CISCO Futures
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Value in Trends from Meta and Market Profiles
Internet http//www.cisco-futures.com
Email dljones@cisco-futures.com
Donald L. Jones, CISCO Futures, November 13, 2004©
The rise of futures daytrading activity has been met with a variety of short
term methodologies from chart services. Among the more popular are
one-minute bars, stochastic oscillators, moving averages and candlesticks, to name
a few. The variety and capability of the charting services is truly
mind boggling. Yet, with all these technical aids, most traders find
success elusive. The problem, very likely, is that these formulations
and charts are designed with little attention paid to the market dynamics
involved. A formula can be calculated or a chart can be drawn that is
completely oblivious to how the market is functioning. For instance,
a twenty point moving average will have little relevance in a market
that is in a 30 point mode. The tools and times that are convenient for you
may not match up with the market's situation.
Traders have long known the market is complicated, with a host of fundamentals
interacting in various ways. Recent research by econophysicists shows
the market to be complex,
self regulating and driven by feedback [ref 1]. To you, the trader, the message
is clear: decipher the feedback to understand your market.
What is feedback? Feedback is market response. For instance,
heavy demand leads to increased market activity; feedback is apparent as
more ticks, more volume, increased volatility and higher prices. You already
know this, but how
can you interpret these data? There are many technical indicators,
but are any adequately coupled to the market? Generally no, because markets are
dynamic and changing. Decoding feedback requires a market attuned approach,
something flexible enough to keep up with changes in the feedback itself. An
important characteristic of feedback is that it takes time to develop a
signal.
A market acts, for example, price jumps. The information is received by all
traders at about the same time. You consider the new information and then
react to it in
your own way at your own pace. Other traders do the same. The sum of all
trader's actions creates the total feedback reaction to the initial market
jump. This takes
time, since each trader's response timeframe is different. Ultimately there is a
new feedback message to which you and all other traders may respond. This
feedback - reaction - feedback - reaction, etc., cycle
continues so long as the market trades. Average feedback response
time has been measured to be some tens of minutes [ref 2].
So what should you measure; ticks, volume, volatility or price? All four
have utility, but generally the short term variation of each is quite large.
Value is an indirect market measure that is defined as price over time or
volume over time. Value is the price (range) the market prefers.
To find value you must use a measurement methodology that is consistent
with the feedback response behavior. In short, you must "decode" the feedback.
Feedback decoders have been around for twenty years. The first was Market
Profile, developed by Pete Steidlmayer [ref 3]. Second is the Meta-Profile
created later [refs 4, 5]. Both use market input to find value.
Some quote vendors offer a product called 'Market Profile', to find
intra-day value which can be read as support and resistance. As with most
such products, quote vendors' Market Profile
generally comes with little explanation; it is just there to be used.
This article will help you understand how Market Profile and Meta-Profile
can find value and how you can evaluate your findings. However, this powerful
tool has it's own idiosyncrasies. This article will also clarify the use of
value in day trading and illustrate a major potential pitfall in its use.
Liquidity Data Bank
When value based market analysis was introduced by Pete
Steidlmayer, CBOT began offering a revolutionary new kind of data called
the Liquidity Data Bank, which included trading volume at price, a
breakdown of volume amongst the four classes of traders on the floor
and a pictorial of the time trades cleared at each price. See figure 1
for an example of an LDB report for Dec 04 wheat, Sep 9, 2004.
While the volumes traded by the four classes of members can be of interest for
market analysis, our primary focus here is on the two prices below
the table titled 70% VOLUME SUMMARY (also called "value area" or VA). VA is
seventy percent of the day's trading volume centered around the
peak volume (3684 contracts at a price of 3220 in figure 1). Value area
(prices 3224 to 3204) identifies and defines support and resistance for
that day.
Market Profile
A Market Profile is imbedded in the LDB report. It includes the
price, volume and BRACKETS(*) of the LDB as shown in figure 2. BRACKETS(*)
identify by letters the half-hour periods in which the prices were cleared:
323:4 cleared in E period (10:00 to
10:30). The price 323:0 cleared (traded) in periods D, E and F (9:30 to 10,
10 to 10:30 and 10:30 to 11). The letters for the half-hour time frames
(D, E, F,...) are called TPOs (Time-Price-Opportunity). Note that the profile
day is broken into half hour periods. A half-hour was Steidlmayer's
choice for the feedback response time, a time measured much later
to be from 25 to 30 minutes [ref 2].
The volume value
area (70% VOLUME SUMMARY) is also a part of the Market Profile.
A day trader tomorrow (Sep 10) has the
value prices of Sep 9 as a starting point. The VA of Sep 9 is not an
artifice of a formula, it is a measure of the actual behavior of the
individuals who form the market, their feedback. For tomorrow, a wheat trader
knows the near term support and resistance: that a price above 3224 represents
a move above previous value; a price below 3204 is below previous value.
Limitations of the Market Profile
While the CBOT LDB and Market Profiles broke new ground in market information,
both products fell short of satisfying the needs of day traders. First was the
lack of current information within the trading day. Initially, LDB reports
were released by the clearing house at the end of day, around 8 PM.
CBOT now provides periodic intra-day LDB reports from 9 AM to 11 PM. However,
the LDB report depends on completion of
the clearing process, so the reported data always lags the actual market,
sometimes by as much as an hour or more late in the day. A larger limitation
is that LDB data are only available on CBOT cleared markets.
There is no Market Profile for traders of crude oil, gold,
cotton and so on.
The CISCO Meta-Profile
Shortly after Market Profile came out, we at CISCO realized the desirability
of value based analyses for all markets, not just those on the CBOT.
Also, real-time analyses were desirable. We turned to the ticker, dividing
the day into half-hour timeframes with the resultant TPO-like markers for
trading at price and time. Tick TPOs (TPTs) (That-Price-Ticked) substituted
for the
LDB volume used in Market Profile. This work was reported in references 4 and 5.
CISCO research found that the tick TPOs were a valid functional
substitute for the
trading volume from the LDB. Figure 3 is a Meta-Profile for the same trading
day as figures 1 and 2
(Sep 9). The half-hour tick data for checking the Meta-Profile of figure 3
are in figure 4.
Market Profile and Meta-Profile can be compared for CBOT futures,
as we do with the day market (floor) wheat trading
on September 9. There are differences: the Meta-Profile of figure 3
is more regular and the cleared volume TPOs (figure 2) do not match the
tick TPTs exactly. Some of the mismatches can be due to differences between
cleared data and ticks, e.g., out-trades (errors) will be on the
tick profile but not on the cleared profile of figure 2. Other differences are
not so easy to understand: figure 2 shows trading at 322:4 in K period (13:00 to
13:30), but the tick bars of figure 4 show no trading above 322:0 in that
period. The same is true of K period trading shown at 319:6 and 319:4.
The value areas agree fairly closely, to within 1/2 cent.
It is a practice of the Meta-Profile to display continuity, each price between
the high and low for a period will list the TPT for that period. Such continuity
was also a feature of Market Profile until CBOT introduced a new data
collection program in January 2003 that posts TPO's only at
traded prices. This may be part of the reason for the
discontinuity of E period on figure 2 where prices 321:4 to 320:6 were skipped.
Day Trader Alert: Meta-Profile Differs from Market Profile
In a quiet, balancing market, profiles from volume and profiles from ticks
find essentially the same value. If value changes within the day
there can be a substantial difference between the two. The Meta-Profile value
comes from a collection of many inputs, the TPTs. Market Profile calculates
value starting from one point, the high volume price, the POCVOL.
Imagine a case in which the market trades
in a set price range most of the day and then value changes, with highest
volume in the less traded price area. The tick based Meta-Profile will
show one value while the volume based Market Profile finds another.
Such a case is illustrated in figure 5 (December 2004 wheat, Sep 17).
Trading was confined to the price range
341:4 to 336:4 from the open at 9:30 AM in period D through period I (12:00
to 12:30). The last hour of the day (periods J and K, 12:30 to 13:30) saw
price drop to
331:0. Peak volume (POCVOL) came at 332:4 while peak TPT count (POCTPT) was
earlier in the day at 339:0. The difference, 6.5 cents, is $325, quite a
lot in a market where the daily range is only $525.
A trader now has two widely differing sets of support and resistance for
this day. Which to use?
From figure 5, the latest (in time) volume value center (POCVOL) is in the
lower price range toward the end of the day. Value from volume
came latest in the day, superseding the earlier TPT value from ticks. Clearly
for this case the volume value is the correct choice.
Markets often display follow-through after an abrupt change in value late in
the day. A trader
would look for continuation to the downside early the next day (Sep 20) . Price
below the support of the 70% VOLUME SUMMARY, 331:0, would indicate continuation
down. From the tick bars in figure 6, you can see that price dropped through
331:0 in the 9:35 to 9:40 timeframe.
The drop continued down to 325:0 in the next five minute period. No one can
say just how a trader (you) would have acted, but it is certain that 1) knowing
which value to use, and 2) understanding a market's propensity to follow-through
would have offered you a nearly six cent ($300) opportunity within a
ten minute time period.
Differing value determinations by the two types of profile
are not rare, occurring more than twenty percent of the time. In the case
treated here, the volume value was the correct one. About half the
time it goes the other way and tick based profiles are the correct ones.
Those getting their values from the "Market Profiles" of quote providers
are most probably receiving Meta-Profiles based on tick data. They have no way
of comparing with volume based Market Profiles unless they subscribe
to the Liquidity Data Bank (available only on CBOT futures). In the absence
of a volume based value to compare with, their
best strategy is to carefully examine their Meta-Profile for a structure like
that of figure 5 (right side). Any late-in-the-day market surge is suspect.
If the trading
is strong and sustained, without a return to the fat part of the profile,
the calculated value support and resistance prices are more than suspect, they
are most likely invalid.
A Trading Example for Wheat on Sep 20
You enter the trading day, Monday Sep 20, knowing that value from the previous
Friday is 339:2 to 331:0. You also know that Friday saw quite a strong down
thrust late in the day. Your preferred direction is down. You would like for
the market to open somewhere above 331, your support, so you could short the
breakout as
price moved down through 331 (should it do so). Referring to the ticks in
figure 6, the
market traded at or above 331 for the first five minutes after the open. Then
price dropped below
331 and you entered short at, say, 330:6. Now your attitude is transformed
into being a congestion seeker; you are in a directional market and you want
to know as quickly as possible when the market goes into congestion. In fact
the market continued down to 325 in the next
ten minutes reaching a bottom (although you would not know it at the time).
You are looking for signs of congestion signalling an end to the trend.
For the next twenty minutes price
ranges between 328 and 326:6. Sometime within that period you should
recognize the congestion build up. So you pick a spot and get out. Just
which spot is determined by you. The market feedback delay gave you plenty
of time to make your decision.
Had you structured your strategy on the wrong value, the one from the
Meta-Profile, you would have found no entry on Sep 20 (low limit is 336:2).
In this example using the wrong value would cause you to miss the trade. Little
harm done there, but a bad value could have as easily gotten you in at a
wrong price. The error would be compounded if you traded several times in
the day.
Market Profile - Meta-Profile differences are most pronounced in strongly
moving markets where mismatches are found up to fifty percent
of the time. The trending markets are just the ones you want to participate in
since those are where the opportunity lies. Having access to only one value
measure, be it
Market Profile or Meta-Profile, is an obvious handicap. It would be best to
have both, but that is not possible for most markets. (As reporting improves
on the computer traded markets, volumes will become more available, increasing
the markets for which Market Profile can be calculated.)
If you do not have access to both profiles, you must
be able to read the profile you do have, not just the value numbers, to avoid
trading the wrong support and resistance.
Sources of Profile Value Data
CBOT Market Data Section: LDB Market Profile and LDB data (CBOT futures only).
Quote Vendors: Meta-Profile, mostly.
Trading Services: Meta-Profile.
CISCO Futures: Meta-Profile, Market Profile and LDB Market data.
If the marketing people at the source of your profiles are not clear whether
they are offering Market Profile or Meta-Profile, check if they have profiles
for, say, crude oil. If the answer is affirmative, then their product is
Meta-Profiles. If their firm also offers CBOT Liquidity Data Bank data (figure
1), that can provide the (volume) Market Profile and it's value area and
you can have both.
References
1. Why Stock Markets Crash, D. Sornette, Princeton Univ. Press, 2003
2. Volatility and Stops for the Daytrader, D.L. Jones, http://www.cisco-futures.com
3. CBOT Market Profile Manual, 1985, 1991
4. Determining the TPO Value Area, D.L. Jones, Market Logic School,
AI Ltr. V1-#3, Apr 13, 1987
5. Estimating the Market Profile Value Area for Intraday Trading, D.L. Jones
S&C Sep. 1987
CBOT VOLUME REPORT (LDB)
TRADING DATE: 09 09 04
CONTRACT: DEC 04 WHEAT (CBOT) DAY
TRADING BEGINS 0930 (CST);CLOSES 1315;TPO SYMBOLS ARE DEFGHIJK
FIRST PERIOD IS 30 MINS;SUBSEQUENT PERIODS ARE ALL 30 MINS
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
3234 208 0.9 50.0 0.0 0.0 50.0 E
3232 48 0.2 50.0 0.0 0.0 50.0 E
3230 902 3.9 51.9 0.0 5.4 42.7 DEF
3226 1330 5.7 49.4 0.3 9.5 40.8 DEF
3224 2480 10.6 47.5 0.0 4.9 47.6 DEFGIK
3222 638 2.7 54.4 1.6 5.2 38.9 DEFI
3220 3684 15.7 44.2 0.6 5.6 49.5 DEFIJK
3216 1748 7.5 56.7 0.0 2.5 40.8 DEFGHIJK
3214 2490 10.6 45.6 0.6 5.3 48.6 DFGHIJK
3212 820 3.5 50.7 0.0 8.5 40.7 DFGHIJK
3210 1746 7.5 48.3 1.1 5.0 45.6 DFGHIJK
3206 1052 4.5 34.5 0.0 3.3 62.2 DFGHIJK
3204 2524 10.8 41.8 1.2 4.5 52.5 DEFGHJK
3202 1330 5.7 48.6 0.2 5.0 46.2 DEFGHJK
3200 1324 5.7 47.4 0.0 5.4 47.2 DGHJK
3196 398 1.7 51.0 0.3 4.5 44.2 GHJK
3194 394 1.7 54.8 0.0 4.1 41.1 DGHJK
3192 278 1.2 50.4 3.6 10.4 35.6 FGH
3190 10 0.0 70.0 0.0 0.0 30.0 G
70% VOLUME SUMMARY
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS
3224 17182 73.4 46.3 0.6 4.9 48.2 DEFGHIJK
3204
*The MARKET PROFILE is a registered trademark of the Board of Trade of
the City of Chicago 1984. ALL RIGHTS RESERVED.
Figure 1. The Liquidity Data report (LDB) for Wheat, December 2004 delivery
for trading on September 9, 2004. Column headings: Price, Volume at that
price in 1/2 turns, %VOL is the percentage the volume at that price is of
the day's total, %CTI1 - %CTI4 is the percentage of that prices' volume
by trader type, BRACKETS(*) identify the half - hour periods in which that
price traded. The 70% VOLUME SUMMARY, posts the volumes, percentages and
trading periods for the prices included in the value area range.
Market Profile from CBOT LDB data
PRICE VOLUME BRACKETS(*)
3234 208 E
3232 48 E
3230 902 DEF
3226 1330 DEF
3224 2480 DEFGIK
3222 638 DEFI
3220 3684 DEFIJK High Volume Price (Point of Control)
3216 1748 DEFGHIJK
3214 2490 DFGHIJK
3212 820 DFGHIJK
3210 1746 DFGHIJK
3206 1052 DFGHIJK
3204 2524 DEFGHJK
3202 1330 DEFGHJK
3200 1324 DGHJK
3196 398 GHJK
3194 394 DGHJK
3192 278 FGH
3190 10 G
70% VOLUME SUMMARY
PRICE
3224
3204
*The MARKET PROFILE is a registered trademark of the Board of Trade of
the City of Chicago 1984. ALL RIGHTS RESERVED.
Figure 2. Market Profile and volume value area with the LDB - Volume method
for Wheat, December 2004 delivery, trading on September 9, 2004. Column
headings are the same as in figure 1, with the CTI's omitted.
BRACKET letters are posted at prices only where a trade is reported and cleared.
Tick - TPO META-PROFILE REPORT FOR 09 09 04
WHEAT (CBOT) DAY DEC 04
Price TPT
3234 E
3232 E
3230 DE
3226 DEF
3224 DEFI
3222 DEFI
3220 DEFIJK
3216 DFHIJK
3214 DFHIJK
3212 DFHIJK Center of TPTs (Point of Control)
3210 DFGHJK
3206 DFGHJK
3204 DGHJK
3202 DGHJK
3200 DGHJK
3196 GHJ
3194 GHJ
3192 G
3190 G
TPT Analysis
VALUE AREA FROM TPTs
UPPER 3220
LOWER 3200
Figure 3. Meta-Profile and TPT value area with the Tick - TPO method
for Wheat, December 2004 delivery, trading on September 9, 2004. Column
headings: Price, TPT are the half - hour periods in which ticks are
reported. TPT Analysis lists the value area for the Meta-Profile. The
TPT letters are continuous between the highest and lowest prices traded.
PERIOD FIRST HI LO LAST TIK PD
9:30: 0 3210 3230 3200 3220 114 D
10: 0: 0 3222 3234 3220 3224 64 E
10:30: 0 3226 3226 3206 3206 40 F
11: 0: 0 3210 3210 3190 3192 63 G
11:30: 0 3194 3216 3194 3214 31 H
12: 0: 0 3220 3224 3212 3214 29 I
12:30: 0 3216 3220 3194 3202 43 J
13: 0: 0 3210 3220 3200 3202 51 K
Figure 4. Tick data half hour bars for Wheat, December 2004 delivery,
trading on September 9, 2004. TIK is the number of recorded ticks,
PD is the TPO/TPT period. Column headings: PERIOD is the half - hour
timeframe's first time, FIRST is the first tick recorded in a given
timeframe, similarly for HI, LO and LAST. TIK is the number of ticks
in the timeframe and PD is the letter designator for the period.
LDB Tick - TPO
Market Profile Meta-Profile
PRICE VOLUME BRACKETS(*) Price TPT
3414 390 D 3414 D
3410 2164 DE 3410 D
3404 1480 DEGH 3404 DGH
3400 1452 DEFGHI 3400 DFGH
3394 1346 DEFGH 3394 DEFGH
3390 2260 DEFGHIJ 3390 DEFGHI POCTPT
3384 1166 DEFHIJK 3384 DEFI
3380 1940 DEIJ 3380 DEI
3374 410 DEIJ 3374 DEIJ
3370 158 IJ 3370 IJ
3364 424 DIJ 3364 IJ
3360 416 DJ 3360 J
3354 262 J 3354 J
3350 508 IJK 3350 J
3344 784 JK 3344 J
3340 968 JK 3340 JK
3334 882 JK 3334 JK
3330 2476 JK 3330 JK
3324 2532 JK POCVOL 3324 JK
3320 1832 JK 3320 K
3314 2388 JK 3314 K
3310 584 JK 3310 K
70% VOLUME SUMMARY Value Area from TPTs
3392 3410
3310 3362
Figure 5. LDB Market Profile (left) and Tick-TPO Meta-Profile (right) for
wheat, Dec 04 delivery, on Sep 17, 2004. Differing values for the two types
of analysis are an alert to value change during the day. Column headings are
the same as for figures 2 and 3.
FIRST HI LO LAST TIK PD
9:30: 0 3314 3330 3310 3314 37 D
9:34:59 3316 3320 3290 3290 47 D
9:40: 0 3286 3294 3280 3280 49 D
9:45: 0 3282 3284 3250 3270 32 D
9:49:59 3274 3274 3264 3272 20 D
9:55: 0 3274 3280 3266 3270 18 D
10: 0: 0 3264 3266 3260 3262 11 E
10: 4:59 3264 3274 3262 3274 26 E
10:10: 0 3272 3276 3270 3272 13 E
10:15: 0 3274 3280 3272 3274 13 E
10:19:59 3272 3276 3270 3270 16 E
10:25: 0 3272 3276 3270 3276 11 E
10:30: 0 3274 3280 3274 3274 10 F
Figure 6. Tick data five minute bars for Wheat, December 2004 delivery,
trading on September 20, 2004. TIK is the number of recorded ticks,
Column headings are the same as for figure 4.