By Ned Robinson
The Basic TPO Chart
Price advertises the opportunity and time regulates it. I wrote that in the article, An Introduction to Market Profile. This article will introduce you to the TPO (Time Price Opportunity) chart and show you how to see the opportunities that await you to make profitable trades, opportunities that exist every day.
The TPO chart is a unique chart type and it shows this relationship between time and price. On it you will see important areas of interest as each trading session progresses. Areas like supply and demand, support and resistance, breakout zones, price ranges and trends. Balance and excess. Buying and selling tails. Of course, like reading a map, it will take time to understand the TPO’s unique language. But understanding will come in time and this article will take you step by step to begin the process.
Let’s start with the basic building blocks of the TPO chart. The TPO chart is built by creating a series of 30 minute bars using a single identifier for each bar. Typically, letters are used as this identifier and the first 30 minute bar uses the letter “A”. You will see TPO charts that start with the letter “B”. This is a tradition that goes back to bond traders and you will occasionally see this used. Most TPO charts are flexible enough to allow you to specify any letter as the starting letter. Some allow you to use numbers instead of letters. In any case, most TPO charts start with “A” and that is the convention that I use.
As the 30 minute bar builds, the same letter is printed for every 2 ticks of price. I have set this in the TPO parameters because of the large number of average ticks in the typical session for crude oil. If I had set this to 1 tick, the chart would quickly become too vertical and I would spend too much time scrolling the chart up and down. However, if you are trading an instrument like the emini which has a much narrower daily range, you can set the prices per row parameter to 1.
Look at the picture below. This shows the first 3, 30 minute bars of the session: A, B and C. The opening of each bar is marked with a “>” symbol and I have drawn the arrows for clarity. The “o” shows the opening of the session. While the close of the bar is not shown, it is inferred by the opening of the following bar.
The view above is known as “split” view where the 30 minute bars are shown side by side. There is another important way to view the TPO chart and this is known the “composite” view. In the composite view the 30 minute bars are collapsed and each letter is used to fill in the distribution curve of the entire session. Both views are critical in understanding the TPO chart and the developing trading opportunities that exist. Both give you a different perspective of time and price as you are trading at the right edge of the chart. For example, the composite view clearly shows the gap that exists between A and C. The indent at the letter B is an important reference to carry forward. But this is an advanced topic and will be covered in future articles when I write about anomalies.
The charts below show the completed profile for Thursday, December, 11, 2014. The profile shows a perfect distribution of price over the course of the daily session. It is the widest in the middle which shows the balance area. It is thin at the extremes which shows excess. Being able to visualize what a completed profile looks like is critical to being able to take high probability trades during the day. The next section will discuss session profiles in more detail and show you how to use them to identify profitable and high probability trade areas.
Now that we have discussed the basic construction of the TPO chart, it’s time to step back and look at the larger view of the TPO chart. The picture below will be used as a reference and I recommend either opening it up in a separate window or printing it out.
Notice that when the TPO chart is zoomed out, the profile letters are replaced with black squares. At this extreme zoom, we are more interested in the overall TPO shape than with the details.
Remember that one of the core beliefs of Market Profile that is that, over time, based on the market auction theory, price creates a perfect distribution which is easliy recognized as a bell curve. The compressed view of the TPO chart below shows this. The first session on the far left is the overnight session for Sunday, 12/7/2014. The next session is the Monday pit session. The profiles then alternate through the course of the week. Crude oil defines the pit session (or regular trading time) as the period between 9:00 am eastern standard time and 2:30 pm est. The overnight session is then defined as the time after the pit session ends until the opening of the next pit session. While some people like to split the overnight session between the Asian and the European sessions, I don’t and treat the full overnight session as 1 session.
Take a few minutes to look at the profiles and try to see the normal distribution of price as it attempts to create the bell curve. I have outlined Thursday’s pit session (the same as the single profile above) in red because it very closely looks like a “prefect” bell curve. Of course, not every profile is a perfect bell curve and some are closer to it than others. A few profiles even look like they contain 2 separate bell curves. And there is one profile that looks like a “P”. Study these profiles and see you can indentify these differences. And look to see how the imperfections in distribution can can be carried forward to identify excellent trading opportunities in future sessions.
Tails and Support and Resistance Levels
All of the profiles in the above Composite have thin areas of price activity at the edges of the profiles. To review, selling tails are where price stopped probing higher and sellers came in to stop the upward probe. Buying tails are where price stopped probing lower and buyers came in to stop the downward probe. Take a few minutes and draw lines on the chart at the point where the tails overlap on consecutive profiles and see how they form strong support and resistance levels. I use these levels all the time as important areas where I want to take trades and mark them on my chart every morning in my pre-opening preparation. I have marked some areas below.
The Point of Control
The widest point on the profile is call the Point of Control. This is the price that has the most letters. Think of this as the price that is considered The Fairest Price by all traders for the current session. As price moves away from the POC, it is probable that price will return to the POC to test that level and see if it is still considered the fairest price. If price continues to move away from the POC and balance at a new price level, the POC will move. This is a great way to see the direction where price is likely to move. If the POC is moving down that is a great indication that price is cycling lower. If the POC is moving up then price is cycling up. I recommend using the direction of a moving POC and trade in the same direction.
The thicker the POC, the more likely it is to be a strong support or resistance level. It is thick because it has the most letters at that price over the 30 minute bars. Time has proven that this is the fairest price and breaking through the POC is more difficult as it gets wider.
I have added a cyan line to our composite TPO chart indicating each session’s POC. See how the POC is an excellent reference point to carry forward to future sessions? It can not only act as support and resistance but the failure to reach a previous POC is also a great indication of a change in market sentiment. For example, last Thursday night had a very prominent POC that Friday’s pit session didn’t even come close to testing. This tells me that Thursday night’s POC is no longer considered a fair price. The same thing happened between the Thursday night POC and the Wednesday pit session POC. These POC failures are marked on the chart as well.
Using the POC for Trade Entries and Exits
The POC makes an excellent trade destination, especially if you are in a counter trade. There is a high probability that the trend traders are waiting for the pullback to the POC to re-enter a trade back with the trend. The odds of this are increased if the POC and the 50% session level are within a few ticks of each other. You can also use this area to take a new trade, this time with the trend.
As I said above, the thicker the POC, the stronger it is as a support and resistance level. Look at the composite above and see the cyan arrow I labeled “Failed POC re-test”. Although that label is for the following pit session failure, the overnight session also came up to re-test that level. When I opened my TPO chart on Thursday morning at 7:55 est, I waited for the next 30 minute bar to open at 8:00 am. When the bar opened, price tested 2 ticks above the POC and then dropped. I entered a short trade as it seemed highly unlikely that price would get back above the POC. I held that trade for 105 ticks! This all happened before the pit session opened!
Later in the day, the market rallied back to the POC in D period. The POC held again and the market dropped and closed down near the low of the session.
The POC is a great area to use for trade destinations and trade entries. The thicker the POC, the stronger it is. Trade with the POC to increase your odds of having successful trades. And be careful if you trade against it. For example, I would not take a trade signal if it was firing into a POC.
In the next article, I will introduce the Market Profile concept of the Value Area.
As always, feel free to send me any questions in the Comments section below or ask me during the live Oil Trading Room. If you are not already a member of the room, you can sign up here.