TOPIC: What is Market Profile?

Market
Profile Construction

Class 1 Notes

Accumulation Phase:
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Characteristics: This phase occurs after the market has bottomed out
from a decline. It is characterised by low prices, pessimism, and low
investor confidence. Smart money (institutional investors and savvy
individuals) starts buying undervalued assets.
Indicators: Low trading volumes, stable or slightly rising prices, and a
general sense of uncertainty. Confirmed by breakdown of the pattern.
Investment Strategy: This is an ideal time to buy, as prices are low and
the market is poised for recovery.

Mark-Up Phase:
Characteristics: During this phase, the market starts to gain momentum,
and prices begin to rise more significantly. Investor confidence grows,
and more participants enter the market.
Indicators: Increasing trading volumes, rising prices, and improving
economic indicators. This phase often attracts more public and retail
investors.
Investment Strategy: Investors continue buying, capitalizing on the
upward momentum. Growth stocks and sectors that are gaining traction
perform well.

Distribution Phase:
Characteristics: This phase occurs after a significant price increase and
is marked by a plateau or slight decline. Smart money begins to sell off
their holdings, taking profits as prices stabilize or start to fall.
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Indicators: High trading volumes, sideways price movements, and mixed
economic signals. There is often a sense of euphoria in the market,
leading to increased volatility.
Investment Strategy: This is a time to start selling or reducing exposure
to overvalued assets. Defensive strategies, such as moving into cash or
bonds, become more appealing.

Mark-Down Phase:
Characteristics: The final phase is characterized by a significant decline
in prices. Investor confidence wanes, and there is widespread selling.
The market bottoms out as it heads into the next accumulation phase.
Indicators: Falling trading volumes, declining prices, and negative
economic indicators. Fear and panic can drive the market down further.
Investment Strategy: Investors should focus on preserving capital,
possibly selling off remaining holdings, and preparing for the next
accumulation phase. Bargain hunting can begin towards the end of this
phase.
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Market Profile

Study & Understanding of Construction of Day:

Explanation: This involves analyzing how a trading day is constructed in
terms of price movements, volume, and time. Traders examine the
distribution of trading activity throughout the day to identify patterns
and key levels, such as high and low points, opening and closing prices,
and areas where trading activity is concentrated.

Understanding the Price Movements of the Day:

Explanation: This refers to observing and interpreting the fluctuations in
price throughout the trading day. By understanding price movements,
traders can gain insights into market sentiment, identify trends, and
make more informed trading decisions.

Detailed Study of Trade Facilitation:

Explanation: Trade facilitation is about how easily and efficiently trades
are being executed in the market. This involves looking at factors such as
liquidity, bid-ask spreads, and the speed at which orders are filled. A
detailed study helps traders understand the dynamics of market
participation and the ease with which they can enter or exit positions.

Composite & Separate Study:

Explanation: This involves analyzing market data in two ways:
Composite Study: Looking at aggregated data over a longer period to
identify broader trends and patterns. This helps in understanding the
overall market direction and longer-term support and resistance levels.
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Market Profile Basics
Market Profile: A charting technique that displays price on the vertical
axis and time on the horizontal axis, with the aim of revealing the price
levels where significant trading activity has occurred. It helps traders see
where the most buying and selling is happening and thus, where the
support and resistance levels are likely to be.

Profile Construction

Left Side: Nifty 30-Minute Candlestick Chart

Description: This chart shows the Nifty index's price action segmented
into 30-minute intervals. Each candlestick represents 30 minutes of
trading activity.
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Usage: Traders use these candlesticks to observe price movements,
trends, and patterns within each 30-minute period.

Middle Left: Market Profile Chart

Description: This chart translates the 30-minute candlestick data into a
Market Profile. Each 30-minute segment is represented by a letter (TPO)
assigned to the prices traded during that time.
Letters: The trading day starts with the letter 'A' for the first 30 minutes,
'B' for the next 30 minutes, and so on.
For instance, if prices between 9,950 and 9,975 were traded in the first
30 minutes, the letter 'A' will appear next to these price levels.

Middle Right: Nifty 30-Minute Candlestick Chart

Description: Another example of the Nifty 30-minute candlestick chart,
similar to the one on the left. This likely shows another day's trading
activity for comparison.

Right Side: Market Profile Chart

Description: Another Market Profile chart corresponding to the
candlestick chart on the middle right.
Key Components:
Value Area: The range within which a significant portion (usually 70%) of
the day's trading activity occurred.
Value Area High (VAH): The upper boundary of the value area.
Value Area Low (VAL): The lower boundary of the value area.
Point of Control (POC): The price level with the highest number of TPOs,
indicating the most traded price.
Initial Balance (IB): The price range of the first 30 minutes (marked by
the letter 'A').

Example Explanation:
First 30 Minutes (A):
On the candlestick chart, identify the high and low prices during the first
30 minutes.
On the Market Profile chart, the letter 'A' is plotted next to the prices
traded during this time.
Next 30 Minutes (B):
Continue plotting the letter 'B' next to the price levels traded in the
second 30-minute interval.
Accumulation of TPOs:
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As the day progresses, letters accumulate next to the price levels they
traded at, creating a vertical distribution of TPOs.
Interpretation:
High Concentration of TPOs (POC):
Indicates significant trading activity at a specific price level, often acting
as a magnet for future price action.
Value Area:
Traders focus on this area as it represents the range where most trading
occurred, suggesting a fair value range for the day.
Initial Balance:
The price range of the first 30 minutes can set the tone for the day's
trading, indicating potential support or resistance levels.

Summary:
By constructing and analyzing Market Profile charts, traders gain
insights into market structure and behavior. The profile highlights where
trading activity is concentrated, identifies key price levels, and provides a
framework for anticipating future price movements. This helps traders
make informed decisions about when to enter or exit trades, based on
observed patterns and key levels in the Market Profile.

TPO

TPO stands for Time Price Opportunity. It is a fundamental concept in

Market Profile analysis, representing a specific price level traded during
a specific time period. Each TPO is typically denoted by a letter or
symbol, and these symbols accumulate on a Market Profile chart to
illustrate where trading activity has occurred throughout the trading day.

Detailed Explanation of TPO:

1. Time Segmentation:
○ A trading day is divided into equal time intervals, usually 30
minutes.
○ Each interval is assigned a unique letter or symbol (e.g., A for
the first 30 minutes, B for the next 30 minutes, and so on).
2. Price Representation:
○ For each 30-minute interval, a letter is placed next to the
price levels traded during that period.
○ This creates a visual distribution of where trading occurred
at different times of the day.
3. Accumulation:
○ As trading progresses, letters (TPOs) accumulate next to the
price levels.
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○ The resulting profile shows a histogram-like distribution of
trading activity, highlighting areas of high and low interest.

Core Of Market Profile

Left Side: Market Activity

Retail Traders

● Retail Traders: Represented by the blue shaded area.

○ Retail traders typically operate within a certain price range,
buying and selling based on short-term price movements.
○ They are often less concerned with fundamental value and
more focused on short-term trends and patterns.

Long Term Buyers and Sellers

● Long Term Sellers:

○ Positioned above a certain price level (indicated by the red
line).
○ These sellers plan to sell when prices rise above this level,
believing the price is too high and thus, they want to take
profits or initiate short positions.
● Long Term Buyers:
○ Positioned below a certain price level (indicated by the green
line).
○ These buyers plan to buy when prices fall below this level,
considering it an undervalued price, making it a good
opportunity to purchase.

Right Side: Bell-Curve Concept of Market Profile

Price and Time Axis

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● Price Axis (Vertical): Represents the price levels at which trading
activity occurs.
● Time Axis (Horizontal): Represents the passage of time over the
trading day.

Key Components:

● Value Area:
○ The range within which a significant portion (usually 70%) of
the day’s trading volume has occurred.
○ Indicates the fair value range for the trading day.
○ Value Area High (VAH): The upper boundary of the value
area.
○ Value Area Low (VAL): The lower boundary of the value
area.
● Point of Control (POC):
○ The price level with the highest amount of trading activity.
○ It is the peak of the bell curve, representing the price at
which the most time and volume were traded.
● Unfair High and Unfair Low:
○ Unfair High (Zero Buyers): The price level above which
buyers perceive the price as too high, resulting in little to no
buying interest.
○ Unfair Low (Zero Sellers): The price level below which
sellers perceive the price as too low, leading to little to no
selling interest.

Bell Curve Distribution:

● The bell curve represents the distribution of trading activity over

price levels.
● High Trading Activity: Concentrated around the POC, where
most of the trading volume occurs.
● Low Trading Activity: At the tails of the bell curve, corresponding
to the unfair high and unfair low levels.

Interpretation:

● Value Area: Indicates the price range where the market has found
a consensus on value.
● POC: The focal point for trading activity, acting as a strong support
or resistance level.
● Unfair High and Low: Price levels that are likely to attract
minimal trading activity due to perceived overvaluation or
undervaluation.
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Components Of Market Profile

Left Side: Key Components of Market Profile

Unfair High and Unfair Low

● Unfair High (Zero Buyers): The price level at which there are
very few or no buyers, indicating that the price is considered too
high.
● Unfair Low (Zero Sellers): The price level at which there are very
few or no sellers, indicating that the price is considered too low.

Value Area

● Value Area High (VAH): The upper boundary of the Value Area,
representing the highest price level within the range where 70% of
the trading activity took place.
● Value Area Low (VAL): The lower boundary of the Value Area,
representing the lowest price level within the range where 70% of
the trading activity took place.

Point of Control (POC)

● POC: The price level with the highest amount of trading activity
(most TPOs), often considered the most accepted price by the
market participants during the trading period.
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Right Side: Detailed Components

Different Units of Time Based on Price Variations

● The image explains how Market Profile breaks down the trading
day into different units of time (e.g., 30-minute intervals) and
assigns different letters to each interval to represent price levels
traded during those times.

Specific Examples and Analysis:

1. A-B and A-H Segments (1 and 2):

○ The segments represent the trading activity during different
time intervals, labeled with letters A through H.
○ This segmentation helps in understanding the flow of trading
throughout the day.
2. Split and Unsplit Profile:
○ Split Profile: Shows trading activity broken down into
smaller time segments (e.g., every 30 minutes) to provide a
granular view of the market.
○ Unsplit Profile: Combines the trading activity into a single
continuous profile for the entire trading period, providing an
overall view of the market activity.

Detailed Labels in the Split Profile:

3. Segments with Different Letters:

○ The letters (A, B, C, etc.) represent different 30-minute
intervals.
○ Each letter corresponds to the price levels traded during that
interval.
4. Combining Segments:
○ Segments labeled with multiple letters show the
accumulation of trading activity over multiple intervals.
○ This helps in identifying price levels with consistent trading
interest over time.
5. Point of Control (POC):
○ The POC is prominently indicated, showing where the
maximum trading activity occurred.
○ It acts as a crucial reference point for traders to understand
the market’s consensus price.
6. Value Area High and Low:
○ The VAH and VAL are clearly marked to delineate the range
within which 70% of the trading activity took place.
○ This range is critical for identifying areas of support and
resistance.
7. Price and Time Distribution:
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○ The distribution of letters across price levels and time
intervals forms a bell curve, illustrating the market profile’s
shape.
○ The concentration of letters around the POC shows the
highest trading interest.

Market Profile shapes

1. P-Shape Profile

Characteristics:

● Appearance: The profile resembles the shape of the letter "P",

with a long vertical tail at the bottom and a bulging area (the "bell"
of the P) near the top.
● POC: Point of Control (POC) is located near the top of the profile.

Market Interpretation:
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● Bullish Sentiment: Indicates a strong upward trend where buyers
dominate.
● Short Covering: Often seen during short-covering rallies when
traders who were shorting the market buy back their positions to
cover their shorts, pushing prices higher.
● Volume Concentration: High trading volume near the top of the
profile suggests that buyers are aggressive at higher prices.

Trading Implications:

● Support Levels: The lower part of the profile can act as support in
future trading sessions.
● Entry Points: Traders may look for buying opportunities on
pullbacks to the lower part of the profile or near the POC.

2. b-Shape Profile

Characteristics:

● Appearance: The profile looks like the letter "b", with a long
vertical tail at the top and a bulging area near the bottom.
● POC: Point of Control (POC) is located near the bottom of the
profile.

Market Interpretation:

● Bearish Sentiment: Indicates a strong downward trend where

sellers dominate.
● Long Liquidation: Often seen during long liquidation phases when
traders who were long the market sell their positions, pushing
prices lower.
● Volume Concentration: High trading volume near the bottom of
the profile suggests that sellers are aggressive at lower prices.

Trading Implications:

● Resistance Levels: The upper part of the profile can act as

resistance in future trading sessions.
● Entry Points: Traders may look for selling opportunities on rallies
to the upper part of the profile or near the POC.

3. D-Shape Profile

Characteristics:

● Appearance: The profile resembles the shape of the letter "D",

with a symmetrical distribution around the POC.
● POC: Point of Control (POC) is located in the center of the profile.

Market Interpretation:
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● Balanced Market: Indicates a balanced or consolidating market
where neither buyers nor sellers dominate.
● Range-Bound Trading: Prices are contained within a defined
range, with equal pressure from buyers and sellers.
● Volume Concentration: High trading volume near the POC
suggests a fair price for both buyers and sellers.

Trading Implications:

● Support and Resistance: The upper and lower boundaries of the

profile can act as resistance and support, respectively.
● Breakout Opportunities: Traders may look for breakout
opportunities when prices move outside the profile's boundaries.