CBOT
Market Profile
and Liquidity Data Bank
-Current Developments
Thomas P. Drinka- Department of Agriculture-
Western Illinois University
Introduction
Price
Volume
Analysis
Current Developments
Market Profile
and the Advent of 24-Hour TradingThis chapter has briefly
considered the theory and use of market profile as developed by J. Peter
Steidlmayer over a 25-year period, and as initially implemented by the
Chicago Board of Trade in the early-1980s.
Everything that I had learned about the markets through my experiences
prior to 1981 was formalized in the CBOT Market Profile
and LDB.
Through these two media, I was able to organize the market, define
market activity and describe that activity by means of volume….
Instead of trying to read the past and extrapolate to the future, as
previous technical systems had tried to do, the object of Market
Profile
and LDB was to understand the present as would a local on the floor.
(J. Peter Steidlmayer, Steidlmayer on Markets,
John Wiley & Sons, New York, 1989), page 64.
This traditional use of the CBOT Market Profile
and Liquidity Data Bank is being modified as markets have evolved in,
primarily, two respects. First, during the 1980s, market volatility and
daily price ranges increased dramatically. Secondly, with the growing
importance of 24-hour markets, the combined role of the day-time-frame
trader and the other-time-frame trader is diminishing, as a third type
of market participant -- namely, the opportunity-time-frame trader
-- is becoming more active. "The opportunity time frame is a moment in
the market that forces a participant to act because of the favorable
price opportunity it offers" (Steidlmayer, page 114). Thus, the
opportunity-time-frame trader has a mode of behavior completely unique
from the day-time-frame and other-time-frame traders; this participant
continually monitors market activity, and takes advantage of trading
opportunities that may arise at any time. The emergence of the
opportunity-time-frame trader is also contributing to market volatility.
The idea of value -- wherein 70% of the day’s trading activity occurs
-- is based upon the definition of the first standard deviation of a
normal distribution. In a normal distribution, the first standard
deviation is positioned around the mean, while the second and third
deviations are positioned, in turn, outside of the first deviation.
However, the Steidlmayer distribution may start from either end,
though not from the middle. That is, development follows either from a
first standard deviation or from a third standard deviation -- never
from a second.... Parts of the Steidlmayer distribution have the
characteristic of being initiating or responsive in relation to the
developing distribution -- initiating in the second and third standard
deviations, where the market moves quickly, and responsive in the first,
where it moves slowly. This volume relationship gives us the speed of
market movement, as the market will move quickly away from the third
standard deviation but slowly away from the first (Steidlmayer, pages
119-121).
As this evolution in market behavior was recognized by Steidlmayer,
he reflected on this for quite some time and found myself beginning to
explore my natural, intuitive feelings about trading. This led to the
developments in the later half of this book, which I believe are far
superior in methodology to the mechanical approach of Market Profile.
I don’t mean that Market Profile
and LDB
aren’t valuable; in fact, I still use all the data developed for them
continually. But, I’ve learned to incorporate these data into my natural
way of trading (Steidlmayer, page 68).
Current Market Profile
Developments
J. Peter Steidlmayer,
Donald L. Jones, and James F.
Dalton continue their innovative Market Profile
research programs, which were initiated in the early 1980s.
Complimentary on-line material is available at their websites. All of
this material is a must-read
for Profile students. For, as Steidlmayer envisioned in the early 1980s,
Market Profile
is an evolving discipline.
In 1990, one of my former
students began developing Profile-based software to assist his
futures/options trading; I participated with him in algorithm
development and testing from Spring of 1992 until Fall of 1998.
Traditional Market Profile
theory does not allow days to be linked over time, the way they are by
traditional technical indicators; additionally, Market Profile
is not a parameter-based algorithm that is amenable to optimization and
back-testing. The focus of this research was to develop such a
Profile-based algorithm. The
Current Research section of my Website traces the evolution of this
research; the College of Business and Technology Investment Club is
currently using two of these algorithms to manage trades of CME hog
futures.
______________________
CBOT Market Profile,
Liquidity Data Bank,
and LDB
are registered trademarks of the Board of Trade of the City of Chicago.
The views expressed in this chapter are solely those of the author,
and are not to be construed as the views of the Chicago Board of Trade,
nor is the Chicago Board of Trade in any way responsible for the
contents hereof.
Last Modification October
1999.
|
miracles,
they are everywhere.............. 
