What is Market Profile

JD says, there are two kinds of market information- 1. Market generated & 2. Non-market generated information. Net sum of all market generated information is reflected in the ‘price’ of the asset or instrument; this is where skill of a technical analyst lies & for a technician- price is everything ! Non-market generated information means news, announcements, earning reports, micro or macro-economic data, cash flow projections etc.; these are primary moving forces for price of the asset & fundamentalists rely heavily on those data.

Amid the analyst vs fundamentalist debate, JD claims that Market Profile act as a ‘confirming information tool’, i.e., Market profile graphic when read in a right way reveals to us the reactions & responses (i.e., market generated information) of the market players to any noise outside of the market (i.e., non-market generated information). So, what’s the Market profile?

Market profile is a graphic as shown in the above image, created using special software in which each half hour of the trading day is designated by a letter. The basic building blocks of the Market Profile are called Time Price Opportunities (TPOs). If a certain price is traded during a given half hour, the corresponding letter, or TPO, is marked next to the price. The height of TPOs is usually taken as one or few ticks wide.

Some of you may have some idea about Market Profile; however, at the beginning itself, be very clear that JD isn’t a market profile trader; rather he uses Market Profile as a graphic to plot market generated structural information, i.e., Price-Time-Value data & most importantly he uses the graphic to think about the market! JD who wrote extensively on Market profile, do use the concept in very different way than mechanical profile traders who have diminished the market profile to an indicator & ignore its huge potential as a fundamental market concept. However, Jim uses special market profile software for the graphic part. Taking his approach further, I have used my liberty of imagination to use his concepts without any need for special market profile software. Using conventional charting software, I use JD’s concepts to think about the market's ongoing auction process.

In a nutshell, having market profile software and being aware of its key parameters isn’t enough to become a trader; rather we must be able to read it in a right way, which is a much more 'nuanced' education or self-learning, which is truly a hard but right path or process to become a kind of trader called Right Way Trader (RWT).