Market profile
A market profile is a graphical representation of the trading activity in a market, typically shown as a histogram. It displays the distribution of prices at different levels, and is used to identify areas of support and resistance, as well as to identify trends and patterns in the market. The market profile can be used in various markets including stocks, futures, and forex, and is often used in combination with other technical analysis tools.
Applications of market profile
There are a few key ways to use market profile in your trading:
- Identifying areas of support and resistance: The market profile displays the distribution of prices at different levels, which can help you identify areas where buyers and sellers are most active. These areas can act as support and resistance levels, and can be used to set stop-loss and take-profit orders.
- Identifying trends and patterns: The market profile can also be used to identify trends and patterns in the market. For example, a market profile that is trending higher will have more activity at higher prices, while a market profile that is trending lower will have more activity at lower prices.
- Time-based analysis: Traders can use market profile to analyze how price behaves at different times of the day, week, or month. This can be useful in identifying patterns in the market that repeat over time.
- Combining with other technical analysis tools: Market profile can be used in combination with other technical analysis tools such as candlestick charts, trend lines, and indicators like the moving averages, RSI etc. to gain a more complete picture of the market.
- Volume-based analysis: One can also use market profile to analyze the volume distribution across different prices, this can give insight on the buying and selling pressure.
It's important to note that market profile is not a standalone indicator, and should be used in conjunction with other technical and fundamental analysis to make trading decisions.
Example of market profile
A market profile is typically represented as a histogram that is plotted on a price axis and a time axis. The histogram displays the distribution of prices at different levels over a specific period of time.
Here is an example of a market profile for a specific day of trading in the S&P 500 index:
- The price axis is on the left side of the chart and ranges from 2900 to 3100.
- The time axis is on the bottom of the chart and is divided into 30-minute increments.
- The histogram is color-coded to represent the distribution of prices at different levels.
- The area of the histogram represents the volume of trading that took place at each price level.
In this example, you can see that the highest volume of trading took place at the price level of 3050, which is represented by the tallest bar in the histogram. This suggests that 3050 is an important level of support and resistance. Additionally, you can see a trend forming where prices are moving higher in the morning and then consolidating in the afternoon.
Table 1. Data for the example market profile histogram
| Price | Time | Volume |
|---|---|---|
| 3050 | 09:30-10:00 | 50 |
| 3040 | 10:00-10:30 | 40 |
| 3035 | 10:30-11:00 | 35 |
| 3030 | 11:00-11:30 | 30 |
| 3025 | 11:30-12:00 | 25 |
| 3020 | 12:00-12:30 | 20 |
| 3015 | 12:30-13:00 | 15 |
| 3010 | 13:00-13:30 | 10 |
| 3005 | 13:30-14:00 | 5 |
It is also possible to customize the market profile by adding different parameters such as volume, volatility, etc. These can provide additional insights into the market.
It's important to note that this is a simplified example and in a real-world scenario market profile would be more complex and dynamic. Market profile should be always used in conjunction with other technical and fundamental analysis to make trading decisions.
Steps to create market profile
A market profile can be created using a charting software that supports the market profile indicator. Here are the general steps to create a market profile:
- Select the market and time frame: Choose the market and time frame you want to analyze. For example, you may want to create a market profile for the S&P 500 index for a specific day.
- Add the market profile indicator: In the charting software, find the market profile indicator and add it to your chart. This will display the market profile as a histogram on the chart.
- Customize the settings: Some charting software allows you to customize the settings of the market profile indicator, such as the number of price levels to display and the color scheme.
- Identify areas of support and resistance: Look for areas on the chart where the histogram is the tallest, these are the areas where the most trading activity took place, they can act as support and resistance levels.
- Identify trends and patterns: Look for patterns in the market profile such as how prices move over time, how price behaves at different times, etc.
- Use in combination with other analysis: Combine the market profile indicator with other technical analysis tools such as candlestick charts, trend lines, and indicators.
It's important to note that, some charting software may have different steps and settings for creating market profile. It's always a good idea to consult the software documentation or seek assistance from the software provider if you have any trouble creating a market profile.
| Market profile — recommended articles |
| Overbought oversold indicator — Long-legged doji — Price pattern — Bear flag — Fear and greed index — Cumulative frequency curve — Bullish divergence — Trading channel — Moving average chart |
References
- Wight, P. A. (1996). North American ecotourists: Market profile and trip characteristics. Journal of Travel Research, 34(4), 2-10.
- Bradley, F., & Gannon, M. (2000). Does the firm's technology and marketing profile affect foreign market entry?. Journal of International Marketing, 8(4), 12-36.
- Singh, D. P. (2011). Indian ecological consumer market profile. Global Business Review, 12(3), 447-457.
