Exactly What is “Market Profile™”?

Market Profile™ is a copyright of the CBOT of a specific charting format. It was originally designed as a graphing format that would highlight on a trading screen the development of prices in the day timeframe that reflected how a market would typically develop on the floor of the trading exchanges. It was the original brain-child of a CBOT floor trader, Peter Steidlmayer.

In the MP charting format a trading day is divided into thirty-minute time segments. Each thirty-minute period is assigned a letter to identify a specific thirty-minute period. Each time a market trades at a price within a thirty minute period the letter for that time period will print on the chart. However, once a letter is printed at a specific price there will be only one print within that timeframe regardless of how often price rotates back and forth across that specific price. As the market develops and new thirty-minute periods begin the process begins again but with a different letter for that time period. This is a charting protocol that was designed to highlight activity on the horizontal scale of the chart. Each letter, (called a “TPO”) was designed to act as a proxy for volume. It is important to note that when this protocol was first introduced to the public real-time, actual volume was not available.

Over several half-hour rotations TPOs will establish a vertical range on the chart and the accumulation of activity at individual prices as the day develops shows how much trade activity is occurring at certain prices relative to other prices, based on the TPO count at that price. The first two half-hour periods (commonly referred to as “rotations’) are identified as comprising the “Initial Balance Period”. The IBP, simply put, is the range of the first hour of trading. The “Value Area” of a profile graph is the area containing 70% of the trading activity in the trading day.

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The original trading application of the MP concept centered around what occurred if prices moved outside the range of the first hour of trading and the “Day Type” of the previous trading day. There were originally five “Day Types” described by Steidlmayer. Two or three more were subsequently added to the mix as an effort was made to refine this initial concept about what Market Profile™ was, and more importantly from a trader’s perspective, how to trade it. This was a predictive approach to trading the profile graph. The thought was that by reading how much or how little activity occurred at different areas in the vertical range of a profile one could ascribe intent and/or infer who was doing what and how much. The “who” part of the guessing game was an attempt to know if volume at certain areas was from a commercial trader(s) doing mostly hedging or an institutional trader(s) who had more of a directional, trend following bias, or one of two categories into which were lumped floor traders. At the time there were four trader classes assigned by the CFTC (Commodity Futures Trading Commission). The exchanges were required to track where the trade activity of each category was taking place. This information was not available until the next trading day. Initially both the CME and the CBOT reported the data available to anyone that requested it, then the CME stopped making it available to the public and only CME members had access to the data. The CBOT continued to make its data available to the public, thanks in large part by the lobbying of Steidlmayer who has always been a tireless proponent of transparency and the dissemination of trade data at the exchanges. This is digressing into the minutiae of how the concepts evolved, but those were very important concepts in early MP principles and how it was taught. They were also over time proven to be wrong, which explains why so many that were attracted to the MP later gave it up as being in the category of “looks great but no practical use”. Interestingly and important to note, a lot of the ideas that have over time been proven wrong either because the underlying premise was invalid or because the markets have changed so much in the past thirty years are still believed in many quarters to be the “gospel” of MP.

The Market Profile™ graph is a tool to be used as a means to an end. It is an artifact of a process; it is a visual graph of how an auction market develops. It is the understanding of auction market principles where the real value lies.

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