CISCO Futures
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Markets in Profile
Book Review: Markets in Profile, Dalton, Dalton & Jones, Wiley 2007
Reviewed by Donald Jones, CISCO Futures, February 26, 2007
* Copyright Donald L. Jones, CISCO Futures 2007
History: Steidlmayer, Dalton, CISCO and the Profile
1960's - 1970's - 1980's: J.P. Steidlmayer was a floor member active in the
grain pits starting in the 1960's and developed his ideas of the Market Profile
in the 1970's, it appears. He said it came about because he was generally
profitable 20 days of the month, but gave back a disproportionately large
amount the other two days. His studies led to the Market Profile.
1984-1985 Steidlmayer and CBOT announces the CBOT Market Profile, a new
way of analyzing futures markets using value (market generated data) in place
of price. The data base that supports the methodology is cleared volume,
broken down by type of member, in the form of the Liquidity Data Bank (LDB).
CBOT published a manual, CBOT Market Profile, 1985, setting down the rules.
It defined the CBOT Market Profile as "not a new trading system, it is an
information service that can provide traders with a greater knowledge of
market activity during the trading day than ever before".
1984 Jim Dalton learns of Steidlmayer's Market Profile methodology, sponsors
Steidlmayer/Koy 1986 book, Markets & Market Logic (for $10,000); becomes very
familiar with the Steidlmayer rules, forms Dalton Capital Management, publishes
with co-authors of his son and mine, Mind Over Markets (1991). Probably (my
opinion) the best book on profiles ever written and probably the most popular,
in terms of units sold, of all futures trading books.
1985: CISCO sells LDB data for CBOT, works closely with Steidlmayer/Koy Market
Logic School in supplying data for their students/clients.
At CISCO we were managing money (from Dec 1972). While overall profitable,
our channelized moving averages (Modified Keltner model) showed larger and larger
equity swings as the markets grew. We hoped to develop a value based model to
replace it. The equity swings (drawdown) kept getting larger. We ceased trading the
channel model in 1988 (43% gain that year, 54+% average gain/yr for the 17 year
period) with no value model to replace it....
Our work with the LDB/Market Profile uncovered a number of problems for traders:
1. Value Area and profiles came from cleared (LDB) data, CBOT was the only
source and that was an end of day clearing (available about 9 PM).
a. Value was not calculatable for other markets at all
b. Intraday value/information could not be found for any market, including CBOT since the
CBOT TPOs (the profile part of 'Market Profile') came from cleared data CBOT released also about 9 PM
2. We devised the Tick-TPO, Meta-Profile from tick data (1987*)
a. Now value was available for any market reporting ticks
b. Intraday profiles are thus available for all markets
*first published in Market Logic School Alumni Letter, April 13, 1987
*later, in Stocks & Commodities Magazine, September 1987
3. Try as we might, we could not find a profitable trading methodology
using profiles and the actual volumes reported in the LDB.
4. The culprit, we believe, is the high variability of the Profiles from day-day-day
regardless of the condition of the market (balance or trend). We needed to know 'market condition'!
5. We subsequently developed the Overlay Demand Curve* from multiple days of profiles,
finding Market Condition. This was the missing link*.
*first published in The Profile Report Vol 2, Oct 1988 (Dalton Capital Mgt.)
*Ch 4. Value Based Power Trading, Probus, 1993
I had observed Jim Dalton reading markets (parsing the profiles) on the
fly. His grasp of profile nuances was impressive. His approach to market
analysis was holistic in the sense that he could rapidly employ various
elements of profile logic (rules) to gain an understanding of current market
action. Since our work at CISCO is more quantitative, I approached Jim
with the idea that CISCO and he work together in melding our two approaches.
We cooperated on a rule based model for several months late in 1998 and early
1999, as I recall. The project did not work out, in part because of lack of
communication between right brained and left brained people. Also, probably
neither Jim nor I had the grasp of market behavior that we have now.
So much for history and so much for any bias you may impute to this reviewer.
Review of Markets in Profile
I am going to employ a somewhat stream of conciousness, sometimes pulling
a phrase from the book, sometimes elaborating, including my opinions.
In this review I will endeavor to present (translate in some cases) the
work of the authors. Consequently, this review will be much more detailed
than most book reviews. Value methodology (again my opinion) is the only
way the average trader can learn enough to trade successfully. As the authors
state many times one way or the other, detail is the key. You must learn
to read, to understand the market generated information from all traders,
collectively.
Information/discussion/argument that comes from me will
be prefaced by 'Comments:'. Any errors or misrepresentations of the authors'
works are solely mine and may be corrected. You might find it worthwhile to
track this review as you study the book. Jim Dalton is developing a website,
(www.marketsinprofile.com?) that will continue the work reported in this book.
For those of you with a short attention span we can jump to the conclusion:
If you do not have Mind Over Markets, buy it; Markets in Profile also belongs
in the bookcase of all traders. You do yourself a great disservice if
you do not read and UNDERSTAND both books. When you finish the new book you
will appreciate Table 4-1, pg 192, in the first book.
As the authors state repeatedly throughout the book, they take a holistic,
intuitive approach. Our CISCO methodology is analytical, scientific and built
on experimentation. These divergent ways of looking at the same phenomena
offer the trader a deeper understanding of markets than either can singly.
Book to printer around August 1, 2006, final October 25, 2006
xi Markets are rational, people are not
xii Taking advantage of the fact that people are irrational in predictable manner
Who is this book for? Todo el mundo! If you trade, UNDERSTAND value.
xiii Timeframe diversification (5 timeframes based on trader intent)
xiv Market Generated Information: defined/explained on page 19
xvii Dalton firm sponsored Markets & Market Logic 1986
xviii Holistic theory for market understanding
CH 1 The only constant: Change
"Addressing across all time frames how change occurs"
Change is in the wind: paradigm shifts, multiple timeframes, relative
performance (funds), absolute performance (hedge funds, public traders),
volatility in consolidating markets greater than in trends.
Comment: this depends on the definition of volatility and consolidation.
Volatility is usually defined to be the variation of the price
range (on a daily basis for economists, on a 30 minute basis
for profiles).
Pure,Unbiased Information: Market generated information: comes directly
from the market itself
We are currently in an equity bear market (peak in 2000)
Market organization/structuring using CBOT Market Profile Fig 1.4, 1.5
Asymmetric opportunities introduced, Fig 1.5
Simple: price and volume move over time to facilitate trade in pursuit of value
Traders greatest adversary = self
Comment: We are reasoning beings, not rational, herd animals, egotistic
and prone to the errors of wishful thinking.
CH 2 Information
Traders (5 types) are 1) innovators, 2) early adopters, 3) early majority, 4) late
majority or 5) laggards---these will be tied into various timeframes
Fundamentals: must viewed in context, information hard to correctly
weigh. Investors 'predictably' irrational. Markets (irrational or
not) are: sum total of actions of all its individual participants and
disciplines and timeframes.
Comment: fundamental information is the broker's mainstay. One who can
speak knowledgeably and at length on market fundamentals has a better
chance of getting a customer. As the authors point out, fundamental
information is not a whole lot of help in trading decisions.
Predictable irrationality:
Example: Bullish at top, bearish at bottom
Short covering rally ==> most bullish at top
Long liquidation drop ==> most bearish at bottom
Market Generated Info: Market Profile allows you to observe the structure
of market as it unfolds,
"Market Profile is not a trading system, nor is it predictive" but does
define structure and offers timeframe information
Auction: made up of: price, volume and time; price is advertising mechanismsm
Fair Value: Different for different timeframes, normal distribution idea,
reversion to the mean (balances only)
Comment: Dogma of Market Profile is the bell shape of the profile, which
is rarely true (and not necessary*). The bell shape reasoning in
Steidlmayer's work led to the definition of value (central 70
percent of volume = +/- one standard deviation). At best, the
bell shape appears only in balanced, congesting markets.
*CISCO website, References: Auction Market Value Theory Sep 2005
Market Profile Fundamentals: A bell curve with the half-hour bars
(segmented auction) demonstrates flow within a day. May visualize the
completion of the profile before eod (if knowledgable enough)
Longer time frame profiles (multiple days for viewing intermediate auction)
Comment: 'Multiple days' (Overlays) is the 'missing link' CISCO found
that Overlays supply the needed information on market condition*
*CISCO website: Overlaybkg.html
Value area defined as including central 70% of TPOs
Comment: The value area of the Market Profile is defined as the central
70% of cleared volume in the CBOT publications*. The Meta-Profile or
Tick-TPO Profile in the CISCO publications defines value as the central
70% of TPO counts. The TPO Value-Area calculation appears in Mind Over Markets (p333)
without attribution to it's source (CISCO) and without pointing out that without it,
value could only be calculated for CBOT markets (the only source of cleared volume).
*Discussed in detail on CISCO website: www.cisco-futures.com
/marketprofile_history.html
Composite profile Fig 2.4 Nov 21 - Dec 29, 2005 shows long term movement
Comment: Fig 2.4 is often called a 'composite or longterm' profile. You can
see the TPO letters, which serve no purpose but to clutter the display. An
Overlay of the same period is cleaner and more to the point, since there
are rules for defining/measuring balances: Compare the below Overlay with
Fig 2.4. Overlay methodology is quantitative, defining balance limits
(ULIM and LLIM and a value region) which
alerts a trader to a change in market condition (balance to trend on breakout).
SP 20051121 - 1229:
COMPRESSION: PRICE = 5, TPO = 2
POC: 126550 193 VA: 127680 126400
OVERLAY LIM: 128350 125950
1 128470 2 ++
3 128450 2 ++
8 128400 2 ++
13 128350 7 +++++++ Upper Overlay Limit, ULIM
18 128300 7 +++++++
23 128250 12 ++++++++++++
28 128200 13 +++++++++++++
33 128150 15 +++++++++++++++
38 128100 17 +++++++++++++++++
43 128050 17 +++++++++++++++++
48 128000 21 +++++++++++++++++++++
53 127950 25 +++++++++++++++++++++++++
58 127900 31 +++++++++++++++++++++++++++++++
63 127850 30 ++++++++++++++++++++++++++++++
68 127800 35 +++++++++++++++++++++++++++++++++++
73 127750 32 ++++++++++++++++++++++++++++++++
78 127700 35 +++++++++++++++++++++++++++++++++++
83 127650 35 +++++++++++++++++++++++++++++++++++
88 127600 43 +++++++++++++++++++++++++++++++++++++++++++
93 127550 38 ++++++++++++++++++++++++++++++++++++++
98 127500 31 +++++++++++++++++++++++++++++++
103 127450 24 ++++++++++++++++++++++++
108 127400 26 ++++++++++++++++++++++++++
113 127350 28 ++++++++++++++++++++++++++++
118 127300 33 +++++++++++++++++++++++++++++++++
123 127250 30 ++++++++++++++++++++++++++++++
128 127200 35 +++++++++++++++++++++++++++++++++++
133 127150 36 ++++++++++++++++++++++++++++++++++++
138 127100 41 +++++++++++++++++++++++++++++++++++++++++
143 127050 34 ++++++++++++++++++++++++++++++++++
148 127000 35 +++++++++++++++++++++++++++++++++++
153 126950 37 +++++++++++++++++++++++++++++++++++++
158 126900 37 +++++++++++++++++++++++++++++++++++++
163 126850 30 ++++++++++++++++++++++++++++++
168 126800 31 +++++++++++++++++++++++++++++++
173 126750 34 ++++++++++++++++++++++++++++++++++
178 126700 27 +++++++++++++++++++++++++++
183 126650 37 +++++++++++++++++++++++++++++++++++++
188 126600 46 ++++++++++++++++++++++++++++++++++++++++++++++
193 126550 48 ++++++++++++++++++++++++++++++++++++++++++++++++
198 126500 39 +++++++++++++++++++++++++++++++++++++++
203 126450 27 +++++++++++++++++++++++++++
208 126400 23 +++++++++++++++++++++++
213 126350 8 ++++++++
218 126300 5 +++++ Lower Overlay Limit, LLIM
223 126250 7 +++++++
228 126200 8 ++++++++
233 126150 5 +++++
238 126100 5 +++++
243 126050 6 ++++++
248 126000 5 +++++
253 125950 6 ++++++
258 125900 4 ++++
263 125850 2 ++
268 125800 1 +
273 125750 1 +
The skips in the numbers on the left margin show the price jumps from the
compression. POC and VA are the point of control and value area, from Tick-TPOs.
Overlay LIMits define the balance region.
An important point on Fig 2.4 and the above is that both used data
prior to the rollover date of Dec 8. This markedly affects the display;
(volume on Nov 11 is 100, on Dec 8 it is 42239). If the correct data
had been used the shape of the Overlay would have been more elongated
and the low would have been 124880. Overlays and other analyses that
cover more than one delivery require some sort of data modification
at the rollovers that continues on (and on, if a third contract or
more are presented). e.g. the open for the Dec contract on the 8th
is 125780, for the Mar 06 it is 126380. For a discussion see*
*Jones & Strahm, Futures Magazine Nov. 1983
In the table I=locals, II=commercials, III=members and IIII=public
I II III IIII
Pre YM
DJ on 20021204 46.5% 3.3% 2.1% 48.0%
DJ on 20060517 58.0% 1.3% 3.7% 36.6%
YM on 20060517 20.0% 52.6% 0.6% 28.4%
On 20060517 the YM has 16 times the volume (cleared) of the DJ.
There has clearly been a paradigm shift in trader types that may well affect
the classical timeframes. e.g. What is the timeframe of the YM commercials?
timeframes, i.e., groupings of 5, 10, 15 and 20 days
Balance Group 05 10 15 20
20060310 x x x x in balance in all timeframes
0322 x 7 5 day and 7 day balance
0323 x 8 etc.
0324 x 9
0327 x x
0329 x x 12 x
0330 x x 13 x
0331 x x 14
0403 x x x
0404 x x x 16
0405 x x x 17
0406 x x x 18
0407 x x x 19
0410 x x x x
0424 x x
0425 x 6
0426 x 7
0427 x 8
0428 x 9
0501 x x
0502 x x 11
0503 x x 12
0504 x x 13
0524 x
0530 x 9
0602 x x x 16
0605 x x x 16
0606 x x 14 17
0609 x x x x
Four groups are posted (5, 10, 15 and 20 days) and each group
is subdivided by day. On Mar 22 there was a 5 day balance from
the first group and a 7 day balance in the 2nd (10 day) group. As the
balance continued building day by day, the 3rd and finally the
4th group were completely in balance by Apr 10. The breakout
came on Apr 11 and the market transitioned into a down trend.
The next 5 day balance appeared on Apr 24, 8 days post breakout.
Overlay balances provide a sensitive guide to market condition
on several timeframes.
SP 20060508 - 0509:
COMPRESSION: Price 2, TPO None
Meta-Profile POC: 132880 VA: 132970 132750
OVERLAY LIM: 133070 132670
1 133080 2 ++
3 133060 4 ++++ ULIM
5 133040 5 +++++
7 133020 8 ++++++++
9 133000 9 +++++++++
11 132980 10 ++++++++++ VAU
13 132960 10 ++++++++++
15 132940 12 ++++++++++++
17 132920 13 +++++++++++++
19 132900 14 ++++++++++++++
21 132880 18 ++++++++++++++++++
23 132860 14 ++++++++++++++
25 132840 16 ++++++++++++++++
27 132820 16 ++++++++++++++++
29 132800 16 ++++++++++++++++
31 132780 13 +++++++++++++
33 132760 10 ++++++++++
35 132740 8 ++++++++ VAL
37 132720 7 +++++++
39 132700 6 ++++++
41 132680 3 +++
43 132660 2 ++ LLIM
45 132640 1 +
46 132630 1 +
The Overlay could have positioned you perfectly for the coming break.
This is a case where the longer one-day bars set the stage while
the short term Overlay gave the entry points. Cherry picking?
No. The authors picked this example, not the reviewer.
Big moves are fairly rare, but why not be ready for the next one?
As I write this review on Tues, Feb 27, 2007, we just experienced
an earth-shaking drop on the SP. The Overlay from the CISCO Visual
Graphic coming into the day (as of Monday close) gave exactly the
same sort of positioning (breakout at 2 AM, Tues) as discussed above.
SP 2 Day Overlay (2007 Feb 23, 26)
1 145830 1 +
4 145800 1 +
9 145750 1 +
14 145700 1 +
19 145650 2 ++
24 145600 4 ++++ ULIM
29 145550 6 ++++++
34 145500 8 ++++++++
39 145450 9 +++++++++
44 145400 10 ++++++++++
49 145350 9 +++++++++
54 145300 10 ++++++++++
59 145250 13 +++++++++++++
64 145200 12 ++++++++++++
69 145150 11 +++++++++++
74 145100 8 ++++++++
79 145050 5 +++++ LLIM Market broke out down about 2 AM Feb 27
84 145000 2 ++
89 144950 3 +++
94 144900 3 +++
99 144850 2 ++
105 144790 1 +
The period in the box in Fig 7.5 starts with a pause at the top.
here is what an Overlay of that two day pause looks like:
SP 20060508 - 0509:
COMPRESSION: Price 2, TPO None
Meta-Profile POC: 132880 VA: 132970 132750
OVERLAY LIM: 133070 132670
(Overlay limits here are based on 3 TPOs)
1 133080 2 ++
3 133060 4 ++++ ULIM
5 133040 5 +++++
7 133020 8 ++++++++
9 133000 9 +++++++++
11 132980 10 ++++++++++ VAU
13 132960 10 ++++++++++
15 132940 12 ++++++++++++
17 132920 13 +++++++++++++
19 132900 14 ++++++++++++++
21 132880 18 ++++++++++++++++++
23 132860 14 ++++++++++++++
25 132840 16 ++++++++++++++++
27 132820 16 ++++++++++++++++
29 132800 16 ++++++++++++++++
31 132780 13 +++++++++++++
33 132760 10 ++++++++++
35 132740 8 ++++++++ VAL
37 132720 7 +++++++
39 132700 6 ++++++
41 132680 3 +++
43 132660 2 ++ LLIM
45 132640 1 +
46 132630 1 +
This is a pretty symmetrical balance, skewed a little to down.
You know to be alerted for the upside at 132980 (breakout from value)
with confirmation at 133080 (breakout from balance). Alerts for
downside price movement (132740, confirmation at 132660).
Lets look at the 3 day Overlay, now including May 10.
SP 20060508 - 0510:
COMPRESSION: PRICE = 5, TPO = 2
Meta-Profile POC: 132770 VA: 132960 132660
OVERLAY LIM: 133070 132400
(Overlay limits are based on 3 TPOs)
1 133080 2 ++
2 133070 4 ++++ ULIM
4 133050 6 ++++++
9 133000 9 +++++++++ VAU
14 132950 14 ++++++++++++++
19 132900 16 ++++++++++++++++
24 132850 21 +++++++++++++++++++++
29 132800 24 ++++++++++++++++++++++++
34 132750 23 +++++++++++++++++++++++ Breakout VAUy
39 132700 18 ++++++++++++++++++
44 132650 9 +++++++++ VAL Breakout LLIMy
49 132600 4 ++++
54 132550 3 +++
59 132500 3 +++
65 132450 3 +++
69 132400 3 +++ LLIM
74 132350 2 ++
79 132300 2 ++
84 132250 2 ++
89 132200 2 ++
94 132150 2 ++
97 132120 1 +
The two breakout points (132970 for VAL and 132670 for LLIM were
hit early (gap) in a day of wild trading that ended closing at
about where it opened. But the freefall had begun in earnest.
Confidence market exhibiting: att dir, VA location, Shape
All Prices and Opportunities are not Equal:
Short timeframes require speedy trade placement
Fig 7.8 Day 4: aggressive B??, clear directional info by C period
Then balance (long liquid P shape) thru M period, then break down, low vol
Elongated profile down = trade facilitated on down side
Ongoing Forensic Investigation: Spike on Day 4:
Low nighttime volume, cannot tell if excess
Rule: trade with directional action following a neutral/balance day
Day 6 (Jun 1) is trend (up) day
Day 7 balance, higher value, low traded twice (no scarcity)
Day 8 trend down, stronger than Day 6 -- more significant
Therefore Day 7 is the high for the mkts 2nd countertrend after big break
Day 4 trend day down b formation, not bode well for continuation
Looking for the All Important Reference Points
Use pit session data. Gaps, prior low (high), expected behavior
Use bar charts, profiles
High stress level
Day 8 is trend day down, next two days balanced below the spike center:
This is continuation (down). Day 10 probing down spike, Day 11 lower
value, Day 12 lower, Day 13 is trend day down with late spike, Day 14
is lower but balancing, day 15 is a balanced day. Day 16 reversed
to up with a gap.
If the market is struggling, ask why.
Never Be A Laggard: In CH 2 laggards are the last in. The action is over
but they see all the move and finally jump in.
Comment: The Dot-Com bubble began in 1996 and ended in the crash of 2000.
Many fund managers recognized it as a bubble and stood aside. Many
lost their jobs because those funds in the bubble profited hugely,
year after year. Some managers finally gave up and got in. Some
just in time to experience the meteoric fall. These were the laggards
the authors described.
A Golden Opportunity: Speculation Dec 2005 - Jun 2006 P130
Gold ran up from 5465 on Mar 10, 2006 to a high of 7320 on May 12
then back down to 5595 on Jun 14 (Jun contract) with heavy volume
there was no timeframe differentiation
No prolonged balancing period (extreme speculation)
Balance periods create a sort of 'market memory', previous balance
areas provide a level of support (resistance). It is the 'structure'
of the market.
Comment: Statement P131 gold move of 580 to 750 without prolonged balance
True for bar chart viewing, but between Mar 10 and May 12 there were
21 separate days with a 10 day balance. From May 11 through June 9
there were 10 occasions of 10 day balances.
Fade the Extremes, Go with Breakouts
Balanced markets offer good short-term trades
1) Fading an auction that reaches an extreme and fails to continue
2) Going with a breakout from the balance
Fig 7.15 shows down breakout from a four day balance of Merrill Lynch
Fig 7.16 is a four day overlay of sFig 7.15
The Expert Reasons Contextually
Expert stays flexible where the novice thinks concretely:
19 entry laundry list of items that may affect performance
Comment: It is well known that our minds cannot parse out a lot of
complexity. There are many things that affect prices and value, each
of which has different effects at different times. As the authors
point out in many places, the profile tends to bring all the variables
together. The profile offers much information about the current mood
of the market, as the authors have shown and will go into quite a lot
more detail in the next chapter. The authors tend to find
market condition, as evidenced by balance or not, from one or multi-
day bar charts. The reviewer feels that the multi-day profile, the
Overlay, is a superior tool for the market condition job. Some evidence
for this is in the comment on Fig 7.5 above, and much other research
posted on the reviewer's internet page www.cisco-futures.com.
CH 8 Day Trading is for Everyone
Everyone is a day trader at points of entry and exit
No such thing as noise: Steidlmayer says every trade occurs to satisfy
some condition of the market
If no noise, the trader is responsible for every outcome
Comment: Jim Dalton recounts his disagreements with Fischer Black about noise.
Black was an extraordinarily gifted mathematician who developed the Black-Scholes
option pricing model. The reviewer agrees with Black. In an ideal
environment (no errors, no outtrades, perfect clearing, perfect
electronic handling and transmission and perfect decomposition of
the encoded received data) Jim has an argument. The reviewer deals
with market data constantly and can affirm that it contains "noise".
What is a Day Trader to DO
Need to know: what your opponents are doing and decide to join or not
This entails figuring out the market activities on all timeframes
Day Trading 1: Go home flat, use large quantities of technical info
Subset: scalpers
Day Trading 2: Other time frame (long time) trader entry or exit
Do ones homework. Do not trade in front of economic releases
Analyze previous day volume
Identify excess and gaps
Past balance ranges (from inside day on)
Prominent POCs
Identify reference points
What You Don't Do May Be more Important Than What You Do
The shorter the timeframe you trade the more important fluid intelligence
The Real World In Action
Volume analysis ==> inventory positions of other day-traders
T-bonds through July 7, 2006: volume is not increasing ==> change underway
b formation Jul 5 suggests buy on Jul 6
The Big Picture: 38 items, driving forces
Top Down
Understanding the key driving forces in a market:
Remain flexible, driving forces may change
Lack of Conviction
Directionless market. If volatile enough can be traded (day traders)
Not for trend traders. If longer term conviction, view a short
term directionless market as opportunity for longer directional trading
Comment: Work at CISCO has led us to believe the market is fractalish.
Each fractal timeframe (long, short, very short) appears to have
its own run-pause signature, although we have not done enough
research to know how to break it down. The point is that our work
tends to reinforce the authors' approach toward conviction at more
than one timeframe.
Flight to Safety
Natural disasters, terrorist attacks ==>flight to quality rally
Balances, etc., remain good reference points
Comment: The London subway blast of July 7, 2005 offers an example.
From around 5 AM through the open of the YM (mini DJ) the market
got as low as 10142 (previous center of value was about 10330).
The close on July 7 was within the previous day's value. Interestingly,
the next day, July 8 offered value traders huge opportunity. Read
about it on the CISCO website at meta_londonblast.html.
Inventory Balances
If market becomes extremely active in the day longer timeframe info
may trump the day time-frame.
If trading range continually increases, longer timeframes may
dominate and then the rules change
Correction of Inventory Imbalances
Inventory imbalance: market repeatedly attempts to go lower and
Excess marks the end of one auction and the start of another
If cannot establish excess ==> short covering rally to allow long term
inventory come into balance
Fig 8.7 The beginning of an intermediate term rally Jul 6 - 14 2006
Short covering all the way up
Comment: There is data for CBOT LDB futures that gives the
buy/sell statistics. These data offer a potential look at the
inventories of the four classes of trader: locals, commercials,
members and the public. The reviewer would be interested to see how the authors
would incorporate the LDB B/S data into their analysis.
Here too we are met with the original LDB problem of a good idea
but limited data. We solved the CBOT Market Profile limitation with
the CISCO Meta-Profile. Unfortunately, we have no answer for the
lack of B/S data from other exchanges. Use of the B/S data is limited
to CBOT cleared data.
Trend Traders Trap
Old business vs new business
e.g. Short covering pushes price up: should lighten up, etc. sets
a restart, not the beginning of a trend (old business)
Market Condition: Bracketing or trending
Change from one to the other rearranges your priorities,
Timeframe important (e.g. short-term trend, long term bracket
Excess marks the ending of one auction, beginning of another).
Again, balance areas from bar chart: by defn are visual.
Stops can be found beyond the limits (extremes) ==> false breakout;
Must know context of the move
Yesterday's Trade
1) What was market 'attempting' to do yesterday, how successful?
Ex 1. Fig 8.10: Prev day is trend up. This day opened near high &
balanced. Price lower, value higher, see balances in Fig 8.11
Ex 2. Fig 8.12: b formation, ==> multiple day low, mkt goes for
stops, with some below the lows of past few days.
If prices had gone too low there would be single prints, so some strength
Opportunity tomorrow: sell above the b, buy below the b
Ex 3. Fig 8.13, 8.14: Gap down on 7/13 + elongation + decent volume
+ close near the low suggests downward continuation tomorrow
Context from checklist on P170. (Exhaustive--daunting)
The Market is Open: Kinds of openings
Open Drive: Opens and auctions aggressively in one direction
High confidence Fig 8.15, 8.16
Cognitive learning when you transcend limitations of fixed defn.
See elongation, value change being pulled by price
Open-Test-Drive
Lower initial confidence, Fig 8.17, Fig 8.18
See elongation, lower (higher) value and price, etc.
Think in terms of 'market confidence'
Open-Rejection-Reverse Fig 8.19
Rejection from single print (buying) tail
Fig 8.20 Gradual, consistent rise ==>one way auction, one timeframe
Open-Auction No/little conviction Fig 8.21
Any conviction from open relative to previous day
If outside prev range ==> out of balance ==> either direction ok
Advice: wait for directional conviction
Day Trader's Checklist
Review previous market
Review overnight market
Post expected opening, etc.
Opening: compare with yest, within or outside range, VA, up or down
Relative to Expected: Identify 3 reference points
Prev high/low
Prev weekly high/low
Prev VA
Prev recent high/low trading range
Note kind of opening + what want to see to judge confidence
Is market in balance, out of balance
Is attempted direction, if any, supported by volume
Project remainder of day: elongated?, squat?, normal? unusual?
Estimate effort to move price directionally, inventory
Coming News announcement--expect volatility
Practice, Practice, Practice
Emotions drive ==> your risk is unique to you
Holistic insight has no bearing on how well you implement understanding
Top professionals are mentally prepared
CH 9 Profiting from Market-Generated Information
Certainty winning is not assured, but you can have the odds in your favor
Timeframe Diversification
Why not have a portfolio that is both long and short
Timeframe diversification is efficient use of resources
Shanahan portfolio has advantage of 5.44% over benchmark (since May)
All markets move both ways
Fundamentals are not enough
Push comes from 'behavioral' behavior
The New Paradigm
Prices not best estimate of true value
Markets in Profile offers a strategy based on a continual reevaluation
of the risk of being long or short
Replacing a long held idea is painful and labor intensive
All decisions are made under some degree of uncertainty
Wrap Up: While this book addresses mostly standard profile operations, as enumerated
by Steidlmayer, the approach is much clearer and better defined. The
reader may question this statement, but only because the reader is not
familiar with the orignal publications. There is much complication in
market behavior (yes, complex means complex). Unraveling that complication
to a useful degree is difficult and taxing, as the authors remind us.
In the beginning of profile analysis the goal was to unlock enough
knowledge, as Steidlmayer put it, to give the trader an edge. That is
still a worthy goal and the authors are to be commended for moving us
along the right path.
Does strictly profile trading work--or can one take the material in Markets
in Profile and apply it directly to trading? In the reviewer's experience the
jury is still out. The authors obviously believe the answer is yes. But the
proof appears to be lacking. In the reviewer's opinion, the best path for the
average trader is to use profile information as only one of the important elements
in the design of a trading strategy. In order of importance, we would put 1)
Knowledge of ones own attitude toward risk; 2) Knowledge of the exterior market
condition as found by tools such as the Overlay Demand Curve, and then 3) Specific
market details (the interior market) found from profile analysis.
For the future: As a money manager the reviewer was honest enough with himself to
realize that he was in control only when the market was gentle, i.e. in
nice long trends. When the exceptional happened, as in a couple of days
of limit movement, he had no clue and his statistics on choices was about
one in four (he guessed right only about a quarter of the time). He believes
a principal reason for his success was diversification. We traded a
portfolio of 24 futures, typically being in 5 or 6 at any one time.
But we were ready to enter any of them when they made a move. So we
often went with the flow without any idea of why. Diversification worked.
In this book, the authors present a methodology for learning very much
about one commodity or equity. Clearly the book is speaking, in part, to
fund managers. the reviewer, and no doubt fund managers, as well as many private
traders, look forward to the next book; 'Markets in Profile for
a Portfolio'. What about it, Jim?
Rules of the Market: Implied from the text Markets in Profile
Note: These rules are the interpretation of the text by the reviewer,
Donald Jones. Any errors or omissions are Jones', not the authors.
Rule 0 Directional Performance Relationships (30 rules) Page 192,
Mind Over Markets, Dalton, Jones & Dalton, Probus
Rule P52 Rising price on increasing volume implies rising value
Rising price on decreasing volume implies value neutral
Rule P52 Regression to the mean: Attempted breakouts on decreasing
volume, likely that price reverts back to balance mean
Rule P52 Fig 4.6, back and forth trading ==> no attempted direction
Fig 4.7, directional trading up ==> attempted direction up
Rule P55 Markets fundamental building blocks: price, time, volume
Rule P55 Nonsymmetrical profiles identify unbalanced markets
a. In a trend, elongation in direction of trend
b. In a balance, b or p formations (Fig 4.8, Fig 4.9)
Rule P65 New bracket forms on declining volume
Rule P70 Long term profiles (Overlays) show main distributions, their
means and upper and lower cutoffs (limits in Overlay jargon)
Rule P74 Bracket develops when views of relevent buyers/sellers are aligned
Rule P74 In bracket odds of higher or lower moves about equal
Rule P79 Intermediate timeframe defined by distance traveled, not length of time
Rule P79 Price range of intermediate generally greater than short term auction
Rule P80 The wider a balance, the more likely several timefames involved
Rule P82 Bracket starts with 1) volume drying up, 2) creation of excess
Rule P85 Gap at end of auction opposite the recent trend reorders beliefs
Rule P85 Excess highs or lows comes with reduced volume
Rule P87 Skilled traders UNDERSTAND the patterns of the market's auctions
Rule P92 Breakout on high volume + close near high indicates higher prices are
attracting more activity ==> auction expected to go higher
Rule P95 (Holding long) once market attempts and fails to auction above market
highs, odds good that sellers will turn price down
(Ditto for holding short)
Rule P96 Overlapping balances, low volume, poor volume distribution among the
daily profiles and counter auctions at least equal to auctions with
the trend---implies trend unlikely to continue
Rule P97 Major trends = long term, balances = intermediate term
Rule P97 Continuation: implied if the direction you are trading has better
volume, progressive value-area migration and more elongated profiles
Rule P100 Must know your market and yourself
Rule P100 Most important skill: distinguish price from value
Rule P101 Analyze previous day activity to find good location for current day
Rule P101 Wider balance range acts as anchor (reversion to mean)
Next day heavy volume may signal new direction
Rule P101 Price is advertising, markets response is the key
Rule P106 Intermediate or term: any breakout from balance
Fade breakout if volume does not support breakout
Rule P113 After long sharp move, first countertrend probably not too strong
Rule P119 All rallies, initially include both short covering and new buying
Rule P119 Price spike: if spike on low volume, odds favor price reverting to mean
Rule P121 After inside day go with any directional auction
Rule P122 Short-term trader should trade in direction of trend
Rule P122 Trading on low (high) in several time periods, probably not a good low
Rule P141 Everyone is a day trader on the days they enter and exit
Rule P144 Beginning day traders might well let market develop for a while
Rule P145 Day traders should not trade in front of early economic releases
Rule P145 Know the reference points, let the market come to you
Rule P148 Like Rule P121: go with any directional move following a balance day
Rule P155 Excess marks the end of an auction
Rule P197 All decisions are made under some degree of uncertainty
Key words
Transparency
Which timeframe is controlling, which is entering the fray
context
old business (short covering)
new business, where market is attempting to go
Context from checklist on P170. (Exhaustive--daunting)
Conviction
Strong move with increasing volume
Strong rejection at excess tails
Confidence
Is a market move accompanied by increasing or decreasing volume
Attempted direction
Does the market try to move and fail, then try again
Volume support
Volume: which or what volume is used in 'volume support for a move'?
Profile shape, asymmetry measures
Inventory
Volatility
Holistic
Paradigm
Typo P113 Fig 7.5 mentions Fig 7.2 ==> should be Fig 7.6?
Typo P120 Fig 7.9, Day 2 ==> Day 4
Typo P132 last line MER (Merrill Lynch) for Fig 7.15
Typo P147 last paragraph, line 1 revels ==> reveals
Error: P24 Value Area 70% of TPOs, method 2 pr above and 2 below
Error: P24 Value Area = one standard dev ==> 2 std dev (+/-)
Error: p25 Value Area summing (?TPOs?)
Error: p43 value area 1 std dev (volume means TPO volume?)
Error: p51 refers to actual volume for VA as earlier CBOT only
Error: Bollinger Bands are actually the Keltner MA channel model
Discrepancies
Fig 8.2 June 30, July 3 and 5: poor agreement with LDB data U2 or U6
Fig 8.3 July 5: same as above
Fig 8.4 July 6 and July 5 does not appear to be valid, based on LDB data
Fig 8.7 July 6 - 14 has some poor agreement with LDB data