Volatility and Volume Technical Indicators

5 Common Misconceptions About Market Profile®

I was in junior high school the first time I was introduced to Market Profile. My Dad was a grain trader and the hedge manager for Ralston Purina, a huge manufacturer of animal feeds, not to mention the creators of Chex cereals and Rye Crisp crackers. He spoke of a friend, Peter Steidlmayer, who was devising a different way to look at markets. “Any interest in this, son?” Off I went on my skateboard as trading was not on my list of priorities, yet.

Years later, struggling to learn to trade, I was reintroduced to Market Profile by a friend and fellow trader who was realizing some success. He handed me his book about the Profile and told me, “Read the first hundred pages, it will change everything for you.”

I read the book that night and almost immediately started making fewer mistakes. My trade locations were the first thing that was noticeably better but there was still much to learn. I still had misconceptions created in my own mind that were common to many of the traders I have known.

1. Market Profile is a trade signal generator.

Market Profile is not a trade signal generator. It is purely a different way of organizing the market’s information to create a picture of the market’s balance, imbalance, and change in real time. All other systems of technical analysis and all the tools that surround them are based on the idea that by recognizing patterns that have occurred in the past, you have some degree of predictability in the future.

They are based on what has happened and not what is happening now. Market Profile has the ability to show you what is happening now, with the difference of the collective perception of value as it is happening, not as it has happened in the past. The day types, features, and changes in Market Profile throughout the trading day, week, or even longer hold clues to what is going on inside the market. Who are the players? Is the market ready to move away from where it has been trading? What levels are the most important to monitor the market for change? What is a good trade location? Are we in a balanced state or imbalanced state? These are only a few of the questions Market Profile can point out to you.

As you increase your knowledge and intuition with Market Profile, one of the first things you should notice is your trade locations/choices improving. How would you like to pay less and spend less time to find out you’re wrong? How would you like to increase your accurate intuition for seeing a market auction that has run out of steam? Market Profile will tell you the places and times to make the decision to act, but not how to react. This comes in time and practice, which brings me to my next point.

2. Market Profile is too hard to learn (I don’t have time).

If you are reading this and involved in trading anything, I must assume you have a desire and passion to do everything it takes to succeed. If not, then stop reading here. If I had not taken the time to learn even the basics of Market Profile, I am very confident that I would be in another career and would have been doing that for a long time by now. Not that there is anything wrong with that but I have had a long run in trading and I’m still not ready for it to end. Countless ups and downs, but a great ride all the way. I believe Market Profile has been so vital to my longevity in the industry; I don’t know how people trade without it.

Learning to use Market Profile does take time, and if you ask me, it’s a life-long study. Similar to learning an instrument, trading is a profession that takes dedication, but you don’t need years of schooling to succeed. If you commit to it, like you have committed to trading, it won’t be long before you begin to see the benefits. I will provide a preferred reading list at the end of the article. If you are serious about trading for life, how can you say you don’t have time?

3. It will confuse my other analysis.

Having worked with many traders who feared “losing their touch” with their current analysis, my first question is, “And how is that analysis working out for you?” Most of the time it is not too long before they see many of the levels from their analysis pointed out by features of Market Profile, but in real time. Using the analysis that is right for you alongside Market Profile might help fill in some of the pieces you feel might be missing. No need to dwell on this point, it’s simply not true.

4. Market Profile is no longer as valid as it was in the “open outcry” days.

The doubters like to hit me with this one and there really is only one answer: Baloney! Every market is an auction – a never-ending, two-way auction. The market auctions higher until no more buyers appear, the upward auction ends and a downward auction begins and will continue until sellers back off and/or buyers enter the market. Repeat ad nauseum. The auction hasn’t changed and the theories of Market Profile are as valid today as they ever have been, in my opinion. I can’t trade without it. The only thing that has changed about the auction is the venue. Now, we can no longer see our competitors face to face which makes Market Profile now even more important than ever. If we can’t see them, we need a tool that lets us gain an intuition into what they may be experiencing in the marketplace. What better way to gain an edge than knowing how your competition is feeling, the probability of what they are doing, and how they are likely to react?

5. If it’s so good, why isn’t everyone using it?

I used to be very secretive of my use and the power of Market Profile. As I have matured and learned more about myself and Market Profile itself, I have come to realize that in a free and open market, the auction process will not change. People’s opinions, psychological makeup, and perceptions will always be greatly varied. The great differences in people and their perceptions is what drives markets and always will. So, I feel it doesn’t matter how many traders use Market Profile, everyone sees things differently. For some, Market Profile may never make sense, as people learn different ways. For me, as a visual learner and an artist at heart, Market Profile helped me greatly. I know Market Profile is not for everyone, but don’t let misconceptions stop you; for it is not Market Profile that is good, it is the person interpreting Market Profile.

Hoagland’s suggested reading list:
“Mind Over Markets, Power Trading With Market Generated Information” by James Dalton

“Markets In Profile” by James Dalton

“Steidlmayer On Markets, Trading With Market Profile” by J. Peter Steidlmayer , Steven B. Hawkins
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