A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 17

Market Profile

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• Understand how to interpret the market in terms of its balance between price and value
• Use Market Profile to define trends and consolidations
• Identify and differentiate between short- and longer-term market participant activity
• Understand the difference between responsive and initiative buying and selling in the markets
• Calculate the value area in term of TPOs and volume
• Determine if there is upside buying or downside selling pressure in the markets over the short and longer term

Market Profile is essentially the charting of the balance between supply and demand, in terms of the level of agreement between price and its perceived value. It is an extremely useful way of viewing market action in terms of whether the participants believe prices are fair or unfair, disadvantageous or advantageous, with respect to their shorter- or longer-term outlook. And unlike conventional charting, trends are determined with respect to the previous day's perception of fair value. This makes Market Profile an indispensable form of analysis to the serious practitioner of technical analysis.

17.1 THE SEARCH FOR FAIR PRICE OR VALUE

The price-discovery mechanism unfolds in response to the overall market participant's belief as to whether prices represent a fair reflection of value. If market participants do not perceive value around the current prices, they will react accordingly by buying or selling ...