Enhance Your Trading Skills with Market Profile: Steidlmayer's Wisdom and Experience in One Book

J. PETER STEIDLMAYER joined the Chicago Board of Trade in 1963, and has been an independent trader ever since. Mr. Steidlmayer served on the Board of Directors for the Board of Trade from 1981 to 1983. While a director, he was responsible for initiating Market Profile and the Liquidity Data Bank, which were revolutionary concepts in data arrangement and trading information. He has communicated his highly successful trading ideas to traders all over the world through his books and courses. He has dedicated the last ten years to developing software to improve the performance of traders and refining his market theory.

STEVEN B. HAWKINS has been involved in the markets throughout his professional career. He has acted as an institutional broker and analyst to some of the largest investment banks and trading houses in the world. His trading experience entails proprietary trading in stocks and commodities. Over the past ten years, Mr. Hawkins has instructed traders in the United States, Europe, Australia, Canada, Singapore, and Hong Kong. He has also collaborated on the writing of trading books and has written articles for industry trade publications. Hawkins graduated from the University of Illinois with a degree in economics.

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A Market Profile is an intra-day charting technique (price vertical, time/activity horizontal)devised by J. Peter Steidlmayer, a trader at the Chicago Board of Trade (CBOT), ca 1959-1985.Steidlmayer was seeking a way to determine and to evaluate market value as it developed in the day time frame. The concept was to display price on a vertical axis against time on the horizontal, and the ensuing graphic generally is a bell shape--fatter at the middle prices, with activity trailing off and volume diminished at the extreme higher and lower prices. In this structure he recognized the 'normal', Gaussian distribution he had been introduced to in college statistics (3).

The promotional material says the Profile is to be the link between the CBOT data and the market. A Profile graphic is to be used to tell "what the market is doing"; the LDB data is for finding the market's 'condition'. As a part of the data-display connection in CBOTMP1, the price of the peak cleared volume is identified as the Point of Control (POC). Following the normal distribution analogy, the central seventy percent of trading activity about POC (+/- one standard deviation) is termed the 'Value Area'.

A new and expanded 335 page CBOT Market Profile manual, CBOTMP2, was released in 1991, (5). In this volume the first five sections are devoted to profile analysis. The last section discusses LDB data. Unlike CBOTMP1, there is no emphasis on a Market Profile ticker product. In the period 1985 - 1991 the profile concept caught on with the public (in one Chicago Tribune article Steidlmayer was identified as "the man who knows where the market is going").

In early 1986 Steidlmayer and Kevin Koy started Market Logic School to teach profile trading. Around the same time the CBOT gave up on marketing the Liquidity Data Bank directly to the public (CISCO Futures became their vendor). Public access to tick data increased greatly so that profiles could be constructed real-time intra-day (whereas the LDB data breaking out the category of participant at price was still generated at the end of day). It was becoming increasingly clear that pit trading's days were numbered. By 1991 it was obvious that the focus was on the profile technology and less on the database used to support the calculations. Hence the change in emphasis on the Profile vs the LDB data in CBOTMP2.

In both CBOTMP1 and CBOTMP2 'Market Profile' occurs in the name, but it is hard to find a definition of exactly what a Market Profile is. Many, many examples are given in both publications. A working definition from Mind Over Markets (9) is: "the market's price activity recorded in relation to time in a statistical bell curve". Added to this would be a definition of the price and the marker, a 'TPO' (time-price opportunity), with TPO defined in CBOTMP1 as: "opportunity created by the market at a certain price at a certain time". For example:

Volume is said to identify signs of continuation or change, to infer the directional facilitation of trade, but "volume data, by itself, is meaningless". The reason given is that "it is essential to know what market participants are doing". Many 'profile readings' are shown in both CBOTMP1 and CBOTMP2, inferring who is trading what and what message they are sending. One method, apparently, is to see if volume is increasing to the upside or downside intra-day. The LDB data discussed here is end of day. Some time later the CBOT began releasing clearings during the day on the half hour. These clearings when compared to tick data indicate an approximately half hour delay. It is not explained just how reading trade facilitation with delayed data is effected.

Day types, of course is chart reading and forecasting. The well known problem with interpreting charts is the multitude of potential interpretations for most any chart. Mastery theory offers some hope for traders who are willing to spend the time and effort in understanding the auction market environment. But that path can well take 10,000 hours of training. A large part of CBOTMPG1 and more particularly, CBOTMPG2, is devoted to 'reading' the profile as it develops throughout the day. CBOTMPG1 suggests that it will take six months to a year to learn the Market Profile methodology.

1. The primary condition for a valid profile is a normal, equilibrium distribution. If the market is not in equilibrium there is no valid POC or standard deviation. A simple visual examination will often be enough to certify that the distribution is abnormal: the day may have two distributions (two peaks) or the trading may be directional, etc. Although unfit, non-equilibrium data can still be operated on as usual by a computer program, the results are likely meaningless or misleading. Most traders who use Profiles seem oblivious to the requirement for normality.

3. Markets have changed since 1985/1991. Pits are approaching extinction. In 1985 and earlier, trading by members in the pits was by open outcry; commercial traders were in view and the 'trade' dominated the markets. Today (2011) there are few pits and public traders dominate the trading volume. Certainly, an intelligent and alert trader like Steidlmayer in the pit had much more to go on than just the Profile graphic available today.

In the first edition of this classic guide to Market Profile, Steidlmayer introduced traders to this revolutionary new way of reading and trading the markets. Now Steven Hawkins returns to update and revise Steidlmayer's concept of Market Profile within the context of today's fast-paced markets.

Steidlmayer on Markets: Trading with Market Profile, Second Edition lays the foundation for understanding and implementing the Market Profile methodology by providing background information based on Steidlmayer's experiences as a commodities trader, and showing how he developed his ideas and learned to apply them successfully within the markets.

Fully updated and completely revised to reflect today's ever-changing economic environment, the new edition of Steidlmayer on Markets combines practical guidelines for learning how to read and use the markets with the underlying principles of how markets work. Filled with helpful tables and charts, and timely new chapters, this book is the most comprehensive guide to trading with Market Profile.

The market profile trading becomes more and more popular among traders nowadays. The Auction Market Theory (AMT) lies in the basis of the market profile. We already discussed the market profile subject when we wrote about horizontal volumes and about how to improve trading using the market profile.

Peter Steidlmayer could be considered the founder of AMT. He laid the basis of the market profile and shifted the accent from the price to the worth in unit time. Steidlmayer tried to forecast the future price movement with the help of the market profile and various types of days but finally had to confess that it was impossible.

We marked a trend movement after a breakout with number 1. The price moved in a certain direction only during 2 candles or 1 trading hour. The rest of the time on June 9 the market traded in balance, that is, the price moved up and down within a range, which we marked with a bell.

And the trend movement marked with number 4 fell on the middle of the trading session. The price broke the current balanced area and entered the trend phase in a search for a new balance. This movement covered 3 candles or 1.5 trading hours.

As we already mentioned before, traders analyze the market situation with the help of AMT and make a balanced decision to buy or sell a contract/asset. The market profile is a visual reflection of the auction market.

Study the market using the modern software and your chances to make profit will increase. Each instrument has its character and specific features. The better you are equipped, the more you are focused and the better you understand the logic, the simpler it would be for you to move together with the market, rather than standing on its way.

In my previous article, we have introduced how Volume Profile VPOC Strategy can be approached in your intraday trading. We now know, that VPOC level, is just another level on a chart, but when combined with other trading clues, it can become a powerful reference point for your intraday trading. Sometimes I might sound like a broken record, but trading is all about picking those clues and building your trading narrative. These narratives then can form all kinds of strategies, such as the strategies used for trading volatile markets, open drive, or reversal type of strategies. In this article, we will focus on using VPOC to build a basic component of our Volume Profile VPOC Reversal Strategy.

Before we continue, check out this article or watch the video down below, describing key questions one has to ask when addressing how to trade around VPOC. This will help you understand the approach we have chosen to formulate our VPOC reversal strategy. Alternatively, you can learn more trading strategies in our market profile course. 2ff7e9595c