What is “Market Profile”?
Saturday, May 29th, 2010A market profile is a way of looking at the relationship between price and a significant value such as time or volumes. The market profile is built by looking at all prices a security traded at on a given period or session, and related them to the number of units that were traded (or time expended) at each price.
As an example, we will look at a simple market profile over a one day “session”. It sounds more complicated than it really is:
| Price | Volume of Contracts Traded |
| 199 | 1,500 |
| 200 | 11,000 |
| 201 | 1,750 |
The market profile above shows that 1,500 contracts were traded today when the price was 199. Similarly, 11,000 and 1,750 contracts were traded at prices 200 and 201, respectively.
Market Profile Analysis can be useful for us to identify how buyers and sellers react to different price levels. For example, in the above profile, we can see that there was a lot of contracts traded on the 200th level, which could be a signal that buyers and sellers are in agreement about the value of this price. This is also known as an efficient zone in price.
We can also consider the terminology of acceptance or rejection. When a large volume of contracts traded during a given price bracket, we could say that the market has “accepted” the price. In contrast, a market often make noticeable moves with low volume that quickly reverse when price reaches a certain value. In this case, it could be said that the market “rejected” this price.
It is usually helpful to view a profile of the market when trying to visualize the volumes traded at price:
From this graph we can see the total price distribution by volume. It displays what looks like a bell curve. In this case, the market has rejected the extreme values, either up or down, as evidenced by the low volume. The market has been accepting trade from the mid-range values, as evidenced by the high volume at these prices, which introduces the concept of the “Value Area”.
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