Market Profile: A Beginner’s Guide

Market Profile (МР) is a method for visualizing market data, based on the price distribution over time. While not a trading system or strategy by itself, MP is instrumental in identifying an asset's fair value and key support/resistance zones.  

In this article, we elaborate on the fundamentals of Market Profile: defining its key components and discussing the principles behind their application.  

Time Price Opportunities (TPO)  

A TPO represents a building block of the Market Profile chart, each block indicating a moment when market participants traded at a specific price. Generally, a TPO block is created every 30 minutes, with the entire Market Profile chart developing throughout a trading session.  

TPO blocks are labeled alphabetically. For example, the first TPO block is labeled as “A”, followed by “B”, and so on.   

Candlestick chart (1), Expanded TPO blocks (2), Market Profile Chart (3). Source: tradingriot.com

The image above shows a single trading session in three different ways: Japanese candlesticks, an expanded TPO chart, and a full Market Profile distribution. Typically, the first and last TPO blocks are distinct from the others, often highlighted in a different color or marked with a symbol like an arrow.

Given that the English alphabet contains only 26 letters—sufficient to cover only 13 hours of trading—uppercase letters are initially used for TPOs, followed by lowercase letters. This method is particularly relevant for the cryptocurrency market, which operates 24-hour trading sessions.  

The Bell Curve  

In Market Profile charts, the distribution of TPOs typically forms a bell-shaped curve. This curve demonstrates where transactions most frequently occur, with fewer TPOs at the edges and more concentrated in the middle.

Bell Curve Chart. Source: updconsulting.com

Theoretically, this curve is symmetrical, with the mean value at the center flanked by several standard deviations on either side. Although in practice the TPO distribution may not be perfectly shaped, it still illustrates that data are clustered around the mean value.  

Statistically, 68.2% of all data fall within one standard deviation, nearest to the mean values. This statistical insight is used in Market Profile to define the Value Area (VA)—the zone of highest market activity.

Value Area  

The Value Area (VA) on a Market Profile chart indicates where market participants have traded most frequently during the session. This area, where 68% of the session's transactions occur, is typically highlighted in a distinct color to stand out.  

VA Range Highlighted in Gray. Source: exocharts.com

The VA is not a trading tool but a visualization of price and time data that shows where traders are most willing to transact. Exiting this zone can lead to two types of market behavior:

• Responsive Activity: This is the expected reaction when the price exits the VA range. If the price trades above the VA, selling is anticipated; if it trades below, buying is expected.
• Initiating Activity: This occurs when the expected market reaction does not happen upon exiting the VA range. Instead of buying below the VA, selling begins, and instead of selling above it, buying starts.

Additionally, the VA framework includes two key points: the Value Area High (VAH) and the Value Area Low (VAL). The VAH is the upper limit of the Value Area and may trigger a reaction that continues an upward trend, while the VAL is the lower limit and may initiate a reaction for a downward trend.

Point of Control  

The Point of Control (POC) represents the price level where traders have engaged most frequently, signified by the highest concentration of Time Price Opportunities (TPO) blocks. The more TPO blocks at this level, the stronger it is considered.

Beginners often mix up the concepts of Value Area (VA), POC, and The Bell Curve. It's crucial to distinguish them: VA represents the range with the highest market activity (for BTC, this could be between $57,500 and $58,000), while POC is a specific price level (e.g., $57,750). In contrast, The Bell Curve is merely a visual representation of the market profile.

The POC is viewed as an area of fair value, serving as a magnet for price. It frequently aligns with technical analysis tools such as support or resistance zones.

POC coincides with a resistance zone. Source: tradingriot.com

Unretested Points of Control, known as Naked Points of Control (nPOC), follow the same logic. Traders typically seek to place trades as close to an nPOC as possible for optimal entry points.  

Initial Balance and Spike  

The Initial Balance (IB) comprises the range set by the first two TPO periods of a trading session, labeled A and B. Since each TPO block forms over 30 minutes, the IB reflects the first hour of trading. The upper boundary of the IB is termed the Initial Balance High (IBH), and the lower boundary is the Initial Balance Low (IBL).

Example of Initial Balance. Source: tradinglite.com

Monitoring the range's expansion beyond the IB allows traders to gauge the prevailing force—buyers or sellers—in the current session. A movement above the IB suggests buyer dominance, while a movement below it indicates stronger selling pressure.  

Additionally, the width of the IB is telling: a narrow IB suggests a strong trend, typically used for initiating continuation trades, whereas a broad IB points to a weaker trend, suitable for trades at the range's edges.  

Lastly, a Spike represents the range defined by the last two TPO blocks of the session. Observing the Spike provides insights into the potential direction of the next trading session. For instance, if trading begins above the previous day's Spike, it often signals the likelihood of a continuing trend.  

Failed Auction  

A Failed Auction occurs when the price breaks beyond the Initial Balance (IB) but fails to maintain that level for more than 30 minutes. Essentially, the price extends beyond the IB's upper or lower boundary only during a single TPO block before retreating back into the IB range.

Traders leverage Failed Auctions to initiate reversal positions: from the TPO that breaches the IB to the opposite boundary of the IB.

Failed Auction in both expanded TPO and on a candlestick chart. Source: tradingriot.com

The image above shows how the price struggles to sustain below the IB during period D. By period E, the price reverts to within the Initial Balance range. On the candlestick chart, this activity resembles an engulfing pattern.  

Excess  

Excess occurs when there is a significant dominance by either buyers or sellers within a specific price range. Visually, Excess appears as a wick with a single TPO block above or below the Value Area.

By expanding the Market Profile chart, one can observe how Excess forms. For instance, the image below displays an Excess that emerged during period M (highlighted by a yellow circle).

The Process of Forming Excess. Source: tradingriot.com

After the price falls below the previous day’s low (PDL), a robust response from buyers pushes the price back into the VA range, leaving a tail composed of TPO blocks from period M. Another word for Excess is buying/selling tail, indicating whether it is driven by buying or selling pressure.

Excess is most effectively utilized in contexts with significant demand/supply zones, such as the highs/lows of previous days/weeks/months, price reversal points, or nPOC.

Single Prints  

Visually akin to Excess, Single Prints consist of a solitary TPO block. Unlike Excess, Single Prints occur within the Market Profile chart framework.

They emerge from the actions of one group of market participants when there is a lack of opposing market interest (e.g., an abundance of sellers with no buyers, and vice versa).

Filling of a Single Print during the period “O” in the latest Market Profile chart and the subsequent price reaction to a short position. Source: tradingriot.com

Single Prints create market inefficiencies, showing a lack of equilibrium between buy and sell orders. These formations often indicate Imbalance on the candlestick chart and can serve as areas of interest or zones for initiating positions.

Poor High/Low  

Poor Highs and Lows emerge when a trend stalls abruptly, often referred to as “unfinished auctions.” These levels are believed to act as magnets for price, representing points where either buyers or sellers did not fully execute their trades due to a decrease in counterparty activity, potentially aiming to continue trading near these levels later.

Visually, you can identify Poor High/Low by two TPO blocks wide at either the top or bottom of the Market Profile chart. On a candlestick chart, this typically manifests as two equal peaks or troughs.  

Poor Highs/Lows are most effectively used in conjunction with Excess. For instance, when the price reaches Poor High/Low levels and simultaneously forms an Excess, this configuration can be exploited to initiate trades anticipating a trend reversal.

Illustration of reaching Poor High/Low values on the first Market Profile chart, followed by the formation of Excess and a subsequent price reaction toward a short position. Source: tradingriot.com

Similar in appearance to Poor High/Low is Ledges, which are created by two TPO blocks within the Market Profile chart. They operate under the same logic as Poor High/Low and serve as robust zones of support or resistance—a criterion being the price reacting to these levels at least twice.

Beginners often confuse Ledges with Poor High/Low. It's worth noting that Ledges occur within the interior of the Market Profile chart, while Poor High/Low is found on the exterior. Nevertheless, the principles governing their behavior are the same.

Using Market Profile in Trading  

The diversity of trader perspectives leads to a multitude of opinions. Each trader views price movements from a personal lens, identifying key zones, the trend, and its potential. This subjectivity can introduce bias and obstruct an objective evaluation of market conditions.

Market Profile overcomes this challenge by offering objective insights into three critical aspects of market behavior:

1. In which range have market participants traded the most extensively?
2. Where is the level of highest trading volume?
3. What are the strong zones of support and resistance?

Many traders combine Market Profile with classical technical analysis, Price Action, and other market analysis techniques. This integrated approach enhances their ability to pinpoint precise areas for opening and closing positions and to gauge the potential movement for the upcoming session.