What is a Market Profile Chart?

The Beginnings of the Market Profile Chart

A market profile chart is a very specific  intra-day charting tool that can help investors better understand complex market activities. J. Peter  Steidlmayer, who worked with the Chicago Board of Trade, developed the market profile. He developed the chart in coordination with the Chicago Board as part of an effort to develop new tools for traders to use. The CBOT wanted a tool that would link data between the board and the market.

The market profile chart was introduced to the public all the way back in 1985, years before the internet became popular for stock traders. Along with the chart itself, the market profile also offers a trading methodology for trading.  The tool quickly became popular for traders, though it is not used as frequently any more. This doesn’t mean, however, that it’s not a great tool. If you’re a serious trader you should consider learning how to use it.

What a Market Profile Shows

A market profile provides a three dimensional view of market activities. The profile includes price vertical information, time/activity, and horizontal activity. Besides showing prices and time, a market profile also shows trade volumes, which helps traders understand which prices are creating the most activity. This can be very useful for determining demand for a particular stock or asset.

The theories behind the profile recognize that volume can identify signs of either change or continuation, depending on what market forces are dictating. Volume data by itself, however, is practically meaningless and hard for most traders to really interpret. By considering other data points and how market volume relates to trading conditions, the market profile helps traders understand what trading volumes really mean.

Market profiles measure plots at thirty minute intervals and show value areas. The value area is where seventy percent of all trading is conducted. According to the theories behind market profile charts, trading will tend to revert back to the value area where the highest amounts of volume in trading are occurring. This is sometimes referred to as the point of control.

Market profiles display information in a bell-curve. This means that those areas with the highest amount of trading will form the “fat” center of the chart. The market profile will show the outlying prices at the outside, where the chart tapers off. This helps investors understand market activity and which price bands offer the most potential for trading.

Market Profile Trading Training

If you are looking for training in market profile trading, your only university based option is at Western Illinois University. This class was launched after the efforts of Professor Thomas P. Drinka. The Chicago Board of Trade has also periodically released manuals that help people understand how to compute, read, and use market profiles. The CBOTMP2, released in 1992, is still considered to be the leading and authoritative source for information regarding the profile, so make sure you check it out.

If you do decide to use market profile data and charts, make sure you take the time to learn about them and how they work. These important tools can be very useful but will take time to learn how to use. Don’t feel discouraged, however, as with time and effort, just about everyone can learn how to use the profile.

The market profile is one of the more difficult to understand trading tools. Nonetheless, for those who learn it, the profile can offer a lot of insight. Trading volumes reflect trader sentiments and how people feel about certain prices. Thus, a tool that can help you understand trading volumes and what they mean can be of great use. Trading volume is sometimes overlooked by traders who are often more concerned with price and headline news, but savvy traders will consider all factors.