The Ultimate Guide to Market Profile

Market Profile is best understood as a way to see order in the markets.

While not a typical “indicator.” Market Profile takes the data from each day’s trading session and organizes it to help us understand who is in control of the market and what is perceived as fair value.

Market profile is more similar to the Market Internals (market breadth and advance/decline line) than a moving average or stochastic indicator.

Developed by J. Peter Steidlmayer in the 1980s, Market Profile was a way for traders to get a better understanding of what was going on, without having to be on the trading floor.

We typically see market data organized by time, price and volume. Market Profile organizes the data in such a way that makes more sense of where prices traded throughout the day.

How it WorksMarket Profile Distribution Curve

Each day the market will develop a range for the day along with a value area. This value area represents an equilibrium point between buyers and sellers. The “profile” follows a normal distribution curve.

Volume is the key ingredient to understanding Market profile. If prices move away from their equilibrium (value area) and volume starts to dry up, it is likely that prices will move back into value.

If price moves away from equilibrium on strong volume, this is a sign that traders are reevaluating the current value area as there has been a shift in sentiment.

Breaking Down the Profile

Market Profile is made up of TPO’s (Time Price Opportunities). A different letter is assigned to each 30-min time period of every trading session. I like to begin with A, but you will see varying charts start with different letters.

Market Profile BreakdownThe POC (Point of Control) is the row at which the most number of TPO’s occurred.

A value area is calculated using 70% of the days TPOs to give us a value area high and a value area low. This value area is used as a reference in the following day’s trading session.

Calculating Value

Let’s look at how we calculate value area using the TPO count.Value Area Calculation

  1. Count the total number of TPOs in a single day’s profile.
  2. Calculate 70% of this number.
  3. Identify the Point of Control (POC), the longest line of TPOs closest to the center of the profile. Note it’s TPO count.
  4. Add the TPOs of the two prices above and below the POC.
  5. Beginning with the larger number of combined two rows of TPOs, add this number to the POC number, continuing this process until the number reaches 70% of the total TPOs for the day (the resulting number from step 2).

Example:

  • Total TPOs = 131
  • 70% of 131 = 92
  • TPOs at POC = 11
  • TPO Count = 11 + 20 + 18 + 16 + 14 + 9 + 6 = 94
  • Value Area Low = $2148
  • Value Area High = 2158

Using Market Profile

As I talk about a lot on the EminiMind blog,  it’s the first 60-mins of trading sets the tone of the day and gives us an upper and lower price range to use as a reference point for the day. In market profile this first hours range is known as the initial balance.

A wide initial balance (or opening range) suggests that prices will stay within that range and we will most likely chop around from the lower end to the upper end of the range, back and forth all day.

When prices go above or below the initial range, this is known as a range extension often seen exaggerated on trend days.

Sometimes, price will only stay at a given price level for one TPO print, this is known as a single print buying/selling tail.

Identifying the Different Types of Days

  • Normal Day – a wide initial balance and a relatively balanced market
  • Normal Variation of a Normal Day (Most Common) – Most activity occurs during the initial balance with a small range extension, usually depicted as nice smooth bell curve.
  • Trend Day – Prices are constantly moving in one direction. On a trend day we typically see 5 or less TPOs per row.
  • Double-Distribution Day – Typically a double-distribution day starts out as a trend day and forms a second balance or equilibrium area.
  • Non-Trend Day – A narrow trading range, with a wide profile, usually little or no range extension.
  • Neutral Day – A symmetrical profile with an open and close near the POC

Market Profile Normal Variation of a Normal DayMarket Profile Trend DayMarket Profile Double-Distribution Day

Market Profile Non-Trend Day Market Profile Neutral Day

Buying and Selling with Market Profile

When we look at Market Profile, we want to compare the developing profile (today’s price action) to that of the prior day’s profile.

You can likely spot a trend forming, by looking at the movement of the value area. If the POC and value area are moving in the same direction day after day, it is a clear sign that we are trending. When the POC begins to move sideways, line up with the previous POC or we trade mostly within the prior day’s value area it is a sign that the trend is either changing, or that no trend exists and we’re moving sideways.

When we open above value and volume is strong (or increasing) that tells us that higher prices are being accepted. When we open above value and volume is weak, that’s a sign we will likely fall back down into value.

The same is true for opening below value. Strong volume indicates prices being accepted, light volume is a sign that we won’t be spending much time at that level.

Responsive Activity versus Initiative Activity

Market Profile Definitions

  • Time Price Opportunity (TPO) – The letters assigned to each 30-min time period.
  • Initial Balance – The first hours range.
  • Value Area – Where 70% of the day’s trading took place.
  • Value Area High (VAH) – The upper level of value area.
  • Value Area Low (VAL) – The lower level of value area.
  • Point of Control (POC) – Price where the most trading occured (longest line of TPOs).
  • Single Print Buying/Selling Tail – When price makes a one letter print in a row.
  • Range – The high to low of a day’s price action
  • Range Extension – An extension of price beyond the initial balance.

Links and Resources from this Article

In creating The Ultimate Guide to Market Profile I utilized graphics from this Market Profile Basics article.

Summary – How Market Profile Can Help You in Your Trading

Market Profile is a way to simplify the market price action and determine the area which traders found to be fair value.

While the Market Profile is not an entry and exit method in itself, we can use it as a gauge of market sentiment to determine what levels are likely to see lots of action, and to identify early on what type of day is forming.

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3 Mistakes I Made When Making the Switch to Trading Full Time

When I first began trading I did it part-time, meaning I worked, went to school, and traded “on the side.” It was nice.

Eventually though, I transitioned to trading full-time. All that really means is trading was my main profession. Over the years, I’ve got my hands dirty in other areas, side projects, web design, executive boards, volunteering, etc. but continue to trade and blog.

Making the transition to trading full-time was a bit scary at first and I made some mistakes in the process. Since then, I’ve learned from those mistakes and improved my trading even more.

So here’s my 3 mistakes I made when making the switch to trading full time (and how I overcame them)…

Focus on One Thing at a Time

We all like to multi-task, but in trading, multi-tasking is no good. It’s fine to look at multiple charts and scan multiple markets. What I mean by don’t multi-task is focus all your energy on the trade. Don’t have the TV on in the background, don’t make plans for what you’re going to do with the money you may make, don’t surf the net, just trade.

A troublesome situation for me was to be in a trade and already looking to the next trade instead of focusing on managing the trade I already have on. The thing that helped me break free of my multi-tasking bad habit was to simplify my trading screen, have a set routine, and time block.

By time blocking I just mean blocking out chunks of time each day for certain tasks. I will typically spend the morning with the markets, then mid-day work on a blog post or other various projects, and go for a bike ride in the afternoon. By time blocking I break up my day into projects (i.e trading, blog, workout, family time, market homework, etc.) These blocks of time can be as little as 30-mins and in fact, blocking in 30-mins is actually proven to be the most effective way to get things done.

It’s called the Pomodoro technique, developed by Francesco Cirillo in the late 80s. This technique breaks down work into intervals of 25-mins, with a 5-min break. Think about it, how many times do you get up from you computer and walk downstairs to refill your coffee, or check the mail, or just go for a quick walk. I’m constantly getting up.

With the Pomodoro technique it allows me to say, okay I’ve got 25-mins to knock this out, then I can take a break. It works well for me, I’d recommend giving it a try!

Don’t Set Deadlines, Set Achievements

This was totally counter intuitive to me. When I began trading full time I set these deadline of when I wanted my account to reach 100k and how in X months I wanted to be making 10k per month. Every time I would fall short of a deadline I’d get discouraged. Instead of saying yeah I was consistently profitable this month and didn’t take any major losses, I would look at it and say, dang I didn’t make it to my 10k goal I’m a failure.

First of all, no you’re not. The only way to truly fail is to give up. So I switched my targets to read as achievements. My goal by the end of the year is to be consistently profitable month after month. Then I broke down what I needed to do to achieve that goal. The time required looking at the markets each evening to be prepared for the following day. Every time I went to place a trade I’d ask myself, is this a valid setup or am I just itching to place a trade.

The other achievement I set was a weekly average goal in that, in order to sustain your lifestyle, how much do you need to bring in each week (then add 30% to that for commissions and taxes, plus it’s good to have a buffer). Setting that kind of a goal rather than a hard deadline helped motivate me.

Don’t Compare Yourself to Others

This one I’m sure I talked about before, but I can’t stress enough how important it is to only compare yourself to yourself, not to others. Don’t make excuses. Stop and think about what advantage you have that others don’t. Sometimes referred to an “unfair advantage.” Focus on how you can improve you and don’t worry about what other people think.

So that’s my list.

Those were the 3 things that really helped me focus in and make it as a trader on my own. If you can go into it with a positive attitude and surround yourself with good people the opportunities will make themselves available to you. As traders we like to do things our way, so don’t be afraid to call the shots and be different. That doesn’t mean tell your boss to take a hike you’re quitting, but there’s no reason you can’t live a life where you enjoy doing what your doing.

I urge you to take control of your own financial future. Put together a long term picture of what you want your like to be like down the road, sit down with your spouse and family and put together a plan. Start small in the trading game, but don’t be afraid to take chances. Typical “jobs” will always be there. There’s no better time than right now!

Suggestion Box

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  • How can I make the EminiMind site better?
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I’m open to any and all suggestions good or bad. Your feedback makes this blog go!

Thank you

Tim

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Fall is Here! And so are a Few Changes

Wow it’s been a busy couple of months! (I feel like I start every blog post off that way these days).

A lot has happened this summer and there have been some big (and exciting) changes in my life. As many of you know, I got married in July and it’s been great! I did more travelling this year, spending time in 19 states mostly for bike racing, but also a little leisure :)

After 5 years of spending my winters in Scottsdale, Arizona my wife and I decided to move there permanently. Well, just north of the Phoenix valley a few hours. We’ll still get seasons, but won’t see anything close to the brutal winters of Chicagoland.

Find Your Groove

Trading is all about finding your groove, a routine, a rhythm. Whether it’s waking up each morning, sitting on your porch sipping your coffee and reading the newspaper, getting out for a run, or taking the dog for a walk, find a way to make trading part of life’s routine.

It doesn’t matter if you’re a full-time trader or work a 9-5 job and dabble in the markets during your spare time. The only way to truly build a lasting career in this business (aside from taking it seriously and treating it as a business) is to incorporate trading into your everyday life.

Don’t keep your friends family in the dark. Talk to them about what it is your doing, your goals and dreams. You might be surprised where the conversations take you!

Family, chores, community events, they all need our attention. Keep your priorities straight. Don’t neglect your family, kids, or friends, but don’t ignore the markets either. Find a happy balance. There are certainly challenges along the way, but as the saying goes, C’est la Vie “such is life.”

Have an open mind, embrace life’s challenges, and be ready to seize opportunities when they present themselves!

Have a comment or response, by all means share your thoughts below!

E-mini ES Trading Strategy Q+A

Your trading questions answered…

This summer has been crazy! I got married last month so I’ve been a little behind with emails and blogging. I thought I’d get back into the groove by answering some of your questions.

Here are some common (and uncommon) questions I get from traders regarding my trading setups, strategy, and trade execution. If anything is unclear or you’d like more clarification just leave a comment below the post and I can go into greater detail.

Q: Do we have to trade with the trend or we can sometimes take counter-trend trades?

A: Always know what the market is doing on the daily time frame. If we’re in a strong uptrend on the daily, then intraday I’m not going to be aggressively shorting. If however, the daily chart has reached a target then looking for counter trend trades in anticipation of a pullback poses a great opportunity.

  1. Trade w/ the larger trend (i.e. If the daily is trending up, 15m is trending up, then trade the 512t up).
  2. Taking the first setup in a new trend poses moderate risk, but high reward.
  3. Use the NYSE tick to pinpoint counter trend trades on small timeframes. When a the high price of the day aligns with the high NYSE tick for the day it’s okay to go short, when the low price of the day aligns with the low NYSE tick for the day it’s okay to go long.
Q: How do you use the market internals (breadth, advance/decline) to place trades?

A: I use the market internals to help interpret market sentiment. The market breadth and advanced/decline line, along with things like the VIX (volatility index) help me gauge what is going on “under the hood” as Peter Reznicek likes to say. In looking at these throughout the day, I can determine for example, if the market is likely to remain in a sideways range bound state and thus lack follow through momentum.

More on market internals can be found in this post An Introduction to Market Internals

Q: How do you know when to use the retracement method versus the breakout method?

A: The answer to this question is determined by what the market state is. Both methods work well in trending or range bound markets, the key is to identify where we are at in the trend or the range.

Getting into the trend near the start allows for the most profit to be had, the same can be said in a range bound market, you want to get into the move at the bottom of the range, ride it to the top, exit, and then get in at the top and ride it back down to the bottom of the range (I stay away from trading the middle of range bound markets).

When the market is trending nicely in a stair step fashion (and it is easily identified visually) then I trade the retracement method. The reason being, I want to get into the trend after a pullback (or pause).

When the market is in a range bound market you can use the breakout method to get into a trade at the top or bottom of a range when the momentum shifts.

The other use for the breakout method is when the market is exceptionally strong and doesn’t make a full retracement. In this case, the breakout method comes in handy, getting you into the trend sooner than the retracement method would.

Both strategies are outlined in detail in my guide Trading Rules for the ES & 6E Futures

Q: How do you manage trades when there is a news announcement?

A: I won’t place a new trade within 5-mins of a news announcement. If I’m already in a trade and haven’t taken any profit (or the trade hasn’t gone anywhere yet) I will either close half, or close the entire thing and re-enter after the announcement (this mainly goes for big news announcements like job reports etc.)

The other announcement that can make the markets go wacky is the Fed Meeting Announcement on Wednesday afternoons every few months. I typically close out my intraday positions a few hours before the announcement (or don’t even trade on these days). Once the news is announced the markets can go bonkers and it usually takes till the close for things to settle down.

Q: What marks a trend change or failure?

A: A break of the 61.8% line equals a break in trend in my book. There are a few other factors I use to determine if the trend change has substance. I talk about them in this video: How to Identify the Market Trend.

Q: How do you use the smaller time frames to enter into the trend?

A: Identify a 15m setup that has traded entry to target. Then draw the next 15-min setup in the trend and when it pulls back to its 50% zoom in to the 512 tick chart. Look for the trend to break on the 512t chart as it comes down into the 15m entry and bounces. Then take the first 50% retracement on this 512t time frame.

Q: Do you ever buy the daily or 15-min levels outright?

A: If it’s a big level and the previous setup in the trend was clean I’m okay with taking 15-min levels with a limit order. If it’s a big daily level that appears to be a significant, but isn’t entirely clear, waiting for a bounce and taking the first setup on the 15-min is my tactic.

In Summary

In addition to where to enter and where to exit, as a trader you need to know how you will respond in various situations. How are you going to get out of your losers? How are you going to keep your winners from turning into losers? Never stay in a losing trade because you think it will come back. Cut it, minimize the loss and move on. What is your opportunity cost of being in this position? Are there better opportunities out there?

Think of yourself as a risk manager in search of opportunity.

If you have questions leave them below, I’m happy to answer them!

  • What are you struggling with?
  • What’s one thing that’s working for you right now?