Its no coincidence that I am personally up over +400% this year alone. The reason I am able to do this is through the use of the market profile. This charting technique is no secret, but its not as popular as the Candlestick charting technique. There are many ways to analyze price action. For example:
- Candlestick/OHLC Bar Type: Displays the Open, High, Low and Close of a specific period of time
- EquiVolume: Same as a candlestick, but the width of the bar displays the amount of volume. The wider the bar, the more volume it had compared to other periods of time.
- Heikenashi Bar Type: Averaged close candlesticks with no gaps
- Point & Figure: Range & Time-based charting technique that looks for reversals within the timeframe. Hint: You are not playing Tic-Tac-Toe when looking at these charts – LOL
- Kagi Line: Range and Trend based charting technique that uses square lines to determine short term direction and reduce random noise.
- Line on Close: The standard charting technique used by finance media and financial advisors. It only displays the close of the time period and connects the dots
The only chart analysis technique missing here is the Market Profile. Most people think it is just an indicator. Which is partly true, but only because we must program market profile as an add-on to our trading platforms, but in reality, it is a charting technique just like the above mentioned. This charting technique is all about analyzing value and where the market did a lot of business and where it did not.
This information is very valuable when it comes to trading. Especially in instruments that have been financially engineered, meaning: Index Futures, ETF’s, and other diversified derivative products. If for example, we look at the $SPY: What makes up that ETF? The answer is a group of 500 large cap stocks from multiple different sectors. This is a diversified derivative of the S&P 500 Index. This is the kind of financially engineered product that we want to analyze with market profile.
How to analyze distributions
Distribution analysis, in my opinion, is the best way to look at markets. There is a continuous dance that all markets perform: Balance → Imbalance → Balance → Imbalance … Etc. With Market Profile, we can see this pattern more clearly. Market Profile shows a specific time period and the Bell Shaped Curve associated with that time period. There are two kinds of Curves that occur in financial markets:
- Multi-Modal Distributions: A singular distribution with multiple modes -or- multiple Points of Control
- Normal Distributions: A singular distribution with only one mode -or- one Point of Control
When analyzing Market Profile, we also investigate the Value Area, which is 70% of where the market spent the most amount of time and volume. The Value Area is where the Balance is located in the Auction. When we transition from one Balance area to another, its called an Extension of the Range, which is the same as Imbalance. Remember Balance → Imbalance → Balance – That’s the way the market operates.
Secrets of the Market Profile
One of the biggest secrets of Market Profile is the use of the Value Area on Normal Distributions. I’m not afraid to say it, there is tons of free education on Market Profile online, but not all education is created equal. There are different methods of trading Market Profile that have merit, but there are those that are not backed up with broker statements. My performance and statements can be found here: https://neurostreet.com/trade-performance-raul-rivera/
So, lets keep talking about this secret. As I explained, Normal Distribution is a Bell Shaped Curve that has only one Point of Control. Ask yourself this question: Have I ever seen in any book, publication, internet, classroom lesson or a magazine that displays anything other than a Normal Distribution?
In most cases, a simple google image search of “Distribution”, “Bell Shaped Curve” or “Standard Deviation” will always show you a one curve distribution and almost never a multi-modal one. The funny thing is that in the world of trading, there are many occurrences of multi-modal distributions. Well what if we were to change that? What if we were to show only Normal Distributions even though we know that the markets will create instances of multi-modal distributions? What happens then?
Well, what happens is you end up unlocking one of the best trading strategies and secrets in the futures market. If you knew where to buy and sell with high accuracy well before the market makes it there, trading doesn’t become a matter of where, but a matter of when. When you convert multi-modal distributions into normal distributions, what do you think happens to the value area of each distribution? This is important! The value of normal distribution are key levels of support and resistance.
Another little secret involves the creation of multi-modal distributions. What do you think makes these distributions? What is little known is that multi-modal distributions are actually a combination of normal distributions within a time period. Again, going from Balance (normal distribution) → Imbalance (range extension) → Balance (normal distribution). This creates a multi-modal distribution. A normal distribution has one point of control. If you have two normal distributions, you now have more than one point of control.
How to Trade with Market Profile
The idea is simple. Buy low and Sell high. This is a trading proverb that has not been followed by traders in recent times. Traders are so caught up on trying to be part of a trend that they don’t try to find a way to be at the very beginnings of trends or swings. Market Profile helps here. The idea is simple. Buy the Value below price and sell the value above price. In essence, buying low and selling high. That is the way to profit and trade with the market profile.
There you have it! A few secrets about market profile. May it potentially serve you, as it has me – (+400% in just 2018). Happy Trading!
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Lead Educator NeuroStreet