Market Profile Versus Indicators

[itzak 10]

Anyone want to give an opinion about which trading methods are more effective and robust over the long haul---Market Profile-based vs indicators and patterns.

[diablo272 10]

This is a gigantic topic that can be addressed by reading through many of the threads that are here already. You should spend some time learning about each of those broad subjects individually and come to your own conclusion.

[Tams 20]

What makes you money?

 

It is not the indicator or method,

it is how you trade those indicator/method.

[ant 10]

The Market Profile is a real-time evolving database reflecting unfolding market activity. It allows traders to understand what is happening in the market, if a trader knows how to read it. I don't know any indicator that can do that. For me, as a discretionary trader, Market Profile wins hands down over indicators and it is how I analyze the markets during the trading day. I don't think you need Market Profile to trade successfully, but it does a great job when used for its intended purpose. I don't use indicators.

 

I think that technical indicators are pushed by the industry as a way to make money off of new traders, and new traders flock to them because it makes it easier for them to make trading decisions. In a sense, it shortens the learning curve, but not really. It gives them the false illusion that they "know" how to trade. Indicators are not market-generated information, but the profile is. Over the long-term, I don't think that one can be successful trading with indicators. I think more in-depth market understanding is required than what indicators can provide. The market is just too complex to adhere to simple rules and indicators. Market understanding takes time to develop which is why I think most traders prefer indicators. Having said that, I will say that indicators are probably more useful than Market Profile if a trader wants to use an automated system. In my opinion, as one gains market understanding and experience, the need for technical indicators go away. Anyway, that's my opinion and I'm sure there are many opposing viewpoints, but I guess that's what makes a market.

 

EDIT: Patterns are not mutually exclusive with Market Profile and indicators. I look for patterns in the Market Profile graphic.

Edited August 7, 2009 by ant
Forgot to comment on patterns.

[VolumeJedi 10]

Anyone want to give an opinion about which trading methods are more effective and robust over the long haul---Market Profile-based vs indicators and patterns.

 

I don't know your trading background, but I see you have less than 10 posts here. As such I will assume you are a "newbie", forgive me if I am wrong.

 

You are asking the wrong question. This is the type of question many newbies and losing traders ask all the time. Before one gets to this question, there are far more important questions and underlying beliefs that must be ascertained.

 

Do you believe that there is a buyer and a seller at every price? If so, then how can there truly be such a thing as "overbought" or "oversold". Where you stand on this influences what indicators you might look at, or at least force you to take a different take on them. For example, it may make more sense to look for a rising stochastic as trade bias versus looking for a reading above 80.

 

Do you believe that price is where it is at because that is where it is supposed to be, and price is supposed to be there because that is where it is at? Do you believe the market is always right. If so then the market can not over shoot or go too far in one direction or the other. Do you want to use indicators that are trying to measure these over extended states, which you might not even believe exist? If you do believe they exist, might price itself be a better way of determining this condition?

 

Do you believe that price is driven in the short run by "technicals" and in the long run by fundamentals? Does this mean trade direction should thus be based on fundamentals and entries based on "technicals" (technicals would include either indicators or price action or Market Profile to name a few). What type of trader do you want to be? Are you looking to be in a trade for two minutes, two days, two weeks, or two months?

 

Do you believe that since the market is made up of human beings it will tend to be ruled by some of the things that naturally rule humans? If so, does that mean studying phases of the moon is a valid approach? Maybe using indicators is good because the "herd" uses them and you can use the herd mentality to your advantage. Where do you stand on the golden ratio? Is this ratio and Fibonacci numbers some sort of universal mathematical code? Since we can see it in a sunflower, does that mean we should see it on a price chart?

 

Do you believe that there is a selective few that tend to be correct more than they are wrong in the markets? Is there a way to track their movements on a chart? Do you need to read the tape to see them? Do you consider reading a price chart akin to reading the tape?

 

There are many more questions to be sure. In the end, we all trade our belief systems. It is important have a solid understanding of what those beliefs are. Some may be right and some may be wrong, but they are ours and therefore need to be recognized.

 

That's why Bill Williams says that if you want to know about yourself, you can spend years meditating on a mountain in the Himalayas, or you can trade the S&P on a five minute chart.

Edited August 7, 2009 by VolumeJedi

[Kiwi 16]

I actually regard Market Profile as an indicator.

 

Less of an indicator is a price bar.

 

Why?

 

Because indicators were almost all invented as a way of summarizing some key elements of the nature of market movement to make them easier to understand/see in real time/use/mechanize (pick yours). MP makes it easier to see the building rotations and excursions from value. MAs make it easier to see potential value. Price bars remove the clutter of every tick to show summarized movement. Stochs and %Rs show how far price has pushed in a X bar range and so on ... Each thing has value if used as designed or sometimes more if used in a contrary manner.

 

What's wrong with summarizing?

 

You lose information. And you may confuse the map with the territory.

[ant 10]

I actually regard Market Profile as an indicator.

 

I don't have a problem with Market Profile being considered an indicator. Market Profile is simply price bars collapsed to the left to form a statistical distribution (i.e., when using TPOs). It's just another way of viewing price, like PnF charts. This re-organization of price data provides other information not easily accessible from a bar chart, but I still use bar charts for a different perspective. Unlike traditional technical indicators, MP isn't derived from price, it is price - just organized differently than a bar chart or any other type of chart. What matters to me is that MP is real-time, market-generated information that doesn't lag the market and helps me understand market behavior as the market unfolds in a way that traditional technical indicators can't.

 

I guess the real issue I have with technical indicators (excluding MP) is when traders use indicators as the basis for making trading decisions as opposed to using it to support trading decisions based on sound market principles and market understanding. But if a trader gets to the point where (s)he has a good grasp of how markets move, I just don't see that trader requiring the use of a technical indicator. In addition, a technical indicator is just one data point, and on it's own, cannot take into account market context and market condition, which have a lot to say about what trade will work or not in the current market environment.

[Kiwi 16]

I But if a trader gets to the point where (s)he has a good grasp of how markets move, I just don't see that trader requiring the use of a technical indicator. In addition, a technical indicator is just one data point, and on it's own, cannot take into account market context and market condition, which have a lot to say about what trade will work or not in the current market environment.

 

I think there are two reasons that make sense (whether they are optimal or not).

 

1. If you program elements of what you do the short cut of an indicator is sometimes much easier than trying to define the price movements in software.

 

2. You say "if a trader gets to the point where (s)he has a good grasp of how markets move." I think there is a huge gap for many between grasping and internalizing in such a way that action is compelled. For example I don't "see" some actions in real time - although I'm planning to work on one of them this weekend. An indicator crossing X might well push the button hard enough that the trader overcomes perceptual blindness.

 

2 would help explain why newbies like indicators but also why some stick with one or two that help them with their perceptions even years after they might well be able to drop them. For the record, I am addicted to a couple of mas that help me see where others in the market perceive value in a pullback.

[UrmaBlume 10]

I actually regard Market Profile as an indicator.

 

During the 80's I spent several weeks at Peter Steidlmayer's ranch at what he called the Butte on the Feather River in California learning Market Profile from the man himself. Tim Mathers of CQG was there with some of his programmers as it was the profile that gave CQG its start.

 

Of course Kiwi is right when he says the profile is but yet another indicator and like other indicators it can be applied with a range of inputs and other parameters.

 

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

 

 

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

 

 

 

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

 

 

 

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

 

 

 

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

 

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