The concept of Market Profile stems from the idea that markets have a form of organization determined by time, price (TPO-Time. Price Opportunity) and volume. Each day, the market will develop a range for the day and a value area, which represents an equilibrium point where there are an equal number of buyers and sellers. In this area, prices never stay stagnant. They are constantly diverging, and Market Profile records this activity for traders to interpret.
Market Profile is based on the normal distribution curve, wherein approximately 70% of the values fall within one standard deviation of the average. If you rotate the normal distribution curve so that price is along the vertical axis and time on the horizontal axis, you have the structure of Market Profile.
The TPO method for Market Profile seems to be slowly but surely being pushed to the sidelines and the new kid on the block (well newer) is the Volume Profile. The Volume Profile follows the same principles as the TPO profile. So the VAH, VAL and POC are still a focal point, is based upon daily cumulative volume against price, The peaks and troughs represent areas of high and low volume respectively. These are areas that are highly likely to be Support and Resistance levels as price is often drawn to these levels due to the extreme amounts of volume traded there over time.
Naked VPOCs (or Naked Point of Control) is generated from the Volume profile of previous trading days. The POC is the price at which the highest amount of volume was traded that day, Naked POCs are POCs that price hasn’t retested since their formation, thus offering an increased possibility of being ‘filled’ in future price movements.
The Initial Balance is a very simple measure used in Market Profile, it is simply the high and low of the first hour of trading. An interesting statistic about this reference tool is that over 68% of the time in the last 5 years, either the high or the low of a trading day has been formed within this time frame. Thus it provides a useful reference for traders in the current trading day and as a reference for the following trading day.
The VWAP is similar to a moving average it describes the ratio of the value traded to the total volume traded over a particular time horizon (usually one day). It is a measure of the average price an instrument traded at over that timescale. We reference VWAPs from multiple timeframes in our creation of the PowerZones, however only the one day VWAP is mentioned on the sheet.