Responsive Trading
New Market Analysis - Home Study Course
A Responsive Trade on April 8, 1992; US Day T-bonds
Trader Control Database Visual Graphic
Contents
1. Definitions
2. Strategy
3. Sample Overlay Demand Curve (tm), with Reference Points
4. Overlay Demand Curve
4a. Alert to Trend
4b. Commercial Support/resistance.
4c. Interpretation of the Commercial Data
5. Trading on April 7, 1992
6. Questions
7. Answers
8. The trade day April 8, using reference points from April 7.
9. Legend for Visual Graphic
10. Getting Visual Graphic from the internet
CISCO Futures
1-303 306 1521 1-800 800 7227 Fax 1-303 306 1572
Internet http//www.cisco-futures.com
Email dljones@cisco-futures.com
We start with some definitions and then a few guidelines.
Definitions
Data base: half-hourly, creating about ten 'mini-days' in each day.
Periods are labeled: A = 8 to 8:30 AM, B = 8:30 to 9,...
A 'profile' is the sum of one days' trading, with volume identified
at each price, constructed on half-hourly time frames.
An Overlay Demand Curve ™ is composed of a number of profiles,
becoming, in effect, a 'super profile'.
A 'bracket' is a trading range market, defined by a price range
and an Overlay ™ time period (5 days, 10 days,
etc.).
Price rotates throughout the range, over the time period.
An 'Octant' is one-eighth of a brackets' price range.
'Value' is the region of 'fair' prices, the area of most trading.
It is at least an octant (1/8 of bracket range) in extent.
A 'responsive' trade is one based on market offered opportunity,
i.e., when price has moved away from value.
A 'breakout' occurs when price exceeds the limit of its' bracket.
For demonstration purposes only, we provide the following rules:
1. To be considered, a market must be in a bracket.
2. A responsive long is triggered when price has entered the lower
octant and then turns up, crossing through the lower
octant.
Target price is the middle of the distribution.
Stop price is the near bracket limit.
If neither target nor stop is hit, then exit on close.
3. A responsive short is triggered when price has entered the upper
octant and then turns down, crossing through the upper
octant.
Target price is the middle of the distribution.
Stop price is the near bracket limit.
If neither target nor stop is hit, then exit on close.
4. Breakouts occur when price moves past the bracket limit.
Stop price is the near octant.
If stop is not hit, then exit on close.
Sample Overlay Demand Curve (tm); with Reference Points
TPO Volume
100:00 x
99:31 xx Trading above the upper limit
alerts to start of up-trend
99:30 xxx <== Upper bracket limit:
Breakout point.
99:29 xxxx
99:28 xxxxx <== Octant: One-eighth of
bracket range.
99:27 xxxxxx
99:26 xxxxxxx (<== Quadrant: One-quarter
of bracket range.)
99:25 xxxxxxxx
99:24 xxxxxxxxx
99:23 xxxxxxxxxx
99:22 xxxxxxxxxxx (<== Middle of
distribution.)
99:21 xxxxxxxxxx
99:20 xxxxxxxxx
99:19 xxxxxxxx
99:18 xxxxxxx (<== Quadrant: One-quarter
of bracket range.)
99:17 xxxxxx
99:16 xxxxx <== Octant: One-eighth of
bracket range.
99:15 xxxx
99:14 xxx <== Lower bracket limit:
Breakout point.
99:13 xx Trading below the lower limit
alerts to start of down-trend
99:12 x
A balanced condition is the
starting point for understanding the market generated data; i.e. for
providing the answer to 'who is doing what, where, and
when they are doing it', the reference points. Note that market
generated data incorporates any news that drives the market, so you have
the effect of the news without the uncertainty of trying to forecast, or
second guess reports.
Prior to the open, we prepare for the market by analyzing the
information accrued up through the close of the previous day:
Overlay (tm); for April 7: From the 5 day Overlay
in the VG,
the market is in bracket, value is known. In the
table below the 5 day Overlay, the 3 reference
points are:
Some bracketing markets develop internal trends. These may be recognized
by tracking the recent history of the closes. This is measured by the
Rotation Index, RI, which will be zero for a perfect internal trend
and 1.0 for perfect internal rotation. If RI is less than 0.6,
a trend is recognized. QD, quadrant of close, tells which price quadrant
the close was in, 1 for the upper and 4 for the lower.
The Internal Trend, on the lower r-h line of the VG, shows
IT = Up. An alert for breakout is on the upside.
Commercial support/resistance, from the r-h side of the VG,
vertical dashed lines with *’s for commercial activity, give for the
last 10 days:
There was commercial resistance at 9929, and commercial support
around 9913. Earlier commercial activity was for a market that had
reached a new, higher level (value) by 4/03. There may still be upward
pressure in this market.
Instructions: Using these reference points, answer the following:
1. Where would an upside breakout tomorrow begin? __________
1. Where would an upside breakout tomorrow begin?
9931 + 1 tick = 10000
What effect would the commercial activity have
on your answer?
2. If there was no upside breakout, where would you short?
9927 - 1 tick
3. Where is price when the probability of either up or down
is equal? 9915
4. Where would a downside breakout begin? 9831 - 1
tick
5. If there was no downside breakout, where would you go long?
9903 + 1 tick
Legend for the Graphic is in the Appendix
Responsive trading on April 8, 1992, using the reference points from April
7.
The market opened at 9925, below the octant short at 9927(and
the upside breakout point at 10000). No trade on open.
In $ period (7:30 to 8 AM) price moved to 9931, then falling back
through the octant in A period, it triggered a responsive
short at 9926 and a stop at 9931, with a target of 9915. The target
was almost hit in C period, where the low was 9916.
Then, in D period (9:30 to 10:00) price moved up to 10001, stopping
us out at 9931 for a loss of 5 ticks (-$157). Had we been trading breakouts,
this would have been an entry.
Commentary
We have picked the middle for our responsive target. The basis
of our reasoning is that at the middle of the distribution there is neither
an up bias nor a down bias in the market, so long as there
is balance. The mid point is rather arbitrary, since the same
reasoning applies to the neighborhood of the middle.
If we broaden our definition of ‘middle’ to the middle price
with an octant superposed (e.g., the middle octant), we have a mid-region
of 9915 +/- 2 ticks or 9917 to 9913. Applying that definition to the two
trades above: Trade 1 would have exited at 9917 with a profit
of 9 ticks and Trade 2 would have done the same. In this case, both trades
would have been winners and there would have been 18 ticks of profit ($562)
(less slip and commission).
The effect of loosening our definition is an increase in the number
of winning trades at the cost of somewhat less winnings per trade. If
such an idea tests positively over an extended time period, we will have
developed a new strategy based on market understanding, confirmed
by practice. This is the sort of thinking that comes from
market understanding, the sort you are encouraged to pick up
from New Market Analysis.
2). Go down to "CISCO Futures Data".
3). Click on "paid-for-or-trial-data".
4). Click on "get summary bracket screen for today".
5). Enter your username (e.g. 499mmm) and password (e.g. genie).
6). Go back to the page with your log-in information.
7). When finished, exit.
CISCO Futures
1-303 306 1521 1-800 800 7227 Fax 1-303 306 1572
Internet http//www.cisco-futures.com
Email
dljones@cisco-futures.com
1. Examine the Overlay Demand Curve for reference points
Bracket limits
Octants
Middle of Overlay.
2. Check the Rotation Index for Alert-to-breakout
3. Look for Commercial trader support/resistance points.
(Commercial traders identified on CBOT and CME
only.)
Limits 9931 & 9831; Octants 9927 &
9903; Mid 9917 - 9913.
Date Upper Limit
Lower Limit
03 25
9819
03 27 9908
03 31
9811
04 01 9918
9812
04 03
9912
04 01
9913
Bracket Limit:
Upper 9931 Lower 9831
Octants:
Upper 9927 Lower 9903
Alert to trend: UP
Comml Cap:
9929
Comml Base
9913
Locate the stop. ______
What effect would the commercial activity have
on your answer?
2. If there was no upside breakout, where would you short? ________
If you (responsive)shorted the market where is
your protective stop? _______
If you (responsive)shorted the market where is
your target? _______
3. Where is price when the probability of either up or down
is equal? _____
4. Where would a downside breakout begin? __________
Locate the stop. ______
What effect would the commercial activity have
on your answer?
5. If there was no downside breakout, where would you go long? ________
If you (responsive) bought the market where is
your protective stop? _______
If you (responsive) bought the market where is
your target? ______
Locate the stop. 9927, at the upper octant.
This stop gives a 5 tick risk ($157).
I would fear commercial capping, but I would
go long above 10001,
since that is one octant above the cap
(9929 + 4).
If you (responsive) shorted the market where
is your protective stop? 9931
If you (responsive) shorted the market where
is your target? 9915
Locate the stop. 9903, the lower Octant.
What effect would the commercial activity have
on your answer?
No problem with the commercial base at 9913,
our bracket breakout
is far below that. A secondary play might
be to consider a
downside breakout just below 9913,
if price dropped through.
If you (responsive) bought the market where is
your protective stop? 9831
If you (responsive) bought the market where is
your target? 9915
Price fell back through the Octant again in E period, setting off
another responsive short at 9926. Falling steadily, the target of 9915 was
hit in H period for an 11 point gain.
In sum, there were two responsive trades on the day, with a total gain
of 7 ticks ($218) (less commissions and slip).
The first line of the graphic gives the contract and the date of the data.
For example U206 05/19/98 is the June (06) T-bonds (day) (U2) contract
for the trading date May 19th 1998 (05/19/98).
The Visual Graphic is in two parts: UPPER graphics and LOWER tables.
The upper part of the VG consists of 6 graphics with a common price strip on the
extreme left.
From left to right, the 6 graphics are:
(U1) Last 20 day Rotation profile 'Rotprof'
symbols a thru t represent the prices traded during each day
a=20 days ago; k=10 days ago; p=5 days ago; t=current day
this is like a market profile with each period equal to one day
(U2) '20 day Overlay'
the histogram represents the # of TPOS's at each price
dashes enclose a distribution/bracket
RotProf symbols: a = 20 days back, t = latest day
a b c d e f g h i j k l m n o p q r s t
(U3) '10 day Overlay'
the histogram represents the # of TPOS's at each price
dashes enclose a distribution/bracket
RotProf symbols: k = 10 days back, t = latest day
k l m n o p q r s t
(U4) '5 day Overlay'
the histogram represents the # of TPOS's at each price
horizontal dashes pairs enclose a distribution/bracket
RotProf symbols: p = 5 days back, t = latest day
p q r s t
All three Overlay histograms have the same horizontal scale.
Note: (Balance defn: Single distribution, close inside dist.)
A balance starts in some day as a congestion. It grows day-by-day. We
only list 5, 10, 15 and 20 day Overlays on the TCP (5, 10 and 20 on
the VG). Clearly there can be a 6 day balance or a 19 day balance, etc.
A rule: If the latest 6 days are in balance, a 10 day Overlay will
report a balance, ignoring the old four days of the previous
distribution. 15 day Overlays must have at least the latest 11 days
in balance, 20 day Overlays must have at least the latest 16 days
in balance. 5 day Overlays must have 5 days in balance. However,
you can eyeball the 5 day display to find shorter balances.
Using RotProf, you can tell exactly how many days are in balance.
The basic balances come to Visual Graphic from the Bracket Screen.
The Bracket Screen Background report explains the data.
Under the flag
End of Day Data
End of Day Data
Regular Bracket Screen
(U5) Last 10 day Commercial Analysis 'cti2' for CBOT and CME only
high-low dashed vertical line bars cover the last 10 days
latest day is on right
* indicates commercial action at high and/or low
the single horizontal dashes on the vertical bars are the closes
(U6) 30 minute high-low bars for latest day '30m bars'
last period on right
(U7) Also, between the Rotation Profile and the 20 day Overlay:
Current day close 'cl'
Commercial action at current day high (if any) 'uc' for CBOT and CME only
Commercial action at current day low (if any) 'lc' for CBOT and CME only
(U8) Trading Units:
Markets are initiated by exchanges to serve a particular 'trade' or
area of commerce. Trading units selected are those in use by that trade.
While many units are decimal fractions, some are not, such as grains
which are traded in pennies and eighths per bushel. A price of 2406 for
corn means 240 and 6/8 cents for a bushel. Other exceptions are the
30 year bond in the Visual Graphic display, which trades in 32nds, 10
year notes and 5 year notes, in 64ths, and 2 year notes in 128ths.
Any questions can be resolved by visiting the exchange's Contract
Specifications.
Example: The 5 day Overlay limits are 12020 to 11930. Range in 32nds
is: 11930 - 11931 - 11200 - 11201 - 11202 ....... 112020 or 23 32nds.
Rounding off to 24 32nds, an octant is 3 32nds.
The LOWER (tabular) PART consists of 5 tables of data.
From left to right, these 5 tables are:
(L1) Below the Rotation Profile:
(L1.1 )'O' is the Open for latest and previous trading day*
(L1.2 )'H' is the High for latest and previous trading day*
(L1.3 )'L' is the Low for latest and previous trading day*
(L1.4 )'C' is the Close for latest and previous trading day*
(L1.5 )'Tf' is the Trade Facilitation Factor for latest and previous trading day*
Smaller TF implies better trade.
(L1.6 )'Vo' is the Price Tick Volatility for latest and previous trading day*
Very Low Volatility implies lack of interest
Very High Volatility implies overheating
(L1.7 )'Sf' is the Shape Factor for latest and previous trading day*
Smaller is better.
(L1.8 )'HL' for the two front months, gives the % of the current close from the 60 day low
also gives the days (in last 10 days) when new highs ('NH') or new lows ('NL')were established
* is a separator
e.g. 81* NH 3 4 means there was a new 60 day high established 3 (and 4 days) back
and close today is 81% of 60 day range (from 60 day low)
(L1.9 )'Tv' is the Total Contract Volume for latest and previous trading day*
(L1.10)'Cv' is the Commercial Contract Volume for latest and previous trading day*
(L1.11)'Pv' is the Public Contract Volume for latest and previous trading day*
(L1.12)'CUL' is the Commercial Action and Type for latest/previous trading day
First is the action at the current days high for each measure
Separating the high and low actions is a ':'
Second is the action at the current days low for each measure
Separating the current day from the previous day is a '/'
Third is the action at the previous days high for each measure
Separating the high and low actions is a ':'
Fourth is the action at the previous days low for each measure
Types: Q=quadrant measure, A=value-area measure, V=volume/price measure
For example: Q--:-A-/QAV:--- means:
Q-- commercial activity at latest days high with Q measure
: seperates activity at high from low
-A- commercial activity at latest days low with A measure
/ separates current from previous day
QAV commercial activity at previous days high with QAV measures
: seperates activity at high from low
--- NO commercial activity at previous day low
The Commercial, Public and Total Contract Volume and the Commercial Action
analysis is derived from the Liquidity Data Bank which is released
by the CBOT and CME exchanges only. It is same day cleared trading volume
and excludes spreads.
(L2) Below the 20 day Overlay is bracket/distribution info for this Overlay
(L3) " " 10 day
(L4) " " 5 day
If the Overlay IS bracketing:
'U ' is the upper limit
'UO' is the upper octant price; the number to the right is the $ gain for
a responsive short going from the octant to the center M
'UQ' is the upper quadrant price; the number to the right is the $ gain for
a responsive short going from the quadrant to the center M
'M ' is the bracket center
'LQ' is the lower quadrant price; the number to the right is the $ gain for
a responsive long going from the qudrant to the center M
'LO' is the lower octant price; the number to the right is the $ gain for
a responsive long going from the octant to the center M
'L ' is the lower limit
Below the U-UO-UQ-M-LQ-LO-L lines are the responsive trade gains (again) and
the $ risk of the responsive trades. The risk/reward ratio is 1 to 3
for the octant. The $ risk on the responsive trade is the same as the
$ risk for a breakout trade (octant is the stop).
Below is the $ gain and $ loss for the quadrant (The risk/reward ratio is 1 to 1.)
If the Overlay does NOT show bracketing:
The number of distributions is listed ('distr'; max 4 shown), with:
The Upper ('U') and Lower ('L') Prices for each distribution
(L5) Below the commercial analysis vertical dashed (if any) and 30 minute solid bars
(L5.1 )'VA U' is the Value Area high price for current and previous day*
(L5.2 )'VA C' is the Value Area center price for current and previous day (POC)*
(L5.3 )'VA L' is the Value Area low price for current and previous day*
(L5.4 )'VA R' is the Value Area range for current and previous day*
(L5.5 )'TPOT' is the # of TPO's total for current and previous day*
(L5.6 )'TPOA' is the # of TPO's above maximum TPO line for current/previous day*
(L5.7 )'TPOB' is the # of TPO's below maximum TPO line for current/previous day*
In a totally balanced market TPOA will equal TPOB
The TPO counts in a perfectly balanced market would be symmetrical, a perfect
bell shaped curve. There would be as many TPOs above the center as below.
If the market is just coming into balance the symmetry will not yet be there.
So long as the market stays in balance you would expect the TPO counts to
approach symmetry. If TPOA is greater than TPOB you would expect more trading
in the lower region to add TPOs.
For non-balanced markets, the TPO counts add little information.
(L5.8 )'Att Dir' is the attempted direction for current and previous day*
The possible values are: n for none, U for Up or D for Down. A rule of thumb for
Att Dir, after the close, measures F% (the close - POC distance) as a fraction of the day's
range. If F% is 20% or more above POC Att Dir = U, 20% below POC and Att Dir = D.
(L5.9 )'IB' is the high and low price of the Initial Balance for current day
The Initial Balance is the first two 30 minute trading periods
(L5.10)'IBR%C' is for the current trading day. It consists of:
'IBR' is the Initial Balance range
'%' is the Initial Balance range as a % of total range
'C' is Location of close relative to Initial Balance: ABV, BLO, INS
ABV when the close is above the Initial Balance
BLO when the close is below the Initial Balance
INS when the close is inside the Initial Balance
(L5.11)'RiQc' is todays Rotation Index/Quadrant of Close using last 4 and 8 days
For example: 0.67/1 .7/4 means Rotation Index for last 4 days is .67
Quadrant of Close for last 4 days is 1
Rotation Index for last 8 days is .7
Quadrant of Close for last 8 days is 4
(L5.12)'VADir' is the Value Area Direction for current day vs the previous day
The possible values are H, A, Z, L or n
'H '= higher
'A' = overlapping higher
'Z' = overlapping lower
'L' = lower
'n' = none (inside or outside)
Preferred direction is up if close above Overlay midpoint, down if below.
(L5.13)'ITDir' is the Internal Trend Direction based on RiQC for last 4 & 8 days.
The possible values are n for none, U for Up or D for Down
This is not in the text version of the TCP data- only on Visual Graphic
* The previous day data value is to the right of the '/'
Getting Visual Graphic Information from the Internet
or "get regular bracket screen for today".
Examine the screen for markets in balance (5 day, 10 day, etc.).
Note: The 5 day balance is required for a balanced market.
Select your list of trading candidates for this day.
Select your first commodity from the "Select One Commodity" box.
Click on "Send".
Click on the "Select delivery" box for the delivery month.
Click on "Send".
Jot down your trading parameters in your trading journal.
Print the graphic you have chosen. You may want to make notes on it.
Select your next commodity from the "Select One Commodity" box.
Click on "Send".
Click on the "Select delivery" box for the delivery month.
Click on "Send".
Jot down your trading parameters in your trading journal.
Print the graphic you have chosen.
Go through the 6). process for all futures you selected.