Steidlmayer on Markets: Trading with Market Profile (Wiley Trading Book 360)

by J. Peter Steidlmayer

In my family, no one was condemned for making mistakes. We understood that all knowledge came from making mistakes. This idea became dominant as I ventured out into the world and got bumped occasionally. "That was a good experience," my parents would say. "Learn from it and go forward."

I learned that by watching you could perceive a sense of order. Emotions and impatience do not produce results-observation and understanding do.

I learned that if you pay more than fair value for something, time is against you; but if you underpay, time is on your side.

A good broker or trader does the same thing. Many times, they use a higher-than-normal price to attract traders, realizing that in the short term they were overpaying, but later that price would be a good one.

In another instance, my father acquired a piece of property by playing a waiting game. He felt that nobody else was going to buy the property so he had plenty of time. The attorney for the estate dickered over the price for a year and a half, but my father knew that the estate had to sell it. He gambled on the chance that no one else would buy it, and he won. He got the property for about 40 percent less than the original asking price. Again, the relationship of market conditions to value and to the buyer's and seller's needs was critical. My father was always prepared. He always had a game plan.

When he started ranching back in 1916, he knew what he was going to buy and how he was going to accomplish his plan. He had the patience to do it over time. He knew when to move quickly and when to move slowly. I was always after him to buy other pieces of property that were outside his game plan. But he never would. He always refused to buy margi...

My father explained these ideas to me, and although I had had no previous market experiences of my own, I began to see the difference between buying a used car, buying a gun, buying a piece of land, or selling crops. These were all different markets, and depending on the needs of the individual, there were different ways to...

So I learned early that transactional data are more important information in any market than nominal quotes.

The more active I am as a trader, the more information I have in my hand.

It means the smallest unit of time and price activity that could develop into a vertical move. One would use these minimum trends to measure market activity and to see when a change in the market was beginning. The advantage of this concept was that the aggregation of these minimum trends would eventually indicate the beginning of a directional move. This is because the minimum trend is one-sided. It can only get bigger, never smaller. The simplicity of this attracted me. I decided to use a 3-minute price range as my version of the minimum trend.

The next step was realizing that a number of minimum trends could be grouped statistically to form a bell curve.

came up with the idea that the bell curve could be used to represent an arrangement of behavior around price. The first standard deviation-the middle of the bell curve, where the majority of activity takes place (68 %) would represent value, whereas the seco...

Whenever the market moved away from value, I would take the opposite side of the trade. Please look at Figure 2-2 to the points illustrated. I would sell the zone indicated by the number 1 or buy the zone indicated by the number 2 because I felt tha...

An important distinction should be made between two types of markets-the initiative market and the responsive market.

An initiative market is one characterized by buying as the price moves higher and away from value or selling as the price moves lower and away from value. This might occur, for example, if an earnings warning was issued by XYZ Corporation. Prices would move directionally lower (distributing) to find a new fair price. Initiating selling would enter the market in the belief that the directional move will continue.

To determine whether activity is initiating or responsive we need to use the previous day's v...

The buying above the previous day's value area is a textbook example of initiating buying.

In a responsive market, participants act just the opposite. As a market moves higher or lower (away from the previous day's value), sellers or buyers enter the market feeling that the market will not continue moving directionally. They feel it is just a matter of time before the market trades back to what is considered an area of established value. They respond to a directional move up by selling into it or a directional move down by buying it.

Once again, the first step in assigning activity as initiating or responsive is to determine th...

Note the price activity for the following day (2/1): the market opened lower (B, first half-hour of trade for stocks) and managed to trade higher (C). In other words, the lower open triggered buying by partic...

What I worked out, without understanding it, was a way of charting trading volume. The underlying formula is simple: Price

As you can see, Figure 2-7 is a perfect example of the so-called normal distribution of price/time usage in the market-a perfect bell curve. This is the form responsive markets took, and still take today.

As a trader, I was basically playing for this symmetrical pattern to develop using the number of minimum trends at each price level as a timing device. I would play for the high-volume price to be at or close to the middle of the day's price range.