Saturday, February 24, 2007

Book Review: Markets in Profile

From Brett: I recently mentioned the use of Market Profile as a trading best practice. Here is my full review of Markets in Profile: Profiting from the Auction Process by James Dalton, Robert Dalton, and Eric Jones (Wiley, 2007). I believe the underlying concept behind the book--understanding what is happening in the auction process at timeframes longer than your normal trading horizon--is an important one. "Which timeframe is in control of the market?" is a question that short-term traders rarely address, leaving them open to unexpected market shifts. The Markets in Profile book does a nice job of showing traders how to answer this question--and what to do about it. The following review was posted to the Amazon site earlier today.

When I initiated an internship program for new traders at a proprietary trading firm, I began by providing students with a conceptual overview of markets and the factors that make markets move. That overview drew heavily upon the book "Mind Over Markets" by James Dalton, Eric Jones, and Robert Dalton. Quite simply, that book is the most readable, lucid, and insightful work on the auction process underlying trading markets that I have yet encountered.

You can imagine, then, my delight when I had the opportunity to read an advance copy of the authors' new work, "Markets in Profile" and provide a review statement for the book's cover. I turn down these endorsement requests rather often. Frankly, many of them are simply favors being done by buddies and don't reflect an actual reading of the text. The least authors can do for their readers is keep it real.

There was no problem in my keeping it real when I wrote that "Good books teach, but the best books enlighten". Markets in Profile is one of those enlightening books, because it takes the conceptual framework from the first book and applies it to concrete trading time frames and trading scenarios. In that sense, I would say it is a worthy bridge between theory/understanding and practice.

A core theme of Markets in the Dalton, Dalton, and Jones text is the following nugget: "If you can correctly identify which timeframe is in control of market activity, and you have a good understanding of how the individual timeframes generally behave, then you are in a stronger position to trade, invest, and effectively control risk." The practical aspect of the book is that it illustrates how to read the Market Profile to grasp the long-, intermediate-, and short-term auctions and place current market activity into a proper context.

Time and again I have observed that a trading edge comes from understanding what is happening at the timeframes greater than the one you're trading. If you're in a trading range, you might want to be prepared for a breakout. Which way is it likely to break? Using price, time, and volume to see how value is being established at those larger timeframes provides invaluable clues.

As the authors also explain, observing volume patterns as the market moves away from value at one timeframe is very important to understanding whether or not we will return to value or reprice value (perhaps in line with the longer-term auctions). Seeing these dynamics evolve over time helps traders understand what is likely to occur, but also *why*.

I find the authors' use of examples, charts, and Market Profile diagrams to be quite helpful. This is not an encyclopedic work; it's a very readable 200 pages. By the end, however, readers will have a solid understanding of how to apply auction-based principles across timeframes and frame their trade ideas with that broader understanding. A particularly practical chapter is the one on day-trading, which shows how these principles are relevant to the active trader.

The authors make clear that Market Profile is not a trading system, but a framework from which trading ideas can be derived. My analogy isn't perfect, but perhaps it will make sense: Just as the periodic table helps chemists organize their understanding of elements and predict how elements are likely to interact with one another, the Market Profile organizes data on price, time, and volume to help traders anticipate market behavior. We have types of elements (metals, non-metals) and combinations of elements, and we have types of markets and combinations of markets: knowing type provides invaluable clues as to likely behavior in various situations.

It's rare that I don't have some reservations about a book. This one is clearly written, straightforward, and doesn't get away from its topic. There's no fluff, and (mercifully) there's no chest-beating self-congratulations from authors who try to make themselves out to be gurus. Markets in Profile is simply a guide for putting theory into practice at different time frames. That, in itself, is unique in the trading literature.


AnaTrader said...

Hi Brett

I have, in fact, just finished reading the Market Profile book : Mind over Markets, by the Daltons & Jones, 1990 edition.

I find it reader friendly and the concept of the auction process at different timeframes applies to online trading too.

Using the MarketDelta tool, I find the correlation between MarketProfile and MarketDelta useful understanding, now that volume shows up in real time as in MarketDelta.

I look forward to reading the Markets in Profile: Profiting from the Auction Process, by same authors, now that you have also reviewed it, and I am sure I will find this a good follow up to the first classic book in MarketProfile.

Steven said...

Hey I don't mess with psycho stuff on my site, whatcha you gonna go and do book reviews for...LOL.

Reading the book now actually, was going to do a book review on Monday or Tuesday, guess I should have read faster.

So far it is good. Getting lost a bit in the whole Market Profile charts, but the focus on price, time, and volume is very eye opening.

For a while now I wanted to do a post on how contrary to popular belief, short and long term investors/traders actually exist to compliment each other. The book does a good job on showing just how that is, e.g. setting value and providing liquidity.

Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

There aren't too many books that have truly changed how I look at markets, but that's one of them. Thanks for the note--


Brett Steenbarger, Ph.D. said...

Hey Steven,

It's all good, my man, I'll be happy to read psycho stuff on your site. No reason I should have a monopoly on psychoticism. :-)

Seriously, though, great point re: the interdependence of the time frames. It's very common for short-term traders to get so caught up in what's happened the last few ticks that they miss the larger picture.

Thanks for the comment--


NStone said...

Hi Brett,

I have to disagree on your book review I'm afraid. I am a massive advocate of Market Profile and found the book Mind Over Markets the best trading information book I have. I bought your book Enhancing Trader Profile and Markets in Profile at the same time - but obviously the latter only arrived recently due to publishing. I have to say the difference in the two texts is massive.

Markets in Profile in my opinion does nothing to rival its previous book. There is no further explanation on importants matters. What is worse I believe that the book is constantly promising to provide the clarity but never actually does.

I appreciate that you had some involvement in the project, but I can't convey how let down I was after wanting the book for so many months. If you contrast the Profile book with your own I think you can see the vast difference. Your book is truly excellent. Firstly it covers an area that nobody has written about. I find your lessons on how to learn very enlightening. It also explains why my italian learning is good but why I will never be a good violinist!

I have to say I was very disappointed in the depth of the Profile book given their previous book. But then I swithed back to yours and found my way again.

I have to add that I have used Market Profile for 5 years now doing my own proprietary research all the time. Maybe there is no book that could help my advancement so I may be being slightly harsh with this one.

Best Regards,


Brett Steenbarger, Ph.D. said...

Hi Nick,

I appreciate your perspective. I do think that an advanced student of Market Profile who is already doing his/her own proprietary research and already using the Profile to track auctions at multiple time frames will get less out of the book than a trader who is less schooled in the Profile's application. We always tend to be most critical of books on topics we know a lot about; that certainly is true for me when I read articles and books on trading psychology!

Where I think the Markets in Profile is helpful is in breaking down the time frames and showing traders how to identify and understand balance and trending at multiple levels. Frankly, IMO, if readers *only* took away from the book an ability to read (at multiple time frames) market force and the likelihood that moves to range extremes would revert to the mean or break out (see p. 70-1 of the text), that alone would more than justify the price of the book.