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Market Profile for StocksMarket Profile charts are famous in the futures industry, as that is where they were born and remain essential tools for many futures traders. A question we often receive is: “Can you use Market Profile for stocks?” It is important to understand that Market Profile is nothing more than a way of viewing financial auctions. In this regard, there is no difference between futures, options, stocks, bonds, commodities or other financial instruments: they all follow the same basic auction process. Thus, Market Profile is perfect for understanding where the value areas are in any particular market, whether it is the ES future or the stock of Apple. Here are a couple examples. First, when setting up a Market Profile chart, it is a good idea to change the price range of each letter. A stock trades in pennies and may sway by many dollars a day. Depending on the stock, 1 dollar may represent a small part of its range, while for others it is a large part of its range. You will probably want to find a letter size between 10 cents and 1 dollar, which you can do in the Custom Letter Range box:
Enter 0.1 or 1 or whatever you feel is appropriate. Here are some examples of AAPL stock using a Market Profile set to 10-cent letter ranges.
Here is a classic example of Market Profile value areas in action. The market broke above value, and then rejected efforts to fall back inside that value. This confirmed that new value was successfully established. Here is another one:
The market falls and trades below value for an entire day. On the following day, the market attempts to push back up in to this prior value, but the value area low stops it cold. Market Profile charting is an extraordinarily powerful tool, and we recommend that anyone serious about it give those charts a try. You can learn a lot about Market Profile concepts, theories and strategies in the books by James Dalton, Markets in Profile and Mind Over Markets. Paint Bar for Cumulative DeltaA very useful indicator that is built into MarketDelta is called the Paint Bar indicator. This indicator allows you to either paint the actual bar or background of the chart based upon a set of conditions. The conditions used to “paint” the bar or background are defined in a scan, signal, or custom indicator. With all the powerful volume and price related studies in MarketDelta, the possibilities are almost limitless in the types of things you can “paint” upon. In the example below I have taken the volume breakdown indicator and created a signal to plot the background based on whether the cumulative delta is positive or negative for the current session. In terms of applying this information, you could use the cumulative delta as a confirmation for trade direction. If green, buy pullbacks, if red, sell rallies. A more aggressive way to apply the indicator would be to use a Footprint chart with the shaded paint bar background. A Footprint chart inherently provides more data than just a bar chart and will give a better idea of order flow. This means you can jump on breakouts if the order flow is present instead of waiting for pullbacks. Here is how to do it, or just download the chart definition here. Create the signal first. The signal is just VB>0. Next, add the Paint Bars indicator, choose Signal, and select the signal you just created. Choose to Paint Background. Click “View” to update the settings or just view how the signal is setup. Double click Volume Breakdown to see the settings for the “VB” token. Here is the result once added to the chart. |
