Common Misconceptions about Market Profile: Beginners Guide

The enigma and power of the Profile have created many misconceptions about this analytical tool. Before we begin discussing what the Market Profile is and how we can actually use it, we need to first address and identify some of the common misconceptions that exist about the Profile and its applications.

List of Common Misconceptions about Market Profile

Below is the list of Common Misconceptions about Market Profile:

Market Profile Charts are Complicated

Unfortunately, many traders are not attracted to the Profile because they think that it is complicated, hard to understand, and difficult to apply. In reality, nothing could be further from the truth. The Profile is actually quite simple and easy to understand. It simply involves a different way of looking at the market. Once you can understand how it presents market data and the valuable information it offers, you will wonder how you could have ever traded without it. It actually provides a very clear view of market activity as it happens.
In some ways, it is far easier to identify critical market information from the Market Profile chart than it is from any other type of chart. The Market Profile is made up of simple building blocks or units. Watching the structure of the market develop in real-time on the Profile is the most clear and precise visual representation of market activity. Once you understand the basic elements that make up the Profile chart, it becomes easy to comprehend and apply the Market Profile concepts.
Even though the Market Profile is easy to learn, it does take some time to learn it and to become familiar with the methods and techniques that are involved in applying it to the market. The learning curve and process will certainly vary from one individual to the other. However, with the proper education, it is just as easy for a beginner to learn as it is for an experienced trader. In this book, every effort has been made to simplify the basic concepts that are involved with Profile charts and their applications. The tutorial series uses a simple systematic approach in explaining and illustrating various Profile concepts. Many diagrams and charts are frequently provided to allow the reader an opportunity to visually examine the elements and the structure of the Profile.

Market Profile Charts are Only for Futures and Commodities

Even though the Market Profile charting system was developed by the CBOT, one of the primary commodity exchanges, the concepts that were used to develop the Profile chart can be used for any electronic auction market. It can actually be used for displaying and tracking trading activity for stocks, ETFs, futures, commodities, bonds, and currencies. If the data is available, the Profile will display it. The Profile concepts are not dedicated to any single type of data. The basic concepts and market structures can be applied to any market. This versatility makes the Profile an important tool for all traders to learn and understand.

Market Profile Does Away with Technical Analysis

Many traders have the misconception that Market Profile eliminates the need for technical analysis and traditional charting techniques. It is certainly true that Market Profile is a unique way of looking at market data, and it does provide us with valuable information that is not found in bar charts, line diagrams, or candlesticks. Nevertheless, it does not eliminate the need for technical analysis or other charting techniques.
Learning to use and apply Market Profile charting concepts does not mean that we will no longer need to look at or use any of other types of charts and technical tools. It is true that we will do away with many of the lagging and confusing indicators that are often stacked on charts. The Market Profile works extremely well with many of the traditional technical analysis methods such as support and resistance, chart patterns, and trend lines.

Consequently, to fully realize the potential and usefulness of the Market Profile, it is important to develop the ability to integrate the information that we gain from a Profile chart with the information that we acquire from other traditional charting techniques and technical tools.
Traders must continually analyze the market with every useful tool that is available to them. The Market Profile is an incredibly powerful analytical tool. It significantly adds and enhances any trader’s toolbox. However, just because we can utilize Market Profile data, it does not mean that we are going to abandon all other analytical tools and techniques. Imagine the constraints and restrictions that an artist would place upon himself if the limited his creativity to the use of a single brush or a single color. Trading is both an art and a science; a trader must learn to select the right blend of tools and data to produce a masterpiece.

Market Profile Requires Memorization of Patterns

Another common misconception is that to effectively utilize the Market Profile all that is required is to simply memorize a set of patterns or rules. While it is important to learn to identify certain patterns as they develop, it is far more important to understand why the patterns are occurring. The Market Profile is not about memorization, it is about understanding and interpreting the patterns that we observe as they develop.
To successfully apply Market Profile concepts, one must genuinely understand the principles that influence market behavior. Therefore, in learning to effectively utilize the Market Profile, it will be necessary to develop a real understanding of the factors and elements involved in creating the patterns and the resulting price developments.

Moreover, it is important for traders to understand the weakness and limitations of buy and sell signal systems. These systems immediately lose their effectiveness when the market conditions on which they are based on change. Market Profile charts, on the other hand, are an accurate representation of actual market data and activity as it occurs, and thus allows us to see the changes in market conditions as they happen. This makes it possible for a Profile trader to make informed decisions about the market. Furthermore, it provides them with the flexibility and ability to react quickly and adjust their decisions based on market dynamics. The Profile trader’s judgment and interpretation of market data determine the appropriate trading decisions that are required for each situation.

Market Profile Predicts the Future

Many traders incorrectly assume that the Market Profile can predict for us what will happen in the market. Once again, nothing could be further from the truth. The Market Profile is focused on the present. It allows seeing with clarity what is happening in the market at the present moment, but it does not tell us what will happen in the future. Unfortunately, nothing can predict the future for us with any degree of certainty.
The future is always an unknown and the Market Profile does not change that. However, it certainly helps us to understand what is currently happening in the market. As we gain a better understanding of the current condition of the market, we can then make better trading decisions about what is likely to happen in the future.

Ankit Maheshwari

Ankit is an avid writer with experience of working Investment Banking domain for over 7 years. He has been tracking Indian markets for over 10 years now for educational and learning purpose.

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