How Market Profile Helps Me Profit
05/15/2015 6:00 am EST
Marc Principato explains how even technical tools traders don't use on a regular basis can make a positive difference in their strategy every time.
The new trader is usually in a rush. They want to be handed a system that will make them profitable practically overnight.
A professional and consistent trader is one who is usually informed in a way that goes against the conventional. Getting to that level of knowledge requires building enough experience with conventional information so that you can make it your own.
It takes a great deal of time and effort to gain the ability of original thinking. Think about a musician starting out with an instrument. They first learn the basics, and then spend years perfecting their own unique style. Eventually that instrument becomes an extension of themselves. Refining your trading skills requires a similar form of commitment and discipline.
One thing I tell new traders is if you want to become an expert in this game, you must have a strong interest in every aspect of the game. You should be enthusiastic about learning techniques or philosophies that will offer no immediate value to your trading. You are learning because you enjoy learning about anything related to trading.
This is what eventually leads to the refined thinking skills required to navigate the markets on the short term.
There are many topics that I am very familiar with that don't have any immediate use in my trading. One such topic is Market Profile.
Market Profile is a technical perspective that was developed by J. Peter Steidlmeyer, a trader at the Chicago Board of Trade. He created this way of looking at prices to better evaluate market value as it developed throughout the trading day. His charts resemble a bell shape that looks similar to a normal statistical distribution. He introduced the Market Profile graphic in 1985.
This is a graphic based on Market Profile. The original profile uses letters to track time in 30-minute intervals:
I read a few books on this perspective. I experimented with charting packages that were able to produce a similar profile graphic. I tried to develop trading strategies around this perspective. I have not been able to use this tool in a way that offers me any immediate benefit.
Next: Have I wasted my time?|pagebreak|
Have I wasted my time? Was all that effort for nothing? Actually, the opposite is true. I may not be able to use the profile graphic in my trading, but I have gained an enormous understanding of price behavior. It is this understanding that helps me interpret price action as it unfolds, and allows me to adjust my expectations appropriately. That is extremely helpful.
One concept that Market Profile emphasized for me is the difference between a balanced market and one that is imbalanced. Balance simply means an equal amount of buyers and sellers around a particular price area. That also means what? A range-bound market.
I also learned that the more time price spends at a particular level, the more significant that level is. Usually you will find the "point of control" or price level where the most time was spent. This implies volume. When price moves away from this area, and happens to revisit it, this area becomes a very important potential turning point. So I can adjust my expectations appropriately and better anticipate the market.
So do I use Market Profile exclusively? No, but I utilize concepts that I would not have known about if I didn't spend time reading the books and experimenting with it in real time.
The lesson here is this: trading is a continuous learning experience. You will never know everything there is to know. This constant pursuit of knowledge is what being "passionate about the markets" is all about.
So the next time you come across a magazine article, book or blog post related to trading, read it and add that one new piece of information to your foundation. Eventually all these pieces of information come together to help you form a much more accurate perspective of the market.
Marc Principato, CMT, can be found on his Twitter account.