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How to Read Market Profile Charts or the Money Zone?

Money Zone Levels

Market Profile Trading is quite different from classical technical indicators. It was developed by a trader at CBOT (Chicago Board of Trade), J. Peter Steidlmayer. It was first introduced to the public in the year 1985. Though it was introduced decades ago, traders find it difficult to understand even until now. Today’s article will cover the basic concept of Money Zone or Market Profile charts and the methods of trading. In this post, I will also guide you on where to get these charts for the Indian stock market. Let’s start with a simple definition of the technique.

Market Profile or Money Zone – Definition

Unlike other technical indicators, it requires keen surveying and parallels studying to identify the real-time data regarding trade. The technique is generally applicable for intraday trading. The chart includes each day’s trading session. By applying this, one can determine the controller of the market, buyer or seller. It assembles a series of data that represents where prices are traded throughout the day. We also call this chart the money zone.

Market Profile or Money Zone Structure and Method

In order to clarify the pattern easily, I am giving a set of images below:

Market Profile or Money Zone for AmiBroker
Figure 1: Market Profile Charts of Nifty Future

Market Profile Charts Trading Components

As you can see in the image below that the market profile trading chart looks exactly like a curved bell-shaped which carries some unique features. In this pictorial representation, the vertical space refers to as the price area while the horizontal zone shows time. Each and every day the market originates a range for the day along with the value area. The volume key plays a significant role here in the market profile. The value area consists of two segments, the upper level of the value area refers to as Value Area High while Value Area Low is the lower level of the value area.

The Bell TPO Curve
Figure 2: The Bell Curve

To understand the Market profile trading, you require TPO or Time Price Opportunity. You can say that these three parts are the pillar of the chart technique. Here in this chart, each letter represents half an hour or 30 min duration of every trading session. You can calculate the TPOs value area by using 70% of the days’ data.

It represents the buying-selling tail, value area with the point of control, and closing range with the closing price. As I have mentioned earlier that each letter shows 30 min data, let’s look at an example here, A- 9:15-9:44, B- 9:45-10:14, C- 10:15-10:44, and so on.

The Money Zone Concept

Figure 1 shows how the Market Profile is put together on Nifty Futures live chart. We get the price on the vertical axis and the time on the horizontal axis. The structure uses the letters of the alphabet to group time and price segments, which we call as “Time Price Opportunities” (TPOs). This is a 30-minutes chart. So, the first segment of time, which is usually the first thirty minutes of the day, is represented by the first letter of the alphabet. The second letter will represent the next thirty minutes of the day, and so on. Until trading is done for the day, each new chunk of time will be matched with a new letter.

During the first 30 minutes of trading, a letter “A” will be put next to every price level that was reached. In the example, the market traded between 17196.10 and 17294 in the first 30 minutes of trading. So the letter “A” was put next to each price point in this range. During the second 30 minutes of trading, the market traded between 17188.90 and 17263.10, so the letter “B” was put next to each price interval in this range. The profile will keep getting more detailed as the day goes on, giving you a real-time look at what’s going on in the market as it happens. The bell-shaped profile that you get will give you an accurate picture of how time and price change throughout the day. It will also show you key levels of interest for the current session and future sessions.

The Important Levels of the Money Zone

While the structure offers an abundance of information, the two areas that stand out are the Point of Control and the Value Area. The Point of Control (POC) is the price where the most trading activity occurred during the day, as represented by the longest line of TPOs nearest to the center of the entire structure. This price is significant because it represents the fairest price to both buyers and sellers. The Value Area is important because it illustrates where 70 percent of the trading activity occurred during the day.

The top and bottom of the value area range can tell you where buyers and sellers entered the market when they perceived the price to be away from fair value. We will delve into these topics in much more detail ahead. Now that we have covered the basics of the Market Profile structure,

let’s take a look at how the Money Zone interprets this information.

VAH, VAL, and POC

The Market Profile structure gives a huge amount of information, from how the market works to how prices move. But for a new trader, it is somewhere between hard and impossible to read and understand the information in its current form. If you haven’t studied Market Profile, it can be hard to figure out what the information is trying to tell you quickly. Even though the structure is a powerful trading tool, it can be hard for traders who are new to the idea to learn how to use it.

Remember that there are whole books about this art. Unfortunately, the Money Zone takes the most important information from the Market Profile structure and puts it in a way that is both powerful and easy to understand. The Money Zone basically takes the three most important levels of the Market Profile and shows them as horizontal price levels on your charts, without all the letters.

Example of Money Zone Levels

Figure 1 shows how the Money Zone turns the structure of the Market Profile into price levels that we actually see. The Money Zone takes the point of control from the Market Profile and makes it a horizontal price level for the next session. In the language of the Money Zone, the point of control is also known as the Value Line (VL). I don’t see a difference between these two words. The Money Zone also extends the top and bottom edges of the value area. We can use them as support and resistance levels for the next session.

The top of the value area is called the Value Area High (VAH), and the bottom is the Value Area Low (VAL). The Money Zone High (MZH) and the Money Zone Low (MZL) are two other names for these levels (MZL). In the rest of the text, I’ll use the traditional Market Profile language so as not to confuse you. No matter what you call them, these are all the same levels.

How to Understand a Market Profile Chart

So, Market profile charts present the price on a vertical scale just like other graphical charts. The volume is present on a horizontal scale and on the other side, the timeframe uses a combination of letters and colors. However, understanding the price is simply straightforward but the volume and time frame parts are way more complicated. 

  • Price: Market Profile charts present the price in the same manner as other intraday charts. We see the price scale on the right side of the particular chart.
  • Volume: The volume on a market profile chart appears as a horizontal histogram along with the longest horizontal lines. It is showing the biggest amount of volume. This implies that the price that has the longest horizontal line is the price. There the maximum portion of the volume has been traded. The price also refers to the point of control because of the price that had control of the market most of the time. 
  • Time Frame: The time frame on a market profile chart uses letters and colors. Each letter means one unit of the time frame, for example, we can say like 5 minutes or 1 hour. Each of the colors also represents one unit of the time frame while colors are used. A 15-minute chart uses colored squares, each of them represents 15 minutes of the trading frame. Any trader can easily see which prices have been traded most recently if he knows the recent color here.

How to get Market Profile Charts for the Indian Stock Markets?

You can get the money zone charts in 2 ways. Either you can down our Market Profile AmiBroker AFL from this post. Or you can get these money zone charts from a charting platform called GoCharting for a nominal cost. I will also tell you how to get a discount while you get their services.

Method 1: Download Market Profile For Amibroker

Therefore, the technique is a way to simplify the price action of the market. It also determines the are of fair price value. You can download the trading system as an AFL on AmiBbroker from the link below. Please check below to know what the Amibroker AFL looks like.

Market Profile AmiBroker AFL
Figure 3: Market Profile on AmiBroker

The AFL will work on recent versions of AmiBroker. This technical indicator is best suited to intraday charts. Read more about MP before applying it to real accounts.

Method 2: Get Market Profile Charts in GoCharting

For this go to GoCharting.com in your browser. Once the website opens, put your mouse on the Charts section and select Equity from the Asset Class.

GoCharting.com
Figure 4: GoCharting Website

It will open the Nifty index spot chart by default.

Nifty Spot Chart on GoCharting.com
Figure 5: Nifty Spot Chart on GoCharting

Next, select your symbol in the symbol section. I am choosing Nifty Futures. It will open the Nifty 1-month continuous futures chart.

Nifty Futures chart on GoCharting.com
Figure 6: Nifty Future Chart on GoCharting

Once you open the chart click on the Indicators section.

Indicators on GoCharting.com
Figure 7: Attach Indicators on GoCharting Charts

In the Orderflow section select Market Profile. This will attach the Market Profile charts to your GoCharting charts.

Money Zone or Market Profile Charts on GoCharting.com
Figure 8: Orderflow Charts on GoCharting

Now you can see the money zone in your Nifty future chart. Check the image below to know what it looks like on the GoCharting platform. I am using a 30-minute Market Profile chart on the GoCharting platform.

30-Minute Market Profile Chart on GoCharting Platform
Figure 9: Market Profile Charts on GoCharting

How to get a 10% Discount on GoCharting?

You can use my Promo code while you purchase any service to get a flat 10% discount. Just use the promo code Indr10 while checking out and you will get an instant 10% discount on any of their services.

Trading with Market Profile Charts

Market profile charts can be applied as a complete trading system. Besides this, it can also be explained as part of a larger trading system that also uses other technical charts. On the other way, we can generally trade market profile charts on the support and resistance. Apart from this, traders can see how the price interacts with the point of control, which would be the most traded price.

Mostly yesterday’s profile is important for today. We can also identify the overall trend by seeing the last few day’s money zone levels. Look in Figure 3, Nifty future is showing an overlapping lower value for 3 consecutive days. Hence, the trend is down here. Check the image below to know how to trade with Market Profile charts.

Money Zone or Market Profile Trading Strategy
Figure 10: Trading Direction with Money Zone as per Frank Ochoa

An intraday trader might trade bounces off the last day’s point of control. Oppositely, a swing or delivery trader might trade breakouts of yesterday’s point of control. With all techniques and methods, by using a market profile chart one can book a huge profit from the market.

Conclusion

Therefore, it determines the fair price value and shows the correct price action in the market. So, if you have an interest in it and want to know more about Market Profile, you can download a 22 web page e-guide book. You can download the file by the link, given here.

So, if we briefly state the features of Money Zone, the following points come out. The Market Profile Trading system

  • Determine the amount of time, the number of ticks, as well as volume, trading at a fix price levels or price ranges during a specific period.
  • To identify prices that are perceived as fair by the market.
  • To identify support and resistance to predict future price movements.

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sachin

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