Is Market Profile an Outdated Tool?

[UrmaBlume 10]

As a tool market profile is maybe not dead but certainly is outdated and has been replace by new and more effective trade decision support technologies.

 

Market Profile as a theory, however, lives on and has spawned many innovations in technology, method and protocol.

 

My notes from weeks at Peter Steidlmayer's ranch in Norther California back in the 80's state again and again that the most important goals of Market Profile are to define order flow/balance of trade and locate strong/intense commercial trade.

 

Nothing in the profile can quantify balance or imbalance and nothing in the profile can identify sudden, very intense bursts of commercial trade.

 

The middle panel in the chart below shows a topping spike in commercial intensity. This indicator takes measurements in the millisecond time frame and reports activity that is too fast for any human or group of humans to have conducted.

 

The bottom sub-graph shows a moving window of the balance of trade that shows the balance of trade at the peaks and valleys in precise numbers of countract imbalance.

 

In this graphic you can see that at the point of the spike in commercial topping activity there was also a negative divergence between price and the balance of buying and selling volumes. The date on the chart is 09/09 and the times are PST.

 

The trade was good for 20+ points in a little over an hour.

 

The answer is that the Profile is dead as a tool but lives on as a concept.

 

Please click to enlarge image

UrmaBlume

[BlowFish 10]

At the risk of repeating myself....actually it's all been said earlier in the thread so I shan't

[xioxxio 10]

The trade was good for 20+ points in a little over an hour.

UrmaBlume

 

This is a joke right? any moving average strategy would have caught that trade.

 

Back to the discussion. Market profile is very much alive and well. Most people don't understand it and treat it as indicator which it is not.

 

Once you start to look at market structure, things get interesting.

[UrmaBlume 10]

This is a joke right? any moving average strategy would have caught that trade. Back to the discussion. Market profile is very much alive and well. Most people don't understand it and treat it as indicator which it is not.Once you start to look at market structure, things get interesting.

 

You are correct in that a Moving Average system would have caught the trade. What is misssing is that a MA system would not have caught the verificcation of the trade offered by the toping spike in the velocity of commercial trade and the divergence in order flow shown by V94Window as shown below.

 

Both a moving average and the chart below caught that trade - the difference is that the MA system would have caught a whole lot of noise trades that the method below would have passed because of the lack of verification by the divergence in order flow and the indication of intense topping activity by commercial trade.

 

It is true that structure is interesting but my notes from several weeks during the 80's at Peter Steidlmayer's ranch studying profile theory from the man himself reflect that 2 points that override structure are the quantification of orderflow/balance of trade and the presence of strong/intense commercial trade (also reflected in the chart below and missed by an MA system).

 

Below is copyrighted text taken from "Practical Short Term Trading - Techniques & Technologies" that is reproduced here with permission from the author.

 

Three True Descriptions of the

 

Price/Time/Volume Continuum are:

 

"As Price changes or not and Time passes Volume happens/accumulates.

 

As Time passes and Trade/Volume happens Prices change in Direct Proportion to the degree to which that Trade is Imbalanced.

 

As Time passes and Trade/Volume happens Prices change in Inverse Proportion to the degree to which that Trade is Balanced."

 

 

Please Click to enlarge image

 

cheers

 

UrmaBlume

[joshdance 10]

Both a moving average and the chart below caught that trade - the difference is that the MA system would have caught a whole lot of noise trades that the method below would have passed because of the lack of verification by the divergence in order flow and the indication of intense topping activity by commercial trade.

 

Can you zoom out your chart and show the entire day?

[UrmaBlume 10]

Can you zoom out your chart and show the entire day?

 

No - there would be too many bars.

 

If you will note the chart is a 1k volume bar chart with about 180 bars that cover only 28 minutes of a 405 minute day session. Even without the nite session, a chart with that particular day's trade would have to show over 2,600 bars - even if the software could draw it, there would be no resolution to the indicators.

 

cheers

 

UrmaBlume

[clmacdougall 11]

Peter Steidlmayer himself only 2-3 months ago at the CME (on a video which was recorded live and runs for about 90 mins)officially negated the usefulness of the Market Profile structure. He put price discovery risk into excellent terms and suggested the use of volume information to help negate the amount of risk inherent in every trade.

 

Watch the video, it is great!! It's on file at the CME

[joshdance 10]

Thanks for the fantastic video reference clmac!

 

Just watched it in its entirety. I do not think that Pete S. is saying that the Market Profile concept is not valid--rather, he is saying that the market of today is supply driven, rather than time driven. So, the original market profile concept using TPOs was more valid when it was a time-price market--as he said, you would see distributions of TPOs and a trader could buy and hold, or sell and hold, and close the trade at a later time. Today, however, the distributions are more scattered and varied, so he is using volume. He has been doing this for years, and has long ago stopped focusing on time as a way to structure the market, if I recall from hearing those who have read his early 2000s book.

 

What he is promoting and selling in the video sounds like essentially a volume profile-based approach. His primary point which he repeats over and over is this: reduce the risk of price discovery by allowing others to discover it, and THEN trade with them. When you initiate a position where little volume has traded, then YOU are doing the job of price discovery. With little capital compared with large traders, the retail trader cannot afford to discover price consistently. It's better to initiate trade at prices which have already been discovered, as shown by looking at volume at price.

 

Is this primarily what you got from the video?

[clmacdougall 11]

Thanks for the fantastic video reference clmac!

 

Just watched it in its entirety. I do not think that Pete S. is saying that the Market Profile concept is not valid--rather, he is saying that the market of today is supply driven, rather than time driven. So, the original market profile concept using TPOs was more valid when it was a time-price market--as he said, you would see distributions of TPOs and a trader could buy and hold, or sell and hold, and close the trade at a later time. Today, however, the distributions are more scattered and varied, so he is using volume. He has been doing this for years, and has long ago stopped focusing on time as a way to structure the market, if I recall from hearing those who have read his early 2000s book.

 

What he is promoting and selling in the video sounds like essentially a volume profile-based approach. His primary point which he repeats over and over is this: reduce the risk of price discovery by allowing others to discover it, and THEN trade with them. When you initiate a position where little volume has traded, then YOU are doing the job of price discovery. With little capital compared with large traders, the retail trader cannot afford to discover price consistently. It's better to initiate trade at prices which have already been discovered, as shown by looking at volume at price.

 

Is this primarily what you got from the video?

 

Hi joshdance,

 

I absolutely agree! Conceptually valid, but the "structure" being useless! The markets will never return to being able to be understood on the level of time at price or for that reason volume at price. He needs to go one step further and accept orderflow imbalance as the only way to support trade initiating activity. Behavioral comparative analysis of price to imbalance is the only way forward in my opinion.

[joshdance 10]

Hi joshdance,

 

I absolutely agree! Conceptually valid, but the "structure" being useless! The markets will never return to being able to be understood on the level of time at price or for that reason volume at price. He needs to go one step further and accept orderflow imbalance as the only way to support trade initiating activity. Behavioral comparative analysis of price to imbalance is the only way forward in my opinion.

 

Ok, I do understand what you're saying. However, do you not feel volume at price is useful?

[clmacdougall 11]

Volume at price only signals activity, not imbalance. Heavy volume signals commitment, but should not be confused with imbalance when compared to lighter volume activity.

[joshdance 10]

Volume at price only signals activity, not imbalance. Heavy volume signals commitment, but should not be confused with imbalance when compared to lighter volume activity.

 

The only true measure of imbalance is a change in price. Would you agree?

[clmacdougall 11]

No, I don't agree Josh. Do you study any internals like delta or such in your trading ?

[joshdance 10]

No, I don't agree Josh. Do you study any internals like delta or such in your trading ?

 

I do--I look particularly for the inability of market orders to move price at a key price level using delta as a confirmation of who's attempting to do the moving. So, buyers and sellers at the market may be out of balance, and this may indicate either a continuation or reversal of the current direction. However, price only moves because of an imbalance between those willing to buy at the market and those willing to offer at that price, or an imbalance between those willing to sell at the market and those willing to bid at that price. Now, if there were no indications of possible future price movement then it would be impossible to trade effectively and it would become only a guessing game. So, I'm not saying that we can't look at delta or volume or whatever else you want to use and formulate some hypothesis about what might happen next; this is what I try to do every day.

[clmacdougall 11]

I do--I look particularly for the inability of market orders to move price at a key price level using delta as a confirmation of who's attempting to do the moving. So, buyers and sellers at the market may be out of balance, and this may indicate either a continuation or reversal of the current direction. However, price only moves because of an imbalance between those willing to buy at the market and those willing to offer at that price, or an imbalance between those willing to sell at the market and those willing to bid at that price. Now, if there were no indications of possible future price movement then it would be impossible to trade effectively and it would become only a guessing game. So, I'm not saying that we can't look at delta or volume or whatever else you want to use and formulate some hypothesis about what might happen next; this is what I try to do every day.

 

So in effect you are attributing all market movements as proof of imbalance at any given moment. How do you add a comparative to this theory? When do you consider price to be away from it's internals and weakening as it continues to move in that direction?

[joshdance 10]

So in effect you are attributing all market movements as proof of imbalance at any given moment. How do you add a comparative to this theory? When do you consider price to be away from it's internals and weakening as it continues to move in that direction?

 

Primarily I look for a climax in volume and usually followed by another push in price on weaker volume. But this means very little if price has not reached a point where the other side is willing to move it, so for me there is not a solid notion of "internals", as trends work for this very reason--traders are willing to push value away from some mean, further than it's "supposed to go." So ultimately, though I am not as good at this as I want to be, I would consider a shift in direction only able to be truly detected after it has happened. In other words, once price has shown that the balance has shifted.

 

How do you do this cl?

[clmacdougall 11]

Primarily I look for a climax in volume and usually followed by another push in price on weaker volume. But this means very little if price has not reached a point where the other side is willing to move it, so for me there is not a solid notion of "internals", as trends work for this very reason--traders are willing to push value away from some mean, further than it's "supposed to go." So ultimately, though I am not as good at this as I want to be, I would consider a shift in direction only able to be truly detected after it has happened. In other words, once price has shown that the balance has shifted.

 

How do you do this cl?

 

Hey Josh,

 

Seems like you've got a little mix of Wyckoff in your study of volume climax and then it's deterioration on a secondary push in price. Then mixed with some sort of MP or fib support and resistance levels you define as price "reaching a point," along with a VWAP or high volume node as your mean/target price, for your trade to return to. Along with those things you are probably using a trendline break when price is far enough away from it's mean to define when the balance in price has "shifted," and as your entry vehicle into a trade. Does this sort of define your strategy?

[joshdance 10]

Hey Josh,

 

Seems like you've got a little mix of Wyckoff in your study of volume climax and then it's deterioration on a secondary push in price. Then mixed with some sort of MP or fib support and resistance levels you define as price "reaching a point," along with a VWAP or high volume node as your mean/target price, for your trade to return to. Along with those things you are probably using a trendline break when price is far enough away from it's mean to define when the balance in price has "shifted," and as your entry vehicle into a trade. Does this sort of define your strategy?

 

Except for the trendline break part, that's very close to what I do. What about you cl?

[clmacdougall 11]

Except for the trendline break part, that's very close to what I do. What about you cl?

 

Here is what I do. I refuse to risk money without a viable understanding of the market in terms that are simple and meaningful to me. I refuse to believe in someone else' "rushed to print" understanding of the market.

 

What I desire, is to learn market principles that don't change because the markets are somehow "different now" when actually the markets have never changed. Look at Pete Steidlmayers video,somehow now because the "markets have changed" his MP structure no longer works. Truth be told it never did, it was behind its time in its day because it was a misapplied science best suited to statistics and judging the average height of an american male and not useful for understanding something as dynamic as the markets.

 

We accept or create simplistic models of the unknown because it's easier than creating our own, or working hard to find the truth. Answers are easy to come by,it's the right questions that are hard to find.

 

Trades and transactions define market bias. Following the trail left by both uncovers the leaning of the market. Although trades and transactions seem like the same thing they aren't. The balance/imbalance they have on their own and share in comparison with each other is a meaningful understanding of orderflow. This is what I am doing, studying the changes in those items as price changes.

[bobcollett 10]

i have to ask myself, if im trading on the globex, an electronic market, and if hft = more than 50% to 70% of the volume am i really trading in an auction market??, is nt that what mp was made for back in the day, if i look at a congestion area on ccandles, well naturally most of the trades went off there, thats what makes the value area congestion??,

 

 

I realise this question is off topic but......

Can somebody explain the difference between a normal Auction and an Electonic market.

I often see anomalies in my daily price feed which is not an auction.

e.g.while prices are rising the spread is 10 points

when prices reverse , the spread becomes 30 points

My market is the Top 40 futures index (South Africa), similar to the Dow,and the trading platform is supplied by I G Markets in London.

Regards

bobc

http://cdn.traderslaboratory.com/Pictures/smilies/Missy.gif

[clmacdougall 11]

Auctions look for 1 thing, buyers. The markets accept sellers. An auction drops the price looking for buyers only. The markets initiate selling activity. I wonder if the definition of the markets as an auction wasn't always misplaced. Another overly simplistic definition of a complex matter that we accepted for some ridiculous reason.

[bobcollett 10]

Auctions look for 1 thing, buyers. The markets accept sellers. An auction drops the price looking for buyers only. The markets initiate selling activity. I wonder if the definition of the markets as an auction wasn't always misplaced. Another overly simplistic definition of a complex matter that we accepted for some ridiculous reason.

 

Dear clmacdougal.

I remember you, the member from Halifax, Canada.

Halifax is where they caught the first halibut fish , and its also where they sent the first fax.

Thanks for the auction answer . Now where's the other part, the electronic market answer?

Kind regards

bobc

[joshdance 10]

Although trades and transactions seem like the same thing they aren't.

 

And what is the difference? They could be interpreted to sound the same, but no doubt you have a distinction you have created which allows you to think about them differently.

 

As to markets being different now, I disagree that they haven't changed--I think they ARE different. Pete S.'s description of different types of markets, both pre-exchange, exchange, and now with no (or few) locals and purely electronic, changes the dynamic enough that a model that worked before may not work as well now.

 

It sounds like you are on a path of discovery to find a universal model. Or, at least, one that reflects current market conditions. But the most important question for a trader (not an analyst) is, can I make more money with this? Even the most simplistic models of the market can be made to work effectively by those who are in tune with them--like a market profile, like support and resistance, like trendlines, or anything else. They all model the market differently, but they can all be used effectively. For example, a trendline-based approach sees the market as moving not only up and down, but in channels related to time or activity as well as price. A support/resistance only model sees vertical movement as paramount. However, both can be used to trade effectively.

 

Unlike physical concepts in the universe like light, gravity, etc., which have a seemingly unlimited amount of new information about themselves which we may discover, the market is not a mystery--it gives us only 2 things: first, a transaction (or tick). From that transaction we have only 4 pieces of information: the price that was traded, the time the transaction took place, how many contracts were traded, and whether the transaction took place at the bid or the offer. Secondly, we have the price levels (for most of us,10 price levels) above the current best offer and below the current best bid and how many resting orders are at those levels. Other than that, we must manipulate this data to form our models and will not find any new information (unless it is released by the exchange).

 

All that being said, I am open to new ideas and definitely interested in any theories or models that will increase my trading edge, or give me a different understanding of the markets.

[clmacdougall 11]

Dear clmacdougal.

I remember you, the member from Halifax, Canada.

Halifax is where they caught the first halibut fish , and its also where they sent the first fax.

Thanks for the auction answer . Now where's the other part, the electronic market answer?

Kind regards

bobc

 

Bob, there are little to no similarities between the electronic markets and auctions. I worked the auction circuit locally for a year to help put me through college when I was a kid. The electronic markets are in no ways similar. You can't compare two way markets to an auction based one. The seller and the buyer search out one thing in common, the speculator.

 

The retail speculator is the best positioned of any participant to win at this game. The smaller your lot size, the greater the odds are of you consistently winning, it works exactly to the opposite for holders of a large lot size. The futures markets are built consciously or not to benefit its smallest members the most.

 

Take advantage of that position in ways no other traders can. You are the most nimble and agile element in the market. Armed with knowledge your edge is unbeatable.

[gosu 10]

* * *

 

The retail speculator is the best positioned of any participant to win at this game. The smaller your lot size, the greater the odds are of you consistently winning, it works exactly to the opposite for holders of a large lot size. The futures markets are built consciously or not to benefit its smallest members the most.

 

* * *

 

How did you arrive at your conclusions? If I were asked the series of questions that might have been asked to draw your answers, I would give mine as follows:

 

1. Who is best positioned of any participant to win at this game?

 

A: The best positioning goes to those who get the information the fastest and whose costs are the lowest. These are the players who run automated programs that extract very small profits at high frequency.

 

2. Is it true that the smaller your lot size the greater your odds of winning; and conversely, the greater the lot size, the lower the odds of winning?

 

A: Not necessarily. A small lot size gets you easier fills without slippage that would be difficult with a large lot size. However, an easier fill and less slippage do not automatically equate to greater winning odds on a trade, and conversely a more difficult fill and slippage may not necessarily be bad things. For example, in the case of a directional trader, a partial fill or slippage might actually be good if he picked the wrong side of the market to trade with.

 

3. Are the futures markets built, consciously or unconsciously, to benefit its smallest members the most?

 

A: This really depends on what is meant by "members." Retail traders are not "members" and have historically been discriminated against in terms of access, access to information and costs. Today, while access and access to market information are more equal between members and nonmembers, there is still a sizable gap in costs. Moreover, always in the background are regulatory schemes to raise more barriers against retail participation. Simply put, futures markets, like all markets, are built to benefit those that are "insiders" at the cost of those who are not, including retail participants.

 

 

Despite the above, the retail participant does have a few modest advantages that are inherent in being independent.