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Market Profile®, developed by J. Peter Steidlmayer and the Chicago Board of Trade in the 1980s, tried to tackle the time and volume problems in financial markets for day-traders. The basic concept behind the theory was that events, including stock and commodity prices, cluster around a mean over time. This is the familiar bell-shaped curve we see in a normal distribution in statistics theory.
Prices with only a single letter can be evidence of the longer-term investor taking advantage of perceived price excess (too high or too low) while prices with many letters represent the value area, or fair value, where short-term traders are comfortable both buying and selling.
Markets continually move from a state of balance to imbalance to balance. Balance, according to Steidlmayer, represents a developing (or consolidating) market whereas imbalance constitutes distribution (or trending). Longer-term investors tend to move the market to new price levels in the distribution phase while short-term traders, along with institutions, have a tendency to trade with each other during periods of development.
Unlike traditional technical analysis and charting techniques where only price movements are measured, by using the Market Profile theories, the trader can now study the underlying nature and strength of the market.
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