Market profile charts are convenient tools that can be used by both short-term investors and long-term traders. They're typically based on price and volume information, combining these factors in a way that displays price, volume, and time frame on a single chart. These data then indicate the value area and points of control for a stock.
Market profile charts use standard market data so they don't require level 2 market data (highest bid, bid size, lowest ask, ask size). Market profile charts are sometimes known by other names, such as Sierra Chart's TPO (time price opportunity, depicted by letters in the graph), the Sierra chart scale, or volume profile charts.
- Market profile charts display price, volume, and time frame on a single chart, indicating the value area and points of control for a stock.
- The price is on the vertical scale (y-axis), and the volume appears on the horizontal scale (x-axis).
- Market profile charts can be used as a complete trading system or as part of a larger trading system.
- As with all techniques and methods, using a market profile chart takes practice.
How to Read a Market Profile Chart
Market profile charts display the price on the vertical scale (y-axis). The volume appears on the horizontal scale (x-axis) and the timeframe uses a combination of letters and/or colors. Understanding the price is quite straightforward but the volume and time frame segments are slightly more complicated.
Market profile charts display the price in the same manner as any other day trading chart, with the price scale being displayed on the right side of the chart.
The volume on a market profile chart is displayed as a horizontal histogram with the longest horizontal lines showing the greatest amount of trading volume. This price is also known as the point of control because it's the price that had control of the market the most.
The time frame on a market profile chart uses letters and/or colors. Each letter represents one unit of the time frame when letters are used, such as five minutes or an hour.
A 15-minute chart might use colored squares, each of them representing 15 minutes of trading. A trader could then easily see which prices have been traded most recently if they know which color is being used.
There are other indicators and areas to highlight and note on market profile charts. The selling and buying tails represent the lowest buying and selling TPOs for the trading period, while the value area represents a generally accepted 70% of the TPOs.
Trading Using a Market Profile Chart
Market profile charts can be used as a complete trading system or as part of a larger trading system. Either way, market profile charts are usually traded based on support and resistance prices (where the market cannot support a lower price, or where it resists a higher price), and on how the prices interact with the point of control.
A day trader might trade bounces (trading at a support level) from the most recent point of control, while a swing trader might trade breakouts (trading at prices that have broken through the resistance or support level) of yesterday's point of control.
As with all techniques and methods, using a market profile chart takes practice. There are a number of virtual trading simulators available that can give you the practice you need to become comfortable trading futures. You'll know you're ready when you feel comfortable enough to invest your money.