The Evolution of Market Profile Theory

[UrmaBlume]

During the 80's I spent several weeks at Peter Steidlmayer's ranch at what he called the Butte on the Feather River in California learning Market Profile from the man himself. Tim Mathers of CQG was there with some of his programmers as it was the profile that gave CQG its start. During that same period I also met Jim Dalton and attended at least one of his seminars. While Jim's book was very good, I asked for my money back at the end of his seminar.

The Market Profile is an indicator, nothing more, and like an indicator it can be applied with a wide range of both inputs and other parameters.

For at least a decade my trading was based almost exclusively on the profile and during that time I found several useful variations on the concept. Here is a shot of a volume profile with structures that last only 30 minues and boxes that represent the trade of 100 contracts - the red and blue dots represent net buying and selling in each of the 30 minute structures and is read on the left index. Since then with the availability of online volume and certain intelligent agents I have found/developed certain other indicators, also demonstrated below, that better and more locally define that which the profile was originally designed to reveal.

Now, with more available data and faster, smarter processing available some developers have produced sets of profile based indicators that offer a precision never possible with the profile.

For at least a decade my trading was based almost exclusively on the profile and during that time I found several useful variations on the concept. Here is a shot of a volume profile with structures that last only 30 minues and boxes that represent the trade of 100 contracts - the red and blue dots represent net buying and selling in each of the 30 minute structures and is read on the left index. Since then with the availability of online volume and certain intelligent agents certain early followers of the profile have found/developed certain other indicators, also demonstrated below, that better and more locally define that which the profile was originally designed to reveal



One of the points Peter always stressed was the importance of locating the participation of commercial traders. In those days the only way you could do that was via a LDB report from the Board of Trade - the issue was that this report didn't come out until after the session was over so you could only see the location of commercial trade in the days after it occurred. Today we have developed indicators such as the intensity if commercial trade which I have described eleswhere on this board. This indicator detects trade that is of such characteristics that it can only be done by commercial traders and is demonstrated below:





A constant topic with Peter in those days was what he called the balance of trade of the balance of order flow. The problem was that when price was in "value" the profile had trouble showing the state of buy/sell balance/imbalance. To better discover this state of balance/imbalance we developed what we call a harmonic of buying and selling volumes as demonstrated below:




The profiles demonstrated earlier show one way for the profile to present data from different timeframes. Timeframes have always posed a problem for the profile and in those days it was dealt with by either breaking profiles or combining them. Today we take and combine information from higher time frames, post/map it to global variables and then retrieve it in lower time frames for information and execution. Here is a shot of one of our indicators of a weighted index of multi-time frame biases. I have discussed the formulation of such indicators of weighted biases in another thread:




A month or so ago I had a couple of conversations with Peter and while I must say that most of what I know of market theory came from his teachings, I am sorry to report that his concepts and technologies are still bound by the data and technical constraints of the 80's.

I agree with the notion that if you know the markets well enough you need very little and if you know almost any set of indicators well enough that is all you will need. For me/us the profile is no longer enough and with faster, more intelligent processing available we have mostly moved on.

[snp500]

This looks incredible -- can you share some of those indicators with us? Specifically the market profile indicator that you've separated into 30-minute intervals?

Thanks much in advance

[Frank]

Perhaps its because I was not trading in the 1980's but I have different perspective --- one that never started with idea that Market Profile was a trading method, as many MP disciples probably did. I think of market profile as 'theory only' and always have done so. How you interpret the developing intraday chart is about order flow and this is achieved through 'multi-timeframe' analysis -- where a bias is created based on higher timeframe order flow and is executed on lower timeframe to enhance the reward/risk relationship.

One thing that is enduring though -- is that the resulting intraday histogram seeks value --- and price 'overlaps' when it reaches that level of value. How you want to define/interpret this is up to the trader. It is not that the profile gives you a heads-up on what WILL happen, it is the underlying concepts that accompany Market Profile that allows you to make a FORECAST about what will happen (and quite often entirely separate from the existing histogram at that point in time). And then it is the correlation between your execution -- relative to what actually happens that drives your profit and loss.

On the one hand, you say market profile taught you all the theory you know -- then go on to say you have moved on. I guess for many of us who never used it as a trading method in the first place -- saying you have 'moved on' comes as no surprise.

comments welcome

[koifan]

I have to mention that anyone that refers to Market profile as an indicator is
completely misguided. Would you call a candlestick an indicator? Of course not.
I will state emphatically that when you really learn to use the profile, it is the MOST
accurate way of determining real support and resistance. It is derived from more than 1 timeframe, not unlike candles or bars. Measured moves can be seen early in the day...accurate projections can be determined (to the tick). The difficult part of
learning the profile is finding someone that can teach you. I have attended many
MP rooms... although there aren't many. And I finally finally found a MP trader that
after 10 years of study, can teach anyone how to use it in a most effective manner.
I am going to ask him to post some material here so anyone interested can check him out.
Regards traders...
Koifan

[jpk trader]

Would be very interested in hearing what this MP trader has to day about MP.

[Kiwi]

Yes I would call a candlestick an "indicator."

It takes real price action and summarizes it. It is the map and not the territory.

Similarly an average (take single dots of the line) is an indicator. So is market profile.


I don't feel even slightly misguided. And who is it who would have guided me there?

[BlowFish]

Frank, I am inclined to agree with you. Rather than think of MP as a 'theory' I now think of it as a heuristic approach that is based on some rather inaccurate (or at least loose) assumptions. Having said that it clearly does provide a useful framework for some traders. Just looking at VAH's and VAL's you can clearly see that often a lot of people initiate trades there. It was after careful study of JPerls excellent threads on markets statistics that 'the truth' (that I already suspected) of MP came sharply into focus for me.

If you look at things from a data sampling perspective you can see that MP was an interesting and novel way of sampling data at the time. Despite the assumptions it seems that it was, and indeed still is useful to quite a few traders. UB's posts are always interesting (and often provocative) however it certainly does not require ever more sophisticated methods of sampling, and pre/post processing data to get a decent edge in the markets (imho).

[suarinver]

Good post.

For me MP and volume histogram is enough (of course, MP is just a indicator, like price, volume, etc.) Allways that I tried to study "trade flow" in a big picture, it work oposite to me. But, here you show me a good idea to work.

Insist... good post.

Thank you

[VolumeJedi]

The market's sole purpose is to find that level where there is a disagreement on value and an agreement on price. The market does this very quickly thru a process called an auction. Market Profile "taps" into this auction market process like few other "indicators" do. I put indicators in quotes, because if we stick to a strict definition of indicators, PRICE IT SELF IS AN INDICATOR as it indicates a level or perceived value and the subsequent cost.

The profile is not about the "what should be", it is about the "what is".

Market Profile is not merely theory or an academic school of thought.

It is the visual representation of the essence of a market. A market where buyers and sellers make decisions about value, then make transactions, then make new decisions and new transactions. This process repeats as new information is gathered by the market participants. One of those new pieces of information is of course price itself.

Simple elegance. That is simply powerful.

[koifan]

I think we need to define what an indicator is and what it's function is. First we start with a market of something to trade. We create a chart. The chart has lines,bars,candles,etc to show prices where tradethe trade auction is taking place. In order for us to understand more clearly direction etc.,we can add indicators like MA's,pivot points,oscillators and so forth. Market Profile is a charting style, like bars or candles, and is not considered an indicator.It is simply another graphic representation of the price being traded using the same data.

koifan