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Market Profile Course 1 – Introduction

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INTRODUCTION: WHAT IS MARKET PROFILE?
- O n e o f t h e m o s t u s e f u l s o u r c e s I h a v e r e a d o n u n d e r s t a n d i n g Ma r k e t P r o f i l e ® f r o m i t s i n c e p t i o n h a s b e e n t h e
Ma r k e t P r o f i l e o u t l i n e f r o m t h e C M E .

T h e b o o k e x p lo r e s e v e r y c o n c e p t o f m a r k e t p r o f i l e f r o m i t s o r i g i n a l s t r u c t u r e. F o r t h o s e i n t e r e s t e d , h e r e i s a
link to the original CME book.

T h e m o s t i m p o r t a n t p o i n t t o b r i n g h o m e a n d t o u n d e r s t a n d i s t h a t Ma r k e t P r o f i l e o r Vo l u m e P r o f i l e a r e d e c i s i o n
support tools, not trading systems. I have recently come across posts online distorting the inherent nature
a n d p a r t i c u l a r p r e m i s e o f Ma r k e t P r o f i l e. I n o r d e r t o u s e t h e Ma r k e t P r o f i l e ® t o o l s s u c c e s s f u l l y , e v e r y t r a d e r
or investor must know what makes them work.

THE LEARNING PROCESS AND THE SEARCH FOR INFORMATION

The learning Process focus on Observation. Our Own Observation and the way we perceive the information.
Ma r k e t P r o f i l e Tr a d e r s i n g e n e r a l t e n d t o b e i n d i v i d u a l s w h o p r e f e r t o h a v e a c e r t a i n d e g r e e o f c o n t r o l o n t h e i r
a c t i o n s . P l e a s e t r y a l w a y s t o r e m e m b e r t h a t w e c a n c o n t r o l w h a t w e d o b u t w e c a n ' t c o n t r o l m a r k e t b e h a v i o r.
T h e m a i n O b j e c t i v e o f m a r k e t s i s t o f a c i l i t a t e t r a d e. I t i s a p l a c e w h e r e b u y e r s a n d s e l l e r s c o m e t o e x e c u t e o r
express their opinions about a certain market or product.

Tr a d i n g d e c i s i o n s i n v o l v e t h e bl e n d i n g o f f a c t g a t h e r i n g a n d a n a l y s i s p e r f o r m e d b y o n e s i d e o f o u r b r a i n , w i t h
t h e i n t u i t i o n d e v e lo p e d f r o m e x p e r i e n c e a t t h e o t h e r t h e o p p o s i t e s i d e o f t h e b r a i n .

THE TRADE FACILITATION OR MARKET AUCTION PROCESS

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T h e o b j e c t i v e o f t h o s e u t i l i z i n g Ma r k e t P r o f i l e i s t o e x p a n d a n d d e v e lo p a lo g i c a l p r o c e s s f o r a n a l y z i n g ,
i d e n t i f y i n g a n d i m p l e m e n t i n g t r a d i n g s t r a t e g i e s . F o r D a y t r a d e r s a n d s w i n g Tr a d e r s , s h o r t - t e r m o p p o r t u n i t i e s .
As most traders have somehow experienced, it is easy to become so involved with the small term events -
A . K . A No i s e - d u r i n g a t r a d i n g s e s s i o n , t h a t w e lo s e s i g h t o f t h e m a r k e t 's o v e r a l l p u r p o s e - o r t h e B I G P I C T U R E -
- t h a t i s t h e f a c i l i t a t i o n o f t r a d e.

To B e c o m e a s u c c e s s f u l s h o r t t e r m t r a d e r, o n e m u s t u n d e r s t a n d t r a d e f a c i l i t a t i o n i n a l l t i m e f r a m e s , We h a v e a
p a r t i c u l a r o b j e c t i v e o r t i m e f r a m e w e w i s h t o p a r t i c i p a t e, b u t i g n o r i n g w h a t t h e o t h e r p a r t i c i p a n t s h a v e i n
m i n d , o r m e s s a g e s t h a t t h e y a r e p o s s i bl y i n t e r v e n i n g i n t h e A u c t i o n , c a n p r o v e c o s t l y f o r m o s t t r a d e r s . .

E x p e r i e n c e d t r a d e r s a r e w e l l a w a r e t h a t n o t e v e r y o p p o r t u n i t y p r e s e n t e d i s e q u a l. I t i s a m a t t e r o f c o n t e x t a n d
s t r u c t u r e. I n f a c t , o n e m u s t a d a p t t o c i r c u m s t a n c e s . E v e r y e l e m e n t f r o m P o s i t i o n s i z e t o s t o p s i z e s h o u l d v a r y
a c c o r d i n g t o m a r k e t c o n d i t i o n s . He r e, Vo l a t i l i t y s t a r t s t o a p p e a r a s a n i m p o r t a n t f a c t o r t o b r i n g i n t o t h e
equation.

That is when often money management plan comes to play and requires varying position size
b a s e d o n o n e 's p e r c e p t i o n o f r i s k a n d o p p o r t u n i t y . W i t h o u t a G o o d u n d e r s t a n d i n g o f w h e r e m a r k e t s a r e i n t h e
overall trade facilitation process, leads to poor decision making.

A g o o d w a y t o a v o i d t h a t i s t o h a v e a p l a n , o r h y p o t h e s i s i n p l a c e b e f o r e t h e d a y . Ha v i n g s o m e a r e a s p r e -
defined in order to do business can help tremendously.

I M P O R TA N T: T h e p l a n s d o e s n o t g u a r a n t e e s u c c e s s . I t i s d o e s h e l p t o m i n i m i z e r i s k .

T h e O N LY VA R I A B L E W E C A N C O N T R O L I N T R A D I N G A S S M A L L O R R E TA I L T R A D E R I S R I S K .

Markets or The Market Place

What

is a Market? 

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures
w h e r e b y p a r t i e s e n g a g e i n e x c h a n g e. W h i l e p a r t i e s m a y e x c h a n g e g o o d s a n d s e r v i c e s b y b a r t e r, m o s t m a r k e t s
r e l y o n s e l l e r s o f f e r i n g t h e i r g o o d s o r s e r v i c e s ( i n cl u d i n g l a b o r ) i n e x c h a n g e f o r m o n e y f r o m b u y e r s .

S o Ma r k e t s R e v o l v e A r o u n d a P r o d u c t o r S e r v i c e a n d t h e i r C o m m o n P a r t i c i p a n t s

Who are the Participants in Financial, Futures, Equities and Commodities markets?
1 . P r o d u c e r s ( lo n g t e r m s e l l e r ) .
2 . Mi d d l e m e n ( s c a l p e r s a n d f lo o r t r a d e r s ) t r y i n g t o m a k e p r o f i t s s h i f t i n g i n v e n t o r y .
3 . C o n s u m e r s ( lo n g t e r m b u y e r s ) .

Producers and Consumers Characteristics:

They often hold positions in order to hedge exposure to price fluctuations, covering production costs and to an
e x t e n t e n t S p e c u l a t e.

Behavioral Characteristics of Middlemen and Scalpers

These are Short term oriented. They don;t want to hold the physical product. There main objective is to
generate profits from shifting inventory. They don;t care about the fundamentals of markets. They have a
v e r y d e t a c h e d v i e w.

I n o r d e r t o p a r t i c i p a t e, t o e n g a g e i n t o t r a d i n g , p a r t i c i p a n t s m a k e s o m e a s s e s s m e n t s . C o m m o n a s s e s s m e n t s
u s e d b y m a r k e t p a r t i c i p a n t s r e l a t e s t o c o n t r a c t s a n d t r a n s a c t i o n s e x e c u t e d a b o v e o r b e lo w a c e r t a i n
T h r e s h o l d . He r e a r e s o m e c o m m o n t h r e s h o l d s o f t e n u t i l i z e d :

1. What is above contract highs ?

2 . W h a t i s b e lo w c o n t r a c t lo w s ?
3 . Where are buy stops ?
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4. Where are sell stops ?
5 . W h a t i s a t y e s t e r d a y 's h i g h?
6 . W h a t i s a t y e s t e r d a y 's lo w ?
7 . W h a t i s a t t h e w e e k l y h i g h?
8 . W h a t i s a t t h e w e e k l y lo w ?
9 . What is really occurring when some technical indicator broadly used cross certain levels ?

Items 3 and 4 are very significant. These areas could generate decent moves. I Consider them KEY DECISION
P O I N T S. T h e y a r e l e v e l s i n w h i c h w h e n t r a d e r s o r s p e c u l a t o r s e x p r e s s t h e i r P a i n . O n c e a c c u m u l a t i o n o r
l i q u i d a t i o n o c c u r i n s u c h a r e a s , m a r k e t s t e n d d o m o v e ! R E A L LY M O V E !

Market Participants and their Behavior.

T h e t e r m t r a d e f a c i l i t a t i o n i s a n i m p o r t a n t t e r m i n o lo g y i n t r a d e. Vo l u m e i s t h e b e s t m e a s u r e o f I N T E R E S T a n d
P A R T I C I P AT I O N, t h e r e f o r e, A k e y f a c t o r i n t r a d i n g f a c i l i t a t i o n . W h e n t h a t a c t i v i t y s t o p o r c h a n g e s , w h a t e v e r
o p p o r t u n i t i e s w e r e a v a i l a bl e u n t i l t h a t p o i n t h a v e d i s a p p e a r e d a n d f r o m t h a t m o m e n t o n a n e w s e t o f
o p p o r t u n i t i e s a r e d e v e lo p i n g . T h e m o s t s u c c e s s f u l t r a d e r s w i l l b e i n d i v i d u a l s t h a t a r e a bl e t o i n t e r p r e t t h a t
i n f o r m a t i o n , r e c o g n i z e t h e o p p o r t u n i t y a n d A C T ! E x p lo r e t h e o p p o r t u n i t i e s . U n f o r t u n a t e l y , t h e m a j o r i t y o f
t r a d e r s f r e e z e. We lo o k f o r t h e s o c a l l e d c o n f i r m a t i o n a n d o n c e c o n f i r m a t i o n c o m e s , t h e o p p o r t u n i t y b e c o m e s
far less advantageous.

T h e m o s t s u c c e s s f u l t r a d e r s w i l l a l w a y s t e n d t o b e i n d i v i d u a l s t h a t a r e a bl e t o n o t i c e t h e c h a n g e s , i n t e r p r e t
t h a t n e w i n f o r m a t i o n f lo w, s e n s e t h e o p p o r t u n i t y a n d A C T p r o m p t l y u p o n t h e n e w w i n d o w t h a t h a s o p e n e d ! I t i s
i m p o r t a n t t o r e c o g n i z e a n d e x p lo r e t h e s e o p p o r t u n i t i e s . U n f o r t u n a t e l y , t h e v a s t m a j o r i t y o f t r a d e r s f r e e z e. T h e y
f r e e z e d u e t o p a s t e x p e r i e n c e s , f e a r a n d n e e d f o r c o n f i r m a t i o n t h a t n o t a l w a y s c o m e. C o n f i r m a t i o n i s a l u x u r y
i t e m i n t r a d i n g ! Ma n y a m o n g u s , lo o k f o r t h e f a m o u s c o n f i r m a t i o n a n d o n c e c o n f i r m a t i o n c o m e s , t h e o p p o r t u n i t y
b e c o m e s f a r l e s s a d v a n t a g e o u s . T h e E d g e i s i n f e r i o r a t t h a t p o i n t ! We e i t h e r a c t o r w e d o n ' t ! P e r f e c t i o n i s
a n o t h e r m a r k e t L u x u r y r a r e l y a v a i l a bl e w h e n s o m a n y s h r e w d m i n d s - a n d c o m p u t e r s - a r e lo o k i n g f o r t h e m !

M
 A R K E T S A R E I N C O N S TA N T M O V E M E N T. O n e m u s t a c c e p t t h e f a c t t h a t i n o r d e r t o t a k e a d v a n t a g e o f t h e b e s t 
p o s s i bl e o p p o r t u n i t i e s , o n e m u s t b e w i l l i n g t o t a k e r i s k . A C C E P T R I S K a s C O S T O F D O I N G B U S I N E S S !

Ma r k e t P r o f i l e C o n c e p t s a r e s t r o n g l y r e l a t e d t o V O L U M E i n t r a d i n g .
MARKET PROFILE VOLUME, VALUE AREA and DIRECTION
Vo l u m e i s c o n s i d e r e d t o b e T h e b e s t m e a s u r e o f o v e r a l l t r a d e f a c i l i t a t i o n o r p a r t i c i p a t i o n . T h e a m o u n t o f
v o l u m e d u r i n g g i v e n p e r i o d s h e l p s t r a d e r s t o u n d e r s t a n d t h e d e s i r e o f m a r k e t p a r t i c i p a n t s . Vo l u m e s h i f t f r o m
p e r i o d t o p e r i o d . Vo l u m e c a n b e G r e a t e r o r L o w e r t h a n p r e v i o u s p e r i o d s o r r e m a i n U n c h a n g e d . .

Va l u e A r e a i s t h e s e c o n d b e s t m e a s u r e o f i n t e r e s t a n d p a r t i c i p a t i o n . Va l u e a r e a s s h i f t s i m i l a r t o v o l u m e : I t i s
either:
a. Unchanged
b. W i d e r
c. Na r r o w e r

3. Va l u e A r e a P l a c e m e n t c o m e s t h i r d b u t a l s o p l a y s a r o l e. Vo l u m e a r e p l a c e m e n t c a n s h i f t a s f o l lo w s >
a. Overlapping
b. Hi g h e r
c. Lower

THE FOUR QUESTIONS!

Ma r k e t P r o f i l e i s a g r e a t t o o l t r a d e r s c a n u t i l i z e I n o r d e r t o a n s w e r t h e s o m e i m p o r t a n t q u e s t i o n s :

What was the market trying to do ?

How successful the Market was in what it was trying to do?
Le t 's i m a g i n e a s i t u a t i o n i n a p a r t i c u l a r m a r k e t . L e t 's a s s u m e t h a t t o d a y 's m a r k e t e s t a bl i s h e s h i g h e r v a l u e - 
t r a d e h i g h e r p r i c e s - b u t w i t h lo w e r v o l u m e - lo w i n t e r e s t o r p a r t i c i p a t i o n . We c a n ' t m a k e c o n cl u s i o n f r o m
this combination unless we take into consideration how the scenario evolved.
I f t h e m a r k e t o p e n s n e a r t h e lo w s a n d m o v e s h i g h e r, t h e lo w e r v o l u m e c o u l d p r o b a bl y m e a n l a ck o f i n t e r e s t i n
Hi g h e r p r i c e s f o r T O D AY ' S S E S S I O N. I t m e a n s t h a t t h e Hi g h e r P r i c e a u c t i o n i s s lo w i n g , a t t r a c t i n g f e w e r
p a r t i c i p a n t s a s i t e x p lo r e s h i g h e r p r i c e s . I n m a r k e t L i n g o w e s a y t h a t Hi g h e r P r i c e s a r e c u t t i n g o f f a c t i v i t y .

I f t h e o p p o s i t e s c e n a r i o t a k e s p l a c e, m e a n i n g t h a t t h e m a r k e t o p e n s o n i t s h i g h a n d a t t e m p t s t o t r a d e lo w e r,
t h i s p r o b a bl y i n d i c a t e s t h a t t h e b u y i n g a u c t i o n i s c o n t i n u i n g i n t h e n e a r f u t u r e - s i n c e t h e a t t e m p t e d t o t r a d e
lo w e r p r i c e s w a s n ; t s u c c e s s f u l a n d i t w a s n o t a t t r a c t i n g p a r t i c i p a n t s .

How proficient was the market in its attempt?

He r e w e a r e s i m p l y d e t e r m i n i n g i f t h e m a r k e t w a s s u c c e s s f u l o r n o t i n i t s c u r r e n t a t t e m p t .

T h e w a y m a r k e t t r a d e s d u r i n g a s e s s i o n g i v e s s o m e cl u e s o f c u r r e n t a p p e t i t e. Ma r k e t s t h a t o p e n lo w e r a n d
m o v e s t r a i g h t h i g h e r w i t h v e r y l i t t l e p u l l b a ck s i s a v e r y D E T E R M I N E D M A R K E T. T h e p r o b a b i l i t y o f c o n t i n u a t i o n i s
h i g h e r t h a n p r o b a b i l i t y o f a s u d d e n d r o p. P l e a s e n o t t h a t t h e w o r d u s e d h e r e i s P R O B A B I L I T Y , n o t C E R TA I N T Y .
No t h i n g i s c e r t a i n .

Ma r k e t p a r t i c i p a n t s a r e C o m p u t e r s p r o g r a m m e d b y h u m a n s a n d Hu m a n s . No w, t h a t t e l l s u s t h a t t h e y c a n b e h a v e
V E RY E R R AT I C A L LY !

S o l e a r n t o T H I N K i n P R O B A B I L I T I E S, N O T C E R TA I N T I E S !

What can we do better in order to improve in the future?

Our main task, as investors or traders, is to be alert. Develop scenarios that might help to act accordingly. We must constantly
ask ourselves the following questions:



1. Wha t is m ore prob a b l e t o ha ppen n ex t ?


2. I f ou r Hypot hesis is correct - if ev en t s u n fol dd- how shou l d w e a ct in order t o ex pl ore t he opport u n it y?
T h e r e a r e m a n y w a y s t o t a ck l e a n i s s u e. T h e r e a r e d i f f e r e n t w a y s t o a d d r e s s q u e s t i o n s . S o m e a r e d i s c r e t i o n a r y
o t h e r s y s t e m a t i c ; s o m e d e l i b e r a t e o t h e r s m e c h a n i c a l; s o m e m e t h o d i c a l o t h e r s n o t . T h e r e i s n ' t a s i n g l e w a y t o
a d d r e s s i s s u e s . We a r e a l l d i f f e r e n t a n d w e s h o u l d u s e w h a t f i t s b e s t o u t m e t h o d o lo g y .

We a r e a l w a y s t r y i n g t o a s s e s s t h e s i t u a t i o n a s i t d e v e lo p s . E l e m e n t s s u c h a s t h e e a s e a n d s p e e d o f m o v e s ,
the level of participation (VOLUME) in relations to PRICE changes, the degree of aggressiveness in a particular
m o v e, t h e t y p e o f c o u n t e r r e a c t i o n a n d h o w t h e m o v e b e h a v e d u p o n r e a c h i n g t h r e s h o l d l e v e l s m u s t b e
a c c o u n t e d f o r.

T h e r e l a t i o n s h i p s b e t w e e n v o l u m e a n d r a n g e s u c h a s H I G H V O L U M E L O W R A N G E ( We a k n e s s o r T I G H T M A R K E T -
Hi g h E f f o r t - L i t t l e r e w a r d ) o r L O W V O L U M E H I G H R A N G E ( P O W E R - l i t t l e e f f o r t Hi g h r e w a r d ) a m o n g o t h e r
things, helps us to identify opportunities.

The Path Towards Success

M r. D o n J o n e s f r o m C i s c o F u t u r e s h a s s t u d i e d a n d e x p lo r e d m a r k e t p r o f i l e f o r d e c a d e s . He i s v e r y s k i l l e d a n d
k n o w l e d g e a bl e i n t h e f i e l d . A f t e r s t u d y i n g e x a m p l e s a t l e n g t h , h i s r e s e a r c h h a s l e a d h i m t o c o n cl u d e t h a t t h e r e
i s l i t t l e c o r r e l a t i o n b e t w e e n t h e s h a p e o f a p r o f i l e a n d w h a t h a p p e n s n e x t . Hi s r e s u l t s a r e b a s e d o n s o u n d
statistical research, not simple observation. They are factual and it is important to take the information. T

He r e i s a n e x c e r p t o f M r. J o n e s a r t i cl e o n A u c t i o n Ma r k e t T h e o r y :

 S e r ia l C o r r e l a t io n a n d Fo r e c a s t in g
There is l it t l e da y- t o- da y seria l correl a t ion in a u ct ion m a rk et s (see e.g . Specu l a t ion , Hedg in g ..., L a b ys &
G ra n g er, 1 9 70 ; or referen ce 4 , p1 9). This m a k es t oda y's t ra din g a poor predict or for t om orrow . Con seq u en t l y,
 it w ou l d b e a q u est ion a b l e a im of a m a rk et t heory t o propose foreca st in g m a rk et b eha v ior. A M T t ra din g is 

b a sed on u n d e r s t a n d in g t h e c u r r e n t m a r k e t s it u a t io n a n d ha v in g a st ra t eg y for cha n g e; n ot predict in g

" t om orrow 's" price.
S o, W h a t s h o u l d w e d o?

I N S U M M A RY , We s h o u l d h a v e s t r a t e g i e s i n Mi n d t o a d d r e s s p o s s i bl e d e v e lo p m e n t s . We s h o u l d p r e p a r e d i f f e r e n t
scenarios and create a plan to deal with different situations. Address issues ahead of time and be ready to
implement an strategy when the opportunity appears!

Ma r k e t s a r e p r o b a b i l i t y G a m e s a n d Ma r k e t P r o f i l e h e l p s u s t o p u t t h i n g s i n t o p e r s p e c t i v e !

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Carlos

© 2 0 2 0 T h e Na t u r e O f Ma r k e t s . A l l R i g h t s R e s e r v e d . Mu f f i n g r o u p

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