Week 48: Market Profile
Filter noise and sharpen your tactics
This is Week 48
50in50 uses the case study method to go through one real-time trade in detail, about once per week. This Substack is targeted at traders with 0 to 5 years of experience, but I hope that pros will find it valuable too. For a full description of what this is (and who I am), see here.
If you want to learn about global macro in real-time … subscribe to my daily: am/FX
Listen to this as a podcast on the web … or Spotify … or Apple.
Update on previous trades
Nothing major to report other than the SPY put spread is a tiny bit underwater and the TSLA short is gradually looking better by the day. Price wars in the auto industry are unlikely to be bullish TSLA, especially with recession lurking around every corner.
KRE has rallied a bit and is slightly out of the money.
Friday Speedrun!
We have a new, 5-minute-per-week Substack coming out! It’s called “Friday Speedrun”. Check it out here.
.
Are you…
A business student?
Studying economics or finance?
A junior analyst in sales, trading, or banking?
Curious about financial markets and want to learn more?
.
If you answered “yes” to any of the above, Friday Speedrun is for you.
Get a clear explanation of what happened in global markets each week from a 25+ year Wall Street trader and global macro expert (me) and contributing editor Justin Ross.
It’s free, easy, and quick.
Five high-yield minutes each week.
SIGN UP HERE (it’s free)
… and even if you aren't interested in finance, we're going to share links to interesting articles, blogs, etc. every week so you can read what we've been reading.
Get smarter, learn more.
Market Profile
In Week 47, I said I would write about Position Sizing this week, but I realized that I covered the topic already in Week 1 and Week 24. Please check those out for a full understanding of how I size positions.
Instead, I’m circling back to a promise I made in Week 36. That week, I said I’d try to write a piece about Market Profile. So here we go!
What is Market Profile?
Market Profile (sometimes called Market Picture) is a streamlined system for charting price, volume, and time data. Compared to normal bar or candle charts, it changes the way time and price are represented and I like it because:
Market Profile provides a concise, visually appealing summary of what’s going on in the market.
It cuts out a lot of noise.
There are simple ways to apply Market Profile to your process if your goal is to use technical analysis as a risk management tool. In other words, Market Profile is great for identifying pivots. And pivots are what you need when you’re determining reassessment triggers like stop losses and take profits.
.
There are many ways to process the torrent of financial data that rushes through the global pipes every day. Bar and candlestick charts are the most popular presentation format for financial time and price movements but there are other equally valid ways of slicing and dicing the data.
Most of the charts on my trading cockpit are in candlestick format. Market Profile is my second favorite way of looking at time and price data. There is a huge body of writing on Market Profile, so if you like the concepts here, check out the suggestions for further reading further down.
The main benefit of Market Profile is that it gives you a quick and highly visual way of looking at many days’ worth of intraday price action. Here is the Market Profile for Apple common stock (AAPL) back to February 27.
AAPL Market Profile, February 27 to now
You can access Market Profile in Bloomberg by typing (for example) EUR {CURNCY} MKTP {GO} on Bloomberg. I believe it’s available on TradingView and other platforms, too. Sometimes it might go by a slightly different name.
Market Profile is best for analyzing shorter time frames, and most intraday charting systems won’t show you more than 30 days. There are ways of using Market Profile on daily and weekly data, but these are way too big picture for me and I don’t use those.
My trading time horizon is usually 1 day to 1 week (on average), so I start with that 30-day view and also often zoom in to something like a 5-day chart with 5-minute increments, like this:
AAPL Market Profile, April 3 to now
Some people like to create the Market Profile manually as the day progresses using graph paper and a pencil. That’s a great idea! Manual intraday charting gives you a more intimate feel for how the day is developing and gives you a more visceral connection to the price action.
It also gives you a better understanding of how the Market Profile is built from the ground up. When I have the time, I build Market Profile charts manually throughout the day. I find doing so helps keep me in the zone.
Each letter on the chart represents a block of time throughout the day (30-minute blocks are used in the first chart example above, and 5-minute blocks in the second).
If there are many letters in a row beside a price, it tells you that the price traded there many times throughout the day. Each column of letters represents a day and the date is indicated on the x-axis below each column.
Look at the column of letters for April 10th on the second chart, for example. You can see that 160.50 traded for much of the day (there are many letters stacked up in a row) whereas 160.10 was touched briefly, and quickly rejected. Same deal with 161.60 to 162.00. There is just one letter next to those prices and this tells you that AAPL was there briefly, but didn’t like it there and went down right away.
To build the chart manually, simply create a blank grid on graph paper with logical intervals on the y-axis. Then put an A beside every price that trades in the first hour of trading, put a B next to every price that trades in the second hour of trading and so on. I suggest you try this for a few days and see how it feels. If your time horizon is shorter, you can use 30-minute or even 10-minute blocks, too. This can help with focus and concentration. It is a fantastic exercise that will make you a better trader.
Market Profile gives you the ability to quickly identify equilibrium zones. These are the areas where many letters form large clusters and long rows. The longer a row of letters, the more times a given price traded there that day. To repeat, areas with many letters show equilibrium zones where a lot of trading took place.
At levels where there are very few letters, on the other hand, the market traded there only briefly before more aggressive sellers or buyers came in and quickly pushed the price away. This is all you really need to know to start using Market Picture. The key is to focus on the equilibrium and non-equilibrium zones.
Single Prints are Money
The simplest trading strategy I use with Market Profile is to look for what are called SINGLE PRINTS. A single print is a point on the market profile where there is only one letter because price traded there but then moved away before the start of the next time period. When you see a single print, you can clearly see that the market rejected this price point aggressively and therefore this is a price point that you should consider as a key pivot.
If you learn nothing else today, just remember this: Single prints make excellent pivots.
Looking at the first chart again, you can see that in the last two days, there were a bunch of single prints. The letter “U” around 163 yesterday, and in the 161.60/162.00 area, where you see three letter “T”s. Don’t worry about what time of day it was; all you need to know is that AAPL could not hold equilibrium yesterday on the 162 handle and it couldn’t find it there today, either. So right away, when I look at this chart, I have 161.60/163.00 as an important pivot zone.
Yesterday we flew up through it, and today we have gapped back down below it. This means that rallies back toward that zone will likely be sold as players that missed selling on the way down will try to sell when price gets back up there. Here’s the same chart with some new annotations.
AAPL Market Profile, February 27 to now
While the zones are far from perfectly defined, you can see there were two primary equilibrium zones (aka value areas) for Apple in February. The first one was 150/156.50 and the second one was 158/162.80. These equilibrium zones are generally where short-term players battle and there is a lot of intraday noise.
When there was enough buying power to take Apple out of the early February equilibrium zone 1 and into equilibrium zone 2, that implies medium-term buying interest came in and take out the supply near 156.50.
When that happens, short-term traders recalibrate. Short positions stop out and buyers that missed the boat in zone 1 move their bids up to the bottom of the new zone. Then, the stock bounces around for a while as retail and smaller players play Pong until stronger hands emerge from the shadows. In this case, the strong hands were buyers and they took price up and out of zone 2.
This time, though (see purple box), medium and long-term demand gets filled and there is nobody left to hold up the bottom of the range. Apple drops out of the purple box and back into the old equilibrium zone. Now, the single prints yesterday should define the top of the new equilibrium zone, while we look to 158 once again as a possible area where demand might reappear.
The purple box looks like a failed attempt to define a new supply/demand equilibrium and now we wonder if there will be demand when Apple gets back to the bottom of zone 2 at 158. Based on this market profile chart, I would expect the new value area to be (once again) 158/162.80 and I will watch closely if we get near 158 to see if demand emerges or if we just gap right through.
This is just a taste
Here I have introduced:
Understanding equilibrium zones
Single prints
The interaction of short-term noise traders inside the value areas
Medium and long-term supply and demand at the edges of those areas, and
How different time frame buyers and sellers can take you out of one zone into another.
.
That is enough to get you started!
If you like this topic, I encourage you to read this huge PDF from the CBOT, and/or “Mind Over Markets” by Dalton, Jones, and Dalton. Those publications will give you a much more in-depth view of Market Profile and the many ways it can be used. I’ve simply provided a basic overview of the most simplistic ways I use it.
Peak Apple
Whenever companies become a gigantic proportion of an index, beware.
MSFT and AAPL currently make up a larger percentage of the S&P 500 than any other two companies in history. The last duo that was this dominant in the S&P 500 was IBM and AT&T in 1978. Here’s how IBM worked out.
IBM stock, 1978 to 1982
Meanwhile, if you see your favorite stock or asset class on the cover of a mainstream magazine… Be afraid. That is very often a sign of a top.
Here’s an explanation of why mainstream magazines are an excellent reverse indicator. This is not investment advice and nothing works every time. Good economic forecasting and excellent trading both rely on probabilistic, not deterministic thinking.
Here’s a doozy from the end of 2021.
Tesla stock and Musk Man of the Year Award timing
Tim Cook is also selling a lot of stock.
Sales of one of Apple’s flagship products are down 40% YoY.
And the daily chart keeps making lower lows, as you can see here.
Apple daily chart, mid-2021 to now
There’s plenty to dislike about Apple right now as the GQ magazine cover could signal peak idolization of Tim Cook the way the Time Magazine cover signaled peak idolization of Elon Musk before his reputation and TSLA stock crashed back to earth.
When you’re selling a raging behemoth stock like Apple, you always need to understand that there is a good chance you’ll be wrong. You want to try to find a good setup, get short, and risk manage it judiciously. You don’t keep selling if you get taken out. You give up and you move on. One of the best ways to go broke trading is to pick a fight with a popular stock.
On the other hand, if you have a bunch of timing indicators in your favor and the stock is already showing weakness, you can get short with a reasonable stop loss and create a trade with excellent risk/reward.
In this piece, I’m looking at two distinct time frames. The market profile charts are zoomed in, while I’m also talking about some bigger-picture ideas like the magazine cover and Tim Cook’s insider selling. That’s OK. The bigger picture stuff is the thesis, then we can zoom in using Market Profile and achieve more leverage and better tactics.
Looking back at the very first chart from the start of this piece, there are single prints in the 161.60/162.00 area, and again at 163.00 and 163.60. This gives us a solid bunch of pivots to consider. For a trade like this, I would use those points to set a tight stop loss at, say, $164.11 (above all the single prints). This stop loss gives us good leverage because the stock is trading at 161.70 right now. Then again, that’s a pretty tight stop for a trade that could go all the way to 130.00 or something if it works.
So in this case, I would put half my stop at 164.11 and give the other half some more breathing room above the April highs at 167.26. Splitting up your stop avoids the risk of getting dinged on the top tick and reduces a bit of your false precision risk. I am a fan of doing this with stops and take profits as long as it makes sense and you can find logical levels to do so.
In this case, I think it’s perfectly logical to seek more leverage on half the position and give a wider berth to the other half.
If we are risking 2,000 on this trade, that means we are risking 1000 on each half of it and we calculate the number of shares to go short as:
SLICE 1
161.50 minus 164.11 stop loss = $2.61 per share.
$1000 at risk / $2.61 = 383 shares
SLICE 2
161.50 minus 167.26 stop loss = $5.76 per share
$1000 at risk / $5.76 = 173 shares
You see the tighter stop gives us twice as much leverage, but it also greatly increases our chance of getting stopped out. By slicing the trade into two pieces, we get more leverage, but still have hope if the first clip gets popped.
When doing a trade like this in real life, one also has to consider overnight gap risk because there are no promises a $164.11 stop loss is going to get filled anywhere near that level through news or earnings. The next Apple earnings release is May 4, so we need to be hypervigilant as that day nears. Most likely the trade will either be in the money or stopped out by then, but you never know.
Note that AAPL is trading a bit higher as I prepare to hit send on this week’s note. I always market the trades to market based on where things are trading at the time I hit send.
Conclusion
Market Profile is a great way to analyze short-term price patterns and come up with useful pivots that will help you risk manage trades and maximize leverage while reducing noise.
Always be sure that the time horizon you are using for risk management matches the time horizon of your thesis. Don’t trade a 2-year view with a 35 basis point stop loss unless you have some strong reason to do so. That said, if you can use tactical methods to find tight stop losses on bigger picture trades and your timing is good… You can find yourself with trades like this AAPL short where we are risking $2.61 to make $20 if all our dreams come true.
Remember: I’m not telling you to do these trades. This is an educational Substack. The concepts are the thing, not the trade ideas. Always trade your own view.
Oh, hey… Don’t forget to sign up for Friday Speedrun.
If you liked this episode, please click the LIKE button. Thanks!
My global macro daily is here
And this is my Twitter
DISCLAIMER: Nothing in “50 Trades in 50 Weeks” is investment advice. Do your own research and consult your personal financial advisor. I’m putting out free thoughts for people who want to learn. This is an educational Substack. Trade your own view!
.
.
..
.
.
.
.
Love it. Good article.
"Volume profile" on TradingView.