Market Profile – Participants Behavior Analysis

The Market Profile helps us to identify various patterns of participant behavior in the market. The “sell-side” and “buy-side” participants have different interests, objectives, practices, and levels of influence on the market.

The “buy-side” participants or large investors have a distinctly different perception of price, time, and value from the “sell-side” participants. These varying perceptions and goals influence their activities and decisions in the market. The Profile helps us understand and identify these different patterns of behavior. The “sell-side” participants have a short time frame perspective when it comes to their daily activity in the market. The “buy-side” participants tend to have a longer time frame perspective for their activities.

Time and Market Behavior

The trading time frame plays an important role in defining a market participant’s behavior. Time frames create forcing points. A forcing point is a point in time that forces a participant to make a trading decision. To help us study and understand the impact of time on market participants’ behavior, we will break up the market participants into two broad categories. The two categories will be based on their time frame for making trading decisions. The first category will focus our attention on the short-term or intra-day participant. The other category will examine the actions and decisions of the long-term participant. Experienced Profile traders recognize and understand the importance of time and its influence on trading activity. In using the Profile to analyze market activity, the term “other time frame traders” is frequently used to aggregate and describe all traders and investors who trade beyond the day time frame.

The time variable creates the forcing points for both the “day time frame” participant as well as the “other time frame” participant. These forcing points may be self imposed or imposed by the market. If a market participant is strictly a short-term trader or a day trader active during the “day time frame,” they must be flat at the end of the day. This means that they must close all positions prior to the market close. When the market is about to close, the day traders must make decisions to address any open positions they have prior to the market close. If they have short positions, they will need to cover them. If they are holding long positions, they will need to sell or liquidate their positions prior to the close. The “event” of the market close forces them to make a decision whether they like it or not. Thus, the market imposes a decision forcing point upon them.

The “other time frame” participant, on the other hand, does not have to contend with the same time constraint. The close does not impose or create a forcing point for them. The “other time frame” participants encompass a broad range of time frames. They are not limited to a single trading day and they do not all share the same time frame constraints. Some may have a time frame of a couple of days, others may be a week or two, and in some cases it may be a month or even longer. Nevertheless, the one common element that all other time frame participants share is that they are not restricted to the “day time frame”.

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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