Initial Balance Concept in Market Profile Trading

The initial balance Concept is defined as the range of price movement that occurs during the first hour of trading for the day, as seen in the below image.

Initial Balance Concept

It is made up of the first two half-hour periods for the day. In other words, the initial balance is the range of price movement created by the first two letters “A” and “B.” This initial balance can often provide us with many important clues about the possible Profile structure developments for the day and the likely trading range for the day. On many days the actual high or the low for the day is established during the initial balance period. Once the initial balance is created, it is prudent to display reference lines at the high and low of the initial balance range as shown in the next image.

This helps traders to monitor and track further price developments for the day relative to the initial balance period. When the market is moving directionally, the price range will be extended in the direction of the trend. If the market is bullish, the initial price range will move higher, extending above the initial balance. However, if the market is bearish, the price range will drop lower than the initial balance.

If the day starts out with a relatively small initial balance range, there is a high probability that the range will extend to one side or the other. However, if the day starts with a wide initial balance, we will usually have one of three possible scenarios develop.

  • The market will continue to move in the same direction as the initial range and thus create a directional or trending day.
  • We may not have any expansion on either side of the wide initial range. In other words, the high and the low for the day will be the same as those of the initial balance period. All of the day’s activity will be contained within the initial balance range.
  • The market actually slightly extends both the highs and the lows of the initial range. On some days, we may actually see prices rise above the high and drop below the low of the initial balance to test the highs and lows for a possible breakout on either side.

The initial balance period is usually the amount of time that it takes the daytraders or short term traders to find an area of fair price where two-sided trade can take place. If a high or a low is set during the initial balance period and continues to hold throughout the trading session, the daytrader is in control of the market for that day. If the other longer-time frame traders decide to enter the market with enough volume, they can extend the initial balance range and move the day’s range price range up or down.

The initial balance Concept is a key period for any trading day. It is important for a trader to carefully monitor, record, track, and study the initial balance data for the instruments that they trade. This will allow them to distinguish between wide and narrow initial balances for the day. Naturally, these initial balance ranges will vary significantly from one financial instrument to the other.

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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