An Interview With Steve Hawkins about Profitable Trading Using Peter Steidlmayer's Market Profile

The following interview is extracted from my book, Breakthrough Strategies of Wall Street Traders. Similar to Market Wizards, within it I interview 17 remarkable traders and investors for their investing stories and unlike other investing books, get them to actually reveal the trading-investing rules and techniques they use as well as what they tried that didn't work. If you want to learn trading and investing, start with these systems.

Many traders and investors are familiar with the statistical charting methodology of Market Profile created by Peter Steidlmayer in the 1980s, but few can truly say that they became experts at using it. Peter’s longtime partner, Steve Hawkins, wrote one of the best books available on the Market Profile and agreed to discuss some actual trading rules that you can use, based on Profile patterns, as well as the evolutionary changes that have developed in the Profile since its early origins.

Previously, Raymond Barros explained how his entire trading style changed because he started incorporating Profile thinking into his trading plans while Adrian Manz also explained the importance of taking advantage of statistical market patterns by turning them into tradable systems. In this interview Steve discusses what the Profile can reveal about the market’s statistical structure and as a publishing first reveals several systems that actually take advantage of various Profile patterns.

Steve, why don't you tell me about your personal trading history? How did you get started in the trading field and how did you get to where you are now including the various paths you went through?

My background is that I'm from the Midwest. I'm from Chicago. I actually went to school at the University of Illinois down in Champaign, and I majored in finance and economics. I really didn't have a lot of background in trading, per say, borrowing my father's and mother's investments and stocks and things like that so I didn’t have a real thorough understanding of it.

When I did graduate from university in the early to mid ‘80s, the job market wasn't the best and I really wanted to get involved in something that would have some upside. I felt sales would be something that would offer that opportunity. One thing that actually did interest me, even though I wasn't knowledgeable in the topic or had a lot of experience in it, was equities.

I took a job with a boutique firm here in Chicago that had traded over the counter as well as exchange traded stock instruments. Essentially I was a salesman doing a lot of cold calling like everyone else who started in the field who initially got all of their friends and family involved in stocks. That experience wasn't good because what they were pushing and what I was selling to them just to generate income were stocks that were marginal at best, and eventually most of the investors lost money in those trades. At that point I realized that if I wanted to stay in this field at all it was probably wise for me to try to learn a bit more about it and understand the approaches that I should use to try to generate my own ideas.

At that same time, I coincidentally came in contact with a friend of mine. My offices were kitty-corner from the Board of Trade, as were his, and we happened to be in the same building. He actually had partnered up with Pete Steidlmayer to start up a company that was pushing the Market Profile and had produced newsletters and helped institutional traders understand the methodology. This friend of mine was from high school where we were relatively close. In high school I was a good athlete so he felt that good athletes could become good traders and he asked me if I wanted to get exposed to the methodology.

While I was working at the stock brokerage house I was initially going between floors and trying to understand the approach when Pete would give classes. I would sit in on them so I gained a decent understanding and then from that point forward I started working with the school. It was called “Market Logic School” and on a monthly basis they would offer week long classes on the methodology. They would probably have thirty to fifty people every month going though these sessions and I started out just really trying to help the individuals understand the methodology a little bit. If they had questions they might call in or sit next to me and gain some understanding. After I got more proficient at it I started working with institutions helping them understand it. Then we got involved on the brokerage side of things, the institutional side.

I started giving recommendations across all markets using the methodology and that's essentially how I got involved from the trading side of things. My focus has been on the Market Profile and I do think it's a wonderful tool. To this day, as I said, I'm working with Peter Steidlmayer developing software. I've been doing that with him since 1991. We've had two iterations of the program and our most recent one is called “Capital Flow 32.” We've been building that out since 1998 and we continue to make it better. That's essentially how I got involved in the business and is what my focus has been.

Primarily you are using the Market Profile to do most of your trading?

Yes, I use the Market Profile. I have access to the standard charting, the CQG that a lot of future traders have access to, and I would say I have a decent understanding of lots of the technicals. There are some technicals that I see merit in and others that I do not, but I do overlay other things with the Profile to help me generate something that is hopefully a more reliable signal, but the core of what I do is within the Profile methodology.

As I said, we have done a lot of things within the software that we've been developing that moves it away from the legacy of the traditional Market Profile. I believe it has a lot of other information that it generates that really helps the trader see things more clearly.

Okay, can you give me any track records of your own numbers or those of clients showing how successful a trader you can become using the Market Profile?

I think it is difficult to talk about success from that standpoint, at least for me. I'm at the Board of Trade and so we have a lot of customers, a lot of exposure to people on the floor and how the locals trade on the floor. They have a smaller capital base but with more leverage so it's really hard to statistically say that it is a 30%, 50%, or 80% return.

However with Pete, my partner, we have been developing one program where he says this - and I'm not going to misquote him at all and you might not believe it - but he feels that you can make a million dollars with all this volatility we see in the markets today. One should be able to make a million dollars a day assuming you have the capital base that allows for you to trade a hundred, two hundred, three hundred contracts. The approach would be essentially to try to understand the volume overlay within the context of the price structure and find situations where one can utilize the program to add to one's position.

Pete is adamant about that fact that one should be able to make that kind of money. I've never made that kind of money in a day, but that's what he feels. I guess we'll see if it proves itself out over time, but that's what we are trying to work towards.

Before we actually get into the Market Profile and how it works, a lot of people have said that the high frequency robot trading has really skewed the market so that there isn’t a real price discovery mechanism anymore since the prices are all being manipulated. Since the Profile gives us a microscopic view of price behavior, have you noticed anything from the Market Profile charts and analysis that would lend you to be able to confirm statements like this about high frequency trading?

With some of the ways that one looks at the Profile and then general trading, I'll say that there is a lot of noise in the marketplace and I equate high frequency trading to noise to some degree. Way back when we were on the floor there were situations where big traders would be able to move the market just because they had the deepest pockets. They had the biggest capital base. To some degree I think you are seeing the same thing within the high frequency world whereas a lot of them are more momentum-based. I think it's almost like they are all trading the same strategy or derivative of that strategy, which is more momentum-based.

Once the market does start moving it does have some degree of follow through, but what I'm always trying to look for in my trading is just the opposite. I'm trying to find those situations in which the participants, whether they are high frequency or whatever type of time frame they might be trading, are offsides on their trades. That’s because I feel that the quickest vertical move is going to happen when the person who is on the wrong side of the market is forced to cover. They just want out whether it's a long or a short. They want out, they want to take their loss and they want to move on to the next trade. If I can find those inflection points, so to speak, that is going to offer an opportunity. You see those in high frequency trading. You also see those in the longer-term or swing trading setups.
I think really you can get run over to some degree with these high frequency tradings. It's just so momentum-based so I think that one thing that I would advocate is that traders trade with less leverage initially. Otherwise there are some people who have come up here into the office at the Board of Trade and they are trying understand how they can approach the market. They want to put on trades where they can risk two or three ticks and to me that two or three ticks risk is just noise. I'll take the other side of all of those trades because I'm sure that net over time I would come out ahead of that because that's an unobtainable objective as far as I'm concerned.

Right, but what I'm trying to get at is whether you can, through the Market Profile, guess what the program traders are going to do. Basically, by looking at the structure of the market that is revealed by Market Profile can you guess what the strategy is going to be?

In addition to the Profile that is obviously overlaying bars with letters we also have a volume component so you can actually see the volume footprint of what is going on in the marketplace. I definitely think that you can see areas in which you can anticipate that something is going to happen based upon the volume.

We talk about markets going from balanced to imbalanced. From a volume standpoint we are still looking at that volume perspective and seeing some type of what we call the “minimum trend” where we get a little push away from that volume reference, up or down, that could be the impetus for those high frequency guys to start to come in. It's something that one can do. The difficult thing about it is when I trade I try to trade a portfolio. If you want to try to understand what they are doing then you are forced to just watch one market or two and I think the best trades or the best approach to trading is trading opportunities and not markets. I might be looking for something to happen in the corn or the gold and instead things are happening in the Australian dollar and the copper. You can see little footprints or indications of what's going to happen, but I think that is a difficult way to try to trade the markets actually.

All right, instead of the theory let's get into some specifics because a lot of people don't know what the Market Profile is thus making our discussion too nebulous. We want to tell them that this is what it does and this is how you use it.

Are most of the people who use Market Profile day traders or are they momentum traders who are going to hold a position for a couple of days? Also, can you run us through some of the most perfect or most common ways to make money with it in terms of setups?

Okay, sure. Through our experience I would say a large percentage of people who use the Profile - because we've been involved with lots of different banks and funds and institutions and things like that just because of its perception of value - are day traders.

They are just looking for where there is a preponderance of letters, where would be the accepted areas of value that is a fair price area. Then they are going to look to see where are price extremes at the top or the bottom of the Profile shape. Are there extremes? Are there single prints?
I like to say that the Profile is a snapshot, a picture of the market. I think it allows for a person to gain that visual and it gives them some levels to lean against from a trading standpoint.

Okay, so let's explain the Market Profile a bit for our readers. As I understand it, we can segment the market into 15-minute segments or 5-minute or 1-minute segments or whatever you want as a time period. We can use an alphabetical letter to tag the price with a time segment with A being the first segment period of the day, B being the second period and so on. We can even adjust this by volume and build up a Profile shape showing the proportion of the time that the market traded at each price level. That usually builds up, let's say, into sort of a bell shaped curve or other shapes. Is that correct?

Correct, yes. I think way back when the liquidity was on the floor you would see more of a tendency for a bell curve. There wasn't as much money trading in the markets and so the locals would set up the range and the price would just oscillate back and forth, and then that range would become compressed and compressed and compressed and then the day would be finished. That was in the early eighties when Pete developed the idea of the Profile that was more of a balance. We would call it a “3-1-3” type of a structure whereas now it's much different. It's almost like a price fix. The way the market acts is like when you get an economic number announcement where you get some type of an imbalance and then you are just going to get the developments skewed more towards the top or the bottom of that vertical range. I would say that today you are seeing more skewed Profiles visually than what we used to see, which was more balanced.

How can people use this to make money? Give me a method such as, “If we see this type of structure then here is a rule to get in and get out of a trade.” Can you give me three or four perfect setups using Market Profile that any type of trader might use? I don't care if they are an institutional trader or a day trader or whatever.

Sure, okay. It's talking about the skew. If you visualize a skew we would call it a “3-2-1 up” pattern. If the “1” is where the preponderance for the letters are then we would say a “3-2-1 up” would look like an uppercase "P."


What typically happens or quite often happens is that the market is going to maintain its imbalance for the duration. If you are late to the party and you didn't get involved then the 3-2-1 would be a buying setup. Then what you want to be trying to do is getting involved with the market trading against the “2” or somewhere where you are in the belly of the Profile as far as a buy setup would go, and looking for the market to then vacillate between that belly and the top of the Profile. You are just essentially trying to put something on where if you missed the bigger vertical then you can still trade the balance. Seeing how you've got a skew to the upside you should be buying it first and then selling it.

In other words, if you get sort of the P-shape in terms of the distribution of the prices in the Profile pattern, and you have missed that whole run-up, what you are going to try to do is get in at the belly of that P-shape and get out near the upper part of the P?

Correct, yes.

Okay, and so people then can develop lots of trading rules on these possibilities. They can get in and out of trades several times during the day or whatever because this type of structure usually hangs there for most of they day. Is that what you're saying?

What we found with trading in general is that you want to trade early versus late. The earlier you see it and the earlier you recognize it then the more stable that structure is going to be. Obviously you are going to have to wait a number of hours for the market to develop but early on, when you see it, you are going to want to start putting your orders in the belly and try to get the trade. And you want to be more aggressive really also because that “3-2-1 up” as we call it might continue to trade higher.
If you want to err on the side of being aggressive early to enter the trade, and not so aggressive in getting out if it does start working for you, then later in the day you want to be less aggressive in buying it because that 3-2-1 visually could actually roll over and build a 3-1-3. That area, that belly that you bought against actually might end up being more middle of the range versus the bottom. So trade early and early on give it more room. Later on you are doing it a couple of times at best and then you are stepping away from it.

All right, if somebody has that sort of P structure and they get in at the belly and they are just doing day trading, from your statistical analysis where should they get out? At the fat part of the P or a little bit upper? What statistically is the best place to get out?

If you are getting it late then you just want to get out at the fat part because the tendency for markets is that once you set up some type of range then the ranges are going to start becoming contracted so you want to get out more towards the fat part. But if you get in early then you definitely want to try to give it the opportunity to actually see if it could expand the range higher.

Got it. All right, give me another pattern that people can sort of envision in their mind so they can then say, “Oh, I see what you are doing.”

Okay. What we have seen is that markets go from balanced to imbalanced, so assume you can find a situation in which the market is balanced (where we get lots of letters across an area) and then it starts moving away from there. The moving away from there is because the buying overwhelms the selling or selling overwhelms the buying to create what we would call “single prints.”

Then if you can allow for another period to develop - and we will just assume that we are starting to develop some form of a little sideways action - those single prints are an area of imbalance. They are an area in which the buyers overwhelm the sellers or vice versa. Those buyers or those sellers who created that imbalance or that minus development should try to defend that position, so when you see single prints within a Profile you want to try to lean against those single prints thinking that they cannot be taken out.

If it is my starting point, when I see single prints I'm going to tend to put an order halfway back through the single prints and then put a stop back through the other end. If the market can't achieve that halfway back point then there is more underlying strength or weakness in the market so you might have to adjust it. But that's a good approach to trying to trade a market that is just starting to move vertically. You want to get onboard and it's a good way to manage the risk as well.

Can you translate that to the words of a buy order here or a sell order here or an exit order here so people can visualize this a little easier? You're using specific Market Profile lingo that a lot of people don't know. They're seeing single prints where a market just went up from say 100 to a 101, to 102 to 103, 104 and it didn't repeat any prices. That Market Profile pattern is what you call “single prints.” Where would you put a buy order or a sell order in after it's done all that?

If it goes up higher … like you said, 1, 2, 3, 4, 5, 6 … then it is pushing the higher prices so those single prints are below us. The market then starts trading sideways so we'll say it starts trading between 4 and 6 (104 and 106). So what I try to do - and we'll just say that the single prints are between 100 even and 104 - is I'm going to put my buy order halfway back. I'm going to put it at 102 or 103 or whatever is my best judgment. Then I am going to put a sell stop to take me out of the trade at 100 because at that price the single prints have been taken out and what I'm trading for is some degree of minus development or imbalance. That's been taken out (if it hits 100) so I have to reassess things and take my loss and move on to the next setup.

Okay, now people can visualize it. How about another type of trade? Is there any other favorite trade or most profitable or most common type of trade you can talk about?

I would say this for the way that we look at markets. If you have the ability to overlay volume at time versus volume at price, then if you are building your Profiles and you get a situation in which you are tracking the volume that's occurring within these fifteen-minute or half-hour segments then note the following. When you see the heaviest of the heavy volume at some type of a market extreme, or we'll say at the top or the bottom of a developing range (and that's a difficult part because what is a developing range - is that over the last month or week or whatever?), then if you can see some type of volume excess within the Profile so that just the heaviest of the heavy volume is at a price extreme …

Let me illustrate. For a fifteen-minute period we have an algorithm within the program that looks at three hundred bars. If I'm looking at three hundred fifteen-minute bars and I'm seeing the heaviest of the heavy volume at the top or the bottom of a range then I'm going to try to fade that. The idea is that when the heavy volume comes in and if they are trying to push new lows or push new highs and fail then there is going to be a good chance that it comes back and trades back through the range.

I have friends in New York who trade individual stocks with our program. They are big traders and they make millions of dollars a year just trading these simple setups. Within our software it's nothing more than you see it generate a red Profile when we get the heaviest volume. They just lean against these red Profiles at the tops or bottoms of a developing range. When it doesn't work they are taking small losses. When it does work they could round up a big profit on their trades.

For the rest of the interview, pick up a copy of Breakthrough Strategies of Wall Street Traders (an average interview includes 20+ pages of techniques) on

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