Introduction to Market Profile: Guide for Beginners

It is important for anyone interested in learning to become a profitable investor or trader to be aware of the fact that learning to trade is a life-long journey. A smart trader is continually learning. The markets are always changing and one must learn to adapt and adjust to the changes as they occur. Hence we need an introduction to Market Profile.

It is both unreasonable and unrealistic for any individual to expect that they will ever beat or conquer the market as many misleading book titles often suggest. The goal of a successful trader is never to beat or outsmart the market. The goal of a successful trader should always be to trade in harmony with the market. Once a trader understands the landscape of the market, they can participate in market moves and profit from the activity that takes place in the market. Trading requires many different types of skills and it takes time, effort, patience, and discipline to acquire and master these skills.

Many new traders start their trading journey with a strict focus on price and price movement in the market. They quickly discover that
a focus on price alone does not lead to profitable trading and that a price movement without volume to support it will quickly fizzle away. After gaining some experience in analyzing the market, traders begin to realize that even a study of price and volume together is not sufficient to gain an understanding of the markets. Time is another major element or dimension that must be added to the equation. Different traders have different time constraints and different goals. Actually, this is often the main characteristic that distinguishes between a trader and an investor. A trader has a short-term horizon, while an investor has a longer-term perspective on the market. Consequently, all investors are traders in the market, but they have different time considerations for their investments or trades in the market. A price that may be too high for a daytrader may in fact be a bargain for a
longer-term trader or investor.

As any type of trader begins to incorporate the time differential into their analysis, they are able to better understand the multidimensions of the market and gain a much broader perspective of the market. However, even with time, price and volume, they are still missing a critical piece of the puzzle. They are missing the main factor that drives the market; the force that is behind all major trading decisions. They are missing where value is in the market. To profit in any market, a trader must buy low and sell at a higher price or take a short position and cover or buy back at a lower price. This cannot be accomplished without an understanding of where value is in the market. Value is the core concept behind any trade or exchange.

Using introduction to Market Profile, the trader’s perception of value is the major deciding factor for any trade decision. When a large instructional buyer decides to buy an item, it is because they have determined that its current market value is lower than its future value. The opinions and perspectives about future market prices will certainly vary significantly from one trader to another. However, they are always at the core of a trader’s decisions. In the case of an intra-day trader, the future value may simply be an anticipation of where price will be in the next five or ten minutes. On the other hand, a swing trader may make their trading decision based on where they anticipate prices will be in the following week. Moreover, a position trader may be looking at future price and value in a month or a year. The one common denominator is that all traders make their trading decisions based on their perceptions of value in the market.

In the past, traders have never had an analytical tool or a charting technique that helped them to identify and track value in real time for every time frame. Now, Market Profile charts make it possible for traders to identify and track value in real time in every time frame. This is the secret behind the power of the profile. The Market Profile gives us the ability to use this powerful knowledge to identify trading opportunities in the market and make better trading decisions. It helps us to better plan our trades; to better time our entries and exits to select more effective targets and stops. Moreover, we are able to learn valuable information about the condition and the structure of the market. We can identify balanced and imbalanced markets; we can identify fair prices, unfair highs, and unfair lows for any given session. Furthermore, the profile allows us to follow the dynamics of the market auction process. The profile is an invaluable tool in the arsenal of any serious trader or investor.

Hope it was a good introduction to market profile. Let us know your feedback in comments.

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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