by Thomas P. Drinka, Ph.D. and Robert L. McNutt
The market is composed of time, price and volume. Each day, the market—in attempting to facilitate
trade—develops a price range delineated by the daily high and low and a Value Area where most of the
prices congregate. Volume is generated by the interaction of time and price.
A "brief time/price relationship" is established when price does not remain in a particular range for a long
time period. In this case, the market does not accept a particular price or price area and moves away from
An "extended time/price relationship" is established when price remains in a range for a long period of
time during the trading day. In this case, the market accepts a particular price or price area and establishes
value by trading within that area.
The fundamental approach to trading is predicated on the notion that—under the prevailing market
conditions—the current price can diverge from market value. This divergence creates market opportunity.
The key is knowing when current market price diverges from value and being able to judge whether price
will move to value or value to price. The Chicago Board of Trade Market Profile identifies the Value
Area within a day's range and allows a trader to take advantage of a divergence of price and value.
Usually, the Value Area is established as the market uses price probes which move, alternately, too high
and too low in order to create Time/Price Opportunities or TPOs that seek the trading activity of market
participants. These price probes have an impact on the quantity supplied and demanded: As price moves
up, the quantity supplied is stimulated and the quantity demanded is dampened. As price moves down,
the quantity supplied is dampened and the quantity demanded is stimulated. In this fashion, price
consolidation is promoted and a Value Area is established within which most trades occur.