Unlocking market and volume profile secrets for day trading

Market profile and volume profile are two essential tools for day traders aiming to understand market structure and price behavior. IndicatorSmart’s Rob Mitchell discussed key concepts of auction market theory, the evolution of market profiling techniques, and how traders can leverage this knowledge for more informed decision-making.
 

The evolution of market profile

 
Market profile originated in the 1980s with Peter Steidlmayer at the Chicago Board of Trade. He introduced a sideways bell curve representation of market activity, which eventually evolved into a broader set of tools, including volume profile and auction market theory.

Initially, market profile was a proprietary tool, requiring a paid license. However, once it became publicly available, software vendors, including NinjaTrader, developed their own solutions, making it accessible to traders worldwide. Today, market profile remains a widely used framework among institutional and retail traders alike.
 

Core concepts of market profile and auction market theory

 
At its heart, market profile is built on auction market theory, which suggests that financial markets function like a continuous auction, where buyers and sellers determine price levels. Key elements include:
 

1. Time price opportunity (TPO) and volume profile

• Market profile (TPO-based): Tracks time spent at price levels, emphasizing areas of price acceptance and rejection
• Volume profile: Focuses on trading volume at specific price levels rather than just time, offering additional insights into market participation

 
2. Key market profile levels

• Value area high (VAH) and value area low (VAL): The price range encompassing 68% of trading activity for the day
• Point of control (POC): The most traded price of the day, representing the strongest price consensus

 
3. Initial balance and range projections

• Initial balance (IB): The first hour of trading sets a reference point for expected market movement.
• Range projections: Markets have a 79% probability of extending beyond the initial balance by one multiple, with a 50% probability of reaching the second multiple.

 

How traders use market profile

 
Market profile is often used in conjunction with other tools, rather than as a standalone trading system. Traders analyze value area levels, price movement patterns, and range probabilities to determine potential trade setups.
 
1. Identifying trend vs. range days

• Narrow value area: Indicates a potential breakout day.
• Wide value area: Suggests a mean-reverting day, where price fluctuates within the defined value range.

 
2. Market profile as a sentiment indicator

• Opening inside the value area: Market sentiment is neutral, and there’s a 33% chance of price closing above, below, or within the range.
• Opening outside the value area: There’s a 78% chance of closing in the direction of the breakout.

 
3. Spotting market profile “failures”

When price moves outside the value area but reenters, it signals a failed breakout, allowing countertrend traders to capitalize on reversions.
 

Beyond market profile: Probability-based trading

 
A major takeaway from the presentation was probability inversion—an approach that analyzes price reversals based on statistical likelihood. Rob highlighted:

• Once a price move extends 25+ ticks, reversal probability increases.
• At 30 ticks, there’s a 70% chance of a reversal.
• By 40 ticks, reversal probability exceeds 90%.

 

Improve your trading edge with this powerful tool

 
Market profile remains a powerful tool due to its widespread use among traders. Understanding key levels, initial balance ranges, and probability-based reversals can significantly improve a trader’s edge.

For those looking to deepen their knowledge, NinjaTrader offers advanced market profile tools, real-time market data, and a wide range of educational resources for both new and experienced traders.