this is a concept that everyone needs to understand see when we talk about market any kind of market there are two kinds of participants in the market one other long-term players these are the players who have a long term view on the market they primarily enter an exit market based on value value can be anything right from earnings to price

to book multiples to expected price to sales ratio to anything that is that is that is not relevant these these are the guys who are called the other time frame traders or the other positional traders throughout the educational series I have mentioned them as OTF that is other time frame traders the other other kind of trader is called the local local is usually a daily time frame trader or a or a single profile trader he is particularly there to provide liquidity now if you need to prosper in the market you need to understand what the

OTF trader is doing and you need to back within if you bet against the other time frame trader you will end up with losses every time so you need to know what the other time frame trader is doing and according to that you need to place your bets all right um there is one more thing that I wanted to you know completely memorize it Oh TF traders are the ones who Pro who give market direction whereas locals are the one who gave market liquidity all right I am if you if you want to understand the

market more in depth let's say the structure of the market I'm not talking in technical terms now there's a book um I think it's named trading and exchanges by Larry I forgot on the last word but last name but just google it trading in exchanges by Larry Harris or something I just forgotten just this google the book trading in exchanges it is it is a wonderful book and it will clear a lot of doubts about about how the market functions all right yeah one thing that I wanted to add about participants is a long-term trader

always enters the market when he feels it is below his desired value and he always exits the market when he feels it is above its desired value okay now range extension this is something we are going to cover in much detail later because it forms an essential part of market profile but basically a range extension is when market the price moves beyond the initial balance now just logically think the initial balance was the blue bracket I showed you if if why would a price move beyond the initial balance if the market is trading within the

initial balance hold a that means only locals are present in that in that profile whereas if initial balance is disturbed and marketing the goes up or goes down and that means other time frame trader is present alright now why other time frame trader because other time frame trader is the trader who gives direction to the market all right do not forget this concept now you know when usually the range extension happens there are two things that can happen one let's say that you need let's say say the initial balance gets breached on the upside and

the price moves up either the price will continue going up or the seller will come and push the price down again okay now this kind of seller who reacts to prices being pushed on the upside is called responsive seller okay and similarly there is a concept called responsive buyer which we'll cover later but but just for the interruptions sake just know what it is so see our initial balance was this the market breached the initial balance and rallied upwards what this what this says is that in this particular profile the other time frame buyer was

present and hence he he carried the market forward after the initial balance was breached now if you see ABCD now see G H and I even I profile t POS here that means once the initial balance was disturbed and the market moved up there was a seller who entered the market and pushed it down again but eventually again the Bulls overpowered it and took it up so as of now just remember this that range extension only happens when the other time frame trader is present it cannot happen when only a local is present all right

value area this I would say is is the heart of market profile even if you even if you don't have a market profile chart if you just know how the value area is shaping up or where is the maximum activity taking place you will be lightyears ahead than most of the traders out there now Whale value area is usually defined as a place where 70% of the day business is conducted instead of day business you can see the profile business because because the market profile was an infrared concept so most of the things I've mentioned

according to intraday you know time frame but but let's consider a profile a complete day's action or however it may suit you so value area basically it's important because it gives you a indication of what the trend is now let's say a price opens at 2000 most of the activity happens at 2020 and next to the market opens at 2014 now what does this say this says that who participants participated at 2020 previous day and they are now seeing price at 2040 if the following day price goes at 2060 and 2080 the value area shifting

upwards what this means is that both the OTF traders that is the OTF buyers and OTF sellers are accepting that the price is trending higher so value area gives you a sort of indication that where prices are going if you remember we we touched upon the greatest symbol which I call it was point of control now point of control is always within the value area okay it is it is it is that level where maximum activity happen or it is the most accepted value in that profile okay okay this value here now let us see

see this was the initial balance the profile got disturbed the market rallied the green bracket is the value area this is where maximum trading happened this thing now within the green bracket that is within the value area the the point at which maximum activity happened that is the point at which maximum TP o--'s are there that is the POC okay you don't you don't need to calculate it manually or something you just need a software for it and it shows up and that is much better okay so this is this is the fairest price now

POC is important when we discuss about some strategies right now just just know the concept of it all right okay buying and selling tails are buying and selling tails like range extension gives you an idea about how strong the profile is it's it usually forms in the form of a single single line tpo that is like this see this is a single print knk there is no other TP over here so this is a single selling tail similarly if you see down you have single line of a a a a a and a this is

this is called a buying tail alright now you know a buying tail is is formed when the price suddenly moves down then the buyer realizes that it's below value any any enters the market and takes the price high so he does not allow lot of trading or rotations around that point that is where you get a single print if you get a lot of rotations at a single point there the value area forms and and multiple TPS will happen all right similarly a sell tail is when a seller enters the market and thinks the price

has immediately rallied too much and he suddenly pulls it down so that forms a sort of selling tail okay now in a in a tale in a selling tale of buying tale what is more important is the length let's say you only have to TP o--'s on the selling tale whereas in the buying tale you have five TP or 60 PS so this means that the buyer OTF was more aggressive and the seller or TF was less aggressive all right now these concepts that I am apply explaining you just cannot take them randomly from here

and there and start applying them what I mean to say is tomorrow don't switch on the screen and see your 10-digit TP or single tail and buy that stock just thinking that the buying tail is there so the other time frame buyer is present so this level has to be defended it's not true a market profile is about the complete picture of the market nothing is based on stand alone you know structure of the market everything has to be combined and put into a it's like a puzzle the the more pieces you fit together the

more clear or the picture will be all right so so whatever basics BC basic things we have discussed right now it's all about the building blocks of market profile there are there are a couple of things that I want to say before moving onto the next tutorial whatever your existing system is right now do not abandon that market profile use market profile as a confirmation to your existing signals that way what happens is once you get a get a signal on your system you can confirm through the profile what is happening so so let us

take an example let us say you get a breakout alright on the on the chart I system signals are by entry what you need to see is how wide the initial balance for that profile is if the initial balance is not too wide then you can link it with your breakout thinking that you know if this breakout is going to be true then that means the price needs to really higher when can a price really higher it can have a really high or when in that particular profile the initial balance is narrow that means you

are giving the other timeframe buyer or seller depending on where the breakout or breakdown breakout happens and opportunity to disturb the prices and take it higher I will getting it similarly what the profile will give you an idea about it let's say you get a you're taking instead of 30 minute instead of a single day profile you are taking a combined profile of three days let's say all right and you see that you get a by single okay but on a three day profile you're seeing that your initial balance is so wide and and the

price is trading in the middle of the profile what does it tell you instantly it tells you that the other time frame trader is not yet present it's only the local who is trading so what you can do with your system is you can adjust the quantity instead of betting the whole desired amount you can just take one tenth of it and start off and see what happens whether the OT of trader comes or not if it does not come believe me the price won't go anywhere it will just all there's no use giving Commission

to your broker all right similarly what you can see let's say finally the price gets disturbed then you can see where the range extension is happening if it's happening on the upside that means your system is correct and it gives you more confidence say trading is all about confidence the more confidence you get the more stress-free you'll be sorry the less stress-free you will be and the less stress free will be not stress-free I'm I stood over what I wanted to say is in trading mistakes happen because it takes stress if you if you take

less stress that will give you you know a clearer mind to take decisions and stress is lower in trading only when you're high on confidence getting it yeah now how do you integrate value area if you see that your system has given a you know break out but but prior profiles are showing that value area is not trending it is just overlapping with each other then that means the market is not yet in a trending phase and probably you are still in a range so again you can reduce your position you can be less aggressive

save on commissions save on potential losses okay and similar is the concept for buying tails that once you see like let's say you you have three profiles in front of you and you are entering on the third profile but in the previous two profiles you're seeing that you have a huge selling tale whose length is you know significant and the third profile on your bar chart you are getting a buy signal on the third profile you can see that the previous two profiles have been you know have a significant selling tail so what it tells

you tells you that sellers are present in the system so what you can do is again reduce your size now this information is not available on a bar chart or on a candlestick chart or pointer figure chart so this is a you can say a third dimension data that is being provided to you and that is where market profile is helpful all right in the next tutorial I think we'll be discussing about profile types that is that is opening of the profile in which which profile shape you need to bet on and how you need

to trade that now it gives you an huge edge again if you use it as standalone basis that's fine if you combine it with your system it will benefit you more alright so you see you guys underdone