Mind Over Markets
PREFACE
When Mind Over Markets was first published in 1990, the Market Profile was relatively new. I was fascinated by the utility because it provided a new way to structure information, a new way to look at the market through a time-sensitive, evolving database that records the market’s continuous two-way auction process.
I had long been skeptical about analysis that treated all prices as equal. After years studying market behavior—with membership on the Chicago Board of Trade and as a founding member of the Chicago Board Options Exchange—I came to the conclusion that fundamental analysis is generally too long term, often appearing out of touch with the market. Auction market theory, on the other hand, seemed to offer the most objective means of allocating the constant flow of bids and offers.
I embraced the idea that auctions are mechanisms for price discovery.
Mind Over Markets is a practical handbook for developing an understanding of market behavior that will help you trade with the odds in your favor. And in the 20 years since it was first published (and translated into Chinese and French), my co-authors and I have continued to delve deeper into the application of auction theory to trading and investment decisions.
In the first printing, we talked about “buying and selling tails” in Profile structure. We’ll get into the mechanics of this concept later in the book, but we mention them here, in this new introduction, because they represent an example of how our understanding has evolved since the original publication, thanks to the best teacher of all: experience. We still believe in the structural significance of tails, but we have developed a more nuanced appreciation for what causes tails, or more tellingly, what causes the lack of a tail (an indication that the market has gotten too long or too short).
This understanding—like all understanding—evolved over time. It is the context surrounding the indicator that signals a deeper layer of meaning. Factors like volume and tempo provide clues about which timeframe is leading market movement. And as you’ll discover, discerning timeframe influence is one of the most important insights you can develop as an agile-brained trader.
Does the Profile Still Work, after All These Years?
I’m often asked if the Profile works. Or, more commonly, if it still works. The better question is this: Is the Market Profile a valid scientific way to organize data?
The answer to that question is a definite yes. The Profile is constructed using a constant—time—on the horizontal axis, and a variable—price—on the vertical axis to form a distribution. Scientists have employed this method to study and observe data for generations. Personally, I would much rather study organized data than unorganized data; the Profile is simply a valuable tool for organizing objective information.
After a lifetime spent observing markets, I choose to give more emphasis to the Market Profile—with its evolving, multidimensional structure— because I believe it provides a more accurate representation of the auction process, as it unfolds. It smooths out aberrations, such as high volume at the opening bell, as well as statistical references like the overnight high and low that can mislead you in the heat of the moment.
To be clear, I’m a trader, not a Profile trader. However, the Profile has been invaluable to my analysis, and it has enabled my personal evolution through decades of reading and interpreting data in its ever-changing visualizations. Over time, my knowledge has deepened through practice—and not just practice, but correct practice. Choose any sport and you’ll recognize the importance of practicing a correct stroke/shot/swing; practice wrong and you’ll cement bad habits that can take years to unlearn.
One of the most astute Amazon.com reviews for this book was not intended as a compliment—the reviewer said Mind over Markets is “too complicated.” Those two words capture the reason why most traders fail, as well as the reason why the book in your hands is still relevant, challenging, and insightful after two decades: It was written for serious traders, and it doesn’t purport to be a total solution.
Ultimately, you must make your own decisions as you carefully choose which tools you use, and which indicators you follow as you trade. Rest assured that no matter what you decide, there is never a single, simple answer. I suggest you compare volume profiles and Market Profiles side by side, writing down your observations as you see how they mirror and/or contradict each other. Constantly ask yourself, What does the ambiguity tell you? Can you identify change before your competitors (mostly laggards) transform opportunity into the familiar patterns of consensus?
On the Long Road to Expert
In reading this book, you will begin to make progress on your path to becoming a successful trader. Over time, you will transform insights into instincts in the kiln of experience. And those instincts will help you rise above the distracting maelstrom of conflicting information with a broader, more holistic market perspective. You will begin to understand the big picture, while also participating in the daily minutia—the hallmark of a professional trader.
Developing this level of market understanding is not an easy process. Most people find it impossible to even begin to parse such an overwhelming amount of ambiguous, conflicting information, let alone transcend it. But armed with awareness, you have the ability to separate yourself from your competitors, most of whom are lost in the shallows of price and opinion. You have the opportunity to forge your own path toward expert.