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141 West Jackson

A Journey through Trading Discoveries

J. Peter Steidlmayer

Steidlmayer Software, Inc.

Chicago, Illinois, 1996
Copyright © 19961. Peter Steidlmayer
All Rights Reserved.

Reproduction or translation of any part of this work beyond that

permitted by Section 107 or 108 of the United States Copyright Act
without the permission of the copyright owner is unlawful. This
publication is designed to provide accurate and authoritative infor­
mation in regard to the subject matter covered. It is sold with the
understanding that the publisher is not engaged in rendering legal,
accounting, or other professional service. If legal advice or other
expert assistance is required, the services of a competent profes­
sional person should be sought.From a Declaration of Principles
jointly adopted by a Committee of the American Bar Association
and a Committee of Publishers.

Printed by: Litho Art Printing· 60 I SE Clay St . • Portland, Oregon


Market Profile® is a registered trademark of the Chicago Board of


Library of Congress Catalog Card Number 96-72352

First Edition

Printed in the United States of America

To Kirby-whose sense of order was complete and wonderfully

It has been an interesting journey. Over the past fifteen

years, I have seen Market Profile evolve from an objective
output which required a fair amount of subjective input, to
what we have today, a Market Profile digital database that
helps to objectify the market. Over that same time horizon,
markets have become more international, interconnected, and
complex. The challenge to the individual trader has become
more daunting. The influence of external markets and today's
capital flows would tax the market understanding of the most
successful intuitive trader of the past. To deal with the ava­
lanche of the information age and remain objective and there­
fore in control as a trader requires new tools.
When reading this book, approach it as you would any
mental exercise. Look to gain knowledge, and consider how
you could apply the concepts presented to your trading. Don't
see it as a how-to book that contains the Holy Grail. The way
Mr. Steidlmayer offers his insights, thoughts, and observations
as public domain is surely selfless and exemplary. He is a
visionary who has conveyed a lifetime of thoughts and ideas on
markets into one all-encompassing manuscript, 141 West

Steven B . Hawkins
SBH Capital Management
December, 1996

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.


When I graduated from college and first started trading, my

father asked me why I would want to get into a business where
almost everyone loses. My answer was that there wouldn't be
much competition.
Despite my bravado, I knew I would need to overcome formi­
dable obstacles on the path to my goal. Most importantly, I real­
ized I was working against a background where the accepted prac­
tices were not making other people successful. Because of my
experience in school, I was confident that I could learn how to
learn. I also knew it was important to keep the learning process
separate from making money. To me, what others regarded as
success, whether it was immediate financial gains, or the good
opinion of others, was not real success, because it might not have
a real foundation. The foundation for being successful was in the
learning; the real definition of success was improvement in my
ability to function, improvement in my performance as compared
to the background of what I was before. I felt that most people
didn't take the time to learn and didn't make a commitment to
keep learning once they began to make some money. The path I
was going to take was one where I would question everything I
One factor in my decision to become a trader was my experi­
ence outside the Chicago Board of Trade (CBOT) in trying to get
into other businesses. I had what I thought were a lot of good
ideas, but I had a hard time convincing people in power to go
along with them. In other words, I got the old "Well son, when

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.

Chapter One
What This Book is About ....................................................... 1

Chapter Two
Getting Started ........................................................................ 7

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 .
....................... .............................................. 75


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? .......................................... 127

Index ...................................................................................... 133


What This Book is About

Studies of the commodities markets consistently show that

85% of all traders lose. I've begun trading stocks in the last couple
of years, and interestingly, if you measure the results of stock
mutual funds versus a standard index, the success ratio is simi­
lar: approximately 85% of all stock funds failed to beat the S&P
last year. The "trading" activity in a stock fund is stock picking.
It is quite revealing that while most commodity traders are tech­
nically oriented, and most stock pickers rely largely on funda­
mentals, their trading results are quite similar.
Why do such diverse approaches lead to equally sub-par per­
formances? What is the common denominator? The answer that
I initially gave myself, and which I still believe is correct, has to
do with understanding, particularly in terms of market back­
ground. The programs of both types of traders seem to eclipse
background; in the case of the technical trader with financial con­
trols, and in the case of the fundamentally based trader with a
belief in projections.
A trader must try to understand a market in the present, rather
than attempting to predict the future. I think that what follows in
this book will go a long way towards solving this problem. The
crux of why people are losing is that they are using the wrong
database, one that actually inhibits the necessary insights from


58-15 50 17 34 33 66
58- 1 4 387 247 63.8 140 36.2
58-13 594 38 1 64. 1 213 35.9
58- 1 2 1530 916 59.9 614 40. 1
58-11 2632 1630 6l.9 1002 38.1
58- 1 0 3288 2092 63.6 1 196 36.4
58-9 5239 3348 63.9 1 89 1 36.1
58-8 3696 2166 58.6 1530 4l.4
58-7 3232 1804 55.8 1428 44.2
58-6 278 1 1910 68.7 871 3 1 .3
58-5 21n 1391 64 781 36
58-4 2019 1350 66.9 669 33.1
58-3 2635 1 7 14 65. 1 921 34.9
58-2 3626 2454 67.7 lIn 32.3
58-1 5543 3462 62.5 2081 37.5
58 6434 3989 62 2445 38
57-31 3849 2360 61.3 1489 38.7
57-30 5136 3 1 93 62.2 1943 37.8
57-29 3952 2627 66.5 1 325 33.5
57-28 3674 2441 66.4 1233 33.6
57-27 2206 1317 59.7 889 40.3
57-26 2582 1681 65. 1 901 34.9
57-25 2078 1 288 62 790 38
57-24 1 317 699 67.2 618 32.8
57-23 1040 622 59.8 418 40.2
57-22 919 586 63.8 333 36.2
57-21 639 404 63.2 235 36.8
57-20 977 582 59.6 395 40.4
57- 1 9 473 258 54.5 215 45.5
57-18 87 76 87.4 II 12.6

Table 1-1. Bond trade volume by categories, Oct. 6 1981

developing, and thus blocks them from learning about the mar-
Internal market statistics reveal that successful traders, who
are mostly concentrated among the professionals, are using a dif-
ferent strategy than unsuccessful ones. Table 1- 1 gives volume

CTIl, 2 CTI4

Top 1 /3 59.4 (62.9) 40.6 (37.1)

Middle 1 /3 64.5 (62.9) 35.5 (37.1)
Bottom 1/3 64.2 (62.9) 35.8 (37.1)

Table 1-2. Trade percentages summarized by categories

statistics for trading in bonds on October 6, 198 1 . It was issued

by the Chicago Board of Trade in an attempt to help the trading
public by providing information on the various types of market
participants. At that time the volume data was broken down into
segments of CTI codes (Commodity Trader Identification codes,
such as commercial trader, local, local off floor, and other); CTII
and CTI2 are the local and professional trader categories, while
CTI4 represents all others (CTI3 was not used).
The total percentage of trades for the local and professional
traders is 62.9%, with the remainder going to the others. If both
categories of traders were trading the same way, then the
percentage columns would read 62.9% and 37. 1 % all the way
down the table. Clearly, this is not the case. To get a better idea of
what's going on, let's average the percent of trades for each
category in the top, middle, and bottom third of the table. The
result is summarized in Table 1-2.
Note that in the top third of the range the CTI4 traders are
several percentage points above their 37. 1 % average, while in
the middle and bottom third they are several percentage points
below it. The implication is that the market is extracting a pre­
mium from this type of trader for the potential opportunities pre­
sented. The CTIl and CTI2 traders have the reverse effect; they
are not paying the premium because they are trading the efficient
part of the market that the trades are going to emanate from. The

implication is to move your trades to this part of the range as

well. The lesson here is that successful traders have an under­
standing of the market that produces a different strategy than that
used by unsuccessful traders.
A great deal has been learned about markets since 1 982, when
the original version of the Market Profile data management and
analysis system was first formalized. The initial effort was based
on the notion that the bell curve, a fundamental organizing prin­
ciple in statistical analysis, would have some important relation­
ship to market behavior. While not perfect, the first version was
successful enough to inspire an ongoing quest to understand more.
Progress was incremental and relatively slow, as learning came
from observation and experience, contributed to by many people
in an open process of exploration, discussion, and discovery.
Many of the key formats used in organizing the data were
fortunate discoveries that proved to have important ramifications
far beyond what we intended when we first developed them. When
we went back to try to understand why the formats worked so
well, we were led to the operating principles of the market. The
original formats, which were based on an intuitive understand­
ing of trading, had in them the seeds of the formal knowledge we
were seeking. It took 1 5 years of working with Market Profile to
develop all the insights. Towards the end, progress was greatly
accelerated by using a computer to do the processing, allowing
us to work out and verify our ideas on many more markets than
we could have dealt with otherwise. In fact, bringing the com­
puter into the world of trading has accelerated the flow of infor­
mation and hence the evolution of the markets and of trading
methods in general. With new types of data arrangement, the com­
puter allows quicker forward movement. Change enables the suc­
cess of people just entering the markets, as a new technique al­
ways offers opportunity to the new person.
Our most important innovation was the data entry system it­
self. Its key advantages were that it allowed us to get away from
using chronological time as a basis for organizing our data, and

forced a two-dimensional data representation, giving us a verti­

cal base for data processing. This system got the effort of data
organization off on the right foot and gave us a solid basis for
going forward.
Over time, the data entry system evolved from daily profiles
into profiles organized around market events, and finally to a
database of smallest meaningful data units. The system accom­
plished the graphic capture and display of the market in a two­
dimensional setting that reflects the underlying market processes.
This is a clear prerequisite for obtaining objective measurements
that define the state of the market, and thus the opportunities that
may be present. Markets measured means markets defined. De­
fining your opportunities in terms of market measurements is as
close as you need to be.
The culmination of our studies was the discovery that the
market is a dynamic, self-organizing system that is based on effi­
ciency. The market is always trying to make order out of disor­
der. It has a well-defined underlying process that can be under­
stood and recognized, and that process has a natural progression
that can be seen and measured. It has reference points, which,
when identified, represent important information, and it produces
a final output or resultant, which accomplishes the market's pur­
pose. The process is cyclic: it reaches closure and then starts over
Finding the market's purpose was our most significant break­
through, and it is the central theme of this book. Our explanation
of the market's fundamental process reconciles the notion of mar­
ket efficiency with the ability of skillful traders to make money.
(In an efficient market, price moves immediately to reflect value.
Thus, the cost of information outweighs the profit potential from
having it.) The idea of efficiency has a long association with
markets, mostly conceived as a barrier to successful trading, and
it has been a revelation for us to note its importance as a dynamic
resource for traders.
The various stages of the development of Market Profile
through the years reflect our increasing understanding, as well as

actual changes in the markets. Throughout the process, we fol­

lowed a consistent theme. As our understanding developed, we
began to notice a correspondence between the disciplines im­
posed on traders by the market and the notions we derived by
studying the bell curve and its expression in Market Profile. At
first these were subconscious revelations that led us to choose
good data representations; later, as theory and practice began to
merge, we were able to objectify our intuitive understanding.
Along the way to our final results, we had several important
contributory insights, which we'll discuss as we follow the path
of Market Profile. For example, the material on liquidity and its
relationship to randomness has very practical applications in trad­
ing. The strategies of big traders are always interesting and note­
worthy, and provide us a viewpoint that should in principle be
adopted by all traders. We' ll look at the concept of background,
which substitutes for financial controls for large traders, and how
it should be used by small traders.
As we consider the notions of horizontal and vertical market
phases, we' ll introduce the terms dominance (the force that drives
the vertical phase) and lull (the pause that usually follows a ver­
tical move, and is hard to handle). These terms will allow us to
formalize and discuss important phenomena that people usually
take for granted as a background, without consciously studying
and measuring them. In particular, we' ll investigate the essen­
tially two-dimensional nature of the market.
The purpose of this book is to enhance your market under­
standing. Your future success is your responsibility; there is no
automatic, "foolproof' formula. As you develop yourself as a
trader, take particular note of the lessons of principle-those that
have come from the market itself, and those coming from your
own experiences. These will provide the basis of integrating
market data into your own trading program.

Getting Started

In the course of this book we' re going to examine the under­

lying ideas behind Market Profile, as it was when we first for­
malized it, as we developed it, and in its present form as we bring
it to a final phase of understanding. Unlike most books about
trading or the markets, we are not going to prescribe a specific
trading plan, nor will we give "how to" details. This book is like
a cookbook that explains the principles of cooking, rather than
giving specific recipes. One always needs a deeper understand­
ing than recipes or formulas can give to achieve anything real.
It's my hope that this book will provide the reader with a strong
background and understanding of markets, and stimulate the de­
sire to take advantage of the opportunity thus presented to pursue
the issue of markets further.
I have been trading for over 35 years. From the beginning of
my trading career, I have organized data around the bell curve,
loosely at first, and more formally from the early 1 980's on. I
feel that I've finally come to a full and complete understanding
of the merits and subtleties of this approach. Data organization
is fundamental to my theory of the market, and it can also serve
as a knowledge base for you, whether you plan to trade as a ca­
reer or just want to understand trading as part of your financial


Like most of you, when I started trading I had questions relat­

ing to my ability to understand what I was going to do. How
would I know whether to buy or sell? How would I recognize an
opportunity, and how long would it remain an opportunity? There
were three stages in my development as a trader. The first was an
exploratory, or educational, phase. I became interested in trad­
ing while at V.c. Berkeley, after reading an article about it in
Fortune. I began to focus on trading as a career after a course on
investments. The text in that course, Graham and Dodd's Secu­
rity Analysis, explored fundamental analysis. The methods de­
scribed in the book appeared logical and made a lot of sense to
me. The book emphasized that mistakes or good decisions could
be isolated and understood against a background of principles.
This was my first exposure to financial controls, the use of ob­
jective parameters like profits per share, cash flow, etc. to control
investment decisions. Significantly, these controls were internal,
in that they emanated from the company itself.
I also became aware that there was a profound difference be­
tween speculation and investing, and that because so little was
understood about markets and speculation, almost all commod­
ity traders ended up losing. I read extensively in "How-To" books,
books about great stock traders, and whatever else I could find
that related to the markets, trying to find the best way to get started.
I asked myself what I was going to bring to the table. What was it
that was going to put me into the successful group? There wasn't
much material available on winning commodities traders, and,
with my lack of experience, I wasn't in a position to readily ac­
cept or reject the available knowledge and teachings that were
basic to the trading industry.
I decided to try to use as my guidelines the business principles
of other industries, ones where most participants were generally
successful, and see if they couldn't be applied to trading. I real­
ize now that I was fortunate that information about winning trad­
ers was so sparse, since I might have tried to emulate them and
would not have had the ability, at that stage of my development,

to do so. Even at the time I felt that by studying business prin­

ciples that worked I would be able to carry on within myself at
whatever level of ability I had, rather than asking myself to be
greater than I was.
Another source of potential wisdom was the many "sayings"
about trading that were passed along by experienced traders. A
"saying" is a truism coming from the practical experience of those
who have dealt with the market. For example, "The market takes
no prisoners," means that there is no middle ground between be­
ing right and being wrong. Such sayings were never explained,
and were usually quite general and unspecific, but they repre­
sented insights that had helped people trade well over a period
Both the business principles and the sayings turned out to be
fruitful areas and worth exploring further. They contrasted di­
rectly with the "take it on faith" attitude and lack of real under­
standing I found in most books on trading. In many of these
books, everything seemed to revolve around financial manage­
ment-that you could always pre-determine where to get out,
but could not determine anything else. You took whatever came
first: if your goal was hit, you had a profit; if your stop was hit,
you had a loss. Further, with no particular knowledge or skills,
one was supposed to be able to deftly mange a winning trade to
its maximum potential. It seemed to me that this type of program
did indeed make commodity trading a gamble, just as most con­
servative investment books said it was. Most commodity indus­
try approaches seemed to fly in the face of commonsense busi­
ness practices that were applied every day in other industries.
You would not dream of running a business you understood with
the practices these books recommended.
Most of the academic works I encountered dealt with eco­
nomics or investments, not with trading, but I nevertheless found
a lot of principles to think about. My basic conclusion was that
understanding had to be the key to success, and that understand­
ing was a present tense process. Predictions, especially those

that can be characterized as more or less baseless assumptions,

cannot be used as a continual foundation for a business. In trad­
ing, people think that they can use money management to com­
pensate for any assumptions they make. This is an illusion. You
solve the problem by understanding the background, projecting
forward from a sound base, and seeing a contrast to the present,
not by looking at the excitement of the moment. Predictions are
dreams, and dreams are hard to evaluate.
Reading gave me a certain amount of preparation, but I real­
ized that the only way to really find out anything about trading
was to give it a try. Some experience would help clarify matters
and perhaps give me a path to follow. I was not very successful
at first, but I managed never to lose more than I had. In retro­
spect, this is about adequate as far as financial controls are con­
cerned, as I always managed to stay about where I started. Most
of the disappointments came when things were going well and
then turned against me. After a couple of years, I started to get
the feeling that I could in fact succeed, and decided to go to Chi­
cago. This began the second stage of my development as a trader,
what I call the early experience phase.
When I started in Chicago, I knew that I had to have a reason
to make a trade other than some baseless prediction, and a mar­
ket-derived reason to exit outside of a simple profit or loss. As a
CBOT member, and a floor trader, I was able to learn by watch­
ing markets and traders at work. Being able to study and contrast
successful and unsuccessful traders was very instructive. There
was definitely a base of successful knowledge on the floor, and
an invaluable opportunity to watch great traders in action. (This,
by the way, is a problem for the young exchanges today, and for
screen-based exchanges, where there's no opportunity for begin­
ning traders to learn by example.) Along with watching traders, I
learned to look for market behaviors: the activity level, tone, and
so on, of markets that were moving up, down, or sideways. I
could tell the basic opportunity level by how many traders were
in the pit. I would ask myself why there were 1 00 people trading

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

me. In other words, if I thought grains were going up, I would

pay the seller's price, go for the idea, and either sink or swim on
the results.
My second insight came after a lunch with two respected trad­
ers who had more of a non-scalp mentality, and whose trading
style was more in line with what I was doing. Both were very
interested in helping young traders from a personal as well as a
market perspective. At the end of the lunch, markets were dis­
cussed. My views and trade positions were opposite theirs in terms
of the next probable moves in the markets. This was quite upset­
ting to me because when I put my trades on I really felt that I was
right. That night I decided just to cover the positions in the morn­
ing and chalk it up to experience-I clearly had a lot more to
learn. The next morning when I got to the trading floor I decided
to wait for an hour or so and give the market a chance to go my
way instead of immediately covering on the opening. The mar­
ket moved sharply my way, and later that day both members came
over separately to ask what I thought now! This experience en­
couraged me to keep the general principle of what I was doing in
place, and confirmed my notion that the best idea for me would
always be my own: a principle I think holds true for all traders.
This attitude was reinforced a couple of years later. I was short
com over the April Stocks and All Positions report. I was fairly
bearish on the market, and it was close to the typical seasonal
end of the price movement for old crop com. Thinking that there
would be no surprises, I did not stay for the release of the report,
but instead went to a Cubs game that afternoon. Some other trad­
ers came out to the game later and told me the report was ex­
tremely bullish. I felt that this was big trouble for me, and that
the market was likely to go limit up the next day. I was just hop­
ing it would not start there.
I went down to the floor early the next morning and ran into a
couple of large com brokers. I asked them what they thought of
the report, and they said the market would likely be unchanged,
or at most only a little bit higher. I was immediately relieved, and

my anxiety started to dissipate. But, after a little more thought, I

realized that what they had said could not be right. I felt that they
and their customers were all short, and that they were trying to
talk the market down. The more I thought about it, the more I
knew that my feeling was right. The market opened reasonably
well versus my worst expectations, but well above the general
opening call given by the pit brokers, and I covered aggressively
right on the open. I was hoping that they had decided to wait and
see, and that they would be covering later in the day if they needed
to. The market closed very strong that day.
To develop myself further as I gained experience trading, I
started a program of working with what I now call market disci­
pline. I studied all my trades each day against the backdrop of
what took place in the market-what I did, why I did it, why was
I right or wrong. I began to look at the market in two phases: a
background phase, and a foreground phase. Market discipline
consisted of studying the relationship between background and
foreground: the internal contrast of the market within itself
Market discipline has many connotations. Practically speak­
ing, it's the school of hard knocks. It means that the market will
punish those who try to fight it. In this sense, it's a discipline that
the market can and does impose on its participants. You learn by
doing, by asking questions of yourself, by not repeating your
mistakes, by taking responsibility for your actions and not com­
plaining about what-ifs, what went wrong, etc. You are in a con­
tinual learning mode. The problem with using financial controls
is that background is never given any consideration-it is always
taken care of by the financial control. This prevents people who
use financial controls from learning. Market discipline is not a
well-wrapped pretty package; learning from one's experience is
never a neat and tidy process, but it is essential.
In a more elevated and reflective sense, market discipline is
the market's efficiency. After all, according to academic theory,
efficiency is the reason one is supposed not to be able to make
money trading. As a trader you are trading an inefficiency or a

potential inefficiency that the market is trying to rectify: in con­

crete terms, a vertical move or potential vertical move. Usually a
trader has paid a premium in terms of trade location for the infor­
mation that an inefficiency exists. The important thing to note is
that an episode of inefficiency has a life and is not static. It is this
"life" that gives the trader an opportunity to succeed. The reason
inefficiency can develop is due to market uncertainty, which al­
lows it to expand or contract on itself. In retrospect, it should
have been obvious to me and others that no static theory could
account for an uncertain process. Inefficiency is the ultimate con­
trast of the market within itself, because that is when the fore­
ground is most different from the background. Both background
and foreground must be expressed in terms of efficiency, in order
to evaluate opportunity. (For example,inefficiencies are gener­
ally absorbed into an efficient background, if they are not power­
ful enough to change the background.) It makes sense, then, that
to succeed, one must understand efficiency, or market discipline,
work with it, and make it central to one's trading approach. As
we shall see, efficiency is a dynamic phenomenon that is totally
internal to the market.
This brings me to the third stage of my development as a trader,
a stage I have been in for a very long time now. It is one of
continual exposure to and absorption of market discipline, ac­
companied by a constant desire to improve myself. Market dis­
cipline is not a road map, it's a compass. You find the direction
and keep going, in a process of discovery.
There are two major advantages that I have had over others in
trying to pursue education as it relates to markets. The first was
being on the floor and getting exposure to a lot of good traders. I
met new young traders who approached the markets in a fresh
way; in growth situations, the new are always closer to the beat,
so to speak. I also met many fine traders who were satisfied
trying to stay the same, and over time I realized that was not the
way to go, as those who continued to update seemed to do better.
Evolution theory tells us that the most specialized organism is

the most successful in a constant environment, but can't survive

through a change. The trader who keeps learning might not be
the most successful in any given situation, but can keep going
and adapting as conditions change. But in either case, the knowl­
edge of markets as expressed by these various individuals was in
a subjective code. Hardly a trader could explain the what or the
why, but the knowledge itself was definitely there.
Most floor traders learn their skills through their experience
of the practical side of trading, where participants are brought
together in the discovery process, whether it's the open outcry
methodology, specialist, screen based, or something else. Oddly,
nothing has ever been directly written about this. Most people
who are learning to trade fantasize about being just like so and
so, the great trader. If you have the opportunity to discuss trading
with a successful trader, try to elicit the principle behind what is
being done. Remember, if someone is good over a period of time,
there is something being done right.
I was trading in the bean pit once on an extremely volatile
day, and I had bought some beans at 786. The market moved up
to around 792. Then, it paused and backed up to the 790 1 12
level. All this was taking place quickly, over a period of just a
few minutes. In the pit there were probably 40 to 50 participat­
ing scalpers and traders in addition to all the brokers. Most of
them were very actively bidding, offering, and competing for any
order that carne into the pit. When the price reached the 790 area,
I decided that I'd like to hit the next bid that carne into the mar­
ket, and I didn't mind hitting a local who was bidding the bid
price or slightly under. As I watched for my chance, to my amaze­
ment not one local had both hands up and they all were only
bidding verbally, which meant that they were only required to
take one contract. I sensed that my of knowledge of this situation
was not isolated, as the behavior of the whole group indicated
that they had read the market the same way, and they were all
waiting to hit the next bid. I dumped the market a cent and a half
lower; it bounced back about a 1 12 cent and then broke 1 0 cents.

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

results from my efforts to attain a higher plane of knowledge.

Over a very long time, I was able to correlate more and more of
my practical trading experience with the visual order created by
the profile, thereby getting what I would now describe as a con­
vergence of the two. Each small piece of understanding contrib­
uted greatly to unlocking the next problem, until now I feel that
I've gone as far as I can, that I've reached my goal of objectify­
ing the market. This goal is different from most people's; it's not
a trade parameter we ' re running through a database and
backtesting with financial controls to see if it produces a profit or
loss. Instead, we have built a framework from which questions
can be asked and the whole spectrum of opportunities can be
identified and routed to the proper trading programs.
For example, a friend called me last week and pointed out a
trade setup. It was good, but the trade took a lot of skill in execu­
tion in terms of finding it, getting it on, and managing it. In look­
ing at the background in which the trade opportunity had devel­
oped, there were many opportunities earlier in the week in which
the same trade could have been made under less demanding cir­
cumstances. Most experienced traders will tell you that the set­
ups for good or losing trades look identical when looked at in the
context of short-term market activity. It's the longer-term back­
ground that can distinguish between them and allow a market­
oriented approach to replace reliance on good financial manage­
ment. Most associate not having financial controls with total reck­
lessness and lack of discipline. An objectified data base, which
provides information related to the background, gives much bet­
ter control than any financial control. Upgraded opportunities are
the result.
While I feel that I've reached my goal of objective market
understanding, I do not think that all my ways of implementing
my insights are by any means ideal. But the basic fundamental
principles are there and will not change. It is these principles
that will propel the industry forward as better ways to implement
are continually found. I see basic industry growth coming from

expansion into other arenas. I think that commodity trading will

expand into the area of investments, and that stock investment
will expand into stock trading. Logic and reasoning in the present
tense, something we' re all capable of, will begin to replace the
fantasy and fiction of predicting the future. The result will be a
business that operates on the basis of internal controls, the key
ingredient for a successful business in the long term.
I have always looked to the future and tried to place myself
somewhere in it. And I think your interest in this book signifies
that you do the same. What does the future hold? I am certain
that it is going to be something very different. I really do not
have the ability to stray too far from my base, so I'm going to just
look at the areas that I'm currently involved in. Coming from a
ranching/farming background, I have always been resource ori­
ented. Trading has been natural extension of that interest. From
a historic view of economics, we' ve had an abnormal situation in
recent years where political and economic policy has been run to
favor the financial markets-and they have certainly benefited.
In addition, there have been other fundamental changes in the
economies of the world that are supporting increasing market
use. I feel that there is going to be a more obligatory participa­
tion in the future; markets are going to be needed as never be­
fore. And these circumstances will arrive sooner rather than later.
We' re all concerned about our future as we move toward a
global society. The increasing speed of computer productivity is
running at a far greater pace than human productivity. If com­
puters and our skills move along at the same rate, we' ll be needed
as people. Thus, the emphasis by the government on education.
But the trend over the last four to five years is disturbing. Tech­
nology is leaping ahead at a tremendous rate. For example, medi­
cal technology has gone to a level that we really can't even af­
ford. We haven't kept pace, and have been left behind as a soci­
ety. If we take a look at computer productivity and the growth of
processing power, we're finding that the gap is beginning to widen.
Is there a path that we can get on now that assures that we have a

future? This is a question that all of us should be asking our­

selves. I've come to the conclusion that trading offers a tremen­
dous opportunity far beyond anything else in today's environ­
ment, in that it gives a person the self reliance that seems to be
called for in the new environment. It's a skill that if learned and
mastered will take you a long way.
Another reason trading is important is because of the increas­
ing importance of resource production and distribution. As edu­
cation and capital spread throughout the world, we're going to
find that consumption becomes more decentralized, increasing
the economic base of markets, and this will produce a lot of mar­
ket growth. I think we' ll come to a day in the U.S . , if we do not
grow at a faster pace, when other economic areas will bid re­
sources away from us. This will be a drastic change. I ' m going
to stay as close to my base of expertise as possible, because ac­
tivity is going to be high, and there are going to be lots of oppor­
tunities for people who understand markets and trading to ex­
I'll close this chapter with a "saying" whose truth we've all
experienced: if you really need a break, or something favorable
to happen, it won't. Being in a position of indifference in rela­
tion to luck is far better, because then you'll probably get it. Prepa­
ration and skill are the foundation for a solid program for your­
self. A personal "business plan" in which you prepare to take
care of yourself will never let you down.

Market Discipline, Background, and


The three topics listed in the chapter title, market discipline,

background, and efficiency, are the most important and least un­
derstood concepts in the trading community. We' ve all had some
exposure to the idea of efficiency, but we' ve been conditioned to
think of it as the Achilles' heel of our trading, when in fact a
proper understanding of it is the key to unlocking the mystery of
the markets. Background has always been present by default;
we' re going to talk about how it changes and how monitoring
background is one of the most important factors in trading deci­
sions. Market discipline was introduced in the previous chapter;
here we' ll expand on the idea and show its close relationship to
the other two.
The major point of this chapter, and indeed of this book, is the
central role that efficiency plays in the market. The market is a
self-organizing system that brings flare-ups of inefficiency back
to efficiency. From a practical standpoint, efficiency is the mar­
ket discipline that ultimately determines either a profit or loss on
your trade.
The benefit from working with market discipline is that you
get closer to the market, to the point where you're really in tune
with it. Market discipline provides a basis of market study that
leads you in the right direction and allows you to learn from your
mistakes. The idea of market discipline is probably vaguely fa-


miliar to you from our discussion so far; it will be central to help­

ing you understand the purpose of the market. The goal of this
chapter is to explain in detail what market discipline is and how
to use it.
I've been working for many years to understand the workings
of the market. The benefit to me was twofold: better trading, even
though I did not have a complete understanding for a long time,
and the fact that I can now begin to objectify my data base. You
will see that understanding did not just present itself, but took
considerable time, effort, and a willingness to rely on my own
judgments, which were many times wrong. To get the most ben­
efit from these ideas, you will also have to take time and effort,
and be willing to develop yourself through learning from your
I was very fortunate to begin to recognize the internal con­
trols of the market, or market discipline, from the outset. Be­
cause market discipline is internal to the market, versus other
controls which are external, it offers an immediacy in response
time-it is always there first. If one deals with market discipline
successfully, it pushes back the need to depend on external disci­
plines or controls.
Being internal to the market, market discipline is imposed upon
everyone who interacts with the market whether they like it or
not; in fact, whether they know it or not. There are two other
types of controls being focused upon by people in the industry,
but they are external controls, and not really necessary if market
discipline is understood.
The most important of these external controls is what I call
trader discipline: a focus on emotional control as it relates to nega­
tive ( or positive) events in the market. It is a tough discipline, as
people tend to trade themselves versus the market. That, in my
opinion, is the wrong focus. Every trader needs this type of dis­
cipline, but I've found through the years that it was best for me to
be very active, and that the activity tended to push me through
any areas relating to emotional control. Shortly after my second

year of trading, I realized what some of my many character flaws

were, and I decided to rectify them, so I could improve my trad­
ing results. After six months of hard work I had made absolutely
no progress (and not much more money, either). I then decided to
accept my faults and neutralize them by working with situations
where they did not come into play. By featuring the things I could
do well, and accepting my shortcomings, I had exponential gains.
I call this industrial indifference: feature what you do best and be
The other discipline is the financial one that has engulfed the
industry: the emphasis on money management. The very fact
that it is endorsed by all segments of the industry (including le­
gal, regulatory, management, and the printed literature) means
that it should not be a trader focus. It should be present to a
natural degree, and one definitely needs to be aware of it, but
anything beyond that is inappropriate. Financial discipline tends
to creep forward, engulfing more of what you do, and in general
interferes with the clear logical thinking needed to trade. It makes
managing your trades an all-foreground program, as financial
controls take the place of background. Every opportunity is treated
the same way, when in fact no two are alike. Overemphasis on
financial controls is a sign of a lack of understanding and self­
confidence, and leads to a false sense of security.
The same is true in any area of business. As an example, a
young and growing business has a banking relationship at the
outset wherein the bank believes in the company and its manage­
ment. The relationship often does not fit all the bank's risk poli­
cies (which are their financial controls) as set out by the loan
committee. As time goes on, and the business gets on its feet, the
bank becomes stricter about its rules. Making a new business
satisfy all the requirements shows little or no interest or confi­
dence by the bank, and forces the management of the business to
focus on satisfying the bank near-term instead of on growing the
business and its industry.

As individuals, we all are different, and will not necessarily

fit a particular style of trading. Market disciplines are the most
natural and immediate form of control available. It does not make
sense to focus on trader or financial controls, which are artificial
and external. I realize that some need more financial controls,
just as some need to overcome themselves. I just want to point
out that these types of problems are out there in all industries and
are external to the businesses themselves.
Working with market disciplines, or market control, does not
imply that we now have control over the markets ; they are uncer­
tain. It means that we can gain control in a business sense. We
have an understanding of what we are trying to do, and we have
an understanding of what the market is doing. We can get objec­
tive answers to our questions. For example, a car maker might
ask, what is the condition of the car market today, and what is our
market share in the compact market? How is our new model
moving compared to last year ' s model and to our chief
competitor's? Has our new advertising the past month shown
any benefit? A trader would ask, where is the soybean market
now? Has there been any change in its condition in the past week?
If so, what? What type of opportunity is it? What is the best way
to trade it? How can we tell if we are right or wrong? These
types of questions need to be answered in order to be successful,
and this book will provide the basis for doing so. Successful
traders have always done this subjectively, so it is not an impos­
sible goal. Objectivity, which can only come from a complete
understanding of what we're doing and what we're working with,
will allow more traders to achieve the same goal.
We as traders need to understand not just the workings of the
market (which is what I mainly focused on at the beginning), but
what it does, what it does it for, and how it does it; what it means
to call the market a self-organizing system, and what the orga­
nizing principles are. We need this foundation in order to gain a
complete understanding of market discipline.

Understanding the market's purpose is the key to unlocking

all this. This basic insight eluded me for a long time. My ap­
proach has always been from the ground up, trying to merge prac­
tical results into theory, rather than starting with a theory and
trying to fit my observations into it. I think the fact that I made a
persistent effort was more important than any one particular idea.
It was my varied experiences in using the developing profile sys­
tem that revealed the most. I could always seem to find new ap­
proaches to keep the discovery process going. The constant
changes taking place in the market really brought focus to the
situation. It forced me to continually do things differently, and
finding the same answers over again in different ways brought a
degree of confidence that I was on the right path.
Let's take a look at some specifics. From my beginnings as a
trader, I have always tried to work with a consistent and recur­
ring aspect of market activity. This ties the trade opportunity to
the market and to my knowledge base, and the trade potential is
therefore much easier to manage on its way to maturity. For
instance, when I first got to Chicago, the markets were very ac­
tive and the pits were generally full. I had a really hard time read­
ing the market activity when the pits were not full. Being more
of a position trader, I began to notice that most of my profits
would dwindle or disappear after the pit emptied out. I saw that
the pit emptied because the good traders could sense a lessening
of directional activity through the order flow, and that it filled
again when there was a new opportunity. The market would al­
ways go the opposite way as the pit filled back up. After a short
time I realized that I should exit my trades when the pit started to
empty out in order to hold on to my profit.
As with the last trading situation I described, I have taken
advantage of this same situation over and over again during my
35 years of trading. Obviously, my ability now after years of ex­
perience to recognize the market conditions that precede the trade
is the key to finding it again. The essential ingredient is the
market's background, which is one of high efficiency. With this

background, any inefficiency that causes the market to move in

either direction is eventually absorbed into the background of
efficiency. Also, with this background, the market tends to move
in the opposite direction from the one it had been moving in when
reaching efficiency. Efficient markets are trading markets, where
the inefficiencies run out of gas before they can change the back­
ground, causing the market to move in the opposite direction when
a vertical move ends.
Another experience taught me to recognize another type of
background. When I started out, I traded all the commodities that
were offered by the exchange, rather than just one. I noticed one
day when I was standing in the corn pit that there was a loud roar
coming from the soybean pit, and that runners were scurrying to
the brokers. The floor was totally focused on the attempt to move
the market higher. The price at the time was about 2.52 a bushel.
About 45 minutes later, I noticed that the price wasn't any higher
than it had been when all the activity started. It seemed to me
that all the king's horses and all the king's men could not make
the market go higher. I also thought it would be difficult for it to
mount another charge of equal magnitude, and that I ought to go
over there and sell the market. And, in fact, the sale worked out
Once again, this is a trade that I've made over and over again.
The issue here is that the market was at an efficient price. Gener­
ally speaking, when the market is in a state of efficiency, it is
going to move vertically out of it at some point due to some real
or perceived change. When the market has made a good attempt
to move vertically in one direction, and fails, going for the oppo­
site direction is one of the easier trades to make, because prices
will either move in that direction or at worst stay the same.
In today's markets, I have noted that this condition often comes
about when the market is focusing on a government report. There
are two possible market conditions prior to the report. In one
situation, everybody is generally getting flat, and the market has
reached some state of efficiency. If the report comes out and it's

deemed to be bullish, and the market barely opens higher and

then starts breaking, then it's the same situation as the bean trade
all over again.
If the day before an important report that everyone's looking
forward to is an active directional day, it can make the report
redundant, because in this case the market has not reached effi­
ciency prior to the report. When a report is issued in an efficient
market, the market will go one of two ways: if there's no rally on
a bullish report, it gives the other direction all the momentum. If
the market is inefficient and moving directionally prior to a re­
port, generally the condition will prevail regardless of the report.
This is again illustrative of the importance of understanding the
There's something in common among the trades mentioned
here and the bean trade example in the first chapter. They all
illustrate what I mean by opportunities that come internally from
the market. The ideas for the trades did not come from anything
that I had read, nor did they come from any particular study, nor
from technical analysis, nor from fundamental analysis, nor from
the person standing next to me, nor from a news letter, nor from
a news flash, nor from a squawk box that detailed what commer­
cial was buying or selling. They were real trading situations that
developed from within the market, and they were recognizable
as characteristic of some type of opportunity. Right now I am
only trying to make the point that there is a great difference be­
tween internal and external approaches to trading. This in itself
is not startling news, as most traders like to have good floor sup­
port from their brokers. But mere closeness to the floor does not
have any value in and of itself. The closeness must come from
your own program, and that calls for your program to be aligned
closely with the workings of the market.
Over the years, I have tried to take these kinds of practical
observations and translate them into theory. But in my case prac­
tical success did not translate immediately or automatically to a
correct theory. In academic circles, accepted market theory had

cast the market as being statically efficient, and hence implied

that traders could not succeed in that environment. (The idea be­
ing that a trader succeeds by taking advantage of a situation where
price has moved away from value. If price immediately changes
to reflect value, there's no opportunity.) I had seen a great deal
of success in the markets and this focused me in the opposite
direction, away from the idea of efficient markets. I started to
look elsewhere for the answers, but progress was slow. I felt it
was necessary to understand the purpose of the market, and that
did not seem to be expressed anywhere by anyone. I spent a good
deal of time trying to find it, as you will see later on.
I mentioned earlier that one potential source of wisdom I con­
sidered were the many "sayings" about the markets and trading.
These sayings tended to be very practical in application, yet al­
ways seemed to defy logical explanation when I attempted to pin
down just how they worked. Looking at the market within the
context of accepted market theory and of practical sayings, it
would be fair to say that the general workings of the markets
were unknown and unexplored. Supporting this claim is the fact
that even the practical everyday traders used external disciplines
to control their trading-a situation that is still very much the
case today.
My insights arose in large part out of working with the Mar­
ket Profile notation as it evolved over time. Many readers will be
familiar with at least the basics of Market Profile; for those who
are not, let's take a quick look at it.
In its raw form, data about a market is just an unstructured
stream of numbers, recording the various times and price points
at which buying and selling takes place: the sort of information
recorded on a ticker tape. In an effort to gain a visual overview of
price activity, traders came up with the bar chart, in which a ver­
tical bar records the range of prices for some fixed time interval.
Many traders use daily bar charts; for our purposes, that time
interval is too coarse. A popular intraday time interval, which
became the foundation for Market Profile, is 30 minutes.

Figure III-I. Exploded profile chart for Dec. LIFFE Bund, Nov. 6, 1996

The problem with a bar chart is that it captures only one

dimension of market activity: the vertical. Because the horizontal
interval is fixed, there is no variance allowed in the display. The
profile chart is, as we shall see, much more two-dimensional, in
that it allows for horizontal variance.
The easiest way to understand a profile chart is to start with
each 30 minute time period shown as a separate column, similar
to a bar in a bar chart. In Figure III-I , the price data for the Dec.
LIFFE Bund for November 6, 1 996 is displayed in this fashion.
(The asterisks are inserted by the Market Profile software, and
need not concern us here.) In Market Profile, each half hour of
the day is assigned its own letter. The LIFFE Bund begins trad­
ing during "1" period, so "1" is the leftmost column for Novem­
ber 6. The next half hour is called "m", and so on through the
alphabet; the half-hour following "z" is "A".
Now we're ready to create a daily profile chart. (The result is
shown in Figure 111-2.) The starting point is "1" period; its range
is from 1 00.3 1 to 1 00.40, and "l"s are placed in the correspond-

Figure 111-2. Daily profile chart for Dec. LIFFE Bund, Nov. 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 2 1 2 3

Figure 111-3. The Bell Curve

gives a clear indication of the horizontal movement of the mar­

ket. If the market spends its time in a small range, the result will
be a short, wide profile, in which the horizontal aspect predomi­
nates. A fast-moving, directional market will create a long, nar­
row profile in which the vertical clearly predominates. (For ex­
ample, periods "z" through "E" in the last profile in Figure III-2.)
This brings out the vertical dimensionality of the market, in con­
trast to "1" through "y" periods on that day.
One feature of this chart deserves some comment. When we
first began working with profiles, we started a new profile each
day. This had some justification, since the global, 24 hour market
of today was in its infancy, and each day on the floor had a dis­
tinctive beginning, middle, and end phase. As we move through
this book, developing our ideas, we' ll also show the correspond­
ing evolution of the profile notation.
The other aspect of profiles that should be brought out at this
point is their tendency to fall into a pattern resembling a bell­
shaped curve. The bell curve, which is at the heart of much of

statistical theory, arises in situations where we' re studying a quan­

tity whose value is influenced by a number of contributing fac­
tors over a large population. For example, if we were to measure
the height of all the men in the country, and make a bar chart of
the result, the chart would form a bell-shaped curve, since height
is influenced by a host of genetic and environmental factors. Of­
ten the situation in the market is the same, as many small influ­
ences on each of a multitude of traders act to form each person's
opinion of a good place to buy or sell.
Figure 111-3 shows a typical bell curve, with some of its more
important features highlighted. If we think of this curve as a bar
chart of heights (where each bar is only one pixel wide), then the
center value, the highest point on the curve, represents the single
most common height. This value is called the mode. For a bal­
anced curve such as this one, it is also the mean, or average,
height. If we go to the left and right of the mean, far enough to
enclose approximately 67% of the data, this distance is called the
first standard deviation. It's shown as a dark area in the center of
the bell curve in our diagram, and marked with the number " 1 ."
If we go out further from the mean, far enough to enclose ap­
proximately 95 % of the data, we get the second standard devia­
tion; adding the third standard deviation encompasses approxi­
mately 99% of the data. In statistics, the size of the standard de­
viation is used as a measure of variability; we've found it useful
in a similar vein when applied to profiles.
Look back at the profile for Nov. 6 shown in Figure 111-2. If
you tum the book on its side, so that the left column of the profile
becomes the bottom, the resemblance to a bell curve is clear.
This profile is particularly close to the classic shape, with its mode
almost exactly in the middle and the volume distributed evenly
above and below the center in the characterstic shape. We'll ex­
plore the implications of this resemblance, and what it means
when the market departs from it, as we develop our theory of the

Looking for the Purpose of the Market

As I began to work with profiles and develop my theory, my

first pronouncement was that the purpose of the market was to
facilitate trade, i.e., to try to do the most business possible. Read­
ing the market from my background as a trader, I was not yet
aware that trading activity within a constricted range is a sign of
efficiency, or that the fast action on the extremes of vertical moves
reveals a high degree of inefficiency. What I did notice in a prac­
tical sense was that the market would not go where it could not
trade. When it tended to hold and accept an area, that area proved
not to be an extreme. If the market was moving directionally,
then I would assess the amount of activity as being increasing or
decreasing; if it was increasing, I'd stay in or go with it, if de­
creasing, I would get out or go against it.
The important point is that I was using information coming
from the market. But, although the theory of trade facilitation
was useful in practice, it was a long way from capturing the pur­
pose of the market. Looking back, this theory was more descrip­
tive than analytical in nature, but it did succeed in giving a good
reading on continuation of directional change.
As time went on, I refined the concept of vertical movement
as it relates to trade facilitation to declare that the purpose of the
market was to distribute. This was the channeling of trade facili­
tation (capital flow) into a medium of expression (markets). Ac-

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

day would be extremely low. This condition would usually have

persisted for a week or so, to the point where I was concerned
about my ability to find any well-paying opportunity. Most of
the things I did would just sort of die on the vine. At this point,
more often than not, I would start off the day trading what I thought
was a good opportunity. The market would immediately go my
way, and I would quickly get out, having been conditioned to do
so by the quiet market. It would never fail that the market made
my small expectations look foolish.
At this point, I was totally unaware that efficiency was the
set-up for change. From a practical viewpoint, market efficiency
was not in the vertical price action, which is what I was looking
for, but in the horizontal, offering very little opportunity for trad­
ing profit. I tended to avoid horizontal price action as dull, a market
with nothing going on, and tried not to trade under those condi­
tions. As time went on, the fact that the market had what ap­
peared to be two phases, dead and then vertical, began to register
in a theoretical way. I began to reassess my earlier rejection of
the generally accepted theory of efficiency, as it seemed that I
had recognized efficiency in my practical trading. It was defi­
nitely a market condition, but not a constant one. The market
was not statically efficient, so its other phase had to be non-effi­
ciency. The market appeared to spend most of its time being
non-efficient (vertical), and shorter amounts of time being effi­
cient (horizontal). The efficient periods were the most difficult
to trade.
It took a longer time to notice that the market was always
trying to get to efficiency; that efficiency, in fact, was always
present in the market to some degree-and, conversely, that the
inefficiencies also were never entirely absent. The varying ratio
of these two factors is what makes the market dynamic. Being
dynamic means that the market is always somewhere between
99% efficient and 99% inefficient. And, most importantly, trying
to get to efficiency is the market's goal or purpose. This whole

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Figure IV-I. 30-year Bond futures for late June and early July, 1 996

fundamental concept can be summarized in two words as dynamic

To illustrate the market's process of moving from inefficiency
to efficiency, consider the chart in Figure IV-I , which shows 30-
year Bond futures for early July, 1 996. In this example, we can
follow the life cycle of an inefficiency, and see how it eventually
gets snuffed out by horizontal activity, preparing the way for a
new inefficiency to happen. The second profile from the left, for
June 28, shows inefficiency predominating, as the market made
a strong vertical move. The market then begins to trade more or
less sideways. We refer to the fat part of a profile, where most of
the volume is concentrated, as the first standard deviation. Look­
ing at the profiles for the 28th and 30th, the first standard devia­
tions are in the upper part of the daily range, while on the 2nd
and 3rd they are at the bottom. It appears, then, that the life of the
inefficiency has been taken out by the consistent average activity
of these four days. In viewing the background, you can see a
change, and a completion, so you know that whether you have a

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Figure IV-2. Bond futures profile showing market development

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.

Having a trading system as your goal would mean working for a

limited purpose. A deep understanding of the market's dynamic
functionality leads to control over your interaction with it. Build­
ing an objective data base where any question can be asked or
answered is far superior to having a set of trading rules.
On realizing that the purpose of the market was to move to­
wards efficiency, I felt that most of what I had done prior to this
point could be understood as a subjective reading of efficiency­
subjective because I had yet to gain a full and complete under­
standing of the market. During the discovery process, insights
gained from working with Market Profile had begun to reveal
clues that seemed to dovetail with everyday experience. In the
early stages of Market Profile, the fact that the market was con­
stantly trying to shift into the horizontal phase of activity was the
key ingredient in all our trade parameter classifications. Trading
experience reinforced this even further, and the ultimate conclu­
sion was that the market was always to trying find efficiency
through a dynamic process.

Efficiency and its Role in Market


Efficiency turns out to be very important for two reasons. First,

it creates the most readable vertical reference in the market. It
generates a fair price, which is the base from which the market
can evaluate any change. Even as the market moves vertically, it
will constantly try to find efficiency, and therefore bits and pieces
of horizontal development can be found throughout the vertical
movement. These represent a reference from which further verti­
cal movement is evaluated by the market participants. Then, as
horizontal trading becomes more predominant, a more concen­
trated appearance of efficiency becomes evident.
Second, an aperiodic cycle of activity repeats itself as the mar­
ket moves itself into the future. Non-efficiency continually flares
up and is processed out again and again. The market shows a
continuous self-organizing capability that is based upon bring­
ing a data mass to efficiency. Each completion leads to the next
one, as efficiency reasserts itself as a natural result of the trading
process. The market processes each small episode of ineffiency
that is part of a larger move; then, when the move is complete, it
brings the entire large-scale data mass to efficiency. Efficiency
represents more of a certainty, while the vertical moves are an
expression of uncertainty. The net effect is a self organizing sys­
tem that is in control of market activity and only needs to be


Let's take a closer look at the self-organizing process inherent

in the market. The initial vertical market movement can be thought
of as gathering or attracting those who want to become involved.
In this way the market begins by searching for a vertical range
from which to apply or define efficiency, and then begins to pro­
cess out the accompanying inefficiency. Thus, the market's pro­
cess has two distinct stages, with the vertical occurring first. The
entire process is dynamic and not necessarily easily readable; the
data mass that is brought to efficiency is always going to be ir­
regular. For example, too few or too many participants may be
attracted in the initial phase. Too few leads to further gathering
(i.e., more vertical movement); too many means some need to be
processed out, producing extended horizontal or opposite verti­
cal activity.
Fundamentally, one says that the market has or has not priced
out the users . Market observers in the media provide the "ex­
cuses" for price moves that we're all familiar with: "profit tak­
ing," some news event, a statement by an authority, and so on.
Experience has shown that where there is a directional stimulus,
and nothing happens, the opposite direction generally ensues,
showing that you already have too many participants in the mar­
ket. In either situation, the market is always moving towards ef­
ficiency. The impulse towards efficiency is an unrelenting force
that is always present, always active, always trying to get con­
trol. It always accomplishes some part of its goal, so, when it is
not present to any large degree, the suggestion is that the market
is not done vertically. This is what allows readability-this is
what the intuitive trader picks up. For instance, most floor trad­
ers will tell you they try to make the hardest trade rather than the
easiest trade; if it's easier to sell, it's usually the wrong way to
go, and vice versa.
Let's look more specifically at the market cycle. The market
first tries to establish one vertical reference point, a point that is
very hard to read in the present tense, due in part to the volatile
nature of the market at this stage, with its many ups and downs.

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

to the outer reaches of the ranch boundaries, trying to push the

outlying cows and calves closer to the middle of the ranch. If
some of the cattle were on the adjoining ranch, I'd have to move
further out in the gathering process. While I was doing this I was
looking at the condition of the cattle. If I saw four or five cows
with only two calves, or four or five calves without cows, I knew
conditions were not perfect. This did not give me a reading on
the entire herd, only an indication, the answer to which might be
over the next hill. I'd be getting some insights as to the overall
condition of the cattle. It would be hard to rely on this small
amount of information or make a decision based on it, but still it
could be very significant.
As we moved more towards the interior of the ranch, or to­
wards the natural location of the corral, and I gathered more of
the herd, my information would become better and more reli­
able. Finally, in getting the whole herd into the corral pasture, we
would definitely know what the condition of the herd was. We
could see how many cattle we had versus what we turned out,
what the cowlcalf ratio was, what the condition of the cows and
the calves was, and we could begin to make plans for next year,
which would be a new cycle of development.
The market organization process is very similar to cattle gath­
ering. The initial gathering at the edges of the ranch corresponds
to a dynamic vertical movement in the market, whose purpose is
to draw in participants. The vertical movement is seldom purely
one-dimensional; it also means the beginning of the effort to move
towards efficiency. The herding of the cattle towards the middle
of the ranch reduces their range of movement, just as the market's
vertical range of movement decreases as it becomes more effi­
cient. The gathering of the herd in a constricted space corresponds
to a more horizontal market where we can get a better reading on
its condition. As we get more of the cattle gathered, from a quar­
ter, to half, to three quarters, we get increasingly more reliable
information as to what the year was like, and are able to plan
ahead for the next year; as the market approaches efficiency, we

have a solid reference point against which to measure future

To summarize our discussion so far, efficiency plays a perva­
sive role in the market when looked at dynamically, since it is
always present to some degree. Efficiency is the only market in­
ternal that can be read throughout every phase of the market cycle.
In reading the degree of efficiency, you are reading the degree of
horizontalness. A reading of efficiency is the information source
for all market disciplines, as it is the basis for processing the
vertical out of the market.
We' ve demonstrated the central role of efficiency. Now we're
going to discuss it in a bit more depth, and define a complex of
related concepts that will help us understand how efficiency af­
fects the market and how it communicates itself to the trader. In
the process, I ' ll be talking through some of the insights that came
from my experiences as a trader.
Note that in practice both the vertical and the horizontal are
actually good trading references. If we examine the extreme ac­
tivity of the market, we would conclude that near or total verti­
calness would be the extreme of non-efficiency, and that near or
total horizontalness would be the other extreme of efficiency.
Since they both represent the outer reaches of the market, these
extreme conditions signify beginnings, and one should be alert
for that. Being dynamic, the market tends to vacillate between
these two conditions. Neither the vertical nor the horizontal ever
disappears, but one or the other is the dominant element in the
market at any given time.
Market condition could logically be expressed in either di­
mension alone, or in both. The form we choose can be whatever
is most convenient for a given study. We must note, however,
that one would want the expression of market condition not only
to be a meaningful and usable communication, but to offer the
possibility of optimal control of trading as it relates to measure­
ment. When the market is moving horizontally in a small range,
that is, when it is highly efficient, the penalty for a wrong deci-

sion on direction is small. When the market is in the midst of a

volatile vertical move, then the potential for damage from a wrong
decision is much larger. Therefore, we' re more interested in study­
ing the horizontal, and expressing the market's condition in terms
of it.
I have always approached control by first establishing the outer
boundaries of possibility; control then has to be within them.
Consider a market that is highly horizontal versus one that is
vertical. In the first instance, both boundaries have been estab­
lished through time in a small range; in the second, it's much
harder to establish a usable constraint. The dimension of non­
efficiency is extremely hard to confine, since it is not bounded in
the present tense. It is very unstable and does not lend itself to
internal measurement. Its composition is not that of consensus
but that of aberration. It's very abrupt, and forces exposed trad­
ers to react. Each vertical move is unlike any other; therefore, the
change towards efficiency is extremely hard to perceive, and is
not of much value as a base indicator. It is safer to use the hori­
zontal: efficiency, being accepted as consensus over time, has
the very characteristics that lend themselves to accurate and mean­
ingful reading of changing market conditions.
Rather than being the impediment to trader success, efficiency
is the very reason traders can make money. It's what a trader
intuits is lacking in the market and thus takes advantage of. While
it's there, it provides a basis from which to sense and evaluate the
degree of change.
This points up the need to incorporate the concept of change
being relative rather than absolute. Traders' expressions of the
market being tight, tired, heavy, etc. are based upon reference to
the horizontal state of the market. Change is related to efficiency
in principle, and the traders' expressions are degrees of interpre­
tation. In understanding the market as dynamic, one needs to think
not of bringing a single inefficiency to zero or removing it from
the market, as is the current tendency; rather one needs to think
of reducing its degree of influence as it relates to a total base,

which is made up of a varying degree of both horizontal and

vertical influences. To attempt to measure volatility is techni­
cally incorrect; one should be looking at the degree of efficiency.
Volatility is vertical and hard to measure except by measuring it
at the changing outer limits. In a volatile period the increment of
change is coming from the outside into the market rather than
from the inside out. More accuracy and better trading would come
from measuring efficiency.
Liquidity is classically thought of as indicative of the depth
of a market. Its real value is informational to market participants.
Liquidity is a form of counter-directional control in a market. It
is a horizontal functionality, a platform that increases the already
horizontal nature of a market, or decreases the vertical nature.
For most traders, liquidity represents a method of reading the
degree of efficiency in the market. Liquidity changes as markets
move from the vertical, towards the horizontal, and into the effi­
cient zone of development, so liquidity does in fact reflect effi­
ciency. Unfortunately, it is not a constant force, and can and
does move within itself, making it a difficult read at times.
Randomness and liquidity are really one and the same. Ran­
domness means that the preceding order has no relation to the
following order. Randomness is in effect, then, when nothing is
really going on. Liquidity is a force that is an extension of ran­
domness. Liquidity expands the boundary of randomness by al­
lowing successive directional orders to be neutralized. Locals who
make a market have in the past received an edge, and should
retain the edge if the market stays in the random zone. The more
liquidity, the stronger the bounds of randomness, and the harder
it is for non-randomness (directionality) to emerge. This relates
our notion of liquidity to the classical one of depth in the market.
Non-randomness is the start of something directional (vertical)
and the shift of control to new forces. The stronger the liquidity,
then, the more reliable a change is when it does occur.
Liquidity can be confined to a certain zone or portion of the
market's range. This type of liquidity in the market may create

choppiness and a more vertical horizontalness in which the mar­

ket has ups and downs instead of just stopping at a particular
vertical reference point. Another type of liquidity comes into play
as the market moves directionally, opposing the market every
tick of the way. A third way in which liquidity enters the market
is when prices go to truly unusual extremes, so that they then
become references for participants to trade against.
As liquidity lessens, you lose the readability of the market
because it becomes more volatile in a random way. Liquidity can
no longer be used to gauge efficiency. In other words, a highly
liquid market can also be thought of as highly efficient, but an
illiquid market is not necessarily inefficient. There was formerly
a link created by the floor trader who helped provide liquidity
and who was reading efficiency. Indirectly, all this is expressed
by your fill and by the fast market indicator you get on your screen.
Most traders would agree that when they get a bad fill the
chances of winning on a trade are higher than when they get a
good fill. I had a good example of this many years ago, when I
shifted to be more of a go-with trader. Com was called a couple
of cents lower and I decided to sell the opening. I put my order in
and the market opened close to and limit down, and quickly
bounced several cents off this base. Naturally I was filled at the
limit. If I had known it was going to be limit down, I definitely
would not have sold it. I now was in a position I surely did not
want to be in, and one that I could not do much about. I still felt
that I was right, but I was very uncomfortable. But I was with the
direction of the market, and several days later had a nice profit.
This corresponds to the floor trader who always notices that the
easiest trade to make is the wrong one: if it's easy to sell, it means
there are lots of buy orders coming in, so selling is a bad idea.
I have learned a great deal about trading from the largest or
most dominant trader in the pit or arena, from the type of activity
that really represents control of the market for that moment. The
market is not random in these circumstances, but has a known
dominance, where dominance is defined as a directional force

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

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.

Normally, traders read dominance on a relative basis versus

efficiency, efficiency being the standard from which change oc­
curs and which it can be relatively measured against. Again, when
you as a small trader get a good fill, you' ve probably noticed that
the trade always turns out a loser. You expected the market to
move directionally, as all your indicators were in favor of it. You
put your order in, and you got a good fill, because the market
really hadn't responded to your indicators at all. Your indicators
did not break the bounds of liquidity, and the market, having seen
the failure, was going to go in the other direction. This is an
example of a subtle information flow in the market, just like the
noise factor in the bean example I gave earlier.
The intermittent zone between phases of dominance is a very
difficult area to manage and interpret. It is a lull or a pause in
directional activity. The market activity during a lull tends to be
counter to the dominance, and it's difficult to judge at times when
the lull itself has turned into a new dominance. Also, one begins
to anticipate it occurring as the markets move directionally faster
than normal. The tendency is to get out after a rapid move and
take a profit, with the idea of getting back in during the lull-but
in the best of situations, the opportunity to get back in just doesn't
occur very often. It is necessary to have a good understanding of
the market's background in order to keep control.
During the past several decades, as markets have grown in
importance and attracted more participation, changes have taken
place that have affected what are mistakenly thought of as mar­
ket internals like support, resistance, retracements, trend lines,
etc., and the effectiveness of ordinary trading decisions and fi­
nancial controls. In the past, every vertical reference was severely
tested by liquidity, and it, being horizontal, made the vertical
internals effectively horizontal as well, since the liquidity at the
reference point was what made them hold. In the old days, a flare­
up of uncertainty would be assessed as to degree by the liquidity,
and was automatically traded against most of the time. Thus, in­
ternal levels could be traded repeatedly. Now, the internals have

a different meaning, due to the lack of horizontal testing from

In today's markets, any unrelenting directional force is essen­
tially free and unrelated to anything that has gone before, and
there is no attempt by the market, as there was in the past, to
create such a relationship. The "internals" we listed above are
really externals, in that the market is not trying to produce them;
the market is trying to find efficiency, and they are a side-effect
of the market's effort to process out inefficiencies. In removing
inefficiency, the market leaves trails or tracks. These trails or tracks
do not relate to the next flare-up of inefficiency to come into the
market. But, when you have floor liquidity, it is injected into this
process, and these so-called internals found their meaning basi­
cally because people thought they would. Changes in liquidity
and dominance have sent the market back to its fundamental base
of processing out inefficiency, which they previously had hid­
Basically, the market has removed the meaningfulness of domi­
nance and liquidity; both need to be redefined in principle. To be
useful, any measurement of a quantity like dominance has to be a
reflection of the market's single unrelenting purpose. It's the
degree of efficiency that provides the meaningful measurement,
as it has all along for the subjectivelintuitive trader. It provides a
background/foreground basis for trade determination, as well as
being the only true market internal. It is the highest form of con­
trol a trader can hope for. And, as we said early on, internal con­
trol is basic to all forms of business. It represents a sound busi­
ness principle, one you have to have to succeed.
Let's take a look at the commodity market's change through
the years, and classify it broadly in terms of efficiency or non­
efficiency as a base characteristic. In the early 1 960's the market
tended to be more efficient, so much so that the percentage of
efficiency was a good fraction of 1 00%. This condition allowed
the market to be in control of itself-short term changes in effi-

ciency were traded out fast, and there was no real internal imbal­
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
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

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
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

more in a week than I used to get in a year. My current program

is composed of exactly this. Simply, the more I see, and the
more I do, the better my chances for success .

How the Market Defines Itself

Producing efficiencies is the way the market continually de­

fines itself. Efficiencies can be highly concentrated , as when the
market is caught in a small trading range for weeks at a time , or
fragmented, as when small horizontal patches show up in the
middle of extended vertical moves . To be able to read the market
objectively requires a screen display or print-out that can faith­
fully represent the underlying process in a readable way. We need
to start with the market's most fundamental definition of self, its
dimensionality, the way it can be measured and recorded. In
moving beyond a simple ticker tape or list of numbers to a graphi­
cal representation , it's critical we be able to view and understand
the internal market organization unfolding .
Graphically, then , we want to catalogue the market's process
objectively. The first requirement is to establish the dimensional­
ity of the market. Second, an objective display mechanism needs
to be found. This can't be imposed from the outside , since it has
to have the capability of freely and completely expressing the
dynamics of market activity.
Looking at the market from the viewpoint of efficiency, if one
answers no to a static condition , believing the market to be dy­
namic , one would have to conclude that the market would both
be efficient and non-efficient. From a practical view, you would
say that it has two dimensions , a vertical (price) and a horizontal


(time) . In bringing both these views together, the vertical would

be non-efficient, the horizontal efficient. Each of these viewpoints
leads separately to the conclusion that the market has two dimen­
sions. These dimensions are the basis of the way to measure the
Fortunately, the computer screen is set up to be at least two­
dimensional for viewing graphics . With a representation that com­
bines a vertical and a horizontal , all the data can be captured and
displayed throughout the market's development . The Market Pro­
file notation we've introduced already demonstrates the poten­
tial for accomplishing this.
Next, the outer limits of possibilities of dimensional move­
ment need to be understood . Can the market move vertically
without any horizontal movement taking place? Can the market
move horizontally, without any vertical movement? Can they
move simultaneously? Can they move not at all? The answer is
definitely yes to all of these questions . It's the mix of dimension­
ality that defines market condition. Change , then, can be illus­
trated and chronicled by dimension . Measuring dimension would
give the market an objective means of expression relating to its
condition . The general history of the market was to be mostly
two dimensional and thus in control of itself, due to the fact that
both the vertical and horizontal phases were active, with short
bursts of one-dimensional vertical activity. The market also had
its liquidity to lessen the impact of the vertical phase . In the past,
it usually reverted quickly back into the active two-dimensional
comfort zone of what can be termed moderate efficiency. In the
last few years this situation has changed, and now, as we pointed
out earlier, the one-dimensional vertical lasts longer and goes
When I first started trading , the markets were more horizontal
than vertical . Over the years this relationship has changed many
times. Change is always de-stabilizing and has to be gotten used
to. The change in market activity can always be described as a
shift in percentage of verticalness versus horizontalness within a

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

really perfect, and the market doesn't go anyplace , we know that

the potential for the trade is over. Conversely, if conditions are
barely adequate and we're getting good results , we know we can
expect much better results under better conditions .
I once discussed this problem with one of the trading floor's
favorite old-time traders , William Emory Uhlman, a member since
1 927 . He just laughed, and remarked that maybe I should have
taken a little bit more engineering in college , or done a little more
work on the farm, so I would be able to understand that wagons
are always moving faster at the bottom of the hill than they were
at the top .
In looking at market output, pit, screen , or specialist based
trading are all operationally the same. Differences in these types
of markets would be capacity, depth of participation , and so on .
Participant activity allows information to be produced and con­
veyed to those using or desiring to use the market. As traders , we
want to be in control of this type of knowledge . It is a free market
expression . In looking at market output, a better understanding
of its self-organizing mechanism is called for.
A meaningful amount of data is composed of a vertical data
mass that is large enough to have allowed the market to gather
participants . This means that somewhere within the data mass
the two vertical reference points will have been found and estab­
lished, creating a vertical base . The background pattern , or data
makeup , of these bases will always be different, due to the fact
that volatility is never the same . This , by the way, is an added
factor in the difficulty of reading the activity of the market while
establishing the vertical references . But, once the predominantly
vertical phase is done, it anchors the rest of the development,
because the market now has established a vertical base to work
within in trying to bring itself to efficiency.
The information coming from the market early in this process
is very unstable, and when the process is final the information is
very "late." It's only after the fact that we know that the bound­
aries of the range have been established. For example, a market

goes from 1 0 to 30; while trading at 30 , it looks as if it is still

going to continue moving vertically. When it trades down to 20 ,
then we can see that 30 was indeed a valid high reference. Once
both vertical reference points are in place, the market turns its
effort to trying to establish a fair price area within the vertical
range - a consensus price for those involved. This fair price area
produces more timely information because the characteristic na­
ture of its development is more horizontal . It is more readable
sooner because we're dealing with lesser volatility and a smaller
range of data. Also, more importantly, it is the most consistent
market information . All the various volatilities have been pro­
cessed out. The fair price area is a common denominator in cross­
referencing a market to itself through time as well as to other
markets , because the resultant of processing volatility out of a
market tends to be consistent. A fair price area is just that.
It is change that starts the whole cycle over again. Change
impacts fairness by calling for vertical movement away from it
in order to reestablish fairness . Or it may be that it just stops the
partial development toward efficiency prematurely, and moves
to establish another vertical reference point before once again
looking for contained development and consensus . Consensus
areas , or fair price areas , are the easiest to read and most valuable
of all market-produced reference points , in that the market uses
them to anchor vertical movement; vertical movement being what
we're trading for, since it gives the most opportunity. Instead of
the late information of the vertical price extreme in the earlier
example, the fair price area or consensus area becomes the new,
more reliable, readable extreme that serves as the basis for verti­
cal development. Only the remaining vertical point needs to be
found. Consensus is needed in order to begin the market process
all over again . And the consensus price is the market output.
The result is a true self organizing mechanism. Vertical back­
ground is varied, while consensus output is more standardized
(in a relative sense) , and therefore more readable. Consensus
output allows consistent readability, which is the best basis to go

forward with. When we combine the free expression of dimen­

sionality with the consensus output on an objective data screen ,
it's only then that the market defines itself. It shows us what it
did, what it is doing and how it has changed.

Capturing Market Data

The purpose of capturing the market on a screen is to put it

into an objective format. Just having the data on a screen is not
enough. The market is two-dimensional, in the sense that it is
vertical and horizontal and the data representation needs to re­
flect this fact. The test is to be able to see independent movement
in both the vertical and horizontal dimensions. If you can, you' ve
achieved your goal.
Most objectified screens have a forced non-varying movement
in the horizontal due to the use of chronological time. For ex­
ample, if the market in development of the horizontal should have
shown only three slots of usage (because no price was hit in more
than three half-hour periods), and actually shows five, just be­
cause five was the chronological time span, you have not accom­
plished your goal of objectively displaying the market. In fact,
you have a one dimensional data base, and it's therefore entirely
subjective, since it cannot faithfully represent the two-dimensional
aspect of the market.
It is very important to understand the proper use of the hori­
zontal and vertical axes in developing an objective graphical rep­
resentation of the market. It is logical to assume that the market's
two dimensions, the vertical and horizontal, would fit with the
screen's capability for two-dimensional display. The vertical axis
fits, because it will record any vertical price that the market uses.


The horizontal axis presents a problem because it's normally as­

sociated with chronological time, which proceeds at a fixed pace.
What is time? We naturally think only of chronological time
since its use has become so ingrained. But in the case of market
definition, it is totally inadequate . Do we really need chronologi­
cal time for order, or do we just automatically assume so?
Development, which is horizontal, is the real market time.
Development begins with initiation of a vertical move that has to
be brought to efficiency. It continues after the establishment of
the vertical boundaries (outer limits) , when the market shifts into
more of a horizontal phase. This activity cannot be forced to
move in lock-step with chronological time. Forced chronologi­
cal time does not allow for free two dimensional expression. It
makes the data one dimensional, which leads not only to repre­
sentational problems, but to control problems as well.
Chronological time has no relationship to the market's devel­
opmental process . The market's development is almost always
inside of an established vertical range, and on that basis is hori­
zontal , because the vertical is not growing . The development of
efficiency represents the time clock of the market. If develop­
ment is interrupted , the market can move to extend the vertical
and then start the process towards efficiency all over again. Re­
gardless of the circumstances , we must look to development as
the timing mechanism for the market: development begins , is at
1 /4, 1 12 , 3/4, and is finally completed. The progress of develop­
ment is shown in the proportion of horizontal slots used versus
those available , where availability corresponds to chronological
time . (See the discussion of profile in Chapter 3 , pages 29-30 .)
This concept represents a huge step toward tradability, since
traders need to fit their trades to a naturally occurring market
event, rather than to outside parameters . A negative effect of
using chronological time is that the data base is forced into a
vertical mode, which , with a vital dimension of information sup­
pressed, makes definition and control extremely difficult, since

efficiency is very hard to recognize in a vertical presentation of

market activity.
False assumptions have caused a lot of financial wreckage,
not only in our industry but others as well. What has been false,
and is false, is that technical analysis on a one-dimensional data
base can capture the essence of what happens in the market. This
type of analysis, which has been portrayed as objective, has never
truly been so. There is evidence supporting this contention within
just the short passage of time since I started trading. There has
been no appreciable increase in favorable results within our in­
dustry compared to the past, notwithstanding the advent of com­
puters and the influx of very bright technical people from other
fields. This is not saying that individuals have not done better; it
is that, if we had objectively conquered anything, general results
should have shown some improvement. While our industry has
grown both domestically and overseas (a factor that tends to keep
the percentage of success down), it shows growth due to need
rather than a breakthrough of new knowledge. This problem can­
not be ignored or glossed over; it needs to be addressed in order
to find objective market definitions that will definitely improve
results and provide industry growth at a much faster and a more
sustainable rate.

The Importance of Two-Dimensional


The most important discovery related to Market Profile was

made by Mike Boyle, vice president of information systems,
Chicago Board of Trade; Bob Jirout, the head of the department
at that time, also played a key role. This discovery was the data
entry system that allowed the market to evolve naturally in mar­
ket time on the horizontal axis within the day time period. It also
made the base of the bell cur�e vertical rather than horizontal ,
allowing efficiency to be portrayed through horizontal develop­
I met with Mike and Bob in Bob's office one afternoon to
discuss developing the profile as an on-line proxy for volume
data, in an attempt to give the off-the-floor trader the opportunity
to make the same type of observations that I made on the trading
floor. The earliest volume report was released each day after the
first run of the clearing house at around six p .m . , so such a proxy
would fill a real need during the day. At that time the volume
data was broken down into segments of CTI codes (Commodity
Trader Identification codes, such as commercial trader, local, lo­
cal off floor, and other) , and a volume value area of 70% was
calculated to approximate the first standard deviation derived from
the bell curve discipline . (See the end of Chapter 3 for a discus­
sion of the bell curve .) A flat presentation was the mode of dis-


play: volumes were given as numbers opposite the prices. (An

example of one of the first such reports is given at the beginning
of Chapter I.)
We planned to put the profile opposite our volume data in the
liquidity data bank report. This would demonstrate the sound­
ness of the profile method, if, as we expected, volume corre­
sponded with the profile mass; i.e., where little time was spent
there would be little volume, and where a lot of time was spent
there would be a lot. This would validate our concept that price
plus time equals volume, and would mean that the profile did
indeed capture market activity. It was, after all, a record of ac­
tual usage of the market by participants. And, in fact, our expec­
tation was fulfilled: there was a close correspondence between
the width of the profile and the volume at each price level.
Briefly, the formula for the profile was, as we described in
Chapter 3 , to use the ranges of the half-hour chronological bars,
using letters of the alphabet instead of numbers to represent the
range, in such a way that the accumulation of letters would sig­
nify acceptance of the corresponding prices in the lettered mass
of the profile. As the market traded during the day, each live quote
that increased the range of a half-hour time period would build
the profile on-line, and thus approximate the actual distribution
of price usage by market participants.
It was our intention at the meeting where the profile was de­
veloped to have the profile data mass also reflect the properties
of the bell curve, especially its first standard deviation. That is,
we expected a daily profile to look like a textbook illustration of
a bell curve, with its first standard deviation corresponding to the
70% volume value area in the LDB (Liquidity Data Bank), and
with the base being vertical rather than horizontal.
The meeting ended after about twenty minutes, and Mike said
that it would take about two weeks for him to prepare something
for us. A little before the end of the two week period, Mike was
ready to show Bob and me his ideas. He had done it a couple of
ways and I could immediately see the one that was just perfect.

We decided to go with it. The decision was visual , based on

resemblance to bell curve examples in a textbook, and volume
data in the first standard deviation was perfect proxy of the pro­
file. Because the correlation was so exact, we felt that we had
indeed captured the market.
It was much later that we added the S&P to the floor data
terminals . I was concerned to see if the relationship would hold
as far as getting a realistic profile that mirrored the volume data,
and it turned out to be as close to perfect as possible . The key, as
stated earlier, was Mike's method of data entry in the two-di­
mensional display that allowed the data to form a bell curve, which
was our main purpose. It also allowed natural market time to
evolve on the horizontal axis, a fact we were not aware of or
interested in at the time. That is, chronological time was sup­
pressed during the day, although the day and beyond were still
chronologically oriented.
The result of this type of data arrangement was to allow mar­
ket usage to determine the number of horizontal slots used. For
instance , consider a six hour trading session. There would be 1 2
half-hour opportunities (and thus 1 2 half-hour bars) on a chrono­
logical time scale. With the Market Profile data arrangement, there
would be a maximum use of 1 2 slots , but usage could be less if
no one price was hit in all 1 2 half-hour periods . The difference
would be the amount of horizontal usage on a comparative basis
to other days.
In the early 1 980 's, we were totally oriented to trading and
trading disciplines , and were looking for objective data to help
people trade . We were not aware of the deeper significance of
this finding . I am going to insert here a statement from Mike
relating his side of the story, which is quite interesting and re­
vealing .
In approximately 1 982, when Pete and I first sat down to
discuss how the Liquidity Data Bank physical presentation
might look , the computer systems in place at the CBOT pro­
vided few display alternatives . The nature of this information

and the requirement that interested parties have access to mar­

kets of their particular interest necessitated the use of then state­
of-the-art alphanumeric display terminals . ( The first PC was
commercially available sometime around mid 1 98 1 , if I recall
These terminals provided the typical 24 lines by 80 charac­
ters of display capability, and although some limited graphics
could be constructed , the computer system which supported
the LOB did not have such software support .
As a result, Pete's input as to what types of information to
display, and how the time factor (i.e . brackets) would be repre­
sented were viewed in light of this physically restrictive dis­
play technology. In addition, the time representation whereby
the brackets were collapsed at a given price level was also a
limitation of the 80 characters per line restriction . In addition ,
a collapsed display effectively made the programming easier
since the software did not need to make any determination as
to what column to place a specific bracket character.
Also , in planning the ergonomics of the display (i .e . , keep­
ing a price per line approach) , the possibility existed that the
number of unique prices would be higher than the 20 available
lines of displays (assuming about 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
1 996) , the CBOT computer system displays of Market Profile
remain in place today, via the same terminal-orientated for­
mat. While terminals are often replaced by PC 's , a terminal
Emulator operates on the PC so the user interface established
in 1 982 remains today.
As we look back on this period of time, we are going to find
that the sum of the parts was greater than the whole. The current
Market Profile methodology is something we were not even think­
ing about. It came about because an effort was being made to do
something toward more understanding of markets , to make them
more tradable. This data entry system can be and has to be used
in all creative data arrangements .

Almost all data arrangements up till now have been in support

of a search for trading parameters that are immediately back­
tested as to financial goals and requirements . Most of us never
get beyond the objective trading parameter stage , especially if
we've been successful . Our dreams never get beyond a trading
system that does nothing but print money, this being construed as
solving the market in the everyday world. In reality, because of
the constantly changing markets , this is not highest goal we can
strive for.
The new view comes more from awareness and experience
than from any direct change . This means having a market focus ,
on market disciplines related to the market as a whole , rather
than a trader or financial focus . This attitude has been able to
move our market operations to a higher plane , giving us a sound
business approach. It gives us an opportunity to understand what
we are about, and what we are working with. We can assess how
we are doing with it, where control really lies , what the condi­
tions are , and how they may have changed. The ability to answer
such questions objectively allows a whole new approach to trad­
ing , and the key to this ability is to create a truly representative
data base. This is the new role for Market Profile - as a data
base. It has the means to accomplish what no other data organi­
zation method does .
It's vitally important that any data arrangement allow the data
to be evaluated relative to its context, which lends support and
smoothness to change. By allowing the singleness of purpose of
the market to express itself in varying ways , we allow this to
happen . The data entry system can produce a Market Profile data
base that represents what the market is doing and allows the mar­
ket free expression , giving us a formalism that is true and repre­
sentative . This is using Market Profile on the highest plane pos­
Once the data are correctly organized, there are two additional
aspects that come into play. First, computers: in trading they have
always worked best in defined objective formats like arbitrage .

Second is trader control . Now, in order to be successful, traders

can work to gain control over the market process by gaining ob­
jective answers to their subjective questions about such matters
as dominance and background. Answers are available that come
directly from collected market background and foreground in­
formation , and are communicated in a uniform language or for­
mat: in terms of efficiency. This produces a framework for ob­
jectifying the market.
Let's use as an example the concept of lull introduced in Chap­
ter V. A lull is an interruption in the dominance that propels the
market directionally. As in most vulnerable situations , a deterio­
ration takes place to some degree in whatever has been going on,
and the lull is likely to be a stressful time calling for adjustment.
We can ask our data base to define it, compare it, compare dete­
rioration to when it occurred previously in this market, to other
markets , to the condition of all markets , etc . Is the lull becoming
dominant? What are we going to do when it's over? Is it over?
Why? How do we know? With dominance and lull defined by
objective market conditions , such questions can be posed and
answered .
Understanding, experience, and market differences are all com­
parative and relative . It is easier to deal with this relativity if
there is a standard data base that is truly representative . Finding
the self-organizing mechanism within the market that is depen­
dent upon the completion of efficiency was a conceptual break­
through. It would never have been possible without the data en­
try system . The details of finding it are like those of most good
things , in that the discoverer is looking for something else . Also ,
since the concept is completely out of the norm of our logical
behavior related to cataloging market activity, the eventual suc­
cessful direction had a very small chance of being pursued .
A great deal of my early data arrangement was visual . It con­
trolled what I did. It was a very limited approach because I was
trying to force the output. If the data for a day did not create a
perfect little bell-shaped profile , I would combine data until I got

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

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-

fined per minute, or per quote , versus actual opportunities that

are present in the day? How many updates do you need to moni­
tor a winning trade? First a lot of information is filtered out, and
then noise is added back in, by providing and continually updat­
ing various studies , giving the illusion of a richness of informa­
tion that is really no longer there .
The essence of floor information is to take a segment of the
activity and assign it to a direction, and then view it in terms of
one's background and experience of similar situations , rating it
as being at, above, or below normal for similar circumstances.
There is no one outright order or price in the stream of informa­
tion that is as important as background. If a trader can use this
information to establish the existence of a barrier to a directional
price movement, it makes trading a lot easier, since all the indi­
cators in that direction are going to be invalid. The goal of our
software is to allow the trader who is not on the floor to simulate
this experience by constructing a background, finding similar situ­
ations , and assessing the market's performance in relationship to
this information.
The bottom line is that, despite some differences in the output
of our software on different machines , the meaning of the output
is consistent with the data sample size being processed. On the
floor, the markets currently trade very well, due to the individu­
alistic way the traders view the information in relationship to
what they 're doing . The information provided by the software
allows traders to understand what the market is doing in relation­
ship to what they are trying to do, and thus has retained the indi­
vidual value concept.
The main reason for mentioning this issue here is to illustrate
how ingrained a sense of visual order and sameness is for most
of us . Prior to the discovery of the new output algorithm, and
immediately afterward , I did not know what I had done . It was
really a higher sense of order than what I could immediately
handle . The new output was a free market expression that above
all was consistent, and I recognized that aspect of it. All the vola-

tility had been processed out, leaving consistency. Logically, vola­

tility cannot be neatly cataloged, as in reality it does not leave
footprints of the same dimension. The result of our new algo­
rithm was an entirely free market expression , which went a long
way towards furthering our new data base concept.
The overall benefits of this data base are many and in my
opinion complete: it gives you everything you need to trade .
Opportunity can be defined and evaluated. Expectations can be
measured against reality. Experience and knowledge are the fruit
of natural occurrences . Growth of the trader control process can
begin. The ability to be in step with the market increases as the
quality of the trading opportunity improves , because the oppor­
tunity is related to natural market development instead of just
financial management. Natural market events are at the heart of
market discipline . Data arrangement with this type of result is
possible only because of the two-dit f

The Bell Curve

My interest in the bell curve began in 1 95 8 , in a statistics class

at Berkeley. A statement in the textbook about "bringing order to
chaos" got my attention. From the beginning, I wanted to use the
bell curve as the basis for formulating a market discipline . I could
see that it had many qualities that helped reveal internal market
organization. The most important was that it presented a visual
sense or feeling of what was going on . At first, I was much like
a first grader with a coloring book, tracing the outline of the mar­
ket within a bell curve , and this was a great boon to my program
of exploring and using market discipline . When the time came to
formally develop Market Profile, after I had been trading for over
twenty years , I could draw on my experience of always thinking
of market activity in relation to the bell curve .
The bell curve discipline, being a dynamic two-dimensional
data organization tool , fit the framework of my practical experi­
ence . Within the chronological day timeframe , I as a floor trader
traded according to how the market felt: was it slow, tired, re­
sponsive, tight, or what? I would compare these intuitive terms
to the profile . Each discovery always led to the next, and the
next, and allowed me to move towards a more complete under­
standing .
Statistical theory states that in a bell curve, almost all data
points will fall within three standard deviations from the mean


(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

• The market has two dynamic dimensions, vertical and hori­

zontal; the bell curve needs to have the same in order to
• The market uses the outer limits (vertical extremes) as a

base to begin the development process; the standard devia­

tions are collectors of outer data which the mean controls .
• The market brings the data to consensus somewhere within

the established vertical range; the bell curve's first stan­

dard deviation begins to develop somewhere within its ver­
tical range .
• Market development time begins , proceeds , and ends; in a

market context the bell curve develops through completion

of all three standard deviations , and ends with price in the
• When change affects the consensus , a new sequence be­

gins , in the cyclic progression of market activity; the bell

curve discipline starts a new data unit after finding a com­
plete first standard deviation , again in a cyclic pattern.
• Background data leading to market consensus is varied, di­

verse etc .; background data leading to the first standard de­

viation is varied, diverse etc .
• Market output (consensus) tends to be consistent, repeti­

tive , more of a standard than the vertical phase of market

activity; the first standard deviation is likewise standard­
ized, repetitive , and consistent.
• Location of consensus can be varied within the background

range, but is mostly limited to either extreme , or to the

middle; location of the first standard deviation when mar­
ket data is plotted in the bell curve is the same.
• Market sequence is from a more volatile vertical to a less

volatile horizontal; the bell curve organizes from vertical

extremes towards horizontal development.
• Consensus and first standard deviation are the only infor­

mation-producing moving parts in their respective environ­

ments .

This match-up has allowed me to attain a focus that had eluded

me for a long time . The disciplines of the bell curve that we
initially used for trading can be re-framed as market disciplines.
This means that the bell curve has been completely neutral within
its disciplines, in the sense that there are no harmful side effects
from using it, as it fits market behavior well enough to allow free
and natural market expression .
This single expression is simply the degree of efficiency present
in the market: a reflection of the process of dynamic efficiency.
From this , everything else follows. It means that randomness ,
liquidity, and efficiency are all the same, i n that they are horizon­
tally oriented . It means that one-dimensional vertical data bases
cannot objectify the market. It means that dominance is expressed
as non-random and non-efficient. It means that the condition of
the market is expressed dynamically as a percentage of a whole
number ( 100% ) , and that the best choice for this measurement is
the degree of efficiency. It means that background and foreground
can be expressed in the same type of measurement, illustrating
contrast between a sample and a subset of it. It means that traders
can express their trades in the same measurements for control. It
means that trader control can be internal to the market. It means
that total objectivity is indeed possible . It means that we have
found the highest point of market discipline from which to begin
to approach trading . It means that we have the path to our future .
As we explore these concepts in the next chapters , I think you'll
see how beneficial the bell curve concept is in bringing an objec­
tive background to our aid. It also is a metaphor for our own
progress, being at the outer boundaries initially, moving inward
towards the goal , and finally arriving at the single central issue
of market purpose .

Up dating Our Understanding of

Market Profile

The development of Market Profile took place over many

years . Over the course of time , changes were made, some as a
result of gaining more knowledge and some that were forced by
the market . We started at the outside rough edges of market or­
ganization and moved inward, led by the ability of the profile to
educate us visually and to represent the market through time .
The underlying reality remained the same throughout, in that the
market was able to express itself dimensionally and that it was
indeed trying to accomplish something dynamically.
Early on, we generally thought of ourselves as working to
understand development, as it could be read in its various stages.
Later, as everything we were doing seemed to lead to the same
type of conclusion, we were brought to a singleness of purpose
which allowed us to realize that Market Profile's contribution
really was going to be as a database from which market objecti­
fication could emerge , because it was able to provide the frame­
work for expressing the dynamics of efficiency.
The first thing to point out is that our approach was subjective
in its early stages . The main reason for this was that we had not
defined the market's purpose. We were not even interested in
doing so , nor, for that matter, were we interested in objectifying
the market; we wanted to trade and we were looking for objec-


tive trade parameters . We did not understand much other than

that. Although the profile did take us out of chronological time
during the day, it did not take us out in larger time periods . We
did not understand the difference between chronological time and
market time anyway. At this point, chronological time and mar­
ket time were one and the same, due to the fact that the floor
population was really in control of the capital flows. Not that
they had all the money; it's just that all money entered and exited
during their market hours , and whatever was going to influence
the market was in most instances readable from the floor envi­
ronment. There was no reason to be aware of any difference if
one was not looking for it.
To further illustrate the subjectivity of our approach at that
time , I can remember giving classes where I would be discussing
indicators , and I would weight them for that occasion . In short
order, a situation would arise were I would use them in a differ­
ent context, and I would adjust the weights . In other words , the
use of the indicators was somewhat subjective based on the mar­
ket context as judged by the trader. The markets were very read­
able because floor liquidity was very high, so when we had an
indication of direction it was usually a dominant one that either
carried on or held the general price area, giving us time to ex­
ecute vis-a.-vis entry/exit.
Our objective trading parameters arose from the discipline of
the tools used to create the profile , i.e. the data entry system and
the bell curve. We were incorporating market discipline into our
work gradually because it was there both in a conscious and non­
conscious manner, mostly due to the visual aspects of the profile.
We could see things better than we could explain them .
For the benefit of those who may be familiar with earlier ver­
sions of Market Profile , and also to show how our later ideas
refined and improved on our early work, I'd like to go back and
reconsider some of the early Market Profile concepts . Looking
first at the data entry system, and the task of creating a dynamic

relationship between the vertical and horizontal dimensions , we

used the following terms:
range extension: This was a vertical movement beyond the
first hour 's trading range (which we called the pioneer range) . It
assumed that after an hour the floor liquidity would be in control ,
and that this event would be the result of dominance.
type of day: We were still mentally tied to chronological time,
so we classified day activity into four types . First were normal
days - those days where range extension was very slight or non­
existent. We would use this information to help us understand
expectations; we'd say something like , "In this case , it isn't go­
ing to go a lot further, so let's get out," or " let's go short," etc .
Next in line were what we called normal variation days , those in
which the range extension would have doubled the original hour's
range . In terms of what we might call offensive versus defensive
trading , these were a little more offensively oriented in that we
would trade for them because the potential range was larger; if
we did not get a normal variation day then at least we would end
up with a normal day, which would be disappointing but would
not hurt us . Trend days triggered the most aggressive of all trad­
ing programs , but we tended to miss them more often than not.
You almost had to anticipate them , because in those early days
we did not like buying bulges or selling breaks . We consoled
ourselves with the thought that at least we were not opposite the
trend . This type of day had two distinct patterns . The most obvi­
ous was the double distribution , where two bell curves would be
stacked one upon another. The other was more of a steady grind­
ing affair, in which the horizontal width of the profile was usu­
ally not more than four time periods (slots used) . Also, we noted
that trend days at times would be a good exhaustion indicator, as
the market's opening the next day was usually just slightly dif­
ferent from the close . Trend days also tended to close on the ex­
treme . The last type of day was what we called a non trend day.
It was a day where the vertical range was very small and the
market was mostly dead and horizontal . They were a favorite of

position traders , as the market would tend to tum around and go

opposite from the way it had been going when it got to the non
trend day. Further, if it did not change directions , it usually traded
opposite to the previous day and then continued in the original
direction at an accelerated rate . Later we added another type of
day called a neutral day. It was similar in meaning to the non
trend day and physically had a range extension in both direc­
tions, but it was a lot more active .
TPO's: "TPO " stands for "time price opportunity " ; in other
words , each individual letter in the profile . The principle behind
their interpretation was the relationship between the high TPO
line , or mode line, the price in the profile that had the most use ,
and the imbalance of usage above and below this line as it related
to the developing profile . We noticed that the market tended to
go directionally to the short count side. The reason it did this
was that the high count side was more horizontal and had reached
acceptance, and that the market had generally moved to get there.
This was quite important because it meant that the dominance
was being reined in by participants . Also, if the market did not
have a move to get to the mode, there really was no dominance to
deal with. The need to find efficiency would create a need for
this range to be fair, so the market would tend to trade above or
below the high TPO line to fill out the profile in a balanced way.
failed auctions: In terms of immediate acceptance , failed auc­
tions were the most popular of all the concepts . They seemed to
work in spite of the various interpretations used, and were easier
to objectively define . Physically, the profile would have a single
range extension (only one TPO) beyond the first hour's range .
Failed auctions were used in many ways, some of which I'm not
totally aware of, but mostly based on two observations . In the
short term (a day or two) , the market would exhibit a propensity
to move opposite the failed auction's direction, and after three to
five days it would begin to move to take out the failed auction ,
and it would then have a rather significant move that was sus­
tainable over time.

In hindsight, the real market factor behind these observations

had to do with floor liquidity (see Chapter V). At the time, it was
the dominating force in the market, and worked to counter any
directional movement, so it provided an environment that was
very readable . Liquidity was dominant in that it had the capabil­
ity of usually being in control of the forces coming from other
environments . When it was not, the dominance coming from the
outside had to be significant- thus the reliability of our trading
parameters . The day profiles were essentially carved out of floor
liquidity, the way a force exerted by an artist changes a solid
block of granite into a form. The same was true of the balanced
and unbalanced bell-curve structures we developed later. In ret­
rospect, the type of day related to the amount of activity and was
actually an indirect measure of the efficiency in the market on
that particular day. In a blind way, the day type classification was
leading us to what we needed to know without our ever being
consciously aware of it. Trend days were the most inefficient,
while non-trend days were the most efficient. Also , the markets
were mostly still two-dimensionally active, which meant that they
were really in control of themselves , following their preferred
pattern of grinding out the excesses in a pattern that adhered to
the bell shaped curve , rather than being at the mercy of outside
forces . And they gave us a background by default, by staying in
that condition for several years .
In terms of the Bell Curve we used:
extremes (3rd standard deviation): These were the very top
and bottom parts of the profile. Typically, to be an extreme, an
area would not have much acceptance, and therefore would not
have much horizontal development opposite the price range. (I
think we stated the objective amount was a width of three or
fewer TPO's ) . As they related to the bell curve , the extremes
were the third standard deviations . They illustrated movement
away from the price area, or non-acceptance. Traders would pre­
fer to have these extremes in a favorable location supporting their
position (under for a buy, over for a sell) , and did not like to have

an extreme positioned against them. We also used extremes in a

broader sense over larger sample sizes of data, in the time infor­
mation list, and in the long-term market activity chart.
first standard deviation value area: This was composed of
70% of the data, whether TPO or volume , in the region around
the longest horizontal line . It was called the value area, and had
significance as an area that the market was either within or out­
side of. Its vertical range was important, in terms of whether it
was large or small in comparison to the average value area over
several day 's profiles . The change in value area size , i .e., the
vertical range of the value area, showed either decreasing or in­
creasing activity over the larger sample . It was used in a number
of ways for trading purposes in conjunction with other param­
eters , but it was also used in a direct sense in that once the market
reentered a value area it would usually traverse to the opposite
end .
initiating versus responsive activity: The tendency of trad­
ers at that time was to use support and resistance in putting on
their trades . This called for them to go against the dominance ,
which was not necessarily the best approach as markets began to
change . For the more dynamic markets , classifying activity as
initiating versus responsive was a way to define objectively what
the condition of the market was in the trade set-up. Initiating
activity was when the trader went with the market, either above
the first standard deviation value area for a buy or below it for a
sell , and responsive activity was when the trader did the oppo­
site. Naturally, a trade made under initiating activity should pro­
duce more immediate results as the move should be already hap­
pening , so to speak, and those taken in the responsive mode would
take longer to develop and generally had to be held longer.
parallel days: These were consecutive active days where the
profiles were very similar looking , usually being normal varia­
tion days . The second profile would be either slightly lower or
slightly higher in range than the first. This profile configuration
meant that the market was making a good effort in either con-

tinuation or in trying to reverse , and it pointed to the next day's

profile as being significant to what the market was going to do
next in terms of direction . It was viewed as a set-up for a trade
opportunity, and the trader was alerted not to hesitate .
long term market activity chart: In the early days of Market
Profile, most traders thought it was a short term/day trade type of
program. It really wasn't, but I think the fact that it was an active
screen-developing program caused people to look on it in that
manner. The long term market activity chart was a running sum­
mary of range extensions , extremes , value areas , and TPO counts ,
that were noted as either initiating or responsive . It was divided
into buy and sell sides so that consistent activity would be con­
spicuous on either side. It never really caught on, as it was cum­
bersome and did not easily lend itself to graphic display with the
equipment available at the time . As is usual in cases like this, it
was actually very good, because its principle was fundamentally
sound in terms of portraying the collective dominance , which
corresponds to market background. It was especially so in view
of the dominance of floor liquidity prevalent at the time . In other
words , it gave us a plural instead of a singular reading: a reading
over a larger sample size of profiles. In fact, it is still a very good
idea in today 's markets . It was essentially a spreadsheet and, to
use it today, one should reconstitute it to include the more mod­
em interpretations that you will see in later chapters . Also , there
are a lot of software programs that can do the same job easily
time information list: This grew out of traders ' need to re­
solve the objective/subjective problem , and their desire to have
lists of things to reference. I refer to it now as packaged objec­
tivity -the orderliness of it made for a more comfortable feeling .
I cannot remember exactly what was included in it because as a
trader I never really liked using lists , nor did I really like present­
ing them in class. I did so only in the hope that it would help
people in their trading .

trade facilitation: This was recognition of what the market

was doing; it was a term used to describe the dominance dis­
cussed earlier. The basic question was whether the market was
doing more business or less in a direction . This again was a lot
more subjective than objective , and called upon traders to bring
their understanding to a focus . li the market was doing more busi­
ness , it would keep control away from liquidity; if less, then it
would slip back into liquidity, which was going to be horizontal
at best. Trade facilitation was a condition that directly impacted
whatever reason you had to trade . As a market discipline it tran­
scended all other analysis by being closer to the top of the food
chain , so to speak: if no business was going on, or if business
was not increasing , then there wasn't much going for you . It was
also intuitive rather than exact. It was very similar to volume ,
but was a subjective indicator that could measure the activity
that had moved liquidity to the background.
trapped money: This came later in our program, and was very
similar to the neutral day or non-trend day in meaning . The mar­
ket would complete a small distribution with the first standard
deviation on the extreme , or a small-range trend day where it
was moving directionally. This would occur near the bottom or
top of a longer-term range, and would signify a potential exhaus­
tion phase in the market. When the market reversed following
the distribution in question, it would always stay above or below
the starting point of the distribution in its subsequent activity,
thus providing an excellent reference point .
We can now return to the meaning of dominance . It corre­
sponds to a concentrated force , capital flow, that overcomes the
randomness of the market, thus giving it direction. As profile
theory has developed, dominance has gone through three distinct
methods of expression . In the early profile days , when we classi­
fied market action in terms of types of days, dominance meant
directional activity overcoming the efficiency of the market; that
is, overcoming liquidity, which we might call the market's de­
fense . Dominance had to prove itself beyond the boundaries of

efficiency. In the second phase of market profile , when we were

combining profiles to form large bell curves, dominance repre­
sented an offensive force that prevented efficiency from happen­
ing , giving rise to the term "minus development" to describe a
period where inefficiency predominates in the market. And fi­
nally, in the current database-oriented phase of market profile,
the measurement of dominance comes directly from dealing with
efficiency; that is, with any change in the vertical/horizontal re­
It is necessary to recognize dominance . What makes it diffi­
cult, though , is that dominance has interruptions: it is there, it is
not there , then it is there again . I have termed the interruption
period a lull . In the early days of Market Profile, the background
of the trade always handled the lull period , by reassuring us that
longer-term direction, and hence the collective dominance, was
in our favor. Lulls always induced activity of an opposite nature
and needed to be looked upon with perspective . The perspective
or background we had at that time came from the type of day
classification system, which had its strength in having evolved
from the floor liquidity. For example, a normal variation day had
more dominance than a normal day, and the fact it could evolve
meant that the background would not just disappear but would at
least hold on. Trades were not made in isolation but as part of
this background. Background was , and remains , an essential part
of market discipline.
I have always tried to look outside our industry for examples,
because for me it has always helped to clarify the situation. In
looking at dominance from my background of ranching/farming ,
I know that if you get careless when things are going well, you're
in for a long and painful process if conditions turn against you .
The recent Quaker Oats/Snapple merger is a case in point. If
Snapple's demand had increased rather than decreased, the amal­
gamation of the two companies would have been easier to man­
age. In this case demand was the immediate dominance . The lull
was the period when attempts were made to improve demand ,

and the background was stockholder patience with quarterly per­

formance .
I have had many funny experiences relating to this . As a young
trader, whenever I started to recalculate my net worth, that mo­
ment would be the high point for quite some time. Or, if I had a
very satisfactory position in something and I got the feeling that
my position was not big enough , that too signaled the end of the
move . Dominance was finished.
All this points out how difficult it is to keep things going when
they appear to be perfect . This is something you have to learn in
order to go forward. You have to proceed on the basis of a strong
foundation , and not try to build on the pinnacle of success , be­
cause it has no base. It is the background that helps hold every­
thing together: the outward control over dominance and its inter­
ruptions . Change can be both frightening and a good opportu­
nity, depending upon the circumstances . If you have built up
something over time , change tends to be a foe; if you're seeking
opportunity, change is the bulwark of it.
When Market Profile was introduced into the London mar­
kets (the LIFFE exchange) in the late 1 980 's, it was at a very
favorable time. Their liquidity was extremely high and was more
sustainable than ours here in the U.S . Many of the large trading
banks were members of the London Exchange and had floor trad­
ing operations , and so the floor liquidity had a good and active
financial base . The state of liquidity of the U .S . commodity mar­
kets had changed. Capital flow into markets had overwhelmed
the floor liquidity, causing chronological time and market time,
which had formerly been coordinated on the day timeframe, to
diverge . Beginnings and endings no longer related to market open­
ings or closes . This was a big change for Market Profile to handle.
It was countered by moving to larger and different samples of
data - the second phase of Market Profile .
Time has brought the London and U .S . markets closer to par­
ity. (The SFE in Australia is currently going through this same
type of metamorphosis.) The time lapse in developmental change

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
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-

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
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

When the market started out looking as if it were going to be

easy to classify, and then would suddenly change, short-circuit­
ing the four step process by skipping a step or part of a step, our
trades were harder to control. I also observed that when a step
was missing because the market had skipped it, market direction
was dimensionally vertical, and for a sound reason, namely that
capital flow was causing a disruption or change in procedures. I
knew from experience that it took dominance to cause this re­
newed vertical movement.
Dominance was synonymous with minus development, a new
concept that related to our work with the stages of market devel­
opment. The term "minus development" came up one day in a
discussion with John Stafford. He repeated a "saying" from an
old trader: "It's what's not happening in the market that's impor­
tant." We could deal with the interruptions in dominance (dis­
cussed earlier) because we had the structure of the four-step pro­
cess to fall back on during the lull. We knew where we were in
the four-step process, and I felt comfortable because we had the
same dominance and lull combination we had earlier, just deal­
ing with it from a different perspective.
The old base for recognizing dominance was the floor liquid­
ity from which dominance could be measured. The background
had now become the four steps of market development, together
with the potential existence of minus development which would
not allow the market to complete its cycle and reach efficiency.
This implied a change from a defensive, floor liquidity oriented,
view of dominance, to what we might call offensive dominance.
The way we measured it was through minus development and
the four steps: if we were missing a step or some part of a step,
we knew dominance was in place.
Again I must state that I was not consciously aware of all this
order and symmetry between both phases of Market Profile. I
just had a lot of peer support and my intuitive feelings to go on.
This allowed a continued movement to market disciplines of a

broader order. I was steadily progressing to a more abstract and

objective formulation from a more subjective and intuitive one.
This process also reinforced my receptive attitude toward
change. For instance, one of my dreams was to organize data
into large data masses, and be able to find a small change within
the large mass that would lead to far bigger things. Much to my
disappointment, I had never been able to do this. I think the source
of my failure was to always think about the large data mass as a
single unit. Instead of thinking of a large mass as I had been, I
changed to thinking of large in a different way, as a composite
large where the individual parts would be in place for me to see
specific change. Just finding this minor change of perspective
was instrumental in removing the blockage and allowing forward
movement. I like forward movement; it's necessary for all of us.
So I encourage change as a foundation of one's development.
As we leave this second part of Market Profile history, sev­
eral things stand out as instrumental in taking us further. The
vertical alignment of the base of the bell curve gave it the format
to illustrate efficiency through its horizontal development. The
real role of the bell curve was the fact that you had to find the
first standard deviation, or at least some part of it. The relation­
ship of the first standard deviation to the horizontal was very
meaningful, and provided insight into development time (the stage
of development that was under way). Reading the bell curve
through the first standard deviation gave direction to the thought
that this was probably the way to read the market. The similarity
of the first standard deviation to efficiency gave reason to ex­
plore that relationship further.
Our software had developed to the point where I could try
some different data arrangements. I began to trade stocks actively,
and this brought even more focus, as it was far different from
commodities. Using the software, I came up with a way for the
computer to scan for efficiency, both for stocks and commodi­
ties, and got some really profound results when running these
efficiency scans on live market data. I had no monetary goals for

these studies; it was just something to try while I viewed the

markets for trading. The scan results popped up where I thought
they would on my screen, and also where I did not think they
belonged. Both worked equally well, with the ones I thought to
be out of place being the best.
I knew I had done something very right, even though at the
time I didn't completely understand what I had done, or why it
worked. I could tell that the results were better than the normal
trading indicators that I was used to. I also knew that I had not
yet found the market's purpose, and that I would need to do that
in order to go further forward. Later, the impact of many differ­
ent types of results provided great insight into the market's pur­
pose. But most importantly, I gave myself time to learn more,
and I made the sacrifices called for in doing so. I paid no atten­
tion to other people's standards Of success or failure. The growth
towards attainment of many goals during this period was very
The evolution of the fundamentals of Market Profile has been
lost on the majority of users because most of the interest was in
using it to make trading decisions, rather than in understanding
the market. Development for purposes of understanding did in
fact continue, but the results were not widely disseminated. In
the past, for many who were and are interested, it was hard to
determine just exactly what the teachings were. The explanation
of the basic principles that we've already given, together with
the material that follows showing how I think they should be
applied, should go a long way towards clearing up the confusion.
For example, let's take a look at a very typical early display
of day profiles using Dec. Cocoa futures, starting on the 19th of
September 1996 (Figure X-I). The interpretations will be drawn
from both phases of earlier Market Profile theory, and are thus
subjective as to what the market is doing. We are going to be
helped along by the visual display alone.
First, look at what you'd like to do as a trader. Go through the
chart and identify the trades you might make in hindsight. I al-

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ways start out by visually reviewing groups of profiles that have

a similar orientation as to direction. I don't just look at the latest
profile, rather I look for an insight into the background. In this
case, the 19th through the 24th are moving sideways, the 25th
through the 27th are moving up, and the 1st through the 3rd are
moving down and then reversing. I look to find the first standard
deviations, and to compare what the market was trying to do. I
then look at their respective ranges. Look at the profiles from the
19th-24th. The first standard deviation is evident on all. It
starts in the middle on the 19th and ends in the middle on the
24th In between, its location is near the bottom of the range on
the higher day of the 20th. On the 23rd, the last time-period
spills sharply down, which has the effect of making the first stan­
dard deviation for the day be in the middle of the range; prior to
that it was at the bottom of the vertical range. This is not a very
strong dominance. Notice the extremes on the 19th, 20th and 23rd,
as they are again indicators of a struggling direction. The quick
move late on the 23rd brings a balance to the laggard vertical that

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had been in place on the up days. Quick moves also bring things
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 X-
2). 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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typical of what takes place now, in that the dominance disap­

peared and the lull was testing the longs' resolve. The 27th
brought early joy but again was cause for concern late.
Notice that the ranges are larger on the 25th-27th than on the
19th-24th, and it's hard to find the first standard deviation early
on the 25th and 26th - it became more obvious on the 26th and
27th. This is indicative of a good effort to move vertically, and
the market seems to be having the same difficulty as before, be­
cause it's staying in the same trading range. The background of
dominance hasn't changed from the earlier set. Looking at the
data as a new composite, one can see an almost completed struc­
ture of a 3-2-1 nature. (see Figure X-3). Collectively it is easier
to see the first standard deviation now. Subjectively, we must
weigh the background, and it is one where the vertical move­
ment has had earlier difficulty. There is no evidence that that
situation has changed.
The real question will be whether or not the lull which is al­
most certainly going to happen will be contained by the struc-

ture. It would be prudent to err on the side of caution. The 30th

confirms this. Notice that the 26th and the 27th are what have
been termed parallel days. (Figure X-I.) On the 27th the market
made a good effort to move higher, and really could not do much.
The following day is usually the clue, and it had the first standard
deviation in the low part of the range. Clearly the life of the
inefficiency in this example is not very robust. (This is a parallel
to the earlier Bond example discussed in Chapter IV). In making
an assessment of the market, one really cannot conclude that the
market is weak, but it's clear that it also can't rally much. A strong
dominance is missing. It would be best to liquidate if long.
Looking at the market from the 30th to the 4th sheds some
additional light on the subject. (Figure X-I.) The vertical ranges
of all the profiles are smaller than when the market tried to rally.
The first standard deviations are present except on the 3rd. That
profile was a trend day where the market worked slowly lower
and the range hardly expanded. Additionally, it was a potential
trapped money situation, as it was a market culmination near the
bottom of the trading range. The background of weakness to the
up side did not in this case translate into strength to the down­
side, as there is no other evidence that supports it.
The 4th confirms this as it is opposite the high end of the 3rd.
As a composite (combination of the 3rd and 4th) the picture is
changed entirely, as it resembles a 3-2-1 up structure. (See Fig­
ure X-3.) A great deal of change has taken place here, but it could
be expected if one has followed our analysis so far. If the market
were to spend less time in this low area on the 3rd and 4th than in
the high area (27th-30th), it would be a minus development situ­
ation, and, given the background, this could be anticipated. Right
here is the crucial part of trading. The market is in good condi­
tion to move higher and one has to act now. It is safe to buy and
it would be best get some type of activity on the 7th rather than
several days later, otherwise minus development would not be
there at this same price level.

This probably is the biggest characteristic of learning to be a

good trader- being able to see the opportunity early and not hav­
ing to wait for it to become more developed. As we look at the
vertical on the 25th-30th and compare it to the 3rd-7th , it is very
clear that the former had more horizontal movement than the lat­
ter. Therefore, the most logical trade would to be try to buy early
on the 7th and hope for the best. Remember that the market still
is going to have the same problem of vertical indifference unless
we see some evidence of change. Don't just focus on the fact
that you have a profit on the trade, focus on the situation that you
need: for the market to show a little more in the way of domi­
nance to the upside .
You can now compare what we have done with the trades that
you could have made in hindsight. We probably did not do as
well, but we were in control of whatever we did.
I would suggest that those who like to use day profiles also try
to work with larger samples of study data as we did in the above
example. Most software has the ability to split and reorganize the
profiles beyond the day time frame. If you do this, then the same
simple display you've been using can take you further into un­
derstanding the structure of the market. The basic 3-1 -3, 3-2-1
distributions will become apparent. Either or both of these pro­
grams (working with day types and forming composites) will force
you to focus on the same thing in different ways. It will start you
toward more trading self reliance, because you will be making a
start on developing your market discipline from the market it­
There are just a few things to focus on as you work through
this program. The first standard deviation is the way to read the
market through the profiles, whether individual or composite. It
also defines efficiency as being present, and the sharp vertical
moves define non-efficiency. Be very alert for quick moves that
continue or reverse themselves. The range of the selected data
segments (day or composite) is important if the direction is clear.
Try to trade as early in the opportunity as possible by under-

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standing the background. It's sort of natural in trading to try to be

sure of the trade, but by the time you're sure it's often over.
This will provide the basis for your continued education, which
is mandatory for all of us. Its value is that it is not dependent
upon any participant but yourself, and the whole of activity III
the market.
I am now going to introduce some basic studies from our soft­
ware that have the computer doing all the work. These studies
come from data that has been rearranged into a data base that is
completely free of chronological time. There is a great benefit to
this in that the workload is a lot smaller and traders can select
whatever condition suits their style or preference. In other words,
one can trade from only the best of situations.
In Figure X-4, I've overlaid the cocoa chart of Figure X-I
with a compression study that is derived from the new data ar­
rangement. This study is very similar to the old value-area con­
cept. It is flexible in that you can show any chosen percentage of
activity of any mass of data as a new mass within the old. The

scope of the study is shown by the large rectangle encasing the

range from the 1 9th through the 4th; the study area is shown by
the horizontal lines inside the large rectangle. In this instance, I
have determined where 93% of the data is, and thereby exposed
the extremes or third standard deviations in the total sample. They
are above or below the range of 1343-1384 enclosed by the hori­
zontal lines. The profiles of the 25th through the 30th are then
defined as possible third standard deviations and are equivalent
to a profile extreme, and the same is true on the 3rd . The interior
of the compression serves as the container for the lull. Notice
minus development at the bottom of this area as compared to the
Another overlay from the new database is the output of the
market's self-organizing system. This is depicted by the smaller
horizontal rectangles. These are areas where one can expect ver­
tical movement away from this type of efficiency. Therefore,
they usually represent the start of something. One looks to have
the market stay above or below these areas. We intentionally used
a broader brush in the overlay in depicting the price as a heavy
horizontal block, as this brings more focus to what it really is: a
fair price area. In deciding what to do, one tries to focus on the
activity in and around the block or mark, as well as looking at the
background. The point is that since something vertical is going
to happen from this area, one is focusing on a potentially good
opportunity most of the time.
The first mark forms at the price of 1 364 at 9.00 0' clock on
the 20th. The market is moving 1 00% horizontally on the bal­
ance of the day and again on the 23rd. You can see this in that
every time period (i.e. every letter) is used at the price of 1 363 on
the 20th and at 1 367 on the 23rd. At the same time, the market
was trying to move vertically higher. It's not a very strong situ­
ation. One could sell it and look for the market to stay under it,
and if you did you would find the same condition in the horizon­
tal occurring at the lower level on the 24th , again at the 1 363

This shows that it is very hard to move vertically when the

market is experiencing 100% horizontalness. This is why one
needs a two-dimensional data base. If we were looking for price
movement, it would have been better to have experienced less
horizontal; a dynamic data base would have been more vertical.
If we had had 90% horizontal instead of 100%, the difference
would have translated into more vertical. Looking at the number
of time slots used versus the potential is an objective way of
measuring dominance. If you did sell on the 23rd under the out­
put mark, you were not getting what you wanted, as the market
was staying efficient. In other words, our mark was at the begin­
ning of efficiency, and efficiency just extended itself. The mar­
ket is still going to move from this to a vertical. It started late on
the 24th and continued on the 25th.
The other mark on the chart, at 1375, occurred on the market's
open on the 1s1. The market was already beginning to move
vertically down, so the zone of market efficiency was not ex­
tended as it was in the first case, but cut off. The consensus or
fair value area (efficiency price level) then was the reference point
that the market used as a base from which to further develop the
vertical to the downside.
Although I am giving a subjective interpretation to you to help
explain this situation , all of this can be read by the computer, as
you will see in the next chapter. Note that the market output
overlay does not indicate anything on the 3rd, which subjectively
was a good opportunity. Notice that the compression does. This
is why one uses different types of studies all looking for the same
thing-market-created opportunities in the dynamic setting of
an objective data base.
The examples in this chapter show what can be done subjec­
tively, as well as indicating the increase in understanding pos­
sible by using an objective data base. I've continued to move in
the direction of increasing automation and objectivity, which gives
a real boost to my productivity.

Looking to the Future--Data


From a historical viewpoint, any achievement of mine has been

entirely due to having the correct base from which to begin. The
market only spits out transactions; it is up to us to record them
correctly if in fact there is informational value in doing so. I have
never found any reference to the author of the current bar-chart
method of data recording, nor have I found any logical explana­
tion for it. It just sort of arrived, and has been just sort of ac­
cepted. Most people's focus to date has been more towards get­
ting good trading results, with market prices fed into programs
that are thought capable of producing them. It is the program
results that are in control. But data arrangement is the real basis
of control; it is the first link to the market, and it requires active
direction in terms of organization. I've always arranged my own
data, rather than accepting the default.
The real key in objectifying the market is to find its purpose,
which is single. The benefit of such a discovery is less subjectiv­
ity and more productivity. The data base plays a critical role in
this process of objectification. It is the basis of measurement, so
it needs to be able to represent market activity faithfully, without
distortion. It is the framework from which to ask questions about
data; it makes the data available as a fundamental resource.


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''15 z.

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" " " !i " , , ' " , , , , , , , , , , 1 1 1 1 1 1 1 1 1 1 1 1 1 7 1

Figure XI-I. Dec. Ten-Year Notes, 1996, Database "phonemes"

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

, ..

� I I�! I J ! '


Figure XI-2. Dec. Silver, 1996

solid base of practical experience. The whole development pro­

cess was completely opposite to the current back-testing mania.
We were trying to find something, not just anything.
Having the answer emerge from the data itself is a basic or­
ganic way to approach analysis with any program where there is
no theoretical basis to work from. By having the right data orga­
nization, working with it, and making it the central focus, one
would logically be in step with the market. It is what the market
itself is referencing. The market has never ordained a data base
or arrangement other than successive quotations. It is not pro­
ducing a one dimensional representation, nor is it producing trend
lines, moving averages etc., or referencing them. These are out­
side the market, at least once removed, and are subjective. They
do not provide a control that comes from within the market, and
therefore have to be supplemented with further financial con­
trols. What the market is producing is some degree of efficiency,
and it is this information that needs to be found.

� mltj" M"r" wl,.'i

.c.ontrllct fage o.ispilly lillviglllte ::ihnly Window Utility feed SCAn Help !!44-0;#!r:=ilU:;;:.DI;iWIP&M.-

Figure XI-3. Dec. British Pound, 1996

The last step in getting control over the market is to under­

stand its condition. We talked about dimensionality in an earlier
chapter, and said that the way to measure the market was through
its dimensions. Based on the argument of this book, its dimen­
sions thus have to be measuring efficiency. Dimensional mea­
surements reveal the present state of the market with regard to
efficiency, and therefore a change in dimensionality is in fact a
change in the state of this primitive, basic process. We can mea­
sure dimensionality by monitoring the vertical/horizontal rela­
tionship in an appropriate data base. The trades that seem to work
best always come from the best background situations. The back­
ground is composed of the degree of efficiency in the data mass
that is under consideration. Testing the market for efficiency
characteristics could eliminate a lot of wasted time and money.
Let's make these ideas more concrete by looking at some ac­
tual examples using the modern Market Profile database. Our
examples involve the December British Pound, Canadian Dollar,
and Silver contracts for 1996; the relevant charts are given in

�DIlIJ'l!'ct �e 0.1. lay Navigate ,S.tudy Window
lltIlity feed
"."Udp #4j-=w=:a."a....-

Figure XI -4. Dec. Canadian Dollar # 1, 1996

Fi gures XI -2 through XI-4. (In these charts, the basic database

units, which were shown as small profile fragments in Figure
XI-I, are portrayed as bars for compactness. The database pro­
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

"- iill!§!li.'b ��l=g=Er.;·;-,

;r -�
.contract fage Display tfavlsate Study Window 1,!tIlity feed SCAn lielp

Figure XI-So Dec. Canadian Dollar #2,1996

rectangles), we see a lot more hits on silver, which indicates a

more efficient condition, presenting more of a trading rather than
a trending atmosphere. The Canadian dollar and British pound
had a more inefficient background, and this, coupled with the
inefficient foreground, made the opportunities more of a go-with
and stay-with trading opportunity. In the silver trade, the near­
term inefficiency would soon be absorbed by the background; in
the others, it would tend to make the background more ineffi­
If we look back just a little farther in the data on the Canadian
dollar contract (Figure XI-5), we can again see the same set-up,
but one that has more hits of the efficiency scan in the back­
ground. As the market trades forward in this instance, the effi­
ciency scans did not materialize, indicating that the background
was not absorbing the foreground inefficiency. The market was
in fact separating itself from the prior condition. In the earlier
Canadian dollar and British Pound trades, and in this chart, the
life of the inefficiencies was sustained - a favorable condition

for the trader to capitalize on from an objective point of view. In

the silver trade, the objective near term condition would have
had to prove itself by not producing scan hits; since scan hits
continued to occur, the trader would know to exit the trade be­
fore a loss was incurred.
With all this information available in the data base, it is only
necessary to develop varied formats that will present it to us in a
readable way. They do not have to be the optimal solution, but
the process needs to get started. With any new format, one first
has to explore the outer limits of possibility. What are the ways
the market can change? Fortunately, the conditions that are pos­
sible in the dimensionality of the market are limited. It can have
vertical growth without any horizontal, which would be charac­
teristic of an inefficient situation; vertical and horizontal growth
taking place together, which would be characteristic of an ac­
tively efficient background where the market would have a ten­
dency to rally off lows and break off highs, while keeping to a
traditional trading range, and where the inefficiencies are absorbed
into this active background; horizontal growth without any verti­
cal, which would be characteristic of a developing efficiency that
is closer to completion, where one would eventually find that the
first bit of change occurring in it triggers the efficiency output
itself; and lastly no growth in either dimension, which represents
a very dead situation in which efficiency would be present, and a
condition that could not absorb any near-term inefficiency but
rather would be influenced by it.
One can see that there is scope within these four categories
for a spectrum of relativity between horizontal and vertical. For
instance, we might have a numerical vertical reading in succes­
sion of 21 , 22, 23, 24 ticks in a range, and a horizontal numerical
reading of 10, which is unchanging. In another instance, the ver­
tical sequence could be the same while the horizontal might be
26. In the first example the vertical is leading, and in the second
it's about on par with the horizontal, even with the horizontal
being locked. This measurement is taking place within the mar-

ket and is measuring efficiency objectively in natural market ex­

pressiveness. The comparison then is going to be quite relative
even though both are non-efficient, being engaged in one-dimen­
sional vertical movement.
We've talked about how the background of the market has
changed since the early days of Market Profile. The change in
the markets has also shown up in other related areas, as we have
seen in earlier chapters. Liquidity is now quite weak, and also
quite variable. Because of weak liquidity, and because domi­
nance is less concentrated and has a more diversified meaning
today, dominance has become more or less destandardized. The
lack of liquidity and change in dominance create a need for rede­
fining trading information compared to what was done in the past.
Now that we understand markets better, reading the degree of
efficiency and the change therefrom is the new and future way to
go. Efficiency can now be used the way liquidity and dominance
once were, and liquidity and dominance can be removed from
their prior role of being a superimposed structure within the mar­
ket. At one time they mirrored the efficiency concept, much as
my trade facilitation idea did, but, because they were derivative
rather than fundamental, they ceased to reflect the situation ac­
curately when the underlying conditions changed. The background
is no longer a given, but is quite variable, and measuring dimen­
sionality is a means of understanding it. Dimensionality would
now express efficiency, and provide a contrast between foreground
and background, making market analysis more direct; it should
therefore be the new market measurement.
It is important to note that the background and foreground are
now being defined objectively in the same terms, using different
studies, those terms being the degree of efficiency. To gain con­
trol, a trader can express a trade opportunity in these terms, and
change can then be directly related to the opportunity. An ex­
ample of the use of background in trading could be a situation
where the market had been moving vertically lower without any
horizontal increase, changing to one where both vertical and hori-

zontal were actively involved. Seeing the change, you decided

to buy, and were fortunate enough to have the market move ver­
tically up. The overall condition is that the market is moving down
in a controlled way, with both dimensions active. The foreground
is doing the opposite: moving up with both dimensions active.
Now you face a lull where the market has begun to move only
horizontally in the foreground. There has been a slight change in
the background sample; it is still moving down, with both di­
mensions active. In this case one could not face very much dete­
rioration in the new dominance-otherwise, the dominance would
be absorbed by the background. Focus, then, would be on the
near term activity being dominant enough to gain and keep con­
Another example could have the market's background as effi­
cient, with no dimensional movement. The market moves verti­
cally up in the foreground, with both vertical and horizontal di­
mensions active, the same as in the first example. It then shifts
into a lull and begins to move just horizontally in the near term.
The background now shows a changed condition, in that having
been neutral or efficient, the more recent activity has changed it
to where it is now moving both vertically and horizontally higher.
This would be a positive change in the direction of the trade, so
the near term situation is not as demanding as in the first ex­
ample. Therefore the strategy would be different; you would al­
most have a free peek at the market, which will be either continu­
ing the dominance or moving sideways, since a faltering in the
short-term dominance would at worst throw the market back into
efficiency at the higher price level.
At the end of Chapter V I we said, "When we combine the free
expression of dimensionality with the consensus output on an
objective data screen, it's only then that the market defines it­
self." In our software we have created a spreadsheet that does
just that. We call it our data base controller. Its function, among
other things, is to give an objective reading on the market's di­
mensions and other objective conditions related to market disci-

plines. Using the controller is similar to being in the pit, where

one can see a change in conditions taking place over and above
just a series of price changes. It is not price change, but market
change, that is being recorded. The data base controller also de­
picts the near-term inefficiencies as they relate to the background,
either being absorbed into it or in effect influencing or changing
the background. More importantly, it objectively defines the lull,
which is an activity that is usually counter to the direction of
dominance. The data base controller is similar in principle to the
old long-term market activity chart, and, as we add more func­
tionality to it, it will eventually fulfill the goal of making the
market's inner workings clear.
To best get a handle on dimensionality, we have tracked infor­
mation for two time frames: a slowed-average type program for
increased stability in reading the background, and an actual ver­
tical/horizontal development from the last market overlay of out­
put (the "Page 2" mark) for foreground information. Change in
dimensionality defines the dominance in the near term. The back­
ground condition is defined with a broader reading of the same
kind. The key here is the word "define." We have not placed faith
in a power big enough to overpower something else, as we did in
the past with liquidity or market structure. W hatever is there is
there, whether large or small; it's there to be measured in the
whole of the market.
The first two data base controller examples illustrate the more
common horizontal efficiencies found in the market. We have
found it extremely exiting to work with uncommon efficiencies,
which are fragments in the vertical, as well, but the software to
deal with these is still under development. Our third example
gives a look at this kind of market situation.
Table XI-1 shows a typical section of data base controller
output.Let's consider the overall format first. As the time column
suggests, the data is sampled every hour and a half. The columns
labeled "Bands" and "B-Horz" characterize the background in
terms of numerical studies run by the software. Bold numbers

Contract: FVZ6 Samples: 249 %Chg: 1.95%

Date Time Price Bands B-Horz Holds Page2 Vert-2 Horz-2

10/23/96 15:00 106130 1 Dn 4 70 13

10/23/96 19:30 106130 2 Dn 4 70 13
10/24/96 3:00 106130 2 Dn 5 70 13
10/24/96 5:00 106130 2 Dn 7 70 13
10/24/96 7:30 106110 3 Dn 9 70 14
10/24/96 9:00 106100 4 Dn 10 70 15
10/24/96 10:30 106090 4 Dn 10 70 18
10/24/96 12:00 106110 5 Dn 10 70 19
10/24/96 13:30 106130 5 Dn 13 106150 10 2
10/24/96 16:00 106120 6 Dn 13 12 4
10/25/96 4:30 106130 6 Dn 14 18 4
10/25/96 7:00 106110 7 Dn 14 18 5
10/25/96 8:30 106120 7 Do 17 52 8
10/25/96 10:00 106170 8 Dn 18 68 9
10/25/96 11:30 106160 8 Dn 18 68 9
10/25/96 13:00 106160 8 Dn 18 68 9
10/27/96 20:00 106170 8 Dn 18 68 10
10/28/96 8:00 106170 8 Dn 18 68 12
10/28/96 9:30 106160 8 Dn 18 68 15
10/28/96 11:00 106150 8 Dn 18 68 16
10/28/96 12:30 106140 8 Dn 18 68 16
10/28/96 14:00 106140 8 Dn 18 68 16
10/28/96 16:30 106140 Up 2 68 16
10/29/96 8:30 106240 Up 3 94 17
10/29/96 10:00 107000 2 Up 3 128 17
10/29/96 11:30 107010 3 Up 6 128 17
10/29/96 13:00 107030 4 Up 7 138 17
10/29/96 14:30 107050 4 Up 7 142 17
10/29/96 16:00 107050 6 Up 7 148 17
10/29/96 18:00 107050 7 Up 7 148 17
10/30/96 1:30 107050 9 Up 7 148 17
10/30/96 3:30 107060 10Up 8 148 17
10/30/96 5:30 107080 12Up 8 158 17
10/30/96 8:20 107070 13Up 8 178 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

Table XI-I. Database Controller Output, Dec. Five-Year Note, 1996


indicate a downward orientation of the background. The columns

at the far right, "Vert-2" and "Horz-2", describe the foreground in
terms of the relationship between vertical and horizontal devel­
opment. Bold numbers in these columns indicate a downward
orientation of the foreground in relationship to the "Page 2" con­
sensus price area,the output of the self-organizing system, shown
in its own column near the middle of the page, W hen a number
appears in the Page 2 column (as 1 061 50 did at 1 3:30 on 1 0/24),
it causes the two right side foreground columns to begin their
calculations anew, thereby giving us quicker and more current
information. It does not affect the calculations of the left-most
In looking for general change in conditions, it is best to group
the lines of change into loosely defined units of group activity
for purposes of analysis, rather than using each individual line.
For more specific reading, one does focus on an individual line
in relation to this general reading. Market change is much
smoother and less erratic when read in this manner. For our pur­
pose we will look at both columns in loosely defined groups of
four or more in relation to the specific change line.
Our first specific example is that of the five year note which is
traded at the CBOT. We'll start by reviewing how the data changes
in a more general sense. In looking at the whole page, notice that
the right-most set of vertical columns first change direction on
the 25th just shortly after the Page 2 mark. Going to the top of
this column, notice that the numerical value of the vertical, 70, is
not changing in front of the Page 2 mark, while the horizontal is
at first locked at 1 3 but then begins to grow. We get a new start,
which shows some continuation to the downside on the first five
units after the Page 2 mark.
Now let's look at the slower-developing column on the left.
Looking from the top down to the same point on the 25th, we can
see that both columns are growing, which is an indication of an
active two-dimensional market to the downside. Comparing the
numerical values in the two background columns, the horizontal

is more than twice the size of the vertical, so on a relative basis

the market is not that weak. The conclusion is that one can usu­
ally buy breaks or sell rallies in this type of environment.
If we now look to the 10:00 line on the 25th, and look at the
Page 2 column, we can see that a sudden, quick, and dramatic
change has taken place that causes a directional shift from down
to up. You can tell this by the amount of numerical change. The
number in the last down line was 52, and the number in the up
line has changed to 68. This represents a non-efficient event that
may be dominant enough to change the current situation.
The following ten listings show no more vertical change, but
increasing growth of the horizontal, as the market adjusts to the
change. Notice how the activity in the slower background col­
umn decreases until there is no vertical or horizontal movement­
a dead state of efficiency. Both of its dimensions stay locked at
8-1 8 for nine successive units, which represent the effect that the
faster Page 2 column changing has had upon it.
Notice further that the prices in the price update column stayed
relatively calm for the period within in this same zone. Clearly
there is not a background condition that has to be overcome.
(Background does have a tendency to absorb the foreground in­
efficiencies.) The issue is whether the upside inefficiency is go­
ing have a life. We can see that it does, as in the foreground
vertical column it begins to increase vertically, and the horizon­
tal locks at 1 7 while the vertical continues to grow. Activity of
this nature is one-dimensional vertical, a very strong situation
for the trader. It also creates a favorable background as we leave
the example-one where it is growing both vertically and hori­
zontally, and where the verticallhorizontal relationship has the
vertical leading (being greater than the horizontal), in contrast to
the earlier relationship in the background where the market was
moving down with the horizontal roughly double the vertical.
Our next example is in the D-mark, which is traded at the
CME. Notice that the foreground vertical column is up ahead of
the Page 2 mark, and that initially the background vertical (the

Contract: DMZ6 Samples 457 %Chg: 0.45%

Date Time Price Bands B-Horz Holds Page2 Vert-2 Horz-2

11/06/96 13:30 6605 14 Dn 13 53 12

11106/96 15:00 6605 16 Dn 13 53 12
11106/96 17:30 6613 17 Dn 13 53 12
11/06/96 19:30 6645 17 Dn 13 94 12
11/06/96 21:00 6646 IS Dn 13 94 12
11106/96 22:30 6665 2 Up 3 114 12
11107/96 0:00 6664 2 Up 6 114 12
11107/96 1:30 6648 4 Up 7 114 12
11107/96 3:00 6652 4 Up 7 114 12
11107/96 4:30 6644 5 Up 8 114 12
11/07/96 6:00 6649 6 Up 9 114 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 6623 14 1
11107/96 15:00 6629 11Up 18 16 3
11/07/96 17:30 6628 13 Up 18 16 5
11107/96 19:30 6624 13Up 18 16 7
11107/96 21:00 6621 13Up 18 16 7
11107/96 23:00 6623 15Up 18 16 8
11108/96 1:30 6628 16Up 18 16 9
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
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

Table XI-2. Database Controller Output, Dec. Deutschmark, 1996


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

background is in control here, and can absorb some counter ac­

tivity that can take place in the lull.
The down period in the foreground includes six listings where
the vertical stays locked at 16 and the horizontal grows through­
out. This illustrates that the market again has found efficiency in
the foreground (in addition to the Page 2 mark) and the lull is
about over. The background has absorbed the counter activity,
which was not much more than a stall.
The next line shows that the up vertical dominance is return­
ing on the 8th in the foreground, so the inefficiency of the back­
ground will be enhanced, thus giving it more life and the trader
more opportunity. The price at this change is 6637, which is
above the Page 2 output mark; it will serve as the vertical base
for further development.
The focus for the trader will now shift to the foreground, as it
is its continued progression that is important for the trade. The
vertical is actively growing, with the horizontal giving a mostly
locked performance. The background responds to this by con­
tinuing to show good vertical direction, locking at 21 in the hori­
zontal after only one horizontal change, which occurred at 18.
Note that after the Page 2 mark at 6623 the vertical/horizontal
relationship in the foreground moves to four times the horizon­
tal, and that of the background changes from being a little less
than half the horizontal to being more than one and one half times
greater. As a trader, then, you'd be continuing to watch for the
interruption of this new surge of dominance and the onset of the
inevitable lull.
Our last example deals with finding some of the more uncom­
mon efficiencies in the market. Most of those we have found and
worked with to date have been the more common varieties that
come in the more horizontal periods of price movement. We
have found that efficiencies can be fragmented and found in the
more vertical periods, and they are very good at referencing abrupt
changes or continuation in the vertical movement. We've come
up with two ways to illustrate this, and the software to automate

Contract: TYZ6 Samples 88 %Chg: 1.03%

Date Time Price Bands B-Horz Holds Page2 Vert-2 Horz-2

11/05/96 22:00 11009 45Up 34 30 20

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 10929 3 1
11106/96 22:30 10923 51Up 35 12 2
11/07/96 0:00 10922 51 Up 35 12 3
11/07/96 1:30 10925 51Up 35 12 5
11/07/96 3:00 10926 52Up 35 12 6
11/07/96 4:30 10923 52Up 35 12 9
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

Table XI-3. Database Controller Output, Dec. Ten-Year Note, 1996

it is currently under development. We'll analyze one of these

manually. There is a little more to it than what we are going to set
out here; however, we'll be able to demonstrate what we're after.
The procedures within the data base controller allow us to set
up a way to isolate fragmented efficiency in the vertical. Look-
ing at the data base controller display in Table XI-3 (the Ten-
Year Notes), consider the foreground columns (the two right-most
columns). A change in the horizontal on the 7th by three (from
11 to 14 ) comes just after the low price that occurred at the 7: 30

listing of 1 0922 on the 7th. Another such change occurs in the

following sequence at the 1 0:30 listing at the price of 10922.
Notice that the vertical foreground then starts increasing, and the
horizontal remains locked, giving a one dimensional vertical op­
portunity that is occurring near the low of the previous move.
The price low on the display of the data base controller is 1 0922;
however, since the change listings are predetermined in the setup,
I want to point out that the actual price low for this study zone
was 10916.
In all of the above examples, we have shown you a more tra­
ditional exercise, in that knowledge, skill, and work were all ap­
plied in a very laborious, time-consuming way. Applying this
methodology to the markets would limit one's productivity in a
physical way. It is important to note that it is not at all necessary
to go through this type of exercise with each trade you make in
the future. It is only necessary to provide the computer with the
knowledge-based requirements of trade opportunities, and it will
deliver the set-up and monitor the conditions for you. An ex­
ample of this sort of screening in a business context could be that
an ore producer would like to open a new mine, one that had a
certain ore content per ton that could be profitably developed.
Mine properties then would be screened until the requirements
were met, and those selected would begin operations.
The varied components in the markets today give us a collec­
tive dominance, where a great many traders are not really desir­
ous of directional movement; for example, in structured trades
that are looking elsewhere for the payoff. In this environment,
it's important to be able to find directional movement as well as
measure it against a background, rather than just considering it
in and of itself. Early on in my trading career we could determine
who was right or wrong, as the traders who bought or sold were
desirous of opposite things. Not so today.
To deal with this situation, we can ask our data base for a
background of such and such with a foreground of some particu­
lar nature; for example, all the commodities that are at least 75%

efficient on the background and 60% efficient in the near term,

and that have just traversed a market output (Page 2 mark). To
give another example from business, we can be like a corpora­
tion that wants to buy smaller companies. The CEO tells the staff
that the corporation's interest will be limited to companies with a
certain amount of gross in industries that have exhibited x amount
of growth during the past three years . Once they buy any com­
pany, it has to move up to at least being number two within a
certain amount of time, or they dump it. Now traders can specify
their trade parameters and justify their activity the same way.
Using an objective data base in today's computer world al­
lows traders to expand far beyond their subjective self. The ad­
vantage goes to a machine-readable data base versus one that
requires a visual or physical presence. There are lots of for-in­
stances, and I don't want to overdo it, but one example would be
where you sense that there is an opportunity in cocoa and the
move materializes over a period of six to nine months, producing
a ten thousand dollar move per contract. The market moved as
you expected and you made about 60% of that as per your con­
tract size. The results are very good; however, having identified
the opportunity, instead of just one entity (you) handling a trade,
it is entirely possible to have several trading programs of differ­
ent natures trading into the same opportunity. Let's just assume
you had five programs and they each made three thousand dol­
lars per contract. You have made fifteen thousand dollars out of a
ten thousand dollar opportunity - a great improvement over a very
excellent one-entity program.
Or say you are interested in stocks, and you have several thou­
sand in your data base that you have been following. You can ask
for all those satisfying certain background/foreground conditions,
route them to various computers according to their characteris­
tics, each of which has a trading program that fits its chosen sce­
nario, and make them meet certain conditions in order to stay
with the trade. All the programs of one type would then be com­
peting versus the same standard, and those with inferior develop-

mental qualities could be watched more intently or just elimi­

In closing this chapter I'd like to relate another one of my
ranching experiences. The horse stock we had at the ranch al­
ways came from a person or family that had a horse that they
boarded with us. As their interest waned and the feed bill rose,
usually they traded the horse for the bill. I have spent many a hot,
dusty summer day on horses that just were not suited for the pur­
pose, and I know what it feels like. Using an outdated or inferior
trading approach is as bad as using a family pet when a work
horse is required. Since that time, I've always made the invest­
ment in productivity whenever it's reasonable, and I still recom­
mend the same.

Price...The Market Messenger

Up to this point, throughout most of the discussion, there have

been very few references to price. The reference instead was to
market activity, its free expression, its output, its dimensions, and
its disciplines. Price is the medium chosen to illustrate change,
and by its very nature is one-dimensional vertical, which tends to
create a reactive atmosphere. Long thought of as a controlling
element, price has been treated as all encompassing, without be­
ing defined. Price offers only a limited view, as it changes only
in relationship to itself, and the depth of information it conveys
is highly varied. It intensifies the one-dimensional approach that
all involved in markets seem to take. To most, it's the only choice,
and it has never been questioned as the matrix of activity.
For people with this view, price has evolved into being the
market data base. It organizes background and illustrates change
in what appears to be an objective setting. In this way, it seem­
ingly provides a medium through which introduced trading dis­
ciplines indicate opportunity, and these, coupled with financial
discipline, offer a major means of control. Price change is equated
to market conditions, to being right or wrong financially, and a
host of other things. The fact that it is always changing makes it
a hard message to read or interpret.


As a message, it is ill-suited for the roles it has been used in.

Its value in this total background is highly subjective, due to the
amount of interpretation called for. A price change related to
itself has a very limited objective information content, especially
when we're interested in market expression and condition. Used
as it has been, it substitutes for market objectivity by defining the
related but external trader and financial disciplines to augment
each other, creating two dimensions. It has aspired to objectivity
as a goal, when in fact the whole process is substantially subjec­
tive. In reality, market conditions and change are defined by the
market's dimensional makeup. Price data needs to be directly
related to this to be in step with the proper representation. As the
medium of expression, price will always change, but it is not the
expression itself; that is the misinterpretation here. W hen price
is used as a message, rather than being regarded as a messenger,
it creates the need for strong subjective skills in interpreting what
most consider to be objective output.

Where Do We Go From Here?

There are going to be two conclusions reached as a result of

this book - yours and mine. I hope that I've presented a back­
ground that has been beneficial in helping you come to your own
conclusions as a trader. I firmly believe that a trader's develop­
ment does not come from theory, but from practice and observa­
tion. As knowledge and experience grow, one moves toward sim­
plicity. If one is fortunate enough to have started on the right
path, coming to a final focus opens up opportunity as never be­
The bottom line is that Market Profile best serves as a data
base. As such, it fills a basic need that is not currently being met.
It provides a dynamic two-dimensional method of data entry and
collection that gives the market freedom to objectively display
itself. It gives one the ability to learn from observation, and thus
provides the necessary foundation for a trader's development.
The path to the future has been laid out. With the cost of infor­
mation and computing equipment within reach of the average
person, and with the availability of computerized market analy­
sis algorithms, the burden of following the market falls on the
machine rather than the individual, making trading practical for
a vastly increased population, in a way that would have been
impossible ten years ago.


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-

ing." This mind-set is a major barrier to effort and a self-confi­

dent spirit.
All this is taking place at this very moment against a backdrop
of utter failure in a true business sense - customer failure. I think
it's pretty clear that what we have today is inadequate for our
growth and role in the future. Given the mere assumption, if one
is not willing to concede the fact, that the market's database is
being misrepresented in important ways, it is logical to expect
some type of exploration of new ideas. Has education or under­
standing ever produced an attitude of self-destruction in other
industries? If people use basic business principles and under­
standing, does it become self-defeating, or does it grow the in­
dustry? Is it a very big step to apply logic to a dynamic data base,
instead of one that is one-dimensional?
Being proactive means that we can learn from our experiences,
and use them as a base to go forward. It also will attract new
people to the industry, and the industry will therefore grow. As a
long-time member of the CBOT, I have always viewed our suc­
cess to be, not the number of contracts traded, but the number of
new faces that showed up to compete. During my active floor
years, there was almost always a new star or stars who showed us
new and better ways to go. The older stars did not necessarily
fade, but adjusted to the new situation, as it was the new situation
that let the new succeed. Is there a lesson here?
I would like to point out that while we are all strong support­
ers of our industry, and we are on the same ideological path, there
are two sides of that road. The left-hand side represents doing
things the same old way. At present, I see our industry growing
just because we have a presence in the marketplace; if that is the
case, it could ideally be growing at a far greater rate. If the rate is
low, we have to ask what are we offering. If it's not much, the
business that was automatically ours will soon be done in a dif­
ferent way somewhere else. Is our infrastructure functional for
the times and opportunities? Are we presenting real opportuni­
ties? I am not of the opinion that our industry is meeting these

needs, or that it cares to. It all starts with direct communication

from us to our customers. Is what we are doing being correctly
presented? If not, then this would be the left-hand side of the
In this light, let's look at our most prominent industry descrip­
tion, that the market is a zero sum game. Do we deserve it? W hy
does it seem to persist? As an industry, do we really care? Per­
sonally, I hate it. I never equate the market to a game, because I
don't know its rules or its time frame. Everybody who uses the
market has a different time frame and different objectives. I have
always thought and experienced the market to be dynamic. The
role efficiency plays never allows the market to revert to zero,
but only to shift between conditions of itself.
Growth is non-static, and I feel that anything growing is never
zero, that the market serves and that it's a growing type of ser­
vice. Any business that doesn't grow isn't going to make it any­
where. To say that there's a loser for every winner does not make
sense in a growing environment. It's like musical chairs - as long
as the music is playing, there is no loser. Music is growth, and we
should not let it stop playing. When the music stops playing,
someone always drops out, but that person does not necessarily
lose. For instance, in some of their studies the Federal Reserve
have come to the conclusion that there are too many banks. This
means that some banks will be gone in the future. They can be
merged, bought out, etc., and the banking industry can effectively
grow to serve our needs.
The right-hand side of the road would be a path that would
lead people toward their goals. It need not detail every step, but
must allow for discovery and growth. In simpler terms, it means
pointing out what we are, what we are doing, and what we offer,
and making certain it's the best we can do. These simple steps
have not really been understood by our industry. There is an un­
der-utilization of the asset base we now have. Putting all the
various talents in the industry in a closer working relationship to
the market would unleash a much greater level of growth.

We need to get beyond our current stalemated position, and,

in doing so, explain the advantage to being associated with the
opportunities we offer. It would be fair to say that in the past the
professional trader had a distinct advantage. Access to informa­
tion, time devoted, experience, location, all allowed one to over­
come most basic handicaps. Those outside of this framework were
at a distinct disadvantage. Today, advanced forms of communi­
cations are delivering information in a cost-effective manner and
without geographical bias. Computer processing power has ar­
rived and can be effectively used by all types of participants. No
market is isolated from world events. With markets moving glo­
bally to an around-the-clock environment, we will soon have a
new and level playing field. Computers will be in place to com­
pensate for the missing time factor, as all traders will have some
type of time gap to handle. Computers will begin to do some
processing even for the floor local. They will eventually do more
and more of this, and do it better than the floor local used to do it.
Everyone will have to be better prepared for whatever role they
intend to play.
All this means that the industry is poised for change, and we
need to be ready for it. As the "zero sum game" idea implies, it is
those who use the markets who are thought to be the losers today,
but it will be those who do not use them who will be the losers of
tomorrow. In a recent article, R.C. Longworth, a senior writer for
the Chicago Tribune, cites a study by the Institute for Policy Stud­
ies in Washington, DC. The study states, among other things,
that 51 out of the 100 largest economies in the world are not
governments, but corporations. Longworth asks a very good ques­
tion: W here will control lie now, as this trend accelerates in the
global atmosphere? If I were to give my answer, it would be in
the markets, and not with government. Even now, it has been the
markets that have really transformed the landscape, not the Fed­
eral Reserve and their counterparts around the world. The oppor­
tunity for our industry today is unparalleled versus any time in
our past. We need to center our efforts on knowledge, education,

and openness to new approaches. We can do a lot better, and

must discover the fact that we have to.
Consumption is the main driving force in all societies, whether
it is due to the wealthy wasting resources, or to the poor
overpopulating, or just to natural/abnormal growth disparities.
Market opportunities have been and are being created. We can
and must do a better job than we have been doing to service this
basic need. If we avoid the risk of having our industry implode as
a result of our inability to innovate, we face the complementary
risk that the opportunity could engulf our inadequate infrastruc­
ture, and we would stand a good chance of getting lost in the
process. It's hard to justify how you missed out on success when
it's past you. That is a position that we do not want to be in. The
future is in our hands, and we collectively need to be a concerned


3-1-3 89, 90
3-2-1 89, 90

background 1, 6, 10, 21,25, 26-

28, 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

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


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

early experience 10
efficiency 3, 5, 13-15, 21, 26-28, 33, 35, 38, 39-48, 57, 100, 116
Emory, William Uhlman 58

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

Graham and Dodd 8

Griffin, Bill, Sr. 51
growth 130

horizontal 36, 39, 43

horizontal and vertical axes 61

industrial indifference 23
inefficiency 14, 16, 33, 57
Institute for Policy Studies 131
internal controls 22
investing 8

Jirout, Bob 65

key to objectivity 37
Kirby iii
Kummel, Gordon 71

large trader 6
LIFFE exchange 88
liquidity 6, 45,46, 49, 56, 83, 111
Liquidity Data Bank 66
Longworth, R.C. 131
lull 6, 49, 87, 91, 96, 113, 119

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

Market Profile, updating understanding of 79-91

market time 62, 90
market's development 62
market's process 40
market's purpose 5
mean 32, 75
measurement 5
Measuring dimension 56
minus development 87, 91
mode 32, 76, 82
money management 10, 23
mutual funds 1

neutral day 86
non trend 81
non-efficiency 39
non-trend day 86
normal days 81
normal variation day 81

objectifying the market 70, 103

objective trading parameters 80
opportunity 8

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

Quaker Oats 87

Randomness 45
randomness 6
range extension 82
Rosenthal, Les v

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

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

two-phased market 34

u.c. Berkeley 8

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

zero sum game 131