Seminal books and important early articles are at the bottom of the page.
Articles by subject are at the link: References by Subject
Articles
Some articles are published only on the CISCO site and links to this material
are provided. Articles published in external media (magazines,etc.) can often
be purchased from the magazine. In cases where we have information in addition
to that published, links are listed.
From Market Profile to Value Analytics: January 11, 2008
The CBOT product announcement of Market Profile in 1985 revolutionized market analysis. The
focus on intra-day market behavior offered more information than ever before possible. Couched
in the terms of pattern recognition, Market Profile Manual suggested that analysis proceeded from
first recognizing day type. Each publication on profiles cited a different number of day types.
At CISCO we could not make pattern recognition work for us. In exploring alternatives we found
that it was very dicey to put too much faith in a single day's profile. In our book, Value Based
Power Trading, 1993, we noted that a market in trend had day to day variations that on a single
day basis made the trend unrecognizable. Broadening that concept led to the Three Day Rule.
That rule, simply stated, says that market condition cannot be found from a single day's data.
Three days of profiles can lead to a pretty reliable measure of market condition.
That missing link in profile analysis led to our work on value based analyses.
From Market Profile to Value Analytics
Dialogue on the Two Systems: Holism and Objectivism: Profile vs Value, Nov 17, 2007
Subscribers to the CISCO Short Course for daytraders are permitted a 15 minute
question session per week. This dialogue between student and teacher concerns the
fundamental principles of Market Profile as initiated in the CBOT Market Profile
manual, 1991; contrasted with the Value Based Analyses developed by CISCO. As such,
this discussion is of general interest to all traders and is shared on that basis.
Dialogue on the Two Systems: Market Profile versus Value Analysis
The Three Day Balance Rule for Profile Value Area, Nov 11, 2007
The TPO-Value Area, as defined in the Meta-Profile, has come into wide use.
This value calculation relies on a balanced market condition for it's
validity (as does the much less used cleared-volume based Market Profile).
Measurements of market condition such as the CISCO Bracket Screen and
the Advice Engine show that markets are in balance only about half the time.
Little or no effort is made by most data providers to offer
market condition information to their profile value subscribers.
Consequently, the unfortunate fact is that about half the time
calculated profile value areas are incorrect and the user has no way of knowing
which are correct. Thus, trading decisions based on value are
often made with flawed data.
This article
illuminates the problem and proposes a solution for non-CISCO users, the Three Day Rule.
This rule says that if one is to trust the profile value calculation
the market condition must be balance (congesting). In the absence of a measured
balance like the CISCO Bracket Screen or Advice Engine Tables,
a good estimate can come from visually examining the last three days of profiles
to form a rough Overlay. If this rough Overlay shows a cohesive group, a single distribution,
you can trust the value area calculation. This is the Three Day Rule.
Profile Value Area Three Day Rule
Value Analytics: A New Departure in Profile Analysis, Sep 2007
Value Analytics (VA) is a melding of the Market Condition analyses pioneered by CISCO (Ref. 1),
with a unique form of Market Profile, one oriented to quantitative evaluation of reference points.
This is a radical departure from the standard Market Profile (Ref 2), a move from pattern recognition to
analytical evaluation of the profile intra-day markers.
Contrary to normal profile procedure,
Value Analytics starts with
Market Condition as the framework within which all trading takes place. Profile analysis
plays a subsidiary, but important, role, describing the infrastructure of the market,
the internal details that identify
market flow and market bias. Standard profile definitions are used, but not for profile
day pattern analysis. In Value Analytics the market is viewed as a continuum, a flow through time.
Profile variables are analyzed for their change over time, their relative values, rather than the
less useful absolute numbers used in regular profile analysis.
By quantizing the profile variables, Value Analytics removes
much of the mystery of profile trading; the pattern recognition and the holistic evaluation
of the motivations of the market's players (Ref 2, 4). Quantized profile data can stand
alone. Dyed in the wool profile traders might enjoy a profile methodology that is more analytical.
However, the synergism of condition and profile together gains much more market information
collectively than either can do alone.
Value Analytics: A New Departure in Profile Analysis
Book Review: Markets in Profile, Dalton, Dalton & Jones, Mar 2007
The book Mind Over Markets, by the same authors has become a classic in Market/Meta
Profile literature. It is a teaching manual, progressing from Novice to
to Expert in five lessons. The new book, Markets in Profile, is more advanced,
attacking timeframe analysis and market structure. Not a 'trading model' book,
the thrust is 'understanding', why the market did what it just did (or is doing)
and who is driving. In order to get in sync with the authors, the trader must
first learn how to differentiate price from value. Then it becomes possible to
understand market structure, profiles, and gain clues from asymmetries
(market deformation from the standard bell shape format). Learn about profiles
and in the words of Pete Steidlmayer (developer of the Market Profile), you
gain an 'edge'. For a competent trader, that is all that's needed.
Recommended reading.
Book Review: Markets in Profile
Short Term (intra-day) Congestion: The Run Pause Profile (tm), Jan 2007
All markets run and pause. There may be several timeframes active at once (a market may be in
a three day balance and a 12 day trend at the same time). The most critical timeframe is the
current day. Everyone is a day trader when they put on or take off a trade. The short term Run
Pause Profile examines market congestion in the 15 to 45 minute window. This timeframe answers
the question: Is the market congesting right now? The Short Term Run Pause Profile is
of use to every timeframe trader as they enter or exit.
The Run Pause Profile (tm)
Drawdown Studies with Advice Engine, Dec 2006
Excessive drawdown is the nemesis of the trader. It is virtually impossible
to do an adequate historical study with the tools available (indicators, charts, etc.).
The practical problem is coupling the method of today with historical data
that may (and probably does) behave differently. Value methodology solves the
problem: The value from a market balance at a point in history identifies the
market situation uniquely. Support and resistance from that balance reflects
conditions at that time exactly. A database for such studies goes back to 2001.
Drawdown Studies for SP
Market Profile Society International, 1992 - 1994
Professor Thomas Drinka at Western Illinois University, Macomb, IL, offered the
first course in Market Profile at the university level. He also led a research
effort as a part of the curriculum. Subsequently, Dr. Drinka led the formation
of Market Profile Society International, again the first such professional
organization in the field. Dr. Drinka has graciously permitted CISCO to make
the publications of the Society Journal available. We thank him.
Market Profile Society International with Links
Five Billion Dollar Loss on Natural Gas Trading, Sep 22, 2006
A hedge fund, Amaranth Advisors, has reported a trading loss in excess of
five billion dollars in trading natural gas futures and options. According
to an article in the Wall Street Journal, September 20, 2006, page C1, the
loss stemmed from a turndown in the price of natural gas. Prior to the
change in trend from up to down (which occurred on August 1), the fund had
a $2 billion gain in their natural gas trade. Without discussing the Amaranth
trading strategy, we show how using Market Condition, available from CISCO
data, could have eliminated much of the down-side loss while possibly maintaining
the upside profit from the earlier run-up.
Tracking the $5 Billion Nat Gas Trade
Financial Markets Auction Market Value Theory, Nov 22, 2005
Auction Market Value Theory proceeds from first principles, a set of axioms, to
form a general theory of market structure and behavior. It is possible to find
permitted and non-permitted practices, thus removing doubt regarding conclusions
made about markets. For instance, a non-permitted practice is efficient markets,
they are shown to be not allowed. An important permitted practice is the
'Market Unit' the basic structure of markets: a balance followed by an
imbalance. A market is formed by a set of market units. This finding is critical
to traders, giving them, for the first time, the ability to determine valid
types of analyses.
Auction Market Value Theory
Three Major Auction Market Discoveries, Nov 22, 2005
Auction market analyses are based on value determination, in large part. Three
discoveries have guided the way to Auction Market Value Theory. These are the
Market Profile from Pete Steidlmayer in 1985, the Meta-Profile and Overlay
Demand Curve from Don Jones in 1987. Each approach finds value in a unique way.
Discoveries Basic to Auction Market Value Theory
Market Profile Problems with New LDB Data
Market Profiles from the LDB Data, the only source, are fraught with error.
Floor traded markets have many spurious TPO errors. Electronic markets have
reporting errors with placement, earlier night market trading can be reported
after the day TPOs.
Market Profile Problems with New LDB Data
Free Meta-Profile access on Weekends
Traders interested in learning how to use value in their market analysis
can come to the CISCO website on weekends. Available are both the Meta-Profile
and the Overlay Demand Curve. You can follow the path set up by the DJ analysis
for May 17 (below). Or you can learn how to use the data for your own methodology.
Free Meta-Profile Analysis on Weekends
Presentation to DTG, Sep 15, 2005
This article is in rough outline form for an oral presentation. It is
annotated with links to the CISCO website.
Denver Trading Group Presentation: Sep 15, 2005
Candlesticks, a Critique
Japanese Candlesticks are a well known charting and technical analysis
methodology based on a set of patterns. The charts are strikingly attractive.
The names of the formations also add a certain cachet of sophistication,
somewhat like the pokeman cards. However, a broad based computer analysis
indicated the methodology is of little value to the trader.
Candlesticks, a Critique
Pivot Points, a Critique
Pivot Points come from a simple calculation of a day's (or other timframe) high,
low and close. The result is a pair of resistances and supports. Basing such
presumed trading points on flimsy and often misleading information does the
trader no service.
Pivot Points, a Critique
Pattern Day Trading, an Example
Pattern recognition trading is popular among traders. Most patterns rely on
a set of elements that are more lore than science. With profiles, that is not the
case. The simple bell shape TPO curve is understood by all. Once that pattern
is recognized, the trader can calculate value and from that measure value change.
Meta-Profile/Pattern_DayTrading_UU050722.html
Day Trading the London Blast of July 7 & 8, 2005, July 14, 2005
World shaking events can have a disasterous effect on markets. The London
bombing of July 7, 2005 is one such case. Such a market moving event may
offer an
extraordinary potential for gain or loss. The Dow Index mini-sized future
illustrates both unusual risk and unusual opportunity over the day of the
event, Thursday and the following day, Friday.
A value trader would have been shut out of the market on July 7, but would
have found a huge opportunity (10334 to around 10443) on July 8.
Meta-Profile/Overlay Trading the London Blast
Scratchpad for Visual Graphics/Overlays
Day Trading Analysis with Visual Graphic and Meta-Profile, DJ Index, May 17, 2005
The day trading study of DJ Index, May 18, 2005 illustrated a common situation, a market, now trending,
that we wished we had had the foresight to trade at the start of the trend. That study showed that it
can be possible to 'get in at the middle'. The current study is of value to see how the trend in place
on the 18th got started. It also illustrates the more normal situation of value trading starting out with
a balanced market.
Meta-Profile and Visual Graphic Market Analysis, DJ Index, May 17, 2005
Day Trading Analysis with Visual Graphic and Meta-Profile, DJ Index, May 18, 2005
End of day Visual Graphic provides the set-up support and resistance for
trading the next day. These data, when used in conjunction with the Meta-Profile
locate value change and hence provide trading targets. Once a position is on, Meta-Profile
shows the run, pause nature of trends, giving the trader alerts for impending
congestion (end of trend). This case of the Dow Index on May 18, 2005 is a
classic example of entering a running market.
Meta-Profile and Visual Graphic Market Analysis, DJ Index, May 18, 2005
Markets do NOT Turn on a Dime, D.L. Jones, June 8, 2005
Unlike the general perception, markets do not turn on a dime. An hour
is more like it. The CISCO CMaPS Meta-Profile gives the half-hourly bar
data used to find pauses and to discriminate between a pause and a full
blown congestion (i.e. a market stop, in preparation for a turn). CMaPS
also offers a 15 minute bar version, which can sharpen ones timing.
Markets do NOT Turn on a Dime
Day Trading With Market Value, D.L. Jones, S&C May 2005 P16.
A discussion of Market Profile (value from volume) as compared to
Meta-Profile (value from tick data) shows the two agree in balanced
markets. In active, directional markets one or the other may be incorrect,
depending on the parameters of the movement. The conclusion is that it is
optimal to have both, a possibility with CBOT data and little else.
A somewhat more thorough discussion is in an allied CISCO article.
Value in Trends from Meta and Market Profiles
Meta-Profile for Day Trading, D.L. Jones, May 27, 2005
An outline for using Meta-Profile and Overlay Demand Curves (an outgrowth
of the Meta-Profile) demonstrates the use of short and longer term value
in trading decisions.
Meta_Profile and Overlay for Day Trading
Market Waves are Not Cycles, D.L. Jones, March 25, 2005
Since early on in the development of technical analysis (e.g. New Concepts in
Technical Trading, Welles Wilder, Trend Research 1978) there has been an
underlying assumption that markets are periodic. Wilders preferred period was
14 days. The data do not bear out this assumption. As we know now markets
display wave motion (ups and downs) but there is no underlying 'period' (see
'The Market Unit' below). The lack of an imbedded period means that market
data is poorly conditioned for most of technical analysis.
Market Waves and Tech Analysis
The Market Unit, D.L. Jones, March 17, 2005
A market unit is the elapsed time from the beginning of congestion, through
breakout and the ensuing directional period, ending with the start of the
next congestion. During the congestion, the market finds value (value region)
as the balance builds. Value changes with the breakout from balance and
continues to change so long as the directional move continues. Significantly,
the market unit for a market is not a constant. The length of a market unit
may be 12 days, while the one before could be 4 days and the one before that
could be 23 days, etc. The significance of this finding is that markets
do not have a characteristic period. Any manipulation of data that assumes
periodicity, such as moving average smoothing, is of questionable value.
The Market Unit
Auction Market Value Theory, D.L. Jones, September 27, 2005
Standard financial market theory (Capital Market Theory, CAPM) has had many
critics since it's inception in 1970. Recent work by econophysicists (2003)
demolished CAPM's basic assumption that markets follow a gaussian (bell shaped)
distribution. Further it was shown that markets are complex, self regulating
and driven by feedback.
An alternative to CAPM precepts is Value. Value is an observable
in all tick producing markets (Meta-Profile 'Value'). Auction Market Value
Theory offers a structure and platform for decision making (trading) in
real, complex markets that have no known distribution function.
Auction Market Value Theory
Overlay Demand Curves (tm), D.L. Jones, December 19, 2004
The Overlay Demand Curve is the missing link in the Market Profile story.
Profiles can only be understood within the context of 'market condition'.
A profile may be a well developed bell shaped curve, with a proper value
area. However, how one reacts to a market movement, say a breakout from
the upper side of the profile value, depends on market condition. If the
profile value is in the middle of a balance, a profile breakout is simply
rotation in a balance. If the market is trending up a profile upside breakout
is a strong buy. Should the market be in a downtrend, buying the profile upside
breakout is very risky.
Overlay Demand Curve Background
Explanation of Visual Graphic
Market Profile/Meta Profile History 1985 - 2004 (Nov 18, 2004)
Market Profile which includes a quasi-bell shaped distribution of TPOs and
cleared volume at each price was produced by the Chicago Board of Trade in
1985. The distribution of TPOs was used to find structural elements such as
range extension and tails, as well as the five characteristic 'day types'
(Normal days, Trend days, etc.). Cleared volume at price locates the point of
control (high volume) and the value area (central 70% of volume).
Meta-Profile was developed by CISCO in 1987 as an alternative to Market Profile
that covered all markets, not just CBOT, and could find value area any time of
the day. Meta-Profile does not use range extension and tails or day types. Meta-
Profile was identified as Tick-TPO Profile in the 1987 articles.
Market/Meta Profiles History 1985 - 2004
Market Profiles/Meta Profiles Develop Market Structure (Nov 8, 2004)
Market Profile value derives from cleared volume. Meta-Profile value comes from
real time tick data. Although both methods attempt to measure the same market
parameter, value, the differences in changing markets offer another sensitive
measure of market structure.
Market/Meta Profiles Background
The Market's Second Chance, D.L. Jones, S&C Nov 2004 P29.
Markets are more and more becoming 24 hour processes. Your analyses may
point you to an entry which turns out to have occurred overnight. If you
understand your market, you can often find second chances.
A subsequent article on the same subject addresses the speed at which
markets reverse themselves, fleshing out the concept of runs and pauses
in a directional market.
Markets do NOT Turn on a Dime
From Noise Trader to Insider, D.L. Jones, Oct. 17, 2004
Insiders, those in the trade, have been thought of as the "them" who control
the market. Insiders do have advantages, sometimes being privy to trade
information about events the ordinary trader does not. But the big events
do not come very often. Sometimes the big events surprise everyone, as in
the famous Nixon wheat deal with the Russians, the Bunker Hunt silver corner,
etc. The point is made that the ordinary trader who understands market value
promotes himself (herself) into the insider category solely on the basis of
market knowledge. (Market knowledge the insider does NOT have.)
From Noise Trader to Insider
Trading Opportunity: The Figure of Merit, March 13, 2004
The 'Figure of Merit, FOM' is the ratio of the maximum you could have earned from
a trade divided by the risk. You can calculate the FOM for any model. Start with
an entry and assume you use the risk (your initial stop loss amount) as a
trailing stop. FOM is the maximum gain point reached prior to a stop-out. Say
you enter long at 100 with a 10 stop. The market moves upward to 120 and then
down to 110 where your trailing stop is activated. Your maximum open trade
gain was 20, risk was 10, so the FOM is 2. You, of course, could not reliably
exit at the top, so the FOM is an ideal, the best possible attainment. The value
of the FOM is that it can help you find markets with opportunity. This subject
is covered in some detail at the Advice Engine on the CISCO site.
Trading Opportunity: The Figure of Merit
Trading Reference Points, A List. Dec 2003
A reference point is an element of market behavior. The market, as the complex entity it is,
is constantly sending messages (price, time and volume). Deciphering these signals is the
trader's job. Prior to 1985 and the advent of the profile concept, price was king. Traders
calculated moving averages, oscillators, price channels and the like. These price calculations
usually needed a time frame, a cycle such as the 14 days espoused in the Welles Wilder work.
Later studies at CISCO have shown convincingly that that much needed cycle does not exist
in the way the calculations required. Profile analysis transferred the emphasis to value, and
day value at that. Subsequent work at CISCO shows that day value is often not stable enough
for analysis and a minimum of three days is necessary for finding overall market condition.
Further, since the market is complex in the mathematical sense (as well as observationally)
much of one's trading is involved with understanding general market behavior and that particular
behavior being exhibited at the time. A key to this understanding is to first know the market
condition (balance or trend). Value can only be found reliably for balanced markets. A primary
piece of information (reference point) is the balance limits. Prices within balance limits
are in the 'rotating' region with limited excursion. This is the realm of the responsive
day trader (selling highs, buying lows). As price leaves balance, the breakout is an alert
to the trend trader.
There are many subsidiary reference points, each illuminating that part of
the market. For instance, an increase in volume over recent days may be an alert to increasing
interest and all that entails. Short term (day) value change may be a directional indication.
And so it goes with the many reference points. The CISCO Value Analytics uses some thirty
reference points to help understand market behavior. The link, Reference Points is an introduction
to reference points, many of which are covered in detail in the CISCO Short Course.
A List of Auction Market Reference Points
Market Profile. Letter to Editor S&C Aug 2003, p 14.
A writer in the May S&C asked how to find the value area for the next day. We pointed out
that the value area at the end of the day locates value for that day, not tomorrow. The
trader goes into tomorrow knowing the support and resistance from the previous day. If
value changes, you have a starting point from which to trade.
Bringing Volatility to the day-trader's level, D.L. Jones, Futures Jun 2003, p 48.
Summary: Volatilities used in option trading are borrowed from the equities model and are hence
annualized. A moments reflection raises the obvious question, what good is a very long term average
to a short term trade? If it is agreed that short term market understanding is important to short
time-frame trading, short time-frame volatilities are needed. The proper time-frame for a valid
measurement is found from Meta-Profile analysis. The best time base for volatility measurement
is shown to be between 25 and 30 minutes.
Volatility
Developing A Model With Auction Market Theory, D.L. Jones, S&C Nov 2002, p 21.
Summary: Everyone would like a "one size fits all" trading model. Unfortunately,
market structure makes that impossible. Auction
Market Theory (AMT) explains that there are four types of market (balancing, transitioning,
trending and transitioning back to balance). Each type should be traded differently.
Also, AMT gives us value measurement. AMT explains the market structure. In short,
AMT gives us the tools to analyze our market(s). But that is not enough. We must
also know ourselves, how we trade, our attitude toward risk, our account size and
so forth. Now, when we put our market knowledge together with our personal
information we can come up with a clear plan of action.
At "Background Reading" on the
CISCO home page, click on 'Trading Model Development', also see the 'Short
Course' link on the CISCO homepage.
Trading Model Development
Short Course Lessons & Data
Daytrading Support and Resistance, D.L. Jones, July 27, 2002©
Summary: Since the Market Profile (1985) and Tick-TPO Profile (1987) value area
has gradually become understood to define short term support and resistance
under the proper conditions. In balanced markets Market Profile and
Meta-Profile (Tick-Tpo Profile) give the same values (see our Market Logic
School Alumni Letter 1987 article and the later S&C paper, 1987).
In un-balanced, directional markets the two methodologies can differ
substantially.
Market Profile and Meta-Profile Compared.
Auction Market Theory and the Longer Timeframe, D.L. Jones, S&C July 2002, p32
Summary: See Auction Market Theory below, and Auction Market Value Theory on the
CISCO website at "Background Reading".
The Auction Market Theory, D.L. Jones, S&C June 2002, p22
Summary: Based on observable facts, Auction Market Theory (AMT) codifies the auction
process. With a serviceable theory as a guide, a trader can know how the market
is structured and how it behaves. This data leads the trader to model development
based on reality. Mathematical manipulations such as pivot points explain little
or nothing about the market, while application of AMT can give the trader
a reason for market behavior. For instance, short covering rallies or long
liquidations are commonplace in auction markets. Auction Market Theory explains
the structure of these rallies/liquidations. This work has been updated to take
into account later research on market distribution functions.
Auction Market Value Theory
Advice Engine Background, D.L. Jones, December 31, 2001
Summary: The Advice Engine end of day report lists all futures in balance,
with their breakout points, the nominal Overlay octant risk and the Meta-Profile
with it's long and short value area breakout prices. A CISCO proprietary
algorithm selects those futures calculated to offer the most opportunity and
lists these choices in the 'Select Table'. The second part of the report posts
the previous day's selections, with their potential (how well the trading
went). This report is a primary tool for the trader who diversifies.
Advice Engine Explained
Day-to-day Serial Correlation of Futures Markets, D.L. Jones, Market Profile
Soc. Intl. Aug. 1993
Summary: A study of day-to-day serial correlation on a long term trending
market shows little to no day-to-day serial correlation. The reason is that
even though the example long term trend (88 days) was - 1.375 cents per day
($68 on the soybean sample), the daily volatility of about 8 cents masked the
trend. On a day to 2 days out sampling the trend began to emerge and became
very clear on a day to 3 days out test. See Value Based Power Trading, pg 21.
The Hourly Liquidity Data Bank as a Tool for Day Traders, D.L. Jones &
Christopher Young, S&C July 1993
Summary: The end-of-day Liquidity Data Bank (LDB) has proved valuable to
traders seeking exact volume data. The hourly LDB is a running log of the
clearing throughout the day. Releases occur hourly from 8:30 AM.
Sample Rates (half-hour periods), D.L. Jones, Market Profile
Soc. Intl. April 1993
Summary: It is apparent to any analyst that ticks sample too frequently. Daily
summary data (O,H,L,C) is not frequent enough. Somewhere in between, just like
baby bear's porrige, is just right. In fact, the optimum sampling rate is defined
as the time it takes for information to enter the market. Thirty minute samples,
as with the Market Profile work well.
Commercial Floor Traders Identify Value, D.L. Jones. S&C Jan. 1993
Summary: The Liquidity Data Bank lists volume by price broken down into
the four category of members (locals, commercials, off floor and public).
Public buying or selling pressure will move markets. If the public weakens,
the commercials will come in with big volume and push price back to balance.
The commercial's price action point is significant in evaluating the public's
will.
Commercial Floor Traders Identify Value, D.L. Jones, Market Profile
Soc. Intl. Dec. 1992
Summary: The Liquidity Data Bank lists volume by price broken down into
the four categories of members (locals, commercials, off floor and public).
Public buying or selling pressure will move markets. If the public weakens,
the commercials will come in with big volume and push price back to balance.
The commercial's price action point is significant is evaluating the public's
will.
Value Based Power Trading with the Overlay Demand Curve, D.L. Jones, Market
Profile Soc. Intl. Sep. 1992
Summary: The Overlay Demand Curve applied to balanced markets provides
support and resistance points for the trader. The support and resistance
are the limits of the Overlay, which defines the 'value region'.
A simple set of rules, seven
in all, comprise the model. A simulated set of trades from March 11 through
May 29, 1992 on 22 futures resulted in 148 trades with 87 winners and an
average of $114 per trade.
Value in the Futures Markets, D.L. Jones, Market Profile Soc. Intl. June 1992
Summary: Value is measured by price acceptance, commonly referred to as
"price over time". A market samples itself continuously,
as it trades. Those prices the market returns to time after time are the ones
at which the participants recognize value. Value is the winner of the price
popularity contest. Time frame is an important variable. Today's value may
not be the longer term value; that is found from market condition.
Overlay Demand Curves, the Missing Link, D.L. Jones, Market Profile
Soc. Intl. March 1992
Summary: As originally accepted, the Market Profile was believed to be
essentially a trading model. However, an essential piece of information for
all trades is the trading environment, i.e. the market condition. This article
discusses the Overlay Demand Curve as a way to find market condition. Also
see the text, Value Based Power Trading.
Overlay Demand Curve Background
Explanation of Visual Graphic
The Profile Report, Vol 4, Nov/Dec 1990: Part 2, Vol 5, Jan/Feb 1991;
Part 3, Mar 1991
Summary: Liquidity Data Bank cleared volume can be compared to tick data
to estimate the contract to tick ratio. For S&P 500 each tick represented
17 contracts. For soybeans, each tick was about 22 contracts.
Reliably Estimating Contract Volume from Tick Information, C.J. Young,
Profile Report Volume 4, #9 and #10, Nov/Dec 1990.
Summary: Liquidity Data Bank cleared volume can be compared to tick data
to estimate the contract to tick ratio. For T-bonds each tick represented
170 contracts.
The Overlay Profile for Current Market Analysis, D.L. Jones & C.J. Young,
S&C June 1990/July 1990
Summary: The Overlay Demand Curve (ODC) is a graphic of multiple Meta-Profiles
added together linearly. Each MP day will be responsive to short term market
effects. Taken as a whole, the spurious effects cancel out. Thus, the ODC
puts several MP days together without introducing lag
Intra-day Trading with Tick Based Profiles, March 1990
This article puts the Market Profile, the Tick-TPO Profile and the Overlay Demand
Curve in context as market analysis tools. Mathematically, the market is
recognized as a "non-linear, non-homogeneous differential equation with
non-constant coefficients", impossible to solve in closed form. For practical
purposes we deal with variables we can observe, price, time and volume. From
these come estimated value.
Both Market and Tick-TPO Profiles find
value (support and resistance) for the latest completed trading day. Overlay
Demand Curve provides the framework (longer timeframe) within which to interpret
the latest day value. This longer term can be set by the trader to be short
(a few days) or longer, depending on need. Thus, with the Overlay it is possible
to find support and resistance for the desired timeframe.
Intra-day Trading with Tick Based Profiles
Enhancing index stock portfolios with futures, D.L. Jones & T.L. Walsh,
S&C Jan. 1990
Summary: Expanded version of the Fin. Anal. J letter to the editor above.
Locating Value with Auction Market Data, D.L. Jones, S&C, Jul. 1989
Summary: Value is defined as market acceptance of price, signified by trading
volume. In a balanced market a day's trading defines a classical bell shaped
curve of price (vertical axis) and volume on the horizontal axis. In non-balanced
markets (trends in particular) value is changing and the price/volume curve
is no longer bell shaped. In the limit of maximum trade facilitation (a straight
up trend) the price/volume curve will be a vertical line.
Overlay Detection of Long Term Market Condition, D.L. Jones, The Profile
Report, Vol 2, Oct. 1988
Summary: Market condition is one of four types (balance, transition to trend,
trend and transition back to balance). The Overlay Demand Curve, an
aggregation of Meta-Profiles, displays the market's condition. Condition
is the most fundmental information a trader needs before starting analysis.
The Trade Facilitation Factor, D.L. Jones, S&C, Sep. 1988
Summary: The Trade Facilitation Factor (TFF) was developed by CISCO to give
a measure to the Steidlmayer trade facilitation concept. The TFF is the
average number of TPO's per price traded. The number will be higher in
quiescent markets where the range is small. The minimum TFF for a market not
facilitating trade is one. That is, in a strongly moving market
there will be only one TPO per price. Conversely, a market not facilitating
trade, e.g. one that is locked at the limit with only one price quoted
that day, has a TFF of the number of half-hour periods (15 for T-bonds).
Market Profile Series, T. Drinka, S&C, Vol 6, June 1988
Summary: Professor Drinka at Western Illinois University was the first academic
to incorporate Market Profile concepts into a university course. He and his
students have published numerous articles on their MP work. Much is posted
on the WIU website http://www.wiu.edu. His email is mftpd@uxa.ecn.bgu.edu
Auction Market Theory, A Primer, D.L. Jones, CISCO Report, 1988
Summary: This 19 page booklet is a compilation of the original Steidlmayer
material:
CBOT Market Profile. Loose-leaf, CBOT, c1984
Markets and Market Logic, J. P. Steidlmayer & K. Koy, Porcupine, 1986
Taking the Data Forward, J.P. Steidlmayer & S. Buyer, Market Logic 1986
It is now superseded by the Auction Market Theory report in "Background Reading"
on the CISCO homepage.
Estimating the Market Profile Value Area for Intraday Trading,
D.L. Jones, S&C Sep. 1987
Summary: Originally, the value area was an end-of-day calculation made from
the volume in the Liquidity Data Bank. This article demonstrates how to use
the TPO's from the intra-day half-hour bars to calculate a value area.
Determining the TPO Value Area, Don Jones, Market Logic School Alumni
Letter, April 13, 1987, P4
Summary: Originally, the value area was an end-of-day calculation made from
the volume in the Liquidity Data Bank. This article demonstrates how to use
the TPO's from the intra-day half-hour bars to calculate a value area.
The (LDB and Profile) Data, D.L. Jones, Futures, Aug. 1987
Summary: A simple picture of Market Profile and Liquidity Data. Much better
examples are now available on the CISCO website.
Developing an Index Using Market-Generated Information, D.L. Jones, The
Profile Report, Vol 1, #13, August 1987
Summary: Index uses 1) value area and volume dispersion; 2) Extremes in the
Profile; and 3) range extension. This index was designed to show market
momentum. Momentum was tested on the price close vs the price open the next
day and close vs best price next day. There were 86 momentum events in a four
month, 164 day test period. On the open there were 47 winners, 39 losers.
On the best price next day basis there were 74 winners and 12 losers,
The Effect of Adding Futures to a Stock Portfolio, D.L. Jones, R.A.
Lofstrand & E.T. Jones, Intermarket Magazine, July 1986
Summary: Extended discussion of the Fin. Anal. J, May-June 1986, report.
Commodity Futures Add Value (to a portfolio), D.L. Jones, Fin. Anal. J,
May-June 1986 (letter to the editor)
Summary: Diversification of a (stock) portfolio is achieved through a mix
of non-correlated instruments. Futures prove to be not correlated with
stocks. For the period 1974 - 1985 (Jun) stocks alone provided and average
annual return of 11.1%, stocks + 10% futures showed 22.3%.
Another way to solve continuation chart problems, D.L. Jones and Norman
Strahm, Futures Magazine Nov 1983
Summary: Futures contracts expire and rollover about every three months. The
new contract, pointing to delivery some three months hence will have a price
disconnect with the expiring contract. For longer term analyses, it would be
convenient to smoothly join the expiring with the new contract. This article
discusses the "continua" method of spread joining the contracts. On each
rollover the spread difference is noted and carried forward. The advantage
is that one has a continuous contract and the carrying charges and price ranges
are conserved.
A disadvantage is that the rolled contract prices are adjusted and are not
directly comparable with those posted in outside sources such as the newspaper.
The Misbehavior of Commodity Futures Prices, D.L. Jones, Commodities Magazine
(now Futures Magazine), August 1974.
Summary: Teweles, Harlow and Stone, authors of The Commodity Futures Game,
McGraw Hill, 1974, voiced the efficient market hypothesis in an article. We
pointed out that 'noise' or random fluctuation makes measurement difficult.
Furthermore, a single counter example can disprove a hypothesis. The disproof
we cited is the article on persistence of trends in our 1973 publication.
Persistence of Trends at Contract Highs and Lows, D.L. Jones, Commodities
Magazine, (now Futures Magazine) Feb 1973.
Summary: This research on market continuation shows that a new life-of-
contract high in a mature contract (60 days of trading) will be followed
by a yet higher high within the next ten days 82% of the time. The probablility
of two higher highs is 62% and three higher highs within the next ten days
has a 46% probability. The same is true of new lows.
This study refutes the efficient market hypothesis. If the future is
(statistically) predictable as shown at new highs/lows, it is clear that
the information driving the market is not instantly assimulated.
This study is the first experimental refutation of the efficient market
hypothesis known to the author.
On the Web at CISCO Futures
Click on "Background Reading"
'Auction Market Theory'
.... A basic understanding of auction markets
'Daytrading Support and Resistance'
....Trading with value (Meta-Profile, Overlays, etc.)
'The interaction between the Market Profile and the Liquidty Data Bank'
'Trading Model Development'
.... Integrates the Market and Trader Strategies into a Working Strategy
In the Background Section
'Auction Market Theory'
'Overlay Demand Curve'
'Commercial Analysis'
'Day Market Review'
In the Data Section
'Market Profiles' and 'Meta-Profiles'
'Liquidity Data Bank'
'Commitment of Traders'
'Advice Engine'
'History Data'
....Ticks, Daily Summary, LDB, Market Profile, BuySell data, Meta-Profile, etc.
'Swing Trader Package'
....Market Condition
....Visual Graphic
....Reference Points
....Overlay Demand Curve + Meta-Profile
....EOD Ticks, Daily Summary OHLC + V + OI
'Day Trader Package'
....Meta-Profile (current + last 10 days)
....Congestion Analysis
....Tick Bars
....Overlay Demand Curve + Meta-Profile
A 'Background' item is listed for each type of data selected
Many of these works are out of print. Some are to be found in the CBOT and
CME libraries. Articles published in trade journals may be available from
the journals.
CBOT Market Profile. Loose-leaf, CBOT, c1984, revised 1991
Markets and Market Logic, J. P. Steidlmayer & K. Koy, Porcupine, 1986
Taking the Data Forward, J.P. Steidlmayer & S. Buyer, Market Logic 1986
Determining the TPO Value Area, D.L. Jones, Market Logic School,
AI Ltr. V1-#3, Apr 13, 1987
Estimating the Market Profile Value Area for Intraday Trading, D.L. Jones
S&C Sep. 1987
Overlay Detection of Long Term Market Condition, D.L. Jones, The Profile
Report, Vol 2, Oct. 1988
Market Profile/Liquidity Data Bank: A procedural outline, D.L. Jones,
S&C Nov. 1988
A User-friendly Guide to Market Profile, R. Jirout, WSM, 1988
Technical Analysis of Stocks, Options and Futures, Ch 10, W. Eng, Probus 1988
Steidlmayer on Markets, J.P. Steidlmayer, Wiley, 1989
Markets 101, K. Koy, MLS, 1989
New Market Discoveries, J.P. Steidlmayer & H. Steidlmayer, KIRBMARN, 1990
Mind Over Markets, J. Dalton, E. Jones and R. Dalton, Probus, 1991
(In print)
The Profile Report: Weekly/monthly research studies on Market Profile,
Dalton Capital Management, Feb 1987 - Feb 1991, 1300 pg
(available (copied) from CISCO $325 postpaid within the U.S.)
CBOT Market Profile. Loose-leaf, CBOT, c1991
Value Based Power Trading, D.L. Jones, Probus, 1993
Book available from CISCO $45 (Also free (read-only) on-line at CISCO website).
Value Based Power Trading, Text errata
Handbook of Technical Analysis, Ch 7, D. Jobman, Probus, 1995
141 West Jackson, J.P. Steidlmayer, Steidlmayer Software Inc., 1996
Complexity, Risk and Financial Markets, E. Peters, Wiley 1999
Steidlmayer on Markets, 2nd Ed. Steidlmayer & Hawkins, Wiley, 2003
(In print)
Financial Market Complexity, N. Johnson, P. Jeffries, P. Hui,
Oxford, 2003
Why Stock Markets Crash, D. Sornette, Princeton, 2003
