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MENTORING - Market Profile - Basics - Coggle Diagram
MENTORING - Market Profile - Basics
The basic building block of a Market Profile graphic is a time-price opportunity (TPO)
A time-price opportunity is a tick or a trade executed by a buyer and a seller at one price. So there can be many ticks at a similar price and many ticks at difference prices.
All the ticks at one price form one TPO.
The Market Profile graphic picturises this movement of opportunity in a trading day over constant time buckets.
When the TPOs formed in such a way are collapsed, a Market Profile graphic in the form of a Normal Distribution (not exactly but near to it) is formed. The graphic shows both the vertical and horizontal movement of the market.
When a distribution like this is formed, we can get better insights if we consider it as a Normal Distribution curve.
A Normal Distribution curve has a MODE, which shows the central tendency of that distribution. That means it shows that the data is lying on that MODE as a base.
A Normal Distribution has data that is spread away from the MODE. The distance of a data point from the mode is measured in terms of STANDARD DEVIATION (SD)
Statisticians have found that there is a pattern with which data in a Normal Distribution is spread out.
About 68% of the data lies within 1 standard deviation (SD) of the mean (mode, for us), that is, between −1SD and +1SD.
About 95% of the data lies within 2 standard deviations from the mean (mode, for us), that is between −2SD and +2SD.
Almost all of the data lie between −3SD and +3SD from the mean (mode for us).
The graph shows 100% of the observations lie between −3SD and +3SD, but more accurately this is 99.74%.
We will consider mode as our average for our Market Profile distribution, because we have dynamic data that keeps printing many times over time.
For us the mode is the most occuring price in a day and it is our average for that day.
Every other data point or price is measured by distance in terms of SD. That means to know where the price is, we will say that it is in 1SD or -SD or 2SD or -2SD.
To make it easy for market players, what Steidelmayer did was renaming these statistical zones with something more meaning for a market player.
He called the mode as the point of control (POC). This is the most powerful area in a Market Profile on a given day or a distribution.
Why it is called the POC. Because it is the price that is holding both buyers and sellers together. It is the most powerful price or price line for the day. However, this keeps moving. We will discuss that later.
He renamed the zone between -1SD and +1SD as the value area (VA). This is the area where buyers and sellers are at least sitting to agree. The high of this VA is called value area high (VAH) and the low of this VA is called value area low (VAL)
The rest of the prices, where the advantage is minimal is called the non-value area (NVA). This is beyond the -1SD and +1SD, and the market spends very less time here.