Intro to Market Profile

for the Day Trader

Presented to
OC Traders
June 2, 2012
by Ray De Golia
• Your job as a trend trader is to locate the
start of a directional move (trend) and to stay
with it until you detect the congestion (non-
directional balancing) that signals end of
trend.
• If you are a congestion trader you want to
sell tops of balances and buy balance
bottoms.
• Your job as a trend trader
is to locate the start of a
directional move (trend)
and to stay with it until
you detect the congestion
(non-directional balancing)
that signals end of trend.
• If you are a congestion
trader you want to sell
tops of balances and buy
balance bottoms.
 History of the Market Profile (tm)
• The Market Profile concept first appeared in the CBOT
Market Profile Manual (1985) and in 1986 in the book
'Markets and Market Logic', by J. Peter Steidlmayer
and Kevin Koy.
• Steidlmayer was a successful floor member at the
Chicago Board of Trade (CBOT); Koy was a trader and a
journalist. Their book created a completely new way of
reading markets. For the first time, the public trader
could measure value and the intentions of the
participants (exchange members and the public).
• These concepts provide the day-trader with an
unparalleled depth of market understanding.
These books are considered the bible
of the Market Profile concept.
 Market Profile Key Terms

• Value area - price range in which

approximately 70% of the
market volume took place.
• Value high -
• Value low -
• Point of control (POC) -
• Initial balance -
• Range extension -
 Market Profile Key Terms
• Value area - price range in which approximately 70% of
the market volume took place.
• Value high - the upper pivot of the value
area
• Value low - the lower pivot of the value
area
• Point of control (POC) -
• Initial balance
• Range extension -
 Market Profile Key Terms
• Value area - price range in which approximately 70% of
the market volume took place.
• Value high - the upper pivot of the value area
• Value low - the lower pivot of the value area
• Point of control (POC) - price level of
most volume. POC indicates an area
of greatest market activity
• Initial balance -
• Range extension -
 Market Profile Key Terms
• Value area - price range in which approximately 70% of the
market volume took place.
• Value high - the upper pivot of the value area
• Value low - the lower pivot of the value area
• Point of control (POC) - price level of most volume. POC
indicates an area of greatest market activity

• Initial balance - market activity in

the first hour of Regular Trading. The
letters “A” & “B” on the next chart
• Range extension -
 Market Profile Key Terms
• Value area - price range in which approximately 70% of the
market volume took place.
• Value high - the upper pivot of the value area
• Value low - the lower pivot of the value area
• Point of control (POC) - price level of most volume. POC
indicates an area of greatest market activity
• Initial balance - - market activity in the first hour of Regular
Trading.

• Range - market activity from

high to low for the current time
period.
 More Key Terms
• Range extension - price action
extending beyond the initial
balance
• TPO -stands for Time Price Opportunity. Letters are used to
build the market profile structure. Each letter represents a
half hour period. The letter is also known as the TPO.
• Single print buying tails -
• Single print selling tails –
• Closing Range
 More Key Terms
• Range extension - price action extending beyond the initial
balance
• TPO -stands for Time Price
Opportunity. Letters are used to
build the market profile structure.
Each TPO letter represents a half
hour period.
• Single print buying tails -
• Single print selling tails -
• Closing Range -
 More Key Terms
• Range extension - price action extending beyond the initial balance
• TPO -stands for Time Price Opportunity. Letters are used to build
the market profile structure. Each letter represents a half hour
period. The letter is also known as the TPO.
• Single print buying tails - any single print
TPO's at the lower extreme of the profile
• Single print selling tails -any single print
TPO's at the upper extreme of the profile
• Closing Range
 More Key Terms
• Range extension - price action extending beyond the initial balance
• TPO -stands for Time Price Opportunity. Letters are used to build the
market profile structure. Each letter represents a half hour period. The
letter is also known as the TPO.

• Single print buying tails - any single print TPO's at the lower
extreme of the profile
• Single print selling tails -any single print TPO's at the upper
extreme of the profile

• Closing Range – The Last period of the Trading Session.

The letter “N” on the next chart.
Candle overlay
Market Profile and Pivot Points
 What are Pivot Points?
• “Potentially” key support and resistance
levels
• Available on Shadow Trader and Prophet
Charts (and other places too)
• Base pivot calculated by High + Low + Close
÷ 3 of prior period time frame
• Support 1, 2, 3 and Resistance 1, 2, 3 levels
are calculated off of the base pivot level
• Available on multiple time frames: Daily,
Weekly and Monthly > often coincide with
Fibonacci Levels
Market Profile and Pivot Points
 PIVOTS
• Are simple mathematical formulas based on
previous day High, Low, Close data.
• Futures use 24-HOUR DATA from the
PREVIOUS DAY.
• Use a pivot point calculator found online to
calculate three Support and three Resistance
Levels (S1, S2, S3 & R1, R2, R3)
• or get the Pivot Levels from ShadowTrader.
www.mypivots.com/investment-
calculators/pivot-point-calculator
 Pivots are:
• Commonly known as floor trader pivots, they
are:
– A simple, effective entry/exit technique
– Typically used on ES, YM NQ, TF
– They also work with DIA, SPY, QQQ, IWM
 Main Advantage
• Price Based as opposed to Indicator based
• Entry can be determined BEFORE the market
opens
• Can be used to get into a trade before a
“buy/sell” signals are generated by stochastic
or oscillator type indicators.
– Especially true on choppy days
 Other advantages
• Can be used to determine the type of trading
day it is going to be on

– TRENDING DAYS- price will move to the pivot,

hang there a while, then move thru it

– CHOPPY DAYS – price moves to pivot, then hangs

around, and then drifts back to where it came
from.
 Limitations on Market Profile

•1. The primary condition for a valid profile

is a normal, equilibrium distribution.
– If the market is not in equilibrium there is no valid
POC or standard deviation.
– A simple visual examination will often be enough
to certify that the distribution is abnormal:
– the day may have two distributions (two peaks) or
the trading may be directional, etc.
 2. Even in overall equilibrium
markets

• there can be days in which the market prices

jump out of bounds (false breakouts) and then
return later in the day or the next day.
• A single day's Profile does not provide a
reliable measure of market condition.
• Research indicates that a three day measure is
the minimum preferred.
 3. Markets have changed since
1985/1991.
• Pits are approaching extinction. In 1985 and
earlier, trading by members in the pits was by
open outcry; commercial traders were in view
and the 'trade' dominated the markets. Today
(2011) there are few pits and public traders
dominate the trading volume. Certainly, an
intelligent and alert trader like Steidlmayer in
the pit had much more to go on than just the
Profile graphic available today.
• Plot them on your chart
• Begin at 5:30 a.m. as that is when the first
government reports come out and I am
prepared to trade sooo early in the morn.
 1
• Note where Daily Pivot Point is in relation to
previous Days CLOSING PRICE (Settlement)
• Next, watch where the OPEN is today (9:30 ET)
• How far away from the Pivot Point.
• 90% of time price will test the previous pivot
during the day.
Trend & Chop
 Sources
• The Chicago Board of Trade book store stocks
the text 'CBOT Market Profile' (parts 1-6).
• Steidlmayer's revised 'Steidlmayer on
Markets', is available from Wiley.
• Currently the Chicago Mercantile Exchange
offers Market Profile training courses by Dan
Gramza
 References
• Pivot Point Presentation, Doug Allen (4/20/08)
– http://coxintl.com/xsprofits/presentations/Pivot%20Points%20Presentation%20PowerPoint.
ppt
• Market Profile Handbook - CME Group
– www.cmegroup.com/education/.../marketprofile/handbook.pdf
• Shadowtrader.net
– http://shadowtrader.net/archives-main/education/
• http://www.trading-
naked.com/MarketProfileILLUSTRATIONS.htm#vah%20val%20va%2
0poc%20dval%20dvah%20dva%20dpoc%20naked%20poc
the end