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CISCO Futures
Intra-day Trading with the Tick Based Profiles
The introduction of Market Profile in 1985 marked the start of a new chapter
in auction market
analysis. For the first time a market analyst/trader could use value as a
parameter (usually the dominant parameter) in trading decisions. Market Profile
value comes from trading data at the Chicago Board of Trade in the
form of
an end-of-day report of cleared volume, listing who on the floor created the
volume at each traded price.
CBOT is unique in releasing these
data. While a signal advance, Market Profile lacks in scope (CBOT only)
and time (end-of-day reports only). To fill this void, the author, at CISCO
Futures, developed an intra-day methodology for finding value from tick data.
This method, called 'Tick-TPO', is applicable to all markets with ticks.
Tick-TPO operates from a quoter hook-up continuously within the day. When
compared to Market Profile end-of-day values, the Tick-TPO method gives
equivalent results.
Value in these determinations is
not an exact price, but rather a range of prices (value area is the name
coined by the Market Profile methodology and is used here as well).
Subsequently, the intra-day Tick-TPO method was
expanded to include multi-days (the Overlay Demand Curve), offering traders
value readings in both the short term (intra-day
profile) and the longer term (Overlay).
For a trader,
the advantage of knowing value offers the ability to tell when value is changing.
Value moving from stable or balancing to directional gives the trader a signal
to trade. When value re-stabilizes (market moves into congestion), the
directional move is over.
Market Profile burst onto the scene in 1985 with the publication of the
CBOT Market Profile manual (R1), quickly followed by Markets and Market
Logic (R2) and Taking the Data Forward (R3), all by J. Peter Steidlmayer
and co-authors. The profile concept is to find market value from the
cleared volume at price at the end of a trading day. Steidlmayer was a well known
exchange member and floor trader at the CBOT (Chicago Board of Trade).
It was generally understood that
Steidlmayer had been exceptionally successful in his 20 years on the floor.
He credited the Market Profile methodology for much of his success.
Two cases of market condition are important to the trader: first
is the change in value that signals the onset of a directional market. The
trader who can recognize a value change has an edge in entry over the one
who cannot.
Obviously one must know the current/previous value in order to recognize a
change. In general, value can only be known in a stable, balancing market.
Balance itself, takes some time to become apparent following the end of a
directional
move. This knowledge led us at CISCO to develop the Overlay Demand Curve (R5),
for balance recognition on a variety of time scales.
Applying Tick-TPO Methodology
Tick-TPO methodology
is different from Market Profile in parameters measured (ticks versus cleared
volume), time frame (real time
versus end of day) and markets covered (all those tick based vs just cleared LDB).
Lastly, Market Profile analysis uses the bell curve in various ways, none of
which is done in the Tick-TPO methodology.
Clearly, tick data in real time is more prone to error than cleared volume.
But ticks are timely and the error rate on quoters is quite low.
Market Profile value focuses on a single point,
the high volume price; while Tick-TPO is averaged over the ensemble of
recorded price-time pairs. The tradeoff is that with Tick-TPO (really, as noted,
Tick-TPT) we are essentially reading the market in real
time. Further, this methodology can be
applied to markets other than CBOT. Nevertheless, Tick-TPO is much more
general, applying to all markets that release quotes. Further, as an
intra-day device, Tick-TPO performs analyses not possible with end-of-day
data. For instance, Tick-TPO is useful in locating congestion as it is
evolving.
Economists paint auction markets as a tug-of-war between buyers and sellers,
the path Steidlmayer takes as well (R2). Fundamentalists like to identify
all the factors of supply and demand and then weight them ("if the soybean
harvest is 10 percent under the expected, soybean prices will rise 20 cents").
Fundamentalists seek intrinsic value (what it is really worth, in spite
of the current price).
But there are myriads of factors in any market, many totally unknown, and they
interact in complicated and non-linear ways. Strictly speaking a mathematical
description of a market
would be a non-linear, non-homogeneous differential equation with non-constant
coefficients. Not knowing all the interactions between the many variables
means that such a market equation could not be written nor solved for real world
markets. A fundamentalist solution is not possible.
The fundamentalist failures gave rise to the technical analysts of the 1970's
who used prices and charts to plot the course of markets. The profile
idea sought current value, what the market viewed as value today, with
no mind paid to what value should be sometime in the future. In view of the
inability of fundamentalists to define their variables and the consistent
failures of the chartists (90 to 95 percent of new traders fail), the only
recourse is with the experimental approach, i.e. the profile.
In our two 1987 articles we used a format similar to the CBOT Market Profile
to illustrate the point that the Tick-TPO quote data formalism provides
essentially the same value area as found from the LDB Market Profile.
In fact, neither method requires the brackets (profile bell shape) to find a
value area, since it is
just the numbers (volume for Market Profile, TPT counts for the Tick-TPO
profile) that are used to calculate value. The actual bell shape of the
Market Profile
was used by Steidlmayer for finding initial balance, range extension, tails
and the five auction market patterns. None of the bell shape related items are
involved in the Tick-TPO Profile.
Obtaining the Market Profile from the CBOT LDB data adds a second
column to Table 1.
Overlays find market condition which gives a longer term value (support and
resistance) to help the decision process. All Overlays in Figure 2 are made from
three days of Tick-TPO Profiles collected into the Overlay. Three days
is an arbitrarily chosen parameter, based on the desire to deal with day
trading and short term market information. A swing trader would use Overlys
of 5 and/or 10 days or more.
With Table 2 and Figures 1 and 2, we can devise a strategy based on value
and value change.
Strategy for the market of the coming day is based on the Value Area and Value
Region EOD of the previous day. The following illustrates using one auction
market concept, value area and a short term (3 day) value region. Simplifying
assumptions are that trading today requires a balanced (3 day) market
yesterday and risk is not adjusted for market conditions. Setting these
conditions in advance permits a firm definition of when to trade. Eight days
are considered, 1), 2), .....
Congestion is the end phase of a market move that normally began as a breakout.
While a breakout can be characterized as an 'event', congestion is much more
diffuse. A directional move runs and pauses, runs and pauses and finally ends
in a pause that grows into a congestion and balance. It is easy to confuse a
pause that lasts for awhile with a congestion and one will never know until
the market
shows which observation was correct. By that time it may be too late.
As noted in an earlier section ('Profiles from Tick Data'), the bell shaped portion
of the Market Profile display (Brackets)
is not used in the Tick-TPO and Overlay Demand Curve analyses. No use is made of
the shape since value depends on the half-hour bar counts. Since
Tick-TPO finds Value Area from the TPO (TPT) half-hour counts, this carries
over to the Overlay. Tick-TPO does not rely on any sort of pattern recognition,
nor does the Overlay Demand Curve.
R1. CBOT Market Profile. Loose-leaf, CBOT, c1984
Copyright CISCO
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1598
Internet http//www.cisco-futures.com
Email dljones@cisco-futures.com
Donald L. Jones, March 14, 1990
Copyright Donald L. Jones, all rights reserved
Day Trading With Profiles
History
In Steidlmayer's view, the market behaved like a bell curve (gaussian
distribution) with little trading at a day's highs and lows, while
most trading occurred at the middle prices. The CBOT began releasing
a data base of cleared price/volume (Liquidity Data Bank or LDB) for
each delivery each evening after market close. From these data they
chose the high volume price, then calculated the upper and lower prices
encompassing the central 70 percent of total
volume. Value (area) was defined as delimited by those two prices.
Steidlmayer and his co-authors developed a nomenclature for describing
markets defined by a bell shaped curve. First the market is divided
into half hour periods (mini-days) with each period identified by a letter
called a TPO (Time Price Opportunity). The letter for 0800 to 0830 is 'A', 0830 to
0900 is 'B' and so on. The days market activity is defined: The first
hour of trading is the 'initial balance' (IB). Price beyond the IB is called
'range extension' (RE). Price extremes (highs, lows) with single TPOs are
'tails'.
Auction markets are characterized by low levels of trading at extremes and
much more activity at middle prices. Hence, the middle prices are "accepted"
while the extremes are "rejected". Also identified within the three publications
(R1, R2 and R3) were five day types, the five separate patterns generated in
auction markets.
It seemed that all the elements for a trading model were present. With
experience one could hope to duplicate Steidlmayer's trading results.
Steidlmayer himself became a principal in a training school, CBOT processed
the cleared (LDB) data containing the Market Profile (end of day), CISCO maintained
the data for sale to traders, James Dalton (who sponsored the Market Logic
book) initiated a trading company based on Market Profile, etc.
In the meantime, the author (Jones), at CISCO, undertook to formalize the profile
methodology. None of the three primary reference works were indexed, so
tracking concepts across the three was difficult. Jones' first step was to
make the indexes, thus aiding the second step which was to develop a trading
manual (R4). Although the completed manual collected and organized the known
profile material, it fell short of being a trading guide. Something was
missing.
As a sort of desperation measure, Jones decided to develop a computer program
that could recognize the five day type patterns as they occurred. A very
competent analyst on the CISCO staff, Chris Young, undertook the job of
devising a pattern recognition technique that would automatically
identify and
discriminate between Normal Days, Normal Variation Days, Non-Trend Days,
Neutral Days and Trend or Double Distribution Days. The plan was to find
the day type and then correlate it with the path the market subsequently
followed. The program was a success but the research failed. There appeared
to be little or no correlation between a day type and what followed. Again,
something
was missing. Further study led to the understanding that the one-day profile
is inadequate to define a market. This was the 'aha' moment, when it was
realized that the missing element is the market's condition
prior to the day being traded. That is, a market in balance will behave
differently from one that is moving directionally. This (now) obvious and elementary
fact led to the development of the Overlay Demand Curve methodology for
finding market condition.
Day Trading in the Real World
The second case is on the other end of the trade,
that point at which a directional market makes its
change into a non-directional, congesting market. The time-frame for
such change can be quite short, but is more usually of the order of an
hour or more. The profile is the tool for this job, but an end of day Market
Profile from the cleared LDB is hardly quick enough. Needing timing within
the day, we turned to the tick
data from a quoter. In place of the cleared volume used by Market Profile,
we used the tick data from our quoter and summed it. Instead of TPOs from
cleared data, our measure is TPTs or 'That Price Ticked'. We named this the
methodology 'Tick-TPO Profile' (R6, R6a). We used 'TPO' instead of TPT because
TPO was commonly used and changing to TPT would just confuse the reader.
Responsive Trading
By the end of 1988 the Market Profile craze was beginning to fade. Those who
expected profile trading to be the end-all be-all were disappointed (Steidlmayer
had said the profile offered the trader an 'edge', but many expected more). Our
findings that the profile provided an incomplete market picture (R4) were
confirmed by the trading results of many traders. Market Logic School was
closed. Steidlmayer was
employed by Commodity Quote Graphics, Dalton Capital Management had
terminated trading and CISCO's LDB customer base was eroding. A vociferous
group of 'anti-profilers' had arisen (centered, it seemed, at the CME). These
debunkers were mostly technical chartists. Market Profile techniques, had they
delivered all that was expected, would have put the chartists out of business.
The Current Situation with Profiles
We will show
that the Tick-TPO profile combined with the Overlay Demand Curve provides
the trader a consistent, effective way to understand markets. Recent (yesterday)
profile value and the previous market balance (multiple days) longer term
value give the trader a platform for understanding value and value change.
We do not offer
the Profile - Overlay methodology as a 'trading model' since each trader's
timeframe and risk parameters are different. The thrust of profile auction
market methodology is market understanding. Traders will behave differently,
but all will have the opportunity to trade better if they understand value.
Profiles from Tick Data
In the next sections we examine a few days of Tick-TPO data for the 10 year note
for the period December 6 - 18 1989. We show both the
'profile' or quasi-bell shape of the TPOs (TPTs) and the half-hour price
ranges for each period, the Segmented Auction. Then we illustrate the Overlay
Demand Curves for finding longer term value. Value from the Overlay and the
Tick-TPO Profile will be used to devise day-to-day trading strategies for
the data sets of Figures 1 and 2 (see section 'Application of Value to Trading'
below).
Tick-TPO* REPORT FOR 12 06 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10027 E E | |
10026 BDEF B D |E |F | | | | | | |
10025 ABDEF |A |B | |D >E >F | | | | | | |
10024 yzABG >y >z >A >B > > | | >G > > > > > >
10023 zAG |z |A | | | |G | | | | | |
10022 GHI G H I | | | |
10021 GHI G H I | | |
10020 J J |
10019 JK J K
10018 JKL J K L
10017 KLM K L M
10016 KLM K L M
10015 L L
TPO Analysis
CENTER 10024
VALUE AREA FROM TPOS
UPPER 10027
LOWER 10020
Tick-TPO* REPORT FOR 12 07 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10017 y >y | |
10016 yz |y >z >
10015 z |z |
10014 ADEF |A D |E |F | | | | |
10013 ADEFHIJ |A | | |D |E |F | |H |I |J | | |
10012 ABCDFGHIJK |A >B >C >D > >F >G >H >I >J >K > >
10011 ABCDGJK A |B |C |D | | |G | | |J |K | |
10010 ABCKLM A |B |C | | | | | |K |L |M
10009 ABCKLM A |B |C | K |L |M
10008 BKLM |B K L M
10007 K K
TPO Analysis
CENTER 10012
VALUE AREA FROM TPOS
UPPER 10013
LOWER 10009
Tick-TPO* REPORT FOR 12 08 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10024 A A | | | | | | |
10023 zAB z A |B | | | | | | | | | | |
10022 zABCD z A |B |C |D | | | | | | | | |
10021 zABCDE z A |B |C |D |E | | | | | | | |
10020 zABCDELM z A >B >C >D >E > > > > > > >L >M
10019 zBCEFLM z |B |C | |E |F | | | | | |L |M
10018 zEFKL z | | | |E |F | | | | |K |L |
10017 zFGJKL z | | | | | |F |G | | |J |K |L |
10016 zFHJK |z | | | | | |F | |H | |J |K | |
10015 zFHIK |z | | | | | |F | |H |I | |K | |
10014 zFHI |z | | | | | |F | |H |I | | | |
10013 zH |z | | | | | | | |H | | |
10012 z |z | | | | | | |
10011 z |z | | | | |
10010 z |z | | | | |
10009 yz |y >z > | | |
10008 yz >y |z | |
10007 yz |y |z |
10006 yz y |z |
10005 z |z |
10004 z |z |
10003 z |z |
10002 z |z |
10001 z |z |
10000 z |z |
9931 z z |
9930 z z |
TPO Analysis
CENTER 10020
VALUE AREA FROM TPOS
UPPER 10023
LOWER 10014
Tick-TPO* REPORT FOR 12 11 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10020 yzACDEG >y |z |A | |C |D >E | |G | | | | | |
10019 yzABDFGHM |y >z >A >B > >D | >F >G >H > > > > >M
10018 zBHIJLM |z | |B | | | | |H |I |J | |L |M
10017 HIKL H I K L
10016 I I
TPO Analysis
CENTER 10019
VALUE AREA FROM TPOS
UPPER 10020
LOWER 10018
Tick-TPO* REPORT FOR 12 12 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10021 C C
10020 BCDE |B |C |D |E | | | | | | |
10019 yABCDEFHI |y | |A >B >C >D >E >F > >H >I > > > |
10018 yzAFHIJKLM >y >z >A | | | | |F | |H |I |J |K |L >M
10017 yzAJKL |y |z |A | | J |K |L |
10016 J J
TPO Analysis
CENTER 10018
VALUE AREA FROM TPOS
UPPER 10019
LOWER 10017
Tick-TPO* REPORT FOR 12 13 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10021 zLM |z L M
10020 yzCFLM |y |z | | |C | | |F | | | | |L |M
10019 yzCDEFIJKL >y |z | | |C |D |E |F | | |I |J |K |L |
10018 yzBCDEFGHJ |y >z > >B >C >D >E >F >G >H > >J > > >
10017 zABFGH |z |A |B | | | |F |G |H | | | | |
10016 zAG z |A | | G
10015 zA z A
10014 zA z A
TPO Analysis
CENTER 10018
VALUE AREA FROM TPOS
UPPER 10020
LOWER 10017
Tick-TPO* REPORT FOR 12 14 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10030 L L
10029 JLM J L M
10028 EGJKLM E G J |K |L |M
10027 AEGIJKL A E | |G | |I |J |K |L |
10026 AEFGIKL |A | |E |F |G | |I | |K |L |
10025 zABCDEG z |A |B |C >D >E > >G > > > > > >
10024 zABC z >A >B >C | | | | | | | | | |
10023 zB |z | |B | | |
10022 yz |y >z | | |
10021 y >y |
10020 y |y
TPO Analysis
CENTER 10025
VALUE AREA FROM TPOS
UPPER 10028
LOWER 10024
Tick-TPO* REPORT FOR 12 15 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10104 A A
10103 A A
10102 zA z A
10101 zAK z |A | K
10100 zAK |z |A | | | | | K
10031 yzABCDEJK |y >z >A >B >C >D >E | | | | |J |K | |
10030 yzABCDEFJK >y |z |A |B |C |D |E >F > > > >J >K > >
10029 yzABCFJK |y |z |A |B |C | | |F | | | |J |K | |
10028 zFGHJK z F |G |H | |J |K | |
10027 zGHIJK z G |H |I |J |K | |
10026 GHIKLM G H I K |L |M
10025 HIKLM H I K L M
10024 KL K L
10023 L L
TPO Analysis
CENTER 10030
VALUE AREA FROM TPOS
UPPER 10031
LOWER 10026
Tick-TPO* REPORT FOR 12 18 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Brackets Segmented Auction
10106 M M
10105 LM L M
10104 LM L M
10103 LM L M
10102 LM L M
10101 L L
10100 L L
10031 L L
10030 KL K L |
10029 K K |
10028 yJK |y | | J K | |
10027 yzDGHIJ >y >z > | | |D | | |G |H |I |J | | |
10026 yzBCDFGHIJ |y |z | >B >C >D > >F >G >H >I >J > > >
10025 zBCFH z |B |C | | |F | |H | | | | |
TPO Analysis
CENTER 10026
VALUE AREA FROM TPOS
UPPER 10030
LOWER 10025
*Copyright CISCO. All rights reserved.
This report may not be reproduced or retransmitted without the express
written consent of CISCO.
Figure 1. Tick-TPO reports December 6 - 18, 1989. Column 1 is price traded;
Column 2, Brackets are the times of day each price traded, y is 0700 to 0730,
z is 0730 to 0800, A is 0800 to 0830, B is 0830 to 0900, etc.; the columns
under 'Segmented Auction' are the 1/2 hour bars posted individually.
Each day report lists the value area. As noted earlier, the value area is not
enough to trade on, but, as a start we will list each from Figure 1.:
Tick-TPO VA
1989 Dec 06 10027
10020
07 10013
10009
08 10023
10014
11 10020
10018
12 10019
10017
13 10020
10017
14 10028
10024
15 10031
10026
18 10030
10025
Table 1. Tick-TPO Value Area basis 70 percent of TPTs.
Value Area Comparison: Tick-TPO with Market Profile
Tick-TPO VA Volume VA
1989 Dec 06 10027 10026
10020 10021
07 10013 10013
10009 10009
08 10023 10023
10014 10017
11 10020 10020
10018 10019
12 10019 10019
10017 10018
13 10020 10018
10017 10015
14 10028 10028
10024 10025
15 10031 10100
10026 10026
18 10030 10100
10025 10026
Table 1a. Tick-TPO Value Area basis 70 percent of TPTs compared with Market
Profile basis central 70 percent of volume. Source of Market Profile volume
Value Area is the CBOT Liquidity Data Bank.
Comparing the Value Areas in Table 1a shows very few instances of differences
of more than one price tick, the computational rounding error. The biggest
difference was the lower VA limit on Dec 8 in which the difference was 3
ticks. Referring to Figure 1 for the Tick-TPO on Dec 8, note that the
profile distribution (Brackets) is split, with the first hour trading centered
around 10008
and the rest of the day centered about 10020. The LDB report explains the
discrepancy:
CBOT VOLUME REPORT
TRADING DATE: 12 08 89
CONTRACT: MAR 90 10 YR NOTE (CBOT) DAY
TRADING BEGINS 0720 (CST);CLOSES 1400;TPO SYMBOLS ARE Z$ABCDEFGHIJKL
FIRST PERIOD IS 10 MINS;SUBSEQUENT PERIODS ARE ALL 30 MINS
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
10024 4 0.0 75.0 0.0 0.0 25.0 A
10023 3628 6.8 51.3 15.2 1.1 32.4 AB
10022 7946 15.0 43.9 14.5 4.0 37.7 $ABCD
10021 12532 23.6 44.4 19.3 6.6 29.8 $ABCDE
10020 6098 11.5 44.6 15.4 4.2 35.8 $ABCDELM
10019 2214 4.2 55.5 20.6 6.2 17.7 $BCEFLM
10018 3130 5.9 56.4 12.7 2.6 28.4 $EFKL
10017 5778 10.9 59.7 18.9 3.0 18.3 $FGJKL
10016 6928 13.1 44.3 20.7 4.1 31.0 $FGHJK
10015 1642 3.1 52.3 26.3 3.0 18.3 $FHIK
10014 1368 2.6 60.3 30.3 6.0 3.4 $FH
10013 256 0.5 50.8 19.5 29.7 0.0 $H
10012 44 0.1 75.0 13.6 11.4 0.0 $
10011 20 0.0 50.0 0.0 50.0 0.0 $
10010 4 0.0 50.0 0.0 50.0 0.0 $
10009 354 0.7 22.0 28.2 0.0 49.7 Z$
10008 576 1.1 36.3 26.6 2.4 34.7 Z$
10007 364 0.7 48.6 5.8 15.9 29.7 Z$
10006 64 0.1 1.6 46.9 1.6 50.0 Z$
10002 6 0.0 50.0 0.0 0.0 50.0 $
10001 24 0.0 8.3 83.3 0.0 8.3 $
9931 4 0.0 50.0 0.0 0.0 50.0 $
9930 26 0.0 11.5 38.5 3.8 46.2 $
%CTI1 %CTI2 %CTI3 %CTI4
VOLUME FOR MAR 90 10 YR NOTE (CBOT) DAY 53010 48.1 18.2 4.5 29.2
VOLUME FOR ALL 10 YR NOTE (CBOT) DAY 63350 46.2 18.7 4.2 30.9
70% VOLUME SUMMARY
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS
10023 41326 78.0 48.6 16.9 4.4 30.1 ABCDEFGJKLM$
10017
Figure 1a. CBOT Liquidity Data Bank for EOD Dec 8, 1989. Peak volume at 10021.
CTI1, 2, 3, 4 refer to trading of locals, commercials, off floor members and
public respectively. BRACKETS(*) are TPOs found from cleared data (each letter
identifies a trading period: A is 0800 to 0830, B is 0830 to 0900, etc). Market
Profile is a subset of the LDB report: Columns 1 (PRICE), 2 (VOLUME) and 8
(BRACKETS(*)). Below the data columns the line '70% VOLUME SUMMARY' shows the
Market Profile Value Area as the region from 10023 to 10017. Value Area is
calculated by the CBOT and comes as a part of the LDB report.
In Figure 1, the Tick-TPO central point (maximum TPTs) is at 10020. Tick-TPO
calculation of value area included more of the data in the 10008 region.
This points up the difference
in the two methodologies. Market Profile is anchored to the peak volume which
can be swayed by a single large trade. Tick-TPO treats all TPTs equally and
is be more spread out, as is clear in the display of Figure 1. To choose
which better represents
reality when they differ requires both displays. In this case we would opt
for Market Profile as better representing the market relative to time of
close. Of
course, that choice cannot be made in the oils, metals, foreign markets or
others that do not release LDB type cleared data.
What can the Value Area in Table 1 or 1a tell? First, it has a large
variation, from 3 to 10. A profile such as for Dec 11 is very flat, the
entire day range is only six. There is little
trading opportunity in such a day. Could we have known about the lack of opportunity
to come from the trading on the previous day, Dec 8? Not really, since Dec 8
had a 10 point VA and a range of 27 points. We do not know why markets vary
so much from day to day, but it clearly they do. Another thing is obvious:
a nice bell shaped curve of the profile TPOs or TPTs is fairly rare, although
the rule of low trading at the extremes is followed.
In the VA tables, we see little to help us understand how to trade
this market the next day because our profile snapshot is of a single day.
We need
to have some understanding of the state or condition of the market we are
dealing with: is it balancing, trending over the last few days or what? What
is its effective support and resistance (value area limits)?
Now, let us turn to the Overlay Demand Curve, the tool for finding
market condition. In this study we look only in a short timeframe, 3 days,
since our interest here is in day trading.
The Overlay Demand Curve
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 04 89 TO 12 06 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10027 1 d d 1 X
10026 2 d cd 8 XXXXXXXX
10025 3 bd bcd 14 XXXXXXXXXXXXXX
10024 3 bd bcd 19 XXXXXXXXXXXXXXXXXXX
10023 3 bd bcd 17 XXXXXXXXXXXXXXXXX
10022 3 bd bcd 10 XXXXXXXXXX
10021 3 bd bcd 9 XXXXXXXXX
10020 3 bd bcd 7 XXXXXXX
10019 2 bd bd 6 XXXXXX
10018 1 d d 3 XXX
10017 1 d d 3 XXX
10016 1 d d 2 XX
10015 1 d d 2 XX
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 05 89 TO 12 07 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10027 1 d 1 X
10026 2 c cd 8 XXXXXXXX
10025 2 c cd 13 XXXXXXXXXXXXX
10024 2 c cd 15 XXXXXXXXXXXXXXX
10023 2 c cd 11 XXXXXXXXXXX
10022 2 c cd 5 XXXXX
10021 2 c cd 5 XXXXX
10020 2 c cd 2 XX
10019 1 d 2 XX
10018 1 d 3 XXX
10017 2 e de 4 XXXX
10016 2 e de 4 XXXX
10015 2 e de 4 XXXX
10014 1 e e 3 XXX
10013 1 e e 8 XXXXXXXX
10012 1 e e 10 XXXXXXXXXX
10011 1 e e 7 XXXXXXX
10010 1 e e 6 XXXXXX
10009 1 e e 6 XXXXXX
10008 1 e e 3 XXX
10007 1 e e 1 X
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 06 89 TO 12 08 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10027 1 d d 1 X
10026 1 d d 4 XXXX
10025 1 d d 7 XXXXXXX
10024 2 df df 6 XXXXXX
10023 2 df df 8 XXXXXXXX
10022 2 df df 9 XXXXXXXXX
10021 2 df df 10 XXXXXXXXXX
10020 2 df df 7 XXXXXXX
10019 2 df df 8 XXXXXXXX
10018 2 df df 6 XXXXXX
10017 3 df def 9 XXXXXXXXX
10016 3 df def 10 XXXXXXXXXX
10015 3 df def 10 XXXXXXXXXX
10014 2 f ef 7 XXXXXXX
10013 2 f ef 11 XXXXXXXXXXX
10012 2 f ef 11 XXXXXXXXXXX
10011 2 f ef 8 XXXXXXXX
10010 2 f ef 7 XXXXXXX
10009 2 f ef 7 XXXXXXX
10008 2 f ef 4 XXXX
10007 2 f ef 2 XX
10006 1 f f 1 X
10005 1 f f 1 X
10004 1 f f 1 X
10003 1 f f 1 X
10002 1 f f 1 X
10001 1 f f 1 X
10000 1 f f 1 X
9931 1 f f 1 X
9930 1 f f 1 X
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 07 89 TO 12 11 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10024 1 f 1 X
10023 1 f 3 XXX
10022 1 f 5 XXXXX
10021 1 f 6 XXXXXX
10020 2 g fg 11 XXXXXXXXXXX
10019 2 g fg 13 XXXXXXXXXXXXX
10018 2 g fg 10 XXXXXXXXXX
10017 3 eg efg 10 XXXXXXXXXX
10016 3 eg efg 9 XXXXXXXXX
10015 2 e ef 8 XXXXXXXX
10014 2 e ef 7 XXXXXXX
10013 2 e ef 11 XXXXXXXXXXX
10012 2 e ef 11 XXXXXXXXXXX
10011 2 e ef 8 XXXXXXXX
10010 2 e ef 7 XXXXXXX
10009 2 e ef 7 XXXXXXX
10008 2 e ef 4 XXXX
10007 2 e ef 2 XX
10006 1 f 1 X
10005 1 f 1 X
10004 1 f 1 X
10003 1 f 1 X
10002 1 f 1 X
10001 1 f 1 X
10000 1 f 1 X
9931 1 f 1 X
9930 1 f 1 X
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 08 89 TO 12 12 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10024 1 f f 1 X
10023 1 f f 3 XXX
10022 1 f f 5 XXXXX
10021 2 fh fh 7 XXXXXXX
10020 3 fh fgh 15 XXXXXXXXXXXXXXX
10019 3 fh fgh 22 XXXXXXXXXXXXXXXXXXXXXX
10018 3 fh fgh 19 XXXXXXXXXXXXXXXXXXX
10017 3 fh fgh 14 XXXXXXXXXXXXXX
10016 3 fh fgh 9 XXXXXXXXX
10015 1 f f 6 XXXXXX
10014 1 f f 4 XXXX
10013 1 f f 3 XXX
10012 1 f f 1 X
10011 1 f f 1 X
10010 1 f f 1 X
10009 1 f f 1 X
10008 1 f f 1 X
10007 1 f f 1 X
10006 1 f f 1 X
10005 1 f f 1 X
10004 1 f f 1 X
10003 1 f f 1 X
10002 1 f f 1 X
10001 1 f f 1 X
10000 1 f f 1 X
9931 1 f f 1 X
9930 1 f f 1 X
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 11 89 TO 12 13 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10021 2 i hi 3 XXX
10020 3 gi ghi 14 XXXXXXXXXXXXXX
10019 3 gi ghi 25 XXXXXXXXXXXXXXXXXXXXXXXXX
10018 3 gi ghi 25 XXXXXXXXXXXXXXXXXXXXXXXXX
10017 3 gi ghi 15 XXXXXXXXXXXXXXX
10016 3 gi ghi 7 XXXXXXX
10015 1 i i 2 XX
10014 1 i i 2 XX
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 12 89 TO 12 14 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10030 1 j j 1 X
10029 1 j j 2 XX
10028 1 j j 7 XXXXXXX
10027 1 j j 9 XXXXXXXXX
10026 1 j j 8 XXXXXXXX
10025 1 j j 6 XXXXXX
10024 1 j j 5 XXXXX
10023 1 j j 3 XXX
10022 1 j j 1 X
10021 3 hj hij 4 XXXX
10020 3 hj hij 10 XXXXXXXXXX
10019 2 h hi 18 XXXXXXXXXXXXXXXXXX
10018 2 h hi 18 XXXXXXXXXXXXXXXXXX
10017 2 h hi 11 XXXXXXXXXXX
10016 2 h hi 6 XXXXXX
10015 1 i 2 XX
10014 1 i 2 XX
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 13 89 TO 12 15 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10104 1 k k 1 X
10103 1 k k 2 XX
10102 1 k k 3 XXX
10101 1 k k 4 XXXX
10100 1 k k 4 XXXX
10031 1 k k 8 XXXXXXXX
10030 2 k jk 9 XXXXXXXXX
10029 2 k jk 8 XXXXXXXX
10028 2 k jk 12 XXXXXXXXXXXX
10027 2 k jk 16 XXXXXXXXXXXXXXXX
10026 2 k jk 15 XXXXXXXXXXXXXXX
10025 2 k jk 11 XXXXXXXXXXX
10024 2 k jk 7 XXXXXXX
10023 2 k jk 4 XXXX
10022 1 j 1 X
10021 2 i ij 3 XXX
10020 2 i ij 6 XXXXXX
10019 1 i i 9 XXXXXXXXX
10018 1 i i 9 XXXXXXXXX
10017 1 i i 6 XXXXXX
10016 1 i i 4 XXXX
10015 1 i i 2 XX
10014 1 i i 2 XX
Overlay Demand Curve*
MAR 90 10 YR NOTE (CBOT) DAY
Three Days 12 14 89 TO 12 18 89
PRICE DYS L/F ROT PROFILE * N-TPT TPT VOL OVERLAY *
10106 1 l l 1 X
10105 1 l l 1 X
10104 2 l kl 2 XX
10103 2 l kl 3 XXX
10102 2 l kl 4 XXXX
10101 2 l kl 5 XXXXX
10100 2 l kl 5 XXXXX
10031 2 l kl 10 XXXXXXXXXX
10030 3 jl jkl 11 XXXXXXXXXXX
10029 3 jl jkl 10 XXXXXXXXXX
10028 3 jl jkl 14 XXXXXXXXXXXXXX
10027 3 jl jkl 22 XXXXXXXXXXXXXXXXXXXXXX
10026 3 jl jkl 23 XXXXXXXXXXXXXXXXXXXXXXX
10025 3 jl jkl 17 XXXXXXXXXXXXXXXXX
10024 2 j jk 7 XXXXXXX
10023 2 j jk 4 XXXX
10022 1 j j 1 X
10021 1 j j 1 X
10020 1 j j 1 X
*COPYRIGHT CISCO 1987, 1990. ALL RIGHTS RESERVED.
This report may not be reproduced or retransmitted without the express
written consent of CISCO.
Figure 2. Overlay Demand Curves, basis three days. The Tick-TPO data used
is slightly modified from that reported in Figure 1, but the modification
does not affect the market condition determined from the three day
aggregate.
We will make one definition for Overlays: a single quasi-bell shaped
distribution will signify balance. The cutoff point of a balance is
three TPOs (TPTs), the limits. The upper and lower limits of the distribution
are defined as the Value Region.
Remember, three days of Tick-TPO profiles (figure 1) comprise one of
the Overlays in the table: e.g. the Overlay for Dec 8 is essentially
composed of the the profiles of Dec 6, 7 and 8 linearly added together.
Now we add the Value Region to the Value Areas of Table 1. The resulting
information set will permit value analysis and lead to a general strategy
for trading the next day.
Tick-TPO VA Overlay Value Region
1989 Dec 06 10027 10026
10020 10017
07 10013 None
10009 2 Dist.
08 10023 10026
10014 10008
11 10020 10023
10018 10008
12 10019 10023
10017 10013
13 10020 10021
10017 10016
14 10028 none
10024 2 Dist
15 10031 none
10026 2 Dist
18 10030 10103
10025 10023
Table 2. Tick-TPO Value Area and Overlay Value Region
Application of Value to Trading
1) For trading on Dec 7, Value at end of Dec 6 is:
VR VA
10027 ST Value changes up above 10027
10026 LT Value changes up above 10026
10020 ST Value changes dn below 10020
10017 LT Value changes dn below 10017
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
a minimum of $94, i.e. 3 price ticks)
For Dec 7 (tomorrow) go long at 10028, or short at 10019 and again at 10016.
Result: From Figure 2, the Dec 7 market traded below 10017, so the second short
was taken at 10016. Now referring to Figure 1, using the profile Segmented
Auction, the market dropped to a low of 10008 by B period (0830 to 0900).
We do not tell you how to trade, just that the strategy found an opportunity
of 9 price ticks ($250).
2) For trading on Dec 8, Value at end of Dec 7 is:
VA
10013 ST Value changes up above 10027
10009 ST Value changes dn below 10020
There is no LT balance on Dec 7. Trading on just the ST profile numbers
is very risky since we do not know market condition.
We have no strategy for Dec 8
3) For trading on Dec 11, Value at end of Dec 8 is:
VR VA
10026 LT Value changes up above 10026
10023 ST Value changes up above 10023
10014 ST Value changes dn below 10014
10008 LT Value changes dn below 10008
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 11 go long at 10024 and again at 10027, or short at 10015 and
again at 10007.
Result: From Figure 2, the Dec 11 market traded between 10020 and 10016.
There were no breakouts.
4) For trading on Dec 12, Value at end of Dec 11 is:
VR VA
10023 LT Value changes up above 10023
10020 ST Value changes up above 10020
10018 ST Value changes dn below 10018
10008 LT Value changes dn below 10008
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 12 go long at 10021 and again at 10024, or short at 10017 and
again at 10007.
Result: From Figure 2, the Dec 12 market traded between 10021 and 10016.
There was one breakout on the downside at 10116 in J period. The market
bottomed there, so there was no opportunity and a loss of 2 price ticks.
5) For trading on Dec 13, Value at end of Dec 12 is:
VR VA
10023 LT Value changes up above 10023
10019 ST Value changes up above 10019
10017 ST Value changes dn below 10017
10013 LT Value changes dn below 10013
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 13 go long at 10020 and again at 10024, or short at 10016 and
again at 10012.
Result: From Figure 2, the Dec 13 market traded between 10021 and 10014.
There was a long in z period with a corresponding 1 tick opportunity and
a short at 10016 in z period with a 2 tick opportunity.
6) For trading on Dec 14, Value at end of Dec 13 is:
VR VA
10021 LT Value changes up above 10021
10020 ST Value changes up above 10020
10017 ST Value changes dn below 10017
10016 LT Value changes dn below 10016
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 14 go long at 10021 and again at 10022, or short at 10016 and
again at 10015.
Result: From Figure 2, the Dec 14 market traded between 10030 and 10020.
There was a long in y period with a corresponding 9 tick opportunity and
a second long at 10022 with an opportunity of 8 ticks.
7) For trading on Dec 15, Value at end of Dec 14 is:
VR VA
none
10029 ST Value changes up above 10029
10023 ST Value changes dn below 10023
none
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 15 there is no balance on the 3 day Overlay so no trades were made.
From the profile it is evident that the market is directionally up and a
day trader may have still chosen to trade.
8) For trading on Dec 18, Value at end of Dec 15 is:
VR VA
none
10031 ST Value changes up above 10031
10026 ST Value changes dn below 10026
none
ST value is from the Profile
LT value is from the Overlay
Risk is a fraction of the VR (Value Region) range (say an eighth of VR or
min $94, i.e. 3 price ticks)
For Dec 18 there is no balance on the 3 day Overlay so no trades were made.
From the profile it is evident that the market is directionally up and a
day trader may have still chosen to trade.
Congestion
We noted earlier that the actual profile, the quasi-bell shaped curve, plays
little role in Tick_TPO Profile market analysis. The basic data, the
half-hour bars,
however, are useful in helping recognize and and discriminate between pauses
and congestions. It is a matter of price at time, over time. In a strongly
directional
market there will be a single TPO (TPT) at each price (there may even be
gaps as prices are jumped). Such movement is reflected in the profile. As an
example, we examine the Tick-TPO Profile for Dec 7, reported as trade 1) in
the 'Application of Value to Trading' section above. The display shows the
Segmented Auction with the dividers removed.
Tick-TPO* REPORT FOR 12 07 89
AND SEGMENTED AUCTION
COMMODITY -- 10 YR NOTE (CBOT) DAY MAR 90
Price Segmented Auction
10017 y
10016 y z
10015 z
10014 A D E F
10013 A D E F H I J
10012 A B C D F G H I J K
10011 A B C D G J K
10010 A B C K L M
10009 A B C K L M
10008 B K L M
10007 K
In trade strategy 1) for Dec 7 in Figure 1 (Dec 7 profile is reproduced above
without the
bell shaped Brackets part) a short was triggered at 10016. That was in 'y'
period (0730 to
0800). Through 'A' period the market dropped. 'B' period (0830 to 0900) showed a
rise up to 10012. From the data at hand we do not know the exact path
taken by the price within the 30 day periods.
Imagine that the market moved from 'A' at 10009 to 'B' at 10008 and
then started back up. At 10009 there are now two TPOs. Is this a pause? Likely
by 10010 with three B's rising, a pause (or even congestion) is assured.
A typical day trader would
probably exit on the pause. Now imagine another trader who sees things differently.
For this person, there is no worry so long as the trade is in the plus column.
This trade is allowed to exit end of day (10009)
Recasting the situation, a third trader defines two TPOs as a pause and
three TPOs as a sign of congestion.
Now, the trader is put on alert in B period when the 'AB' pair appears. And
the congestion exit is in 'C' period, between 10012 and 10009, depending on
which price traded first after 0900 ('C' period is 0900 to 0930).
The important point is that knowledge of value and how it behaves when changing
expands a trader's range of options.
Recap
References
R2. Markets and Market Logic, J. P. Steidlmayer & K. Koy, Porcupine, 1986
R3. Taking the Data Forward, J.P. Steidlmayer & S. Buyer, Market Logic 1986
R4. Applications of the Market Profile. CISCO Training Manual, 1988
R5. Overlay Detection of Long Term Market Condition, D.L. Jones, The Profile
Report, Vol 2, Oct. 1988
R6. Determining the TPO Value Area, D.L. Jones, Market Logic School,
AI Ltr. V1-#3, Apr 13, 1987
R6a. Estimating the Market Profile Value Area for Intraday Trading, D.L. Jones
S&C Sep. 1987
For more information phone 1-800-800-7227 or 1-303-306-1521
Send e-mail to CISCO <dljones@cisco-futures.com>
CISCO US postal address is: PO Box 441396, Aurora, CO 80044
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