CISCO Futures
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Contents
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Every trader has, at one time or another, benefitted from a surprisingly
fast, good trade. We immediately begin asking ourselves "should I take what
I have and run, or should I hold in hope of additional appreciation?". Our
next thought usually is: "I wish I knew what the market is telling me".
Market Profile Defined
A Market Profile is a graph of one day's trading with price on the vertical
and volume on the horizontal. It is a price-volume distribution chart.
J.P. Steidlmayer defined the Market Profile in 1986 (Markets and Market
Logic by Steidlmayer and Koy). Market Profiles convert one-dimensional
price data into two-dimensional value data (see figure SC 2 of paragraph B).
The advantage
of the Market Profile over other intra-day data displays is that you can watch
value build as the trading day proceeds, knowing that the 'fat' part of the
price-volume display is where your fellow traders, i.e the market, locates fair
prices. Market Profiles build 'day timeframe' information.
Overlay Demand Curve Defined
A year or so after Steidlmayer's book, this author developed a longer term
profile by linearly combining several days of Market Profiles. The new
display, an Overlay Demand Curve, tends to integrate out the noise inherent in
each day's Market Profile. The resulting multi-day price-volume distribution
now shows 'market condition' (see figure SC 7 in the section "Development of an
Overlay"). That is, you can tell from the
Overlay whether the market is in balance (single distribution), breaking out
of balance, trending or moving back into balance (congesting). Overlays with
different time frames (5 days, 10 days, 20 days, etc.) give a panorama of
recent market value development. Combining knowledge from the profiles and
Overlays provides a detailed view of market behavior on both day and longer
timeframes. You can see where the market has been, where it is and
where it is recognizing value. This is the information needed for quantative
trading decisions.
Auction Market Theory
Auction markets have a number of identifiers (ticks, highs, lows, time of
events, etc). Theory compresses the data into a small number of theoretical
assumptions, converts price to value and sets rules for analyzing the market.
With the theory comes a more generalized and simpler view of markets. Most
any type of auction market behavior can be analyzed. Even if the theoretical
model does not fit the data exactly, it is still useful to describe the
situation. Trading strategy flows directly from market analysis.
Auction Market Knowledge:
Markets report activity in terms of price and volume. You trade in price
units. But demand is driven by value. Clearly, it is necessary to convert
trading units from price to value if the analysis is to proceed. Price to
value conversion is made via Market Profiles and Overlays. While value is
the dominant variable, trading involves a number of other factors noted in
the Identifiers and Observables table above. These factors can play a
critical role in trading success.
Auction Market Knowledge: The Longer Timeframe
Let's start by reviewing two important facts: markets are not correlated
on a day-to-day basis and markets are in a continual cycle. The lack of
correlation precludes finding market condition from yesterday's market.
But we need to know the condition for all directional trading decisions.
Enter the Overlay Demand Curve.
Development of an Overlay:
First, look at five sequential days of Market Profiles in figure SC 6.
The display appears for all the world like three days down (3/16, 3/19 and
3/20) and then three days up (3/20, 3/21 and 3/22).
Market Condition from Overlays:
As traders, we speak colloquially of market condition. Is the market trending?
Is the market unusually volatile? Has it crossed a resistance or support
price? And, of course, what path do we expect the market to take?
These descriptors are pretty qualitative. Trending implies a time frame.
A market may be trending in the twenty day period but quite balanced in
the last five days. Bar chart support/resistance points are historical and
rarely tied to current market activity--ultimately current activity may provide
the next set of support/resistance points, but that rarely helps our
decisions of today. Predicting a market's future course would at least
imply a knowledge of the current market condition. However, technical
analysis and/or chart reading really says very little about the current
market situation. The writer has caught sharp moves that grow open
trade equity very fast, as noted in the opening paragraph. A pause comes. The
technical indicators are strong, but that is to be expected and helps little.
The dilemma is: run with our profits or stay in the hopes of more? Truly,
a weak trader is easily recognized by leaving a good move too soon. That
is not the case: here it is a question of will the good move get better?
If one can determine market condition, the problem is resolvable.
Calculating Risk
Auction Market Theory Reviewed
Why Auction Market Theory? The short answer is that it gives us
auction market analysis for devising trading strategy. The theory isolates
the individual pieces of a market and integrates them into a whole.
We know the effects of
exchange hours, how auctions behave in seeking both too high and too low
prices to locate value, and the fact that normal trading builds bell
shaped distributions. We know how to find value and market condition.
In a run, we know the importance of congestion in recognizing trend end.
And we can use market cycling to prepare for the next breakout or trend
end. Lastly, we have a feel for members intentions. In short, taking
the facts about auction markets and applying them to any particular market
situation guides us in developing our strategy from that point on.
Application
Auction Market Strategy for March 23, 2001: Market Condition from Overlays:
Short Covering Rally
A common phenomena in markets is the 'short covering rally'. Conceptually,
imagine that many of the local members on the floor end the day short,
rather than the more usual flat. After a sleepless night, they come to work
eager to exit. As professionals, they know better than to exit all at once.
Each one is looking for an exit that hurts the least. Some trade immediately
and some wait. The net is that the market sees demand
over the period in which the members are buying in their shorts. This period
is typically an hour or two. During the time the members are net
buying, public interest is aroused. The public carries the price on up until
they realize demand has evaporated. But this takes time. The market
is not efficient. The TPO shape of a short covering rally is that of a capital
P. Price runs up, stopping past the point where the excess demand is gone.
Then there is a period of backing and filling, forming the loop of the
P. Look at figure SC 10 again. Do you see the P?
Buy/Sell Confirmation of the Original Premise for Short Covering
Commercial Capping
Paragraph F) mentioned commercial capping; the process where the commercial
members (CTI2) sell heavily at the top (or buy heavily at a bottom) to
push price back to balance. March 22 T-bonds moved up on demand that
was exhausted at the top. Did the commercials aid the price drop?
In figure SC 5 the CTI2 average volume for the day is 6.1 percent
of the total. Going down the %CTI2 column we see the first two values
of 14.7 and 8.7. Both are substantially larger than the average. The path
of price in F period (10:30 to 11:00) is down from 10708 to 10630.
Indeed, it appears the commercials capped and drove price well back to
the middle.
Volatility
Volatility from the half-hour bars is:
Value Areas from LDB and Market Profile
Conclusion
Auction Market Theory shows the structure and patterns of auction
markets. It provides the tools to convert price to value and value change
(Market Profile) and to market condition and risk (Overlay Demand Curve).
The theory allows you to deconstruct a
market from it's current condition. To look inside, so to speak.
In addition to value, condition and risk, you can know which
prices are accepted, which rejected. You can often even know what
the members are doing. Yes, you can understand your market. You have
the salient facts and these facts lead to conclusions. We call these
conclusions 'strategy'. Understanding your markets imbues you with
a confidence unfamiliar to most traders. When you know, and know that
you know, confidence replaces fear.
Unfinished Business
But wait. A lot of analysis went into developing a strategy for trading
on March 23. How did it work out? Our trading strategy TS1 - TS14
indicated a small liklihood of any further upward activity. No new demand
entered. The market of March 23 confirmed our analysis. It is a classical
'dead' market. The events of March 22 took the wind out of the trader's
sails. The day market opened at 10610 and stayed within 10 ticks of that
price all day long.
Disclaimer
Reports such as this one rely on examples to illustrate their
principles. Sometimes the case selected has unusual properties, ones
that the reader would rarely meet in trading. That is not done here.
Our intent is to show how to understand the markets you work with
and from that understanding to permit you to develop your own trading
strategy. Our example would have shown a loss or possibly a wash if
you are a swing trader, and likely a winner if you day trade. The
example is intended show a complex market situation and how you can use
the theory to make sense of it.
Day trading the market indexes is a fast growing arena. Market Profile
value analysis for short term support and resistance (i.e. the value area)
is currently in vogue. Unfortunately, few traders realize that Market
Profile values are not at all reliable under certain circumstances. Such
situations occur about one-third of the time. In this article we show
how to identify and resolve the unreliable situations.
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1598
Internet http//www.cisco-futures.com
Email dljones@cisco-futures.com
Auction Market Theory
Market Profile Defined
Overlay Demand Curve Defined
Auction Market Theory
Auction Market Knowledge:
Auction Market Knowledge: The Longer Timeframe
Development of an Overlay:
Market Condition from Overlays:
Calculating Risk
Auction Market Theory Reviewed
Applications
Short Covering Rally
Buy/Sell Confirmation of the Original Premise for Short Covering
Commercial Capping
Volatility
Value Areas from LDB and Market Profile
Conclusion
Unfinished Business
Daytrading Support and Resistance
Market Profile, a Summing Process
Liquidity Data Bank, a Point Process
Points of Agreement/Disagreement
Value Calculations
Auction Market Analysis: Reading the Market
Evaluating Trading Opportunity the Next Day
Validation
Trading as a Career
Career Development in General
Career Development for Traders
Trading Model Development
Strategies, Models and Auction Market Trading
Learning to Trade
Step 1. Market Principles
Step 2. Market Strategy
Step 3. Trader Strategy
Step 4. Working Strategy
Step 5. Trading Your Plan
Trading Plan Case Study
Trading Plan Case Study: A Second Chance
Volatility and Stops
The Advice Engine
Marvin Minsky and the Emotion Machine
The Psychology of Stress in Trading
Leverage
CISCO Basic Trading Model
Liquidity Data Bank, Commercial Activity and Buy-Sell Statistics
Parts of this report appear in Stocks & Commodities Magazine
June 2002 and July 2002
Auction Market Theory for the Trader
A theory gives structure and pattern to the data.
Introduction
When you know, and know that you know, confidence replaces fear.
Traders are slaves to the practical, how to make winning trades. "Theory"
often seems esoteric, the opposite of practical. That is not the case here.
Theory is needed to tie the myriad loose ends of market data together,
to organize and simplify market analysis. Auction Market Theory
takes the entirety of market data and information and compresses it into a
set of assumptions and rules. The resulting structure permits the trader
to understand the migration of value and the market's condition within which
the value change is taking place. This knowledge answers the "what is the
market saying" question.
Value is the dominant variable in markets. Demand drives value. Change in
value reveals demand. Read a market's value path and you can
make reasoned and reasonable trading decisions. Auction Market Theory is
your guide. It is based on observable facts. Facts lead to conclusions;
to consistent, intelligent trading strategies.
A trader is interested in two things: when is a trend starting and
when is it ending? In Auction Market terms the question is when does
value begin to change and when is the value change over? Value is tracked
with the Market Profile and integrated by the Overlay Demand Curve (two
market structures that are explained below, see figures SC 2 and SC 7). In
this article we will first develop the theory to get a clear picture of general
market structure and let that knowledge guide our market analysis.
Then we will apply the theory to develop trading strategy,
including risk. The process is illustrated by walking through a real world
example. Within the theoretical framework, Market
Profile and Overlay Demand Curves alone are adequate to develop trading
strategies. Additional auction market structures can buttress and augment
those strategic decisions.
Auction markets have a price-based bid-ask format. Price and value are
only loosely related. Price traces the activity, but value reveals the
meaning of the activity. Time is the arbiter of value.
Track a market throughout the day and you will note that some prices
occur infrequently (highs and lows) while prices in the middle of the
day's range are traded again and again. The middle prices are a region
of high volume (and hence time) per price tick. Middle prices are the winners
of the day's popularity contest. Typically, the distribution of price over
time, i.e. volume, maps out a bell shaped curve. Heaviest trading is
near the central price,
smoothing out to low volume near the high and low. Prices around
the center are the ones traders see as 'fair', where they perceive value;
where the overwhelming majority of trading occurs. The bell shaped
curve of price and volume describes a Market Profile.
The middle seventy percent of the distribution is named the 'value area'.
In an ideal bell curve the value area is approximately one standard
deviation above and below the center of the distribution, that is the
central seventy percent of the activity. Value, then,
is a group of prices, not just one.
A Sample Market Profile
TRADING DATE: 30 DEC 99 CONTRACT: MAR 00 SOYBEANS (CBOT) (S H)
TRADING BEGINS 0930 (CST); CLOSES 1315; TPO SYMBOLS ARE DEFGHIJK
4710 I
4706 I
4704 HI
4702 HI <= Value Area Upper
4700 FGHI
4696 FGHI
4694 FGHI
4692 FGHI
4690 DFGHI
4686 DEFHI close
4684 DEFI
4682 DEF
4680 DEF <= Value Area Lower
4676 DE
4674 DE
4672 DE
4670 DE
4666 D
4664 D
4662 D
4660 D
4654 D open
4652 D
4650 D
Figure SC EX-1. Market Profile for Soybeans March 00, Dec 30, 1999.
The letters D, E, F, G,... identify trading in particular timeframes
(D is 9:30 to 10 AM). At 4690 trading occurred in five different time
periods). Value area contains seventy percent of the TPOs (see figure
SC 1 and below for TPO definition). (Price 4690 is shorthand for
$4.69 cents per bushel of soybeans.)
Price ranged from 471:0 to 4650. Value Area is 4702 to
4680. Center of the day's distribution is 4686. Relative volume
is in the letters, the TPO's. There was five times the volume at 4686
as at 4710 or 4650.
1) The open was quickly rejected by the market at 4654 (9 - 9:30 AM)
2) The Low was immediately rejected by the market 4650 (9 - 9:30 AM)
3) Price traded most of the day within the value area 4702 - 4680
4) The high at 4710 was immediately rejected by the market (12 - 12:30) PM
It is clear that the market accepted (as value) prices in the 4702 to
4680 range and did not much value prices outside that range.
Day timeframe data are immediately useful. Imagine you are a day trader
tracking a market's profile at midday. You know: 1) the
location of yesterday's value area, 2) today's value (so far) and 3) where
today's value is, relative to yesterday. The fact is, you now know a great
deal about the market you are trading. Any trading decision you make will
be aided by your knowledge of value.
Comparison of Market Profile with a Candlestick Display
In the Japanese Candlesticks technical method, the basic
element is a cylinder with open and close as limits; with the high and
low spiking above and below the open/close base. The candlestick form
for the Market Profile above looks like:
| high 4710
|
----- close 4686
| |
| |
| |
----- open 4654
|
|
| low 4650
Figure SC EX-2. Candlestick representation of Figure SC EX-1.
The prices most utilized by Candlesticks, the high and low, are just the ones
least valued (traded the least) by the market. Likewise, the open, in
this case, was also quickly rejected, but was used by Candlesticks to form a base.
As with the Market Profile, Candlesticks would combine this day with others
to develop trading decisions. Value, not price governs. Candlesticks is
using price, i.e. poor, non-representative data in their construction.
Every day's high
and low are those prices least valued by the market. Trading decisions
taken on the basis of poor data are unlikely to prove to be good predictiors
of the market's future path or even provide a reasonable picture of the
current market situation.
Candlesticks is a closed, fully defined system and can be investigated
completely. Giovanni Maiani, S&C Nov 02, p60, has done so. In his words
"The most reliable, long lower shadow, present 1.9% of time, anticipates a
declining session 49.12% of time, rising session 40.61% of time. For traders
who are quantitaively based, candlestick patterns are not terribly useful"
Steve Nison, the creator of Candlesticks, responded (S&C Jan 2003, p74)
that Candlesticks are "A tool, not a system", and that you need to know
the trend to use them. We feel that if you know the trend there is little
reason to use something that we, at least, would use to find the trend.
Longer timeframe information, i.e. market condition, is the foundation for all
subsequent analysis. If the market is in balance, you know exactly where price
will exceed the balance (for both upside and downside breakouts). Swing
/position traders are alerted to the potential start of a trend at the
breakout. Further, the range of the balance region, coupled with the bell
shaped curve of the price - volume distribution, estimates trading risk. Day
traders get a directional cue from the balance. They should look to be a
short seller of downturns near the top and a buyer on upturns near the bottom.
On breakout, the daytrader knows to switch, and to now trade in the
direction of the trend (e.g. seeking local bottoms in up trends).
Identifiers and Observables
1) Markets have a place (exchange, computer) and structure (members,
clearing) for doing business with defined rules and oversight or
regulation. They also set margins based on risk.
2) Auction prices are arrived at by negotiation
3) Some prices are accepted (value), some are rejected
4) In balanced markets, both Market Profiles and Overlays are bell shaped
5) A market may be balancing, trending or be in between the two phases
6) Participants may be oriented to the short time frame (day traders)
or longer timeframes (swing traders)
7) Trader's opinions determine whether the market will be active or quiet
8) Markets display little day-to-day serial correlation
9) Markets cycle from balance to trend and back
10) Individual market cycle phases may be short or long
11) Exchange members perform numerous functions on the floor
12) Larger traders make strategic trades ("if you want to buy 1000 contracts,
first sell 100")
A) Exchange Trading Hours Affect Price and Volume:
Overnight order accumulation creates a backlog at the opening. Thus
prices are distorted early in the day. In most markets there is an
'opening range'. Likewise, day traders and others exiting near the
close are responsible for a 'closing range'. Typically, members can
assign any price in the opening or closing range to a trade made for
a customer.
Exchanges, or clearing authorities for some electronic exchanges,
interact with the public principally in setting margins. Margin is
'earnest money' guaranteeing the broker we deal through that we
will cover our losses. Our interest in margins in part is the
amount of money we must deposit in order to trade. Far more important
is how the exchanges set margins. With a lot of experience
backing them up, the exchange margin is set to mirror the risk.
Our trading models inevitably have a risk function of some sort.
However, anytime we see the exchange margin being changed, we
should look to our methodology to be sure we are recognizing a
change in the risk we are taking. Since exchange margins are not
necessarily what your broker charges you (brokers often charge more),
keeping track of exchange margins takes some effort.
B) Prices are Set by Negotiation:
There is a buyer and seller for each contract traded. In the price-
volume figure SC 1, price auctioned up to 6054, above
which there were no bidders. Also, during the day, price went as
low as 6036, below which there were no sellers. In between, there
were many buyers and sellers.
CONTRACT: DEC 01 S FRANC (CME-IMM) TRADING DATE: 10 26 01
TRADING BEGINS 0720 (CST) CLOSES 1400 CHICAGO TIME
PRICE VOLUME Volume Plot x = 10
6054 10 x
6052 20 xx
6051 28 xxx
6050 84 xxxxxxxx
6049 136 xxxxxxxxxxxxxx
6048 182 xxxxxxxxxxxxxxxxxx
6047 464 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6046 210 xxxxxxxxxxxxxxxxxxxxx
6045 536 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6044 186 xxxxxxxxxxxxxxxxxxx
6043 254 xxxxxxxxxxxxxxxxxxxxxxxxx
6042 166 xxxxxxxxxxxxxxxxx
6041 122 xxxxxxxxxxxx
6040 74 xxxxxxx
6039 60 xxxxxx
6038 24 xx
6037 6 x
6036 12 x
Figure SC 1. Swiss franc volume by price. Minimal trading occurs
at the top and bottom prices. The three top and three bottom prices have
only 3 percent of the day's volume. The middle six (6042 - 6047) have
70 percent of the trading. The disproportionate volumes at 6045 and 6047 are
at least partly artifacts of the way orders are placed (e.g. five is a popular
trading point, diminishing the six next to it). Volume data is from the
CME Liquidity Data, with volume in 'sides' (two sides = round turn).
With no idea of when the trading at a particular price took place
we would be hard pressed to tell from figure SC 1 just when we might
have traded at that price. That is not much of a problem in a
congesting market, since there are many opportunities at all
the prices in the value area.
Recasting the price - volume plot into a Market Profile and a half-hour
bar chart adds a substantial level of information. The half-hour bars
are identified by letters; y, z, A, B,..., where each letter signifies
a time span. The y's are for the period 07:00 to 07:30, z is for 07:30
to 08:00, A is for 08:00 to 08:30 and so on. The letters are called
TPO's or time-price-opportunities. Collapsing the bars to the price
axis creates the Market Profile. TPO counts are commonly used in place
of actual volume since they embody both price and time.
MARKET PROFILE* REPORT FOR 10 26 01
AND SEGMENTED AUCTION
COMMODITY -- S FRANC (CME-IMM) DEC 01
Price Market Profile Segmented Auction
6054 F F
6052 FJ F J
6051 CFJ C F J
6050 CFGJKL C F G J K L
6049 CDFGHJKL C D F G H J |K |L
6048 ACDFGHJKL A C D F G |H | |J |K |L
6047 zACDEFGHJKL z |A |C |D E |F |G |H | |J |K >L
6046 yzACDEFGHL |y |z |A | |C |D |E |F |G |H | | | |L
6045 yzACDEFGHI >y |z |A | |C |D |E |F |G >H >I > > |
6044 yzACDEFGHI |y >z |A | |C |D |E |F |G |H |I | | |
6043 yzABCDEFGI y |z >A >B >C >D >E >F >G | |I | | |
6042 zABCDEFG z |A |B |C |D |E |F |G | | | | |
6041 zABCDEF z A |B |C |D |E |F | | | |
6040 zABCDE z A |B |C |D |E | |
6039 AB A B
6038 AB A B
6037 AB A B
6036 B B
Figure SC 2. Swiss franc Market Profile. The price - time distribution
is quasi-bell shaped. TPO volume peaks in the middle prices
(6050 to 6040) and then tails off toward the upper and lower limits. There
is very little support for trading at the highs and lows of the day.
The highs and lows are rejected. Prices in the middle are accepted.
The 70% region (value area) is 6049 - 6040. Value area calculation
starts with the 'point of control', the price with the most TPO's
(6047, in this case). Then add the next two highest and so on
until 70 percent of the TPO's are included.
C) Accepted Prices and Rejected Prices:
Prices between 6039 and 6050 traded heavily. You could have traded
at 6044 many times within the day. Had you wanted to trade at
6054 or 6036 you would have found little opportunity. Accepted prices
define value for any particular point in time. So value is a product
of price and time. The most accepted price is 6047. That price traded
in all but three of the fourteen time frames.
D) Auction Markets in Balance Map Out Bell Shaped Price - Volume Curves:
Many of our life experiences are described with bell shaped curves.
Distributions as widely diverse as the heights of men and the batting
averages of baseball players display the bell. Markets do too.
The bell shape is useful in defining value, market condition and in
determining risk. In short, the bell curve concept is invaluable
in understanding the market, even though the Market Profile and Overlay
distributions are not perfect 'normal' distributions.
E) A Balanced Market:
The market of figure SC 1 is in balance for the day (single bell
shaped curve). It is said to be accumulating (i.e. congesting). The
high - low range is relatively narrow, attesting to an only moderate
interest level on the part of the traders.
CONTRACT: DEC 01 S FRANC (CME-IMM) TRADING DATE: 10 29 01
TRADING BEGINS 0720 (CST) CLOSE 1400 CHICAGO TIME
PRICE VOLUME Volume Plot x = 20
6143 86 xxxx
6142 50 xxx
6141 228 xxxxxxxxxxx
6140 194 xxxxxxxxx
6139 308 xxxxxxxxxxxxxxxx
6138 842 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6137 548 xxxxxxxxxxxxxxxxxxxxxxxx
6136 1022 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6135 384 xxxxxxxxxxxxxxxxxx
6134 334 xxxxxxxxxxxxxxxxx
6133 496 xxxxxxxxxxxxxxxxxxxxxxxxx
6132 684 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6131 468 xxxxxxxxxxxxxxxxxxxxxxx
6130 836 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6129 794 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6128 520 xxxxxxxxxxxxxxxxxxxxxxxxx
6127 240 xxxxxxxxxxxx
6126 252 xxxxxxxxxxxxx
6125 122 xxxxxx
6124 214 xxxxxxxxxxx
6123 52 xxx
6122 28 x
6121 366 xxxxxxxxxxxxxxxxxx
6120 124 xxxxxx
6119 16 x
6118 112 xxxxxx
6117 322 xxxxxxxxxxxxxxxx
6116 126 xxxxxx
6115 402 xxxxxxxxxxxxxxxxxxxx
6114 326 xxxxxxxxxxxxxxxx
6113 1286 xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.....xxxxxx
6112 576 xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
6111 260 xxxxxxxxxxxxx
6110 72 xxxx
6109 78 xxxx
6108 56 xxx
6107 16 x
6106 4 x
Figure SC 3. Swiss franc volume by price. October 29 is the next trading day
after October 26 of figure IDO 1. The trading range is twice as large and
the orderliness of IDO 1. has disappeared. Volume today is 12,844 compared
to the much lower 2,574 of yesterday. This market has moved over $1,000
in one day (close to close). Volume data is from the CME Liquidity Data,
with volume in 'sides' (two sides = round turn).
Monday, October 29 (figure SC 3), is quite different from Friday.
The range is wider. This day has two distributions, 6106 to 6122 and
6122 to 6143. Obviously, there was activity in the overnight
market because of the gap (Swiss franc does trade throughout
most of the 24 hour day). Of importance to day traders,
is that this market has directional movement. It may offer trading
opportunity. The direction and amount of movement is readily apparent
in the Market Profile in figure SC 4.
MARKET PROFILE* REPORT FOR 10 29 01
AND SEGMENTED AUCTION
COMMODITY -- S FRANC (CME-IMM) DEC 01
Price Brackets Segmented Auction
6143 K K
6142 KL |K L
6141 KL |K |L
6140 HKL |H | | |K |L
6139 EHKL |E | | |H | | |K |L
6138 BEHKL B | |E | | |H | | |K |L
6137 BDEHKL B |D |E | | |H | | |K |L
6136 BDEHKL B |D |E | | |H | | |K |L
6135 BDEHJKL B |D |E | | |H | |J |K |L
6134 BDEHIJKL B |D |E | | |H |I |J |K |L
6133 BDEHIJKL B |D |E | | |H |I |J |K |L
6132 BDEHIJK B |D |E | | |H |I |J |K |
6131 BCDEHIK B C |D |E | | |H |I | |K |
6130 BCDEFHIK B C |D |E |F | |H |I | |K |
6129 BCDEFGHK B C |D |E |F |G >H > > >K >
6128 BCDEFG B C |D |E |F |G | | | | |
6127 BCDEFG B C >D >E >F >G | | | | |
6126 BCFG B C | | |F |G | | | | |
6125 BCFG B |C | | |F |G | | | | |
6124 B B | | | | | | | | |
6123 B B | | | | | | | |
6122 B B | | | | | | | |
6121 B |B | | | | | | | |
6120 B |B | | | | | | |
6119 zB z |B | | | | | | |
6118 zA z A | | | | | |
6117 yzA y |z |A > > | | | |
6116 yzA |y |z |A | | | |
6115 yzA |y |z |A | | |
6114 yzA >y |z |A | |
6113 yzA |y >z >A | |
6112 yzA |y |z |A | |
6111 yzA y |z |A | |
6110 yzA y |z |A | |
6109 zA z A | |
6108 zA z A | |
6107 zA z A | |
6106 z z | |
Figure SC 4. Market profile for SF on October 29, 2001. A trend day.
The volume profile, figure SC 3, shows the same general structure, but
the market profile shows timing within the movement. Overnight trading
in the intra-bank market moved price upward as noted (from about 6050 to
the 6114 region). For the first three periods the market accepted 6114
as the new balance. But this was merely a pause, not end-of-trend.
The next jump in B period (8:30 - 9:00) found a new balance around 6133.
Also, trading opened on Monday well above the value of Friday. Each
market day will find it's own characteristic value. Each day will have it's
own news, rumors, power plays and the like. Consequently, value will
fluctuate from day to day. In a balanced market the fluctuation is bounded.
If the market it trending, day to day changes in value are unbounded. The
bounds are determined by the Overlay Demand Curve (see "Development of an
Overlay" below). An example of Market Profile variation in a bounded
environment is figure SC 6.
F) Demand: Day Traders and Swing/Position Traders:
A (day) trader who is out of the market by the close generates no
lasting demand. One who holds for an extended period does create
demand. Within a day, the local-member may be in and out fifty
times, long or short with equal probability. No demand created there!
Public traders often act directionally. They buy and hold. Their
actions are often due to chart formations
(with which the members are also familiar!). Within a day, the
public can drive prices away from the balance so prized by
members. If the public is successful, a trend begins. More often
we fail, leading to an aborted trend or a failed breakout which quickly
crumbles. (Commercial members often have quite a lot to do with the
failure, called commercial capping. Capping is discussed in detail
in the text Value Based Power Trading, pg 33 - 47).
G) Trader's Opinions Govern Market Activity:
Public traders make money only by capturing a non-equilibrium
market move, a trend. Volatility is a must. Trends are driven
by a fundamental change in demand. But one rarely knows or has
information on the driving fundamentals. Rather, your measure is
change in value. That you can track. Collectively, traders opinions
create demand. The auction market trader gains an opinion from value
change. For example, the Swiss franc of Friday has value centered around
6045. Monday opening at 6114 is way, way above previous value.
We ask ourselves, "is this the new value?" "Did I miss the whole
move?" That question is answered when price breaks out
of the y-z-A congestion in B period (8:30 to 9:00 am) at 6120. There
is still additional demand driving the market. There is opportunity
for the day trader.
H) Markets Display Little Day-to-day Serial Correlation:
We know from observation that even in long term trends the probability
of tomorrow being higher (or lower) than today is close to fifty
percent (see example in Value Based Power Trading, pg 19 - 24). Today
is therefore not a good predictor of tomorrow. So
what does auction market analysis use for predicting future price?
Nothing! Absolutely nothing! Auction market analysis makes no
projections. Rather, we learn as much as we can about the current
market situation. Then, we trade off the changes. We know when
today's value moves relative to yesterday. We know when yesterday's
balance breaks out. The market is showing its motivation by its
behavior relative to value and market condition.
I) Markets Cycle from Balance to Trend and Back:
We do know that the market in balance today will trend
sometime in the future. The next step from balance is a breakout
(really, an alert that a trend may be starting). On a Market
Profile that alert is often seen as a series of single prints as
the B's from 6120 to 6124 in figure SC 4. The alert may stall
before a trend gets underway, resulting in a 'failed breakout'.
Or, as in SC 4, a trend does begin; in this case running
up to 6138 within the single half hour B period (8:30 to 9).
The end-of-trend transition is sometimes marked by a reversal,
but more often by congestion. Continuation of the congestion
leads ultimately to a new balance. Both stages are present
in figure SC 4. In B period we had the nice run to 6138, a
reversal back to 6131 in C period and then congestion the rest of
the day. The B period run is exactly what day traders seek.
Since we know the phases of the market, throughout the run we
are watching for either the reversal or congestion signaling the
onset of the next phase (transition back to balance). The form,
Market Profile/half-hour bars, combined with market knowledge
gives us the ability to see deeply into the market process.
J) Market Cycles may be Short or Long:
The trend in the example took place within one half hour period.
At another time a trend might last several periods or several days.
Market knowledge tells us the order but not the time or the magnitude.
We can be sure that a trend will end and ultimately move into a
balance. But we have little information on how far the trend will
go or how long it is until the transition begins. We do not need
to guess. The market will tell us. We just need to
be alert to the tell-tale signs of reversal and/or congestion.
K) Exchange Member's Functions:
So far we have equated market knowledge to an understanding of
value based data displays. A market is also comprised of people,
us and the members and/or professional traders. Four classes of
members inhabit the floor. We must interact with them. It is to our
advantage to understand their motivation. Class 1 are the Locals or
scalpers, the other side of virtually every transaction. They work for
themselves, provide liquidity and are most comfortable with balanced
markets. Class 2 are the commercials who's job is to trade for their
companies. These are the businessmen of the floor. Their company
will be a large commercial firm, e.g. Morgan Stanley. Since commercials
know both the cash and futures markets, they are the best informed
traders on the floor. They too work best in balanced markets.
In addition to their "business" they may speculate when prices
are out of line (the capping mentioned in paragraph F). Commercials
typically do five to fifteen percent of the volume. Class 3
are members clearing for other, off-floor, members. This class accounts
for around five to ten percent of the volume. Lastly, Class 4 clears for
us, the public. We, the public, are typically twenty to thirty percent
of the day's trading volume. Chicago Board of Trade and Chicago
Mercantile Exchange release the Liquidity Data Bank reports with
volume-price-member type statistics.
CBOT VOLUME REPORT
TRADING DATE: 03 22 01
CONTRACT: JUN 01 T-BOND (CBOT) DAY
TRADING BEGINS 0720 (CST);CLOSES 1400;TPO SYMBOLS ARE Z$ABCDEFGHIJKL
FIRST PERIOD IS 10 MINS;SUBSEQUENT PERIODS ARE ALL 30 MINS
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
10708 2036 0.6 45.6 14.7 4.5 35.2 F
10707 5694 1.8 59.0 8.7 12.2 20.1 F
10706 5934 1.9 60.5 3.8 6.8 28.9 FIK
10705 8342 2.6 57.6 2.9 5.9 33.6 FIKL
10704 13868 4.3 56.4 3.6 11.5 28.5 EFIKL
10703 14320 4.5 54.0 5.8 5.5 34.7 EFIJKL
10702 12186 3.8 61.5 12.3 6.2 20.0 EFGHIJKL
10701 20582 6.4 56.9 9.7 7.9 25.5 EFGHIJKL
10700 15382 4.8 57.2 8.5 6.7 27.6 DEFGHIJKL
10631 23526 7.4 50.5 6.5 6.7 36.3 CDEFGHJKL
10630 32526 10.2 56.7 7.5 6.0 29.8 CDEFGHJL
10629 19146 6.0 57.2 4.3 9.6 28.9 CDEGHJLM
10628 24108 7.5 56.3 6.6 7.9 29.1 BCDEGHLM
10627 14762 4.6 54.5 5.7 10.9 28.9 BCDEGHLM
10626 13938 4.4 55.1 9.2 5.5 30.3 BCDEGH
10625 12528 3.9 59.8 3.9 13.3 23.0 BCEGH
10624 8466 2.6 61.7 2.8 7.4 28.0 BCE
10623 19036 5.9 61.1 5.1 5.7 28.2 BCE
10622 5384 1.7 57.5 4.5 4.4 33.6 BE
10621 2104 0.7 57.7 6.7 5.9 29.7 BE
10620 582 0.2 78.7 0.0 0.9 20.3 BE
10619 1210 0.4 60.6 0.0 2.4 36.9 ZAB
10618 6980 2.2 53.8 1.5 3.5 41.2 Z$AB
10617 8616 2.7 59.9 7.3 8.1 24.8 Z$AB
10616 8616 2.7 55.9 2.1 7.8 34.2 Z$A
10615 5056 1.6 54.0 5.7 9.0 31.2 $A
10614 8106 2.5 61.5 3.5 9.9 25.1 $A
10613 5006 1.6 63.2 2.2 7.2 27.4 $A
10612 1900 0.6 58.6 3.9 7.6 29.8 $
10611 4 0.0 50.0 0.0 0.0 50.0 $
%CTI1 %CTI2 %CTI3 %CTI4
VOLUME FOR JUN 01 T-BOND (CBOT) DAY 319944 57.0 6.1 7.6 29.3
VOLUME FOR ALL T-BOND (CBOT) DAY 320350 57.0 6.1 7.6 29.3
70% VOLUME SUMMARY
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS
10704 225338 70.4 56.3 6.8 7.9 29.0 BCDEFGHIJKLM
10624
TPO ANALYSIS FOR CURRENT DAY :
VALUE AREA FROM TPOS
UPPER 10705
LOWER 10625
CONTROL 10631
*The MARKET PROFILE is a registered trademark of the Board of Trade of
the City of Chicago 1984. ALL RIGHTS RESERVED.
Figure SC 5. Liquidity Data Bank for T-bonds, March 22, 2002.
Column headings: Price, Volume (in half contracts), %Volume for
each price, %CTI1 is volume percentage for the local members, %CTI2 is
volume percentage for the commercial members, %CTI3 is volume percentage
for the off-floor members and %CTI4 is members acting for the public.
On the far right, BRACKETS refers to the Market Profile.
Below the volume table, totals show the average percentages of volume
for each of the four member classes. 70% Volume Summary is the volume value
area. Point of control for the volume is the high volume price, 10630.
Below that is the TPO value area, with point of control (peak TPO price).
T-bonds are quoted in 32nds. The price 10708 stands for 107 and 8 32nds.
The next price tick above 10631 is 10700. A move from 10600 to 10700
is $1000 for the one unit jump. A move from 10621 to 10622 is one price
tick, worth $31.25.
Liquidity Data Bank reports are a more comprehensive version of
a Market Profile. The value area is defined by trading volume
as opposed to using the TPO's in SC 2. (T-bonds trade in 32/nds,
10708 is 107 and 8/32nds, where one 32nd is $31.25.)
L) Trader's Strategies:
Trading is a 'me against the rest of you' situation. In a zero sum
game (no fees and commissions) the losers buy the winners beer. Mis-
direction is a valid strategy. The old saying "if you want to sell
a thousand contracts, first buy one hundred" illustrates a strategy.
By making others believe the market is taking an upturn, it becomes
easier to sell a large holding. If we understand the value situation,
that the buying of the hundred was done without any apparent change in
value, it is easier to avoid such traps.
You now have the, mostly, day time-frame, facts of auction markets. With
practice you can use these facts to trace the evolution of value throughout
the day. You can usually answer the question "what is the market doing".
Something is still lacking in developing a trading strategy. It was alluded
to in the brief discussion of longer timeframe information. If we know the
context of the current market situation,
the market conditon, we are able
to set our strategy. Yes, a day trader should behave differently in
balanced markets and trending markets.
FIVE DAYS OF MARKET PROFILES
MARKET PROFILE* REPORT FOR 03 16 01 - 03 22 01
COMMODITY -- T-BOND (CBOT) DAY JUN 01
Day ID ==> 5 6 7 8 9
Price 03 16 01 03 19 01 03 20 01 03 21 01 03 22 01
10708 F
10707 F
10706 FIK
10705 FIKL
10704 EFIKL
10703 EFIJKL
10702 EFGHIJKL
10701 EFGHIJKL
10700 DEFGHIJKL
10631 CDEFGHJKL
10630 CDEFGHJL
10629 A CDEGHJL
10628 AB BCDEGHL
10627 AB BCDEGHL
10626 ABCD y BCDEGH
10625 ABCD y BCEGH
10624 ABCD yz BCE
10623 ABCDE yz BCE
10622 ABCDE yz BE
10621 ABCDE yz BE
10620 zABCDE yz BE
10619 zABCDE yz yAB
10618 zABCDEL zB yzAB
10617 zABCEFL zABCGHJ yzAB
10616 zBCEFL ABCGHJ yzA
10615 zBCFL ABCGHIJK z
10614 zBCFGIL y ABCFGHIJK z
10613 yzBFGHIL yz L ABCFGHIJK z
10612 yzFGHIJL yzA L ABCEFGGHIJK z
10611 yzFGHIJL yzABG L BCEFHIKL z
10610 yzFGHIJL yzABCG L BCDEFHKL
10609 yzFGHJKL yzABCDG L BCDEFKL
10608 yzFGHJKL yzABCDEFGHI KL CDEFL
10607 yzGHJKL ABCDEFGHIJ KL CDEFL
10606 yGJKL BCDEFHIJ KL CFL
10605 JK CEHIJK KL
10604 JK yBJKL
10603 KL yzABCDEJK
10602 KL yzABCDEJK
10601 KL yzABCDEJK
10600 L zACDEJK
10531 L zEFJK
10530 L zEFGIJK
10529 EFGHIJ
10527 FGHI
10526 I
Figure SC 6. Five sequential days of Market Profiles.
US T-bonds, March 16, 2001 through March 22, 2001.
If we simply sum the five days, the longer term view is one of balance!
The five day Overlay in figure SC 7 shows a roughly bell shaped curve
with upper and lower distribution limits at 10706 and 10528. The close
of trading at 10628 is well within the balance.
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUN 01 T-BOND (CBOT) DAY
03 16 01 TO 03 22 01
PRICE DYS L/F ROT PROFILE * TPOS TPO VOL OVERLAY *
10708 1 9 9 1 X
10707 1 9 9 1 X
10706 1 9 9 3 XXX <== Upper Dist. Limit
10705 1 9 9 4 XXXX
10704 1 9 9 5 XXXXX
10703 1 9 9 6 XXXXXX
10702 1 9 9 7 XXXXXXX
10701 1 9 9 8 XXXXXXXX
10700 1 9 9 9 XXXXXXXXX
10631 1 9 9 10 XXXXXXXXXX
10630 1 9 9 11 XXXXXXXXXXX
10629 2 59 59 10 XXXXXXXXXX
10628 2 59 59 8 XXXXXXXX <== Close
10627 2 59 59 7 XXXXXXX
10626 3 59 589 9 XXXXXXXXX
10625 3 59 589 10 XXXXXXXXXX
10624 3 59 589 10 XXXXXXXXXX
10623 3 59 589 9 XXXXXXXXX
10622 3 59 589 9 XXXXXXXXX
10621 3 59 589 9 XXXXXXXXX
10620 3 59 589 11 XXXXXXXXXXX
10619 3 59 589 11 XXXXXXXXXXX
10618 3 59 589 12 XXXXXXXXXXXX
10617 3 59 589 15 XXXXXXXXXXXXXXX
10616 3 59 589 15 XXXXXXXXXXXXXXX
10615 3 59 589 16 XXXXXXXXXXXXXXXX
10614 4 59 5689 19 XXXXXXXXXXXXXXXXXXX
10613 5 59 56789 22 XXXXXXXXXXXXXXXXXXXXXX
10612 5 59 56789 22 XXXXXXXXXXXXXXXXXXXXXX
10611 5 59 56789 24 XXXXXXXXXXXXXXXXXXXXXXXX
10610 4 5 5678 25 XXXXXXXXXXXXXXXXXXXXXXXXX
10609 4 5 5678 22 XXXXXXXXXXXXXXXXXXXXXX
10608 4 5 5678 24 XXXXXXXXXXXXXXXXXXXXXXXX
10607 4 5 5678 21 XXXXXXXXXXXXXXXXXXXXX
10606 4 5 5678 20 XXXXXXXXXXXXXXXXXXXX
10605 3 5 567 10 XXXXXXXXXX
10604 2 67 7 XXXXXXX
10603 2 67 11 XXXXXXXXXXX
10602 2 67 12 XXXXXXXXXXXX
10601 2 67 11 XXXXXXXXXXX
10600 2 67 10 XXXXXXXXXX
10531 2 67 7 XXXXXXX
10530 2 67 7 XXXXXXX
10529 1 7 5 XXXXX
10528 1 7 5 XXXXX <== Lower Dist. Limit
10527 1 7 1 X
Figure SC 7. Five Day Overlay Demand Curve of June 2001 T-bonds 3/16 - 3/22.
The label L/F gives the range of the earliest day (5) and the most recent
day (9). The Rotation Profile (ROT PROFILE) is the range for each of the
five days presented in Market Profile form. It allows the relative dates
of trading to be resolved. In this case, the 9's show the latest day's
trading to be near the top of the 5 day distribution. Distribution limits
are at the last price before the TPO's fall below three.
What happened? For one, our eye fooled us. This often happens with graphical
data--our perception is colored by differences rather than similarities. The
best known cases of this is with chart formations (head and shoulders, Elliot
waves, fibonacci numbers, candlesticks, etc.). Also we often cannot pick
the details out of the overall picture. In figure SC 6 the centers of value
and value areas are:
CTR VaU VaL
3/16 10611 10619 10606
3/19 10608 10611 10605
3/20 10602 10604 10529
3/21 10612 10617 10609
3/22 10700 10705 10625
The earliest four days have a mean value of 10608 for the center. The average
deviation is only 3 ticks. The market of 3/22 does not seem to fit. We will
use auction analysis later to explain and understand that large deviation
(23 ticks).
Market Profiles track value from yesterday to today. They do
not give the context for any longer timeframe. This comes from the Overlay.
Refering to figure SC 7, we see that at the end of 3/22 the past
five days action is described as 1) a single quasi-bell shaped curve
with the closing price inside the distribution. In short, on a five
day basis, the market is in balance. If the distribution is defined to
terminate on three TPO's (approximating the +/- two standard deviation,
95 percent confidence level of the 'normal' distribution), we find the
upper limit of the distribution at 10706 and the lower limit at 10528.
Reasoning from the 95 percent confidence concept of the normal distribution,
we find that prices above 10706 have a good chance of not belonging to
the five day balanced distribution. That is, price above 10706 is a breakout,
the potential start of a new (trending) distribution.
The Overlay range is a measure of a market's activity. Range is related
both to volatility and to trader interest in the market (which usually
increases volatility). Volatility is
equated directly to risk in the stock market. But it is not the whole story
in active trading markets. Trader interest is triggered by outside events,
say a currency devaluation. That brings more traders into the market and
hence more volume at each price; more prices that are tradeable (increased
range). So range is one place to look for a risk measure.
The other aspect of range depends on the Overlay's relationship to the
bell shaped curve. From the middle of the range to the upper limit is
two standard deviations. Same for middle to lower limit. The total
range is four standard deviations. So, one standard deviation is very roughly
one-quarter of the of the range, or 10.5 points in figure SC 7. Experience
shows that this type of risk varies from about one-eighth to one quarter of
the range (half a standard deviation to a whole one).
Figure SC 7 has a 42 point range for the 5 day Overlay. At $31.25 per point,
that is $1312. If an upside breakout occurs at 10707, what would be a good
trading risk? The quadrant (one quarter of the range) is 10.5 points or
$328, half of that is $164.
Risk generally depends on the type of trading, more for swing (overnight)
trades and less for short term day-trades. In this example the swing/position
trader should risk over $300 to not be stopped out by market range volatility.
A day trader has a much shorter time horizon, with a commensurately smaller
risk of around $150. Risks derived from the Overlay range offer a starting
point, a logical rule of thumb, for risk analysis.
Volatility
Volatility is a natural part of all auction markets. It is related to
the trading range; small in quiescent periods, larger in more active
markets. It changes from day to day. Fluctuation grows with volume (demand)
in the day timeframe. Daily trading
range gives a gross estimate of market fluctuation.
A better working estimate of volatility describes activity within the day.
Market Profiles are based on half-hour periods. Half-hour timeframes
break down the day into manageable parts. More importantly, a half-hour
appears to be the minimum average time for changes in demand to be reflected
in value. This was the original reason for selecting the half-hour timeframe.
We define the (AMT) volatility as the average range of the half-hour time
periods of a Market Profile. In figures SC 9 and SC 10, these are:
y z A B C D E F G H I J K L Average
March 21 8 8 6 10 12 4 6 9 6 8 5 6 7 6 7.4
March 22 4 8 7 12 9 7 17 11 10 9 7 7 8 11 9.1
The average of the half-hour bars approximates the risk of a trade stop-out
from either the long or short side. It is the 'fluctuation' risk. If one sets
a risk (stop-loss) smaller than this noise, then the probability is high
that simple market fluctuation will cause trade exit. The volatility, then,
sets the minimum risk for a trade.
Practically, volatility has another important use. It is a sensitive measure
of market congestion. Balanced markets (congestion) tend to have low volatility.
Trending markets have larger volatilities. March 21 is clearly congesting,
as observed in figure SC 9. March 22 (figure SC 10) is a combination
trend (periods y through F) and congestion (periods G through L).
The 90 day average volatility for T-bonds (as of March 13, 2002) is 8.3.
Minimum is 3.9 and maximum is 15.5. Assuming about the same range in 2001,
both March 21 and 22 are near the average. Very large volatility increases rarely
precede the start of a trend, although often the general market tenor,
as measured by volatilty, rises prior to directional movemant. Volatility
helps to uncover trend end. In the
table below, volatility offers a tip-off to market intentions. The 90 day
average volatility as of March 18, 2002 is 376. High is 880, low is 200.
UU MAR 02
DATE OPEN HIGH LOW CLOSE BAL VTY ULIM LLIM
1/28/ 2 113250 113880 112610 113550 YES 303 113900 111800
1/29/ 2 113600 113825 109750 110050 NO 546
1/30/ 2 110050 111575 108075 111550 NO 775
1/31/ 2 111550 113000 111300 113050 NO 405
2/ 1/ 2 112875 113225 111850 112350 YES 350 113600 108700
2/ 4/ 2 112325 112400 109100 109525 YES 471 113000 108700
2/ 5/ 2 109550 110150 108225 108900 NO 614
2/ 6/ 2 108925 109450 107700 108375 NO 600
2/ 7/ 2 108625 109500 107625 107700 NO 578
2/ 8/ 2 107625 109675 107550 109650 YES 483 110300 107750
2/11/ 2 109700 111275 109425 111025 NO 308
2/12/ 2 111050 111325 110250 110750 NO 337
2/13/ 2 110725 112150 110525 111875 NO 383
2/14/ 2 111900 112550 111175 111675 NO 367
2/15/ 2 111650 111800 110300 110475 YES 387 112400 109850
Table SC-T1. S&P emini March 2002. Market demand interpretation
aided by the volatility. BAL is 5 day balance as discussed in the
Overlay Demand Curve section. ULIM and LLIM are the Overlay balance
limits. VTY is the half-hour bar average range volatility for the day.
Start with the Balance as of close Jan 28.
Jan 29, breakout on down side alerts for start of trend.
Close of Jan 29: Price lower, volatility at 546 is up 80 percent.
Interpretation: volatility implies demand is still present.
Close of Jan 30: Trend bottomed out at 108075. Closed higher.
Interpretation: short timeframe trend is over. Higher volatility
is not directional and is thus disregarded.
This short run from Jan 29 11 AM to Jan 30 11 AM is confirmed by
the volatility of Jan 30, but not until end of day. By that time
the move was over.
Start with the Balance as of close Feb 4.
Feb 5, breakout on down side, volatility up 30 percent, price lower.
Interpretation: short timeframe trend is probably still in place.
Volatility confirms the move.
Feb 6, price moves down slightly, volatility is only 27 percent above entry.
Interpretation: demand or trader interest is not growing.
Feb 7, price continues down, volatility is down to 22 precent above entry.
Interpretation: demand continues to decay.
Feb 8, local bottom reached at 107550, close is higher, market in balance,
volatility is back where it started from.
Interpretation: trend is over.
Start with the Balance as of close Feb 8.
Feb 11, breakout on the upside, close at breakout price, volatility lower.
Interpretation: breakout not supported by demand increase. In the
following days price continued strong and volatility grew. On Feb 15
a new balance was reached at the higher price level.
On longer moves, the volatility tends to strengthen. End of day volatility
is important to the longer timeframe (swing) trader, less so to the day
trader.
Volatility is another valid way to check markets for demand. As
reference point for market condition, volatility adds to the visual measures
discussed in figures SC 9 and 10.
Volatility calculations are tied to the timeframe. If a different timeframe
is selected (say 15 minute bars) the volatility will be unique to that
timeframe. However, the only valid volatility is the one associated with
the appropriate timeframe, the timeframe that best reflects the time delays
inherent in the market. That timeframe is thirty minutes in the data in
this report.
Is Auction Market Theory a trading model? No. A trading model has most
market parameters pre-chosen, built into an algorithm.
Given a particular price structure, a model will follow the same path
regardless of internal market conditions. A strategy
is different. Strategy comes from understanding the market situation
as it relates to us, to our unique needs and desires. We have general rules
but a wide latitude for action. For instance, a day trader active
in a balanced market who knows the upper and lower limits, will seek to
sell downturns near the upper limit and buy upturns near the bottom.
If price breaks out of balance on the upside, strategy changes to
buying upturns only. Market condition sets the strategy. But the
trader selects action points and risk.
Presumably we could build a trading model for our own trading style. Such
a model would have more in common with an 'expert system' than a technical
model. An expert, one who is familiar with auction markets, knows how to
marshal the available information and data, when faced with an unfamiliar
market situation. The expert needs information rather than a rigid model
that makes a rigid decision for any market situation. Really, this is
no different than the way a good company CEO acts.
At the end of a trading day we are faced with the decision of how to
trade tomorrow. A swing/position trader will first attend to the
trades that are still on. A day trader will presumably have no current
trades. For this example we assume no positions left over at the
close of March 22.
Our general approach is to collect the information available on value and
market condition. These data will include the latest day's behavior
and at least the market of the day prior. Then we factor in what we know
from the theory of markets. Lastly, we set our strategy for the next day.
Both day and swing traders start their analyses at the same place--with the
market condition.
Market Condition at the close of March 22 from figure SC 7 is:
MC1) Market in 5 day balance, with limits 10706 and 10528, close 10628
MC2) Balance is skewed toward the top
MC3) Latest day trading (L/F = 9) concentrated at upper prices
From the previous 5 day Overlay of March 21 in figure SC 8:
MC4) Market in 5 day balance, limits 10626 and 10527, close 10611
MC5) Balance is symmetrical
MC6) Latest day trading (L/F = 9) mostly above the midpoint
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE
JUN 01 T-BOND (CBOT) DAY
03 15 01 TO 03 21 01
PRICE DYS L/F ROT PROFILE * TPOS TPO VOL OVERLAY *
10629 1 6 1 X
10628 1 6 1 X
10627 1 6 1 X
10626 2 9 69 4 XXXX <== Upper Limit
10625 2 9 69 5 XXXXX
10624 2 9 69 6 XXXXXX
10623 2 9 69 6 XXXXXX
10622 2 9 69 6 XXXXXX
10621 2 9 69 6 XXXXXX
10620 2 9 69 9 XXXXXXXXX
10619 2 9 69 9 XXXXXXXXX
10618 2 9 69 10 XXXXXXXXXX
10617 3 59 569 13 XXXXXXXXXXXXX
10616 3 59 569 13 XXXXXXXXXXXXX
10615 3 59 569 15 XXXXXXXXXXXXXXX
10614 4 59 5679 18 XXXXXXXXXXXXXXXXXX
10613 5 59 56789 23 XXXXXXXXXXXXXXXXXXXXXXX
10612 5 59 56789 25 XXXXXXXXXXXXXXXXXXXXXXXXX
10611 5 59 56789 27 XXXXXXXXXXXXXXXXXXXXXXXXXXX
10610 5 59 56789 30 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
10609 5 59 56789 25 XXXXXXXXXXXXXXXXXXXXXXXXX
10608 5 59 56789 27 XXXXXXXXXXXXXXXXXXXXXXXXXXX
10607 5 59 56789 24 XXXXXXXXXXXXXXXXXXXXXXXX
10606 5 59 56789 23 XXXXXXXXXXXXXXXXXXXXXXX
10605 4 5 5678 15 XXXXXXXXXXXXXXX
10604 3 5 578 12 XXXXXXXXXXXX
10603 3 5 578 18 XXXXXXXXXXXXXXXXXX
10602 3 5 578 19 XXXXXXXXXXXXXXXXXXX
10601 3 5 578 19 XXXXXXXXXXXXXXXXXXX
10600 3 5 578 18 XXXXXXXXXXXXXXXXXX
10531 3 5 578 13 XXXXXXXXXXXXX
10530 3 5 578 13 XXXXXXXXXXXXX
10529 2 5 58 11 XXXXXXXXXXX
10528 2 5 58 11 XXXXXXXXXXX
10527 2 5 58 4 XXXX <== Lower Limit
10526 1 5 5 2 XX
10525 1 5 5 2 XX
10524 1 5 5 1 X
Figure SC 8. Five Day Overlay Demand Curve of June 2001 T-bonds 3/15 - 3/21.
This balanced market preceeded the breakout day 3/22.
Conclusions from Market Condition (MC) behavior:
MC7) On March 22 the balance broke out on the upside but did not hold
MC8) Price ran up to 10708 (14 ticks = $437), then pulled back to close
at 10628, a sign of weakness
MC9) At end of day, market is back in balance (is this a failed breakout?)
Market Condition Preliminary trading decisions (TD) for March 23
TD1) Swing trader will go long above 10706 or short below 10528
TD2) Risk will be around $325, the one standard deviation level.
Recall that the market condition provides the framework within which value
based trading decisions are made.
Auction Market Value Analysis (MV) for March 23:
At the end of trading on March 21 the value area is 10617 to 10609.
Market Profile for the day is unremarkably congesting (figure SC 9).
MV1) Value Area 3/21: 10617 to 10609, 8 points ($250)
LENGTH OF FIRST PERIOD = 10 MINS
MARKET PROFILE* REPORT FOR 03 21 01
AND SEGMENTED AUCTION
COMMODITY -- T-BOND (CBOT) DAY JUN 01
Price Brackets Segmented Auction
10626 y y
10625 y |y |
10624 yz |y |z |
10623 yz >y |z |
10622 yz |y >z | |
10621 yz |y |z | |
10620 yz y |z | | |
10619 yz y |z > | | |
10618 zB z | |B | | |
10617 zABCGHJ z |A >B >C > > | |G |H | |J | |
10616 ABCGHJ A |B |C | | | |G |H | |J | |
10615 ABCGHIJK A |B |C | | | |G |H |I |J |K |
10614 ABCFGHIJK A |B |C | | |F |G |H |I |J |K |
10613 ABCFGHIJK A |B |C | | |F |G |H |I |J |K |
10612 ABCEFGHIJK A |B |C | |E >F >G >H >I >J >K >
10611 BCEFHIKL B |C | |E |F | |H |I | |K |L
10610 BCDEFHKL B |C |D |E |F | |H | | |K |L
10609 BCDEFKL B |C |D |E |F | | | | |K |L
10608 CDEFL C |D |E |F | | | L
10607 CDEFL C D |E |F | L
10606 CFL C F L
TPO Analysis
CENTER 10612
VALUE AREA FROM TPOS
UPPER 10617
LOWER 10609
Figure SC 9. Market Profile for T-bonds, March 21, 2001.
After the seven point drop in the first two periods, the market
is in congestion the rest of the day.
The latest trading day, March 22, has value area of 10705 to 10625.
It shows congestion, trend and then large congestion.
MV2) Initial trading is slightly above and inside previous value
MV3) Trend: breakout from the congestion at 10620 with a run to 10628
MV4) Congestion for the rest of the day, a sign of trend termination
MV5) Close of 10628 is well down into the congestion region
LENGTH OF FIRST PERIOD = 10 MINS
MARKET PROFILE* REPORT FOR 03 22 01
AND SEGMENTED AUCTION
COMMODITY -- T-BOND (CBOT) DAY JUN 01
Price Brackets Segmented Auction
10708 F F
10707 F F
10706 FIK F I K
10705 FIKL F |I | |K |L
10704 EFIKL E F | | |I | |K |L
10703 EFIJKL E |F | | |I |J |K |L
10702 EFGHIJKL E |F |G |H |I |J |K |L
10701 EFGHIJKL E |F |G |H |I |J |K |L
10700 DEFGHIJKL D |E |F |G |H |I |J |K |L
10631 CDEFGHJKL C D |E |F |G |H | |J >K >L
10630 CDEFGHJL C D |E |F |G |H | >J | |L
10629 CDEGHJL C D |E | |G |H | |J | |L
10628 BCDEGHL B C D |E | |G |H | | | |L
10627 BCDEGHL B C D |E | |G |H | | | |L
10626 BCDEGH B C |D >E > >G >H > | | |
10625 BCEGH B C | |E | |G |H | | | |
10624 BCE B |C | |E | | | | | |
10623 BCE B |C | |E | | | | |
10622 BE B | | |E | | | |
10621 BE B | | |E | | |
10620 BE |B | | |E | |
10619 yAB |y | |A |B | | | |
10618 yzAB >y |z |A >B > > | |
10617 yzAB |y |z |A |B | |
10616 yzA y >z >A | | |
10615 zA |z |A | | |
10614 zA z A | | |
10613 zA z A | | |
10612 z z | |
10611 z z | |
TPO Analysis
CENTER 10631
VALUE AREA FROM TPOS
UPPER 10705
LOWER 10625
Figure SC 10. Market Profile for T-bonds, March 22, 2001.
After moving out of the y-z-A congestion the market struggled to
a top in F period. From C period through the rest of the day
the market is congesting.
Conclusions from Market Value behavior:
MV6) Value is higher on the day, but got there early (B period)
MV7) Market showed congestion early, during first hour or so
MV8) Market spent last 5 hours in congestion
MV9) Except for the quick run in B period this is a congesting market
MV10) Value at 10705 - 10625 provide support/resistance for tomorrow
MV11) Price nearing 10705 (upper limit = 10706) is a warning of impending
breakout
MV12) Price below 10625 is a sign of weakness
Trading Strategy (TS) for March 23, Basis both Condition and Value:
Note that all the information used is market developed. Also remember
that market condition can change overnight as happened in the Swiss franc
example. The trader reads the market and determines a strategy based
on current conditions. Any substantial change will be obvious, requiring
an upgraded analysis.
TS1) The market is in balance. Price above 10706 is an upside breakout
Price below 10528 is a downside breakout
TS2) Risk on breakout for the swing trader is around $330
TS3) Risk on breakout for the day trader is around $160
TS4) Early congestion followed by massive later congestion on 3/22
is indicative of a market confused about underlying demand
TS5) A breakout tomorrow is unlikely because of the congestion picture
in the last few market hours of 3/22.
TS6) This is a low priority market for the breakout swing trader
TS7) If tomorrow open is still in the upper area of the Overlay, day
traders are looking to short any turndown. If prices reach
near the bottom of the Overlay, we will seek to buy bottoms.
TS8) If the upper limit (10706) is exceeded, day traders change to looking
to buy into upturns.
TS9) Upper Limit (10706) and upper value area (10705) are nearly
coincident. Price there is strongly bullish.
TS10) Day traders turn bearish below 10625, seeking to short downturns.
Trading strategies TS1 through TS10 come from a direct reading
of the auction market variables. Another seasoned trader may use the same
data in a different way. The starting point is the same: trading on
3/22 began with an upside thrust, a breakout, and then traded down while
congesting. The previous day, 3/21, ended in a much more symmetrical
balance and that day's Market Profile was likewise quite normal for
trading in a balance.
So 3/22 is a colossally failed breakout. Why? How soon in the day's
development could a market savvy trader catch on? Congestion tells the
tale. We are looking for that transition from trend to balance. We can
recognize congestion graphically as in figure SC 10. But if we know
more about markets, we have a chance to do some intelligent guessing.
Now we understand the overloading toward the upper prices in the Overlay
for March 22 (figure SC 7). The upside breakout was likely driven by a short
covering rally. It was merely an accident that the rally occurred near the
breakout of the Overlay. Now we have evidence for the failure of the
trend. No wonder the Market Profile for March 22 did not fit in with the
prior four days.
Additional Market Analysis from Short Covering Data:
TS11) The odds are that the Overlay tomorrow will pull back, i.e. 10708 is
a local high.
TS11) Unless new upside demand enters the market, the odds are that the
Overlay tomorrow will pull back, i.e. 10708 is a local high.
TS12) Understanding the probable cause of the rise on March 22 does
not substantially change our strategy for March 23. Corroboration
adds confidence in the original analysis.
We cannot look into the minds of the floor traders. But often
we can see what they have done. The Chicago Board of Trade releases an
end-of-day Buy/Sell report. These data list the
four classes of member's volume at each price and also how much of the
activity is buying and how much is selling. The Buy/Sell Report for
March 21 is in figure SC 11. For the Locals, CTI1, it lists the buying,
selling and net for each price, and totals at the bottom. Floor traders
indeed ended the day selling more than they bought by over 1000 contracts
(2108 sides = 1054 equivalent contracts). Yes, on the 22nd, Locals probably
came to work with latent demand and an itch to get out.
Net Buy and Sell/Bracket Information:
Updated on March 21, 2001 at 20:56 for US 01M Traded on March 21, 2001
___________________________________________________________________________
Price Volume CTI1b CTI1s CTI1n CTI2n CTI3n CTI4n Half-hour Brackets
Z$ABCDEFGHIJKLM
_____________________________________________________________________________
10626 2010 53 644 -591 -35 -206 832 Z
10625 1796 516 264 252 20 98 -370 Z
10624 864 259 294 -35 5 -48 78 Z$
10623 5834 1663 1575 88 26 278 -392 Z$
10622 3914 1086 1143 -57 280 57 -280 Z$
10621 4696 1776 1215 561 -70 -97 -394 Z$
10620 6726 1974 2307 -333 66 -20 287 Z$
10619 5198 1690 1439 251 -207 -41 -3 Z$
10618 4188 1503 1333 170 4 -45 -129 $B
10617 7388 2113 2736 -623 -263 322 564 $ABCGHJ
10616 12732 3572 4117 -545 357 -166 354 ABCGHIJ
10615 24336 6729 7848 -1119 458 -155 816 ABCGHIJK
10614 22922 7033 7287 -254 345 -596 505 ABCFGHIJK
10613 23874 6659 6593 66 -404 -95 433 ABCFGHIJK
10612 13172 3902 3748 154 200 -426 72 ABCEFGHIJK
10611 15886 4586 4862 -276 -14 -62 352 BCEFHIKLM
10610 16566 4226 5195 -969 16 -232 1185 BCDEFHKLM
10609 12748 3718 3643 75 -491 174 242 BCDEFKL
10608 16040 4379 5010 -631 163 -211 679 CDEFKL
10607 12728 4177 2897 1280 -339 355 -1296 CDEFL
10606 1246 519 91 428 0 0 -428 CVL
___________________________________________________________________________
Grand 214864 62133 64241 -2108 117 -1116 3107
Total
Figure SC 11. Buy/Sell statistics for T-bonds (day), March 21, 2001.
CTI1, floor traders buy (b), sell (s) and net (n) volumes at each price
culminates in a net sell of 2108 sides (side = 1/2 contract). The other
three classes of traders (CTI2 = Commercials, CTI3 = Off Floor Members and
CTI4 = Members Trading for the Public) show the net only. Market Profile
symbols are Z = 07:20 to 07:30, $ = 07:30 to 08:00, A = 08:00 to 08:30.
B = 08:30 to 09:00 and so on.
Additional Market Analysis from Buy/Sell Data:
TS13) At the end of March 21 the Locals were net short 1054 contracts.
Analysis for March 22 would suggest a potential net demand
from the floor traders.
Additional Market Analysis from Commercial Capping Data:
TS14) Commercial selling at the top indicates the public does not have
enough buying power to keep the upward trend in place. Again,
commercial data confirms analyses TS4, TS5, TS6 and TS11.
5.0 for March 20,
6.0 for March 21,
8.4 for breakout day March 22
5.0 for March 23
8.3 for 90 day average.
It is clear that the action of March 22 was not accompanied by
the sort of increase in volatility associated with increasing demand.
Volatility casts a vote for a false breakout.
The Liquidity Data report (LDB) in the CISCO format carries both the volume
value area (VA) and the VA developed from the TPO's. Volume VA is centered
on the peak volume price, called the 'point of control'. This is the
original end-of-day VA. Within the day, Market Profiles develop. These
use TPO's to identify market activity, so-called TPO volume. A natural
extension led to the TPO VA. A study published in the Market Logic
School Alumni Letter (Vol 1, #3, April 1987) compared the two VA methods,
showing a close correlation.
At the close of March 22, the T-bonds LDB report give the volume value
area as 10704 - 10624, while the TPO VA is 10705 - 10625. They are essentially
the same. There is no special demand that skews the distribution. Thus,
the VA gives us no additional clues to help interpret this day. The general
VA information situation is illustrated in the following.
Recent studies for the special case of the S&P Index show some substantial
deviations from correlation. There will always be some deviations between any
two methodologies. The peak volume may not correlate with the peak TPO, so the
point of control will differ. Volume normally is thought of as directly
showing demand. Trading strategies intended to mislead can artificially
create large volume at particular prices. This is not true "demand volume",
but even an LDB report has no way of telling. On a temporal basis, the artificial
volume is fed into the market in a short time to maximize the shock effect.
But a short time of activity does not create a lot of TPO's. So the Market
Profile VA tends to ignore such strategies. The conclusion is that one
best have both VA's. When they disagree, one can go back to the LDB report
to determine which best describes the value.
As an example, not a complete study, the difference between the volume
value area from the LDB and the TPO value area from tick data for February
2002 S&P's are:
VAU (Vol - TPO) VAL (Vol - TPO)
02/28 1.0 0.0
02/27 -1.5 -2.7
02/26 1.1 0.9
02/25 3.7 -1.9
02/22 2.9 -0.2
02/21 1.4 -1.5
02/20 6.3 3.9
02/19 -1.0 -4.9
02/15 3.8 1.3
02/14 -3.3 -4.2
02/13 0.8 0.1
02/12 -0.8 -0.2
02/11 -3.3 -5.2
02/08 10.8 4.5
02/07 -3.2 -3.4
02/06 0.8 2.3
02/05 1.2 0.4
02/04 1.2 -0.7
02/01 1.0 -0.6
01/31 8.9 3.5
Table SC-T2. Value area differences. TPO value area is subtracted
from volume value area. 1.0 is $250.
For the upper value area price
the average deviation is +1.1. The lower value area price shows an
average deviation of -0.6. On the average, the deviation between the
two measures is not unreasonable.
But the average is not relevant in the large deviation cases such
as February 8. If two measures of the same thing, value, differ wildly
something must be wrong with one of them at least. It is a wake-up call
for the trader. These data are available in the evening prior to the
next day's market. There is time to study the raw LDB data, the source
of the value areas. There is time to come to a conclusion on the one
to use.
The LDB report for February 8 is in figure SC 13.
At the close of February 8, 2002, the S&P Index showed a Volume VA of
109850 - 1108450, with a point of control at 109600 at a volume of 5686.
TPO VA is 108770 - 108000. The upper VA is 10.8 points ($2700) apart.
CME VOLUME REPORT
TRADING DATE: 02 08 02
CONTRACT: MAR 02 S&P 500 (CME-IOM)
TRADING BEGINS 0830 (CST);CLOSES 1515;TPO SYMBOLS ARE BCDEFGHIJKLMNO
FIRST PERIOD IS 30 MINS;SUBSEQUENT PERIODS ARE ALL 30 MINS
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
109850 52 0.0 42.3 0.0 0.0 57.7 O Vol VAU
109830 72 0.1 51.4 0.0 5.6 43.1 O
109820 68 0.0 42.6 0.0 1.5 55.9 O
109810 4 0.0 50.0 0.0 50.0 0.0 O
109800 1468 1.1 38.6 3.4 4.1 53.9 O
109790 100 0.1 48.0 10.0 5.0 37.0 O
109780 752 0.5 36.0 2.9 6.1 54.9 O
109770 448 0.3 48.9 2.2 0.4 48.4 O
109760 480 0.4 23.1 7.3 1.0 68.5 O
109750 1946 1.4 49.1 5.6 2.7 42.5 O
109740 40 0.0 50.0 50.0 0.0 0.0 O
109730 144 0.1 51.4 0.0 2.1 46.5 O
109720 280 0.2 36.8 0.0 3.9 59.3 O
109710 4 0.0 25.0 0.0 0.0 75.0 O
109700 1436 1.0 37.3 1.4 1.7 59.6 O
109680 170 0.1 55.9 0.0 2.9 41.2 O
109670 54 0.0 48.1 0.0 0.0 51.9 O
109650 3616 2.6 35.2 2.7 3.4 58.7 O Close
109640 20 0.0 75.0 0.0 0.0 25.0 O
109630 496 0.4 42.3 1.4 7.1 49.2 O
109620 460 0.3 35.7 1.1 3.9 59.3 O
109610 50 0.0 0.0 0.0 0.0 100.0 O
109600 5686 4.2 43.8 3.0 0.6 52.6 O Vol POC
109580 694 0.5 46.7 0.0 6.6 46.7 O
109570 654 0.5 51.8 0.6 3.7 43.9 O
109560 290 0.2 36.6 0.0 0.0 63.4 O
109550 1738 1.3 37.9 0.6 3.7 57.8 O
109540 10 0.0 70.0 0.0 30.0 0.0 O
109530 560 0.4 44.1 4.3 5.4 46.3 O
109520 416 0.3 51.2 0.0 8.7 40.1 O
109510 8 0.0 50.0 0.0 0.0 50.0 O
109500 2746 2.0 42.8 1.5 3.8 51.9 O
109490 52 0.0 55.8 0.0 0.0 44.2 O
109480 692 0.5 53.3 4.3 5.3 37.0 NO
109470 302 0.2 46.7 0.0 6.0 47.4 NO
109460 40 0.0 52.5 0.0 2.5 45.0 NO
109450 688 0.5 53.2 5.2 3.3 38.2 NO
109440 34 0.0 52.9 0.0 0.0 47.1 NO
109430 202 0.1 52.0 0.0 3.0 45.0 NO
109420 370 0.3 43.0 6.8 4.3 45.9 NO
109400 1830 1.3 45.1 1.6 3.5 49.8 NO
109390 10 0.0 50.0 0.0 10.0 40.0 N
109380 842 0.6 51.8 0.2 6.5 41.4 NO
109370 206 0.2 73.8 0.0 5.3 20.9 NO
109360 84 0.1 2.4 0.0 0.0 97.6 N
109350 712 0.5 39.7 4.4 5.2 50.7 N
109340 16 0.0 0.0 0.0 0.0 100.0 N
109330 110 0.1 48.2 0.0 0.0 51.8 N
109320 100 0.1 62.0 0.0 1.0 37.0 N
109300 658 0.5 29.6 0.2 5.5 64.7 N
109280 212 0.2 27.4 4.7 0.9 67.0 N
109270 86 0.1 57.0 0.0 11.6 31.4 N
109260 40 0.0 12.5 0.0 0.0 87.5 N
109250 820 0.6 45.7 2.4 9.9 42.0 N
109240 2 0.0 50.0 0.0 0.0 50.0 N
109230 190 0.1 53.2 0.0 15.3 31.6 N
109220 160 0.1 55.0 6.3 2.5 36.3 N
109200 1260 0.9 45.5 2.0 6.0 46.6 N
109180 412 0.3 53.4 0.2 6.1 40.3 N
109170 156 0.1 48.7 0.0 5.8 45.5 N
109160 10 0.0 50.0 0.0 50.0 0.0 N
109150 1062 0.8 52.9 0.0 3.2 43.9 N
109130 362 0.3 50.0 0.0 4.1 45.9 N
109120 146 0.1 63.0 0.0 4.8 32.2 N
109100 932 0.7 52.1 0.0 7.0 40.9 EN
109090 126 0.1 53.2 0.0 5.6 41.3 E
109080 194 0.1 49.0 2.6 7.7 40.7 EN
109070 34 0.0 55.9 0.0 0.0 44.1 EN
109060 70 0.1 28.6 7.1 35.7 28.6 E
109050 948 0.7 51.3 2.2 5.1 41.5 EN
109040 16 0.0 50.0 0.0 0.0 50.0 E
109030 314 0.2 50.3 0.0 3.8 45.9 EN
109020 342 0.3 62.3 0.3 12.3 25.1 EN
109000 1828 1.3 50.1 3.2 9.0 37.7 DEN
108990 28 0.0 50.0 0.0 3.6 46.4 DEN
108980 440 0.3 70.0 0.2 5.2 24.5 DEN
108970 158 0.1 57.0 0.6 6.3 36.1 DE
108960 12 0.0 50.0 0.0 0.0 50.0 DE
108950 2200 1.6 56.4 5.6 4.4 33.7 CDEMN
108940 6 0.0 50.0 0.0 0.0 50.0 EN
108930 376 0.3 68.6 6.4 9.8 15.2 CDEMN
108920 330 0.2 66.7 1.2 6.1 26.1 CDEMN
108910 66 0.0 59.1 0.0 0.0 40.9 E
108900 2596 1.9 53.8 1.6 8.0 36.6 CDEMN
108890 90 0.1 50.0 0.0 0.0 50.0 CEMN
108880 808 0.6 55.1 1.7 9.2 34.0 CDEMN
108870 468 0.3 59.0 3.2 13.7 24.1 CDEMN
108860 52 0.0 23.1 0.0 38.5 38.5 DM
108850 3282 2.4 58.0 1.5 5.3 35.3 CDEMN
108840 24 0.0 50.0 0.0 8.3 41.7 DE
108830 662 0.5 58.9 3.2 6.2 31.7 CDEMN
108820 930 0.7 61.0 1.1 8.4 29.6 CDEMN
108810 36 0.0 72.2 27.8 0.0 0.0 DE
108800 3548 2.6 55.3 2.7 6.5 35.5 CDEMN
108790 18 0.0 55.6 0.0 0.0 44.4 CDE
108780 954 0.7 64.5 0.6 10.1 24.8 CDEMN
108770 800 0.6 54.9 3.3 18.1 23.8 CDEM TPO VAU
108760 32 0.0 56.3 15.6 28.1 0.0 DM
108750 3196 2.3 60.3 1.7 4.8 33.1 CDEFMN
108740 74 0.1 55.4 0.0 0.0 44.6 CDEMN
108730 684 0.5 66.2 2.8 9.9 21.1 CDEFMN
108720 1208 0.9 68.1 1.2 7.5 23.1 CDEFM
108710 42 0.0 52.4 0.0 26.2 21.4 CDEF
108700 3711 2.7 61.3 1.5 7.0 30.2 BCDEFMN
108690 66 0.0 31.8 22.7 3.0 42.4 BCDM
108680 1056 0.8 64.1 2.8 7.6 25.5 BCDEFMN
108670 744 0.5 58.5 1.6 20.4 19.5 BCDEFMN
108660 34 0.0 50.0 0.0 14.7 35.3 BC
108650 3182 2.3 58.6 1.6 5.3 34.5 BCDEFMN
108640 10 0.0 50.0 0.0 50.0 0.0 F
108630 600 0.4 62.2 0.3 10.0 27.5 BCDEFM
108620 962 0.7 56.5 3.0 12.0 28.5 BCDEFM
108610 58 0.0 36.2 0.0 17.2 46.6 DM
108600 3138 2.3 59.8 0.7 6.4 33.0 BCDEFM
108590 62 0.0 8.1 41.9 40.3 9.7 BDF
108580 1136 0.8 65.1 7.5 12.8 14.7 BCDEFM
108570 728 0.5 61.8 0.1 11.7 26.4 BCDEFM
108560 28 0.0 50.0 0.0 35.7 14.3 BDE
108550 2868 2.1 61.9 2.0 6.6 29.5 BCDFKM
108540 340 0.2 49.7 0.0 0.0 50.3 BCFK
108530 1024 0.7 66.9 1.0 6.3 25.9 BCFKM
108520 1338 1.0 64.0 0.8 10.4 24.8 BCFGKM
108510 78 0.1 53.8 12.8 2.6 30.8 BCF
108500 4220 3.1 55.2 1.6 7.7 35.5 BCFGKLM
108490 30 0.0 66.7 0.0 3.3 30.0 BFK
108480 1766 1.3 64.2 2.5 9.8 23.5 BCFGKLM
108470 1236 0.9 60.6 0.8 20.7 17.9 BCFGKM
108460 62 0.0 56.5 0.0 40.3 3.2 BCFG
108450 2794 2.0 58.3 3.8 7.8 30.2 BCFGKLM Vol VAL
108440 28 0.0 46.4 0.0 7.1 46.4 GKM
108430 724 0.5 62.0 4.6 8.6 24.9 BFGKLM
108420 822 0.6 62.5 1.5 10.1 25.9 BFGHKLM
108410 22 0.0 50.0 0.0 22.7 27.3 FKM
108400 2626 1.9 51.8 3.1 8.8 36.4 BFGHJKLM
108390 96 0.1 50.0 2.1 0.0 47.9 BHJ
108380 1264 0.9 56.3 3.4 13.5 26.8 BFGHIJKLM
108370 844 0.6 58.3 2.4 13.7 25.6 BFGHIJKLM TPO POC
108360 56 0.0 50.0 0.0 3.6 46.4 BGHJKM
108350 2970 2.2 54.9 2.3 7.6 35.2 BFGHIJKLM
108340 96 0.1 55.2 0.0 17.7 27.1 BGHIKLM
108330 1028 0.8 59.4 1.3 7.3 32.0 BFGHIJKLM
108320 1940 1.4 49.5 3.6 8.2 38.6 BGHIJKLM
108310 88 0.1 15.9 0.0 13.6 70.5 GHK
108300 3788 2.8 52.2 1.8 5.6 40.3 BGHIJKLM
108290 88 0.1 47.7 0.0 4.5 47.7 BIJKL
108280 1424 1.0 54.6 3.0 8.8 33.6 BGHIJKLM
108270 906 0.7 62.8 1.0 13.4 22.8 BGHIJKLM
108260 74 0.1 20.3 0.0 31.1 48.6 BHIJ
108250 2888 2.1 53.4 2.0 6.5 38.2 BGHIJKLM
108240 14 0.0 100.0 0.0 0.0 0.0 GHL
108230 566 0.4 59.5 4.2 15.9 20.3 BGHIJKLM
108220 866 0.6 54.3 4.4 10.5 30.8 BGHIJKLM
108210 134 0.1 32.8 0.0 6.7 60.4 BGHJ
108200 2514 1.8 52.7 4.8 6.6 36.0 BGHIJKL
108190 34 0.0 52.9 0.0 29.4 17.6 GIKLM
108180 1158 0.8 58.7 0.7 11.0 29.6 BGHIJKL
108170 734 0.5 52.6 7.6 11.3 28.5 BGHIJKL
108160 166 0.1 40.4 0.0 7.8 51.8 BGHIKL
108150 3204 2.3 56.2 1.5 6.2 36.1 BGHIJKL
108140 32 0.0 59.4 0.0 9.4 31.3 GIJ
108130 704 0.5 57.1 0.9 7.0 35.1 BGHIJL
108120 1182 0.9 56.9 0.5 12.8 29.9 BGHIJKL
108110 72 0.1 25.0 13.9 34.7 26.4 GJL
108100 2210 1.6 52.0 4.6 6.1 37.3 BGIJKL
108090 34 0.0 70.6 0.0 5.9 23.5 GJK
108080 940 0.7 53.4 5.3 11.1 30.2 GJKL
108070 502 0.4 53.4 4.8 7.8 34.1 GJKL
108060 44 0.0 43.2 0.0 22.7 34.1 JL
108050 1548 1.1 52.4 1.0 7.9 38.8 GJKL
108030 264 0.2 64.8 0.8 6.1 28.4 GJKL
108020 864 0.6 57.4 0.3 19.8 22.5 GJKL
108010 94 0.1 75.5 0.0 10.6 13.8 JL
108000 1088 0.8 42.4 0.4 11.0 46.2 GJKL TPO VAL
%CTI1 %CTI2 %CTI3 %CTI4
VOLUME FOR MAR 02 S&P 500 (CME-IOM) 136763 53.2 2.3 7.1 37.4
VOLUME FOR ALL S&P 500 (CME-IOM) 136869 53.2 2.3 7.1 37.4
70% VOLUME SUMMARY
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS
109850 96023 70.2 52.8 2.2 6.3 38.6 ONEDCMFBKGL
108450
VALUE AREA FROM TPOS
UPPER 108770
LOWER 108000
CONTROL 108380
*The MARKET PROFILE is a registered trademark of the Board of Trade of
the City of Chicago 1984. ALL RIGHTS RESERVED.
This report may not be reproduced or retransmitted without the express
written consent of CISCO.
Figure SC 13. Liquidity Data Bank report for March 2002 S&P futures
on February 8, 2002. Volume value area is labeled Vol VAU and Vol VAL.
TPO value area is TPO VAU and TPO VAL.
A look at the actual LDB report shows one peak of activity, centered around
108380, the TPO point of control (POC is the maximum TPO count). The volume
POC, at the high volume point, is at 109600. What is the source of the
excess volume in an otherwise normally trading market? It is easy to see:
CTI1 Floor Members average percent volume is 53.2. At 109600 it is 43.8.
CTI2 Commercials average percent volume is 2.3. At 109600 it is 3.0.
CTI3 Off floor members avg percent volume is 7.1. At 109600 it is 0.6.
CTI4 Public trading average percent volume is 37.4. At 109600 it is 52.6.
So it is the public that was big at 109600. All this activity
came within the closing half-hour period. The public, who hold overnight,
are the source of demand. It is possible that the demand picture changed
late in the day of February 8 and that change is mirrored in the volume
value area. In such a scenario, the TPO value area represents trading
that has since been superceded by changing demand. One would go to the
overnight market to see if the volume value area is sustained.
Examination of night trading shows the high 109's were sustained throughout
the night, with the rise continuing into the next trading day, which closed
at 111020.
The T-bond with the largest deviation in Table SC-T2 is February 4. The
LDB report is in figure SC 14
CBOT VOLUME REPORT
TRADING DATE: 02 04 02
CONTRACT: MAR 02 T-BOND (CBOT) DAY
TRADING BEGINS 0720 (CST);CLOSES 1400;TPO SYMBOLS ARE Z$ABCDEFGHIJKL
FIRST PERIOD IS 10 MINS;SUBSEQUENT PERIODS ARE ALL 30 MINS
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
10408 182 0.2 57.7 0.0 0.0 41.8 I
10407 1214 1.2 60.0 0.0 7.2 32.6 I
10406 2284 2.3 47.9 4.4 9.1 38.7 GHILM TPO VAU
10405 4858 4.9 58.5 0.0 12.5 29.0 GHILM
10404 4040 4.1 60.1 3.5 6.9 29.6 GHIJLM
10403 6294 6.4 58.1 2.4 11.3 28.2 GHIJL
10402 4184 4.2 57.6 0.0 4.4 38.0 GHIJL
10401 2976 3.0 57.8 0.0 5.9 36.3 GHJKL Vol VAU
10400 3604 3.7 57.9 0.0 10.0 32.2 DFGJKL
10331 6336 6.4 56.5 4.9 7.4 31.2 DEFJKL TPO POC
10330 6082 6.2 59.9 8.2 10.7 21.1 DEFK
10329 4802 4.9 55.7 1.6 14.1 28.6 DEFK
10328 2262 2.3 53.5 0.2 3.8 42.5 CDEF
10327 2532 2.6 55.5 0.6 5.4 38.6 CDE
10326 3234 3.3 55.7 0.5 6.9 36.9 CD
10325 9188 9.3 51.9 12.5 2.5 33.1 $ABCD TPO VAL
10324 11236 11.4 58.1 1.2 5.1 35.6 Z$ABCD Vol POC
10323 5384 5.5 69.0 1.8 6.4 22.8 Z$ABC
10322 7048 7.1 60.8 0.7 15.0 23.6 Z$ABC
10321 6932 7.0 57.7 1.9 9.5 30.9 Z$AB
10320 2540 2.6 60.3 0.4 4.4 34.9 ZAB Vol VAL
10319 1322 1.3 62.5 0.0 15.0 22.5 AB
10318 80 0.1 56.3 0.0 0.0 43.8 A
%CTI1 %CTI2 %CTI3 %CTI4
VOLUME FOR MAR 02 T-BOND (CBOT) DAY 98614 57.9 2.9 8.2 31.1
VOLUME FOR ALL T-BOND (CBOT) DAY 98760 57.9 2.9 8.1 31.1
70% VOLUME SUMMARY
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS
10400 71180 72.2 57.9 3.5 7.8 30.7 Z$ABCDEFGJKL
10320
VALUE AREA FROM TPOS
UPPER 10406
LOWER 10325
CONTROL 10331
*The MARKET PROFILE is a registered trademark of the Board of Trade of
the City of Chicago 1984. ALL RIGHTS RESERVED.
This report may not be reproduced or retransmitted without the express
written consent of CISCO.
Figure SC 14. Liquidity Data Bank report for March 2002 T-bond futures
on February 4, 2002. Volume value area is labelled Vol VAU and Vol VAL.
TPO value area is TPO VAU and TPO VAL.
The TPO value area is about 5 points (about $160) above the volume value
area. An examination of trading at the volume point of control (peak
volume) shows it came early in the day. TPO's Z$ABCD go from opening at
7:20 AM (Z period) through D period (9:30 to 10 AM). Point of control
for the TPO's is 10331. TPO's at that price are DEFJKL (9:30 AM through
the close at 2:10 PM). Value did move up during the day. The TPO value
area reflects the later value. While 5 or 6 ticks is not a lot, it still
represents over $150 in locating the day's value. The trader who knows
which value area most represents the market has the edge.
An advantage of understanding the market and setting up a strategy
based on that understanding is that if your strategy turns out to be
wrong you know it very quickly. The swing trader will know when
a breakout fails. A swing trader will also have a strong clue when
a trend falls into congestion--in hours, not days. Day traders, too,
will usually know when market conditions change, say from balance to
trend, and so can react accordingly.
The generality of the theory makes it a starting point for much new
market research. One area, just being explored, is the measurement
of reward to risk ratios. An early finding is that the Dow Jones Index
has a reward to risk ratio about twice that of the SP Index. Another
area is categorizing markets by trading opportunity. Now that the
initial development is in place, and with a theory to lean on, there is a
vast arena of practical market applications waiting to be discovered.
LENGTH OF FIRST PERIOD = 10 MINS
MARKET PROFILE* REPORT FOR 03 23 01
AND SEGMENTED AUCTION
COMMODITY -- T-BOND (CBOT) DAY JUN 01
Price Brackets Segmented Auction
10615 H H
10614 BCH B C H
10613 BCFGH B C F G |H
10612 BCFGH B C F |G |H | |
10611 yzABCDFGHI |y |z A |B |C |D | |F |G |H |I | | |
10610 yzABCDEFGI >y |z |A |B |C |D |E |F >G > >I | | |
10609 yzABCDEFI |y >z >A >B >C |D |E |F | | |I | | |
10608 yzABCDEFIJK y |z |A |B |C >D >E >F | | |I >J >K >
10607 zBCDEFIJK z |B |C |D |E |F | | |I |J |K |
10606 zBCDEJKL z B |C |D |E | | | | |J |K |L
10605 BCDEJKL B C |D |E | J |K |L
10604 BCDEJL B C D E J L
10603 BDEL B D E L
10602 DEL D E L
10601 D D
TPO Analysis
CENTER 10608
VALUE AREA FROM TPOS
UPPER 10611
LOWER 10605
Figure SC 12. Market Profile for T-bonds, March 23, 2001.
The market congested all day.
Recalling some of our analyses:
TS4) Early congestion followed by massive later congestion on 3/22
is indicative of a market confused about underlying demand
TS5) A breakout tomorrow is unlikely because of the congestion picture
in the last few hours of 3/22.
TS6) This is a low priority market for the breakout swing trader
TS11) Unless new upside demand enters the market, the odds are that the
Overlay tomorrow will pull back, i.e. 10708 is a local high.
TS12) Understanding the probable cause of the rise on March 22 does
not substantially change our strategy for March 23. Corroboration
adds confidence in the original analysis.
The Market Profile of March 23, in figure SC 12, fits neatly into the
Overlay of March 21. The breakout on March 22 is shown to be a
transient, not due to any pemanent change in demand or value. The trader
can totally discard the action of March 22. Trading action of March 22
did not alter the value picture of the market. Trading analysis for Monday,
March 26 can be based on figure SC 8, the Overlay of March 21!
This example was chosen entirely on the basis of a balanced market (March 21)
breaking out the next day. No other criteria were applied. It was not known
initially that the breakout fit the short-covering-rally picture, nor did we
know that the buy/sell data or the commercial trading would support the short
covering hypothesis. It is a fortuitous benefit of the analysis that a short
covering rally, confirmed by the buy/sell data and commercial capping were
found. Had there been no confirmations, the original analysis would have
been rechecked with a critical eye. It is a fact that Auction market analyses
often uncover surprising and unexpected market features. These always add
to market understanding.
Figures/Tables
Figure SC EX-1. Market Profile for Soybeans March 00, Dec 30, 1999.
Figure SC EX-2. Candlestick representation of Figure SC EX-1.
Figure SC 1. Swiss franc volume by price. October 26, 2001.
Figure SC 2. Swiss franc Market Profile. October 26, 2001. The price - time distribution.
Figure SC 3. Swiss franc volume by price. October 29, 2001.
Figure SC 4. Market Profile for SF on October 29, 2001. A trend day.
Figure SC 5. Liquidity Data Bank for T-bonds, March 22, 2002.
Figure SC 6. Five sequential days of Market Profiles. T-bonds, March 16 - 22, 2001
Figure SC 7. Five Day Overlay Demand Curve of June 2001 T-bonds 3/16 - 3/22.
Table SC-T1. S&P emini March 2002. Market demand interpretation.
Figure SC 8. Five Day Overlay Demand Curve of June 2001 T-bonds 3/15 - 3/21.
Figure SC 9. Market Profile for T-bonds, March 21, 2001.
Figure SC 10. Market Profile for T-bonds, March 22, 2001.
Figure SC 11. Buy/Sell statistics for T-bonds (day), March 21, 2001.
Figure SC 12. Market Profile for T-bonds, March 23, 2001.
Table SC-T2. Value area differences. TPO value area is subtracted from Volume VA.
Figure SC 13. Liquidity Data Bank report for March 2002 S&P futures, February 8, 2002.
Figure SC 14. Liquidity Data Bank report for March 2002 T-bond futures, February 4, 2002.
References
Markets and Market Logic, Steidlmayer & Koy, Porcupine Press, 1986
(Out of Print)
Value Based Power Trading, Jones, Probus, 1993
Mind Over Markets, Dalton, Jones & Dalton, Probus, 1990
Possible Insert boxes:
Market Profiles locate value.
Market condition is the basic building block for futures analysis.
Longer timeframe information, i.e. market condition, is the foundation for all
subsequent analysis.
Donald Jones is the president of CISCO Futures, www.cisco-futures.com. He
has traded and researched the futures markets for over 30 years.
------------------------------------------------------------------------
Daytrading Support and Resistance
Donald L. Jones
CISCO Futures
July 20, 2002
Recently I wrote on Auction Market Theory, the framework within which auction
markets operate (ref1, ref2). Three auction market structures are covered:
Market Profile, Liquidity Data Bank (LDB) and Overlay Demand Curves. In this
work I will draw from the Market Profile (which is being used by many traders)
and the LDB (which is not). To briefly review, Market Profile builds a
utilization picture of market activity by marking the times at which trading
took place. LDB posts volume at price, regardless of time of occurrence. LDB
displays typically include a Market Profile.
Market Profile, a Summing Process
In the earlier articles Market Profile was shown to be a tool for finding
the market's perceived value at the end of the most recent trading day.
A profile is a graphic that sums the frequency of trading at each price with
TPOs (trading at a price in a particular timeframe). Profiles post and
integrate the trading over the entire day. The net result is a bell shaped
price-time chart where the central 70 percent of the action defines value.
Price at the peak of the summed activity is called the point of control, or
POC. POC of the Market Profile will be identified as "TPO POC". The Market
Profile in figure 3 has a TPO POC of 101400 with value area limits
101850 - 101050. A summing process for determining value works well for
markets in balance but can be quite wrong if value changes within the day.
Liquidity Data Bank, a Point Process
An alternative method of value measurement, independent of the profile, uses the
volume figures from the Liquidity Data Bank (LDB). LDB's in ref2 located the
prices at which commercial traders dominated the market. The same volume data
can be used to find value. The peak volume price for the LDB is also called
the center of value or POC. Unlike the profile, in which the POC is the sum of
a number of events, POC on the LDB display can be created by heavy trading
in a very short time. The weakness of a point process is that a maximum
trading price may be superceded by a region of not-quite-as-much-volume at a
group of prices. The new region could dominate in terms of value, but the
price from the one big volume point would remain the point of control.
Points of Agreement/Disagreement
In stable markets both profiles and LDBs find essentially the same value
centers and value areas. Should demand shift within the day, one or the
other will likely be wrong. Below, we examine a shifted value day in which
the difference between the profile TPO POC and LDB volume POC are large. The
big difference between the two is the tip-off that value has moved. The
trader following the correct value figures (LDB, in this case) will have
numerous trading opportunities the next day. The profile values offer none.
Value Calculations
There are two value determinations from the S&P of June 11, 2002, the profile
and the LDB. Each will provide it's own self_consistent support/resistance,
or value areas. Value limits found will be used in trading the market of
June 12. We can get both value areas from the Liquidity Data Bank display,
which posts price, volume, volume distributed among the four classes of floor
members and the Market Profile. We are concerned here with only the
price, volume and profile columns (a full discussion of the LDB is on the
website of ref3). S&Ps are highly volatile, with wide daily trading ranges.
Figure 1 is a shortened LDB report for June 11, to illustrate the format.
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
104020 86 0.1 53.5 29.1 2.3 15.1 E
104000 272 0.2 52.9 5.1 0.0 41.9 E
103980 102 0.1 52.9 9.8 4.9 32.4 E
103970 84 0.1 52.4 7.1 7.1 33.3 E
103960 2 0.0 50.0 0.0 0.0 50.0 E
103950 522 0.4 53.8 3.6 1.3 41.2 DE
103940 2 0.0 50.0 0.0 0.0 50.0 E
103930 110 0.1 54.5 8.2 18.2 19.1 DE
103920 128 0.1 49.2 0.8 15.6 34.4 DE
103900 1198 1.0 56.3 4.0 6.3 33.5 BDE
103890 78 0.1 15.4 0.0 0.0 84.6 DE
103880 362 0.3 48.9 3.0 11.3 36.7 BDE
103870 420 0.3 56.4 1.0 12.1 30.5 BDE
103860 16 0.0 56.3 0.0 18.8 25.0 BDE
103850 1908 1.5 51.0 6.6 3.7 38.7 BDE
103840 14 0.0 14.3 0.0 0.0 85.7 BD
103830 846 0.7 56.6 3.7 9.8 29.9 BDE
103820 1056 0.8 57.4 7.3 2.4 33.0 BDE
103810 24 0.0 95.8 0.0 0.0 4.2 DE
103800 2540 2.0 60.9 4.3 3.9 30.9 BCDE
103790 36 0.0 55.6 38.9 0.0 5.6 BCD
103780 1302 1.0 56.5 3.1 11.8 28.6 BCDE
103770 937 0.8 58.6 3.7 11.6 26.0 BCDE
103760 54 0.0 51.9 1.9 37.0 9.3 BDE
103750 2682 2.2 60.9 4.4 5.2 29.5 BCDE
103740 18 0.0 50.0 0.0 27.8 22.2 CE
103730 760 0.6 63.2 2.6 14.2 20.0 BCDE
103720 1330 1.1 59.6 2.6 3.8 34.0 BCDE
103710 48 0.0 35.4 0.0 0.0 64.6 BCE
103700 3165 2.5 55.4 2.7 8.8 33.1 BCDE
103690 24 0.0 54.2 0.0 41.7 4.2 B
103680 1118 0.9 64.3 2.5 9.1 24.1 BCDE
103670 888 0.7 60.7 2.5 9.7 27.1 BCDE
103660 34 0.0 61.8 0.0 8.8 29.4 BCDE
103650 3426 2.8 62.3 3.1 6.0 28.6 BCDE
103640 58 0.0 62.1 24.1 1.7 12.1 CD
103630 766 0.6 66.1 0.4 10.6 23.0 BCDE
103620 1020 0.8 60.2 2.6 5.6 31.6 BCDF
103610 104 0.1 51.0 21.2 6.7 21.2 BCDE
103600 3214 2.6 57.7 1.3 6.6 34.3 BCDEF
103590 40 0.0 57.5 27.5 15.0 0.0 BE
103580 912 0.7 58.7 3.2 7.5 30.7 BCDEF
103570 596 0.5 57.6 1.2 9.4 31.9 BCDEF
103560 26 0.0 76.9 0.0 23.1 0.0 CDF
103550 1951 1.6 62.2 3.5 4.8 29.4 BCDEFG
103540 28 0.0 42.9 0.0 17.9 39.3 BCEFG
103530 870 0.7 64.4 2.8 9.9 23.0 BCDEFG
103520 1520 1.2 63.2 1.6 9.5 25.7 BCDEFG
103510 155 0.1 53.5 0.0 14.8 31.6 BCDEFG
103500 3596 2.9 59.0 4.2 5.5 31.3 BCDEFG
------------------------------------------------------------
Figure 1. Partial listing of a standard LDB for S&P June 2002,
June 11 2002. Volumes are reported in sides, where two sides
make a round turn, or complete trade. Trading is concentrated
at the 00 and 05 price levels. Example: 103600 shows 3214
sides traded; 103520 shows 1520 sides traded and much less
trading at the 'odd' prices 103590, 103580, 103570 and 103560.
The dominance of trading at 00 and 05 is consistent for the S&P.
The S&P is characterized by
heavy trading at the 'even' prices 00 and 50, with much less at the 'odd'
prices 01, 02, 03, 04, 06, 07, 08 and 09 (odd and even refer to market
acceptance, not mathematics). Indeed, even in a relatively heavily traded
market some 'odds' are not traded at all (e.g. no trading at 104010, 103990,
103910, etc.).
In a search for the peak volume price, the 'odds' play no role at all
and may be ignored.
Figure 2 is the full LDB for June 11, with the 'odds' removed.
PRICE VOLUME %VOL %CTI1 %CTI2 %CTI3 %CTI4 BRACKETS(*)
104020 86 0.1 53.5 29.1 2.3 15.1 E <== tpoVaU
104000 272 0.2 52.9 5.1 0.0 41.9 E
103950 522 0.4 53.8 3.6 1.3 41.2 DE
103900 1198 1.0 56.3 4.0 6.3 33.5 BDE
103850 1908 1.5 51.0 6.6 3.7 38.7 BDE
103800 2540 2.0 60.9 4.3 3.9 30.9 BCDE
103750 2682 2.2 60.9 4.4 5.2 29.5 BCDE
103700 3165 2.5 55.4 2.7 8.8 33.1 BCDE
103650 3426 2.8 62.3 3.1 6.0 28.6 BCDE
103600 3214 2.6 57.7 1.3 6.6 34.3 BCDEF
103550 1951 1.6 62.2 3.5 4.8 29.4 BCDEFG
103500 3596 2.9 59.0 4.2 5.5 31.3 BCDEFG <== volVaU
103450 2246 1.8 59.5 3.9 5.2 31.5 BCDFG <== tpoPOC
103400 1635 1.3 52.5 2.8 12.7 32.1 BCDFG
103350 1440 1.2 61.3 1.2 10.2 27.3 BCG
103300 898 0.7 56.0 2.7 7.9 33.4 BCG
103250 406 0.3 58.1 1.2 12.6 28.1 G
103200 96 0.1 63.5 0.0 5.2 31.3 G
103150 596 0.5 55.7 2.0 4.7 37.6 GH
103100 1000 0.8 53.3 3.6 5.9 37.2 GH
103050 496 0.4 57.3 2.0 0.0 40.7 GH
103000 332 0.3 44.9 0.0 6.6 48.5 H
102950 440 0.4 55.0 3.0 0.0 42.0 H
102900 372 0.3 42.7 0.0 0.5 56.7 H
102850 862 0.7 55.6 2.9 3.9 37.6 H
102800 1478 1.2 55.5 6.4 3.5 34.6 HJK
102750 1980 1.6 56.4 3.4 8.6 31.6 HIJKL
102700 1864 1.5 52.5 4.5 8.3 34.7 HIJKL
102650 943 0.8 61.2 6.6 5.9 26.3 IJKL
102600 1104 0.9 56.7 5.0 10.8 27.5 JKL
102550 1153 0.9 55.9 2.3 3.6 38.1 JKL
102500 1217 1.0 57.2 1.6 7.4 33.8 JKLM <== tpoVaL
102450 1218 1.0 46.6 2.9 5.1 45.4 JLM
102400 910 0.7 51.0 6.6 2.3 40.1 JLM
102350 612 0.5 53.3 15.0 6.2 25.5 LM
102300 254 0.2 50.0 0.0 7.1 42.9 M
102250 138 0.1 58.0 0.0 5.8 36.2 M
102200 876 0.7 53.4 9.8 9.8 26.9 M
102150 336 0.3 58.9 3.0 10.4 27.7 M
102100 508 0.4 60.0 1.0 1.6 37.4 M
102050 564 0.5 63.5 2.1 6.6 27.8 MN
102000 1164 0.9 56.1 7.0 5.8 31.1 MN
101950 1194 1.0 57.1 1.4 9.9 31.6 MN
101900 832 0.7 55.9 1.2 6.3 36.7 MN
101850 354 0.3 50.3 8.5 10.5 30.8 MN
101800 640 0.5 52.2 6.3 5.5 36.1 MN
101750 336 0.3 50.0 0.0 8.9 41.1 N
101700 594 0.5 52.4 0.2 6.1 41.4 N
101650 804 0.6 53.1 4.0 5.2 37.7 N
101600 914 0.7 57.8 1.8 8.5 31.9 N
101550 924 0.7 56.4 3.5 10.7 29.4 NO
101500 1734 1.4 54.0 1.7 4.2 40.0 NO
101450 2278 1.8 47.3 4.8 4.9 43.0 NO
101400 4212 3.4 47.3 4.9 3.8 44.0 NO <== volPOC
101350 3792 3.0 49.7 4.3 4.0 41.9 NO
101300 2850 2.3 44.6 0.7 3.6 51.1 O
101250 552 0.4 57.6 3.6 5.8 33.0 O
101210 76 0.1 17.1 2.6 0.0 80.3 O <== volVaL
Figure 2. Volume at major 'even' prices. Columns: 1 is price,
2 is volume (1/2 of round turn) and column 8 is a Market Profile.
Columns 3, 4, 5, 6, and 7 show trading statistics for the four
classes of members on the floor and are not used in this article.
Value areas from the Market Profile (TPO) and from the volume (vol)
are identified by the arrows on the right of the display.
In figure 2, column 2, the peak volume of 4212 occurs at a price of 101400.
101400 is then the center of value (POC) for volume. For the Market Profile
on the far right, the peak TPO count (POC) of 6 is at 103500 (or 103550).
The centers are far apart. Both cannot describe value at the end of the day.
Which is correct?
Auction Market Analysis: Reading the Market
Market Profile is clustered around trading activity in periods B through
G (8:30 to 11 AM, each letter identifies a 1/2 hour trading period). The
70% value area is from 104020 to 102510, marked as TPOVaU and TPOVaL on figure
2. The volume value area, centered at 101400 (periods N and O (2:30 to 3:15
PM)), is 103500 to 101210, identified as volVaU and volVaL.
Market Profile says value (demand) is at the top of the trading range, which
it is from the open to 11 AM. Volume places maximum demand later in the day,
near the bottom of the price range. From the profile part of figure 2, it
is clear that the market opened (B period) near the highs and did quite a lot
of trading there. Demand began shifting downward around H period (11:30 -
12:00) and moved steadily down the rest of the day. Market Profile value was
superceded by the appearance of heavy volume late in the day. In this example
the volume value area is the correct descriptor of end of day value.
To recap:
1. Demand centered around the price 103480 until about 11 AM.
2. Then price started down, pausing at the 102700 level (11:30 to 14:00).
3. The next run ended at the 101400 level near the end of the trading day.
Both the profile and LDB are correct for their respective
times of day. But the trader needs to know which value area to use for
tomorrow and that is clearly