Market Profile Charts—What They Are and How to Use Them

These charts can be convenient if you understand how to use them

Explanation of derivatives market
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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, and they combine these factors in a way that displays price, volume, and time frame on a single chart. You can gather a multitude of information with a glance. 

Market profile charts use standard market data so they don't require level 2 market data or any additional market information such as separate time and sales.

Market profile charts are sometimes known by other names, such as Sierra Chart's TPO, the Sierra chart scale, or volume profile charts. They all do largely the same thing. 

How to Read a Market Profile Chart

Market profile charts display the price on a vertical scale just like most graphical charts. The volume appears on a horizontal scale 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. 

  • Price: 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.
  • Volume: The volume on a market profile chart is displayed as a horizontal histogram with the longest horizontal lines showing the greatest amount of volume. This means that the price that has the longest horizontal line is the price where most of the volume has been traded. This price is also known as the point of control because it's the price that had control of the market most of the time. 
  • Time Frame: 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 5 minutes or 1 hour. Each color also represents one unit of the time frame when colors are used. A 15-minute chart would use colored squares, each of them representing 15 minutes of trading. A trader can easily see which prices have been traded most recently if he knows which color is the most recent. 

    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 that also uses other charts. Either way, market profile charts are usually traded based on support and resistance and on how the price interacts with the point of control, which would be the most traded price. A day trader might trade bounces off the most recent point of control, while a swing trader might trade breakouts of yesterday's point of control.

    As with all techniques and methods, using a market profile chart well takes practice. You might want to give it a dry run—or two or three dry runs—before you jump in. You'll know when you feel comfortable enough to invest with "real" dollars. 

    Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.