Trading Strategies Using Market Profile
A professional instrument to analyze the trade volumes available on the exchange is known as Marketing Profile. Market Profile is a graphical representation of the volume distribution across all price levels. Peter Steidlmayer founded the marketing profile in the year 1985. He introduced this to the Chicago Board of Traders (CBOT).
Daily, there is a battle between buyers and sellers in the market. Buyers want to purchase cheaply, while sellers like to sell at a high price. The price keeps fluctuating up and down to find a suitable price that pleases both buyers and sellers. When the market achieves a fair price or balance, a shape of the bell is taken by the graphical Market Profile. Stages follow one another, and trend price moves of varying duration and power begin in the balancing area. The Market Profile enables a trader to determine whether the market is in balance (flat) or distribution (trend) at any given moment. Depending on the Market Profile, many sources identify two types of trades:
- Proactive
- Responsive
In the proactive type, there is a breach of the previous balance area in quest of a new fair price, whereas, in the responsive trade, there is a return to reasonable pricing from unreasonably low or excessive pricing.
Market Profile helps assess the auction course; just by using the various ways of constructing the Market Profile, an analyst may examine the dynamics of trade development throughout the day and over lengthy periods. The usage for the above-mentioned includes:
- Keep a close eye on the breakout of the Initial Balance area.
- Monitor VA and POC movements to determine who is on top – buyers or sellers.
- Using the Virgin Point Of Control, you can prevent any reversals.
- Calculate your take profit ahead of time-based on how the day unfolds.
- When the price returns to the previous day’s VA, apply the 80/20 rule.
Here is a brief description of all the methods of trade using Market Profile:
Initial Balance
The price movement during the current trading session’s first hour high and low is known as IB. When the Initial Balance High X3 level is combined with number 1, it is possible to notice that the price has risen above the initial level to be utilized for trading.
VA and POC
VA stands for the Value Area, whereas POC for Point of Control.
Keep an eye on how Value Areas from neighboring days interact:
- Opening higher than the previous day’s VA – a bullish indicator
- Opening below the previous day’s VA Is a negative sign
- VA – the price fluctuates inside a range after opening within the prior day.
As a rule, the POC maximum volume level follows the trend.
80/20 rule
According to the Pareto Principle, 80% of the outcomes result from 20% of the causes. It is an experimental rule, which means that it describes complicated and non-uniform processes using simpler terms.
