Here are my thoughts and comments on Markets in Profile: Profiting from the Auction Process, by James Dalton, Robert Dalton, and Eric Jones (authors of Mind Over Markets). I’ve just finished reading it.
At only 200 pages, Markets in Profile isn’t exactly a hefty tome. Don’t let its length deceive you, though. This is an intellectual book which incorporates a fairly wide array of topics, including some common academic theories, in to the mix. While there are loads ofÂ graphics included to provide visual examples in support of the text, which serves to cut down the actual amount of textual content, do not expect to breeze through this book in an afternoon sitting. It delves in to the heart of trading in a way that will force you toÂ examine how you approach the markets.
One of the things that most, if not all of us forget when we’re analyzing and trading the markets is exactly what’s going on. We see the movement of prices and fail to remember what is really happening to create that price movement. That’s the auction process. To quote the authors, “… price and volume move over time to facilitate trade in the pursuit of value.”
A great deal of effort is expended by market participants to determine value. Fundamental stock marketÂ analysts spend hour upon hour trying to come up with a figure that represents the worth of a company based on earnings, book value, and other factors. That is all fine and good, but it is the market, in the end, which defines value. And it does so on a running basis.
The problem we market participants have is that we focus too much on price, which the authors indicate is merely the advertising side of the auction process. They demonstrate how price is just a way for the market to seek value. There’s an important distinction here. Price is not value. It is just a way for the market to find value, which is defined as the price area where volume is generated because buyers and sellers meet in agreement.
To help us understand that process, the authors use some easilyÂ understood examples to define the basic mechanisms of the financial markets. They are the same as inÂ other markets, after all. The process might operate faster and on a broaderÂ scale, but otherwise it is the same. Sellers are trying to receive theÂ highest possibleÂ value in the sales price, while buyers are trying to minimizeÂ the price they pay in relation to the value the expect to receive. When there is disagreement between the two, little trading takes place. When they agree, lots of trading happens. It doesn’t matter if the product is automobiles, bananas, or stocks.
About the first half of Markets in Profile is laying the kind of mentalÂ groundwork needed for reallyÂ getting in to the analytic method known as Market Profile. Market Profile is the technique the authors use to identify the levels where the market has found value and when the market is in search of value. It is an approach first developed by Peter Steidlmayer (see Steidlmayer on Markets) at the Chicago Board of Trade (CBOT)Â for the futures market,Â and which they spent considerable time defining and outlining in their previous book, Mind Over Markets.
On the surface, Market Profile appears to be just another way to present price history in graphic form. The authors, however, demonstrate how the Market Profile distribution patterns put “market-generated information” to excellent use in identifying value and the market’s pursuit of it.
Using numerous examples, the authors explain in detail the ways Market Profile can be used to identify what they refer to as “asymmetric opportunities”. These are market set-ups where not only do the odds more favor a move in one particular direction, but the situation is such that a move in that direction is likely to be substantially larger than were the market to go the other way. Think of it as you would a trading system that has a win rate in excess of 50% and a high average winner to average loser ratio. That’s a pretty good combination!
This is a book that can make a huge difference in the way you look at the markets, and by extension, the way you trade, but only if you let it. The authors challenge quite a few elements of trading. Some readers may put up walls where that happens. The open-minded reader, though, will find themselves thinking along completely new paths and gaining massive insights in to the way they see price action.
(For the record, years ago, when I was a professional analyst focusing on the futures market, I used Market Profile extensively and with considerable success. In the intervening years I fell away from it when I shifted market focus, but I’m now making a move back.)