Monday, January 22, 2007

Increasing your Edge with Market Profile

Have you ever wanted to improve your placement of stops and profit targets? Of course we all have had that moment when we placed our stop just too close to our entry and watched it get stopped out only to later see the market reverse and go the direction we originally thought it would. Many of you are already thinking - "Dude I already know about support and resistance, duh, trading 101". True, but we're going to go deeper than that. Market profile is like classic pivot point S/R analysis on steroids.

Market Profile according to the Chicago Board of Trade's website is defined as the following:

Market Profile is a graphical organization of price and time information. Market Profile displays price on the vertical axis and time on the horizontal axis. Letters are used to symbolize time brackets. Marketprofile is an analytical decision support tool for traders—not a trading system.

Market Profile reveals pricing patterns from any market as they develop. By effectively organizing price and time information, it is possible for traders to see which price areas the market is accepting or which ones it is rejecting…and adjust their trading styles accordingly.

The CBOT's 346 page Market Profile Handbook goes into exacting detail describing what these rows of letters all mean.

In essence, though, Market Profile is simply a way of viewing historical price activity. The more a series of letters build up in a particular price area, the more support or resistance is given to this area. Additionally, volume can be utilized at these price points to analyze whether the market truly finds value at this price (high volume) or whether it is likely a passing fancy (low volume). Another useful feature of these price activity areas is that they tend to form a bell curve (hence support and resistance are a region not a particular price) and you can easily spot where a real breakout or reversal is likely to occur (at the edge of these bell curves).

Another golden gem that comes from this methodology is that a trend can be defined not in technical terms such as a cross above/below a Moving Average, but rather where new "balance areas" or support and resistance are accepted and the market moves higher to the next balance area (in an up trend) and the opposite in a down trend. This methodology reduces the probability of being "faked out" by a reversal.

Now admittedly looking at this data at first looks like a nightmare of complexity, but with careful study it will soon become a powerful trading tool to add to your other technical trading systems. If this still seems overwhelming to you I highly recommend Balance Trader's course that gives video examples and is extremely reasonably priced (I have no affiliation with Balance Trader other than that I have and continue to enjoy his curriculum.)

Also for other Market Profiler enthusiasts out there, I would love to hear from you about how you use Market Profile.
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LifePost said...

Market profile is the best method to reading the markets IMO.

Lord Tedders said...

Glad to see another market profiler.