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J. Peter Steidlmayer
This
Portland, Oregon
97214
Market Profile is a registered trademark of the Chicago Board of
Trade.
Preface
Acknowledgments
In this book there are many uses of both the singular and plu
ral in describing developments. Sometimes it's I, sometimes we
or us, depending on the way I just naturally felt about what took
place at that particular moment. I've been fortunate to have a lot
of help throughout this project, including especially the full sup
port of all those associated with me as well as those who be
lieved in me. It would be proper to acknowledge each person
who was involved individually, but the contributions came from
the whole Market Profile community, and that includes almost
everyone I've dealt with. I would like to single out the person
most responsible for the existence of Market Profile: the former
Chairman of the CBOT, Les Rosenthal. Leadership, unlike stew
ardship, calls for having a sense of direction, and more impor
tantly a clear perception of how to let things proceed. To all of
you who participated, I'd like to express my thanks for a very fun
journey, and for your efforts in helping to make what I feel is a
lasting contribution to the industry.
It is always difficult to find a clear way of expressing radi
cally new ideas. And expressing myself is not my strong point in
any case. I'd like to particularly thank my editors, Cynthia Brown
and Robin Mesch, for their truly brilliant transformation, or per
haps I should say transmutation, of my rough manuscript into its
present polished form.
1111
Background
you have a lot of experience come back and see me," attitude. I
was terribly frustrated. I could see that it would be a long time
before I got the opportunity to use my capabilities in the business
world. I began looking at the CBOT markets as a place where
my ideas could hatch. I wanted to become an outright trader, rather
than a broker, a spreader, or a scalper, because I felt that was the
highest echelon one could achieve: it had a limitless potential. If
I couldn't succeed as a trader, I was willing to leave the industry
and try something else.
The path I eventually developed for myself was rather unor
thodox at the time, and, because of my preference for market
controls over financial controls (ideas I ' ll explain later) and my
insistence on the need for the industry to change, it is still very
controversial. However, in view of the lack of success of the cur
rent methodologies, logic would say that change is necessary.
Over the years, as I worked to become a successful trader, I
kept returning to my father's question, wondering why so many
aspiring traders fail. I have come to believe that consistently suc
cessful trading requires a grasp of the underlying processes that
drive the market, at least on an intuitive level. Successful trading
has to emerge from an understanding of the background of the
market. My goal has been to make that understanding explicit,
and to make the processes objectively measurable. The tool I've
evolved and used in this endeavor is the database and market
analysis system called Market Profile. This book is the result.
Contents
Chapter One
What This Book is About
.......................................................
Chapter Two
Getting Started
........................................................................
Chapter Three
Market Discipline, Background, and Efficiency
................
21
Chapter Four
Looking for the Purpose of the Market
..............................
33
Chapter Five
Efficiency and its Role in Market Organization
................
39
Chapter Six
How the Market Defines Itself
...
.........................................
55
Chapter Seven
Capturing Market Data ....................................................... 61
Chapter Eight
The Importance of Two-Dimensional Expression
.............
65
Chapter Nine
The Bell Curve
.......................
..............................................
Xl
75
xii
Chapter Ten
Updating Our Understanding of Market Profile
...............
79
Chapter Eleven
Looking to the Future--Data Arrangement
103
......................
Chapter Twelve
Price...The Market Messenger
125
...........................................
Chapter Thirteen
Where Do We Go From Here?
Index
127
..........................................
133
......................................................................................
CHAPTER ONE
CHAPTER ONE
PRICE
58-15
58- 1 4
58-13
58- 1 2
58-11
58- 1 0
58-9
58-8
58-7
58-6
58-5
58-4
58-3
58-2
58-1
58
57-31
57-30
57-29
57-28
57-27
57-26
57-25
57-24
57-23
57-22
57-21
57-20
57- 1 9
57-18
1,2
TOTAL
CTI
50
387
594
1530
2632
3288
5239
3696
3232
278 1
21n
2019
2635
3626
5543
6434
3849
5136
3952
3674
2206
2582
2078
1 317
1040
919
639
977
473
87
17
247
38 1
916
1630
2092
3348
2166
1804
1910
1391
1350
1 7 14
2454
3462
3989
2360
3 1 93
2627
2441
1317
1681
1 288
699
622
586
404
582
258
76
Table 1-1.
CTI
1,2%
34
63.8
64. 1
59.9
6l.9
63.6
63.9
58.6
55.8
68.7
64
66.9
65. 1
67.7
62.5
62
61.3
62.2
66.5
66.4
59.7
65. 1
62
67.2
59.8
63.8
63.2
59.6
54.5
87.4
4%
CTI4
CTI
33
140
213
614
1002
1 196
1 89 1
1530
1428
871
781
669
921
lIn
2081
2445
1489
1943
1 325
1233
889
901
790
618
418
333
235
395
215
II
66
36.2
35.9
40. 1
38.1
36.4
36.1
4l.4
44.2
3 1 .3
36
33.1
34.9
32.3
37.5
38
38.7
37.8
33.5
33.6
40.3
34.9
38
32.8
40.2
36.2
36.8
40.4
45.5
12.6
6 1981
developing, and thus blocks them from learning about the markets.
Internal market statistics reveal that successful traders, who
are mostly concentrated among the professionals, are using a different strategy than unsuccessful ones. Table 1- 1 gives volume
Top 1 /3
Middle 1 /3
Bottom 1/3
Table 1-2.
CTIl, 2
CTI4
59.4 (62.9)
64.5 (62.9)
64.2 (62.9)
40.6 (37.1)
35.5 (37.1)
35.8 (37.1)
CHAPTER ONE
CHAPTER ONE
CHAPTER Two
Getting Started
CHAPTER Two
GEITING STARTED 9
10
CHAPTER Two
GETIING STARTED
11
com, compared to 300 in the bean pit, and how that affected the
way the market was acting. This gave me a chance to understand
the different types of market activity.
In my first week of being a CBOT member, I had two real
insights that tested my resolve. Many of the successful traders at
the exchange were scalpers or scalper-spreaders, trying to buy
the bid or sell the offer. The way they illustrated their technique
to young traders was to mark a price on one side of a trading card
with a pencil, showing a hypothetical buy at, say, $ 1 .23 1/8. Then
they would flip the card to the other side, where there would be
three potential exit prices: $ 1 .23 1/4 (a profit), $ 1 23 1/8 (scratch),
or $ 1 .23 (a loss), whichever came first. They were most helpful
to me and other young members. Their advice was never to be
smarter than the market. The market was always right, i.e., take
your loss if price went against you.
I understood the principle that trader discipline was impor
tant, but I felt that this type of trading again reduced the market
to a gamble in terms of whatever event came first, and I ques
tioned its merits. I did not understand the reasoning as it related
to taking the loss in the prescribed manner. How could a finan
cial loss by itself make you right or wrong? I did not think that
anyone could be so good as to never have an equity loss at some
time during a trade, so I decided not to use that as a determinant.
My first need was to find a way other than stops to exit a bad
trade. I reasoned that the market had only three ways to move:
up, down, or sideways. I figured that if I thought the market was
going to go up, and it didn't, it should at least move sideways.
This gave me a 66% chance of not losing, a big improvement
over the 50/50 chance associated with using a financial stop. If I
thought the market was moving opposite the way I was set, I
would get out immediately, but if the market was moving side
ways I would tend to stay in, even if it was going against me to
some extent. In addition, I was not at all skilled at or desirous of
competing for the scalping type of trades in the pits, and viewed
giving up the edge for the right to the idea as a sound practice for
12
CHAPTER Two
GETTING STARTED
13
14
CHAPTER Two
GETTING STARTED
15
16
CHAPTER Two
The thing that surprised me was that we all came from different
approaches, and we all traded differently, but we all knew that
the situation was not favorable for an active bid.
In looking back on this experience over the years, I learned to
make the same trade over and over again. The important clue
that we all picked up on in the pit was that there was a very quick
move from 92 back to 90. This indicated a large degree of ineffi
ciency in the market, which became an outer boundary from which
the market was going to move vertically. In later years, when
ever the market was in a position where it was ending a vertical
movement that I wanted to trade against, I always waited for a
quick vertical move in the direction I was looking to go in before
I would make the trade.
This example illustrates that the market does in fact commu
nicate with those attuned to some sort of market discipline. Trad
ing based on events like quick moves, totally dead markets, and
so on represents implicit knowledge that has never gotten out.
Most people approaching markets want rigid definitions, when
in fact it's best to have a general principle defined in relative
terms. The intuitive feeling of those attuned to market discipline
is filled with relativity.
What is the underlying order in the seemingly chaotic open
outcry system that allows it to work so well? What information
is produced, when and how does it become available to partici
pants or to those wanting to participate, and how do they use it?
This would, if understood, be the basis from which to go for
ward, because it provides an organic understanding. It is an in
tuitive part of successful trading that has never been articulated.
Importantly, one could note that with prediction and financial
controls dominating traders' thought processes, there was prob
ably no demand for it.
The second advantage I had in coming to grips with the order
of the market was the visual output of Market Profile. I could
begin to trace the outline of market discipline in the data units of
the aggregated profiles. I was also able to separate my trading
GEITING STARTED
17
18
CHAPTER Two
GETTING STARTED
19
20
CHAPTER Two
CHAPTER THREE
22
CHAPTER THREE
23
24
CHAPTER THREE
25
26
CHAPTER THREE
27
28
CHAPTER THREE
Figure III-I.
29
6, 1996
30
CHAPTER THREE
Figure 111-2.
6, 1 996
ing rows (price levels), forming a column just like the column of
"l"s in Figure III-I . The next period is "m", which ranges from
1 00.35 to 1 00.47. Its range overlaps that of "1" period between
1 00.35 and 1 00.4 1 . When the "m"s are added to the daily profile,
the ones between 1 00.35 and 1 00.4 1 go to the right of the "l"s,
making the developing profile two letters wide at that point. The
"m"s between 1 00.42 and 1 00.47 are the first letters in their price
range, so they go in the leftmost column, where we placed the
original "l"s. If you look at just the "l"s and "m"s in the Nov. 6
profile in Figure 111-2, you can see this pattern in place.
Now we go through the rest of the half-hour periods in the
same way, assigning each letter to its proper row (price level),
and to the first empty location, starting with the original "1" col
umn. The effect is as if we collapsed the half-hour columns of
Figure 111- 1 by squashing them over to the left as far as possible,
with the "1" column as a starting point.
Notice the difference in the information conveyed by Figure
111- 1 and Figure 1II-2. In Figure 1II-2, the width of the profile
3
Figure 111-3.
31
32
CHAPTER THREE
CHAPTER FOUR
34
CHAPTER FOUR
tually, this was farther from the true purpose of the market than
my original theory, in that distribution (a one-dimensional verti
cal move that stands out from the background) is an expression
of the degree of inefficiency. What was revealing was that distri
bution was part of a sequence of events: prior to a vertical distri
bution the market had to have a base of horizontalness in order
for the distribution to be seen. In other words, an underlying
order of events was there which could be recognized and so po
tentially lead to some form of control.
Moving from trade facilitation to distribution as the underly
ing purpose of the market advanced our understanding by pin
pointing the area where the distribution started. I noticed that the
background prior to the start of a distribution was always more
horizontal, and this led to the key insight of a two-phased mar
ket. Also, in the early days a vertical move usually started in the
fat, or horizontal, part of the day profile. In short, the distribu
tion theory advanced the necessary understanding of vertical
movement for practical use, but it did not truly identify the pur
pose of the market.
Throughout my early career, I wrestled with the issue of
whether or not the market was efficient. From a practical stand
point, I did not think it was efficient, or if it was, it was only
efficient for short periods of time; it was not statically efficient.
Further, in my trading, I was not interested in the phase when the
market was more horizontal, and thus potentially efficient. I started
to take notice, however, when evidence showed that a lack of
activity, which created a horizontal profile, usually preceded a
good vertical move.
What really brought this phenomenon into focus was the num
ber of misplayed opportunities that started with a horizontal mar
ket. It has always been a good trading practice to go with some
thing until it's no longer there, and not to trade for what isn't
there. I mostly adhered to this practice, and, as a result, I would
sometimes be fooled by what I called a false expectations gap.
Nothing at all would be going on, so expectations vis-a-vis the
35
36
CHAPTER FOUR
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profit or loss in the trade, the life of the inefficiency that caused
the market to move is over. On July 5, the next cycle began with
a sharp decline.
Another way to look at the process is to reorganize the pro
files, getting away from using chronological time beyond the day
timeframe. The idea is to start a new profile when the market
shifts into inefficiency, i.e., distributing, and to combine all the
half-hour periods as the market works its way to efficiency. In
this way a roughly bell-shaped profile should emerge from the
mass of data, culminating with a new vertical move. Figure IV-2
shows the profiles from the chart above regrouped according to
this scheme.
I knew that discovering the market's purpose was the key to
objectivity. I had been trying to find it for many years through
my work with Market Profile. Many people would assume that
the highest possible goal of data arrangement would be a trading
system in which money would come out forever. I do not believe
that such a system is possible or even necessarily the best thing.
38
CHAPTER FOUR
CHAPTER FIVE
39
40
CHAPTER FIVE
41
Then it proceeds to find the other outer parameter, i.e., the sec
ond vertical reference point, again hard to read in the moment.
Vertical activity is quite irregular in the data mass (volatility can
not be neatly cataloged), and the where and how of these refer
ences can't be easily established. It's only necessary to know that
they will happen. This is the gathering process, the first stage,
and is highly unstable and difficult to read.
To some extent during, but mostly after, this process, the move
to efficiency will begin to develop. The fair price area, or effi
ciency, is what I call market output, the result of the self-organiz
ing system. This represents the real "close" of the market pro
cess-that is, the result that summarizes that phase of activity. It
is necessary for the market to find this in order to start the whole
process over again.
It is important to note that the outer boundaries and the amount
of data processed during this cycle will vary dramatically. It is
the output of efficiency that is the constant. The cycle from inef
ficiency to efficiency is a great reference at any stage of its de
velopment, whether the beginning , middle, or end. Like the de
veloping ears in a crop of corn, it represents a direct output that
can be measured in stages. Price discovery, long thought of in
relation to a fair price, has an entirely new meaning in this con
text: it's defined by where the market is in its process. You may
have a fair price generated during the gathering phase, which
would be one of the vertical extremes, or a fair price during the
horizontal phase, which would represent the consensus fair value.
Also note that in the process of gathering the market will try to
involve those on the edge of development, because it's easier to
do the job once than to do it twice. This explains the volatile
nature of the market in establishing vertical reference points and
the difficulty in using them.
A practical example of a gathering process similar to that of
the market comes from my personal experience. As a young man,
I had to gather cattle every year on the family ranch after school
was out at the end of May. The first thing I did was ride my horse
42
CHAPTER FIVE
44
CHAPTER FrVE
45
46
CHAPTER FIVE
that exceeds liquidity and is the start of something. The big trader
in this case is the source of dominance, and is really controlling
the foreground with his activity. The fact that the directional im
pulse exceeds liquidity means that the background needs to be
favorable, in order for the trader to retain control. In order to exit
a bad trade with a small loss rather than a large one, the big trader
cannot be totally wrong about the background. Regardless of profit
or loss, it's always the background one has to exit to.
As an aside, to begin to focus on background, which is all
important in trading even for those who would like to use finan
cial controls, it's a good exercise to assume that your trade repre
sents the biggest position in the market, and to ask yourself where
you think you would land if you had to get out. With marginal
trades, you would find that you would have a big loss.
This is relevant to all traders because if in fact there is little
liquidity, we have a similar situation to deal with. There are no
financial controls that can neatly take us out. Control must again
rest with either the background or foreground of the market. In
using a financial control (such as a stop) to exit, one never begins
to learn about the background. Over a long period of time, this
has a devastating effect on one's trading success.
The trading floor was a great place to learn the lessons of back
ground. For instance, one day the beans were trading about 1 5
cents above limit, and prices were on their way down-the back
ground was definitely to the down side. The market was very
volatile, and it was very close to the closing bell. The market hit
a bunch of stops in one part of the pit and brokers were offering
beans limit down at the same time they were still trading 1 5 cents
higher in other parts of the pit. (All this took place in less than 30
seconds.) You have a choice as a trader in this situation either to
sell the higher price first or buy the limit down. Good floor trad
ers would automatically understand that since the background
was weak, selling the buy orders was the appropriate strategy, as
they were the anomaly or inefficiency. Poor floor traders would
look to buy at limit and think it was a steal-but, if they could
48
CHAPTER FIVE
not get it off at higher prices, they would be caught on the bal
ance limit down, and maybe have a big loss the next morning if
the market was limit down again (which in fact it was).
This is a good example of background rather than foreground
controlling a trade. There were two opportunities that were
roughly equal on a superficial level, with the background deter
mining which one was better. In this case, the inefficiencies (the
resting buy orders) were absorbed into the background because
they weren't big enough to change the background, where the
background comprises sell-at-market type orders. A point to ask
yourself right now is, how often is background the deciding fac
tor in your trade decisions?
The best floor traders always took the whole offer. The ad
vantage to taking the whole offer was that when the orders came
in the other way, the trader would be in control, rather than hav
ing 1 0 or 1 5 people competing to get out. The trader took out the
competition of the background by denying inventory to every
one else. This is an example of the type of floor discipline that I
learned in Chicago. I was always aware of trade opportunities
where I did or did not do well, but more aware of the lesson or
principle involved.
Dominance, as we stated earlier, is a directional force that is
non-random. When present, it is in control of the market. It does
not express itself as a constant very often (an extreme example of
which would be successive limit days), but rather intermittently.
In other words, it does not operate continuously, but has inter
ruptions. Its appearance is not consistent; it shows up differently
all the time. What was previously a dominance may not occur
again in the same manner, or, if it does, may not have the same
impact. It is variable and changing as markets change. The only
markets I experienced that had a constant expression of it oc
curred in the 70's for a very short period of time. The vertical
movement was very one dimensional and persistent, to the amaze
ment of most experienced traders, induding myself.
50
CHAPTER FIVE
ciency were traded out fast, and there was no real internal imbal
ance.
In the seventies the percentage of efficiency dropped consid
erably. But in both instances, the markets held whatever general
range of percentages they had for a substantial period of time
before changing, and we were given background by default. As
we look at the late eighties and nineties, we see such characteris
tics changing very fast; efficiency pops in and out of control of
the background of the market. We now need to know and assess
background.
This indirectly shows how important background is, and how
dependent we are on it. In the more consistent eras we could
establish what worked for our trading programs, and proceed
through a considerable period of time with whatever edge we
had found. In addition, we had a stable liquidity to supplement
the existing condition whenever the market was in the process of
changing. Liquidity was an extension of the condition at the time,
and was a counter-force to change. Therefore change was not
abrupt and one could deal with it. I can remember when I first
started trading in Chicago that it took several weeks for a market
to really change. I also remember holding positions for several
months with most of the settlement prices being successively fa
vorable to the position. Markets were mostly two-dimensional,
in that they had both the horizontal and vertical dimensions equally
active; most of the time one could buy breaks or sell rallies, and
if caught with a counter-directional trade have whatever external
controls one was using work to some extent.
In the current era, change needs to be the focus. The more
modem markets of today are a great deal less two-dimensional,
as directional moves are not countered by as much liquidity.
Therefore, the one-dimensional verticality is more pronounced,
goes farther, and lasts longer. As traders we must make the ad
justment in our programs so that we fit this new scenario. When
I first started trading, Bill Griffin, Sr. was a very good position
trader. He once came up to me at the end of a day when I had
52
CHAPTER FIVE
been trading opposite the way the market was going for a little
longer than I should have, and he asked me if my goal was trying
to prove that I could be stupid forever. Every time I think I have
to make a change and I'm debating about it, I reflect back to this
encounter.
The side effects of this new market behavior are many, but
one thing traders should review is how they were successful . If
success in the past came from the errors of others instead of be
ing directly related to market opportunity, then the prospects are
dim. The type of markets that are in place now are going to re
move this source of success , as they really do punish mistakes
harshly, and this in tum will reduce trade, and make it more de
manding. More people understanding the current climate of op
portunity will provide for a better, more sustainable basis for
growth. This is no different from the original reason that got me
started trading - trading as a marketplace for ideas .
As I look back on my experience with market discipline , I
feel very fortunate to have stumbled into the correct path to my
future . Time and continued effort were big factors in my devel
opment, as learning new ways to do the same thing was more or
less forced on me . Early in my trading career I learned how to
determine market discipline by looking at my results , and asking
questions . The markets , being dominated by efficiency, provided
a safe environment in which one could learn from mistakes. That
environment has gradually shifted over the years to be one that is
more difficult to learn in .
It would be very hard to follow my earlier program today. If
one takes a modem approach, it just means doing the same thing
in another and what I think is a better way. The key is to get on
the right path and learn the basics of how markets work. Incor
porate this insight into computer programs that can manage and
process enormous amounts of data. Learn to distinguish between
opportunities, and limit your trading to the best of these. In other
words , you are giving yourself a chance to learn, in that most
good opportunities will take care of themselves regardless of any
struggles you may have to personally deal with . It took me years
to get enough exposure, while today, using a computer, I can get
54
CHAPTER FIVE
CHAPTER SIX
56
CHAPTER SIX
57
1 00% cap. (In practice, neither actually ever gets to zero.) It should
be fairly easy to establish the best parameters within this spec
trum for any trading approach . The place where there is little or
no vertical movement would be characteristic of efficiency; re
gions where both dimensions are active would be a two-sided,
moderately efficient market; and where only the vertical was ac
tive is a one-dimensional, non-efficient market. It's important to
observe here that change and condition of the market can be seen
to be made up of dimensionality. It's through this medium that
we can objectively express captured market data.
The market is in general control of itself when it is actively
gaining efficiency, and this usually takes place when the market
has both active dimensions working: a condition that we have
become used to , because it is more conducive to trading . It is a
more orderly flow, even though the dimensions may work at ir
regular or sporadic intervals .
When either dimension is moving separately, control is with
capital inflow/outflow (inefficiency) . When the vertical is in the
ascendency, inefficiency is present and is dominating the mar
ket; when movement is horizontal, it creates a background that is
highly vulnerable to change . The market expresses itself directly
in the ratio of its dimensions .
Once we understand the basics of dimensionality and how to
measure it, the other thing we need to monitor to have a complete
picture of the market's condition comes from what I call market
output. The output, which is the efficent price area, demonstrates
what the market is trying to accomplish through its self-organiz
ing system. An overlay of this on top of dimensionality would
provide more control , as the precision would be enhanced; we
would know the circumstances under which the market was pro
ducing its output.
If we were in manufacturing, for example, we might change
our expectations of output based on the fact that today's plant
shift was operating at half capacity due to the installation and
testing of a new machine. In the market , if the conditions are
58
CHAPTER SIX
59
60
CHAPTER SIX
CHAPTER 7
62
CHAPTER SEVEN
64
CHAPTER SEVEN
CHAPTER EIGHT
66
CHAPTER EIGHT
67
1 982,
68
CHAPTER EIGHT
1 98 1 , if I recall
correctly.)
These terminals provided the typical
24 lines by 80 charac
In addition ,
20 available
4 lines of header type infor
mation are needed) , which also made a strong case for the col
lapsed bracket display per line (price) . As of this day (July
69
70
CHAPTER EIGHT
71
one . This was a logical approach: the larger the data mass, the
more likelihood of finding efficiency, as efficiency was commonly
expressed in this manner. I could only see opportunity in this
context. It's logical to want to always trade order, but the oppor
tunity is often in disorder.
Other than intuitively, I was not aware of this . I remember
when we first started with the software; we were actively arrang
ing the data by breaking up and combining daily profiles, and
were having a good deal of success . I said that it was wrong to do
it that way. Most of my supporters were really taken aback that I
could drop what I had been doing for something so seemingly
unreal . My inability to logically explain the change made mat
ters even more complicated. I admitted as much and asked them
to trust my judgment. The result was a discovery process that
eventually led to a data arrangement algorithm that produced the
foundation for all our future accomplishments .
A good example of the importance of accepting disorder is
the self-organizing methodology displayed on the screen I call
"Page Two" in our software . The output, or resultant, from the
data arrangement algorithm was consistent in meaning. What
was not consistent was the background. We did not use a single
output scenario; instead, the triggering of a new cycle was data
dependent rather than predetermined.
When we released the software to our clients , the program
mers responsible for the program, Bill Pollack and Gordon
Kummel , received a number of calls concerning what appeared
to be several inconsistencies in the program. The output was dif
ferent on different machines, as a result of small perturbations in
the data received, plus some internal procedures of the software .
This was counter to the rigid order most of our clients expected,
which in and of itself was quite normal. In addition, the market
output would mostly take place in the present, and be located
within the data itself. At other times, though, the program would
mark the resultant back in the data, saying in effect that it was not
immediately recognizable at the time . So our resultant would
72
CHAPTER EIGHT
sometimes occur well after the fact. When the resultant indicator
is outside the data, and late, it has its own significance, in that the
associated move is usually quite strong . The superficial lack of
sameness is simply a reflection of reality. We are not trying for
the impossible , but the practical . In fact, the output actually rep
resents sameness of a higher and more functional order.
I personally thought that .all of the irregularity was a great
feature, in that we experience this type of output in the markets
all the time . In the active trading pits , all the traders do not get
the same feelings or trade indicators , yet the information is there .
The difference is in the way they subjectively organize the data,
into different size groupings that give a distinct feeling for the
same information. If this weren't the case, if all traders had the
same perceptions all the time , the markets would never trade . In
our software, we avoid the problem of everybody getting the same
conclusive information in the same way. This goes a long way
towards rebutting the "self-defeating" prophesy, which says that
as soon as a good trading system becomes widespread, it fails ,
because too many people are trying to do the same trades at the
same time.
Let's consider the idea of "disorder" in the light of the graphi
cal display systems currently in use, in comparison to the ticker
tapes and clacker boards of the past. Is market change informa
tion getting out through the current systerms, or has the informa
tion been narrowed from everyone doing their own organization
and interpretation to a mere trading focus, where everyone is look
ing at the same half-hour or hour or five-minute bars and the
same studies to decide where to trade? The functionality of this
process , not only for the trader, but for the exchanges that are
trying to disseminate the information, is questionable .
Why is the information being distributed so impoverished in
comparison with the information available on the floor? Basi
cally, the information is processed and packaged for the conve
nience of trading programs whose net result is a profit or loss,
rather than market information. How many opportunities are de-
73
74
CHAPTER EIGHT
CHAPTER NINE
76
CHAPTER NINE
(the average price of the entire data sample) . For our purposes ,
we use the mode (the longest horizontal line) as a surrogate for
the mean; it's much easier to locate visually, is often exactly the
same value, and gives good results . The mode is the anchor for
development as the data stream continues. At first glance , it ap
pears to be a fixed quantity, but in fact it adjusts to increased
activity as more data comes in, making it dynamic .
The standard deviations are groupings of the data mass being
observed, and provide the basic organization within it. Each one
has a prescribed amount of data in it, and the total of the three is
very close to 1 00%. The first standard deviation has the most
data at approximately 67% , the second has roughly 26% , and the
third about 7% . These standard deviation intervals are used to
capture and define data . Figure III-3 shows a symmetrical bell
curve with the standard deviations shaded in; a more off-center
data mass would not create such a pretty picture , but the basic
idea is the same.
As I began to develop insight into the market disciplines that
controlled my trading, I also incorporated the disciplines of the
bell curve as more or less distinct unto themselves . I benefited
tremendously when I sensed an ever increasing unity developing
between the concepts related to the bell curve and what I had
been doing all along in my trading . I gradually became aware of
how it all fits together as a single entity. In other words , there
was no reason for separate and distinct analysis , because the bell
curve was able to accommodate all the properties of the data
stream that we were collecting and present it in a natural way.
Personally, this was when it all came together for me . When the
market disciplines and the discipline of the bell curve converged,
the light started to come on.
Let's list some of the commonalties between innate market
discipline and the discipline of the bell curve as applied to the
market.
78
CHAPTER NINE
CHAPTER TEN
80
CHAPTER TEN
82
CHAPTER TEN
84
CHAPTER TEN
86
CHAPTER TEN
trade facilitation:
88
CHAPTER TEN
between London and the U.S. helped define the change in the
U.S. markets. It did even more to verify that moving from the
first towards what would become the second phase of Market
Profile was the right thing to do. It helped enormously to validate
in a very direct way that the change I was in the midst of was
correct, by clarifying why the first phase of Market Profile worked.
When you're in the throes of change, you get all kinds of con
flicting thoughts, and the best thing that can happen is to find a
clarifying example that shows that the new direction is indeed
valid.
Prior to this change, we had already started to remove chrono
logical time from the day profiles, so, as the market changed, we
could change with it by removing chronological time altogether.
This was accomplished by splitting and merging market data into
smaller, larger, and different segments of market activity regard
less of their origin date. These provided development structures
and gave background control, promoting the move to market de
velopment time. (See Figures IV-l and IV-2 for an example of
this type of data rearrangement.) All the repercussions of this
were still not consciously understood by anyone, especially me.
Any data arrangement that retained Mike Boyle's entry system
was valid, and this was in fact carrying us correctly forward even
though we did not know it. As you will see in later chapters, the
data arrangement is a breakthrough that will change the very struc
ture of the industry for the better. The concept of data arrange
ment into segments that represented market structure began here,
and gave insight into the need to have a representative data base.
It was really the visual data arrangement that showed how the
market developed. Using the bell curve as a focus in this second
phase, our data arrangements took on a shape determined by where
the first standard deviation was located, which could be in one of
three places: on either extreme of the vertical data range, or in
the middle. We classified these profile structures as being either
a 3-1-3 (first standard deviation in the middle; see Fig. X-I, page
94, profile for Sept. 19 and Oct. 4) or 3-2-1 (first standard devia-
90
CHAPTER TEN
tion on an extreme; Fig. X-I, Sept. 30). At this juncture the per
ception also began to present itself that the only significant mov
ing part of the profile seemed to be the first standard deviation. It
took a long time for this to really register; the horizontal aspect
of building the first standard deviation seemed at the time to cor
respond to the dead period just before a vertical movement.
Market time was related to the complete development of the
profile into either type of bell-shaped structure, 3-2-1 or 3-1 -3.
In order to delineate market time, we soon learned that there were
four steps to the blueprint of development. Step 1 is the start of
the vertical movement, the laying down of the vertical range that
is to be developed. In this step the market establishes a series of
prices in one direction; it represents the most profitable trading
opportunity. Step 2 occurs when the market finds a price that
stops the vertical movement and begins to build the first standard
deviation. The third step occurs when the market begins to move
sideways, as it begins to develop around the area where it stopped
in the vertical range, and the first standard deviation begins to
emerge. Lastly, in Step 4, the market tries to bring the whole
structure to efficiency by moving the first standard deviation down
towards the middle of the range. We also noted that the first step
was vertical and the three remaining steps were mostly horizon
tal.
The most important result of arranging the data in this format
was that we could watch the four steps developing. This allowed
us to observe the cycle of change as really coming from the hori
zontal, the place of focus and increased control. Development
was horizontal, and studying it was more fruitful than working
with the unstable vertical. At the beginning we were looking for
vertical distributions coming after the completion of either struc
ture (3-2-1 or 3-1 -3), either of which would have ended with hori
zontal development. Such a vertical move was the start of a new
development that would become either a 3-1 -3 or 3-2-1 in its
tum.
91
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to more of a focus, and you need to get more intent.
The activity on the 24th is bringing the opposing forces to
gether as the market is now balanced, ready for a new dominance
to emerge. This can easily be seen by putting all four profiles
together, giving a well-proportioned 3-1 -3 structure. By arrang
ing the data a little differently, one can see that the J time period
of the 23rd was indeed contained by this background (Figure X2). One could also note that the first standard deviation or value
area of the composite profile would correspond to the J period
range, and that J period traversed the value area; this is normal
for any such movement, as we explained earlier in the chapter.
By trading on the 25th one would at least be at the start of
something where either trade (buy or sell) could be evaluated
from the market. The next day was a trend day where the market
moved higher, and all was well if you bought, or sold and had
covered. The latter means you did a good job of exiting, which
really is a quite important trader function. The following day is
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The ideal data base would be one where each data element, or
unit, would be one-dimensional and would be a measurement of
either verticalness or horizontalness. The units themselves would
start out with a neutral two-dimensional base, and, as soon as
there was any indication of being one-dimensional, they would
be completed. The units of the database would then be the small
est possible increments of change. The algorithm for unit forma
tion could not force completion, but must allow each unit com
plete freedom in its expression. Each unit then must be devel
oped in natural market time. All units would be dissimilar, as
they would define themselves. Some data units would have more
data than others. They would all have a dynamic nature which is
potentially of either dimension that would be formed from the
neutral setup. The definition of each unit would change in a com
parative way as successive units were added. This would allow
for relativity in terms of the background, which is very important
when collecting data sequences for trader viewing and analysis.
In essence, the algorithm would be identifying the basic elements,
the phonemes, that make up the language of the market. Any and
all studies in the data base would then be giving a different view
of the same underlying process. Any further data arrangement
would have a sound basis on which to build.
The practical side of this list of requirements as it relates to
our software is that we have had the data base in place for several
years, but we did not have the market figured out as to its pur
pose. (Figure XI-1 shows a typical set of basic units, using the
Dec. Ten-Year Notes contract for 1996.) I made a lot of progress
through doing different data arrangements and efficiency scans
that started producing indications at exactly the points where we
were making subjective trading decisions, as in the earlier cocoa
example. I would be talking to some friend who was a good
trader, and he would say that he really liked bonds, and had bought
some. So I'd bring up bonds on the screen, and more often than
not there would be a scan or data arrangement output on the screen
at the same level. I was experiencing the same thing myself; wher
ever I wanted to make a subjective trade, it would also be indi
cated on the screen objectively.
I started looking at a screen with just the data base and no
studies on it, going through and determining in hindsight what
was the best trade. I would then run my programs, and the indi
cations would be very close to the artificial level on the hindsight
trades. But I was more interested in finding the market's purpose
than in finding things that worked as far as trading was con
cerned- thus the chapter title. All this went on for about three
years before the insights I related in the first chapter dawned on
me. In essence, market discipline is really efficiency in action,
and finding efficiency is indeed the market's purpose. It is very
difficult to make money when the market is efficient, so the less
efficiency there is, the more the opportunity. With my computer
studies, dynamic efficiency was being captured and measured.
This was the critical information our data base was producing,
and we only needed to understand it in this light. We had some
how managed to put the system together as an outgrowth of a
106
CHAPTER ELEVEN
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cessor identifies a significant control price for each bar; it's shown
as a small dark rectangle on the bar.)
In all three examples, the data representation in the foreground
is practically identical. Each chart shows two data outputs from
the market's self-organizing system (shown as approximately
square-shaped open rectangles) at roughly equal prices, which is
indicative of extended efficiency, followed by a scan indicator
(large black rectangle) marking a short-term inefficiency to the
up side. If only the foreground is considered, all three look like
potential rally situations, and trades in all three commodities
would be made and managed in the same manner going forward.
If you had the ability to analyze the background condition of
the market, you would see that while silver was a foreground
opportunity, it was different from the other two. Running a back
ground efficiency scan on all three charts (shown by narrow open
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106150
10/28/96 12:30
106140
10/28/96 14:00
106140
10/28/96 16:30
106140
10/29/96 8:30
10/29/96 10:00
9:00
106100
10/24/96 10:30
106090
10/24/96 12:00
106110
10/24/96 13:30
106130
10/24/96 16:00
106120
8
8
8
8
8
Dn
Do
Dn
Dn
Dn
Dn
Dn
Dn
Dn
Dn
Dn
70
4
5
70
13
70
13
13
70
13
9
10
10
10
13
13
14
14
17
70
14
70
15
18
18
18
18
18
18
18
18
18
106150
70
18
70
19
10
12
18
4
4
18
52
68
68
68
68
10
68
12
68
15
68
16
68
16
68
16
Up
68
16
106240
Up
94
17
107000
2 Up
128
17
10/29/96 11:30
107010
3 Up
128
17
10/29/96 13:00
107030
4 Up
138
17
10/29/96 14:30
107050
4 Up
142
17
10/29/96 16:00
107050
6 Up
148
17
10/29/96 18:00
107050
7 Up
148
17
10/30/96
1:30
107050
9 Up
148
17
10/30/96 3:30
107060
10Up
148
17
10/30/96
5:30
107080
12Up
158
17
10/30/96
8:20
107070
13Up
178
17
10/30/96
9:30
107030
14Up
10
178
17
10/30/96 11:00
107040
15Up
11
178
17
10/30/96 12:30
107020
17Up
11
178
17
Contract: DMZ6
Date
Time
Samples 457
%Chg: 0.45%
B-Horz Holds Page2
Vert-2 Horz-2
Price
Bands
14 Dn
16 Dn
17 Dn
13
13
13
53
12
53
12
53
12
13
13
94
12
94
12
11/06/96 13:30
6605
11106/96 15:00
6605
11106/96 17:30
6613
11/06/96 19:30
6645
11/06/96 21:00
6646
17 Dn
IS Dn
11106/96 22:30
6665
2 Up
114
12
11107/96
0:00
6664
2 Up
114
12
11107/96
1:30
6648
4 Up
114
12
11107/96
3:00
6652
4 Up
114
12
114
12
11107/96
4:30
6644
5 Up
11/07/96
6:00
6649
6 Up
114
13
11/07/96
7:30
6646
6 Up
12
114
15
11/07/96
9:00
6638
7 Up
13
114
17
11/07/96 10:30
6648
8 Up
15
114
19
11107/96 12:00
6650
9 Up
18
114
22
11107/96 13:30
6629
10Up
18
11107/96 15:00
6629
11Up
18
11/07/96 17:30
6628
13 Up
18
11107/96 19:30
6624
13Up
18
11107/96 21:00
6621
13Up
18
6623
14
1
3
11107/96 23:00
6623
15Up
18
11108/96
1:30
6628
16Up
18
16
16
16
16
16
16
11/08/9
3:30
6637
18Up
18
23
10
11108/96
5:00
6638
19Up
18
23
10
11108/96
7:00
6637
21Up
18
23
10
11108/96
8:30
6632
22Up
18
23
12
5
7
7
8
9
11/08/96 10:00
6656
24Up
21
43
12
11108/96 11: 30
6657
25Up
21
50
12
11108/96 13:00
6664
26 Up
21
50
12
11110/96 17:30
6666
28Up
21
50
12
11110/96 19:00
6665
29Up
21
52
12
11110/96 20:30
6670
30Up
21
52
12
11110/96 22:00
6672
31Up
21
55
12
11110/96 23:30
6671
33Up
21
55
12
11111/96
1:00
6666
33Up
21
55
12
11111196
2:30
6666
34Up
21
55
13
11111/96
4:00
6662
34Up
21
55
13
118
CHAPTER ELEVEN
left hand columns) is down for the first five listings before chang
ing to being up. The down background is relatively strong, show
ing increases in the vertical while the horizontal is locked for the
first five listings. The foreground is extremely strong, and is not
being absorbed by the background. You can see the numbers in
creasing in the vertical foreground from 53 to 1 1 4 without any
horizontal movement. It almost doubles its vertical base. It
changes the background, which was moving vertically down, to
where it is vertically up, with both dimensions now active. No
tice that the vertical and the horizontal in the background were
about equal. Thus, the ability of the sharp foreground move to
change the background.
The foreground, in contrast, is making a very strong showing
to the upside with good vertical change, with the horizontal be
ing locked from the same sample size. The verticallhorizontal
imbalance here increases from four times larger to over six in
favor of the vertical. The foreground has been and is clearly in
control and dominant. One must remember that dominance has
interruptions, and that usually one faces a deterioration or test
that serves as a basis for renewed vigor if it proves only to be an
interruption. Such a lull usually starts after having a period of
strength; the vertical refuses to grow for a period, and then it
starts a move to the downside. We can clearly see this in the
foreground column, where we had ten successive unchanging
vertical updates at 1 1 4 with the horizontal locked at 12, then grow
ing to 22 just before we got a new Page 2 mark at 6623. The ten
successive unchanging vertical updates represent the beginning
of the lull.
The Page 2 mark indicates the sample's efficiency, and that
usually means that a vertical move will follow. Subsequent to
this mark, the market changed to down, continuing to expand the
lull. The background column opposite this in the same time pe
riod was moving in a one dimensional manner, in that the verti
cal was growing upwards with the horizontal locked at 1 8. The
Contract: TYZ6
Date
Time
Samples 88
Price
%Chg: 1.03%
Vert-2 Horz-2
20
11/05/96 22:00
11009
45Up
34
30
11105196 23:30
11012
45Up
34
32
20
11106/96
1:00
11013
47Up
34
34
20
11/06/96
2:30
1 l 01O
47Up
34
34
20
11106/96
5:00
11009
48Up
34
34
20
11106/96
7:30
11002
48Up
34
34
20
11/06/96
9:00
11000
48Up
34
34
20
11/06/96 10:30
11004
49Up
34
34
20
11106196 12:00
11003
49Up
34
34
20
11/06/96 13:30
10931
49Up
34
34
20
11106/96 15: 30
11000
50Up
34
34
22
11106/96 18:00
10931
50Up
34
34
24
11/06/96 19:30
10925
51Up
34
11106/96 22:30
10923
51Up
35
2
5
11/07/96
0:00
10922
51 Up
35
3
12
12
11/07/96
1:30
10925
51Up
35
12
11/07/96
3:00
10926
52Up
35
12
11/07/96
4:30
10923
52Up
35
12
10929
1
3
11/07/96
7:30
10922
52Up
35
12
11
11107196
9:00
10924
52Up
35
12
14
11107/96 10:30
10922
52Up
36
12
17
11/07/96 12:30
10931
52Up
38
17
17
11107/96 14:00
11007
52Up
38
25
17
11107/96 15:30
1 l 01O
52Up
38
27
17
11 107/96 18:00
11010
53Up
38
28
17
11107/96 19:30
11010
53Up
38
28
17
121
123
CHAPTER TWELVE
125
CHAPTER 13
I also think there's a path to the future for our industry. I feel
that at this juncture, drawing on the experience I've gained over
35 years, I can see areas of change in the industry that are as
important to it as the changes I have been through were to me as
an individual.
With all the money and talent that has been put into this in
dustry, plus the growth in the power of the computer over the
past few years, it would seem to be a small accomplishment rather
than a large one only to have distilled the trading process down
essentially to arbitrage, i.e. relationships between various prod
ucts, rather than the contrast of things within themselves. A great
deal more has been done by some individuals and companies in a
subjective way, which I think supports the idea that more can be
done objectively.
The shortfall is due to the unfortunate representations of mar
ket data being used, to the representation of opportunity as one
dimensional, and to lots of faulty ideas and concepts about mar
kets in general; to the "it's not possible," "one can't do it," and,
even more importantly, to the lack of openness to new ways of
doing things. This even extends to trying to find ideas or new
directions. In recent times there have been no indirect benefits to
the industry like those that formerly came from the large compa
nies or exchanges doing new things. Sort of reminds me of an
old feeling: it's quiet out there. That is the condition in which one
does not know what type of problem one faces.
I feel that as an industry we have become a great deal more
cynical internally, and it is very hard to shake this overall effect.
It's rather ironic that we are doing this to our own future-what
some might call imploding. Anything new or different has been
viewed totally in dollar terms, with a short time span in which to
produce results. The attitude is, "I tried it, but did not make any
money, so it's no good," or "It used to work, but not any more,"
or, if it's a new product, "Who's going to use it?" Or the biggest
cynicism of all, "Once everyone has it, it will soon be self defeat-
129
131
Index
Symbols
3-1-3 89, 90
3-2-1 89, 90
B
background 1, 6, 10, 21,25, 2628, 36, 47,48, 73, 88,91, 97, 108, 111, 125
background efficiency scan 108
beginning traders 10
bell curve 4, 6, 7, 32, 37, 65, 75, 89
Berkeley 75
big traders 6
blueprint of development 90
Boyle, Mike 65, 89
British Pound, example using software 107-111
business principles 9
c
Canadian Dollar, example 107-111
capital flow 33
capturing Market Data 61
CBOT (Chicago Board of Trade) viii, 3, 10, 129
Chicago Tribune 131
chronological time 4, 37, 61, 81, 89
Cocoa, example using software 93, 94, 122
collective dominance 121
Commodity Trader Identification Codes 65
computer processing power 131
computer productivity 18
consensus 77, 44, 59, 112
control 44
cn codes 2,3
133
134 INDEX
D
D-mark, example- data base controller 116
Data arrangement 69, 74
data base 1, 74
data base controller 113, 113-121
data entry system 4, 5, 65
data organization and representation 5- 7
day profile 34, 83
development 62
development as a trader 8
dimensional measurement 107
dimensional movement 56
discipline 6
discipline of the bell curve 76, 78
distribution theory 34
dominance 6, 46, 48, 50, 70, 84, 86, 91, 96, 111
dynamic efficiency 36, 78, 105
E
early experience 10
efficiency 3, 5, 13-15, 21, 26-28, 33, 35, 38, 39-48, 57, 100, 116
Emory, William Uhlman 58
F
fair price area 39, 41, 59
Federal Reserve 130
financial control 1, 6, 10, 23, 47, 106
first standard deviation 32, 36, 65, 76, 86, 89, 92
Five year note, example data base controller 115
foreground 13, 47, 48, 109, 118, 119
four steps of market activity 90-91
fragment 55
fundamental analysis 8
G
Graham and Dodd 8
Griffin, Bill, Sr. 51
growth 130
INDEX
H
horizontal 36, 39, 43
horizontal and vertical axes 61
I
industrial indifference 23
inefficiency 14, 16, 33, 57
Institute for Policy Studies 131
internal controls 22
investing 8
J
Jirout, Bob 65
K
key to objectivity 37
Kirby iii
Kummel, Gordon 71
L
large trader 6
LIFFE exchange 88
liquidity 6, 45,46, 49, 56, 83, 111
Liquidity Data Bank 66
Longworth,
R.C. 131
M
market activity 11
market behavior IO
market cycle 40, 43
market data base 125
market development time 77
market discipline 13, 16-17, 21-24, 52, 76, 78, 80, 86, 91
market efficiency 5
market organization 42
market output 41 , 57, 77
Market Profile v, 4, 5, 7, 28-32, 88, 127
Market Profile, dynamics of 93
135
136 INDEX
N
neutral day 86
non trend 81
non-efficiency 39
non-trend day 86
normal days 81
normal variation day 81
o
objectifying the market 70, 103
objective trading parameters 80
opportunity 8
p
Page 2 mark 115
phonemes 104
Pollack, Bill 71
prediction 9, 10
price 125
Price discovery 41
price plus time equals volume 66
profile, formula for 66
purpose of the market 33-38
Q
Quaker Oats 87
INDEX 137
R
Randomness 45
randomness 6
range extension 82
Rosenthal, Les v
s
saying 9
sayings 9
scalper 11
scalper-spreader 11
scan indicator 108
Security Analysis 8
SFE 88
Silver, example 107-111
small trader 6
Snapple 87
software,Page 2 71
software, studies 99-101
speculation 8
standard deviation 76
stops 11
T
Ten-Year Notes, example-data base controller 120
The Bell Curve 75
third standard deviation 83
Trade facilitation 86
trade facilitation 33, III
trader discipline 11, 22
trader's development 127
trading plan 7
trading programs 72
trading system 38
trapped money 97
Trend 81
trend day 97
two dimensionality 55
two-dimensional data organization 75
two-dimensional display 61
two-dimensionality 61
138 INDEX
two-phased market 34
u
u.c. Berkeley 8
v
value 5
vertical 5
vertical background 59
vertical dominance 119
vertical extremes 77
vertical market phase 6, 58
vertical reference 41, 58
vertical/horizontal relationship 56, 116, 119
volatility 74
volume data 3
z
zero sum game 131