Tuesday, March 04, 2014

Market Profile: A Practical Theory

Thanks to Trading Naked for the above graphic, and thanks to reader Todd who mentioned Jim Dalton's mentorship work on Market Profile in response to the recent post

There is nothing as practical as a good theory, psychologist Kurt Lewin once observed.  What I like about Market Profile is that it is a good theory:  a way of making sense out of market action.  When I led a trading internship program in Chicago back in the day, Jim's book Mind Over Markets was the one required text.  (See WindoTrader for a unique implementation of Market Profile). 

Once you understand markets as auction processes with bidders and sellers, shifts in volume and price over time make much more sense.  Is it any wonder that a breakout from a trading range is more likely to continue to move away from the range if accompanied by higher volume and if it is occurring at times of day when liquidity is highest?

Where has the market set value?  When is a move away from value most likely to persist or reverse?  Thinking in terms of auctions and the actions of buyers and sellers greatly illuminates market moves that otherwise might make little sense.

Further Reading:  Market Profile as a Best Practice in Trading