Volume Profile and Market Profile are invaluable analytical tools for traders, credited to Mr. Peter J. Steidlmayer. These tools help traders inspect market structures to identify trading opportunities.
Volume Profile is a visual representation of trading volume at various price levels within a specified time frame. It illustrates where the most substantial trading activity has occurred, highlighting areas of high or low volume. The idea stems from Steidlmayer’s conceptualization in 1958, where he applied the Gaussian curve to understand market behavior, focusing on where transactions are most likely to happen.
Market Profile in contrast, this method charts the time and price dynamics over a trading session. It displays price on the vertical axis and time on the horizontal, creating what is commonly known as a bell curve or “TPO” (Time Price Opportunity) profile. This profile shows how much time the market has spent at different price levels, providing insights into market sentiment and balance.
A modern adaptation of the Market Profil, known as the Time Variable Profile (TVP), was developed by Mr. Steven Hawkins. TVP offers a refined approach to Market Profile by allowing for customization of time intervals, enhancing the observation of the market’s two-way auction process. This process reflects the continuous negotiation between buyers and sellers that propels market movements.
Market Profiles
Nature
- Market Profiles are based on the time price spends at different levels. Each price level is represented by letters (TPOs – Time Price Opportunity), indicating how long the market has traded at that price within a given period, typically 30 minutes.
Time Representation
- The key feature of Market Profiles is the integration of time. It shows the distribution of time spent at each price level, creating patterns that resemble a probability distribution. This makes it particularly useful for understanding market sentiment over specific intervals.
Visual Representation
The profile often forms patterns like bell curves, D, P, or b shapes, which traders interpret to understand market balance and control:
- D Shape: Indicates a balanced market where both buyers and sellers are present but indecisive.
- P Shape: Suggests an uptrend or buying pressure where the market has moved up and then consolidated.
- b Shape: Indicates a downtrend or selling pressure, opposite of the P shape.
Data Used
- While volume is not ignored, Market Profiles focus more on whether a trade occurred at a price rather than the volume of trades.
Use Cases
- Used to identify value areas, breakout points, and market control by examining where and how long price traded.
Volume Profiles
Nature
- Volume Profiles focus on the amount of trading activity at each price level. They display how much volume was traded at different price points, not how long the price stayed there.
Volume Representation
- Each price level on a Volume Profile is represented by a histogram bar, where the length of the bar indicates the volume of trades at that price. This provides a clear visual of where the bulk of the trading activity occurred.
Visual Representation
Common shapes include:
- P-shaped: Often seen in uptrends or when there’s aggressive buying.
- b-shaped: Seen in downtrends or when there’s aggressive selling.
- D-shaped: Shows a market in balance or in consolidation.
- I-shaped: Indicates a strong trend where there’s little consolidation.
Data Used
- Volume Profiles use true volume data, showing the actual number of shares or contracts traded at each price level, which can highlight high and low volume nodes (HVN and LVN).
Use Cases
- Traders use Volume Profiles to pinpoint support and resistance levels based on volume, identify potential breakouts by observing volume at different price points, and understand market liquidity.
Key Differences
- Time vs. Volume: Market Profiles emphasize the time spent at each price, while Volume Profiles emphasize the amount of trading activity regardless of time.
- Data Sensitivity: Market Profiles might miss nuances in trading volume at specific prices, whereas Volume Profiles can sometimes overlook the duration of price action at those levels.
- Interpretation:
- Market Profiles help in understanding the market’s auction process over time, providing insights into market balance and control by showing where price has been accepted or rejected over time.
- Volume Profiles give traders an edge in spotting where traders agree or disagree on price (HVN) or where trading interest wanes (LVN), which can be crucial for entry and exit points.
- Application:
- Market Profiles are often used for identifying broader market structure and sentiment, especially useful in futures trading or for longer-term analysis.
- Volume Profiles are typically employed for more precise entry and exit strategies, focusing on where significant trading has occurred, useful for day trading or short-term swing trading.