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Steidlmayer on Markets: Trading with Market Profile, Second Edition

by J. Peter Steidlmayer and Steven B. Hawkins (2002)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Steidlmayer on Markets: Trading with Market Profile, Second Edition

By J. Peter Steidlmayer and Steven B. Hawkins

Quick Summary

J. Peter Steidlmayer, the creator of Market Profile, and Steven Hawkins present the definitive guide to trading with Market Profile -- the analytical framework that revolutionized how traders understand market structure. The book covers the development of Market Profile, its theoretical foundations in auction market theory, the interpretation of TPO (Time-Price Opportunity) charts, value area analysis, initial balance concepts, day structure types, and the Steidlmayer Distribution. This second edition includes enhanced treatment of volume analysis, trade setup identification, and the Liquidity Data Bank.

Executive Summary

"Steidlmayer on Markets" is the authoritative text on Market Profile, written by its creator. The book is structured in two parts: Part I traces Steidlmayer's personal journey and the intellectual development of Market Profile from his early farm experiences through his career on the Chicago Board of Trade floor; Part II, written by Steven Hawkins, provides a detailed interpretation and practical application guide. Market Profile transforms raw price and time data into a visual representation of market value, making the auction process visible to all market participants. The book establishes Market Profile as a tool for understanding the market's natural organization and for identifying high-probability trading opportunities based on the interaction between different types of market participants.

Core Thesis

Markets are auction processes that naturally organize themselves around value areas. By tracking the distribution of time spent at each price level (TPO), traders can objectively identify where the market is finding value, when it is in balance or imbalance, and when conditions favor directional moves or range-bound trading. The key to successful trading is understanding the market's internal structure -- the interaction between short-term (day) traders and longer-term (other timeframe) participants -- and positioning accordingly.

Chapter-by-Chapter Analysis

Part I: The Steidlmayer Method

Chapter 1: Early Lessons - Steidlmayer draws parallels between the natural order he observed on his family farm and the natural organization of markets. Concepts of trust, freedom, order, and control are introduced as foundations for understanding market behavior.

Chapter 2: College Years - Steidlmayer discovers the bell curve and its relevance to market price distributions. John Schultz introduces him to the concept of the "minimum trend," which becomes foundational to Market Profile.

Chapter 3: Chicago - Steidlmayer begins trading on the CBOT floor, learning the distinction between responsive and initiative activity and observing the "common laws of the marketplace."

Chapter 4: Changing Markets - The advent of commodity trading funds and the volatile 1970s markets provide the conditions that accelerate the development of Market Profile concepts.

Chapter 5: The Information Revolution - The formalization of Market Profile through the concepts of price recurrence, volume, and the natural organization of market activity. The distinction between fundamental and technical information is explored.

Part II: The Hawkins Interpretation

Chapter 6: Understanding Market Profile - Comprehensive treatment of Market Profile mechanics: TPO construction, value area calculation (the price range encompassing 70% of the day's TPOs), initial balance (the range established in the first two trading periods), and five typical day structures (Normal, Normal Variation, Trend, Double Distribution Trend, and Non-Trend days).

Chapter 7: Liquidity Data Bank, On Floor Information, and Volume @ Time - Introduces supplementary analytical tools including the Liquidity Data Bank (which breaks down volume by trader type), on-floor information sources, and volume-at-time analysis. Covers blow-off extremes and volume excesses.

Chapter 8: The Steidlmayer Theory of Markets - The theoretical framework: the market is an organized medium that expresses human behavior in different price areas at a given point in time, always presenting an opportunity to someone.

Chapter 9: The Steidlmayer Distribution - Introduces the Steidlmayer Distribution as an improvement over the normal (Gaussian) distribution for modeling market behavior. Explains how the distribution's shape reveals the speed and character of market movement.

Chapter 10: The You - Addresses the trader's objectivity and market discipline as prerequisites for applying Market Profile successfully.

Chapter 11: Anatomy of a Trade - Step-by-step guide to trade identification and execution using Market Profile, covering game plans, trade setups, human capacity limits, volume studies, chronological databases, parallel activity, and the creation of a "high level of trading."

Key Concepts and Terminology

  • Market Profile: A graphical representation of the market's auction process, organizing price, time, and volume data into a bell-curve shaped distribution
  • TPO (Time-Price Opportunity): Each half-hour period that trades at a given price level, represented by a letter on the Market Profile chart
  • Value Area: The range of prices where approximately 70% of the day's trading activity occurred, representing the area of accepted value
  • Initial Balance: The price range established during the first two 30-minute periods of trading, setting the stage for the day's directional activity
  • Point of Control (POC): The price level with the highest concentration of TPOs, representing the most accepted price
  • Responsive vs. Initiative Activity: Responsive activity occurs when other-timeframe buyers enter at low prices or sellers at high prices within value; initiative activity occurs when participants push prices beyond the value area
  • Day Structure Types: Normal Day, Normal Variation Day, Trend Day, Double Distribution Trend Day, and Non-Trend Day -- each with distinct characteristics and trading implications
  • Other Timeframe (OTF) Participant: Longer-term traders whose activity drives directional movement and creates market imbalances
  • Excess: Single-print TPOs at the extremes of a Market Profile, representing aggressive rejection of prices
  • Steidlmayer Distribution: A proprietary distribution model that better captures market behavior than the standard normal distribution

Practical Applications

  1. Construct daily Market Profile charts to identify value areas, points of control, and structural imbalances
  2. Monitor the initial balance to assess the potential for trending vs. range-bound behavior
  3. Identify other-timeframe participation through range extensions beyond the initial balance
  4. Trade responsive strategies when the market is in balance (buying low value, selling high value)
  5. Trade initiative strategies when the market shows signs of imbalance (single prints, range extensions, poor high/low structures)
  6. Use day structure classification to adapt trading approach to current market conditions
  7. Apply the Liquidity Data Bank to understand the behavior of different trader categories
  8. Monitor the development of the daily distribution to anticipate end-of-day value area migration

Critical Assessment

This is the definitive text on Market Profile, written by the method's creator. The combination of Steidlmayer's philosophical depth and Hawkins' practical interpretation creates a uniquely valuable resource. The book's greatest strength is its emphasis on understanding market structure rather than applying mechanical rules. However, the writing can be abstract and philosophical, particularly in Steidlmayer's sections, which may frustrate readers seeking purely mechanical trading instructions. The book assumes some familiarity with futures markets and may be challenging for complete beginners. Despite these limitations, it remains indispensable for anyone serious about auction market theory and Market Profile.

Key Quotes

  • "Market Profile is the product of a professional floor trader's ability to communicate the pit trading experience symbolically in chart form."
  • "The market is an organized medium that expresses human behavior in different price areas at a given point in time, always presenting an opportunity to someone."
  • "Visual focus equals accurate communication equals better trade identification."
  • "Market Profile has no chronological restriction. It expands horizontally only when prices repeat."

Conclusion

"Steidlmayer on Markets" is the foundational text for auction market theory and Market Profile analysis. Steidlmayer's creation of Market Profile represents one of the most significant innovations in market analysis of the 20th century, transforming how traders understand the auction process. The book provides the theoretical framework, practical tools, and philosophical perspective needed to apply Market Profile to real-world trading. It is essential reading for any trader seeking to understand market structure at the deepest level.