For Whom the Bell Tells

By organizing price
data via the Market
Profile technique,
you usually can spot

By organizing

trading patterns
thatll give you
a statistical edge
in your investing

FIGURE 1. Type USA <Cmdty> MKTP <Go> to see the 3-Day Market Picture
function for the current 30-year U.S. Treasury bond future. The histogram on the
right of the screen displays the most recent trading days activity at each price

s there a way to display price

information without using standard bars, lines, or candlesticks
a way that greatly increases the
value of such information to investors? There is. Its a technical
analysis tool called Market Profile
thats favored by thousands of members and salespeople on the floor of
the Chicago Board of Trade (CBOT).
Market Profile was the brainchild of a
soybean floor trader named Peter
Steidlmayer in the 1960s.
Steidlmayer realized that intraday
market activity could be presented
more effectively by organizing tick
data into distribution curves rather
than in bar-chart format. He therefore substituted for a conventional, two-dimensional price
chart a two-dimensional variable matrix that gives a more
Type INFO <Go> for a schedule of
upcoming seminars, conferences,
in-depth view of market activand events in your region. Topics range
ity. The new configuration
from equity technical analysis to valuing
also enabled him to determortgage-backed securities.
mine whether major players
were initiating or respondType INFO <Help> for more
ing to market rallies and deinformation on the function
clineswhether they were

Tip Box

92 July 1998 Bloomberg

buying strength/selling weakness or

were selling strength/buying weakness. To a trader such information
can be invaluable.
What was Steidlmayers innovation? Chances are youve seen an
illustration of a bell-shaped curve
also known as a normal distribution
curve. Given a large enough number
of occurrences, bell-shaped graphs
result about 70 percent of the time.
And approximately 70 percent of
the data plotted by such a curve fall
within one standard deviation of
their mean.
Knowing those facts can be extremely useful in understanding
price movements. Thats because if
traders assume theres a 70 percent
chance that a bell-shaped distribution will occur during a specified period, they can anticipate that before
the end of that perioda trading
day, for examplecertain developing formations will eventually conform to a bell-shaped-curve pattern.
For a more fundamental understanding of what Steidlmayer developed, look at how a securitys price

EQUITY
data transcribe into a price distribution formatinto whats usually
termed a Market Profile. Steidlmayer
divided the trading day into 30minute sessions. He called the 99:30
a.m. session the A bracket, 9:3010
the B bracket, 1010:30 the C bracket, and so on. As markets appeared
that opened before 9 a.m., he used
lowercase letters going backward
from the end of the alphabet. For instance, 8:309 is the z bracket; 88:30
is the y bracket; and so on. Next, he
plotted the brackets on X and Y axes,
with the X axis displaying the number
of brackets the market traded at a
given price, and the Y axis the price
itself. A days price data plotted in this
way appear in the chart below. In addition to that normally distributed
Market Profile, four other standard
Market Profile distributions are likely
to occur on any given day.
The beauty of Market Profile
methodology is that if you can figure
out quickly enough which profile
shape is forming on any given day,
then within a few hours of the markets opening you can reasonably
infer where the market will trade for
the balance of the day. This is a huge
advantage for those trading intraday
movement, especially sell-side dealers, buy-side proprietary traders, and
outright speculators.
For example, to call up the Market
Profile for the past three days for the

active 30-year U.S. Treasury bond future, type USA

<Cmdty> MKTP <Go> (figure 1). The new screen
3. MULTIPLEthat appears combines the
DISTRIBUTION
GIMP (Intraday Market
1. NONTREND
2. TREND DAY
TREND DAY
Picture) and GIMH (IntraABE
ABC
L
day Market Histogram)
ABCDEFJK
ABC
L
functions onto a single
ABCDEFGHIJKLM
ABDE
HL
screen. The new screen
ABCDEFGHIJKLM
BCDEF
HJKL
displays the most recent
ABFGHKLM
CDEFG
HJKLM
three days trading of this
CEFG
HIJKLM
security, as well as a volume
EFGH
GHIJKL
histogram from the most
4. TEARDROP
FGH
GHIJK
recent session.
A
GHI
G
The volume histogram
A
HIKL
G
shows how many times the
A
HJKL
G
market ticked at any given
A
IJKLM
FG
price or, in the case of eqA
IJKLM
FG
uities, when actual volume
AB
IJKLM
FG
is posted intraday at that
ABI
I
BDEFG
price. You can use it, too,
ABDFHGI
BDEF
as a corroborative piece of
BCDFGHI
BCDEF
information. If, for examBCDFGHI
ABCDEF
ple, the volume histogram
BCDFGHI
ABCDEF
takes on the same shape
BCEFG
AB
as the price profile, you
BCEF
AB
have a more in-depth way
BE
A
of analyzing the days data.
A
Moreover, the volume hisA
togram tells more than just
volume: it also tells where
volume wasnt.
Note: Neither the two different trend profiles
To put it another way,
nor the teardrop profile has to be in the price
the volume histogram can
order shown above. For example, the trend day
spot in profile terms whats
could form by opening low and trending upward
called low-volume areas.
during the day, but it will always take on the basic
Whereas a price profile
characteristic of trending lower or higher
would include the
throughout the day.
R.B.
price range for
each bracket, a volPrice Range
ume histogram shows how
per Bracket
Bracket
Market Profile
much volume actually got
4249 . . . . . . . A . . . . . . . 52 B
traded at each price. Know4752 . . . . . . . B . . . . . . . 51 B
ing that can be extremely
5145 . . . . . . . C . . . . . . . 50 BCIK
helpful to a trader, because
4440 . . . . . . . D . . . . . . . 49 ABCIK
markets tend to test lightly
4246 . . . . . . . E . . . . . . . . 48 ABCFIJK
traded pricesmore often
4548 . . . . . . . F . . . . . . . . 47 ABCFHJK
than not rejecting such areas.
4541 . . . . . . . G . . . . . . . 46 ACEFHJK
Figure 2 is a profile of
4347 . . . . . . . H . . . . . . . 45 ACEFGHJK
Microsoft Corp. for April 20
of this year. It features a
4850 . . . . . . . I . . . . . . . . 44 ADEGHJK
teardrop-shaped profile with
4843 . . . . . . . J . . . . . . . . 43 ADEGHJK
an early run-up followed by
4250 . . . . . . . K . . . . . . . 42 ADEGK
normal distribution for the
41 DG
balance of the day.
40 D
The accompanying volume

Standard Market
Profile distributions

Normal
distribution

Bloomberg July 1998 93

histogram, too, is in a teardrop shape

and includes some important information not found in the price profile
alone. Observe the low-volume bars
between 93 and 93.5 that occurred
during the rally. They indicate that
the market hardly traded these prices
relative to all other prices traded that
day. In other words, theres a hidden
support levelthe
On any given trading day, one of five low-volume areathat
would not be easy to
market profiles is likely to appear
see on a bar, candle, or
point-and-figure chart. Spotting this
might well have put you in a buy
frame of mind the next day had the
market sold off to this area, which in
fact it did. And had you bought at this
level on April 21, you would have
been right into the low of the day and
seen the market head upward thereafter and close right by the highs
(figure 3).

FIGURE 2. Type MSFT <Equity> MKTP1 <Go> for the 1-Day Market Picture
function for Microsoft Corp.

Using low-volume points can therefore help identify potential future

support or resistance areas. If the
market closes above its low-volume
points during the day, for example, it
might well find support at that area
the next dayor anytime in the future that it sells back down to that
area. If it closes below its low-volume
area, then that area, too, is a potential
resistance level anytime in the future.
With respect to the price profiles
themselves, the key to their successful

use is the ability to spot early in the

day the profile shape that will likely
be formed by the end of that day.
Again, if you can figure out within
the first few hours of trading which of
the five usual shapes is likely to form
that day, you have a leg up on how
and where to play the market for the
rest of the day.
For example, look at the progression of a profile for a typical day in
the CBOT long-bond futures contract. Figure 4 shows that the market
for this security made new lows in C
bracket, but within an hourduring E bracketthe market had
come all the way back to test the
highs. That action, coupled with a
somewhat normal-looking volume
histogram, was a signal that the day
was likely to be a normal distribution day because no other price
profile shape was likely to emerge
barring a late teardrop tail. Your
trading decision in this situation was
to sell into the high-value area, looking for a move down that would test
back to the low-value area.
By the time of H bracket, in this example, the market had sold back
down again to test the low-value
areawhere youd likely cover your
short position, and inasmuch as the
day still had more than two hours of
trading left, you might even have
gone long, looking for a move back
up to the high-value area. The market then bounced in J, K, and L
brackets to retest in the high-value
area, only to see bracket M once again
retest the low-value area (figure 5).
The most important thing to learn
from this example is that once you
identify which profile shape the market is making, several low-risk/highreward trading plays are possible.
What follows are some other Market Profile trading strategies that have
worked well for me over the years. On
a normal profile day, for example, the
market usually clusters around the
mean of a profiles normal distribution. The two red lines that appear on
the profile create the value area,
meaning, the area where approximately 70 percentthe first standard
deviationof trading takes place.
Bloomberg July 1998 95

You could categorize the value area as

one that has an extensive price/time
relationship. Any price action above
the upper red line is called the highvalue area and any below the lower
red line the low-value area. Both
high- and low-value areas have brief
price/time relationships.
Based on traditional Market Profile
behavior, you could reasonably suppose that if its around midday and
theres what appears to be a normal
bell-shaped curve in both the price
and volume histograms, then if you
were in the high-value area, you

oil recently has been averaging a

40-cent range each day and on this
particular day the market has a nontrend-shaped profile and just a 15cent range by noontime, then the
shape and range of the profile are
telling you not to play today.
That kind of profile usually occurs
in markets trading in preholiday
mode characterized by low-volume
activity. It also often happens in the
bond market the day before an employment report comes out; in an
agricultural commodity, the day before a major crop report; in foreign
currency markets, before a Group of
Seven meeting, and so on. You can
get a good idea of how a nontrend
day looks by viewing the profile of the
Eurodollar futures contract traded
on the Chicago Mercantile Exchange
on any typical day. The normal distribution profile there looks highly
condensed, and there isnt much
money to be made on trades.

H
FIGURE 3. Type MSFT <Equity> MKTP2 <Go> for the 2-Day Market Picture
function for Microsoft Corp.

could look to sell on the assumption

that the market will likely trade lower
between this point and the close.
Conversely, if the market were trading in the low-value area, youd look
to buy on the assumption that it
would trade higher between this
point and the close. You can make
the assumptions based on bellshaped-curve statistics alone.
Another strategyin this case, a
strategy of inactionthat Ive used
successfully is the following: if its a
nontrend profilea day characterized by what appears to be a normal
distribution thats largely condensed
into the value areathen its not
likely that therell be during the
day a large enough countermove to
make money. For instance, if crude
96 July 1998 Bloomberg

eres another profile

pattern you might encounter: trend days characterized by an early extreme
priceusually by the third bracket
with prices then trending in the opposite direction for the bulk of the
day, and a close thats usually near
the opposite of the morning extreme
price. For instance, the market opens
and establishes a range within the
first hour. In the case of, say, an uptrend day, the profile that takes
shape after the first-hour low is followed by a rally during which each
successive half-hour low is higher
than the prior half-hours low: the
stronger this days uptrend, the more
likely the intraday, ascending-bracket
low pattern will continue. In the case
of a downtrend day, the exact opposite characteristics are on view: the
high usually is made within the first
two brackets, and subsequent bracket highs are successively lower than
the prior brackets high.
In another profile pattern, youll
sometimes encounter a trend day during which two or three separate, normal-looking distributions are on view,
typically with single-print bracket

letters separating the distributions. If

at midday you can infer by the shape
and progression of the profile that a
trend day is exhibiting these characteristics, you can trade in the direction of the trend and make money,
because such days typically close opposite their morning price extreme.
Personally, Ive noticed through the
years that the bulk of these singleprint moves occur middayusually
in F or G bracket.
If the profile takes on a teardrop
shape, it opens up two possibilities.
The first is when the teardrop forms
early in the day and prices move fairly quickly away from the extreme
found in the first brackets. This is a
preferred teardroppreferred in
the sense that once you determine
the teardrop shape has been formed,
you can play the ensuing normal distribution part of the teardrop. More
specifically, if this profile is a
teardrop with the early tail on the
bottom, then once the market starts
to distribute normally, you can look
to buy at the bottom of the curve because the early tail is not typically revisited; the opposite strategy applies
if the early tail is at the top. The second possibility, if the tail comes late
in the sessionas often happens
with Standard & Poors 500-stockindex futurescomes out of left
field and is not anticipated. This can
cost you money, because if you sold
high value or purchased low value
late in the sessionlooking for a
countermoveit may never come,
and you could get hit with a late
squeeze or a liquidating sell-off. My
own rule of thumb is to never initiate
a day-trading position within 60 minutes of the close.

ast, you might want to

keep in mind that Market Profile methodology works especially well in futures markets,
in which so much trading activity gets
offset by the closing bell. This means
that those who sold below value early
in the day are forced to pay up later
in the day, which helps push the market from low value to high value and
vice versa.

FIGURE 4. Type USA <Cmdty> MKTP1 <Go>. This midday picture of the June
30-year U.S. Treasury bond future shows the development of a normal Market
Profile during early trading on May 27

FIGURE 5. Type USA <Cmdty> MKTP1 <Go>. Late in the trading day of May 27,
the June 30-year U.S. Treasury bond future continued to trade around a normalshaped distribution

The Market Profile technique has

long been a favorite of many market
players. And the successes of those
players suggest that bell shapes have
much to tell about the directions of
future price moves.
Any comments? Type MAGAZINE
<Msge>. For reprints, type MAGZ <Go>.

Rick Bensignor is an
applications specialist for
Bloomberg in New York
Bloomberg July 1998 97