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Traditional technical analysis uses
historical market-generated information to solve for profitable technical
indicators by the process of optimization/back-testing; the resultant
indicators are used to monitor market behavior on a day-to-day basis. This
approach to technical analysis allows the market participant to deal with
the markets on a part-time basis.
Market Profile is a form of technical analysis, in that it utilizes
market-generated price and volume data. However, it differs from traditional
analysis, in that market behavior is monitored throughout the trading
session. In order to gain market understanding, the profile trader observes
the market in real-time, either on the trading floor, or away from the floor
via price-quotation equipment.
Following more than four years of development by
J. Peter Steidlmayer and the
Chicago Board of Trade
(hereinafter, "CBOT"), the CBOT Market Profile and Liquidity Data Bank
went on-line in 1984. The first vendor of the data was
Donald L. Jones.
Figure 19
below displays a Market Profile graphic with CBOT Volume, and a 30-minute bar
chart of CBOT January 1990 soybean futures for December 8, 1989. The graphic
is a real-time, time-and-sales quotation ticker that displays time/price
relationships. The letters comprising the graphic designate the following
standard 1/2-hour time periods: "A" represents 8:00-8:30 A.M. Central Time,
"B" represents 8:30-9:00, and so on. The price of SF0 ranged between 5770
and 5736 during the D period (the first period of this market), between 5762
and 5744 during the E period, and so on. The day's open and last prices are
designated by the two triangles appearing adjacent to 5754 and 5790,
respectively, while the third triangle designates the middle of the day's
price range.
Each letter comprising the graphic is a time-price-opportunity (hereinafter,
"TPO"); a TPO is an opportunity to trade in a specific 1/2-hour period at a
specific price.
Figure 20 illustrates the formation of
the graphic that is displayed in the previous figure. In Figure 20, trading
activity is depicted with the TPOs displayed as a 30-minute bar chart; with
the TPOs left-justified, the conventional profile graphic® displayed in
Figure 19 results.
The CBOT Volume presented in turquoise at the left side of
Figure 1 is generated from the CBOT Liquidity Data Bank. It is the
distribution of contract volume at each tick over the day's price range, and
is presented both numerically and graphically.
With the availability of the CBOT Market Profile and LDB, the
general public has access to market-generated information which previously
had been available only to individuals who trade on exchange floors. Thus,
it is possible to get the feel of a market, while trading away from the
floor.
Market Profile
Some individuals trade, on the one hand, by following market fundamentals
and/or by conducting technical analysis; as seen in previous chapters, the
intent may be to trade by using some system or formula which is construed to
represent market behavior. On the other hand, the discipline popularly known
as market profile entails understanding what is happening in the market,
thinking about it logically, and acting accordingly.
The Market's Purpose
The purpose of a market is to accommodate trade. Futures exchanges promote
trade accommodation by providing such things as a location at which to
trade, market-imposed time-frames (for example, the hours of the trading
session, the life of futures contracts, and the timing of market reports),
and the information captured in the profile graphic and the volume
distribution.
The Market's Operational Procedure
The market is self-regulating through the use of time and price, and
market
activity is interpreted by the acceptance or rejection of TPO's by market
participants. The market operates through a dual auction process. As it is
attempting to accommodate trade, the market seeks the activity of
participants through rotation: that is, as can be seen in Figure 20, it uses
price probes which move, alternatively, too high and too low in order to
create trading opportunities. The acceptance or rejection of these TPO's by
market participants is a function of their needs and objectives.
The Behavior of Market Participants
Market participants are categorized by their time-frames. Day-time-frame
traders intend to conduct business in a specific trading session. They seek
a fair price in order to accommodate trade: that is, they operate to buy the
bid price, or to sell the asking price, so as to take the edge.
Other-time-frame traders, who may not initially intend to conduct business
in a specific trading session, may acquire a market position because of an
attractive TPO. Their usual mode of behavior is to fade the market: that is,
they usually operate to buy at the low end of the day's price range, or to
sell at the high end.
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