Volume & Market Profile
Mind Over Markets: Power Trading with Market Generated Information
Market Profile organizes a trading session by price and time instead of price alone, so you can see which prices the market actually accepted and which it threw away in seconds. Dalton gives you the vocabulary and the mechanics in full. He also gives you 1980s pit charts and one eleven-month bond study as proof.
The one idea
A bar chart tells you the market went from 100 to 103 and closed at 102. It does not tell you it spent four minutes at 103 and four hours at 101. Market Profile fixes that. Cut the session into half-hour blocks, give each block a letter, and stack that letter next to every price that traded during it. Each letter mark is a TPO, short for Time Price Opportunity, which is just a record that this price was available at this time. Stack them all and you get a sideways histogram, usually a lopsided bell. Fat rows are prices the market kept coming back to. Thin rows are prices it rejected fast. Dalton's shorthand for the whole thing is price times time equals value.
Once you can see that, everything else follows from two questions he repeats for 300 pages: which way is the market trying to go, and is it doing a good job of getting there? Direction comes from the shape. Performance comes from volume and from where today's fat part sits against yesterday's. A market can grind higher all day and still be weak, if volume dries up and the fat part refuses to move up with price. That gap between what price is doing and what value is doing is the entire edge Dalton is selling. It is also why he calls price-only traders blind: they see the number and miss who responded to it.
Underneath sits a simple model of what a market is for. It exists to facilitate trade, not to be right. It auctions up until the last buyer buys and down until the last seller sells, and the overshoot at each end is called excess. Excess marks the end of one auction and the start of the next. Balance is what happens in between, when both sides agree enough to trade back and forth. In the 2013 chapter Dalton reduces his whole career to those two words: excess and balance. Everything else in the book is detail hanging off them.
What it actually teaches
The day-timeframe method runs in a fixed order, from building the chart before the open to deciding whether the day is even worth trading.
BUILD THE DAY AS A DISTRIBUTION
Split the session into half-hour periods, letter them, and mark every price traded in each period. The first two periods (the first hour, slightly longer in the S&P) are the initial balance, the range where floor traders found two-sided business. Anything printed beyond it is range extension, and Dalton treats that as proof the longer-term participant, whom he calls the other timeframe, has stepped in. Single prints at the top or bottom are a tail, and a tail must be at least two TPOs long to count. A tail in the final period is not a tail, because nothing has had a chance to reject it.
MARK THE VALUE AREA AT 70 PERCENT
The value area is the price band holding 70 percent of the day's volume, roughly one standard deviation. Start at the price with the highest volume, the point of control. Sum the volume of the two prices above it and the two below it, add whichever pair is larger, and repeat until you have covered 70 percent. Dalton's worked example: the point of control at 96-12 held 22,168 contracts, the two prices above totaled 34,491 and the two below totaled 43,773, so the lower pair went in first. With no volume feed you can substitute TPO counts, which gets you close but not the same answer (see the table below).
PREPARE BEFORE THE BELL
Dalton starts as far from today's price as he can get: monthly bar first, then weekly, then daily, then the profiles. He is looking for two things on every timeframe, excess (a sharp rejection that ended an auction) and one-timeframing (a run where each new bar fails to trade back through the prior bar's opposite extreme, which he says you should not fight). Then he checks overnight inventory, measured from the prior session's settle. If most overnight trade happened above the settle the overnight crowd is long, and since overnight volume is usually no more than 25 percent of the day session, that position often gets flushed shortly after the open. Last, write down three scenarios: stays in balance, breaks out and fails, breaks out and runs.
CLASSIFY THE OPEN
Four types, in falling order of conviction. Open-Drive: price leaves the opening range and never trades back through it, the extreme holds most of the time, and you must get in early even at a worse price. Open-Test-Drive: it pokes past a known level first to check for business there, fails, then drives the other way. Open-Rejection-Reverse: it goes one way, gets pushed back through the open, and that first extreme holds less than half the time, so you wait for the market to come back to you. Open-Auction: it rotates around the open, which means nothing inside the prior range and a great deal outside it, because an open outside yesterday's range means the market is out of balance.
ESTIMATE THE RANGE OFF THE PRIOR DAY
If the market opens inside yesterday's value area and stays there for at least an hour, sentiment has not changed and today's range will rarely exceed yesterday's. Pick the extreme you believe will hold, usually one anchored by a tail, and measure yesterday's full range off it. Allow 10 percent either way and re-measure if the extreme is broken. His S&P example, September 23, 1988: yesterday's range was 285 points, a B period buying tail set the low at 270.30, so the projected high was 273.15. It printed 273.15. If instead the market opens outside yesterday's range, he says range potential is unlimited in the direction of the drive and you do not estimate at all.
TRACK WHO IS WINNING WHILE THE DAY BUILDS
Four running measures. Tails and range extension show aggression at the edges. The TPO count measures the quieter fight inside the body: sum the TPOs above the point of control and below it, excluding the single-print tails, and watch the ratio move. His January 29, 1988 bond example ran 13/21 favoring buyers, back to 21/22 as floor traders covered, then 30/47 by the close. The Rotation Factor scores direction objectively: plus one if this half hour's high is above the last one's, minus one if below, same for the low, zero if equal, and his sample day nets plus six. Finally, watch the point of control migrate. He now calls it the fairest price, and a fairest price that keeps climbing means someone bigger than the day trader is paying up.
GRADE PERFORMANCE, NOT JUST DIRECTION
Attempted direction is worthless on its own. Rate it against volume, value area placement (higher, lower, overlapping, inside, outside) and value area width. Table 4.1 lists all 30 combinations: up with higher volume and higher value is very strong, up with lower volume and higher value is slowing, up with lower volume and lower value is weak. Value area width is the intraday proxy for volume when the volume figure is not in yet. His bond study from December 14, 1988 to June 22, 1989 found value areas 1 to 5 ticks wide averaged 127,000 contracts, 11 to 15 ticks averaged 284,000, and 26 to 30 ticks averaged 417,000.
TAKE THE SIX SPECIAL SITUATIONS, SIT OUT THE REST
The trades he says almost have to be done: the 3 to I day (initiative tail, TPO count and range extension all pointing the same way), the Neutral-Extreme day (two-sided range extension that closes on one extreme), the Value-Area Rule (open outside yesterday's value, and if price is accepted back inside with double prints it will usually run all the way through, best when that value area is narrow), spikes, balance-area breakouts (go with the break, stop a few ticks back inside), and gaps, which he defines as an open beyond yesterday's high or low, not from the close. Against that he lists four days to place no trade at all: nontrend days, nonconviction days, long-term ranges with no direction, and the day or two before a scheduled number when desks have flattened and price rotates on rumor.
What it looks like Monday morning
You stop quoting yesterday's high and low and start quoting yesterday's value area, the band that held 70 percent of the volume. Where today opens against that band sets your expectations before you have risked anything. Inside it means balance: low risk, low opportunity, and a range that will probably look like yesterday's. Outside the range means the market is out of balance and Dalton refuses to give a range estimate at all, because the move can go as far as it wants. Then you spend the first few minutes classifying the open into one of four types rather than reacting to it. An Open-Drive means get in now and accept a worse price. An Open-Rejection-Reverse means the first extreme is a coin flip, so sit and let the market rotate back to you.
The harder change is the sit-out list. Dalton names four conditions where the correct action is no trade: the nontrend day, the nonconviction day (which looks like a perfectly normal day once it is finished but never handed you a reference point while it was forming), the long-term range with no direction, and the session before a scheduled release. Most readers get more money out of that list than out of any pattern in the book, because it names the exact days on which a chart-reader talks himself into something.
| Step | Prices added | TPOs | Running total |
|---|---|---|---|
| Count everything, single prints included | 99-17 to 100-04 | 78 | 70 percent target is 54.6, call it 55 |
| 1. Longest line, the point of control | 99-24 | 11 | 11 |
| 2. Pair above beats pair below | 99-25 and 99-26 | 16 | 27 |
| 3. Pair below | 99-22 and 99-23 | 16 | 43 |
| 4. Pair above | 99-27 and 99-28 | 10 | 53 |
| 5. Nearest price below clears the target | 99-21 | 4 | 57, which is 73 percent |
The TPO value area is 99-21 to 99-28. Run the identical day on real volume instead of letter counts and it comes out 99-20 to 99-30, which is why two charting packages can hand you different value area edges on the same session.
The best trades often fly in the face of the most recent market activity, and never lose sight of the bigger picture.James F. Dalton, Mind Over Markets
Where it fails
- The plumbing is pit-era, and the authors say so themselves. The initial balance, the reference every other measure hangs off, is defined as the range in which floor locals found two-sided trade, and Dalton notes those locals were "typically responsible for over 50 percent of the day's trading volume." Almost every chart in the book is Chicago pit data from 1987 to 1989, and the figure credits still read "Copyright Board of Trade of the City of Chicago 1984." The 2013 update concedes the problem in a single paragraph: "The importance of floors has continually diminished as off-floor, electronic, screen-based trading has evolved," and "Initial balance today is slightly more ambiguous." That paragraph is the entire fix. No replacement rule follows.
- It never tells you where the session starts, and that decision changes every number. Initial balance, value area, point of control, overnight inventory and every gap depend on where you cut the day. Dalton's answer in 2013 was to keep charting the US pit session separately from the 24-hour session so he could still see gaps between day sessions. CME closed most futures pits in 2015, two years after this edition shipped. A trader now has to pick regular hours, full 24-hour, or a custom window, and that pick moves the value area and can erase a gap the book would have told you to trade. There is no guidance here for making that choice, because when this was written the choice did not exist.
- The statistics are one instrument, eleven months, and they end before the 1987 crash. The 3 to I day, the flagship setup, rests on Treasury bond data from June 24, 1986 to May 29, 1987: 94 percent of following sessions traded better than the previous day's value area in the first 90 minutes, and 97 percent closed within or better than it. The Neutral-Extreme study is bonds again, June 1986 to August 1987. The authors flag the limitation honestly ("these findings are derived from one market studied over a limited period of time"), and then the 2013 edition reprints the same percentages untouched, 26 years later, with no re-test in any other market. If someone tells you 3 to I days work 94 percent of the time, they are quoting eleven months of one bond contract.
- Stocks were never the subject, and the equity close breaks the core equation. The book is catalogued under "Futures" and every worked example is a futures contract. Price times time equals value assumes volume arrives spread across time. In a US stock it does not: a very large share of the day's volume prints in the closing auction in a single instant, and much of the rest never touches a lit exchange. That volume lands as one enormous row with almost no time behind it, or as no row at all, which drags the point of control and the value area toward a price nobody actually traded around. Appendix 2 warns about exactly this distortion at the opening print ("It is not uncommon to witness much higher volume at or around a single price level") and offers nothing for the close, because in 1990 the close was not where the volume lived.
- Nearly every worked example is a hindsight narration of a winner. Chapter four runs on sentences like "shorts should have been placed at 4472" and "longs should have been entered when price returned to the region of the previous day's value area," written over a chart on which the outcome is already printed. There is one honest loser in the whole book, the February 6, 1989 S&P balance breakout that failed and was exited at minimal loss. And excess, which the 2013 chapter calls one of the two most important concepts in trading, is by Dalton's own admission "useful only in hindsight analysis, for it is not identifiable until it has already formed." That is candid, but it also means most of this cannot be tested, and the framework is elastic enough to explain any close after the fact.
- It quietly assumes a professional's day, capital and data feed. The method needs you watching structure build in half-hour steps for the entire session, on top of a pre-open routine that runs monthly bar to weekly to daily to profiles to overnight inventory. It needs resting orders sitting ahead of price, because "if the trade location is truly ideal, then those prices will not be offered long enough to enter a position unless you have already placed your order." It needs enough capital that you are not counting ticks, since undercapitalization "leads to tick-watching." It wants a landscape view, meaning a wall of screens on correlated markets. One of the three data sources he recommends for finding high-volume prices, the CBOT Liquidity Data Bank, no longer exists. Read this part-time and you will acquire the vocabulary and none of the method.
- Half the page count is not method. The five-stages-of-learning frame, the running allegory of David learning the piano, and detours through Mike Singletary, Garry Kasparov, Candid Camera and The Tao of Pooh occupy most of chapters 1, 2, 3, 5 and 6. Chapter 6, "The Expert Trader," is two pages of encouragement with no content in it. Chapter 5 is a generic small-business checklist: capital, location, timing, information, inventory, risk, goals, dedication. All of the mechanics live in chapter 4 and the two short appendices. The 2013 "updated edition" is the 1990 text with one new chapter bolted to the back and a handful of inserted paragraphs, which is worth knowing before you pay for the newer cover.
Who it is for
Buy it if
You trade index or Treasury futures intraday, you are at the screen for the whole session, and you keep bleeding money in quiet markets because you cannot tell a rotation from the start of a trend. This is the source text for the vocabulary that every profile platform, order-flow course and volume-profile plugin borrowed without attribution. Buy it for chapter four and the two appendices and treat the rest as optional.
Skip it if
You look at charts once a day, you trade daily or weekly signals, or you want rules you can code and backtest. Dalton states plainly that there are no absolute answers and that excess is only identifiable after it forms, which puts most of this beyond testing. And if your plan is to run Market Profile on stocks, this book will not tell you what to do with a closing auction that prints a tenth of the day's volume in one second.
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