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PROFIT WITH THE MARKET PROFILE: Identifying Market Value in Real Time BY DR. JOHN KEPPLER Marketplace Books Columbia, Maryland Publisher: Chris Myers VP/General Manager: John Boyer Senior Editor: Courtney Jenkins Art Director: Larry Strauss Graphic Designer: Jennifer Marin Layout Design Intern: Josh Boyer Graphic Design Intern: Ciera Boyd Copyright © 2011 by John Keppler Published by Marketplace Books Inc. All rights reserved. ISBN: 1-59280-527-2 ISBN 13: 978-1-59280-527-3 Reproduction or translation of any part of this work beyond that permitted by section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to the Permissions Department at Marketplace Books. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. This book, along with other books, is available at discounts that make it realistic to provide them as gifts to your customers, clients, and staff. For more information on these long lasting, cost effective premiums, please call us at 800-272-2855 or e-mail us at sales@ traderslibrary.com. All Market Profile charts used in this book have been produced using MarketDelta, one of the leading Market Profile charting platforms. Some of the charting features displayed in the book may not be available on other Profile platforms. A special thanks is hereby extended to the MarketDelta team for their support and pioneering work in the field. The word Footprint when referencing a chart is a registered trademark of MarketDelta LLC. The phrase Market Profile is a registered trademark of the Chicago Board of Trade. PROFIT WITH THE MARKET PROFILE: Identifying Market Value In Real Time Introduction to Market Profile vii Chapter One: Market Profile Charts 1 Chapter Two: Value Area 29 Chapter Three: Financial Market Participants 45 Chapter Four: Auction Markets 57 Chapter Five: Analyzing the Open 77 Chapter Six: Market Profile Structures 97 Chapter Seven: Split and Merged Profiles 119 Chapter Eight: Volume and Value Tracking 143 Chapter Nine: Volume Tracking Indicator 171 Chapter Ten: Designing Profile-Based Strategies 191 Chapter Eleven: Profiles and Stocks 211 Chapter Twelve: Forex Meets the Profile 229 Challenges and Opportunities 247 About the Author 259 Glossary 261 Trading Resource Guide 277 INTRODUCTION TO MARKET PROFILE It is important for anyone interested in learning to become a profitable investor or trader to be aware of the fact that learning to trade is a life-long journey. A smart trader is continually learning. The markets are always changing and one must learn to adapt and adjust to the changes as they occur. It is both unreasonable and unrealistic for any individual to expect that they will ever beat or conquer the market as many misleading book titles often suggest. The goal of a successful trader is never to beat or outsmart the market. The goal of a successful trader should always be to trade in harmony with the market. Once a trader under- stands the landscape of the market, they can participate in market moves and profit from the activity that takes place in the market. Trading requires many different types of skills and it takes time, effort, patience, and discipline to acquire and master these skills. vii Many new traders start their trading journey with a strict focus on price and price movement in the market. They quickly discover that a focus on price alone does not lead to profitable trading and that a price movement without volume to support it will quickly fizzle away. After gaining some experience in analyzing the market, traders begin to realize that even a study of price and volume together is not suffi- cient to gain an understanding of the markets. Time is another major element or dimension that must be added to the equation. Different traders have different time constraints and different goals. Actually, this is often the main characteristic that distinguishes between a trader and an investor. A trader has a short-term horizon, while an investor has a longer-term perspective on the market. Consequently, all investors are traders in the market, but they have different time considerations for their investments or trades in the market. A price that may be too high for a daytrader may in fact be a bargain for a longer-term trader or investor. As any type of trader begins to incorporate the time differential into their analysis, they are able to better understand the multi- dimensions of the market and gain a much broader perspective of the market. However, even with time, price and volume, they are still missing a critical piece of the puzzle. They are missing the main factor that drives the market; the force that is behind all major trading decisions. They are missing where value is in the market. To profit in any market, a trader must buy low and sell at a higher price or take a short position and cover or buy back at a lower price. This cannot be accomplished without an understanding of where value is in the market. Value is the core concept behind any trade or exchange. The trader’s perception of value is the major deciding factor for any trade decision. When a large instructional buyer decides to buy an item, it is because they have determined that its current market value is lower than its future value. The opinions and perspectives about future market prices will certainly vary significantly from one viii Keppler trader to another. However, they are always at the core of a trader’s decisions. In the case of an intra-day trader, the future value may simply be an anticipation of where price will be in the next five or ten minutes. On the other hand, a swing trader may make their trading decision based on where they anticipate prices will be in the follow- ing week. Moreover, a position trader may be looking at future price and value in a month or a year. The one common denominator is that all traders make their trading decisions based on their perceptions of value in the market. In the past, traders have never had an analytical tool or a charting technique that helped them to identify and track value in real time for every time frame. Now, Market Profile charts make it possible for traders to identify and track value in real time in every time frame. This is the secret behind the power of the profile. The Market Profile gives us the ability to use this powerful knowledge to identify trading opportunities in the market and make better trading decisions. It helps us to better plan our trades; to better time our entries and exits to select more effective targets and stops. Moreover, we are able to learn valuable information about the condi- tion and the structure of the market. We can identify balanced and imbalanced markets; we can identify fair prices, unfair highs, and unfair lows for any given session. Furthermore, the profile allows us to follow the dynamics of the market auction process. The profile is an invaluable tool in the arsenal of any serious trader or investor. History & Development Market Profile charts and concepts are relatively new to the invest- ment and trading world. The idea for the profile began in the early 1980s. In an attempt to create greater transparency for off floor traders and attract new business to the exchange, the Chicago Board of Trade (CBOT) started to make some market data and information Introduction to Market Profile ix