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.