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New Short Course SC2

A Tutorial on Futures Trading

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Trading in auction markets like stocks and commodities is attractive to many as a means of becoming an independent businessperson on a relatively small investment. Often overlooked is the fact that, like most businesses, knowledge and expertise is required. Trading is rarely taught at university and most other training is seriously deficient. CISCO Short Course SC2 fills the void.

Trading is a competetive sport. In a fair game (auction markets mostly are) the trick is to find an 'edge'. Since most training in trading results in an estimated 95 percent fail rate, an edge can obviously be found in better training. Since most training centers around chart reading or indicator calculation and the results are awful, it seems wise to avoid both. A better path could be understanding markets and how they work before trading. That is the CISCO Short Course approach. Incidentally, the same approach, learning ones field, is used at university. This leads to the suspicion that, in trading, you may get an edge by understanding what you are doing since you are competing with many who do not.

SC2 has it's roots in the Market Profile (MP) developed by J.P. Steidlmayer and the CBOT (1985). MP, designed for pit trading, is a day-model of market behavior based on the assumption that a day's market behavior is explained by the statistical, Normal distribution and that model permits prediction of the day's impending market behavior. Day value (the value area) was designated the central 70% of trading. Examination by CISCO of many, many profiles led to the conclusion that most day's distributions are not Normal and consequently, value found from blindly applying Normal distribution methods was questionable. This is unfortunate, since Value (real value) and Value change, are vital elements in market analysis. Given the tick data, a profile can always be calculated. However, more often than not, Value found from the Value Area is not correct. Message: do not blindly follow the profile!

CISCO developed another tack in the search for Value. Markets run and pause, run and pause over and over. Value can be found in the pause phase, but usually not during a run. A typical run will take about 9 or 10 days on average, while the pause phase averages about 4 to 5 days. However, variations from the norm can be large (see the link 'Market Unit' at the References, Research link, main page under the flag).

Making the common-sense assumption that only during a pause, while the market is stable, will Value become apparent, led to the development of the Overlay Demand Curve. The CISCO Short Course, SC2 is based on this principle. Result: there are many (most) times when any market is too dangerous/risky to trade (the Overlay is not showing balance, so value is unknown). Overlay Demand Curve played an important role in Auction Market Value Theory (see link on References, Research).

In the final analysis, successful trading of an auction market depends on two elements: 1) a trader must be able to find suitable candidates to trade (balances), and 2) the trader must be able to manage the resulting trade. In the real world of trading, finding item 1) is difficult for most. SC2 solves that problem for it's students with the daily 'fool proof' list of markets in balance. Item 2 poses bigger challenges. Here, 'market knowledge' must be gained by doing, much like the laboratory sections of university courses. Short Course SC2 includes hands-on training in trade set-up and monitoring every trading day.

Who is SC2 designed for?
1. Lookers: Potential traders looking for an introduction to trading (is trading for me?).
2. Committed Beginners: They expect to find a way to beat the markets.
3. Veterans: Those with 4 or 5 years of experience who are still not winning (enough).
4. Active daytraders marginally profitable, who still do not know when to get in or out.
5. Day/swing traders who consistently risk too much.
6. Busy professionals who have some free time, but who need a lot of guidance.

Groups 1, 2 and 3 should start with SC2 Basic Lesson Package, learning trade set-ups, etc. In three months they can determine if Profile methodology fits their needs. (They can always use the 'fool proof' list of markets in balance, a part of their training). These people will use about 30 minutes in the evening to do their trade set ups for the next day and then the next evening take about 30 minutes to track their previous day's set ups (via the CMaPS application).

Groups 4 and 5 need as much Value training as possible to hone their skills. These people are candidates for the entire 8 month Short Course SC2. Since this group is so market active, they are a natural for the coming Tipping Point(TP) application. TP gives a good read of current market condition (Where is the Market Right Now?). TP is ideal for the intensive trader who needs to know what is happening down to the minute.

The busy professionals cannot escape spending some time learning markets. They too should start with the SC2 Basic Lesson Package (and commit to doing the work for three months). Then they should arrange mentoring time with the course director to bring them to the point where they can use their limited time to best advantage in the market. Typically this would be 30 minutes in the evening to do the trade set ups for the next day. Then in the evening of the next day, take about 30 minutes to track the day's trading via the Meta-Profile (CMaPs).

The General Picture: Auctions
An auction market is a place where buyers and sellers set the price of a product via a bid/ask process (open outcry or automated trade matching). Such a market is driven by a difference of opinion between buyers and sellers. These opinions change with time, sometimes quite a lot very fast. Many of these opinions are based on hope, guesses, mis-reading charts, bad technical analysis, news, etc. The emotions involved often lead to 'piling on'. The person with a knowledge 'edge' may take advantage of these market foibles.

Prediction is always a goal. Unfortunately the nature of auction markets (complex and driven by feedback) precludes reliable forecasting, as a simple example will show. Say a market is moving up over the past few days. You get long, as do a number of other traders. Unbeknownst to you there is consortium, a big hedge fund who believes the market is unable to maintain higher prices and heavily sells a little above the price you just bought. This is feedback, the reaction to higher prices. It is completely hidden from you and the rest of the market until it happens. You cannot know what is in the mind of that hedgefund (or others), and hence you cannot do a very good job of predicting that market's future path.

The upshot of the normal market process is that there are numerous intra-day long runs and many more shorter ones. These are there; they are easily seen on a CISCO Meta-Profile display that also shows 1/2 hour bars (CMaPS). These opportunities occur in the "Minor Auction" time frame (Lesson 3) and often start from a short term, intra-day congestion. In a normal active market there are dozens of such trading opportunities.

Taking advantage of market opportunities is the basis of all successful trading. Finding opportunities comes first (e.g. the fool proof data set and the intensive homework in the 'trade set-up and subsequent trade analysis the next day).

Many models take a graphical approach, pattern recognition. Others calculate indicators based on market periodicity. Most new traders are sold one or both of these methods and the vast majority of new traders lose. This is a cruel hoax since pattern recognition takes many years to master (if ever) and indicators are based on a methodology that is alien to the basic market structure. So far as we at CISCO know, value based analysis is the only valid approach to market understanding.

In the futures trade a number of groups use profiles for value on a single-day basis as in the CBOT Market Profile manuals (1985, 1991) but few, if any, use the multi-day analyses developed by CISCO. This analysis produces that 'fool proof' set of trading candidates each day. Thus, as a starter, finding opportunities (Item 1) is solved at the beginning for the student (Lesson 1 of SC2). Furthermore, the daily set-up and trade analysis gives the student a deep understanding of each individual market's particular behavior patterns. This understanding of a complex system can only be gained by exposure, over and over. Hence a course with 8 months of set-up/analysis.

Market Analysis: Finding Value, Reference Points
As a market is driven and reacts to it's environment; it leaves tracks. Ticks and time and price movement are the data. The shape of the movements; runs, pauses, heavy action, light action and so on were cataloged by Steidlmayer (CBOT 1985) as 'Reference Points'. A day's price-time data was put into a 'Market Profile' display. As a floor trader, Steidlmayer was interested primarily in the current day and many on the web follow that approach. However, a market condition of balance requires multiple-days of data to confirm the balances and/or day to day continuity (see CISCO research at the References, Research link on the main page).
Market/Meta Profiles Background

Generating 'Profile' reference points:
Take a Profile TPO data set with the assumption that it has a statistically 'Normal' distribution (a bell shape); then a number of reference points can be derived: e.g. the "initial balance" (first hour of trading), "point of control" (high trading center of the day), the Value Area (central 70% of trading), "tails" (high and low prices beyond which there is no more trading) and many more. But remember: it has to be a Normal distribution or the Value Area is incorrect as well as some of the other reference points. The CBOT Market Profile manual (1985, 1991) does not make this distinction.

At CISCO, our studies focussed on the problem of projecting a market's trajectory on the basis of a (Normal) distribution to find value (Value Area) when in fact the actual distribution is usually not Normal. We found that value defined via one day's data was rarely accurate. In fact, 'Market Value' can be defined only from two or more day's market data and then only when the market is in a 'pause' mode (recall, markets run and pause, a cycle taking around 15 days with the pause mode averaging 4 or 5 days). Our book, Value Based Power Trading (1993) studies the crossover from value area to Value analysis. Numerous studies in this arena are available on the CISCO website in the References, Research section. Reference Points, descriptors of market elements, are developed in detail. Also, Lessons 4 and 5 are devoted to reference points. Some applications (Meta-Profile (CMaPS), Value Analytics, Visual Graphic, etc., include reference points in their displays).

Valid reference points can be used to reveal/understand that market, that day. And the CISCO methodology does just that. The case of non-Normal distributions are discussed in Lessons 4 and 5 on Value Analytics.

There is another complication, an important one.

Markets are Complex
Auction market activity creates a 'Complex Environment'. What does this mean and how does it affect you, the trader? Complex means that if you measure a reference point like the price movement one day and relate this to another reference point such as trade facilitation; identical reference points the next day will probably not mean the same thing. The relationships between reference points are not linear. There is feedback between all the reference points which creates the non-linearities. Consequently, analysis of market behavior cannot be safely done by looking at individual reference points by themselves. Obviously, somehow you must find a way to use reference points in combinations. This is addressed later in the Value Analytics lessons, Months 4 and 5.

Where does a new trader start? CISCO's answer: As in any other field, get educated. Learn the Business! Ideally, a starting point is a university where a good foundation in the objective knowledge of the field is obtained (think medicine). A graduate MD then goes into practice and learns and continues to learn subjective information that continuously builds his knowledge base. For a trader to get educated in the basic, objective knowledge of markets, no university is available. CISCO fills this void. The market basics are to be found from the market generated data. Then the subjective part of trading can be added via experience.

At university a typical course will teach the underlying theory/practices of the field along with a laboratory part for hands-on experience. Upon graduation the student is prepared to join the workforce and become increasingly competent in the field.

CISCO's SC2 follows the university educational path. Each of the 8 monthly lessons presents new trading tools or new uses of previous tools. Each tool has explanatory background information (the underlying theory/practices of the university approach). Application of the tools to build and test trade setups is the SC2 laboratory. At the completion of SC2 the students, just as in the university case, have the theoretical and practical knowledge that equips them for work in their field.

CISCO's research and Short Course offers training in both the objective and subjective elements of trading.
1. Learn how markets work, their flow: (balance to run to balance to run, etc.) (SC2)
2. Learn where to find market generated data (MGD): (CISCO website)
3. Learn how to use MGD to gain information about the market (SC2)
4. And finally, combine the information gained into trade setups (Student)
5. Trade setups are a teaching tool. We can test ideas and learn. (Website, SC2, Student)
6. By the end of SC2 the student will understand trading basics: trade set-up and management
These six steps embody a great deal of learning; and a lot of effort on the student's part. Those who do not do the homework cannot expect success.
Steps 1 - 6 are effectively the same path we all follow when we enter a new professional level job.

An advantage CISCO has over all other training in this field is that Short Course is based on knowledge gained from years of profile and value research and publication of that research (that gets it vetted). Another advantage in the development of Short Course methodology is that the writer traded/managed individual customers' accounts for fifteen years (before the rise of hedge funds). Much of Short Course is a distillation of that experience.

Nothing like the CISCO Short Course is offered in any institution of higher learning or anywhere in the futures industry, so far as we know.

With very rare exceptions, the training found within the futures industry is the same tired old screeds on chart pattern recognition and/or calculating indicators. Most Colleges and Business Schools are still in the dark ages of market analysis and believe in the efficient market theory, a theory we at CISCO disproved back in 1973 (Jones, Commodities Magazine, Feb. 1973). Also, universities are not too eager to jump into complex situations (like markets) where there are many variables and feedback between variables exists.

CISCO offers a course of study, SC2, for traders. This intensive path takes a beginner through to the point where he or she can make and analyze trade setups. As in all training, the student's work ethic is the critical element.

Unequalled Advantages of SC2:
1. Works within Auction Market Value Theory (it starts with Value).
2. Applies equally to initiative (breakout) and responsive (balanced market) trades.
3. Covers all markets. On any day the trader can focus on those markets with potential.
4. Streamlined learning based on setups rapidly builds market familiarity.
5. This Theory, Application and Practice methodology is logical, valid and learnable.
6. SC2 treats the market as it is, not as it is imagined to be by analysts.
7. Minimal cost.

Short Course is eight months:

Month 1: An introduction to Auction Markets within the framework of a complex environment.

Auction Market Value:
Three CISCO tools can take you through a basic trade set-up.
These three tools are:
Tool # 1.1
Regular Bracket Screen: End of Day Balances (5, 10, 15 and 20 Days).
These are the 'Fool Proof' lists of markets where Value is known
This is the starting data set for tomorrow's trade setups.
Tool # 1.2
Visual Graphic II: 4 time frames (5, 10, 20) Balance Graphic + Reference Points.
Gives more detailed information for trade setups.
Tool # 1.3
Meta-Profile CMaPS: Current Profile, Bars, Pause Alert, Reference Points.
Intra-day information for trade setup management.

Your first trade set-ups will be built in Lesson 1. You will use this process the rest of the course.
For a view of Profile based market analysis, visit the link below. If you are at all weak in your Profile knowledge, the link merits some serious study.
Introduction to Profile Day trading

Futures Symbols, Tick, Universal, Exchange

A list of symbols with activity of each delivery can be found on the CISCO main page:
Across from the flag: Tick Status Table.

Month 2: The Major Auction is the Multi-day Market Condition
The three Tools of Month 1 are used for generating setups this month, with the major thrust of learning about the market's condition.
Condition governs trade selection and gives a first estimate of risk (the octant).
The optimum condition for analysis is balance (say 3 or 5 day). No market is in balance every day.
An un-balanced market may be traded with the Pause Alert of the Profile (CMaPS).
An un-balanced market may be traded with the short term methods of Month 6. (Day Trading Engine).
Tool # 2.1
A new Tool: 5 Days of Profiles on a Common Price Strip is used to compare day-to-day profiles; to validate trade setups.
Market Profile/Meta-Profile & Market Condition

Tool # 2.2 A new Tool: Overlays (2-25) Days, investigates condition on varied Overlay timeframes.

Month 3: The Minor Auction: Current Day Market Market Structure
Minor Auction is the Current Day Timeframe, as it develops.
Minor Auction is a subset of (occurs within) the Major Auction.
All Trading activity takes place during the Minor Auction.
Meta-Profile is used for current, intra-day market analysis.
CMaPS Pause Alert shows Tipping Points in the Minor Auction.
Tool # 3.1
A new Tool:: Run-Pause Congestion, identifies intra-day congestion periods.
Tool # 3.2
A new Tool:: Intra-Day Meta-Profile plus Overlay (5 Day) Data
Shows clustering, yesterday and today.
Tool # 3.3
A new Tool:: Advice Engine Search/Potential
Provides a history of the Trade Potential for a chosen Delivery
Tool # 1.3 Revisited
CMaPS: In addition to Profiles, CMaPS tracks the Pause Alert
Tipping Points are identified by pause Alerts in intra-day market action
Half-hour bars 'Pause Overruns' give risk estimates for day-trading Pause-Alerts

Month 4:, Value Analytics: Reference Points: Part 1
Period Covered: Approximately Old Pit Open (Heavy Volume Start) to 15:15
Number of Reference Points ~ 30
Reference Points are utilized to identify market continuation
Tool # 4.1
A new Tool:: Value Analytics EOD Report

Utilization of Reference Points
Value Analytics calculates end-of-day reference points for the time frame usually of the old pit open to the standard close (15:15). This period includes the bulk of trades for the day. Typically, the old pit open time is the start of the day's heavier volume. The one reference point that is most affected by an arbitrary start time (for a 24 hour market) is the Initial Balance which is pegged to the first hour of the market. In our studies this decision has not posed a problem.

A typical trader will list out the daily report (Table) for the delivery (s) of interest. The three columns of a VA Report list each of the last three days of reference points. Most of the entries will be either larger or smaller than the previous day. These are directional reference points. A few are activity related and are marked with a capital A.

Examples of Reference Points:
Balance (Upper & Lower Limits)
Price (Hi, LO)
Price (First, Last)
Number of Distributions
Number of Price lines
TPOs Total
Why do we use some 30 or more reference points?
A market generates a lot of information. This is captured in reference points. Value Analytics daily calculates the reference points for the market(s) of your choosing; so you do not have to make them yourself. But you surely must understand them to use them. The Value Analytics Background reports (there are several) can educate you on what is available on the CISCO system.

For instance, in the Day Trading Engine app we have an algorithm (formula) that predicts the direction of the next day's market (up until about noon) that is good about 80% of the time. This app uses 16 reference points, eleven for direction and 5 for magnitude.

The typical profile trader is often satisfied with Point of Control (POC) and Value Area (VA), a woefully inadequate set for market analysis. Why is this true? Any observer knows that quite often non-bell profiles appear. We also know that profile is defined in terms of the (statistical) Normal distribution (the ideal bell shaped curve). If not a bell shape, then that day the calculation of Point of Control and Value Area are indubitally wrong. The poorer the fit to the ideal Normal distribution, the bigger the error.

If your analysis depends on a non-representative profile POC and VA, your analysis will likely give you the wrong numbers to trade with.

Trading on bad information is worse than throwing darts. The list of reference points shows that there is a lot of reference point information. The more information about market condition(s) you have and understand, the larger your edge.

Even in poorly developed profiles many reference points are still valid; e.g. number of price lines, high and low price, TPO counts, trade facilitation, tails and so on. If you are dealing with a complex market that you must analyze (say you have a position on), then it is imperative that you use all the reference points you can justify.

Month 5:, Value Analytics: Reference Points: Part 2
Rule: Data must be valid and adequate for analysis (condition known)
Sample Data: 3 Types: Condition (balance or not), Meta-Profiles and 2 and 3 day Overlays
Dialog with Beta Testers--a day of market analysis
Extended explanation of V-A
Extensive background

Month 6: The CISCO Day Trading Engine: Intra-Day Tipping Point Trading: The Single
Tipping Points arise when the bulls (longs) are at a standoff with the bears (shorts)
A tipping point is seen as a pause in price movement, often a price turning point
The 'Single' one delivery display contains a directional prediction ==> trading opportunity
Time frame range: few seconds to 30 minutes
Tool # 6.1
A new Tool:
DTE Single: Market Tipping Point

Month 7: The CISCO Day Trading Engine: Intra-Day Tipping Point Trading: Triple, History
Triple tracks three markets simultaneously for Tipping Points
History permits going back within a day to review market action
Tool # 7.1
A new Tool:
DTE Triple: Tracks 3 deliveries at once: ==> Arbitrage
Tool # 7.2
A new Tool:
DTE History: Permits lookback within a day

Month 8: Trade Management as Value Changes
Value change occurs with a change in market condition. A market in balance can change slowly (turtle), maintaining balance. Most common is an abrupt change of condition (breakout)
Recognition of transition from a balance to a trend or trend to balance tracks change
Tipping Points can occur within either a balance market or an un-balance market

1. Reuse: CMaPS meta-Profile with Pause Alert (30 min basis)

2. Reuse: The Run-Pause Congestion tool (time frame set by market)
Find major changes throughout the day

3. Reuse: Intra-Day Meta-Profile + Overlay (time frame set by market)
Find major changes throughout the day

4. Reuse: Day Trading Engine (Time frame from 15 min to 5 sec)
Monitor Tipping Points and breakout direction
Tool # 8.1 Day Trading Engine Price - Time Array
Reuse of 2-25 Day Overlays

Short Course combines lessons and paper trading in real time. Data is from a real-time (internet delivery) ticker.

Daily Trade Setup Procedures Guide
Trade setups are a daily part of the learning process.
Daily Trade Setup Procedure

Weekly conferences (via email) with the course leader (up to 5 questions) are a part of this correspondence course. Additional conference/mentoring time can be arranged at extra cost.

Cost: $800 for the eight months of the course.
Course includes Programs and Data. There is a $15 monthly Meta-Profile fee.
After completion of the course, the student can sign up for the data/tools desired.
A typical post-course user pays about $150/mo for data + tools.

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Copyright CISCO Futures September 1, 2010