Market Profile - Introduction - Where is the edge? (If we change our…
Market Profile - Introduction
Where is the edge?
Fundamentals give us 'what' to trade
Technicals tell us 'where' to trade
Market Profile tells us 'when' to trade.
Order flow tell us who is trading and with whom you should trade.
Why do we need a subject like Market Profile to determine when to pick up an opportunity.
A price is a certainty historically, but it is uncertain in the future sense.
Historically each time, t, is associated with only one price, that is P(t).
If the same time, t, is in the future, that is t = n+x, then the price is not a definable thing. That is we cannot look at one price in the future sense.
In the future tense, we have a group or set of prices instead of one price.
If future is uncertain, how are you going to take a decision on the market.
If we change our mindset towards set of prices instead of one price, then our ability to analyse the market will improve. That is we will analyse a zone of market rather than one price point for the market.
For this, we will take the help of statistics, which deals with data analysis.
This mindset comes from data science, which is used to take decision under uncertainty.
Tomorrow the market can open over a set of prices rather than at one price. So my analysis begins with analyzing a set of price data rather than one data point.
If we need to analyse a set of data, we need certain basic understanding of statistics which is the study of analyzing data sets and making inferential statements.
When we do data analysis, we should identify what kind of data or data distribution we are dealing with. This it the first step of any statistician or data analyst.
Over years what statisticians have done is divided data sets into distributions, based on how the data in those sets are distributed or are behaving.
As a result, because of more deeper interest in the behaviour of financial market data, most researchers or statisticians found that stock market returns (data; and so prices) follow a special type of behaviour called normal distribution.
What that means is that stock prices and returns are basically distributed normally over a time frame. Now, how do we understand data of this type?
Generally, any data set can be fitted into one of the many distributions that statisticians have postulated. So stock prices are modelled always as normal distributions.
Each statistical distribution has certain features. Similarly a normal distribution too has certain features.