Day Structures

As you study Market Profile® day structures, it is important to note that the most common types of days are balanced days that rotate back and forth with buyers and sellers present. Trend day markets occur only five to ten percent of the time; yet, many traders approach each day as though it were a trend day, positioning themselves for a big move and giving profits back as the market rotates.

The profile not only provides information on the balance and imbalance of current market conditions, but allows each trader to initiate positions at an individual comfort level. An aggressive trader may initiate a position on the opening and use the profile to monitor the trade. A more conservative trader may wait until a range extension has occurred before deciding when and where to enter the market. Most importantly, the profile provides the information to allow both traders to locate a time and place of market opportunity at a level of trading comfort.

A criterion for identifying most of the day structures is the relationship of the size of the initial balance to the total day's range. Likewise, the size of the initial balance can also provide an anticipated trading session range and type of day structure. Each market has its own typical initial balance for each day structure, and an analysis of that market's profiles will reveal distinctive patters. For example, if a fifteen tick initial balance in a particular market usually results in a normal variation day structure, the range for the day structure can be estimated by doubling the range of the initial balance. Similarly, if a trading session for the same market yields an initial balance of twenty-five ticks, it probably will be a normal day. If the initial balance is five to six ticks, it would probably be a trend day, and so on. The initial balance's relation to the day structure will vary market to market, and can be identified accordingly.

The concept of market balance and imbalance applies not only within the day, but also in a longer time-frame. If a review of the past trading days reveals initiating buying extremes and range extensions on increasing volume, with very few selling extremes and range extensions, this is probably a market that is imbalanced to the buy side, with buyers in control. Therefore, Market Profile analysis provides the information to confidently hold an existing long position; or, if looking to go short, to step aside until there are indications that sellers are entering the market.

As discussed, these Market Profile basics reveal much about current market conditions. In application, these principles can:

Locate where the buyers and sellers are active within the market through the use of extremes and range extensions,
Identify the strength of buying and selling activity by using initiating and responsive classifications,
Provide a range for the day's trading by identifying the initial balance and the expected day structure, and
Improve trade location and monitoring of trade positions, whether short- or long-term.

When volume is also considered, an even stronger market reading can be made. The more volume that is generated, the more significant each one of the above elements becomes in determining continuation or change in the market direction. This concept applies both to intraday and interday trading.

Market movement is not the result of price moving randomly; rather, it is the collective activity of the market participants. Market Profile organizes this activity into a visual structure that defines value and allows the trader to take advantage of the opportunities where price is away from value. The Market Profile approach allows the trader to logically monitor market conditions and to make trading decisions based on information generated by the market.