Market Profile Explained – How to Read and Use It Correctly?

Market profile looks at how long a price of an underlying security traded at each price level, which makes the market profile a time-based indicator. This stands in sharp contrast to the volume profile indicator, which is a price-based indicator. Both are visualized with a Gaussian distribution, but it is important to be aware of the differences between volume profile vs market profile.

Advanced futures trading platforms often include market profile tools and use data feeds from providers such as Rithmic to fill up the historical data quickly. But what exactly is market profile, and how to interpret and use it?

what is market profile

What is Market Profile

Market profile is a time-based intraday-charting methodology, which was originally introduced by a trader of the Chicago Board of Trade, J. Peter Steidlmayer. The concept was introduced to the public in 1985 as part of a CBOT product (CBOTMP1+2).

Market profile is defined as a time-price opportunity, also known as TPO. That’s because the market profile evaluates at what time a security traded at a specific price while neglecting things like trading volume.

Similar to the volume profile, you see a bell curve type of visualization, and in both cases, you have a point of control. Still, the volume profile and market profile are entirely different since the market profile has nothing to do with volume.

Market Profile is a Charting Tool

Market profile is a charting tool that helps traders to identify patterns caused by the price of an underlying security over time, which organizes the data by displaying letters. The indicator can be used for all types of tradeable assets, such as futures, stocks, or ETFs.

Market Profile Structure

The best way to approach market profile is by seeing it as a unique way of charting price and time but without a time axis. Normally, you have the time as X-axis and the price as Y-axis, and your chart prints in a traditional way. But market profile is entirely different.

A composite market profile chart only consists of letters and the price. The letter A always stands for the first period. So, if you use a 15-minute chart, the letter A stands for the first 15-minute time increment. The letter B for the second time increment, and so on.

But then the market profile does something unique since it combines that information of every time increment to evaluate a composite view of the price action, which mixes various letters within one column.

You can see it that way, that at first, the indicator still evaluates every period, and instead of printing a candlestick, it prints letters. But instead of finally displaying it, all those columns with letters are compressed vertically, and all empty fields on the left will be closed as long there is a letter on the right.

market profile composite logic

Understanding and Interpreting Market Profile

Okay, now you have a composite market profile. You see a bunch of letters ranging from A zu whatever letter, depending on the number of time increments you used. E.g., if you use a 60-minute chart on a trading day with 600 minutes of trading time, you have 10 letters A, B, C, D, E, F, G, H, I and J.

Now, all that information is pressed together, and you don’t see the exact time when a specific price was printed. At least not directly, but still indirectly. You will notice that if you look at the composite market profile chart, there is often a mix of letters in each letter column.

There is always the letter A in the first column, simply because the day began with the first time interval, which was labeled as A. If you see the letter B or higher letters in the first column, it means that at a later point, the price of a security traded outside of the price range of the first period (A).

Example:

market profile trading

Within the first 15 minutes, a stock trades in the range of $120-$121. In this case, the first column of the composite market profile prints the letter A in the price range of $120-$120.

Within the second 15 minutes, the stock trades in the range of $120.50 to $122. Once that period is over, the market profile will combine that information.

Period two equals the letter B, and you will see the letter B in two different columns. First of all, you see the letter B in column one, where the price was higher than in period one, which is above $121 to $122.

In addition, the price was for a certain time in the same price span as in period one, and here the letter A will remain in column one, but the letter B will appear in column two when prices match, which was the case for $120.50 to $121. It’s like playing Tetris shifted by 90 degrees.

Support & Ressitance

Markt profile helps to understand the market flow better by clearly visualizing the price points where the market was at the longest time. The basic assumption is that if the market was at a certain price point for a long time, it must be a price point of high importance.

Therefore, you can see the TPO (time-price opportunity) as support and resistance evaluation method.

When a price at a later point nears the price point where the security was traded for a long time before, it might indicate that there is an increased level of resistance when prices come from below or support if prices are near the top.

In addition, if you see, for example, the highest letters appear in the first column, you quickly know that the market closed at its highs (if the highest letters are at the top of the first column) or its lows (if the highest letters are at the bottom of the first column).

Market Profile Conclusion

I think volume profile is of higher value than the market profile since I think the volume insights are of higher importance. Using the market profile requires an entire rethinking of traditional stock analysis. It is definitely a unique view.

The simplicity is a big advantage. There is no noise in the charts, no indicators, just you and the price over a given time. However, you must like to adopt it, and I can’t see any direct benefits other than that I can use that information to evaluate support and resistance areas by using the POC of previous periods.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.
Last Updated:
We may receive a commission if you click on links.