Market Profile and Understanding Different Day Types

Market Profile allows us to evaluate market value as it developed during the day time frame, week or other timeframes. Price is displayed on a vertical axis against time on the horizontal, and the chart represents price as a distribution of frequency. Each Unit of time is a 30 min period. If shaped like a bell shape–fatter at the middle prices, with activity trailing off and volume diminished at the extreme higher and lower prices, value will be deemed at the price where the most time has been spent. This is called the Point of Control.

The same principles apply in Volume Profile, only Volume not time is represented on the horizontal axis. Value is located at the price where the most traded volume has been conducted called the Volume Point of Control.

Depending on where the majority of time or volume has been conducted and how the distribution was constructed we can gain a lot of information about participants positioning in the context of the current auction.

The first step to using this information to make objective trading decisions is understanding day types. Here are a few and what they represent.

Normal Day

Normal days, despite their name, are not all that common. A usual day happens when the market opens with conviction in one direction, usually owing to the release of new information. The market loses confidence after the move and trades basically sideways or retraces somewhat for the rest of the day. Essentially, the major players enter the market early and trade aggressively.

A Normal day tends to have the following characteristics:

  • A wide range of beginning balances
  • The IB High and IB Low are both unbroken.
Normal Day type

Normal Variation Day

  • A wide range of IB usually 50% of the days range
  • The IB OR IB Low are broken.
Normal Variation Day Type

Neutral day

When both sellers and buyers are particularly active on a given day, it is known as a neutral day. You get significant moves both up and down, shattering both the IB High and the IB Low, because both sellers and buyers are quite active. The market usually closes in the middle of the range.

A Neutral day has the following characteristics:

  • The IB High and IB Low have both been broken.
  • The market comes to a close in the middle of its range (Within the IB)

Neutral Extreme Day

A Neutral Extreme Day is identical to a Neutral Day, with the exception that the market closes to one extreme. This usually suggests that the traders that bet in the direction of the close won, and we should expect a continuation move in the coming days.

A Neutral Extreme Day has the following characteristics:

  • A typical starting balance range
  • The IB High and IB Low have both been broken.
Neutral Extreme Day Type

Double Distribution

A Double Distribution Trend Day is a less common day type. It consists of a day that starts off in balance, forming a narrow initial balance. However, traders enter the market aggressively and drive the market in one direction with little to no counter trading. A clear separation occurs where activity started and ended the session with no overlap. The market then continues sideways once it reaches what it considers value.

The characteristics of a Double Distribution Trend Day are:

  • A narrow initial balance
  • A wide day range
  • Closes at the day’s range extreme (Within 25% of the day’s range)
Double Distribution Day Type

Trend Day

When the market perceives a significant change in value, it is called a trend day. As a result, the market begins to move in one direction and stays that way for the rest of the day, with only modest pullbacks. The market closes at or near the extremity of the day’s movement.

A Trend day has the following characteristics:

  • A large range
  • There is little to no reversal of the trend.
  • Closes at the extremity of the day’s range (within 25% of the day’s range)

Trend day type

P or b Distribution

A p or b distribution tends to typify short covering or long liquidation move. The market closes at or near the extremity of the day’s movement.

A Trend day has the following characteristics:

  • A large range
  • There is little to no reversal of the trend.
  • Closes at the extremity of the day’s range (within 25% of the extreme)
P distribution