Investing smart means using the right tools. Whether that’s considering a stock’s volatility metrics or its price history, you won’t invest as well without the proper resources. One such resource? The market profile chart, first used in 1984. A market profile chart conveys a stock’s price and volume information over time in one quick format. It can be useful for long-term investors, speculators and day traders alike — if, that is, you know how to read one.
Market Profile Chart, Explained
Not to be confused with the practice of building a market profile for a business, a market profile in the financial industry refers to a chart that uses a single graphic to display a security’s trading history. It’s a series of letters and/or colors that are combined into a chart that represents price action over time, typically over the course of one day.
The market profile chart demonstrates an asset’s volatility, showing not only how many units moved but also the price-to-volume ratios at any given time — that is, how much of an asset traded at a given price.
How to Read a Market Profile Chart
A market profile chart has a few key elements:
- Time-price opportunity (TPO): This is the core unit of a market profile chart. Time-price opportunity represents each time trading of the asset touched a given price during the trading day. A market profile chart typically uses letters to represent TPO and most often measures this in 30-minute increments. So for example, the letter “A” might represent the first 30 minutes of trading, the letter “B” would represent the next 30 minutes, and so on. (Note that some charts use colors instead of letters to measure time increments.)
- Price and profile distribution: The vertical axis of a market profile chart displays the asset’s price. The horizontal axis is a combination of both volume and date. On a given market profile chart, the X-axis will likely have a range of dates. A complete chart for a given day is referred to as that day’s profile distribution.
- Volume: Each given day on a market profile has its own profile distribution representing the price and trading volume for that day. The bars will extend horizontally along the X-axis, but within the day’s trading chart a horizontal bar does not represent time; it represents volume. The longer a horizontal bar at a given price point, the longer the asset traded at that price.
- “O” and “#”: On a standard chart, the letter “O” is placed at the asset’s opening price for the day. A “#” sign shows its closing price.
When you combine the elements of a market profile chart, you get a graphic that shows how often an asset traded over the course of the day and at what prices. Understanding time-price opportunity is essential to reading a market profile chart. Each time a TPO letter appears, it means that the asset traded at that price at that time during the trading day.
The Bottom Line
A market profile is not a technical indicator, nor is it the result of a predictive model. It’s simply a manner of organizing existing data to confirm trades, although investors can use it to determine points of stability and likely future price movements based on how the asset has traded.
A market profile chart is useful for judging how an asset has trended over the course of a single trading day. By using this tool traders can understand how heavily the asset has traded, at which prices and in which direction the asset has moved. For this reason it’s particularly relied on by day traders.
Tips for Investors
- Learning to read a market profile chart is only one tool in an investing arsenal. To get the most complete picture of your investments, it’s helpful to understand your tolerance for risk as well as how well your portfolio is diversified.
- Managing your own investment portfolio requires thorough research and a big time commitment. Staying abreast of trends in the market also requires some background knowledge and may be easier for a professional who has access to sophisticated software and other relevant analytical data. To get the most from your money, consider working with a financial advisor.
- Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in just 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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