The Evolution of Market Profile Theory

[UrmaBlume 10]

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

 

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

 

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

 

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

 

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

 

 

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

 

 

 

 

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

 

 

 

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

 

 

 

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

 

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

[snp500 10]

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

 

Thanks much in advance

[Frank 10]

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

 

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

 

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

 

comments welcome

Edited August 11, 2009 by Frank

[koifan 10]

I have to mention that anyone that refers to Market profile as an indicator is

completely misguided. Would you call a candlestick an indicator? Of course not.

I will state emphatically that when you really learn to use the profile, it is the MOST

accurate way of determining real support and resistance. It is derived from more than 1 timeframe, not unlike candles or bars. Measured moves can be seen early in the day...accurate projections can be determined (to the tick). The difficult part of

learning the profile is finding someone that can teach you. I have attended many

MP rooms... although there aren't many. And I finally finally found a MP trader that

after 10 years of study, can teach anyone how to use it in a most effective manner.

I am going to ask him to post some material here so anyone interested can check him out.

Regards traders...

Koifan

[jpk trader 10]

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

[Kiwi 16]

Yes I would call a candlestick an "indicator."

 

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

 

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

 

 

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

Edited August 21, 2009 by Soultrader
revised. avoiding conflicts

[BlowFish 10]

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

 

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

[suarinver 10]

Good post.

 

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

 

Insist... good post.

 

Thank you

[VolumeJedi 10]

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

 

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

 

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

 

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

 

Simple elegance. That is simply powerful.

[koifan 10]

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

 

koifan

[koifan 10]

Volumejedi... you are absolutely correct...thank you for your reply...

[uexkuell 10]

The market's sole purpose is to find that level where there is a disagreement on value and an agreement on price. The market does this very quickly thru a process called an auction.

 

Certainly there are many ways to look at the market.

 

To me this sounds a little idealistic.

 

 

Allow me to formulate another view not for theoretical reasons but because I learned that it can make trading efficient:

 

Why are there people that keep markets alive?

Because some people make profits through them. And markets will be kept alive only as long as some people (has to be always the same) make really big profits. (If it were only small profits they would start looking for other fields).

 

Therefore the main purpose is to give the few a chance to make big money.

On the other hand this implies that they have to take it from the masses.

 

So in this view it is not about finding agreements or disagreements more on finding areas of comfort (for the masses) which quickly turn into traps.

 

It is more like:

Where do the masses go?

How can we make them feel comfortable (in order to build bigger positions)?

After that, how can we shake them out / make them panic?

[sevensa 10]

Certainly there are many ways to look at the market.

 

To me this sounds a little idealistic.

 

 

Allow me to formulate another view not for theoretical reasons but because I learned that it can make trading efficient:

 

Why are there people that keep markets alive?

Because some people make profits through them. And markets will be kept alive only as long as some people (has to be always the same) make really big profits. (If it were only small profits they would start looking for other fields).

 

Therefore the main purpose is to give the few a chance to make big money.

On the other hand this implies that they have to take it from the masses.

 

So in this view it is not about finding agreements or disagreements more on finding areas of comfort (for the masses) which quickly turn into traps.

 

It is more like:

Where do the masses go?

How can we make them feel comfortable (in order to build bigger positions)?

After that, how can we shake them out / make them panic?

 

That sounds a bit idealistic, or rather very simplistic. What about the big players that need to hedge? The airlines who want to hedge their fuel costs, the industrial companies that want to hedge for raw materials? They are not in it for purely speculation profits and to take money from the masses.

 

Why does this have to be the same players who has to make money? For the markets to keep functioning, there need to be buyers and sellers. What are you basing your statement on that one side always will be the same ones making money?

[Crazynasdaq 10]

 

PS. For the person requesting Urma's stuff. For some reason he posts them at various points but then doesn't provide more than a hint as to how they are constructed. I think it makes him feel good. Oh, and they too are indicators ... they summarize price action (or price and volume action) to make it easier to make decisions.

 

I'm agree with You Kiwi. The post and the images posted by Urma don't tell Us nothing.....nothing to understand as they work, nothing to understand which phliosophy works behind them... volume....price or a mix of them....they are only images with dots and lines. I've worked on Volume profile very hardly in the last 2 years and on the relationship between volume and price. I've studied the relationship on the VWAP and the peak of volume, the differences between MarketProfile© and Volume Profile (little but very significant), the importance of Big players vs. small trader (SMart VS. Dumb) and I can clearly say that it's very important to understand these relationships using the today technology as tick data and Time& sale tape, bid vs. Ask or a proxy like Upticks vs. Dowticks. But a self celebratory post as the Urma one is unuseful and doesn't help anyone. It's like a joke against who read to bring them to a commercial purpose as selling them indicators and not a constructive manner to help the forum user as teaching them a knowhow built in a decade of studies. This is only my thought, but it's the second time on a different post that I read a post of Urma like this.

Then anyone could think what he/she wants about me or about my thought, but this is my way of thinking about Urma latest posts.

[Kiwi 16]

1. a person or thing that indicates.

2. a pointing or directing device, as a pointer on the dial of an instrument to show pressure, temperature, speed, volume, or the like.

3. an instrument that indicates the condition of a machine or the like.

4. an instrument for measuring and recording variations of pressure in the cylinder of an engine.

5. Chemistry.

a. a substance, as litmus, that indicates the presence or concentration of a certain constituent.

b. a substance often used in a titration to indicate the point at which the reaction is complete.

6. Ecology. a plant, animal, or species that indicates, by its presence in a given area, the existence of certain environmental conditions.

 

 

I too like VolumeJedi's view that price is also an indicator. In turning things on their heads we gain an opportunity for an insight.

 

On the same basis so is a TPO chart. Or a Volume Chart. Or a bar. Or this point or that of a Moving Average or a RSI.

 

What I don't like is the pretentious BS that we see on trading boards: my toy is better than your toy. And how often is it phrased as "my toy is pure and your toy is an indicator."

 

Get over it. TPO charts summarize price action over time in an attempt to indicate where value lies (or what you read from it).

 

They are indicators.

 

As are my bar charts and volume profiles.

 

For the record: my swing's are better indicators of the edge of value than your value areas (I define here, to make myself look better than you, that better equals allowing more precise entries with greater rr )

[taotree 10]

I too like VolumeJedi's view that price is also an indicator.

 

And Bid/Ask, and T&S, and market depth... they are all just indicators (and writing my own software, that's how I coded it) because they indicate information about something else: the market. "The map is not the territory": the market is not made up of the numbers streaming through the servers--the market is thousands of agents (human or otherwise) that are interacting with each other in a system. The numbers simply "indicate" some information about one or more of those agents at a given moment.

 

 

For the record: my swing's are better indicators of the edge of value than your value areas (I define here, to make myself look better than you, that better equals allowing more precise entries with greater rr )

 

Let me use those for a while so I can see if you're right

[ant 10]

For me, anything that is market-generated information (Open, High, Low, Close, and volume) is not an indicator.

 

I also find VolumeJedi's view of price being an indicator interesting, because someone who trades using Market Profile principles trades value, not price. Price is simply an advertising mechanism, i.e. price advertises "price away from value" in balancing markets or "price leading value" in trending markets. But in the end, I don't consider price an indicator. Price and volume are all the markets generate.

[shreem 10]

Hello all. Very interesting thread and exchanges of ideas here.

 

1st post has still attracted alot of great posts on this thread about the relevance of the application of market profile as framework to see the auction market theory in a lively and well organized manner.

 

I do agree with volumeJedi, Frank and some others that MP is not an indicator per se or a trading methodology by itself but rather a conceptual framework of the current state of the law of supply and demand laws in motion and where is the current auction in relation to fair or non-fair value.

 

So great posts guys and much appreciated

 

Shreem:)

[koifan 10]

Kiwi... the descriptions above are perfect...put this in context with a price chart.

A raw chart has prices shown by bars, candles, lines, etc. If you wish to measure what it is doing, you add an indicator. A moving average, an oscillation, etc.(#2 above) A MP chart shows price volume and time that has no indicators. Price alone makes not an indicator.

Using the same data, it creates another graphic view of an auction. It can and usually is used in conjunction with other charts that do have indicators.

If you find the right person to teach you the profile, it will also become clear that it is a powerful tool, and a tremendous tool to use with your other charts and indicators. And anyone that trades the EDGES of value should consider taking some more study, because

a little information about the Profile can hurt you. Would you like to know where the next swing will be before it happens... that's where the Profile can be of assistance.

BTW, my toy is not better than anyone's toy ... not sure why that popped up.

Any way good trading wishes to you...

 

Koifan

[sep34 10]

Wow…The indicator discussion. Until a standard definition is adopted there will be no closure on this subject, yet I will bite.

 

 

Some folks don’t think that a price chart (OHLC bar or candle etc…) is an indicator

Some folks don’t think that NYSE tick is an indicator.

By my definition…The above are indicators, so too is a market profile;

 

Time based price charts are indicators of Price and Time.

Tick, NYSE is an indicator showing the difference of Issues on a up/down tick within a user determined period of time.

 

Therefore, anyone that uses a price chart to trade is using an indicator in my book.

 

I suppose you can have sub-categories for indicators.

For example there are a host of indicators that are based on another indicator. For example a Moving average placed on a time based chart is an indicator of another indicator--"the price chart".

 

So when I say I’m a price action trader and use no indicators, what I really mean is that I don’t use any secondary indicators based on my main indicator, e.g. MA’s , oscillators etc., which is a Time based price chart displayed in Japanese Candle Stick.

 

As for the opening post and its author, although detailed information is not given and I cant fault him for such. Everyone that posts on these boards is in one way or another fulfilling some kind of need, and I dont expect him to be an exception. UB offers a unique view and to me that by itself is a contribution and at the very least gets me to think outside my normal Frame of thinking.

[uexkuell 10]

What about the big players that need to hedge? The airlines who want to hedge their fuel costs, the industrial companies that want to hedge for raw materials? They are not in it for purely speculation profits and to take money from the masses.

 

Sure there is something like what might be called big unflexible money.

But: They are certainly not the people who are interested in the game of comfort and panic.

That can be shown indirectly: Big swings are clearly not in the interest of these people. They are negatively effected by it just as the small traders. Just watch the airline comments (and the reaction of their share prices) on big crude moves.

True you can take advantage of their existence because they leave big traces.

 

 

What are you basing your statement on that one side always will be the same ones making money?

 

The infrastructure (people, software, leasing rates, hardware) that the price moving players use is so expensive that they would be taken out of business soon by their supervisory boards if they wouldn't be very profitable constantly.

 

What Urmablume is showing are the traces of this sophisticated infrastructure. For the volume spikes seen in the postings some specialized stuff is needed: Servers right next to the exchange, many clever software engineers and many man-years of programming, some good traders, big pockets.

[VolumeJedi 10]

Certainly there are many ways to look at the market.

 

To me this sounds a little idealistic.

 

 

Allow me to formulate another view not for theoretical reasons but because I learned that it can make trading efficient:

 

Why are there people that keep markets alive?

Because some people make profits through them. And markets will be kept alive only as long as some people (has to be always the same) make really big profits. (If it were only small profits they would start looking for other fields).

 

Therefore the main purpose is to give the few a chance to make big money.

On the other hand this implies that they have to take it from the masses.

 

So in this view it is not about finding agreements or disagreements more on finding areas of comfort (for the masses) which quickly turn into traps.

 

It is more like:

Where do the masses go?

How can we make them feel comfortable (in order to build bigger positions)?

After that, how can we shake them out / make them panic?

 

This has already been answered by Sevensa.

 

There are farmers who want to hedge their crops. Companies issue stocks to finance business expansion. Individuals own stocks to become board members. Airlines want to make plans now based on the perceived value of oil some time in the future. Markets exist for this.

 

Yes there are a few that can make money on inefficiencies and manipulation but markets exist in spite of them not because of them.

[Kiwi 16]

Yes there are a few that can make money on inefficiencies and manipulation but markets exist in spite of them not because of them.

 

 

I really like that too. So I should thank Urma for creating an interesting thread rather than worrying about whether he's trying to sell something or not.

Edited August 13, 2009 by Kiwi

[VolumeJedi 10]

For me, anything that is market-generated information (Open, High, Low, Close, and volume) is not an indicator.

 

Price and volume are all the markets generate.

 

It seems I have not been clear.

 

I put Market Profile in quotes because if you use a strick definiton Price ITSELF IS AN INDICATOR....

 

The Wyckoffians would say, much more articulately than me, the price is contiguous. It flows independent of time. Thus any attempt to parse this flow into compartmentalized data points is to create false snippets of prices true nature. In other words, a 30 minute chart only indicates as false picture on prices natural flow. Since price is contiguous, there is no open, there is no close, there is no high and there is no close. These notions are merely constructs or indications of what prices actually has done over an artificial timeframe. If something gives an indication, then by definition it is an indicator. Therefore price itself (as seen on a bar chart) must be an indicator.

 

I do not see price as an indicator. I do not see Market Profile as an indicator. I do not see volume as an indicator.

 

Market Profile is the visual representation of the price/value discovery process. The aution.

[UrmaBlume 10]

Urma,So, why keep posting essentially the same pictures and providing no useful information on it?Feel free to prove me wrong by explaining how the CPMEThr in the second picture is calculated.

 

Sometimes the same pics can be used to make DIFFERENT points. In this case I have used some of these pics earlier to describe the indicators themselves and in this later case they were used again to demonstrate that some of them have evolved from early market profile theory. Different points/subjects - same pics.

 

The posts on trade intensity and the PRIMER on the formulation of an index of weighted biases were designed to stimulate development and not to be a code donation.

 

Of note is that more than a few of the more astute members here have found that my clues have provided enough useful information so that they could accurately reproduce the intensity indicator/!!!CPMEThr and a couple have almost completely cracked the index of weighted biases.

 

As to selling these indicators, I am asked several times a day from this forum and other sources to sell these - those from this board that have asked can verify that they are not for sale or lease but rather for training our in-house traders.

 

I guess it will always be that some gain insight and understanding from some posts and others not. To those that have thanked me - I say thanks and I am glad that you found value - to the others I say best wishes.

 

 

cheers