What Is Market Profile?

A few times a year I see a spike in intrigue regarding market profile.  Being one of the few bloggers who consistently produces real time market profile analysis I enjoy the discussion influx.  What I enjoy even more is “when” the spike occurs—usually when uncertainly perks up in the marketplace.  This week was no exception.  When the rug was pulled out from under the indexes the tool flexed its muscles.

Market profile is like a very powerful weapon.  Imagine you were in a battle and possessed a device or tool which could completely devastate the opposition.  The key is knowing when and where to deploy the weapon and to assess the carnage (or lack thereof).  Misused and it only creates confusion in the field.

Market profile is not a timing tool.  It is not predictive in nature.  What market profile provides is context and potential opportunity.  The charts are graphical representations that allow us to clearly see the market as an auction and assess who might be participating in the auction, what they are trying to do, and how good of a job they are doing in their efforts.

Think about other ways you can obtain context.  If you like, think of yourself as a General tasked with capturing a territory, what information would you want to have?

The size of the opposition, their location, their behavior in past encounters

Intelligence from the people who are on the ground, insiders and spies

Weaponry, drones

Maps or satellite imagery of the land

Market profile satisfies most of these contextual pieces.  The size and location of “supply” above can be seen as a high volume node, long thin stretches on a TPO show participants reacting to an attack or initiating an advance.  Thin volume zones which never received a proper battle may serve as an easy land grab or might be barren for a reason, like they are fortified with conviction.

Intel comes from the traders, the pros.  Intel comes from the iBankCoin brain trust.

Lets end this discussion with an excerpt from last Thursday morning, when we woke up to a 50 point gap down in the Nasdaq:

“Thus far the responsive buying tail from last Tuesday has held as support.  Whether or not it holds through today will be an early clue as to whether we sustain intermediate term balance or move into a seller controlled environment.”

This was key intel for early in the session, something to lean on before panicking out of your longs.  Here was the map:

 

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