Understanding Use of Letters

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Understanding the Use of Letters in Market Profile Charts

Market Profile charts utilize a unique method of marking each price level with letters to represent different trading periods within the session. This letter-based labeling system helps traders visualize how the market develops over time and identify key trading ranges and levels of interest. Here's a deeper look into why letters are used and how they are assigned in Market Profile charts.

Purpose of Using Letters in Market Profile

The use of letters in Market Profile charts serves several important purposes:

Time Tracking: Each letter represents a specific time block during the trading day. This allows traders to see not only where price was trading but also when it was trading at that level.
Volume Accumulation: By observing how many letters stack at a particular price level, traders can gauge the amount of trading activity (volume) that occurred there, which indicates the level’s significance.
Market Development Visualization: Letters make it easy to see how the market developed throughout the trading session, providing insights into market dynamics such as the movement of the value area or shifts in the point of control.

How Letters Are Assigned in Market Profile

In Market Profile charts, each consecutive letter of the alphabet is used to represent a sequential time period within the trading day. The assignment typically follows the order of the alphabet starting with 'A', and each letter corresponds to a predefined time interval. Here’s how the letters might be assigned for a typical trading day:

A: Represents the first segment of the trading session, such as the first 30 minutes.
B: Follows 'A' and represents the next time segment.
C: Assigned to the third segment, and so forth.

For a more detailed example, consider a trading day that starts at 9:00 AM and ends at 2:30 PM, with each period lasting 30 minutes. The letter assignment would be as follows:

9:00 AM to 9:30 AM: 'A'
9:30 AM to 10:00 AM: 'B'
10:00 AM to 10:30 AM: 'C'
10:30 AM to 11:00 AM: 'D'
11:00 AM to 11:30 AM: 'E'
etc.

Each letter is added to the Market Profile chart at the corresponding price levels traded during these times. If the price revisits a level multiple times at different periods, more letters accumulate, indicating a strong area of interest.

Example of Letter Assignment Extension

To further illustrate, let's extend the letter assignments up to 'E', assuming each represents a different half-hour of trading:

A (9:00 AM - 9:30 AM): The market opens and trades from $101 to $103. Letter 'A' is placed at each of these price levels on the chart.
B (9:30 AM - 10:00 AM): Prices move up and trade between $102 and $104. Letter 'B' is added to these price levels, stacking on top of or next to 'A' where the prices overlap.
C (10:00 AM - 10:30 AM): The market extends gains, trading from $103 to $105. 'C' is placed at these levels, showing continued buying interest.
D (10:30 AM - 11:00 AM): Prices fluctuate back down to $102 to $104. Letter 'D' overlaps with previous letters at these prices.
E (11:00 AM - 11:30 AM): The market stabilizes and trades tightly around $103. 'E' is added, highlighting $103 as a significant level with multiple visits throughout the morning.

This method of letter assignment helps traders quickly identify which price levels were most active at specific times, facilitating a deeper understanding of market behavior and aiding in strategic decision-making based on how the market values different price levels throughout the session.