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Auction Market Value Analytics (tm)
Lookup: Mind Over Markets, Dalton, Jones & Dalton 1990
Copyright CISCO Futures 2007
**************** Reference R3 Mind Over Markets ******************************************
R3. Mind Over Markets, Dalton, Jones, Dalton 1990
Application of R1 and R2, Directional Performance Relationships????????
Part 1. MOM90 Reading the Market Profile Graphic (Intra-day) (Markets Organizational Structure)
p5 Distribution, tool not indicator, dual auction
Ch 1. MOM90 Introduction
p2 Less volume is significant
p3 History is gone, the evolving market is NOW!
Novice: recognizes objective facts and features relevent to the skill
p4 Advanced beginner: continuity, step by step
Competent: understands, capable
Proficient: feels
p5 Expert: at one with the market
Ch 2. MOM90 Novice
p7 Many definitions and patterns to memorize
p8 Information sources
Fundamental
Technical
Market Generated ==> visual indication of market activity
Market Profile a way of organizing market activity as it unfolds
Foundation
Profile information is interrelated and integral to a complete understanding of the market!!
Must integrate each section of book with what you have learned so far
p10 Futures auction: if open below value, auctions up, if open is too high, auctions down
p11 Organizing the day: Half-hourly TPOs show time and price, Fig 2.2, 2.3
1. Initial Balance (IB) generally price range of first two half hours of trading 'Short:' timeframers
p14 2. Range Extension (RE) trading beyond the IB 'Other:' long timeframers push price
3. Responsive buyer: moves market back toward middle
4. Range all prices top to bottom
5. RE down 98 28/32 & below, other: timeframer
p15 6. Value Area: middle 70% of volume (TPO VA from middle 70% of TPOs==> CISCO 1987)
7., 8. Tails: single prints at the extremes (high or low) complete an auction (from other: timeframer)
9. Point of Control (POC): most TPOs on a price line, fairest price of the day (most popular)
p16 10. Last TPO range of the day, used to compare with next day (measure of sentiment)
p17 Role of Market: to facilitate trade, see Fig 3-3: price moves up and down as buyers/sellers demand
p18 Other: timeframer leads: to be successful, must know what other; timeframer is doing
Going with the crowd: not a good idea
p19 Day Timeframe Structure: 1) tails show presence of other: timeframer
Day evolves as in relation to IB and confidence of other:
Narrow IB ==> more likely RE, wide IB (base) ==> more stable
Other: level of confidence important
p20 Day Types
Normal Day: Fig 2.4, early entry of other: ==> wide IB
Characteristics: Wide IB that holds
Sage advice: Best trades often fly in face of most recent maarket activity
Never lose sight of the bigger picture
P22 Normal Variation of a Normal Day Fig 2.5
Quiet in early part, later other: enters and extends range; conviction is evident from RE
Structure: Not so wide IB as Normal Day, value established lower (or higher)
Trend Day; 2 types, Standard and Double Distribution; high level of directional confidence Fig 2.6
Structure: Open forms upper or lower extreme (other: in control), thin, elongated profile (4, 5 TPOS max)
p25 Double-Distribution Trend Day: inactive early on, other: enters, driving price Fig 2.7
Structure: Small IB, then other: takes over, some single prints,
trading back into the single prints, marks the exit of other:
p27 Nontrend Day: No directional conviction Fig 2-8
Structure: Narrow IB, other: stays out, no RE
Neutral Day: Other: buyer & other: seller not far apart, market balances Fig 2-9
Structure: IB between Trend and Normal day, RE on both sides of IB
Summary p31: Directional Conviction vs Day Type grows from Normal Day to Trend Day
Ch 3. MOM90 Advanced Beginner Learning to see the 'bigger' picture
p34 The big picture, 1) market structure, 2) trading logic and 3) time
Time is the markets regulator: time validates price (multiple TPOs shows value)
p35 Time regulates opportunity (1 TPO vs 5 TPOs) more opportunity at a price if 5 TPOS
Understanding: Observe, interpret and trade
p36 Profile like puzzle: develops throughout the day, ends with a structure
Time and trading are components ==> understanding: see the puzzle with all three
Mastering market structure from recognizing and interpreting the Profile graphic
Trading logic: raw human instinct of the marketplace: harder to learn, need experience
p37 Recognition Speed: must lead structure development
Trade Location: Late recognition ==> late entry; want to see control change as it occurs
Confidence Level: Trading structure ==> confidence, but late to trade
p38 Summary: Logic ==>impetus, time ==> signal, structure ==> confirmation
Evaluating Other: Timeframe Control: can form illusion, example of strong opening
p39 Factors in other: control: RE, tails, activity in body of Profile, VA and VAy
Each studied basis of initiating or responsive action
p40 Other: Timeframe Control on the Extremes
Tails: aggressive other; selling at top, buying at bottom
Other: Body of the Profile: subtle, TPO count (above/below POC) is one measure
p41 TPO Count: Time = market regulator, price = markets advertiser
Measures the level of imbalance between short: and other:
TPO above = sum of TPOs above POC, TPO below = sum of TPOs below POC Fig 3-1
p45 Fig 3-2 Example
Initiative vs Responsive Activity Fig 3-3
Initiative buying activity within or above VAy
Initiative selling activity within or below VAy
Responsive buying activity within or below VAy
Responsive selling activity within or above VAy
p49 Trending Vs Bracketed Markets: Trend = divergence of price from value; Bracket = contained/delimited movement
p54 Key Elements
Estimate: Markets trend 20 - 30% of the time: Trading a trend--leave it alone
Trading brackets: Identify the outer reaches of the bracket and then take gains quickly
p55 Trending Markets: starts by initiative action by other:
Bracketing Markets: Other: buyer and seller become responsive traders
p57 Two Big Questions: Cornerstones for understanding the market
1) Which way is the market trying to go (attempted direction)?
2) Is it doing a good job in its attempt to go that way?
Knowing 1) and 2) is the equation for trade facilitation
Ch 4. MOM90 Competent p59 - 310
I. Day Timeframe Trading p60
Begin the day with a set of expectations that serve as guidelines, based on markets past performance
Longer-term market direction
Recent Value Area placement
Opening call
Post open ==> more intuitive: molding expectations to developing market structure
Opening type
Open relationship to previous day value and auction rotations
p61 Day Timeframe Directional Conviction (Which way is market trying to go? how good a job is it doing?
Interpet other: to find which way market is attempting to go
Open Call: Several as open nears, mostly from other:
p62 Open: First half hour quite often establishes on of the days extremes
Find which one
p63 Open as a Gauge of Market (Directional) Conviction
1. Open-Drive
other: drives market directionally Fig 4-1, confidant ==> Normal Variation or Trend Day
2. Open-test-Drive
Tests a known reference point, then reverses strongly Fig 4-2
Counters most recent activity ==> Normal Variation or Trend Day
3. Open-Rejection-Reverse
Opens, moves directionally, reverses back thru opening range Fig 4-3, requires patience
p70 4. Open-Auction
No conviction, stays within yest range; Fig 4-4
Outside yest range (out of balance), directional conviction likely to develop Fig 4-5
p74 Estimating Daily Range Potential: greatest potential (and risk) on open outside yest range
p75 Open Within Value
Guidelines
1) Find relationship to yest value and range
2) Find the initial extreme most likely to hold: superpose length of yest range for estimate
3) Allow 10% variation (this is just an estimate!)
4) As extremes change and directional conviction arises, adjust the estimate: Fig 4-7, 4-8
p80 Open Outside of Value but Within Range
Acceptance: produces range similar to yest
Rejection: if breaks out of range and then comes back in, potential for oposite move Fig 4-12, 13, 14
p87 Summary: Reference point: where market opens in relation to yest range and VA Fig 4-15, 16. 17, 18, 19, 20
p97 Two Timeframe Markets: Other: controls along with short: Fig 4-21
p98 One Timeframe Markets: Trend Fig 4-22
p98 Other: Timeframe Control, using Rotations
Use Market Structure and Market Time (Structure alone is too slow)
Time: Lower acceptance ==> lower time at that level: enough time vs too much time ==> control change
1) No transition ==> one or two timeframe days (Trend Day)
2) One timeframe to two timeframe
3) Two to one timeframe
4) One timeframe in each direction (Neutral Day) Fig 4-23
p106 Auction Failures: No follow through Fig 4-25, 26
p110 Excess: Too far in a given direction, one TPO tails Fig 4-27
p112 Rotation Factor: Which direction market is attempting to go:
Rotation Sum = +1 if current high gtr prev period high, -1 if current low less than prev low Fig 4-29
p113 TPO Counts (see Ch 3) Fig 4-30, 31, 32, 33
p122 The Close: Day traders exit, other: may buy or sell Fig 4-35
p124 Day Timeframe Visualization and Pattern Recognition
1) Short Covering Rallies: old business covering looks like new demand 'P' distribution Fig 4-36
2) Long liquidation breaks: like 1) but selling 'b' distribution Fig 4-39
3) Ledges: market stalls again & again at one price Fig 4-40
p135 The Liquidity Data Bank: Cleared volume at price (data for Market Profile Value Area) EOD report
p136 General uses of LDB: Volume, Value Area, Dispersion of Volume, etc. see reference R2
LDB situation changed with electronic markets
p159 High and Low Volume Areas LDB
p162 High Volume Examples LDB
p169 Low Volume Examples LDB
p176 Summary: Day Timeframe Trading
Day Timeframe may give wrong impression
II. Long Term Trading
Moving from day timeframe to longer term
p177 Long Term Directional Conviction
1) Which way is the market trying to go (attempted direction)?
2) Is it doing a good job in its attempt to go that way?
Facts to help gauge attempted direction
p178 Attempted direction: Which way is the market trying to go
1) Auction Rotations
Rotation Factor
2) Range Extension
Entrance of other: beyond IB Fig 4-59
3) Long-Term Excess Fig 4-60
Works same as day timeframe excess (tails)
Island Days (from gaps) Fig 4-61
Long Term Tails: bar chart tails Fig 4-61
Gaps: signals change in perception of value (other:)
4) Buying/Selling Composite Days
Composite Analysis: Evaluates where the majority of the days trade took place rekatuve ti open
Divide range into 4 parts (a la LDB)
Composite buying day when open resided in lowest quarter
Composite day when open resides in bottom or top quarter
p187 Directional Performance: Is the Market Doing a Good Job in its Attempt to Get There
Three Factors
1) Volume
Volume measures trade facilitation
Compare volume with previous periods
No standard, trader must keep records
Example: Mkt attempted direction up basis Rotation Factor & (buying) RE
Volume strong or up, TF is good, so doing a good job
2) Value Area Placement
Compare one day VA with next e.g. unchanged, overlapping-higher, higher
May be contrary to day timeframe attempted direction Fig 4-66
Table 4-1 directional relationships 15 attempted direction up, 15 down Fig 4-65, 6, 7, 8, 9, 70, 1, 2
3) Value Area Width
Within day measure, VA usually wider on higher volume Fig 4-73, 74, 75, Table 4-2, Fig 4-78 - 4-86
Long Term Activity Record: table for trader to answer "Big" questions (p177 1) and 2))
p192 Attempted Direction: 15 Up measures, 15 down measures
p204 Long Term Auction Rotations
Bracket is a long-term two-timeframe market
70% of the time, other: buyers & sellers are responsive traders
Brackets are hard to define Fig 4-87, 88, 89, 90
1) Responsively trade Fig 4-92
2) Markets generally test a bracket extreme more than once
3) Markets fluctuate in brackets
4) Monitor activity near bracket extremes for acceptance/rejection
All brackets eventually evolve into trends Fig 4-93
Trend is a long-term one-timeframe market
Trend is the result of directional conviction by other:
Strong conviction ==> strong excess ==> Fig 4-96
Trade Location in a Trend
"Get on board early", easier said than done
Older trends, trade responsively: go with the trend
p227 Monitoring Trends for Continuation
Compare activity (volume) on up days with that on down days
Transition of Trend to Bracket
Up trend ends when the responsive other: seller creates significant excess at the top Fig 4-96
p233 Detailed Analysis ofa Developing Market
Bracketing market is complex: emotionally difficult to trade (must change gears quickly)
Bracketing 70 to 80% of time: other: buyer and seller close together Fig 4-97
Reference points: Market balance, Nontrend days, balance break-outs, auction failures
Use a relatively short timeframe, litle overnight holding
Sharp spurts between balances offer opportunities
Early identification of breakout lies in concept of market balance: a bracket develops a series
of short term balances (brackets within brackets)
Monitor for continuation: key to identifying other: control
Breakout often begins with gap or auction failure Fig 4-98, 99, 100, 101 (bar charts)
p244 Long-Term Auction Failures: Failure = market auctions above(below) known ref point & fails to follow thru
Fig 4-102 (bar), Fig 4-103, (TPOs)
p248 Long Term Short Covering and Long Liquidation: Present long-term just as in short-term (day) Fig 4-104 (TPO)
and Fig 4-105 (bar), Fig 4-106 (long term profile)
p259 Corrective Action: Defn: 'counteraction'
p260 Function of Corrective Action: 1) Profit taking, 2) Test of strength (health of a trend)
p262 Long Term Profiles: shows that auction processes apply to all timeframes Fig 4-108
Use: Clear definition of value (brackets) and migration of value
p264 Long Term Profile in Action: Fig 4-109 (bar), 110 (CISCO Overlay), 111 (bar), 112
Special Situations p272
p273 3-I Days
Initiative tail, TPO count and RE Fig 4-113
Expect tomorrow to open within value or higher
Tomorrow first 90 min did show continuation, table p275
p277 Neutral-Extreme Days
Day timeframe balance with RE on both sides
Close on an extreme: continuation next day 1sst 90 min is good, table p277
p278 The Value-Area Rule
Price accepted (2 or more TPOs) within yest VA, prob that auction will go through yest VA Fig 4-115
Caution! Need to know 'condition' before trading
p280 Spikes: quick run up or down away from value
Sign of acceptance: next day: accumulation of TPOs at the new level
Rejection: new session opens away from spike direction
Open within spike: ==> balancing, two-timeframe rotational trading in spike area Fig 4-116, 117
Open outside spike: indication of out of balance
Bullish: Initiative buyers in control, if starts trading down, can move fast Fig 4-118, 119
Bearish: Rejection of spike, bearish for day timeframe Fig 4-120
Spike Reference Points: Limited to first price probe: Extremes Fig 4-121
p288 Balance Area Break-outs
Strategy: go with Fig 4-123
p292 Gaps: Opening outside previous days range Fig 4-124, 125, 126
1) Breakaway gap: Early stages of a long-term trend, other: strong conviction
2) Acceleration gap: Within the trend, reaffirms conviction
3) Exhaustion gap: May mark end of trend
Markets to Stay Out Of p300
1) Non-Trend Days: Small range, not facilitating trade Fig 4-127
2) Non-Conviction Days: looks like Normal Day, but no directional conviction 4-128
3) Long-Term Nontrend Markets: Lacks directional conviction, may still be ok short term Fig 4-129
4) News-Influenced Markets: Most traders have balanced going in
p304 Summary: When the market has no confidence, stand aside.
News p304: Trying to anticipate news is a highly dangerous gamble.
News/government reports, etc. is present. Opportunities may arise. Be ready with:
1) Direction of major auction
2) Known reference points
3) Market expectations for this news Fig 4-130, Table p307, Fig 4-131
p310 Beyond the Competent Trader
1) Must achieve self underestanding
2) Must be so intimate with with the mechanics (Ch 1-4) that they form a holistic pattern in your mind
Ch 5. MOM90 Proficient
p312 Beyond competency: Intuitively feel when conditions are right for a trade
Experience, to automatically recognize trading conditions
Self understanding
Introspection for deeper understanding
Results Equation: Market Understanding x (self-Understanding + Strategy) = Results
1) Market understanding
2) Self-Underestanding
3) Strategy
Self-Understanding: Becoming a Successful Trader
Emotional rewards primary, financial secondary
p315 Self-Observation
Find your weaknesses, keep a trading journel for a record of your motivations
p316 The Whole Brained Trader: Right brain is intuitive, artistic, has feelings,
is gestalt oriented (sees forest, not just trees), controls our visual perceptions
Left brain: analytically oriented, reasons logically and sequentially, responsible for speech
Stores knowledge
Both hemispheres together: Left for analysis of the data, Right for actively trading/interpretation
p318 Strategy
Set-up and management of a trade is guided by rules based on market understanding
Complete strategy: ==> holistic game plan built on market understanding, self understanding
and structural guidelines
p319 Business Strategy: Trading is a business!
Tangibles: Capital,risk, cash flow, taxes, record keeping, etc.
Intangibles: Knowing the competition and the product, dedication, daily execution, planning
Capital: 1) Be sure to have enough, and 2) Conserve it. Undercapitalization ==> tick watching
p320 Location: Trade, not business. "Best trades generally fly in the face of the most recent activity."
Timing: Hallmark ==> timing and patience
Information: Rely on yourself, not others
p321 Know Your Competition: Scope out other: and short:
Know yourself: Self-observation, introspection, journal
Consistent Daily Execution: Consistency breeds objectivity, eases tensions
Inventory: Buy inventory when no one else wants it (sell highs)
Risk: Regulate your trading (risk only what you can afford to lose)
p324 Record keeping and Performance: Trading records give objective way to evaluate strategy
Dedication: Heartbeat of a business
p325 Applications:
1) Accept and begin to view trading as a business
2) Develop a comprehensive strategy based on concepts of successful business management
3) Formulate specific rules and "mini strategies" that will help guide your trades
and mold your individual trades in order to meet your longer term goals. Fig 5-1
p327 Summary: Balance left brain discipline with right brain creativity
Ch 6. MOM90 The Expert Trader: Requires complete dedication and determination. Strong desire.
Appendix 1 MOM90 Value Area Calculation
VOLUME Value Area: ref: CBOT Market Profile, 1985 p53, p73, p112
CBOT Market Profile, 1991 p51
Start with volume at days peak. Add next higher and so forth until 70% of total is reached
Value Area (volume) is the price range found, containing 70%+ of the volume
p51 70% Range Calc: High volume price, add 2 above, 2 below until 70% of volume reached
Note: Market Profile value area is defined to be from (cleared) volume
TPO Value Area Calc: From CISCO article The Alumni Letter, Market Logic School, April 13, 1987
Also: Estimating the Market Profile Value Area for intraday trading S&C Sep 1987
Start with days peak TPO count. Add next higher and so forth until 70% of total TPOs is reached
Appendix 2 MOM90 Reference Texts & Educational Literature