Author and former hedge fund manager James Dalton is a Market Profile believer, and he'd be the first to tell you that. A member of both the CBOT and the CBOE, he served as executive vice president of the CBOE during its formative years. Between writing Mind Over Markets and his latest book, Markets In Profile, he also served as director of research for managed accounts at UBS Financial Services, where he worked with an array of professional money managers. As a result of this experience, Dalton has come to place added emphasis on employing Market Profile for the longer time frames.STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Jim Dalton on October 10, 2007, via telephone.
Jim, how did you get interested in the markets?
I came out of the Marine Corps and went to work for IBM. I was there about a year and a half. I was the top salesman in the country, and I hated every day of it. Then I went to work for Merrill Lynch as a broker. Shearson Lehman hired me after that but I didn't think their research was any better, so I started doing my own research in stocks but that still wasn't any better than what they had to offer.
Then I got involved with a couple of professors at the University of California-Irvine campus. They had a strategy where they would be long stock and short warrants, knowing that the warrants would converge. I was fascinated, and since warrants are similar to options I was able to gain some background in options.
Eventually, I went to work for the Chicago Board Options Exchange (CBOE), where I was responsible for research and public investor affairs, and was the director of marketing. The early days of the CBOE were interesting because it put me in touch with all the brokerage firms and all proprietary trading accounts. I got a pretty good foundation in options.
In those days I watched people do a lot of quantitative research. That was how I got to know Myron Scholes, Bob Merton, and Fischer Black, who acted as consultants for the CBOE. I had the closest relationship with Fischer Black. We used to talk about the options pricing model. I was never comfortable with the pricing model. It didn't appear to work as well as it should have. We would go to lunch once a month or so and talk about it.
At the time I really did not understand why it didn't work, and later on I began to understand the fallacy.
Which was?
The fallacy was that all those models basically treat all prices as equal. As you become more sophisticated in the markets, you realize that is a fallacy. It doesn't allow you to view any of the prices contextually. I hit on that as I was working on what I called an option strategy chart. I was trying to create a distribution curve to determine the best time to do puts, calls, strips, straps, spreads, straddles, and so on.
One day I had my chart up in my office. At that time I was running JF Dalton Associates, a discount futures firm. A friend of mine walked up and saw the distribution curve and said, "Oh, you must be working with Pete Steidlmayer," and I said, "Who?" I had no idea.
Is that how you were introduced to Market Profile?
Basically. My options strategy chart didn't work well, and again it was at the extremes that it broke down. When I met Steidlmayer, I don't think we talked for more than two or three minutes before I understood the discovery he had made.
What was that?
Treating time as a constant and placing it on the horizontal axis, while at the same time placing price, the variable, on the vertical axis whose output now forms the distribution curve that is Market Profile. After a brief discussion, Steidlmayer asked me if I wanted to sponsor his new book. Like a responsive trader, I wrote him out a check right on the spot.
When Markets And Market Logic was published, there was a credit
to JF Dalton Associates and that put me right in the middle of all the
work Steidlmayer was doing. Then that led to us writing our own book.
...Continued in the December 2007 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the December 2007
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reserved. © Copyright 2007, Technical Analysis, Inc.
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