Updated July 9, 2019

For him, it’s the Market Profile Trading Strategy.

Not only did he double his account, he used the same technique to help other funds hit triple-digit returns.

So what is Market Profile trading?

And why is it so powerful?

In this post, we’ll introduce you to the basics of this little-known trading strategy. And we’ll show you how to read Market Profile charts yourself.

What Is Market Profile Trading?

The strategy isn’t new.

In the simplest possible terms, Market Profile does three things:

That’s crucial information. If you know the fair market value of an asset, you can instantly see whether it’s overvalued or undervalued.

From there you can enter the market with more confidence. Better yet, you can predict where the price will go with lower risk.

It’s like Seeing All the Cards in Texas Hold’Em Poker

Trader Matt D. compares it to being able to see everyone’s cards at a poker table.

It’s a snapshot of the entire market sentiment.

A map of where buyers and sellers are most active.

And it works with any market - stocks, forex, indexes, bonds, futures, ETFs. And in any market conditions - up or down.

How Market Profile Works

The Market Profile tool is available on TradingView and most other trading platforms.

Market Profile Trading Strategies:
How It Gives Your Trades the Competitive Edge

With this one simple tool, you can see whether an asset is undervalued or overvalued.

If the current price is above the value area, it’s a warning sign. At this point, the market is considered over-valued. It could be dangerous to take a long position, especially if trading volume is thin.

You can also execute trades based on how the price interacts with the “point of control” line.

For example, if the current price is below the line, there’s a good chance it’s under-valued. In theory, it should return to value. And vice versa.

This is a very simplified analysis and we’ll get deeper into how to execute a trade shortly.

Think of Market Profile Strategy like having the playbook to an Auction

To fully understand Market Profile, you need to know that every financial market is like an auction.

There are a small number of buyers who will only buy in at the bottom price range. It’s a very small group willing to wait for that elusive price.

And there are only a handful of buyers at the very top of the price range. Few are willing to pay above market value for something.

These two extremes represent the tail-ends of the bell curve.

They have low trading volume.

Everyone else is somewhere in the middle. And that middle creates a fair-market value. An average price people are willing to pay.

Trading with Market Profile simply reveals where that middle, fair-market value lies.

How to Read Market Profile Charts

Let’s get deeper into the chart itself and show you how it works.

To start, enable “volume profile” on your trading platform. On TradingView, it’s located under “indicators and strategies.” This will bring up the Market Profile, or Volume Profile charts.

Select the time range.

As we’ll discuss, a six-eight week period is ideal. This gives us plenty of volume in the market.

And enough time for the big picture to emerge. We need to see a broad spectrum of buying and selling pressure over time to see where the value lies.

Volume is displayed on the right-hand axis. You’ll see that each price has a horizontal bar - that’s the measure of volume. The longest horizontal bar represents the most amount of buyers and sellers.

In our example above, $174.39 has the longest bar. So $174.39 is the price that generated the biggest interest from the market.

The red line is the point of control. The median of all the buyers and sellers over the selected time period.

The dark green bars show the “area of value.” Above and below that, the price is outside the area of value. 

How Do Market Profile Charts Work?

If you look at the chart above, the Market Profile indicator tells you three pieces of information:

By combining these three indicators, you get a much deeper analysis of what’s going on in the market.

How is it different from any other volume indicator?

The key difference is that it measures volume at a specific price rather than a moment in time. That’s an important difference. Measuring volume against price tells you exactly where traders see value in the market.

That means you can enter the market at the perfect moment. You can enter a trade knowing you bought in at a bargain price compared to other traders.

Let’s compare a Market Profile chart to a candlestick chart. A candlestick chart tells you the price range of an asset at a point in time. But it’s missing some context. We don’t know how that price activity compares to other points in time.

The Market Profile strategy throws in the missing element. It gives you the extra context of which price triggered the most volume. And when you know expected prices you can trade ahead of everyone else, profiting tremendously.

It’s like having a crystal ball for the market. While other traders are guessing at entry points, you know exactly where the value lies. And that means you can get in below value and pocket the profits.

Market Profile Trading Strategies

Market Profile can be used intra-day or over a medium-term period.

Trader Matt D. uses a Market Profile swing trading strategy. He uses a six-eight week range to gauge the broad sentiment and value of a market.

A mid-term range is ideal because it gives the market time to create an equilibrium of supply and demand.

Day-traders use Market Profile too.

For example, they could enter a trade when the price moves away from the daily point of control. This is a basic Market Profile intraday trading strategy.

As a medium-term tool, Market Profile is ideal for anyone looking to start trading.

You don’t have to be at your desk for the opening bell or check intraday charts. You can set a confident trade and let it run for a few weeks.

Which Markets Work Best with Market Profile?

The beauty of this technique is that it works with pretty much any market or asset, in any time frame.

However, you should choose something with plenty of liquidity. Matt D. recommends the S&P 500 futures as a great place to start. Five-year bonds are also good. Not only are they highly liquid, but you can trade with a relatively small account.

What about stocks? You can trade stocks using the Market Profile method, but they generally have a higher trade size minimum than futures and bonds. You’ll probably need an account with more than $20,000 to trade stocks.

Oil futures are another good choice, but there are lots of fundamentals at play here. You’d need to know the ins and outs of the crude market too.

Market Profile will also work with exchange-traded funds (ETFs). Just bear in mind there are other factors here like slippage.

Executing a Trade with Market Profile Strategy

Now you know the basics of Market Profile and how to read the charts, let’s see a trading set up in action.

Below is a screenshot from our exclusive Matt D. video (you can get the interview below). In it, he takes us through a real oil futures trade.

It’s a four-week timeline. The red circle is the entry point. At the time of the trade, oil was at $45 dollars, below the value range and the point of control. In other words, it’s undervalued. 

Chances are, the price is going to move back towards the point of control.

In this case, you might go long in the belief it will move back up into the value range. As you can see, that’s exactly what happened.

How amazing is that?

The Market Profile strategy revealed the perfect entry point, and locked in a profitable trade.

Consider the Volume Pattern

Executing this trade isn’t a perfect science. The price doesn’t always come back to the value range.

The key indicator to look for is volume. Has the price moved away from the point of control with strong volume?

Or weak volume?

If the price shifts away from the point of control and volume has dried up, there’s a good chance the price will come back to that value range. In this case, our trade above would work perfectly.

But if the price moves away from the point of control with strong volume, it’s a sign that traders are rethinking the market value.

If there’s enough support outside the value area, it could shift the market sentiment. If that happens, our trade might not work out.

You can see this price breakout is on high volume. Would you short this breakout because the Point Of Control is far below that price or is market sentiment going to change and have it be a successful breakout?

How to Manage Risk with Market Profile Trading

As with any good trade, the Market Profile method should be executed with a risk management strategy.

A Risk Management Strategy is a critical part of your Trading Plan.

In other words, set a relatively tight stop-loss. That will minimize your loss if the trade goes the wrong way. In the oil futures trade above, a stop loss set at 1-2% below the trade price is a sensible choice.

If the price fell below that point, it would show that traders were re-evaluating the market value. It could fall much further.

So long as you’re confident in your set up, don’t be concerned if the trade turns negative for a while. This is having the proper setup.

Even D. admits, “80% of my profitable trades go against me at some point.” So long as you stick to a risk management strategy, temporary downturns shouldn’t worry you.

Hardly Anyone Knows This Trading Strategy. Now You Do

Now you know the basics of Market Profile trading and how to execute a trade.

Like any trading strategy, it’s not a silver bullet. But it can help give you an edge by showing you the bigger picture.

It shows you a snapshot of the market. The weak hands, the strong hands, and the fair market value.