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Market Profile Provides Clarity To Market Volatility -
A trader at Chicago Board of Trade by the name of J.Peter Steidlmayer, an intraday has introduced a charting technique known as the Market Profile. With the help of this technique, he was trying to evaluate the market value, which would develop within the daytime frame. Simply put, the chart displays the price on the vertical axis and the time on the horizontal axis. The graphic representation is usually in a bell shape while actively trailing off with the volume getting diminished at higher and lower prices.
Different types of Market Profile Trading Strategies are available, which the pro-traders implement for their intra-day trading. Data sorting is one such strategy of a market profile which many of the professional traders use. It gives a unique insight into the financial auction market. It analyzes the financial instruments like the stock, bonds, options, futures, etc. which gives you an insight that will go beyond the typical trading chart.
In most of the trading platform software, they put the Market Profile in the indicator category. But this is a wrong placement since it's not a derivative calculation ...
... compared to most other indicators. When a trader trades with a market profile, he or she, in effect, gets a new and powerful way to view base market data. This base data comprises price, volume, and time. In a typical charting, this data is taken and used to chart the volume. Even market profile uses this data, but it delves deeper into the price, volume, and time which provide otherwise invisible insight.
It provides a market database that accounts for price and how much volume or time is spent at that price. It provides the data at which price level did the market spent significant time. Typical charts don't show this data even though it is much more significant than the other levels. It also shows the price level at which most transaction has happened. Again, this data is not shown in typical charts unless the trader does not use the market profile. Hence, a trader will be making decisions based on insignificant data if they are not using market profile. Hence the data shown by the market profile is of huge value for traders.
Traders know that the key to understanding trading charts is to know the support and resistance value. But it is not a straightforward chore to identify these levels, and it will be more difficult to identify them fast and when needed. This can be simplified by the market profile, as it displays the point of control, which is the price level. This is the level at which most transaction that happens during the session.
This the level at which the seller is eager to sell and buyers to buy. In simpler terms, it shows the resistance and support level. The point of control acts as a support when prices fall and act as resistance when the prices rise. With the knowledge of this, the traders can place orders anticipating the level around the control point. The market profile provides key data of support and resistance level. With the help of volume at price data, it determines the point of control, which provides more validity to the derived levels.
Another strategy of a market profile is the value area, which is an important zone. The traders who play based on statistics recognize it as one of the standard deviations. Around seventy percent of trading happens in the market profile value area. The area defines the boundary of the range trade. Trade above the value area will lead to potential breakout trade, and trade below the value area will lead to potential breakdown trade.
Traders take range trades when the market is trading within the value area. This clarity provided by the market profile is invaluable for a trader. The cornerstone of the market profile is the value area and is one of the reasons that the market profile has stood the test time and will for time to come.
A normal chart will provide the price trend of the past period traveled; it is good information but is missing some vital data. For example, it is difficult to tell whether the long bar consists of few outlier trades on low volume or whether it was a high-volume push giving it a higher significance during the volatile time. The tall volume area of the market profile communicates volume backed volatility.
It will represent the trader that the large move was more than the empty gap formed by a lack of sellers and buyers. This volume volatility info can form the boundaries for range and breakout trades. If the price reverses into the value area, then the trade happens within the range, and if the prices break out of the value area down or up, it is the place for breakout or continuation trades. In any case, the market profile gives a clear picture of the volatility of the market.
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