Market Profile: A SMB Trader Reveals How to Use This Tool to Make Effective Trades in $SPY

Introduction to Market and Volume Profile

In this video, a junior SMB trader teaches the basics of market profile and volume profile to identify key tactical areas from which to make winning trades.

What is Market Profile?

• Market profile is a way of analyzing the market or a specific chart by looking at volume by price.

• It provides an opportunity for us to see how and where volume was distributed throughout the day and at what prices specific market participants showed acceptance to price.

• The value area is calculated on your charts, highlighting where buyers and sellers have shown price acceptance on that day.

• The high volume node or point of control for that entire volume profile structure is the specific price at which the concentration of volume was highest on that day.

How Can Market Profile Help Formulate Higher Timeframe Ideas?

• We can compare the value area of each day in the context of a larger overall market environment to determine overall bullish or bearish news of the market structure.

• The point of control can be a valuable resource if you're looking to determine a potential launching point of directional movement after you have a multi-day consolidation.

Conclusion

Market profile and volume profile are useful tools for traders. By analyzing volume by price, traders can see how and where volume was distributed throughout the day, providing insight into where buyers and sellers have shown price acceptance. This information can help formulate higher timeframe ideas and determine potential launching points for directional movement.

Building a Contextual Analysis of ETFs

The speaker explains how to build a contextual analysis of an ETF, such as the SPY or QQQ, by using market profile. They explain that futures traders often use market profile to develop reference areas and determine who is currently in control.

Value Areas and Bullish Signs

• A value area entirely above the value area of the previous day indicates higher price acceptance and is a bullish sign.

• When balance areas develop, finding the high volume note of a larger composite structure can determine who is currently in control.

Examples of Bullish and Bearish Sessions

• A bullish session has a value area structure entirely above the previous day's value area.

• In contrast, a bearish session may have taken out an entire range but with most volume done at lower prices, indicating that value has shifted lower.

Creating Composite Structures for Balanced Areas

The speaker explains why creating composite structures is useful for defining balanced areas instead of just high and low ranges.

Finding Key Inflection Areas

• Volume profile allows traders to find key inflection areas within larger overall balanced structures where directional movement can potentially be launched from.

• The high-volume node or point of control tends to be around this key inflection area.

Combining Multiple Range Days into One Structure

• Combining multiple range days into one larger composite structure allows traders to see potential areas of inflection without having to wait for breakouts or breakdown trades.

Understanding Market Profile Theory

In this section, the speaker introduces market profile theory and explains how it can be used to build a larger picture of the market.

Building a Composite Structure

• The speaker combines key technical analysis with market profile theory to build out composite structures.

• Value area highs, value area lows, and high volume notes are used to build zones where the market may potentially inflect from.

• Value areas do not need to be perfectly lined up. Roughly lining them up is close enough to combine them.

Low Volume Nodes

• Low volume nodes are historical areas where volume has not been done and the market does not know what price acceptance is or is not at.

• Low volume nodes can be vacuums where price will quickly move through or even fill in order to find the next previous area of high volume.

• Markets are efficient and always looking for how many participants are involved in the market.

Using Market Profile Theory for Futures and Spies

• High volume nodes within value areas are used to build out composite structures over balance areas.

• Confluence with major swing highs/lows, breakdowns, breakouts, consolidation areas are looked at when combining these areas.

Building Out a Chart

• The speaker shows an example of building out a chart using market profile theory.

• Peaks and valleys come from the market profile chart. Areas of low volume indicate potential inflection points.

• Pay attention to how low-volume areas react to price because they did not spend any time doing price discovery there.

Building Market Profiles Using Volume Profile

In this section, the speaker explains how to build market profiles using volume profile and contextual knowledge.

Building Key Inflection Areas

• To build key inflection areas, look for where the low of the day comes in when the volume and profile chart starts to pick back up again.

• Building structures takes time and requires contextual knowledge of why certain lows or high-volume nodes are important.

• Once you start building structures every day, it builds off the previous day's levels.

Market Profiles vs. Volume Profiles

• A market profile chart is a combination of numbers and volume profiles stacked up against each other over several days with time on the bottom.

• The speaker uses candlesticks along with market profiles to find confluence areas.

Using Volume Profile Analysis

• The speaker recommends using volume profile analysis on stocks that have a large amount of institutional participants since it follows institutional liquidity.

• Following where most people are getting involved and where most volume is being done can add an edge to your analysis.

Building a Volume Bar in Trading

In this section, the speakers discuss building a volume bar to analyze how specific units of volume change price. They also talk about the software used to build it and how it can be labor extensive.

Building a Volume Bar

• A volume bar is used to see how specific units of volume change price.

• It is possible to build a volume bar in Einstein's but it can be labor extensive because you have to define the size of your own volume bar.

• The size of the volume bar is defined by the specific amount of volume traded, for example, every time there are 1000 lot contracts traded in ES.

• To build a volume bar, you would have to do it yourself or talk to Dr. Steen Barger who has built some type of script out and uses specific charting software.

Trading Active Stocks When VIX is Below 15

In this section, the speakers discuss trading active stocks when VIX is below 15 and using market profile as an idea of where the market could go.

Trading Active Stocks

• When VIX is below 15, trading individual stocks may be more profitable than waiting for levels because the market doesn't move much.

• If you're creating intraday trades, you're probably missing out on action if you're just waiting for levels.

• On days where we touch one level and then go to another without moving much, we miss out on volatility that comes with trading high beta stocks.

Using Market Profile

• Market profile can be used as an idea of where the market could go and to find some edge in individual stocks.

• The point of control shows the level where the most volume is being done, while VIX should show the same thing. However, they are calculated differently.