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The Professor Series
An interview with J. Peter Steidlmayer
by Jim Miclōt, Ph.D.
©MARKET PROFILE PLUS (MP+)
Exclusively on Aspen Graphics 4.0
Market Profile® is a registered trademark of the Chicago Board of Trade.
JM: The original Market Profile offered a graphic tool with distinct advantages not only for trading but also for understanding market activity as a process. It depicted the unfolding of market imbalances in the present tense, as ongoing development, and so it captured all the nuances that describe how value is established over time--rather than the jittery depictions offered by price-to-price displays. Market Profile was “time sensitive” in a unique way, holding present market activity to some realistic expectations given the interchange between participants with various timeframes. The markets have changed. In what ways does the new Market Profile Plus capture that change?
JPS: Basic and fundamental programs always automatically adjust to changing conditions. The fit is forever while application always needs to be updated. For over twenty–five years now Market Profile has chronicled market development in all types of trading markets. Individuals have learned about the various stages and characteristics of market development, and have learned from experience how to best apply its unique form for their personal use. Profile usage has grown due to the ease of which it communicates market activity to the trader in a fundamental sense, and due to the fact that it anchors the days trading activity.
Markets have evolved over that same time period into a vast array of products that serve an ever-growing appetite for risk transfer and management. Access has grown to include many front-end devices that have taken mere price quotes to being an exchange equivalent operation. Firm proprietary accounts have grown along side commodity funds to increase the size of permanent capital available to trade on a daily as well as longer-term basis. Trading hours have expanded to almost equal a full day instead of just a partial, which makes information much harder to catalogue. Profiles help fill this void by being timeless chronologically while at the same time being able to choreograph market development however or whenever it occurs.
The nature of market development has changed as one might expect due to all this evolution, and has negatively affected some traditional opportunities while opening new avenues and approaches to trading success. Success is where and how one can find it in the new evolutionary sequences rather than lodged in the past. One should not be insecure while change is taking place, rather one should seek to discover what the outer limits are going to be--once that is defined, the opportunity becomes a lot more competitive and is also restrictive in terms of growth. Such moves are never clearcut or defined by past activities, but evolve from a feel for the situation as it unfolds. The new will very soon by themselves evolve into new standards that in turn will end the opportunity for discovery for that sequence.
There are several fundamental understandings related to the profile that need to be part of this discussion. The first of which might surprise most of you is that market profile is a supply display rather than one of price. Most discussions [early ones] have been centered around the Bell Curve and its various properties, which lend themselves to vertical price references. It is however the horizontal measurements that reveal the pricing power of supply, and in effect changes the trading format from the more random one of price-to-price to one more related to supply itself, which imparts a more non-random influence.
Market Profile accomplishes this by defining the change that overtakes the market equality at trade prices [open interest—longs and shorts balanced] to one of being inventory imbalance. Longs or shorts do not operate on an equal timeframe, and this imbalance causes the market to move vertically, which is a move that all are trying to catch in a consistent manner. The profile needs to be free to express itself by building its development unrestricted from chronological time, and in doing so it gives a varying horizontal count [or measurement] across its mid-section. Where less than, it indicates pricing power of supply in that direction, where more than, it pin points a new supply position. The expansion and contraction of the horizontal in comparative profiles defines supply [inventory] or the collective market allocations of those using the markets.
JM: In graphic terms, the expansion of the horizontal means that the belly of a profile (or several profiles conjoined) is bulging, and that from this relative expansion or contraction the trader can begin to read a fundamental process of market allocation (supply/demand). With the “splitter” function that is built into Market Profile Plus, we are able to organize the horizontal/vertical expression of data into more properly developmental terms, rather than compacting that relationship (horizontal/vertical) into forms that are imposed externally--like chronological bars.
Reading development means not getting “stuck-in-vertical” where one is only reading price-to-price gyration. Seeing the horizontal relationship is essential because whatever inventory is being accumulated will only be held further and extended if it finds itself attuned to a larger market allocation process, one that is more glacial over time. In other words, allocation must be read as a whole, not by way of mere price rotation--through which liquidity is being generated and regenerated--since most of that transactional activity (by volume) is simply “in-and-out” and so rotation itself cannot be the key to sustained market moves.
In today’s markets, the prevalence of vertical price gyration (for purposes of liquidity) would seem to imply some fundamental behavioral changes in the way markets are now being traded, changes that ought to be more readable in the Market Profile Plus—once those changes are understood.
JPS: The modern liquidity [market access] is far different than in the past. Both the local trade as well as the screen book [listing of orders above and below the current trade price] are a lot more passive than the more active pits of the past. The latter offered a supply filter that compressed each order into a tighter range and gave more meaning [less random] to each price due to this supply influence. Traders referencing their positions were really making inventory decisions rather than ones of price even though they probably were not directly aware of doing such.
Today’s conditions have changed dramatically in that this filter is almost totally gone. Prices have a much larger vertical range, have less stability at each price, and are more random in nature. Most local traders, especially the smaller ones, have to trade for range development rather the order processing of the past. The large or largest traders have an increasing advantage now over the past in that their volume [supply] can more easily influence market direction. The supply function is now spread out more into what can be called a supply chain where the replacement inventory resides outside of the liquidity process. Where a trader has a loss and exits, the replacement comes from the outside and carries a commitment to a direction instead of just stopping the one in place. I have always stated to myself over and over again not to buy someone else’s problem, but to trade something new with my capital.
The unfiltered supply is an easier read due to its directness, which gives the trader quite an advantage over the past. The effect of supply on the market is quite high when price is close to it. The opposite is true where the time-distance between the two elements is large, which makes the quotation nominal. On a relative basis, it is the movement of supply forward with price that keeps continuation intact. Contrary to most beliefs, it is new selling that moves the market forward as losing trades are transferred, and it is new buying that cause it to fall. All of this activity takes place under conditions of what I call the tone of the market. It quite naturally takes a buyer and seller to make a trade, but direction is always fueled by those wrong being replaced versus those that are right. It is the latest rights in the market that control inventory, and it is the latest wrongs that that are making the adjustments, which brings a consistent tone to change [non rotational].
JM: Finding the supply (or liquidation) behavior seems to be the key to reading how the market is allocating fundamentals, supply and demand. When near to inventory-building, price has a very different meaning than it does when further away from accumulation. All prices are not created equal. At a distance from inventory, price becomes more autonomous in its relation to sustainable behavior, hence more rotational and more random--until another phase in the allocation process manifests itself. This suggests that trade management could take on a more offensive quality insofar as supply pricing can be differentiated from the price-to-price activity stirred up through mere liquidity generation.
JPS: Market Profile really allows one to manage the inventory of the market, which is a much broader platform than one that consists of just price-to-price activity. Any semblance of a decision related to supply is far superior as an entry or exit process than one that is just a small differential [price change]. The more of the whole [market inventory] that can be involved in the decision the more realistic the potential outcome. The latter has been and remains the stumbling block for consistent success over time.
Instructions, illustrations, and examples are demanded in all academic works. This booklet is not of that kind. The best results from Market Profile have comes from those who made the effort to find a way to use it, and the same holds for today. The knowledge that the horizontal expansion and contraction of the profile represent inventory, and coupled with the fact that inventory is a whole that is more non–random than random when related to change directly serves to help overcome the costs associated with random access.
JM: Yes, in the original Market Profile, the way that one learned market activity as a process was through individual engagement, a continuous course in self-discovery as one came to appreciate the subtle, behavioral differences that were articulated through that developmental format. You are saying that the same applies today, that one can actively take account of changes in the markets and stay engaged with what matters by keeping the larger allocation process at the forefront of attention—because that is the only form of imbalance that can move the market in a sustained manner.
What is the first step to organizing one’s own trading behavior around that fundamental form of imbalance?
JPS: The first step is to just sit down at your computer, move the profile to market time rather than the more limiting chronological, and look for supply locations. Then look to see the effects of that supply, then to see how supply follows [chain effect] on all good directional moves. Understand that working with the largest or a just a large piece of supply is beneficial to even the shortest time frame trade. It is so because it is very hard to change [leading to its non-random characteristic]. Then compare this stability to price activity, and learn then to take advantage of price in this context versus just another view of price.
J. Peter Steidlmayer will present a class for Aspen Graphics on December 14, 2002 in Chcago. The Blue Books I through V are available for $100. Contact jim@steidlmayer.com
The Professor Series, Jim Miclot, Ph.D.
Series One: “The Blue Books” by J. Peter Steidlmayer and Jim Miclot
Blue Book I Trading—By Self
Why do people have such a hard time trading?
Where can one find relevant market data for trading?
What’s wrong with the “buy low/sell high” approach?
Why is exiting the most important part of trading?
How do you use cash flow instead of prices for trading?
Blue Book II Trading Psychology
What is meant by market feel?
What is the first step to trading success?
What are the hardest things for traders to detach from, and how?
What is the path to independence in trading?
How can aggressiveness be beneficial in trading?
Blue Book III Fragmentation and Trading
What is the nature of market fragmentation?
What is the effect of information technology on trading?
Why hasn’t market data been more beneficial to traders?
How can you be so positive about X-Fund directionality?
What attributes of the X-Fund offer a platform for success?
Blue Book IV Time-Normalization-Platform (TNP)
What are the key ingredients in constructing a TNP platform?
What is the difference in TNP useage for trader and investor?
What determines success for either type of participant?
Can you illustrate by results the way to use TNP for trading?
Can a trader use part of this program without embracing it all?
Blue Book V Inventory Insights
How does inventory imbalance put the market ahead of price?
Why does the spike between entry prices occur?
How do you evaluate inventory trading programs?
In working with TNP platforms, what has surprised you the most?
Does the inventory approach have additional legs?