What is Market Profile?

Understanding Market Profile

Market profile is a charting technique that organizes price and time data into a bell-shaped distribution, revealing where the market has spent the most time and establishing value areas. Developed by J. Peter Steidlmayer for the Chicago Board of Trade in the 1980s, market profile displays how prices auction throughout a trading session, highlighting levels where participants accepted or rejected value.

The profile builds a horizontal histogram showing price on the vertical axis and time on the horizontal axis. Each time period (typically 30 minutes) adds a letter to the price levels traded during that period, creating a visual representation of market activity. Areas with many letters indicate price levels where the market spent considerable time—zones of value or equilibrium. Thin areas show quick rejection or prices passed through rapidly.

Key Components

Market profile analysis centers on several critical concepts:

• Point of Control (POC): The price level with the most time spent or volume traded during the session. This represents the fairest price where the most business was conducted.
• Value Area (VA): The range containing 70% of the session's trading activity, bounded by Value Area High (VAH) and Value Area Low (VAL). This zone represents where institutional participants found prices acceptable.
• Initial Balance (IB): The range established in the first hour of trading, which often sets boundaries for the day's range.

Price acceptance above the prior day's Value Area High or below Value Area Low suggests directional bias and potential trend continuation. Conversely, when price returns into the prior value area after an overnight gap or extension, it signals balancing behavior and potential range-bound conditions. Combine market profile with volume profile for deeper insight into liquidity and participant behavior at each price level.

Profile Shapes and Market Behavior

The shape of the market profile reveals market character. A balanced, bell-shaped profile indicates normal auction behavior with two-sided trade. A P-shaped profile (activity concentrated at one end) suggests strong directional conviction. A b-shaped profile shows initial rejection followed by acceptance at new levels. Recognizing these shapes helps traders anticipate continuation versus reversal scenarios.

Limitations and Application

Market profile requires clean, steady data feeds and is most effective on futures platforms with centralized exchange data. Spot forex traders face challenges because forex lacks centralized volume data. Adaptations include using tick volume as a proxy, constructing synthetic profiles from broker data, or focusing on futures-based currency products like 6E (Euro) or 6J (Yen) which provide authentic market profile data.