There are legions of dedicated Market Profile users who are hopelessly dedicated to this market-driven information tool. Though I dont usually write about Market Profile (MP), for reasons I dont completely understand, MP is a great tool to understand the overall structure during the course of the trading day. To clarify, I am a scalper so I dont utilize MP in the longer term, but there are great applications using the system if your trading horizon is longer than 15 minutes.
What is Market Profile about?
The system has its roots at the Chicago Board of Trade (CBOT) and was initially developed by J. Peter Steidlmayer and was released in various incarnations in 1985 and later years. The purpose of Steidlmayers research was to gauge market value as it develops throughout the course of the trading day. In strict MP theory, various market participants are identified; locals, commercials, members filling orders for other members, and members filling orders for the public. Recent MP theory can be more easily understood in a popular book by James F. Dalton, Eric T. Jones and Robert B. Dalton entitled Mind Over Markets, 2013 edition. While the book is certainly not easy reading, careful study of the book can be very helpful in understanding daily market structure and helps identify the participants driving e-mini trading price movement.
So who cares who is driving market movement and of what use is this knowledge?
As I mentioned earlier, I dont specifically initiate trades based on Market Profile, but use the profile to identify specific areas that potential e-mini trading may develop. Areas like values areas, developing value areas, auction actions and reactions, and bracketed markets are all very useful in alerting e-mini trading opportunities to traders. At this point you might wonder, if I dont use the system to identify specific trading opportunities, how do I integrate MP into my trading system?
Order flow, is the wild card in this equation. I currently use tradetheeminis and sceeto order systems. If I can determine specific areas, using the MP system, where trades are likely to develop, then order flow can pinpoint (in real time) the direction of trade at these general areas where trades can be initiated with startling accuracy. Further, by using confirming real time indicators, like tape reading and analysis, in tandem with MP and order flow, you can initiate some extremely accurate trade set-ups.
Because of the complexity of understanding MP theory and applying it to your trading it is often glossed over as being too technical or time consuming for the retail e-mini trader. I can tell you that time spent understanding market structure, order flow, tape reading, and correlated markets is well spent and will greatly increase your trading accuracy. Is it tough stuff? Yep, it isnt exactly a walk down in the park when you embark on the task of integrating these systems together; but the rewards are manifold.
The trading system I have described is in sharp contrast to the status quo of correlating lagging indicators and hope the market continues in the direction of your tardy entry trade point. I dont fully understand the current crop of retail traders lack of acceptance of the real-time indicators and data that are emerging in recent years. I have noticed a great number of traders who desire to sit in a trading room and take calls from a lead trader. The key give away is wanting to see some sort of brokerage statement to decide whether a room is a good one. What ever happened to learning to trade without specific calls in a trading room? In my opinion, a trading room should be a laboratory where traders interact and educate themselves, with the ultimate goal of trading independence. Is it laziness on the part of retail traders? I cant tell you how many traders expect to sit in a trading room and absorb, through osmosis, what is transpiring in the market, but the numbers of these types of inquiries are a daily part of my trading life. As the saying goes, give a man a fish and he will be satisfied today, teach a man to fish and he will be satisfied for life. I am interested in education and technique, not spitting out trades that participants blindly initiate. Its no way to run a business, and your personal trading is a business. Taking blind trade calls is like owning an auto parts store and not knowing the function of a brake rotor or alternator. Like I said, its no way to run a business.
In summary, I urge you to learn and master the techniques of real time trading, as the tools to accomplish this end are emerging and being refined on a daily basis. The lack of more widespread acceptance of these tools, which were once the exclusive domain of professional and institutional traders, continues to even the playing field against the once dominant role large trading firms enjoyed.