37 Years of Excellence in Auction Market Research
CISCO Futures
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1572
http://www.cisco-futures.com
dljones@cisco-futures.com
Auction Market Value Analytics(tm) Game
Teaching Yourself Profile Trading
CISCO Futures Copyright 2007
Since the beginning of the CBOT Market Profile(tm) product in 1985 the promise of true value based trading has remained
attractive but elusive. The major difficulty comes in recognizing market situations as they are
developing, using pattern recognition. To help, the basic source of Market Profile (CBOT Market Profile, 1991)
identifies four major day types or patterns. The most widely read source (Mind Over Markets) lists nine
day types. Day types are made from individual reference points (TPO's, time, etc.) put together in a profile with
recognizable characteristics; such as a double distribution day (two humps) or the triplet neutral, neutral-center
and neutral-extreme. Since markets develop in many, many ways there can be more day types than the 30 or so reference points.
A reference point is somewhat akin to the 'indicator' of technical analysis. There is a substantial difference:
a reference point is closely tied to something real and observable in the market; whereas an indicator is the result
of a computation--typically from a moving average related process, removed from observation.
A hard look at pattern recognition leads to the suspicion that it is not quantifiable. Each reference point carries it's
own type of information. The information from reference point 1 may or may not be equatable to the information in
reference point 2, although each is telling you something about the market. Some reference points are clearer than
others; a tail is very clear, a day type is often not clear at all. Stirring all reference points into the pot
makes it difficult to reach a measurable outcome (in a quantitative sense). Indeed, this has been the experience of most
traders. Many have felt that there has to be a better way if traders are to gain the obvious benefits of market value
analysis.
The better way, we feel, is to focus on each reference individually. Understand it, and then put each one in
context, ralative to the others.
Starting at the beginning: There are 30 or so reference points. Each reference point contains unique information about
the market. Value area points to value, tails at the extremes of a profile distribution indicate whether
an auction has completed, day-to-day volume differentials point to increasing or decreasing participation and
so on for each of the reference points. Each can tell you something about a market. If you track a reference
point, e.g. volume, over the last several days you can see how it is moving, it's flow. You now have a flow variable.
You not only have the latest day's volume, but also the direction it is moving. Do the same for the other
reference points and in a one-page table you have captured the substance of that market. No set of patterns
to memorize, no holistic grouping, just some simple flow variables that you can understand. This is
Value Analytics.
Auction Market Value Analytics (AMVA) was created as an analytical, measurements based, approach that
puts value trading technology within the reach of all traders. Even before AMVA beta testing was
complete it had become clear that many who professed to be 'profile traders were poorly prepared on the profile side.
These people use certain elements of profiles, such as value area, to
help guide their trading. Many do not know that there are many situations where profile
variables do not give the correct information, e.g. value area can always be computed, but there are times when
it is misleading or just plain wrong, e.g. when calculated from data in a trend.
The Game
From our Value Analytics experience was born the idea of a profile tutorial,
A game format where the trader competes against the market and learns from the experience.
The trader is actually doing an apprenticeship. To make it work requires 1) daily Value Analytics
data over an adequate time frame, say a year (250 trading days) and 2) market condition over the
same timeframe. Fortunately, CISCO has a wealth of historical market condition data broken down
by 5, 10, 15 and 20 day balances. We also have created historical Value Analytics profile data.
these profile and Overlay data fuel such a trading game, permitting the examination of hundreds
of trades.
The Game is for a player to choose a desired day, analyze it with Overlay
and profile methodology (Value Analytics), ending up with a good enough understanding of the market to
formulate a trading plan for the next day. This will typically lead to finding at least
four significant price markers: upside breakout, downside breakout (for trend initiation) and the upper responsive short
and lower responsive long (in a congesting market). You also must determing two risks, one for breakout
trading, one for responsive trading. The trading risk you accept has two inputs: market risk tied to volatility
and the (personal) risk that fits your trading personality. Once you have in hand the market trading points
and the risk(s) you are willing to take you have a trading strategy for the next day. This is your 'set up'.
Now you know what you will do if the market hits your points.
Then you trade the next day with the
CISCO real time profile builder (CMaPS), tracking the profile development just as is one
does regularly when trading the current day. This is the Game. The market, in its normal run pause behavior,
offers you opportunity. How well you handle that opportunity is your score.
On a given day the test market traded may have had a breakout, a run up to continue the trend for a while, then a
pause and finally a return back to balance. you, of course, do not know this until you have run the Game
for that day.
The potential of that market move is the range from
the breakout price to the price at the top of the run. Your score is the amount your strategy
would have collected as a percentage of the market's potential. An example:
Profile Game Example: UU Jan 19, 2006
If, on average, you do 40 percent, you
are a credible trader. But there are cases where your skill can bring you returns in excess of 100 percent.
Such cases are what traders live for, the money and the bragging rights. These exceptional
opportunities are really not rare. One such case occurred
during the 30 day Value Analytics beta test. Profile Game Example: UU Jun 20, 2007
Developing Your Background in Profiles
Learning comes from playing the Game in many different market situations. In your conduct of
the Game, questions may arise about the definitions and applications of some of the profile
reference points.
As a part of the Game CISCO has built a set of reference tables for the published sources
of profile information. This set, the Lookup Publications lists keywords and their
page locations. For instance: If you are
not clear on the definition of TPO, go to Lookup Publications, find a source (e.g. CBOT Market
Profile Manual) and you will see a list of key words. Search for 'TPO' and voila, there it is
on page 11. Now you can go to your copy of CBOT Market Profile (it is free to download on the
CBOT site) and get a complete description. This sort of directed research accelerates your
learning about profile reference points (that is the goal of this tutorial).
Steps
To play the Game: First do your homework after the close: items 1 - 6
1. Select a date from Overlay History table. You will generally play with balance days.
2. Get the Value Analytics Reports for that day.
3. Read the Report Table for the three day flow of the profile variables.
4. Consult the other Tables (3 day Overlay, 2 day Overlay and the profile as needed.
5. Tally the profile variables to find directionality, tendency to change, etc.
6. Develop your strategy: risk, entry points, contingencies.
7. Next (trading) day: Use CMaPS History program to follow the market (30 and/or 15 min basis).
8. Calculate your score.