Technical Analysis

Introduction to using Market Profile

What is Market Profile?

Everyone has seen conventional volume displayed as a vertical bar underneath the price bar. But the most important information that this cumulative tally of total volume omits to tell you is at what individual prices the trades that make up this volume were traded at. Knowing what prices traded the biggest volume can give you a significant edge with regards to understanding what price levels traders see as significant now, and likely will again if market price trades back in the same area.

In its simplest form,
Market Profile is a graphical organisation of price, volume and time information. Market Profile displays price on the vertical axis and volume/time on the horizontal axis. In the conventional legacy approach to charting Market Profile, letters are used to symbolize time intervals and volume traded (see Fig. 1 below).


caption: Fig. 1

This approach of letter based market profile was conceptualised and developed in the 1980s and trademarked by the Chicago Board of Trade. It originating back in the days before city pit traders had instant access to a computer screen or chart on the dealing floor. In order to get the volume data showing which prices traded what volume at what times, traders would print the market profile letter based chart onto a sheet of paper which they could then put in their pocket and use in the pit.

The computer screen as opposed to the dealing floor pit is now establishing itself as the most efficient means of trading, but analysing volume at price data can still be used very effectively by both screen traders and pit alike for significant advantages.

Market Profile reveals pricing patterns, from any market, as they develop. By effectively organizing price and time information, it is possible for traders to see which price areas the market is accepting or which ones it is rejecting? and adjust their trading styles accordingly.

The Markets’ perceived value

A price level that has been confirmed over time takes on added meaning. A price that is touched only briefly and trades low volumes at that [[Level I|level
I]]s just a price and little more. Confirmed by time and traded volume, however, traders collectively reveal how the market values that price.

The Markets’ perceived value to the biggest number of traders is ultimately the key to anticipating where price is likely to move. In order for the price to move there must be an imbalance between supply and demand. Current market price will naturally gravitate towards price points that attract high volumes of trades because in order for there to be equilibrium between buyers and sellers, prices have to be reduced or increased to the point where the new lower or higher value will bring sufficient buying or selling activity to meet demand. If the increased activity at the new price balances enough sellers to buyers, then an up move will come to an end, and vice versa.

It is simple supply and demand, but market profile can give you an edge in seeing where additional buyers or sellers have, and are likely to again, join the bid or the offer to counter a current price move. Market Profile will also show the price areas where participants have not previously engaged in significant volumes of trading and hence where any moving price is unlikely to meet support or resistance through additional supply or demand.

Using peak volume prices to establish key support & resistance

Charting packages such as TradeStation now have add-ons for displaying both conventional letter style market profile and histogram based volume at price data. Screen traders who dont want to get into learning the whole approach of understanding a jumble of coloured letters on a chart can simply eyeball price data and see which levels traded significant volume and at what time by comparing the horizontal volume bar lengths (see Fig. 2 below).


caption: Figure 2

This simple approach to Market Profile can reveal support & resistance data that is vastly superior to any fibonacci levels, calculated pivot points or gann lines, since it shows at which price levels the maximum number of traders participated in the market – as opposed to some potentially asbstract fibonacci line drawn at a level that may have no significance to anyone else other than you. The chart in Fig. 3 (below) shows a simple histogram based market profile analysis of 15 min intervals on a 3 min intraday chart in the e-mini S&P future.


caption: Fig. 3

By drawing a line on the chart at the price points that traded the peak number of contracts for each 15 minute interval analysed, it is possible to establish levels that market participants hold as significant, and you can see from the illustration in Fig. 4 (below) how market movement reacts to these price levels on the following day.


caption: Figure 4

An edge in any market, any timeframe

Another reason why Market Profile is so effective is because it works on any market, and on any time frame, from short intraday intervals right up to daily and weekly price bars. Better still, volume at price can be used in conjunction with your existing trading methods to give you a valuable extra context to market price movement that can only help to improve your trading edge.

Martin is currently a full time trader at Refco's London trading floor, primarly scalping calendar spreads in the Euribor, Short Sterling and Eurodollar interest rate futures.Martin especially enjoys the dynamic environment of the markets, the people involved in trading, and in the constant need to be adaptable. The ability to earn almost unlimited amounts of money and be responsible for his own success and wages are a factor in making trading his career of choice.

Martin is currently a full time trader at Refco's London trading floor, primarly scalping calendar spreads in the Euribor, Short Sterling and Eurodoll...

MartinD

Active member
105 2
The code for the indicators in the screenshots came from a 3rd party developer, I dont know if its available for TS2000i as I am using v8.1
 

MartinD

Active member
105 2
I should also add that there is a lot more to market profile than the basic info I included in that article - I did not touch at all on the significance of value area, price distribution or interpreting whether the market is displaying responsive or initiative activity.

The article is intended to show that volume at price is significant and that useful support and resistance information can be obtained from the study of volume price levels.

Much more detailed info for market profile specifics can be seen at the following links:
MP Basics: http://windotrader.com/Portals/0/WT_MKTPROF.pdf
CBOT MP presentation: http://cbot.com/cbot/docs/mp_show_1.PPS
CBOT MP Handbook: http://cbot.com/cbot/docs/handbook.pdf

Also, the indicators I used in my screenshots were from the following TradeStation 3rd party developer:
http://www.1st-tradingtools.com
 

TWI

Senior member
2,527 252
That is a very interesting use of volume. I have never seen it displayed on a chart like that but I think this could be very useful. I see the website is down at the moment but do not think the indicator will be too hard to write. What options are available as presume it has a different timescale to the underlying chart.
I am thinking a horizontal volume indicator that will run for e.g. 60mins laid on a 10min chart, something like that where you can define how many volume levels you wish to display.
 

Glenn

Experienced member
1,040 117
Using such a method, how does one take account of the fact that much of the largest volume is hidden or displaced in time in most markets ?

Glenn
 

MartinD

Active member
105 2
twalker,
yes, you can change the on chart volume bar interval to whatever you like - 60 min analysis on a 10 min chart, or on a 1min chart, whatever suits you.

I've got to go out very shortly, but probably tomorrow I'll post a chart setup however you like if you want a look at volume at price on this or any other market. Let me know what you would like to see.
 

Glenn

Experienced member
1,040 117
If you study the various Order types available on exchanges you will see that there are facilities for hidden orders, iceberg orders and that certain rules of volume dictate how long in time it is before a trade is declared i.e. delayed..
Got a trade running - have to go..
Glenn
 

Glenn

Experienced member
1,040 117
By coincidence I believe a delayed trade of 4000 contracts has just gone through on the Ftse100 June futures at 13:37 pm.
It is visible from a Mytrack data feed, but not from IB.

Glenn
 

TWI

Senior member
2,527 252
But volume will still show real-time on traded volume. Icebergs just execute in fractions so is the same as not knowing if somebody is about to place a large volume order at a price. You can only work off already executed volume anyway.
 

Glenn

Experienced member
1,040 117
"But volume will still show real-time on traded volume"
I have just given a live example of a delayed print where that was not the case.

A Hidden order (generally a large volume order) shows no evidence of its existence in either the market data or the deep book. -( Island Exchange)

An Iceberg order allows you to submit an order (generally a large volume order) while publicly disclosing only a portion of the submitted order.
(IB Smart, Belfox(s), CBOT(s), CBOE(s), FTA(s), Globex(s), EurexUS(s), HKFE(s), IBIS, IDEM(s), LIFFE(s), ME(s), MEFF(s), Monep/Matif(s), Nymex(s), ONE(s), OSE.JPN(s), SNFE(s), Soffex(s), SWX, TSE, TSE.JPN(s), VIRTX)

Glenn
 

TWI

Senior member
2,527 252
I know, but once it trades the volume will appear. Iceberg orders onlline hide the volume that has not yet traded, not the portion of the order which already has. I think there is a distinction to be made between traded volumme and orderbook volume. I only ever expect to see traded volume on an indicator of this nature.
 

TWI

Senior member
2,527 252
I have no facility for delaying the announcement of traded volume on TT so very surprised if some people are able to do this.
 

Glenn

Experienced member
1,040 117
twalker said:
I know, but once it trades the volume will appear. Iceberg orders onlline hide the volume that has not yet traded, not the portion of the order which already has. I think there is a distinction to be made between traded volumme and orderbook volume. I only ever expect to see traded volume on an indicator of this nature.
"..once it trades the volume will appear."
You may choose to question your current understanding, perhaps to your advantage.
Likewise you may wish to look at Off-market trades and how/whether they are declared.

The whole point of Icerbergs is that you can only see the tip of them. The vast bulk is hidden.

"I think there is a distinction to be made between traded volume and orderbook volume"
I am talking about traded volume, which is what I assume that Market Profile needs to know.

Glenn
 

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