1-303-306-1521 1-800 800 7227 Fax 1-303-306-1598
Value Trading: Overview and Qualifications for Short Course
June 30, 2006
The goal of this article is to give you a guide to value based trading,
including the prerequisites for understanding the CISCO courses.
By value, we simply mean the price range that the bulk of buyers
(traders) will accept within a given timeframe (day, week, etc.). Value is
a price range, not a fixed number. Also, value is time dependent. Yesterdays'
value may not be the same as the average value for the week.
Value trading is the development of trading strategies based on value and
value change in both short and longer timeframes.
Many people think of the value analysis field as Market Profile, but
Market Profile is just the tip of the iceberg.
Who is Qualified, Who is Prepared to Learn Value Methodology
Before we get into describing value methodology, you need some idea of whether our courses are for you. To take this significant step into market analysis, you should already know something about trading; what futures are, how they work and the risks as well as the benefits. You are expected to have a general understanding of the Market Profile concept--the idea that a day's trading volume traces out a rough bell shaped curve on the price axis (see 'A Picture of Value' below, where the price column is matched up with the TPOs column. Those TPOs show frequency of trading (volume) at each price. And as noted, this leads to (day) value. Our courses focus on value (day and longer). Since longer term value defines the congestive market condition, and longer term value comes from a collection of day values; it is important for the trainee to start with some familiarity with the basics of profiles. (You can find what you need in the first four chapters of Mind Over Markets by Dalton, Jones and Dalton.)
Ideally, you will have dealt with the markets and gained enough experience so that, unlike the ads, you know making money trading is not easy. You are not expected to know that most of the books, seminars, charts and trading models you meet up with do not work. You are expected to have enough sense to realize that if 95% of new traders lose, and all the books, seminars, charts, etc., did not work for them, then the same tools most likely will not work for you either. If you still have faith in the wild claims of the industry (i.e. gain without effort, someone will sell me a model that works,...), you are not ready for value training. In that case, you should go to the link for beginners on our main page under the CISCO logo.
If you are still with us, we want to take you on a short detour before getting down to the business of locating value. We want to talk to you about psychology, namely yours. Trading involves taking risks. You can lose on over half your trades and still be quite successful. But you have to be able to take a loss. If you were in a poker game with six other players your wins would come (on average) once every seven hands. That is just an average. In a real poker game you may lose 20 hands in a row. The same is true for trading; on a fifty/fifty average (win half the time), out of 1000 trades you can expect somewhere a run of 10 losers in a row (also there will be 10 winners in a row, but this is no problem). You must know how you face up to adversity.
Some people cannot handle losing at all. They are not trader material. Others' risk orientation makes them play for the low risk very short term (seconds or minutes). Yet others are willing to take a larger risk over a longer time. You need to know yourself. That requires some introspection and probably takes some time in the market as well. You may have to feel your way. An article on our site at the Whats New link on our main page, looks at the Psychology of Stress in Trading. Another article on creating a trading model goes into some detail on the fitness question.
Trading Model Development
Philosophy of Trading
You may feel that trading philosophy belongs in the classroom, not in the actual give and take of the market. Don't you believe it. The implicit philosophy that leads to standard technical analysis "all I need is in price (and sometimes volume)" and "data is there so I can find trading signals in graphs and simple calculations" has cost millions (yes millions!) of traders their capital.
Professional fields rely on a knowledge base of fundamentals. A physician who does not know anatomy is not the guy you want looking at your sciatica, or setting your broken arm. There was little progress in the medical profession until the rise of medical science. The old philosophy of medicine was bleed, put on poltices, do witch dances, etc. Medical science and research now provides a base of fundamentals. The current practice of medicine is examine, test, diagnose and treat (i.e. follow the scientific method).
Today's trading is like the practice of medicine before medical science. Current trading relies on a combination of ideas, beliefs, hearsay, computers, charts, charlatanism and self dealing that has little to do with actual market understanding. Trading decisions do not follow the scientific method. The trading philosophy of traders cannot be based on science because traders do not have the basic market facts and the appropriate methodology to apply them.
A newly evolving Auction Market Value Theory, described in the two links in the last paragraph of this note, offers traders that fundamental information (value) and the technology necessary to find it. This brings market analysis into the arena of science. Now traders can understand basic market facts. The door is opened to a trading philosophy of: examine, test, diagnose and create strategy (i.e. follow the scientific method). The basic variable, the fundamental information, is value rather than price; although price behavior over time is the source of measured value.
A Picture of Value
Meta-Profile REPORT FOR 01 26 06 with SEGMENTED AUCTION Mini S&P 500 (CME-IOM)MAR 06 Price TPOs Segmented Auction (Half-hour Bars) 128075 G G 128050 G G 128000 GM G M 127950 FGMN F G M N 127900 FGLMN F G L M N 127875 FGHLMN F G H L M N | VAU 127850 FGHLMNP F G H L M N |P 127800 FHLMNP F H L |M |N |P 127750 FHLMNP F |H | |L |M |N |P 127700 BCFHIKLNP B C F | |H |I | |K |L | |N |P 127650 BCFHIKLN |B |C | |F | |H |I | |K |L | |N | 127600 BCEFHIJKL |B |C | |E |F | >H >I >J >K >L > > > POC 127550 BCDEFIJKL >B |C |D |E >F > | |I |J |K |L | | | 127500 BCDEFJKL |B |C |D |E |F | | | |J |K |L | | | 127450 BCDEJK |B >C |D |E | | | | |J |K | | | | VAU 127400 BCDEJ B |C >D >E | | | | |J | | | | 127350 CDE C |D |E | | | | | | 127300 CD C D | | 127250 CD C D 127200 D D 127150 D DA profile day is broken into half-hour periods. B is 8:30 to 9, C is 9 to 9:30 and so on. The half-hour trading ranges are shown on the right, the Segmented Auction--a vertical alphabetic line for each half hour.
Introduction Market Condition, the overall picture Overlay Demand Curve is source of condition Trending ==> long time-frame traders Balance ==> short time-frame traders Trader Control Package provides data A. Elements of Auction Markets and Exchange Member's Roles Market Cycle Four exchange member types Two market timeframes Two trader timeframes B. Market Generated Data: Price and Time Market Profile (tm) Liquidity Data Bank (tm) Overlay Demand Curves (tm) Trader Control Package Non-Market Generated Data Ticks Open, High, Low, Close, Volume, Open Interest C. The Bell Shaped Distribution and How it Affects Your Trading Standard for comparison Expected and unexpected events Defines center of value and value area D. Swing Trading Reference Points; the Primary Six Six basic reference points of 'Value Based Power Trading' Bracket: Limits, Octant, Middle, Commercial, Internal Trend Trend: Run-pause characteristic of trends E. The Run-Pause Trend Reference Point Illustrated. T-bonds April 1 - April 7, 1998 F. Additional Reference Points, Free TCP Tables (Day) Market Review reference points Reference Point Daily Range Uses High - Low Close Relative to previous day POC Maximum TPO count price (center of day value) Value Area Day value Total TPO's An estimate of trading intensity TPO's Above POC Day demand above POC TPO's Below POC Day demand below POC Trade Facilitation A measure of congestion Shape Factor An estimate of the symmetry of the bell curve Volatility CV Short term volatility Total Volume Cleared, total LDB volume Commercial Volume Cleared, commercial LDB volume Public Volume Cleared, public LDB volume Initial Balance High/Low prices of first two TPO pds of the day I-B Range Range of first two TPO periods of the day Clo/IB Close relative to IB (ABV, INS, BLO) Pct/Tot IB percentage of the total days trading range Value Area Range Range of the value area Attempted Direction Direction the market is trying to go (U, Null, D) Value Area Dir. Value area position relative to yesterday H = Higher, A = Overlapping to Higher, Bl = Inside L = Lower, Z = Overlapping to Lower Tables on homepage Summary Bracket Screen Dollar range of brackets. No limits inc. Summary, Last 10 days Brackets, last 10 days Bracket Range Averages Average width, last 250 days Leading Deliveries Estimated date of delivery Total Exch. Volume Avg. Exchange (newspaper) volume (inc. spreads) Total Volume Averages LDB cleared total volume (no spreads) Floor Mem. Volume LDB cleared floor mem. volume (no spreads) Commercial Mem. Volume LDB cleared commercial mem. volume (no spreads) Public & Other Volume LDB cleared public & other volume (no spreads) Trade Facilitation Fac. TF Factor averages (congestion) Daily Range Averages Daily Trading Range Daily Range Dollar Avg. Daily Trading Range averages in dollars Volatility Rng. Averages Day volatility averages in range factor Volatility Averages in $ Day volatility in dollars in range factor Initial Balance Ranges Day Initial Balance range averages Value Area Averages Day Value Area in dollars G. Developing a Basic Swing Trading Strategy Basic Breakout Strategy Low Risk Day Trades Breakout Responsive Longer Timeframe Swing Trading H. Trading the Basic Strategy Basic Strategy T-bonds, May 7, May 8, 1992 I. Expected/Unexpected Events, Projections, Predictions Overlay Soybeans, June 4, 1998 TCP ==> evaluation ==> set trade parameters ==> stop on entry ==> continuation J. Practice Trading, Four Months (Jan - Apr 1996) Basic Model Questions for notebook Swing trades tabulated Questions/answers/errors Commercial control of trading Trades tabulated Review of six basic reference points K. Trading as a Business Method, discipline, rules, leverage, cost control L. Questions Open book exam, 30 questions Appendix: Legend for Visual GraphicMonth 3. The Minor Auction
Introduction Market Condition, the overall picture Overlay Demand Curve is source of condition A. Elements of Markets and Exchange Member's Roles Market Cycle Four exchange member types Two market timeframes Two trader timeframes B. Market Generated Data: Price and Time Market Profile (tm) Liquidity Data Bank (tm) Overlay Demand Curves (tm) Trader Control Package Non-Market Generated Data Ticks Open, High, Low, Close, Volume, Open Interest C. The Bell Shaped Distribution and How it Affects Your Trading Standard for comparison Expected and unexpected events Defines center of value and value area D. Attempted Direction Yesterday AD formula Current (partial day) AD E. Market Profile from Period to Period Five days through June 4, 1998 for soybeans F. Market Profile List of Market Profile reference points Half-Hour tick bars June 4, 1998 Point of control (POC) POC direction (H, E, L) Initial Balance Initial Balance range, Close location, Pct of total Initial Balance, Percent of total day range Initial Balance location of close (A, I, B) Gaps VA, range, direction Shape factor (less is better) " " " TPO's total TPO's above POC (less is bullish) (Mkt Prof Theory) TPO's below POC (less is bearish) " " " Half-Hour Tick Bars and Volatility Running Profile (Split day) June 5, 1998 G. Additional Reference Points Excess Long Term Bar Chart Soybeans Feb 26, - Jun 4, 1998 Long Term Overlay Demand Curve Mar 9 - Jun 4, 1998 Long Term Overlay Demand Curve Msy 22 - Jun 30, 1998 H. Trade Facilitation Factor TFF = # TPO's per price level I. Intra-Day Congestion: Short Covering, Long Liquidation CISCO Congestion Report J. Overlay Demand Curve with Market Profile Overlay Demand Curve T-bond May 19, 1998 Combined Overlay and Market Profile T-bond May 20, 1998 K. Value area location in Overlay (higher or lower) Overlay with VA T-bond May 19, 1998 Market Profile T-bond May 20, 1998 L. Volume Reference Points Volume interpreted within market condition M. Practice Trading Congestion ==> high TFF ==> narrow range ==> narrow VA ==> low committment Minor Auction trading, soybeans Overlay Jun 8, 1998 Period by Period trading N. Trading as a Business Method, discipline, rules, leverage, cost control O. QuestionsMonth 4. Reference Points Developed and Reviewed
Introduction Part 1. Trade Selection On-Line Equity Trading Trade Selection Advice Engine Specifics for Analysis Market Profile Market Dynamics Overlay Demand Curve The One Market Trader Advice Engine Report, Part 1 Advice Engine Report, Part 2 Data Bases for Research Entry Point, Price for Entry Risk on Entry, Research Drawdown Search Potential for Profit, History Timeframe Long Term Market Behavior Recent Market Behavior Value Diagram Part 2. Trade Management A. Bracket Screen B. Overlay Reference Points Bracket Limits Bracket Octants Bracket Middle Location of Close Overlay Consistence (5 + 10) Shape Time Pattern of Trade Gaps Nodes C. Commercial Activity Commercials Re-balance (buffer) the Market Commercials Go-with Trending Markets Measuring Commercial Activity Three Quantitative Measures of Commercial Activity D. Rotation Index/Quadrant of Close E. Visual Check of Overlay Demand Curve F. Volume Reference Point G. Volatility as a Reference Point H. Trade Facilitation Factor I. Value Area & Direction J. Attempted Direction K. Point of Control L. Range M. Quadrant of Close N. Visual Graphic O. Market Review in TCP Text File P. Congestion Q. Excess R. Consolidation/Continuation S. Expected vs Unexpected Behavior T. Sources of Other Reference Points U. Acceptable/Reasonable Risk Outline of Advice Engine Lesson 1 Text: Value Based Power Trading, Jones, Probus Press 1993 (Traders Press) 1. Market Profile a. Example The Market Profile Structure Normal Distribution (Bell Shape) 5 days of Profiles b. Text, Chapter 1, Futures Data 2. Overlay Demand Curve The Overlay Demand Curve 5 days of Profiles Structure Multiple days (5,10, 15, 20) Market Patterns (balance, run, pause, congestion) a. Text, Chapter 4 3. Trade Selection a. Text, Chapter 5 Day Trading Trading Rules, p 123 Position Trade, p 134-144 Trading Rules, p 139 b. Advice Engine Figure 3.1 Selections for November 17, 2000 4. Trade Management a. Text, Chapter 6 Day Trading, p 145-146 Position Trading, p 147-173 Trading Rules, p 148 Responsive/Breakout Trading, p 173-181 Trading Rules, p 173, The Basic Model Outline of Advice Engine Lesson 2 Text: Value Based Power Trading, Jones, Probus Press 1993 (Traders Press) Reference points covered, in order: Overlay condition Overlay Limits U and L Octants UO and LO Middle M *Internal Trend Ri and Qc *Commercial * *Nodes *Location of Close cl Market Profile *Volatility Vo *Initial Balance IB R range 7 on the VG % % of day range 70 C loc of close INS (inside the IB) *Value Area VA U upper limit VA C center VA L lower R range *Trade Facilitation Factor Tf Reference points preceded by the * are the subject of this lesson. Note that volume is not included as a reference point. Volume is potentially an important reference point, but getting the correct volume is difficult. Exchange Official volume, the sort found in the newspaper, includes spreads. Since spreads vary widely day to day and may be a substantial part of the total, a large unknown variance is created. In most research cases we find that TPO volume (counts) work well as a volume surrogate. Liquidity Data Bank data on the CBOT carrys the actual cleared volume without spreads. This data is used in the TCP's Commercial Capping measurement, but since it is not so generally available, we eschew forming a reference point with it.
Fees and details are in the Product Catalog.
Major Auction: New Trades, Starting Out: Selection Validation Confirmation Strategy Swing Trading Basic Model: Elements of the Model Example Potential Improvements Track Record Old Trades: Resetting stops Reference Points for trade continuanceFees and details are in the Product Catalog.
Auction Market Analysis: Elements of Auction Markets Bell Shaped Curves Reference Points The Minor Auction: Short Term Analyses Continuation Reference Points ExpectedBehavior Trade Management: Commercial Reference Point Market Cycle Hourly LDBs Fluctuation and Volatility: Long and Short term Volatility, Volatility as a Reference Point Responsive Day Trading: Overlay Demand Curve, Commercial Control, Model and Rules, Example
Reference Points: Overlay Demand Curve (3) Internal Trends Commercials Pauses in Trends (nodes)
Quarter 2, Month 4, 5,6: Review of Ref Pts, Volume, Trade Facilitation, Quadrant of Close
Cost Control: Discipline Rules Leverage Scale-up Scale-Down Cost Control Slip Workbook: Examples and Tests Trading: Data Market Profiles LDBs, Hourly LDBs Overlays Selection Management Menus Four Phases of Markets: Balance Testing the Balance Trending Testing the Trend Testing: Transitions, Continuation Analyses, Liquidity Data Bank and LDBRES Processor Reference Points: Volume Volatility Trade Facilitation Factor Quadrant of Close
Quarter 3, Months 7, 8, 9: Major to Minor Auction, Commercials, Review of Reference Pts
Reference Points: Value Area (2) Point of Control (POC) Shape Factor Trading Range (2) Initial Balance (2)
Interaction of Major & Minor Auctions: Major/Minor Auction Timeframes Short Timeframe Traders Commercials: Function/Role Capping Going With Work-out-time Risk Limitation Three Measures Review of Reference Points: The Basic Six Volume Volatility Value Area Others
Quarter 4, Months 10, 11, 12: Technical Analysis, Exiting, Review
Reference Points: New Highs/Lows Total TPOs TPOs Above/Below POC Top4/Bot4, Congestion
Technical Analysis: Role in NMA Cycles Oscillators Moving Averages Pivot Points Trade Exit: Basic Exit Model Exiting (Why) Examples
Review: Major/Minor Auctions Testing Day and Swing Trading Exits Money Final Exam
CISCO 1 303-306-1521
PO Box 441396, Aurora, CO 80044
1 800 800 7227