Why You Must Use Market Profile? Especially If You Are A Beginner...

Market Profile, the buzzword that is on the minds of all traders nowadays. Some have already learnt it, some have started learning, some are thinking whether it will be worth the effort and yet again some are denying that it is of any help. What can a beginner, someone new to trading, someone keen on making it as a successful full-time trader, do in such a situation?

Well don't worry, after trading for almost 13+ years and with the market profile for well over half a decade, I think I can provide you with the answer. This is not a tutorial of the nitty gritty of market profile, I will cover it elsewhere, nor is it about the basics or core concepts or trading strategies with the market profile, I have a full-fledged online course for that...

This post will try to answer why in the hell you should, or rather you must learn market profile?

What is Market  Profile?

Well, right at the outset let me make it clear what Market Profile is not,

1. It is not a trading system, it can serve as an indispensable part of a system, but it is not one by itself.
2. It is not going to provide you with buy and sell signals, it can help you in finding them as well as filtering the bad signals out from any system, but it cannot generate buy and sell signals.
3. It is not a magic tool, which when you start using all your trading worries will be over, but it can take you market understanding to levels which you have never thought of.

So, what is market profile after all? Well, in simple words it is a way of organising data. If you are trading for some time, you must have come across candlestick charts or simplest of them all bar charts. We use these charts for organising the price and volume data so that we can see trends and patterns developing and act on them.

Market Profile is similar, it is just way of organising data and we can use MP charts to spot patterns and trends to act on them.

How to read market profile charts?

Well, I will make a separate blog post soon which will cover this. For the time being, I will just focus on why you should use market profile charts and how they feature in the big scheme of things.

You must have heard about my LCTR framework, which covers the basic framework that I follow while trading the markets. A framework is much bigger than any trading strategy, trading system, trading methods or tools. It is an all encompassing thing which includes everything from the tools to be used, how to use them and then also focusses on risk and psychology part of things. You can get an introduction to this framework here...

But today I wanted to look at the market profile in a completely new way. Nobody has ever put the market profile in this new avatar so let us jump in...

Trading Decision-Making Process

via GIPHY
If you are trading for a while you know how we make trading decisions, it is either of the following...

1. Listen to a guru or a tips provider, try to copy his trades or follow his advice.
2. Trade based on gut feel, news announcements, before big events, basically flipping a coin.
3. Trade based on technical analysis, but only by using an indicator or a single method or charting technique.
4. Trade based on a black box trading system, trading robots which generate signals to buy and sell automatically, relying on the claims of profitability and success ratios as provided by the system seller.
5. Trade based on a set of rules by using complementing trading systems and methods in an overall framework which takes care of all essential aspects of trading, which includes, entry, trade management, money management, exits, trading psychology, record keeping, reviewing your trading progress, et al.

If you are using no 1 and 2, may god be with you...

If you are using no 3 you will soon realise that trading is much much more difficult than it is made out to be, because you are trading based on an incomplete picture. But at least you are in control of your future...

If you are using no 4 then even god cannot help you, because God does not mess with mathematics, and the math never adds up with this type of trading...

If you are using no 5, then according to the most respected risk management and position sizing expert Dr Van K Tharp, you have a chance to be one of the 90% of successful traders.

Now, let us examine how the market profile can help you with no 5 and to move on to a better situation if you are using no 3.

Where does market profile fit in the big picture?

There are two parties to successful trading, they are as follows...

1. The trader and,
2. The trade...

Trader, obviously includes you, your psychological traits, whatever you have learnt till date, your grasping power, your ability to trust your decisions, etc.

Trade includes the trading method, tools, systems used etc along with your logic for entries and exits, your definition of risk, your capacity to weather the drawdowns, your ability to come back from setbacks, etc.

Now, market profile sits pretty in between the trader and the trade, let us explore why...

The main reason why the majority of traders struggle...

via GIPHY

One f the most prevalent reason why traders struggle and to which they are completely oblivious to is market understanding or in other words, they don't have an answer to the following question...

Why market does what it does? Is the real question! - Dean

You may succeed in any given trade or you may lose, but you cannot be at peace with yourself if you don't know why the hell did you make money on a trade or you lost it on another. This unanswered "why" wreaks havoc in the life of a trader and the sad part is a struggling trader is not even aware of this...

So, unless you understand where you went wrong you can't really correct your mistake, can you? And how do you know you are wrong, no not by looking at your PnL, because a losing trade is not always a wrong trade. If you believe this then stop trading and pick up a different profession, because you will eat your peace of mind alive with this kind of philosophy about trading losses...

You know you are wrong when you have something to benchmark your trading decisions against. Imagine, you could figure out what the successful trader was looking at when he took a trade. Why he went long instead of short? What was he thinking? Would it not help you? I bet it would...

Market Profile lets you track the smart money...

So, the market profile will let you track the activity of smart traders and lets you see what they see in the markets. Imagine that, you come into a trading day, observe the markets develop, be confident of what the smart money is doing and then simply try to match their trades.

You can use your current trading method, your favourite trading indicator or tool, use the same setups that you were using earlier and were struggling with, just add this market profile filter. The moment your trading system gives you permission to buy or sell, you confirm using market profile whether that is what the smart money is thinking.

If the smart money is with you go on and put in the trade, if they are not, scrap that trade idea and look elsewhere or come back later... - Dean

That is what market profile can do for you... and what I have learnt over the past few years this is invaluable to your trading...

What market profile is not?

So, if the market profile is what I have just described it to be, it definitely is not the following...

1. It is not a trading system, so I can't tell you what your success ratio will be when you start using it, but it will surely help you reduce the trading mistakes and if you ask any successful trade what he will give to reduce his trading mistakes by 50% you will be shocked by the answer...
2. It will not provide you with buy and sell signals, but if you have a system which tells you when to buy and sell, the market profile can help you filter out some of the bad apples at the same time you can increase your position size on trades which have the backing of smart money...
3. It is not a magic tool, but once you start becoming good with the market profile, you will experience nothing short of magic on many occasions in your trading. The hardest part is to believe what the market profile chart is telling you...

Conclusion

I will stop my rant here because I believe I have made my point if this does not convince you to take up the market profile, I guess you have a few more years of struggle to convince you otherwise. But I am sure whenever you decide to take up the market profile, you will thank me for it. It has the power to change your trading forever. 

I hope you liked this piece of information about the market profile and I would really appreciate it if you could share it with your friends and colleagues who can find it useful too. I have always found that the more people engage in an activity the better are the end results of it. So go ahead and share it on the social media platform of your choice or share it on all of them by using the share buttons below, because...

Sharing Is Caring 👇👇👇