“Market Profile” is a ‘view’ of the market which was originally developed by J. Peter Steidlmayer in the 1980s. He developed the system whilst working for the Chicago Board of Trade (CBOT).
It is also closely linked with Auction Theory.
I think we sometimes forget this, but financial instruments trade under some type of auction principle, i.e. buyers and sellers trying to agree on a price. The price will move higher trying to entice more sellers into the market, and it will move lower trying to entice more buyers into the market. Due to the nature of the auction this process is not instantaneous of course, and price tends to “randomly walk” up and down trying to establish value.
Traders often focus on trending environments, and often dismiss the sideways price movement as being “congested” or “stalled”. These very words uses have negative connotations. However, in reality these sideways price movements are areas where the auction process has found value – it is balance.
The market usually lurches from balance to imbalance (breakout / trend) to balance again, etc.
Actually, from time perspective the market spends much more time in these sideways ( balanced) movements that it does in vertical development.
Market Profile tries to detect these areas of balance, and in doing so a) enables us to trade the value area, and b) gives some insight into when the balance area might break and in what direction.
Download A Six-Part Study Guide to Market Profile ebook was written in 1996 by the Chicago Board of Trade professionals.