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Peter Steidlmayer - Makes Sense out of Pieces

Peter Steidlmayer: Market Profile Developer
Makes Sense out of Pieces
July 1988

While sitting in on one of Peter Steidlmayer's market strategy seminars, you sense a bit of impatience in the air. The students, many of whom have flown to Chicago to hear Steidlmayer, want to get to the main point: Tell me how to make profitable trades.

But Steidlmayer, senior vice president of education and research at Chicago-based Barnes & Co., stresses the importance of experience and learning. In addition, he urges the use of his market profile system in conjunction with, not as a substitute for, the student's own theories or indicators.

"You want to be your own person. (When losing money) you don't have to apologize to anyone but yourself," he says. "Market Profile can give a false sense of security. Most of the time you're struggling with yourself."

Steidlmayer also believes that is why it pays to be optimistic, because then "you're never down with yourself."

This former floor trader has replaced the grain pits at the Chicago Board of Trade (CBOT) with classrooms and computers. "I don't miss (the pits)," Steidlmayer says.

Steidlmayer is also a bit of a contradiction: A respected teacher, yet somewhat of an anti-academic. As the organizer of several workshops and seminars and the author of Markets and Market Logic and Markets 101, Steidlmayer has become a de facto professor in the industry.

At the same time, he has tweaked the noses of the traditional academic community, especially with his studies of nonrandom and nonefficient market outlook.

Steidlmayer's theory behind Market Profile, a market prism he designed but whose copyrights the CBOT controls, says that price and value are two different things continually working to converge. In its search for what Steidlmayer calls "fair value," the market will venture above and below the fair value area before finally accepting it. Acceptance is shown by volume, represented by price/time units.

This view of the market tosses both random walk theory and the idea of efficient markets out the window. He contends he has a natural bias toward the price vs. value mindframe.

" I grew up in the 1940's and 50's when the value was the key," he explains. "If you paid less than value for something, good; if you paid more than value, you were an idiot.

Many of the top finance schools, including the University of Chicago, espouse the theories Steidlmayer handily discards. But he doesn't appear anxious to gain converts in any of the institutions.

"I don't know if I have any (converts)," he says. " I don't waste too much of my time with academia. They're like politicians: They go with the popular trends.

However, he notes that Western Illinois University has accepted Market Profile into its curriculum.

While a member of the board of directors at the CBOT in the early 1980's, his theories grew into a time, price and volume matrix called the Liquidity Data Bank (LDB), which could be used to reinforce Market Profile conclusions.

Steidlmayer began teaching Market Profile itself as a structured tool two years later when he formed the Market Logic School. The school basically consisted of four days of seminars with texts included. Advanced traders were encouraged to join an elite class conducted at Steidlmayer's ranch in Northern California.

After several disagreements with others involved in the school, he and an assistant left in mid-February to start a similarly formatted program at Barnes, where he says he is now doing much more than teaching.

"The (Barnes) class is 95% different from what I was doing before," Steidlmayer claims, noting he also is designing on-line trading systems in addition to conducting seminars.

But, wherever he goes, Steidlmayer tries to keep in touch with former students from both schools.

"I often get letters and things. It's very gratifying," he says. "(The students' success) satisfies me because it will expand the industry, and it'll take an old guy like me along with it."

During class he can fit the "old guy" image as he takes his tutelage spot at the front of the class -- reading glasses at the end of his nose -- with younger students hanging on every word. But, privately, he has the presence of a 20-year-old. During an afternoon interview following an early morning flight and eight hours of speaking, he fidgets in his chair, suddenly darting around for pencil and paper to illustrate a point at any given moment.

If this is the old guy, it's hard to imagine what the young one might have been like. Born and raised in Calusa, Calif., a small town north of Sacramento, Steidlmayer graduated with a bachelor's degree in accounting from the University of California at Berkeley.

"In 1957 there was a recession, but I read about how a soybean trader had made lots of money. I knew then that's what I wanted to do," he says.

His bell-curve view of the markets stemmed from a mixture of course work and off-the-floor trading. His conclusions were greatly influenced by his statistics course and books by economist Charles Schultze.

Although he says his armchair trading during college and an Army stint was "unsuccessful," he went ahead and obtained his CBOT membership in 1963. He put the bell curve idea to the test on the trading floor and created something called the "minimum trend indicator," the precursor to Market Profile (while Market Profile separates time periods into half-hour brackets, minimum trend's periods were three minutes long and resembled point-and-figure charts).

Steidlmayer attributes the refinement of his system to the slower markets of the mid-1960's.

"I had plenty of time -- 10 days as opposed to one hour-to see the trend build," he says.

Slightly shy and reflective -- rare traits for a floor trader -- Steidlmayer says he didn't leave the floor because he was losing money.

"Every year on the floor was a winning year," he claims.

His responsibilities on the board of directors at the CBOT forced him to cut his trading in half by 1983, which he didn't mind due to "having an off-the-floor mentality anyway."

One of the main advantages of Market Profile has been its simplicity, both mechanical and theoretical. With a piece of graph paper, a pencil and market updates every half-hour, anyone can attempt to use the system. Instruction is necessary to draw conclusions from the tool, but they are based on trader common sense, according to Steidlmayer.

"Every good trader has thought of it. There's no knowledge I offer that a good trader doesn't already have in his head, but I put it all together," he says. "I've always had the ability to pull a lot of things together."

Teaching how to use Market Profile no longer takes up the majority of his time. Steidlmayer says that the work he now does at Barnes is "more that of a programmer than a teacher." The programming hopefully will now inject his years of knowledge into microchips rather than human minds by designing proprietary trading systems with, in his words, "human oversight."

Steidlmayer is a rationalist and has always encouraged students to pare emotion from their trading and look at market logic. He says his computerized system will take the emotion out of the "three areas where humans fail." The area he's tackling now is trade implementation.

"I adjust. I always see opportunities, and I never look for disasters," he says, wondering why people would want to stop trading amidst signs of a recession.

Testing his theories is important to Steidlmayer -- but not at the expense of not learning others.

"In 1973, some friends of mine from the floor made seven figures and decided to retire. Now they're back, but out of step and out of shape," he says.

Steidlmayer's academic approach would never let this happen. Rarely does a professor fail to keep abreast of his own field.