Market Profile The evolution

vtrender.com/market-profile-the-evolution/

vtrender September 9,
2019

After my last post on Market Profile in May, I received a lot of email on the different
theories and concepts which all get aggregated in one common term called the
“Market Profile”.

Truth be told, there are 3 variations of the Market Profile and at Vtrender we follow all
the 3 variations completely and we could be one of the very few markets in the world
where all 3 variations work simultaneously as well as asynchronously. I’ll explain…

But first, what are these 3 variations?

Pete Steildlmayer, the founder of Market Profile as a study, has evolved the Market
Profile from :

a) The Traditional Market Profile: Which was about 30-minute price and time ranges
and the base concept was time x price= value.

into

b) Steidlmayer Distribution: It consists of the IPM ( Initial Price Move ) which is followed
by the start of a Balance followed by short covering or long liquidation Imbalance (
sometimes both in the same bracket) and then another IPM again. We have written
extensively on this – http://vtrender.blogspot.in/2011/04/steidlmayer-distribution.html.

into

c) SteidlMayer Volume Strips: Instead of using only 30-minute price ranges, Pete
recommends using a set profile of 12 of 30 minute time period periods and a range of
9 to 30 minute time period to catch the imbalance moves better.

Why did Pete have to do this?

When Pete started off on Market Profile his basic premise was to search for “value” on a
price vertical and time horizontal axis. It made waves because not many people had
thought about plotting markets like that. The equation was simple then :

Price x Time = Value.

Let’s understand here that the concept of volume as we see it today, was not prevalent
then.

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Pete argued that the market was an auction process and under normal circumstances,
you would fade movement away from value and under exceptional circumstances, you
would buy new highs and sell new lows. The market’s job was to facilitate trade and be
efficient and the best expression of that efficiency was the bell curve. Jim Dalton
expounded on this in detail in his book “Mind over Markets” which till date remains the
best explanation of the traditional market profile concept.

As Markets evolved and more volumes came in and changes started taking place in the
timings at the US and European Exchanges, Pete felt that the institutional volumes and
the 24-hour electronic markets created a lot more imbalances than earlier seen and the
Steidlmayer distribution and the Volume Strips were a response to this. The change to
screen-based trading from floor-based information in which locals were more powerful,
now gave new powers to the institutions who with their algorithms fundamentally
changed the control and hence imbalances became as important a part, as the balance
or movement to value.

Next, as exchanges started giving out volume information fully, Value now could be
easily seen through the volume traded at that price . Previously time defined price in the
past tense but now volume was current information defining price at every step of the
way. Time x Price was then Volume and since Volume became so freely available why
would anyone use a surrogate for it? Per the Original Market Profile theory, if the
function of the market was trade facilitation, then it would seek levels where
opportunities for trade would be maximized ( volume POC). This maximization would
also be reflected in the volumes and range of the day.

So what does all this mean for us now?

Fortunately, for us, not much has changed. Let’s remember again that Pete did these
changes to the market he was trading which moved to a 24-hour environment. This
made the concept of value, day types and Initial Balance not as useful to them as they
used to be. But as dwelled upon in the last post, the key to understanding everything is
context. And because we have a market which opens at 9.15 and closes at 3.30 we get to
use all the 3 methods which Pete has handed over to us. We can still use them
separately and I make an mention of day type in all my posts made in the evening and
also we can view the profile as a composite and see if we are in an IPM or a balance. We
use only composite profiles in all our posts.

At Vtrender, we build on what has been passed on to us. The Market Principles remain
the same but the application of these principles needs to change over time. It’s about
modifying the traditional theory to incorporate new insights
and substituting with modern applications some old tools. Volume information has
changed everything today and at Vtrender we were quick to see the Opportunity for
insightful trading when the OrderFlow information came through. Quite simply
OrderFlow meant to us looking inside the candle and see what the market was doing and
instead of making educated guesses about lack of demand or no supply or even test of
old supply or old demand we could see it live, working right in front of our eyes and the
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Volume opened the curtains to what the institutions were doing. Yes, we are
incorporating the best of OrderFlow practices to see the auction market theory work live
right in front of our eyes. So if the principles of Auction Market Theory tell us
that xyz point is rejection we look for OrderFlow to confirm that rejection. It’s this
marriage of Market Profile and the OrderFlow which is our defining edge in this fast-
changing sphere of trading. They can build faster algos and move from cable to laser, but
we see them and track them.

Our approach to the market is to build 2 hypothesis every day on the expected behavior
of the market. This is what Market Profile tells us about what the market ought to do
next ( I say “ought” not “will”) . Next, we interpret using the OrderFlow what the market is
doing currently. The gap between the two is our trading opportunity. The closer the gap,
the better is the trade.

I’ve often been asked why I pass on trading secrets and trading information to other
traders. The truth is that there are no secrets out there. What we speak about in our
trading room is common knowledge in every institution which works these markets. It’s a
different matter that they don’t know that we know it too and that we see them and
track them live and that’s our edge!

Trading is an extremely difficult profession but it’s difficult only for those people who do
not understand how the system runs. Most people pay tuition to become a lawyer,
doctor, engineer, accountant but ask how many traders read a book on Analyzing
Markets or have made an effort to tuition themselves and the answers would tell you
why this profession has a high fail rate. There is no literacy here.

I coined the subject of this post – Evolution. Pete Steidlmayer has evolved the Market
Profile and adapted it completely to a changed trading environment. I’ve seen sharp
traders unable to evolve losing out their edge eventually. Evolution is the only truth for
us as traders. A pond refusing to allow fresh water to flow in will attract pests and
eventually stink. Winning traders constantly refresh and renew their knowledge and add
to their expertise. Trading is a place where there is no place for resting on laurels. Keep
evolving.

True Success is a journey, not a destination.

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If you want to expand your understanding of the Market Profile then we have a place
where we not just look at the various concepts of the Market Profile but also put them to
practice in a Live moving market.

Pricing options are at – https://vtrender.com/pricing/

Some more details at – https://vtrender.com/trading-room/

A quick link to join the Vtrender Trading Room is at

– https://in.explara.com/e/vtrenderlive-trading-room

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